As filed with the Securities and Exchange Commission on November 30, 1995
File No. 33-62861
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
|_| Pre-Effective Amendment No. ___ |X| Post-Effective Amendment No. 1
(Check appropriate box or boxes.)
Exact Name of Registrant as Specified in Charter:
SEPARATE ACCOUNT I
OF WASHINGTON NATIONAL SCUDDER VARIABLE LIFE
INSURANCE COMPANY INVESTMENT FUND
Address and Telephone Number (with Area Code)
of Principal Executive Offices:
300 Tower Parkway Two International Place
Lincolnshire, Illinois 60069-3665 Boston, Massachusetts 02110-4103
(708) 793-3000 (617) 295-2567
Name and Address of Agent for Service:
Craig R. Edwards, Esquire Thomas F. McDonough
Washington National Insurance Company Scudder, Stevens & Clark, Inc.
300 Tower Parkway Two International Place
Lincolnshire, Illinois 60069-3665 Boston, Massachusetts 02110-4103
Copy of all communications to:
Frederick R. Bellamy, Esquire Caroline Pearson, Esquire
Sutherland, Asbill & Brennan Dechert Price & Rhoads
1275 Pennsylvania Avenue, N.W. Ten Post Office Square South
Washington, D.C. 20004-2404 Boston, Massachusetts 02109-4603
Approximate Date of Proposed Public Offering:
As soon as possible after effectiveness of this registration statement
Calculation of Registration Fee under the Securities Act of 1933:
The Registrants hereby register an indefinite amount of their respective
securities under the Securities Act of 1933 pursuant to Rule 24f-2 under the
Investment Company Act of 1940. No additional registration fee is required to be
filed herewith because, pursuant to Rule 24f-2, an indefinite amount of units of
interest in variable annuity contracts previously have been registered by
Separate Account I of Washington National Insurance Company (File No. 2-81129)
and an indefinite number of shares of beneficial interest previously have been
registered by Scudder Variable Life Investment Fund (File No. 2-96461).
It is proposed that this filing will become effective on December 30, 1995,
pursuant to Rule 485(b) under the Securities Act of 1933.
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CROSS REFERENCE SHEET
Pursuant To Rule 481(a) Under the Securities Act Of 1933
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Item of Form N-14 Location in the Prospectus
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1. Beginning of Registration Statement and Cross Reference Sheet; Notice of Special Meeting of
Outside Front Cover Page of Prospectus Separate Account Voters
2. Beginning and Outside Back Cover Page of Table of Contents
Prospectus
3. Fee Table, Synopsis Information, and Risk Synopsis; Principal Risk Factors; Comparison of Fees
Factors and Expenses
4. Information About the Transactions The Proposed Transactions
5. Information About the Registrant Information on the Separate Account and the Fund;
Availability of Certain Other Information; Prospectus
dated May 1, 1995, for Scudder Variable Life
Investment Fund
6. Information About the Company Being Information on the Separate Account and the Fund;
Acquired Availability of Certain Other Information; Prospectus
dated May 1, 1995, for Separate Account I of
Washington National Insurance Company
7. Voting Information Notice of Special Meeting of Separate Account Voters;
General Information Regarding Proxy Solicitation;
Voting of the Fund's Shares
8. Interest of Certain Persons and Experts (Not Applicable)
9. Additional Information Required for (Not Applicable)
Reoffering by Persons Deemed to be
Underwriters
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<TABLE>
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Item of Form N-14 Location in the Prospectus
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10. Cover Page Outside Cover Page
11. Table of Contents Table of Contents
12. Additional Information about the Statement of Additional Information dated May 1,
Registrant 1995, for Scudder Variable Life Investment Fund
13. Additional Information about the Statement of Additional Information dated May 1,
Company Being Acquired 1995, for Separate Account I of Washington National
Insurance Company
14. Financial Statements Statement of Additional Information dated May 1, 1995, for Separate
Account I of Washington National Insurance Company; Semi-Annual Report dated
June 30, 1995, for Separate Account I of Washington National Insurance Company;
Annual Report dated December 31, 1994, for Scudder Variable Life Investment Fund;
Semi-Annual Report dated June 30, 1995, for Scudder Variable Life Investment Fund
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<PAGE>
PART A
INFORMATION REQUIRED IN THE PROXY STATEMENT/PROSPECTUS
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Separate Account I of Washington National Insurance Company
300 Tower Parkway
Lincolnshire, Illinois 60069-3665
January __, 1996
Dear WN PLAN Variable Annuity Contract Owner:
Washington National Insurance Company is pleased to announce improvements
planned for your WN PLAN variable annuity contract. Since these improvements
must be voted on and approved by the contract owners, a proxy statement and
proxy card are enclosed. It is very important that you sign and return the proxy
card in the enclosed envelope.
The proposal offers several advantages to you as an investor in the
Separate Account:
. experienced mutual fund management
. enhanced diversification of investments
. immediate reduction in fees
. more investment options
Under the proposed plan, your contract values would be invested in mutual
fund portfolios managed by Scudder, Stevens & Clark, Inc. ("Scudder"). Scudder,
which was founded in 1919, is one of the oldest and most experienced investment
counsel firms in the United States with assets under management aggregating in
excess of $90 billion. Directly or through affiliates, Scudder provides
investment advice to over 50 mutual fund portfolios. Due to the larger size of
the portfolios of Scudder Variable Life Investment Fund that have been selected
to replace the Sub-Accounts of Separate Account I, Scudder can afford the
potential for greater diversification of assets and a lower fee structure than
is presently the case with Separate Account I. In addition, you will have the
availability of a fourth investment option in which to further diversify your
investment dollars.
These proposed improvements are described in the enclosed proxy statement.
Please read it carefully, then sign and return the proxy card. A postage paid
envelope is enclosed for your convenience. YOUR VOTE IS IMPORTANT. Thank you.
Sincerely,
James E. Dresmal
Chairman of the Board of Directors
<PAGE>
SEPARATE ACCOUNT I
OF
WASHINGTON NATIONAL INSURANCE COMPANY
NOTICE OF SPECIAL MEETING OF SEPARATE ACCOUNT VOTERS to be held February 15,
1996
A Special Meeting of persons (the "Separate Account Voters") entitled to
vote in respect of Separate Account I of Washington National Insurance Company
(the "Separate Account") will be held at the Home Office of Washington National
Insurance Company ("Washington National") at 300 Tower Parkway in Lincolnshire,
Illinois, at __:___ __.m. Central Time, on Thursday, February 15, 1996, for the
following purposes:
1. To approve an Asset Transfer Agreement and Plan of Reorganization ("the
Agreement") and a set of transactions (the "Transactions") whereby the
Separate Account (presently a management investment company comprised of
three divisions or "Sub-Accounts" investing directly in securities and
other instruments) will be reconstituted as a unit investment trust (the
"Continuing Separate Account") comprised of the same three Sub-Accounts,
each of which will invest all of its assets in a corresponding investment
portfolio (an "Eligible Portfolio") of Scudder Variable Life Investment
Fund (the "Fund"), which will serve as the underlying investment vehicle
for and the continuation of the Sub-Accounts' investment portfolios. If the
Transactions are approved by the Separate Account Voters, then, immediately
following the restructuring of the Separate Account, the Separate Account
Voters will have beneficial interests in the same number of units in each
Sub-Account of the Continuing Separate Account as they owned in that
Sub-Account of the Separate Account immediately prior to the Transactions.
2. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
<PAGE>
The proposed Transactions are discussed in detail in the remainder of the Proxy
Statement/Prospectus dated January __, 1996, that accompanies this Notice.
The close of business on December 31, 1995, is the record time for
the determination of the number of votes entitled to be cast at the Special
Meeting and the determination of the Separate Account Voters entitled to notice
of, and to vote at, the Special Meeting and any adjournments thereof.
BY ORDER OF THE BOARD OF DIRECTORS
OF THE SEPARATE ACCOUNT
Lincolnshire, Illinois
January __, 1996 ____________________________________________
Craig R. Edwards, Secretary
Separate Account I of Washington National
Insurance Company
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Proxy Statement of January ___, 1996
SEPARATE ACCOUNT I
OF
WASHINGTON NATIONAL INSURANCE COMPANY
Prospectus of and
SCUDDER VARIABLE LIFE INVESTMENT FUND SEPARATE ACCOUNT I OF WASHINGTON
NATIONAL INSURANCE COMPANY
Two International Place 300 Tower Parkway
Boston, Massachusetts 02110-4103 Lincolnshire, Illinois 60069-3665
(617) 295-1000 (708) 793-3000
The variable component of your WN Plan deferred annuity contract (the
"Contract") is invested in Separate Account I of Washington National Insurance
Company (the "Separate Account"), which is a management investment company
comprised of three Sub-Accounts (i.e., the Bond Sub-Account, the Short-Term
Portfolio Sub-Account, and the Stock Sub-Account). If the Transactions are
approved, the Separate Account will be converted into a unit investment trust
(the "Continuing Separate Account") comprised of the same three Sub-Accounts.
Upon completion of the Transactions, the Bond Sub-Account, the Short-Term
Portfolio Sub-Account, and the Stock Sub-Account of the Continuing Separate
Account will each invest all of its assets exclusively in shares of the Bond
Portfolio, the Money Market Portfolio, and the Capital Growth Portfolio,
respectively, of Scudder Variable Life Investment Fund (the "Fund"). Only these
three Portfolios of the Fund (the "Eligible Portfolios") will be available under
the Contracts immediately following the Transactions. Shortly thereafter,
however, Washington National Insurance Company intends to make available a
fourth Sub-Account of the Continuing Separate Account, which Sub-Account will
invest all of its assets in the Growth and Income Portfolio of the Fund.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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Each Sub-Account of the Separate Account and its corresponding Portfolio of
the Fund have similar investment objectives:
o The investment objective of the Bond Sub-Account of the Separate Account is
to obtain as high a level of current income as possible while preserving
capital. The Bond Portfolio of the Fund pursues a policy of investing for a
high level of income consistent with a high quality portfolio of debt
securities.
o The investment objective of the Short-Term Portfolio Sub-Account of the
Separate Account is to obtain a moderate level of current income,
consistent with liquidity and preservation of capital. The Money Market
Portfolio of the Fund seeks to maintain the stability of capital and,
consistent therewith, to maintain the liquidity of capital and to provide
current income.
o The investment objective of the Stock Sub-Account of the Separate Account
is to achieve long-term capital growth through capital appreciation and
income. The Capital Growth Portfolio of the Fund seeks to maximize
long-term capital growth through a broad and flexible investment program.
This combination Proxy Statement and Prospectus concisely sets forth
information about the Transactions and the proposed future operation of the
Continuing Separate Account which the persons entitled to vote in respect of the
Separate Account (the "Separate Account Voters") should know before casting
their votes. This Proxy Statement/Prospectus should be retained for future
reference.
A Statement of Additional Information dated January __, 1996, relating to
matters covered in this Proxy Statement/Prospectus has been filed with the
Securities and Exchange Commission and is incorporated herein by reference. That
Statement is available upon oral or written request and without charge. The
Separate Account will also furnish, without charge, a copy of its Annual Report
dated December 31, 1994, and its Semi-Annual Report dated June 30, 1995, to a
Separate Account Voter upon request. Such a request (for the
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<PAGE>
Statement and/or the Annual Report and Semi-Annual Report) should be directed to
Washington National Insurance Company, Life and Annuity Administration, 300
Tower Parkway, Lincolnshire, Illinois 60069-3665 (telephone 800-933-5432). Other
inquiries about the Separate Account should be directed to Washington National
Insurance Company at the same address or telephone number.
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Proxy Statement/Prospectus
TABLE OF CONTENTS
Page
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GENERAL INFORMATION REGARDING PROXY SOLICITATION................................................................ 5
SYNOPSIS ....................................................................................................... 7
PRINCIPAL RISK FACTORS.......................................................................................... 8
THE PROPOSED TRANSACTIONS....................................................................................... 9
DESCRIPTION OF THE TRANSACTIONS........................................................................ 9
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES....................................................... 12
COMPARISON OF FEES AND EXPENSES........................................................................ 19
REASONS FOR THE TRANSACTIONS........................................................................... 26
ACTUAL AND PRO FORMA CAPITALIZATION.................................................................... 28
COMPARATIVE PERFORMANCE................................................................................ 29
INFORMATION ON THE SEPARATE ACCOUNT AND THE FUND................................................................ 31
MANAGEMENT OF THE SEPARATE ACCOUNT AND THE FUND........................................................ 32
ORGANIZATION AND OPERATION OF THE FUND................................................................. 34
Characteristics of the Fund's Shares.......................................................... 34
Dividends, Distributions, and Taxes........................................................... 36
Voting of the Fund's Shares................................................................... 37
Certain Ownership Interests................................................................... 39
DIVISIONS OF THE SEPARATE ACCOUNT AND THE FUND......................................................... 40
Sub-Accounts of the Separate Account.......................................................... 40
Portfolios of the Fund........................................................................ 41
SALE OF THE CONTRACTS AND FUND SHARES.................................................................. 42
DEDUCTIONS, CHARGES, FEES, AND EXPENSES................................................................ 43
Deductions and Charges Under the Contracts.................................................... 43
Fees and Expenses of the Fund................................................................. 47
SUPPLEMENTARY FINANCIAL INFORMATION.................................................................... 48
Condensed Financial Information for the Separate Account...................................... 48
Financial Highlights for the Fund............................................................. 49
AVAILABILITY OF CERTAIN OTHER INFORMATION....................................................................... 50
OTHER MATTERS................................................................................................... 51
FORM OF PROXY
APPENDIX A -- FORM OF ASSET TRANSFER AGREEMENT AND PLAN OF REORGANIZATION
APPENDIX B -- PROSPECTUS DATED MAY 1, 1995, FOR SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
APPENDIX C -- PROSPECTUS DATED MAY 1, 1995, FOR SCUDDER VARIABLE LIFE INVESTMENT
FUND
</TABLE>
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<PAGE>
GENERAL INFORMATION REGARDING PROXY SOLICITATION
This Proxy Statement/Prospectus is furnished in connection with the
solicitation by the Board of Directors of Separate Account I of Washington
National Insurance Company (the "Separate Account") of proxies for use at a
Special Meeting of persons (the "Separate Account Voters") entitled to vote in
respect of the group and individual deferred variable annuity contracts (the
"Contracts") issued by Washington National Insurance Company ("Washington
National") and funded by the Separate Account, as discussed in the foregoing
notice.
If the enclosed proxy is executed and returned, it may nevertheless be
revoked at any time before its exercise by written notice to Washington National
or by vote in person at the Special Meeting. A later-dated proxy received by
Washington National will revoke a prior proxy. The expenses of the proxy
solicitation, which will be by mail but may also be by telephone, telegraph, or
personal interview conducted by personnel of Washington National, will be paid
by Washington National. Such expenses are expected to be approximately
$_____________________.
The rules governing the Separate Account provide that the number of votes
which may be cast with respect to a Contract before Annuity Payments begin will
be determined by the number of units credited to the owners of Contracts
("Contract Owners"). After Annuity Payments begin, the number of votes which an
Annuitant may cast is based on the reserve credited to the Contract and held in
the Separate Account under the variable annuity Settlement Option in effect,
divided by the Accumulation Unit value for the particular Sub-Account.
As of December 31, 1995, there were __________ votes entitled to be
cast at the Special Meeting, including __________ votes in respect of the Bond
Sub-Account, __________ votes in respect of the Short-Term Portfolio
Sub-Account, and __________ votes in respect of the Stock Sub-Account.
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Before Annuity Payments begin, Contract Owners have the right to vote at
the Special Meeting. After Annuity Payments begin under a Contract, the
Annuitant has the right to vote at the Special Meeting. Participants under a
group Contract may have the right to instruct Contract Owners as to votes
attributable to their respective interests in the Separate Account.
All proxies executed and returned to Washington National will be voted in
accordance with instructions marked thereon. If instructions are not marked
thereon, proxies for each Separate Account Voter will be voted FOR the proposals
to be voted on at the Special Meeting.
Approval of the Asset Transfer Agreement and Plan of Reorganization (the
"Agreement") and the set of related transactions (the "Transactions") requires,
with respect to each of the three Sub-Accounts, the affirmative vote of the
lesser of (a) 67% of the votes cast at the Special Meeting, if more than 50% of
the total eligible votes are present in person or by proxy, or (b) more than 50%
of the total eligible votes. The Transactions must be approved by the requisite
vote of the Separate Account Voters of each Sub-Account as a prerequisite to its
implementation.
By virtue of Washington National's beneficial ownership of more than 25% of
the voting securities of each Sub-Account of the Separate Account (i.e., __.__%
of the Bond Sub-Account, __.__% of the Short-Term Portfolio Sub-Account, and
__.__% of the Stock Sub-Account as of December 31, 1995), Washington National
and its parent company, Washington National Corporation ("WNC"), may each be
deemed to control the Separate Account. In making this statement, neither
Washington National nor WNC nor the Separate Account acknowledges the existence
of such control. Indeed, Washington National will vote those units of beneficial
interest in any Sub-Account which are attributable to Contracts owned by
Washington National, or for which no timely voting instructions are received by
Washington National, in the same proportion as the units for which timely voting
instructions are received under other Contracts. Washington National, an
Illinois corporation, is a wholly-owned subsidiary of WNC, a Delaware
corporation, both of which are located at 300 Tower Parkway, Lincolnshire,
Illinois 60069-3665.
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<PAGE>
If a sufficient number of votes is not represented at the Special Meeting
to approve the Transactions, the Special Meeting may be adjourned for the
purpose of further proxy solicitation, or for any other purpose. Unless
otherwise instructed, proxies will be voted in favor of any adjournment. At any
subsequent reconvening of the meeting, proxies will (unless previously revoked)
be voted in the same manner as they would have been voted at the original
meeting.
SYNOPSIS
The Board of Directors of the Separate Account has authorized the
reorganization of the Separate Account from a management investment company into
a unit investment trust, which shall be comprised of the same three Sub-Accounts
that currently comprise the Separate Account. All of the assets of the Bond
Sub-Account, Short-Term Portfolio Sub-Account, and Stock Sub-Account of the
Separate Account will be invested in the Bond Portfolio, Money Market Portfolio,
and Capital Growth Portfolio, respectively, of the Fund. The Fund is a
management investment company (commonly known as a "mutual fund") that is not
affiliated with the Separate Account or Washington National and that is advised
by Scudder, Stevens & Clark, Inc. ("Scudder"). The current investment objectives
and policies of the Bond Sub-Account, Short-Term Portfolio Sub-Account, and
Stock Sub-Account of the Separate Account are similar to the investment
objectives and policies of the Bond Portfolio, Money Market Portfolio, and
Capital Growth Portfolio, respectively, of the Fund.
Washington National will assume all costs and expenses associated with
effecting the Transactions that might otherwise be borne by the Separate
Account; the Fund bears its own costs and expenses in this regard. The charges
provided for in the Contracts will not increase as a result of the Transactions,
and in certain cases may be reduced. Contingent deferred sales charges,
financial accounting service charges, and annuity rate guarantee deductions
under the Contracts will remain unchanged. There will be no change in the value
of your Contract and no change in your benefits under the Contract. Exchange
rights, redemption procedures, and other features of the Contracts will not be
affected by the Transactions. Washington National believes that the Transactions
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<PAGE>
will result in no adverse tax consequences to owners of Contracts ("Contract
Owners").
PRINCIPAL RISK FACTORS
The principal risk factors involved in investing in the Continuing Separate
Account and the Fund will be substantially similar to the principal risk factors
currently associated with investing in the Separate Account. Those risk factors
are that the investments made by the Fund's investment adviser may not
appreciate in value or will, in fact, lose value. Specifically, the investments
are subject to three general types of investment risks: financial risk, which
refers to the ability of the issuer of a security to pay principal and interest
when due or to maintain or increase dividends; market risk, which refers to the
degree to which the price of a security will react to changes in conditions in
the securities markets and to changes in the overall level of interest rates;
and current income volatility, which refers to the degree to which and the
timing by which changes in the overall level of interest rates or, in the case
of certain derivative instruments, other underlying economic variables or
indices affect the current income from an investment.
In addition, by investing in the Continuing Separate Account and the Fund,
Contract Owners will become exposed to certain additional risk factors that are
not currently associated with investing in the Separate Account. For example,
one or more Eligible Portfolios may fail to qualify as a regulated investment
company in any particular year and may thereby incur Federal income tax
liability. This would adversely affect the investment performance of the
disqualified Portfolios and therefore the investment performance of the
corresponding Sub-Accounts of the Continuing Separate Account. Also, the Fund's
shares of beneficial interest currently are, and will continue to be, owned by
separate accounts of other insurance companies ("Participating Insurance
Companies") to fund variable annuity contracts and variable life insurance
policies. While it is conceivable that, in the future, it may be disadvantageous
to the Continuing Separate Account to be invested in the Fund simultaneously
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<PAGE>
with such other separate accounts, Washington National and the Fund do not
currently see any such disadvantages.
Unlike the Sub-Accounts of the Separate Account, one or more Eligible
Portfolios may invest in lower rated debt securities, foreign securities,
forward contracts, and derivative instruments. Such investments typically
involve greater risks than the Separate Account's investments. (See the Fund's
prospectus dated May 1, 1995, which accompanies this Proxy Statement/Prospectus
as Appendix C, for further discussion of the risk factors involved in
investing in the Fund.)
THE PROPOSED TRANSACTIONS
DESCRIPTION OF THE TRANSACTIONS
The Transactions involve the transfer of the net assets of each Sub-Account
of the Separate Account to a corresponding Portfolio of the Fund in exchange for
shares of beneficial interest in that Portfolio. If the Transactions are
approved by the Separate Account Voters, the Separate Account will no longer
hold securities and other instruments directly but rather will hold similar
investments indirectly through the intermediate vehicle of the Fund. Those
investments will be managed by Scudder instead of Washington National, the
current investment manager of the Separate Account, and instead of NBD Bank, the
current sub-adviser for the Stock Sub-Account.
At present, the Separate Account is a diversified management investment
company, as such companies are defined in the Investment Company Act of 1940, as
amended (the "1940 Act"). It is supervised by a Board of Directors having a
majority of members who are not "interested persons" (i.e., who are drawn from
outside) of Washington National, and each Sub-Account thereof invests in
securities and other instruments in accordance with objectives outlined in a
prospectus. (See the Separate Account's prospectus, dated May 1, 1995, which
accompanies this Proxy Statement/Prospectus as Appendix B and is incorporated
herein by reference.) If the Transactions are approved by the Separate Account
Voters, the Separate Account would be restructured as a unit investment trust
(the "Continuing Separate Account") that will continue to be subdivided into
three Sub-Accounts, each now corresponding to, and investing solely in shares of
beneficial interest in, a particular Portfolio of the Fund. (See the Fund's
prospectus, dated May 1, 1995, which accompanies this Proxy
Statement/Prospectus as Appendix C and is incorporated herein by reference.) The
value of a unit in each Sub-Account of the Continuing Separate Account will be
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based on the net asset value per share of the corresponding Portfolio of the
Fund. The total value of the Accumulation Units a Contract Owner has in each
Sub-Account of the Separate Account immediately prior to the Transactions is no
different than the total value of the Accumulation Units the same Contract
Owner will have in that Sub-Account of the Continuing Separate Account
immediately after the Transactions.
Currently, the persons participating in the variable annuity portion of the
Contracts look to the investment performance of the securities and other
instruments held in the three Sub-Accounts of the Separate Account. After the
Transactions are consummated, the Continuing Separate Account will have the same
three Sub-Accounts, but such persons will look to the investment experience of
the Fund's Portfolios corresponding to the chosen Sub-Accounts of the Continuing
Separate Account. By offering Contract Owners the chance to choose among three
of the Fund's Portfolios, the Continuing Separate Account will take a passive
role with respect to the selection of the type or types of investments that will
underlie a Contract Owner's variable annuity.
At the time of the Transactions, all of the investment assets of each
Sub-Account of the Separate Account, together with any related liabilities, are
expected to be transferred to the corresponding Portfolio of the Fund in
exchange for the number of shares of beneficial interest in that Portfolio which
has an aggregate net asset value equal to, or based on, the market value of the
transferred assets, less the principal amount of any transferred liabilities.
(The market value of the transferred assets will be measured in compliance with
Rule 22c-1 under the 1940 Act, as described on page 17 of the Separate Account's
prospectus dated May 1, 1995, which accompanies this Proxy Statement/Prospectus
as Appendix B.) The liabilities to be transferred from the Separate Account to
the Fund may include certain charges and deductions under the Contracts which
have been accrued but not yet paid and outstanding obligations under certain
investment arrangements (e.g., repurchase agreements, borrowings, securities
transactions before final settlement). Some of the assets of the Sub-Accounts
may be liquidated prior to the Transactions to facilitate the transfer, but
Washington National will pay any related brokerage commissions.
Washington National, as the legal owner of the Fund's shares to be held in
the Continuing Separate Account, will not realize taxable income as a result of
any gain on the sale of those shares or as a result of distributions made by the
Fund to Washington National, as described above, to the extent that such gains
or distributions are reflected in variable annuity contract reserves. Washington
National does not believe that it will recognize gain or loss in connection with
the Transactions, but if it does, Washington National will not make any charge
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<PAGE>
to the Continuing Separate Account or Contract Owners for federal income taxes
resulting from recognition of any such gain.
More information on the Transactions is contained in a document entitled
"Asset Transfer Agreement and Plan of Reorganization," which has been approved
and adopted by the Board of Directors of the Separate Account and entered into
by Washington National (in its capacity as the insurance company of which the
Separate Account is a part under state insurance law), the Separate Account, and
the Fund. This document is attached to this Proxy Statement/Prospectus as
Appendix A. Approval of the Transactions by the Separate Account Voters is a
prerequisite to their implementation.
The Transactions may be postponed from time to time or cancelled for any
reason with the consent of the parties thereto. Washington National will pay all
of the costs of the Transactions that might otherwise be borne by the Separate
Account; the Fund bears all of its own expenses in this regard.
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
In the opinion of Washington National and the Board of Directors of the
Separate Account, the investment objectives, policies, and restrictions of the
Bond Portfolio, the Money Market Portfolio, and the Capital Growth Portfolio of
the Fund are not materially different from the investment objectives, policies,
and restrictions which have guided the Bond Sub-Account, the Short-Term
Portfolio Sub-Account, and the Stock Sub-Account, respectively, of the Separate
Account, with the following exception: Currently, the Separate Account's
policies are to invest directly in individual securities selected by Washington
National, its investment manager, and by NBD Bank, its sub-adviser for the Stock
Sub-Account. Specifically, it is currently a fundamental investment policy that
no Sub-Account of the Separate Account may have more than 5% of its assets
invested in any one investment company, have a total of more than 10% of its
assets invested in investment company securities, or own more than 3% of the
outstanding voting securities of any one investment company. Approval of the
Transactions by the Separate Account Voters will be an approval
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<PAGE>
of a change in the investment objectives, policies, and restrictions of the
Sub-Accounts of the Separate Account to require investment entirely and solely
in specific mutual fund portfolios.
In addition to this material difference, there are several other
differences between the investment objectives, policies, and restrictions of the
Sub-Accounts of the Separate Account and the investment objectives, policies,
and restrictions of the corresponding Portfolios of the Fund. Noteworthy among
these differences are the following:
o Bond Sub-Account compared to Bond Portfolio
-- The Bond Sub-Account invests at least 85% of its assets in U.S.
Government and other debt securities within the four highest bond
rating categories. The Bond Portfolio invests at least 65% of its
assets in U.S. Government and other debt securities, up to 20% of
which may be in below-investment grade bonds.
-- The Bond Sub-Account may invest up to 10% of its assets in real
estate. The Bond Portfolio may not invest in real estate.
-- The Bond Sub-Account may not invest in restricted or foreign
securities and may not purchase put or call options or combinations
thereof. The Bond Portfolio may invest in foreign securities
(including up to 20% of its assets in non-U.S. dollar-denominated
foreign debt securities) and may use forward contracts and other
derivative instruments in managing its investment portfolio.
o Short-Term Portfolio Sub-Account compared to Money Market Portfolio
- 12 -
<PAGE>
-- The Short-Term Portfolio Sub-Account does not maintain a stable net
asset value. The Money Market Portfolio seeks to maintain a stable net
asset value at $1.00 per share.
-- Instruments purchased by the Short-Term Portfolio Sub-Account must
have a maturity date of sixty (60) days or less, and portfolio
maturity may vary. Instruments purchased by the Money Market Portfolio
may have remaining maturities of 397 calendar days or less and must
maintain an average portfolio maturity of ninety (90) days or less.
Unlike the Short-Term Portfolio Sub-Account, the Money Market
Portfolio is subject to the credit and quality limitations of Rule
2a-7 under the 1940 Act.
o Stock Sub-Account compared to Capital Growth Portfolio
-- The Stock Sub-Account may invest up to 10% of its assets in real
estate. The Capital Growth Portfolio may not invest in real estate.
-- The Stock Sub-Account may invest in debt securities in the form of
investment-grade debt obligations and securities convertible into
common stock, and may invest in debt instruments for temporary
purposes. The Capital Growth Portfolio may invest up to 20% of its net
assets in intermediate- to longer-term, convertible and non-
convertible debt securities (including up to 5% of its assets in debt
securities rated below investment-grade), and may also invest up to
25% of its assets in short-term debt instruments in order to reduce
risk.
-- The Stock Sub-Account may not invest in restricted or foreign
securities and may not purchase put or call options or combinations
thereof. The Capital Growth Portfolio may invest without limit (except
the limit applicable to debt securities generally) in U.S. dollar-
denominated foreign debt securities and up to 25% of its assets in
non-U.S. dollar-denominated equity securities of foreign issuers and
may use forward and futures contracts, put and call options and other
derivative instruments in managing its investment portfolio.
- 13 -
<PAGE>
Certain investment policies and restrictions of the Separate Account and
certain investment restrictions of the Fund are fundamental and therefore may
not be changed with respect to a Sub-Account or Portfolio, respectively, without
the approval of a majority of the outstanding voting securities of that
Sub-Account or Portfolio. For this purpose, a majority of the outstanding voting
securities means the lesser of (A) 67% of the voting securities present at a
meeting of the security holders of the Sub-Account or Portfolio, if the holders
of more than 50% of the outstanding voting securities thereof are present or
represented by proxy, or (B) more than 50% of the outstanding voting securities
of the Sub-Account or Portfolio. The following table compares the fundamental
policies and restrictions of the Separate Account to the fundamental
restrictions of the Fund:
<TABLE>
<CAPTION>
<C> <C>
The Separate Account The Fund
---------------------------------------------------------------------------------------------------------------
The assets of the Bond and Stock Sub-Accounts will be (No comparable fundamental investment restriction)
kept fully invested, except that cash may be kept on
hand for the following purposes: (1) to handle
redemptions; (2) pending reinvestment; (3) during
periods warranting a more defensive investment
position, a larger proportion of the assets of the
appropriate Sub-Account may be temporarily maintained
in cash of may be placed in money market instruments
or short-term fixed income securities; or (4)
temporarily, to take a defensive position if
warranted by market conditions.
With respect to 75% of the value of its total assets, With respect to 75% of the value of the assets of a
the Separate Account will not invest more than 5% of Portfolio, the Fund may not, on behalf of any
the value of the assets in the securities of, nor Portfolio, invest more than 5% of the value of the
acquire more than 10% of the outstanding voting Portfolio's total assets in the securities of any
securities of, any one issuer except those of the one issuer, except U.S. Government securities, and,
United States Government, its agencies and with respect to 100% of the value of the total
instrumentalities. 25% of the Separate Account's assets of a Portfolio, the Fund may not, on behalf
assets may be invested in the securities of one or of any Portfolio, invest more than 25% of the value
more issuers without regard for those limitations. of the Portfolio's total assets in the securities of
any one issuer, except U.S. Government securities.
The Fund may not, on behalf of any Portfolio,
purchase the securities of any issuer if such
purchase would cause more than 10% of the voting
securities of such issuer to be held by a Portfolio.
</TABLE>
- 14 -
<PAGE>
<TABLE>
<CAPTION>
<C> <C>
The Separate Account The Fund
---------------------------------------------------------------------------------------------------------------
The Separate Account reserves the right to invest up The Fund may not, on behalf of any Portfolio,
to 10% of the total assets of each of the Sub- purchase and sell real estate (though it may invest
Accounts, other than the Short-Term Portfolio Sub- in securities of companies which deal in real estate
Account, in interests in real estate. Purchases and and in other permitted investments secured by real
sales may be made by the Sub-Accounts, other than the estate).
Short-Term Portfolio Sub-Account, of securities which
invest or deal in oil, gas or other mineral
exploration or development programs or real estate
and real estate trusts.
Loans will not be made except through the acquisition The Fund may not, on behalf of any Portfolio, make
of a portion of an issue of publicly distributed loans to other persons, except loans of portfolio
bonds, debentures, or other evidences of indebtedness securities and loans to the extent that the purchase
of a type customarily purchased by institutional of debt obligations in accordance with its
investors and except that money market instruments investment objectives and policies and the entry
including repurchase agreements may be acquired and into repurchase agreements may be deemed to be
held as permitted in accordance with the Separate loans. The Fund may not, on behalf of any
Account's investment objectives and policies. Portfolio, enter into repurchase agreements or
Investments in repurchase agreements maturing in more purchase any securities if, as a result thereof,
than seven days and in interests in non-marketable more than 10% of the total assets of a Portfolio
real estate or any other illiquid asset will not (taken at market value) would be, in the aggregate,
exceed 10% of the total assets of any Sub-Account. subject to repurchase agreements maturing in more
than seven days and invested in restricted
securities or securities which are not readily
marketable.
No investment will be made in the securities of any (No comparable fundamental investment restriction)
issuer for the purpose of exercising management or
control.
Investments will not be made in restricted or foreign (No comparable fundamental investment restriction)
securities, except that the Short-Term Portfolio
Sub-Account may acquire certificates of deposit
issued by U.S. branches of foreign banks and foreign
branches of U.S. banks, and commercial paper issued
by foreign corporations, assuming proper rating,
provided that no more than 25% of the assets of the
Sub-Account will be so invested at the time the
investment is made.
No securities owned or held will be mortgaged, The Fund may not, on behalf of any Portfolio,
pledged, hypothecated, or in any manner transferred pledge, mortgage, or hypothecate its assets, except
as security for indebtedness. that, to secure borrowings permitted by these
investment restrictions, it may pledge securities
having a market value at the time of pledge not
exceeding 15% of the value of a Portfolio's total
assets and except in connection with the writing of
covered call options and the purchase and sale of
futures contracts and options on futures contracts.
</TABLE>
- 15 -
<PAGE>
<TABLE>
<CAPTION>
<C> <C>
The Separate Account The Fund
---------------------------------------------------------------------------------------------------------------
Senior securities will not be issued. The Fund may not, on behalf of any Portfolio, issue
senior securities, except as appropriate to evidence
indebtedness which a Portfolio is permitted to incur
pursuant to these investment restrictions and except
for shares of various additional series which may
be established by the Trustees.
Investments will not be concentrated in any (No comparable fundamental investment restriction)
geographical area of the United States (such as
northeastern states, mid-western states, etc.).
No more than 25% of the total assets of any Sub- The Fund may not, on behalf of any Portfolio,
Account will be invested in any one industry other purchase securities if such purchase would cause
than obligations of the U.S. Government, its agencies more than 25% in the aggregate of the market value
and instrumentalities, or bank certificates of of the total assets of a Portfolio at the time of
deposit, bankers' acceptances, or instruments secured such purchase to be invested in the securities of
by these money market instruments. one or more issuers having their principal business
activities in the same industry, provided that there
is no limitation in respect to investments in
obligations issued or guaranteed by the U.S.
Government or its agencies or instrumentalities (for
the purpose of this restriction, telephone companies
are considered to be a separate industry from gas
and electric public utilities, and wholly-owned
finance companies are considered to be in the
industry of their parents if their activities are
primarily related to financing the activities of the
parents).
The Separate Account may borrow money for temporary The Fund may not, on behalf of any Portfolio, borrow
or emergency purposes up to an amount equal to 5% of money except from banks as a temporary measure for
the value of the Separate Account at the time of extraordinary or emergency purposes (each Portfolio
borrowing. All borrowings will be unsecured. is required to maintain asset coverage (including
borrowings) of 300% for all borrowings) and no
purchases of securities for a Portfolio will be made
while borrowings of that Portfolio exceed 5% of the
Portfolio's assets (the payment of interests on
borrowings by a Portfolio will reduce that
Portfolio's income). (In addition, the Board of
Trustees has adopted a policy whereby each Portfolio
of the Fund may borrow up to 10% of its total
assets; provided, however, that each Portfolio may
borrow up to 25% of its total assets for
extraordinary or emergency purposes, including the
facilitation of redemptions.)
Securities of other issuers will not be underwritten, The Fund may not, on behalf of any Portfolio, act as
nor will the Separate Account purchase the securities underwriter of the securities issued by others,
of other issuers that might later be deemed to be except to the extent that the purchase of securities
underwritten by the Separate Account. in accordance with its investment objective and
policies directly from the issuer thereof and the
later disposition thereof may be deemed to be
underwriting.
</TABLE>
- 16 -
<PAGE>
<TABLE>
<CAPTION>
<C> <C>
The Separate Account The Fund
---------------------------------------------------------------------------------------------------------------
No purchase will be made of commodities or commodity The Fund may not, on behalf of any Portfolio,
contracts. purchase and sell commodities or commodities
contracts, except debt securities futures contracts
and securities index futures contracts and options
thereon.
Short sales, purchases on margin, or purchases of put The Fund may not, on behalf of any Portfolio,
or call options or combinations thereof will not be purchase securities on margin or make short sales
made. unless, by virtue of its ownership of other
securities, it has the right to obtain securities
equivalent in kind and amount to the securities sold
and, if the right is conditional, the sale is made
on the same conditions. The Fund may not, on behalf
of any Portfolio, purchase or sell any put or call
options or any combination thereof, except that the
Fund may purchase and sell options on futures
contracts on debt securities, options on securities
indexes and securities index futures contracts and
write covered call option contracts on securities
owned by a Portfolio, and may also purchase call
options for the purpose of terminating its
outstanding obligations with respect to securities
upon which covered call option contracts have been
written (i.e., "closing purchase transactions").
Investments may be made in the securities of one or (Although the Fund has no comparable fundamental
more investment companies; but no Sub-Account may investment restriction, Section 12(d)(1)(A) of the
have more than 5% of its assets invested in any one 1940 Act imposes essentially these same limitations
investment company, have a total of more than 10% of on each Portfolio.)
its assets invested in investment company securities,
not own more than 3% of the total outstanding voting
securities of any one investment company.
(Although the Separate Account has no comparable The Fund may not, on behalf of any Portfolio,
fundamental investment policy or restriction, Section participate on a joint or a joint and several basis
17(d) of the 1940 Act imposes essentially these same in any trading account in securities, but may for
limitations on each Sub-Account with respect to the purpose of possibly achieving better net results
participation on a joint or a joint and several basis on portfolio transactions or lower brokerage
in a trading account in securities. However, when commission rates join with other investment company
Washington National believes it is in the best and client accounts managed by Scudder or its
interest of the Separate Account, transactions for affiliates in the purchase or sale of portfolio
the Separate Account may be executed together with securities.
purchases or sales of the same security for
Washington National's fixed account or for other
accounts served by Washington National.)
</TABLE>
- 17 -
<PAGE>
<TABLE>
<CAPTION>
<C> <C>
The Separate Account The Fund
---------------------------------------------------------------------------------------------------------------
(No comparable fundamental investment policy or The Fund may not, on behalf of any Portfolio,
restriction) purchase or retain securities of an issuer any of
whose officers, directors, trustees or security
holders is an officer or Trustee of the Fund or a
member, officer, director or trustee of the
investment adviser of the Fund if one or more of
such individuals owns beneficially more than
one-half of one percent (1/2 of 1%) of the shares or
securities or both (taken at market value) of such
issuer and such individuals owning more than
one-half of one percent (1/2 of 1%) of such shares
or securities together own beneficially more than 5%
of such shares or securities or both.
</TABLE>
If the Transactions are approved by the Separate Account Voters, Contract Owners
will lose the protections of certain fundamental policies and restrictions of
the Separate Account (and become subject to additional investment risk) to the
extent that the corresponding policies and restrictions of the Fund either are
not fundamental (i.e., may be changed without the approval of a majority of the
outstanding voting securities) or impose less severe limitations than those of
the Separate Account.
A more complete description of the investment objectives, policies, and
restrictions of the Separate Account and the Fund is contained in their
prospectuses dated May 1, 1995, which accompany this Proxy Statement/Prospectus
as Appendices B and C, respectively.
COMPARISON OF FEES AND EXPENSES
The overall costs to Contract Owners after the Transactions generally
are not expected to be materially greater than they were before the Transactions
and may be lower. The Fund offers and sells its shares to insurance company
separate accounts at each Portfolio's net asset value per share without sales
charge.
- 18 -
<PAGE>
Currently, four charges are imposed under the Contracts against Separate
Account assets -- a 0.80% annuity rate guarantee deduction, a 0.35% financial
accounting service charge, a 0.50% investment management fee, and a 0.20% charge
for other expenses (these charges are the specified annual percentages of each
Sub-Account's average daily net assets). In addition, a contract maintenance
charge of $30 annually generally is also imposed under the Contracts. The
charges for the annuity rate guarantees and financial accounting services are
guaranteed not to increase. After the Transactions, the 0.80% annuity rate
guarantee deduction and the 0.35% financial accounting service charge will
continue to be imposed against the assets of the Separate Account (and the
annual $30 contract maintenance charge will continue to be deducted from the
accumulated value of the Contracts), but the 0.50% investment management fee and
the 0.20% charge for other expenses will no longer be imposed against the assets
of the Separate Account. Instead, Scudder, which is the investment adviser of
the Fund, charges each of the Portfolios of the Fund a fee, which accrues daily,
for its investment advisory services. Unlike the common level of the investment
management fee currently incurred by all three Sub-Accounts of the Separate
Account, the level of the Fund's investment advisory fee differs from one
Portfolio to another (for 1994, 0.475% annually of the average daily net assets
for the Bond Portfolio, 0.370% annually of the average daily net assets for the
Money Market Portfolio, and 0.475% annually of the average daily net assets for
the Capital Growth Portfolio). In addition, the Fund pays certain of its
operating expenses and also makes payments to Scudder and to Scudder Investor
Services, Inc. and Scudder Fund Accounting Corporation, both wholly-owned
subsidiaries of Scudder, for clerical, accounting, and certain other services
they may provide to the Fund. In 1994, these expenses and payments were 0.105%
annually of the average daily net assets for the Bond Portfolio, 0.190% annually
of the average daily net assets for the Money Market Portfolio, and 0.105%
annually of the average daily net assets for the Capital Growth Portfolio.
In total, the sum ("Total Portfolio Operating Expenses") of the
investment advisory fee and these payments deducted in 1994 from the assets of
each Eligible Portfolio of the Fund (0.58% for the Bond Portfolio, 0.56% for the
- 19 -
<PAGE>
Money Market Portfolio, and 0.58% for the Capital Growth Portfolio) compares
favorably to the 0.70% sum of the investment management fee and the charge for
other expenses currently imposed against the assets of each Sub-Account of the
Separate Account. In other words, the level of the charges currently imposed
against the assets of all three Sub-Accounts of the Separate Account for
investment management and other expenses exceeds the 1994 level of Total
Portfolio Operating Expenses for all three Eligible Portfolios of the Fund. In
addition, certain Participating Insurance Companies (including Washington
National if the Transactions are consummated) have agreed to contribute to the
capital of the Fund to the extent that the Total Portfolio Operating Expenses of
any Eligible Portfolio exceed 0.75% of the average daily net assets of that
Portfolio for any year of the Fund.
The following comparative fee tables for the year ended December 31, 1994,
illustrate, for each Sub-Account of the Separate Account: the current charges
and deductions under the Contract; the fees and expenses of the corresponding
Portfolio of the Fund; and the charges and deductions under the Contract
(including the fees and expenses of the Fund) restated as if the Transactions
had been consummated at the beginning of 1994:
- 20 -
<PAGE>
<TABLE>
<CAPTION>
BOND SUB-ACCOUNT and BOND PORTFOLIO
-----------------------------------
<C> <C> <C> <C>
COMPARATIVE FEE TABLE The Continuing
(for the year ended December 31, 1994) Separate Account The Fund (A) Separate Account
---------------- ------------ ----------------
(current) (current) (pro forma)
Contract Owner Transactions Expenses
Sales Load Imposed on Purchases $ --- $ --- $ ---
Maximum Contingent Deferred Sales Load (as a
percentage of Accumulated Value withdrawn) 6% --- 6%
Transfer Fee $ --- $ --- $ ---
Annual Contract Fee $30 per Contract $ --- $30 per Contract
Separate Account Annual Expenses
(as a percentage of average account value)
Management Fee 0.50 % --- ---
Annuity Rate Guarantees 0.80 % --- 0.80 %
Financial Accounting Fees 0.35 % --- 0.35 %
Other Expenses (net charged to account) (B) 0.20 % --- ---
------- ------- -------
Total Separate Account Annual Expenses 1.85 % --- 1.15 %
Scudder Variable Life Investment Fund
Annual Expenses
(as a percentage of average net assets)
Management Fee --- 0.475% 0.475%
Other Expenses (after Reimbursement) (C) --- 0.105% 0.095%
------- ------- -------
Total Portfolio Operating Expenses --- 0.58 % 0.57 %
------- ------- -------
Total Separate Account and Portfolio Expense 1.85 % 0.58 % 1.72 %
======= ======= =======
- ----------------------------
</TABLE>
(A) The amounts for the Fund itself do not reflect the contract or policy
charges, including sales load, and the separate account charges of any
Participating Insurance Company.
(B) The amounts for "Other Expenses" are the amounts charged to the Bond
Sub-Account of the Separate Account during 1994.
(C) The amounts for "Other Expenses" are the amounts charged to the Bond
Portfolio of the Fund during 1994. Participating Insurance Companies investing
in the Bond Portfolio of the Fund have agreed to reimburse the Bond Portfolio to
the extent that its Total Portfolio Operating Expenses exceed 0.75% of its
average net assets in a calendar year. If the Transactions are consummated,
Washington National will have a similar reimbursement obligation in its
agreements governing its participation in the Fund.
- 21 -
<PAGE>
<TABLE>
<CAPTION>
SHORT-TERM PORTFOLIO SUB-ACCOUNT and MONEY MARKET PORTFOLIO
-----------------------------------------------------------
<C> <C> <C> <C>
COMPARATIVE FEE TABLE The Continuing
(for the year ended December 31, 1994) Separate Account The Fund (A) Separate Account
---------------- ------------ ----------------
(current) (current) (pro forma)
Contract Owner Transactions Expenses
Sales Load Imposed on Purchases $ --- $ --- $ ---
Maximum Contingent Deferred Sales Load (as a
percentage of Accumulated Value withdrawn) 6% --- 6%
Transfer Fee $ --- $ --- $ ---
Annual Contract Fee $30 per Contract $ --- $30 per Contract
Separate Account Annual Expenses
(as a percentage of average account value)
Management Fee 0.50 % --- ---
Annuity Rate Guarantees 0.80 % --- 0.80 %
Financial Accounting Fees 0.35 % --- 0.35 %
Other Expenses (net charged to account) (B) 0.20 % --- ---
------ ------- -------
Total Separate Account Annual Expenses 1.85 % --- 1.15 %
Scudder Variable Life Investment Fund
Annual Expenses
(as a percentage of average net assets)
Management Fee --- 0.37 % 0.37 %
Other Expenses (after Reimbursement) (C) --- 0.19 % 0.19 %
------ ------- -------
Total Portfolio Operating Expenses --- 0.56 % 0.56 %
------ ------- -------
Total Separate Account and Portfolio Expense 1.85 % 0.56 % 1.71 %
====== ====== ======
</TABLE>
- -------------------
(A) The amounts for the Fund itself do not reflect the contract or policy
charges, including sales load, and the separate account charges of any
Participating Insurance Company.
(B) The amounts for "Other Expenses" are the amounts charged to the Short-Term
Portfolio Sub-Account of the Separate Account during 1994.
(C) The amounts for "Other Expenses" are the amounts charged to the Money Market
Portfolio of the Fund during 1994. Participating Insurance Companies investing
in the Money Market Portfolio of the Fund have agreed to reimburse the Money
Market Portfolio to the extent that its Total Portfolio Operating Expenses
exceed 0.75% of its average net assets in a calendar year. If the Transactions
are consummated, Washington National will have a similar reimbursement
obligation in its agreements governing its participation in the Fund.
- 22 -
<PAGE>
<TABLE>
<CAPTION>
STOCK SUB-ACCOUNT and CAPITAL GROWTH PORTFOLIO
<C> <C> <C> <C>
COMPARATIVE FEE TABLE The Continuing
(for the year ended December 31, 1994) Separate Account The Fund (A) Separate Account
---------------- ------------ ----------------
(current) (current) (pro forma)
Contract Owner Transactions Expenses
Sales Load Imposed on Purchases $ --- $ --- $ ---
Maximum Contingent Deferred Sales Load (as a
percentage of Accumulated Value withdrawn) 6% --- 6%
Transfer Fee $ --- $ --- $ ---
Annual Contract Fee $30 per Contract $ --- $30 per Contract
Separate Account Annual Expenses
(as a percentage of average account value)
Management Fee 0.50 % --- ---
Annuity Rate Guarantees 0.80 % --- 0.80 %
Financial Accounting Fees 0.35 % --- 0.35 %
Other Expenses (net charged to account) (B) 0.20 % --- ---
-------- -------- --------
Total Separate Account Annual Expenses 1.85 % --- 1.15 %
Scudder Variable Life Investment Fund
Annual Expenses
(as a percentage of average net assets)
Management Fee --- 0.475% 0.475%
Other Expenses (after Reimbursement) (C) --- 0.105% 0.085%
-------- -------- --------
Total Portfolio Operating Expenses --- 0.58 % 0.56%
-------- -------- --------
Total Separate Account and Portfolio Expense 1.85 % 0.58 % 1.71%
====== ====== =======
</TABLE>
- -------------------
(A) The amounts for the Fund itself do not reflect the contract or policy
charges, including sales load, and the separate account charges of any
Participating Insurance Company.
(B) The amounts for "Other Expenses" are the amounts charged to the Stock
Sub-Account of the Separate Account during 1994.
(C) The amounts for "Other Expenses" are the amounts charged to the Capital
Growth Portfolio of the Fund during 1994. Participating Insurance Companies
investing in the Capital Growth Portfolio of the Fund have agreed to reimburse
the Capital Growth Portfolio to the extent that its Total Portfolio Operating
Expenses exceed 0.75% of its average net assets in a calendar year. If the
Transactions are consummated, Washington National will have a similar
reimbursement obligation in its agreements governing its participation in the
Fund.
- 23 -
<PAGE>
EXAMPLE
A. You would pay the following expenses on a $1,000 investment in your
Contract, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
1. If you surrender your Contract at the end of the applicable time period:*
The Separate Account Continuing Separate Account
-------------------- ---------------------------
(current) (pro forma)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
-------- -------- -------- -------- ------ ------- ------- --------
BOND SUB-ACCOUNT $ 73 $113 $156 $225 $ 72 $109 $149 $210
SHORT-TERM PORTFOLIO
SUB-ACCOUNT $ 73 $113 $156 $225 $ 72 $109 $149 $209
STOCK SUB-ACCOUNT $ 73 $113 $156 $225 $ 72 $109 $149 $209
</TABLE>
* These expense amounts also apply if you annuitize your Contract under certain
settlement options during the first five (5) Contract Years.
<TABLE>
<CAPTION>
2. If you do not surrender your Contract:
The Separate Account Continuing Separate Account
-------------------- ---------------------------
(current) (pro forma)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
-------- -------- -------- -------- ------ ------- ------- --------
BOND SUB-ACCOUNT $ 19 $ 60 $103 $224 $ 18 $ 56 $96 $210
SHORT-TERM PORTFOLIO
SUB-ACCOUNT $ 19 $ 60 $103 $224 $ 18 $ 56 $96 $209
STOCK SUB-ACCOUNT $ 19 $ 60 $103 $224 $ 18 $ 56 $96 $209
</TABLE>
<TABLE>
<CAPTION>
B. A separate account would pay the following expenses on a $1,000 investment in the Fund,
assuming a 5% annual return on assets:**
The Fund The Fund
-------- ---------
(current) (pro forma)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
-------- -------- -------- -------- ------ ------- ------- --------
BOND PORTFOLIO $ 6 $ 18 $ 32 $ 73 $ 6 $ 18 $ 32 $ 71
MONEY MARKET PORTFOLIO $ 6 $ 18 $ 31 $ 70 $ 6 $ 18 $ 31 $ 70
CAPITAL GROWTH
PORTFOLIO $ 6 $ 19 $ 32 $ 73 $ 6 $ 18 $ 31 $ 70
</TABLE>
** These expense amounts do not reflect the contract or policy charges,
including sales load, and the separate account charges of any Participating
Insurance Company.
- --------------------------------------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES, AND THE ACTUAL EXPENSES PAID MAY BE GREATER OR
LESS THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
- 24 -
<PAGE>
REASONS FOR THE TRANSACTIONS
If the Transactions are approved by the Separate Account Voters, each
Sub-Account of the Continuing Separate Account will invest its assets indirectly
through a corresponding Portfolio of the Fund rather than directly, as the
Separate Account currently does.
The Transactions should benefit Contract Owners by enabling them to
participate in investment portfolios with investment objectives, policies and
restrictions similar to the current investment objectives, policies, and
restrictions of the Sub-Accounts of the Separate Account, but with a larger
asset base than that currently held by each of the Sub-Accounts of the Separate
Account. It is anticipated that the larger asset base will increase investment
opportunities for and broaden diversification of the funding medium for the
Contracts. It may also result in economies of scale with respect to operating
expenses.
Various legal and practical difficulties make it infeasible to use the
Separate Account, as it is currently structured, as the funding vehicle for
insurance products other than variable annuity contracts issued by Washington
National. The Fund, however, currently is and will continue to be used for
variable annuity contracts and variable life insurance policies issued by
several Participating Insurance Companies. Therefore, more assets currently are
available to be invested in the Fund than are available to be invested in the
current Separate Account alone. Washington National and the Board of Directors
of the Separate Account believe that this will result in economies of scale
(particularly in view of the declining assets of the Separate Account under the
current circumstances in which no new Contracts are being sold).
In addition, Contract Owners may benefit from the breadth and depth of
investment advisory expertise of Scudder, the investment adviser for the
Portfolios of the Fund. As manager of Portfolios significantly larger than each
Sub-Account of the Separate Account, Scudder may be able to expend larger
resources cost-effectively to attain higher performance for these Portfolios
although there is no guarantee that higher performance will be achieved.
- 25 -
<PAGE>
Using the Fund as a multiple-option investment vehicle for the Continuing
Separate Account would facilitate the addition of new investment options, if the
Board of Directors of Washington National should choose to do so in the future.
It would be administratively simpler and less costly to add (and maintain) new
investment options in the form of new unmanaged Sub-Accounts of the Continuing
Separate Account (structured as a unit investment trust) investing in additional
Portfolios of the Fund than to add new investment options in the form of new
managed Sub-Accounts of the Separate Account (structured as a management
investment company). Indeed, if the Transactions take place, then Washington
National intends to make a fourth investment option available to Contract Owners
in the form of a new Sub-Account investing in the Growth and Income Portfolio of
the Fund.
In summary, Washington National and the Board of Directors of the Separate
Account expect the Transactions to result in economies and efficiencies which
will benefit Contract Owners.
Because the Portfolios used by the Contracts will also be used by variable
life insurance policy owners (as well as variable annuity contract owners),
there is a possibility of a conflict of interest between these two types of
contract owners. Pursuant to an Order of the Securities and Exchange Commission
under the 1940 Act, these potential conflicts are addressed by providing that
the Fund will be managed by a Board of Trustees which has a majority of members
who are not "interested persons" of the Fund. The Board of Trustees will monitor
for conflicts of interest, such as would occur if life insurance policy owners
voted their proxies for a different result than annuity contract owners. In the
event a material, irreconcilable conflict is determined to exist, the
Participating Insurance Companies will undertake to resolve it, going so far as
withdrawing and reinvesting assets allocable to one or more of the separate
accounts utilizing the Fund as a funding vehicle, or putting the question of
such segregation of assets to a vote of all affected Contract Owners and other
beneficial owners of shares. No charge or penalty would be levied against funds
withdrawn under those circumstances, and the Board of Trustees of the Fund would
act only in the interest of Contract Owners and other beneficial owners of
shares.
- 26 -
<PAGE>
Washington National and the Board of Directors of the Separate Account
believe that the interests of Contract Owners immediately following the
Transactions will not materially differ from their interests immediately prior
to the Transactions. Contract Owners will still have an interest in a diverse
portfolio of investments with respect to each Sub-Account of the Continuing
Separate Account. The value of Contract Owners' interests will not be changed by
the Transactions. In the opinion of Washington National, the Transactions are
not expected to have any direct or indirect adverse tax consequences for
Contract Owners. Furthermore, the overall level of fees and expenses borne,
directly or indirectly, by Contract Owners should be lower immediately after the
Transactions than immediately before them. Nevertheless, as described below,
there are some legal differences between investing directly (as the Separate
Account currently does) and investing indirectly through the Fund (as the
Continuing Separate Account will do if the Transactions are approved by the
Separate Account Voters and implemented as planned).
ACTUAL AND PRO FORMA CAPITALIZATION
The following table shows the actual capitalization of the Sub-Accounts of
the Separate Account and the Eligible Portfolios of the Fund on June 30, 1995,
as well as the pro forma capitalization of the Eligible Portfolios on that date
after giving effect to the Transactions:
- 27 -
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CAPITALIZATION
- --------------
(as of June 30, 1995) The Separate
Account The Fund The Fund
------------ -------- ----------
(actual) (actual) (pro forma)
BOND SUB-ACCOUNT and
BOND PORTFOLIO
- --------------------
Net Assets $12,322,881 $145,619,667 $157,942,548
Net Asset Value per Unit or Share $2.38 $6.93 $6.93
Units or Shares Outstanding 5,172,649 21,008,272 22,786,209
SHORT-TERM PORTFOLIO
SUB-ACCOUNT and
MONEY MARKET PORTFOLIO
- ----------------------
Net Assets $ 1,706,097 $83,948,559 $ 85,654,656
Net Asset Value per Unit or Share $1.74 $1.00 $1.00
Units or Shares Outstanding 982,975 83,948,559 85,654,656
STOCK SUB-ACCOUNT and
CAPITAL GROWTH PORTFOLIO
- ---------------------------
Net Assets $ 29,728,467 $290,023,690 $319,752,157
Net Asset Value per Unit or Share $3.06 $13.72 $13.72
Units or Shares Outstanding 9,713,617 21,145,291 23,312,879
</TABLE>
COMPARATIVE PERFORMANCE
The following tables show the actual and pro forma historical performance
of the Sub-Accounts of the Separate Account, for periods ending June 30, 1995,
using various measures appropriate for the Portfolio of the Fund in which each
Sub-Account of the Continuing Separate Account will solely invest if the
Transactions are approved. The pro forma performance figures (shown in the right
column) are derived from the actual performance of each of the Eligible
Portfolios (shown in the center column), as adjusted to reflect the annuity rate
guarantee charge and financial accounting service charge of the Continuing
Separate Account and the contingent deferred sales charge (unless otherwise
noted) and contract maintenance charge under the Contracts. In other words, the
pro forma performance figures show how the Transactions might have affected
historical performance if they had been consummated at an earlier time. Although
past performance is no guarantee of future results, Separate Account Voters may
wish to compare this pro forma performance of the Continuing Separate Account
with the actual performance of the Separate Account (shown in the left column of
performance figures):
- 28 -
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
YIELD AND EFFECTIVE YIELD
- -------------------------- The Continuing
(for periods ended June 30, 1995) Separate Account The Fund Separate Account
---------------- -------- ----------------
(actual) (actual) (pro forma)
SHORT-TERM PORTFOLIO
SUB-ACCOUNT and
MONEY MARKET PORTFOLIO
- ----------------------
Yield (7-day period) 4.18% 5.55% 4.37%
Effective Yield (7-day period) 4.27% 5.58% 4.46%
AVERAGE ANNUAL TOTAL RETURN
Standard Format*
- --------------------------- The Continuing
(for periods ended June 30, 1995) Separate Account The Fund Separate Account
---------------- -------- ----------------
(actual) (actual) (pro forma)
BOND SUB-ACCOUNT and
BOND PORTFOLIO
- ---------------------
One Year 4.81% 11.42% 4.90%
Five Years 5.61% 9.44% 7.50%
Ten Years (A) 7.61% 8.78% 7.60%
STOCK SUB-ACCOUNT and
CAPITAL GROWTH PORTFOLIO
- ---------------------------
One Year 20.12% 20.31% 13.84%
Five Years 9.39% 11.39% 9.52%
Ten Years (A) 9.87% 13.30% 11.97%
* After deduction of 6% contingent deferred sales charge (assuming a complete redemption at the end of the period).
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------
Non-Standard Format** The Continuing
(for periods ended June 30, 1995) Separate Account The Fund Separate Account
---------------- -------- ----------------
(actual) (actual) (pro forma)
BOND SUB-ACCOUNT and
BOND PORTFOLIO
- --------------------
One Year 10.15% 11.42% 10.24%
Five Years 6.43% 9.44% 8.26%
Ten Years (A) 7.61% 8.78% 7.60%
STOCK SUB-ACCOUNT and
CAPITAL GROWTH PORTFOLIO
- ---------------------------
One Year 25.37% 20.31% 19.12%
Five Years 10.08% 11.39% 10.21%
Ten Years (A) 9.87% 13.30% 11.97%
** Assuming contingent deferred sales charge percentage of 0%.
</TABLE>
- ----------------------------
(A) As the Bond Portfolio and Capital Growth Portfolio commenced operations on
July 16, 1985, their performance figures are computed from that date, which
results in a measurement period of slightly less than ten full years.
- --------------------------------------------------------------------------------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE
RESULTS.
- --------------------------------------------------------------------------------
- 29 -
<PAGE>
INFORMATION ON THE SEPARATE ACCOUNT AND THE FUND
The Separate Account was established on November 5, 1982, as a "separate
account" under the insurance laws of the State of Illinois. Although Washington
National owns the assets of the Separate Account, each Sub-Account's income,
gains and losses, realized or unrealized, are credited to or charged against,
the assets held in the Sub-Account from which they have arisen without regard to
Washington National's other income, gains or losses. The Separate Account is
registered with the Securities and Exchange Commission (the "SEC") under the
1940 Act as a diversified open-end management investment company -- a type of
separate account known as a "managed account." (SEC registration does not
involve supervision of the management or the investment practices or policies of
the registered investment company.) The Separate Account offers its units of
beneficial interest exclusively to the Contract Owners, who have purchased
certain variable annuity contracts (which are no longer being sold) from
Washington National, and to Washington National and its parent company. As a
"series" type of investment company, the Separate Account issues distinct series
of units, each of which represents an interest in a separate diversified
portfolio or "pool" of investments (a "Sub-Account"). Additional information
about the Separate Account is contained in the Separate Account's prospectus
(which accompanies this Proxy Statement/Prospectus as Appendix B and is
incorporated herein by reference) and in the Separate Account's statement of
additional information referred to in the Separate Account's prospectus.
The Fund was organized in the Commonwealth of Massachusetts on March 15, 1985,
as a "Massachusetts business trust." The Fund is registered with the SEC as a
diversified, open-end management investment company -- a type of company, in
this case, commonly known as a "mutual fund." The Fund offers its shares of
beneficial interest exclusively to variable annuity and variable life insurance
separate accounts of insurance companies. As a "series" type of investment
company, the Fund issues distinct series of shares, each of which represents an
interest in a separate diversified portfolio or "pool" of investments (a
"Portfolio"). Each of the Fund's Portfolios resembles a separate mutual fund
issuing a separate series of shares. Additional information about the Fund is
contained in the Fund's prospectus (which accompanies this Proxy Statement/
- 30 -
<PAGE>
Prospectus as Appendix C and is incorporated herein by reference) and in the
Fund's statement of additional information referred to in the Fund's prospectus.
MANAGEMENT OF THE SEPARATE ACCOUNT AND THE FUND
The Separate Account is managed by a Board of Directors. Washington
National acts as investment manager for the Separate Account under an investment
management agreement between the Separate Account and Washington National. NBD
Bank acts as investment sub-adviser for the Stock Sub-Account under a
sub-investment advisory agreement between NBD Bank and Washington National. For
a complete discussion of the Separate Account's investment advisory
arrangements, see the Separate Account's prospectus dated May 1, 1995, which
accompanies this Proxy Statement/Prospectus as Appendix B. It has been announced
that NBD Bancorp, Inc., a Delaware corporation and bank holding company which
controls NBD Bank, has agreed to merge with First Chicago Corporation, also a
Delaware corporation and bank holding company. First Chicago Corporation's
shareholders reportedly are expected to own 50.1% of the merged entity, First
Chicago NBD Corporation.
The Fund is managed by a Board of Trustees. Scudder serves as investment
adviser for all of the Portfolios currently offered by the Fund. For a complete
discussion of the Fund's investment advisory arrangements, see the Fund's
prospectus dated May 1, 1995, which accompanies this Proxy Statement/Prospectus
as Appendix C.
Washington National currently serves as the investment manager for the
Separate Account, and NBD Bank currently serves as sub-adviser for the Stock
Sub-Account. At such time as the Transactions take effect, these investment
management relationships will be ended, as the Sub-Accounts of the Continuing
Separate Account will then invest only in shares of corresponding Portfolios of
the Fund. Because each Sub-Account of the Continuing Separate Account will
invest in only one Portfolio, the Continuing Separate Account itself will have
- 31 -
<PAGE>
no discretion in investment decisions and no need for investment management or
advice.
Pursuant to an Investment Advisory Agreement dated November 14, 1986,
Scudder serves as investment adviser for the Bond Portfolio, the Money Market
Portfolio and the Capital Growth Portfolio of the Fund. Scudder is a Delaware
corporation which is not affiliated with Washington National. It is located at
Two International Place, Boston, Massachusetts 02110-4103. Scudder is a
registered investment adviser under the Investment Advisers Act of 1940, as
amended. Scudder provides investment counsel to many individuals and
institutions, including insurance companies, colleges, industrial corporations,
and financial and banking organizations. Directly or through affiliates, Scudder
provides investment advice to over 50 mutual fund portfolios.
The Fund's Investment Advisory Agreement terminates automatically in the
event of assignment or, with respect to any Portfolio, upon sixty (60) days'
notice given by the Fund's Board of Trustees, or by Scudder as the case may be,
or by majority vote (as defined in the 1940 Act) of the Fund's shares.
Otherwise, the Investment Advisory Agreement will continue in force with respect
to any Portfolio so long as its continuance is approved at least annually by a
majority of the noninterested members of the Fund's Board of Trustees, and by
(i) a majority vote (as defined in the 1940 Act) of the Fund's shareholders or
(ii) a majority of the Fund's Board of Trustees.
In general, Scudder performs the same investment advisory services for the
Fund as Washington National currently does for the Separate Account (as
supplemented by the sub-advisory services of NBD Bank with respect to the Stock
Sub-Account). Scudder has day-to-day responsibility for making investment
decisions and placing investment orders for all of the Fund's Portfolios.
Scudder is also responsible for seeing to it that purchases and sales of
Portfolio investments are made in a manner consistent with the current
investment objectives and policies of each Portfolio. Scudder is responsible for
- 32 -
<PAGE>
the execution of securities transactions for all Portfolios. Scudder furnishes
to the Fund and its Board of Trustees such statistical information and reports
as Scudder may deem appropriate or as may be requested by the Fund.
The Fund's primary consideration in placing Portfolio securities
transactions with broker-dealers for execution is and will be to obtain and
maintain the availability of execution at the most favorable prices and in the
most effective manner possible. Scudder will attempt to achieve this result by
selecting broker-dealers to execute Portfolio transactions on behalf of the Fund
and other clients of Scudder on the basis of their professional capability, the
value and quality of their brokerage services, and the level of their brokerage
commissions. In some instances the availability of research or other services is
also considered in the selection of broker-dealers. In addition, Scudder may
consider sales of variable life insurance policies and variable annuity
contracts, for which the Fund is an investment option, as a factor in the
selection of broker-dealers to execute portfolio transactions.
ORGANIZATION AND OPERATION OF THE FUND
Characteristics of the Fund's Shares
The Fund's shares of beneficial interest are divided into six separate
series. The Fund's Board of Trustees is authorized to establish additional
Portfolios and to issue additional series of shares without the consent of
shareholders or Contract Owners. The Board of Trustees also may, by majority
vote, decide at any time to discontinue any Portfolio, subject to compliance
with any requirements for governmental approvals or exemptions or approval by
owners of annuity contracts or life insurance policies. The Fund intends to
exercise this right to discontinue a Portfolio only where, in its sole
discretion, it determines that there has been minimal interest in the Portfolio
to be eliminated. If the Transactions are approved by the Separate Account
Voters, Contract Owners using (through a Sub-Account of the Continuing Separate
- 33 -
<PAGE>
Account) any Portfolio to be eliminated will be given at least thirty (30) days'
notice to make a transfer to another Sub-Account investing in another investment
option. (There is no charge for transfers.)
The Fund's Board of Trustees has approved the adoption of a multiclass plan
pursuant to which an additional class of shares of each Portfolio of the Fund
would be created, although it is currently anticipated that the Money Market
Portfolio would not participate in the plan. Further, it is expected that
certain shareholders in the Fund's Portfolios, including the Bond Sub-Account
and the Stock Sub-Account of the Separate Account investing in the Bond
Portfolio and the Capital Growth Portfolio, respectively, will be issued shares
of a newly created class of shares, which will have the same rights and
privileges as shares which are currently issued by the Fund.
Each issued and outstanding share of a Portfolio is entitled to participate
equally in dividends and distributions from such Portfolio and in the net assets
of such Portfolio (i.e., the assets remaining aftersatisfaction of outstanding
liabilities) upon a liquidation or dissolution. For these purposes, and for
purposes of determining the purchase and redemption prices of shares, any assets
which are not clearly allocable to a particular Portfolio or Portfolios will be
allocated in the manner determined by the Fund's Board of Trustees. Accrued
liabilities which are not allocable to one or more Portfolios will generally be
allocated among the Portfolios in proportion to their relative net assets before
adjustment for such unallocated liability. In the unlikely event that any
Portfolio incurred liabilities in excess of its assets, the other Portfolios
could be liable for such excess. Similarly, and equally unlikely, each
Sub-Account of the Continuing Separate Account could perhaps be liable for
claims arising out of another Sub-Account's operations, in some circumstances.
The Fund's authorized capital consists of an unlimited number of shares of
beneficial interest of no par value. The Trustees are authorized to divide the
shares into separate series. Shares entitle their holders to one vote per share;
however, separate votes will be taken by each series on matters affecting an
individual series. Shares have noncumulative voting rights and no preemptive or
subscription rights. The Fund is not required to hold shareholder meetings
- 34 -
<PAGE>
annually, although shareholder meetings may be called for purposes such as
electing or removing Trustees, changing fundamental policies or approving an
investment management contract. In the event that shareholders of the Fund wish
to communicate with other shareholders concerning the removal of any Trustee of
the Fund, such shareholders shall be assisted in communicating with other
shareholders for the purpose of obtaining signatures to request a meeting of
shareholders, all in the manner provided for in Section 16(c) of the 1940 Act as
if Section 16(c) were applicable.
Pursuant to certain decisions of the Supreme Judicial Court of
Massachusetts, shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable as partners for the obligations of such
a trust. Even if, however, the Fund were held to be a partnership, the
possibility of its shareholders incurring financial loss for that reason appears
remote because the Fund's Declaration of Trust includes an express disclaimer of
shareholder liability for obligations of the Fund and notice of such disclaimer
is normally given in each agreement, obligation or instrument entered into or
executed by the Fund or its Trustees, and because the Declaration of Trust
provides for indemnification out of the Fund's property for any Shareholder held
personally liable for the obligations of the Fund.
Dividends, Distributions, and Taxes
Each Portfolio qualifies and intends to continue qualifying as a "regulated
investment company" under certain provisions of the Internal Revenue Code of
1986, as amended (the "Code"). Under those provisions, each Portfolio generally
will not be subject to federal income or excise tax on the part of its ordinary
income and net realized capital gains which it distributes to shareholders.
Accordingly, each Portfolio intends to distribute all of such income to the
insurance company separate accounts which own its shares, thereby generally
avoiding any federal income or excise tax liability. Such distributions to
Washington National in respect of the Sub-Accounts of the Continuing Separate
Account will be reinvested in additional full and fractional shares of the
Portfolio to which they relate. Shares of each Portfolio which are purchased
- 35 -
<PAGE>
with reinvested distributions paid by such Portfolio will be held in the
corresponding Sub-Account of the Continuing Separate Account, and will be
appropriately credited to the investment performance of that Sub-Account for the
benefit of Contract Owners.
To qualify for treatment as a regulated investment company, each Portfolio
must, among other things, derive in each taxable year at least 90% of its gross
income from certain categories of income, including dividends, interest, and
gains from the sale or other disposition of "securities"; derive less than 30%
of its gross income (without deduction for losses) in each taxable year from the
sale or other disposition of "securities" and certain other assets held for less
than three months; diversify its portfolio assets; and distribute substantially
all of its earnings to shareholders. Each Portfolio of the Fund will be treated
as a separate entity for federal income tax purposes. Therefore, the investments
and results of the Portfolios will not be aggregated for purposes of determining
whether they meet the foregoing requirements.
Although the Fund intends to operate in such a way that it will have no
federal income tax liability, if any such liability is nevertheless incurred,
the investment performance of the Fund would be adversely affected, to the
detriment of Contract Owners. This risk does not currently exist for Contract
Owners, since the Separate Account, unlike the Fund, need not qualify as a
regulated investment company. Indeed, the Separate Account is not treated for
tax purposes as an entity separate from Washington National, which is taxed as
an insurance company under different provisions of the Code.
Voting of the Fund's Shares
The current voting procedures with respect to the Separate Account are set
forth under "General Information Regarding Proxy Solicitation," above.
- 36 -
<PAGE>
Each share of all series of the Fund's shares of beneficial interest is
entitled to one vote, and the votes of all series are cast on an aggregate basis
except on matters where the interests of the Portfolios differ. Where the
interests of the Portfolios differ, the voting is on a Portfolio-by-Portfolio
basis. Approval or disapproval by the shareholders in one Portfolio on such a
matter would not generally be a prerequisite of approval or disapproval by
shareholders in another Portfolio; and shareholders in a Portfolio not affected
by a matter generally would not be entitled to vote on that matter. Examples of
matters which would require a Portfolio-by-Portfolio vote are changes in a
fundamental investment policy of a particular Portfolio and approval of an
investment advisory agreement.
If the Transactions are approved by the Separate Account Voters, Washington
National will offer Contract Owners the opportunity to instruct Washington
National as to how the Fund's shares allocable to their Contracts and held by
Washington National in the Continuing Separate Account will be voted with
respect to the same kinds of matters as to which Contract Owners are currently
entitled to vote. The number of shares held in each Sub-Account of the
Continuing Separate Account deemed attributable to each Contract Owner for this
purpose will be determined by dividing the total value of the Contract's
Accumulation Units (or, after Annuity Payments commence, the amount of Contract
reserves) allocable to that Sub-Account by the net asset value of one share of
the corresponding Portfolio of the Fund as of the record date. Fractional votes
will be counted. Shares of the Fund in any Sub-Account which are not
attributable to the Contracts or for which no voting instructions are timely
received by Washington National will be voted in the same proportion as the
shares for which voting instructions are timely received under the Contracts.
Thus, although voting instructions will be reflected somewhat differently after
the Transactions than before, Washington National believes that this will not
result in any significant diminution of Contract Owners' voting privileges.
Notwithstanding the foregoing, it is anticipated that the Transactions will
result in dilution of the voting influence which Contract Owners have with
respect to the funding medium for their Contracts. This dilution is attributable
to the fact that other separate accounts have voting interests in the Fund, and
- 37 -
<PAGE>
shares of the Fund which are held in separate accounts of insurance companies
other than Washington National will be voted in accordance with instructions of
the owners of policies or contracts issued by such other companies.
Certain Ownership Interests
As of December 31, 1995, Washington National owned of record and
beneficially __.__%, __.__%, and __.__% of the Bond Sub-Account, the Short-Term
Portfolio Sub-Account, and the Stock Sub-Account, respectively, of the Separate
Account. Its ownership interests will not be affected by the Transactions. As of
December 31, 1995, all directors and officers of the Separate Account, as a
group, owned less than one percent of the equity securities of each Sub-Account.
Based on the December 31, 1995, relative sizes of the Separate Account and the
Fund, Washington National would become both the record and beneficial owner of
__.__%, __.__%, and __.__% of the Bond Portfolio, the Money Market Portfolio,
and the Capital Growth Portfolio, respectively, of the Fund.
As of December 31, 1995, the following persons owned of record or
beneficially five percent or more of the outstanding shares in one or more
Portfolios of the Fund: Mutual of America Life Insurance Company of New York
(666 Fifth Avenue, New York, NY 10103) and its subsidiary American Life
Insurance Company (666 Fifth Avenue, New York, NY 10103) (collectively, the
"Mutual of America group"), American Skandia Life Assurance Corporation (1
Corporation Drive, Shelton, CT 06484) ("American Skandia"), and Charter National
Life Insurance Company (8301 Maryland Avenue, St. Louis, MO 63105) and its
subsidiary Intramerica Life Insurance Company (1 Blue Hills Plaza, Pearl River,
NY 10965) (collectively, the "Charter National group") owned of record and
beneficially __.__%, __.__%, and __.__%, respectively, of the Bond Portfolio.
The Charter National Group and The Union Central Life Insurance Company (1876
Waycross Road, Cincinnati, OH 45240) ("Union Central") owned of record and
beneficially __.__% and __.__%, respectively, of the Money Market Portfolio. The
Mutual of America group and the Charter National group owned of record and
beneficially __.__% and __.__%, respectively, of the Capital Growth Portfolio.
- 38 -
<PAGE>
The Charter National group, the Mutual of America group, Union Central, and
Aetna Life Insurance and Annuity Company (151 Farmington Avenue, Hartford, CT
06156) ("Aetna Life") owned of record and beneficially __.__%, __.__%, __.__%,
and __.__%, respectively, of the Fund's total outstanding shares. As of December
31, 1995, all trustees and officers of the Fund, as a group, owned less than one
percent of the equity securities of each Eligible Portfolio and less than one
percent of the Fund's total outstanding shares. Based on the December 31, 1995,
relative sizes of the Separate Account and the Fund, upon consummation of the
Transactions: the Mutual of America group, American Skandia, and the Charter
National group would own of record and beneficially __.__%, __.__%, and __.__%,
respectively, of the Bond Portfolio of the Fund; the Charter National group and
Union Central would own of record and beneficially __.__% and __.__%,
respectively, of the Money Market Portfolio of the Fund; the Mutual of America
group and the Charter National group would own of record and beneficially __.__%
and __.__%, respectively, of the Capital Growth Portfolio of the Fund; and the
Charter National group, the Mutual of America group, Union Central, and Aetna
Life would own of record and beneficially __.__%, __.__%, __.__%, and __.__%,
respectively, of the Fund's total outstanding shares.
DIVISIONS OF THE SEPARATE ACCOUNT AND THE FUND
Sub-Accounts of the Separate Account
The Separate Account is comprised of three Sub-Accounts. The investment
objectives of the Sub-Accounts stated below are not fundamental policies and may
be changed without the approval of the Contract Owners. There is no assurance
that the investment objectives will be achieved. The following is a summary of
each Sub-Account's investment objectives and practices:
Bond Sub-Account objective -- To obtain as high a level of current income
as possible while preserving capital. Investments will be made primarily in
fixed-income securities. It is anticipated that 85% of the assets will be
invested in (1) securities issued or guaranteed by the United States Government
- 39 -
<PAGE>
or its agencies and (2) publicly traded, investment grade nonconvertible
corporate debt securities issued by United States corporations which bear one of
the four highest bond ratings of either Moody's Investors Service, Inc. or
Standard & Poor's Corporation.
Short-Term Portfolio Sub-Account objective -- To obtain a moderate level of
current income, consistent with liquidity and preservation of capital. We will
pursue this investment objective by investing in high quality money market
instruments such as: obligations of the U.S. Government, its agencies, and
instrumentalities; certificates of deposit; bankers' acceptances; commercial
paper; corporate bonds, notes and other debt instruments; variable amount demand
master notes; repurchase agreements; reverse repurchase agreements; and
when-issued and delayed delivery securities. The assets will consist entirely of
cash and investments having a maturity date of sixty (60) days or less from the
date of purchase.
Stock Sub-Account objective -- To achieve long-term capital growth through
capital appreciation and income. The assets of the Stock Sub-Account are
expected to be invested primarily in equity-type investments, including common
stocks and securities convertible into common stocks, which investments may be
maintained in both rising and declining markets.
For a complete discussion of each Sub-Account's investment policies and
restrictions, see the Separate Account's prospectus dated May 1, 1995, which
accompanies this Proxy Statement/Prospectus as Appendix B.
Portfolios of the Fund
At present the Fund is comprised of six Portfolios (only three of which
will be available to Contract Owners through the Continuing Separate Account),
but existing Portfolios may be discontinued and additional Portfolios may be
established by the Fund's Board of Trustees in the future. The investment
objectives and policies of each Portfolio may, unless otherwise specifically
stated, be changed by the Fund's Board of Trustees without a vote of the
- 40 -
<PAGE>
Shareholders. The following is a summary of the investment objectives and
policies of the Portfolios:
Bond Portfolio objective -- The Bond Portfolio pursues a policy of
investing for a high level of income consistent with a high quality portfolio of
debt securities. Under normal circumstances, the Portfolio invests at least 65%
of its assets in bonds, including those of the U.S. Government and its agencies,
and those of corporations and other notes and bonds paying high current income.
It will attempt to moderate the effect of market price fluctuation relative to
that of a long-term bond by investing in securities with varying maturities and
by entering into futures contracts on debt securities and related options for
hedging purposes.
Money Market Portfolio objective -- The Money Market Portfolio seeks to
maintain the stability of capital and, consistent therewith, to maintain the
liquidity of capital and to provide current income. The Portfolio seeks to
maintain a constant net asset value of $1.00 per share, although there can be no
assurance that this will be achieved. The Portfolio uses the amortized cost
method of securities valuation.
Capital Growth Portfolio objective -- The Capital Growth Portfolio seeks to
maximize long-term capital growth through a broad and flexible investment
program. The Portfolio invests in marketable securities, principally common
stocks and, consistent with its objective of long-term capital growth,
preferred stocks. However, in order to reduce risk, as market or economic
conditions periodically warrant, the Portfolio may also invest up to 25% of its
assets in short-term debt instruments.
For a complete discussion of each Portfolio's investment policies and
restrictions, see the Fund's prospectus dated May 1, 1995, which accompanies
this Proxy Statement/Prospectus as Appendix C.
- 41 -
<PAGE>
SALE OF THE CONTRACTS AND FUND SHARES
The Contracts were sold by Washington National's life insurance agents, who
were licensed to sell variable annuities and were registered representatives of
Washington National Equity Company ("WNEC"), formerly a wholly-owned subsidiary
of WNC. Until March 31, 1990, WNEC was registered as a broker-dealer under the
Securities Exchange Act of 1934, as amended (the "1934 Act"), was a member of
the National Association of Securities Dealers, Inc. ("NASD"), and was the
principal underwriter of the Separate Account. Although no sales load is imposed
on Purchase Payments at the time they are received, a contingent deferred sales
charge of 6% of the amount withdrawn is charged in connection with certain
withdrawals. The Contracts could also have been sold by registered
representatives of other NASD member broker-dealers who were authorized to sell
variable annuity contracts. The commissions paid to dealers did not exceed 6% of
Purchase Payments. The Contracts are no longer being sold; however, additional
Purchase Payments will continue to be accepted in accordance with contractual
provisions. Washington National currently does not intend to issue new Contracts
following the consummation of the Transactions.
Shares of beneficial interest in each Portfolio of the Fund are offered
continuously to the separate accounts of Participating Insurance Companies by
Scudder Investor Services, Inc. (the "Distributor"), a wholly-owned subsidiary
of Scudder. The Distributor is registered as a broker-dealer under the 1934 Act,
is a member of the NASD, and is the principal underwriter of the Fund. The
Distributor accepts orders for shares at their net asset value, as no sales
commission or load is charged.
- 42 -
<PAGE>
DEDUCTIONS, CHARGES, FEES, AND EXPENSES
Deductions and Charges Under the Contracts
If the Transactions are approved by the Separate Account Voters and
implemented, certain Separate Account annual expenses will not be incurred
directly by the Continuing Separate Account but, in effect, will be replaced by
the Fund's fees and expenses (discussed under "Other Expenses of the Separate
Account," below). Other deductions and charges under the Contracts will continue
to apply to the Continuing Separate Account. Specifically, the Separate
Account's investment management charge and charge for other expenses will be
discontinued, although the Contracts' contingent deferred sales charge, contract
maintenance charge, annuity rate guarantee deductions, and financial accounting
service charge will continue to apply.
Contingent Deferred Sales Charge. Washington National does not make any
deduction for sales charges when Purchase Payments are received. The full amount
is invested and credited to the Contracts, although sales expenses for items
such as commissions, preparation of sales literature, and other promotional
activities were incurred in connection with their sale. Washington National
does, however, assess a contingent deferred sales charge in connection with
certain withdrawals. This charge is made at the rate of 6% of the amount
withdrawn and is deducted from the amount withdrawn. The contingent deferred
sales charge is made only when a withdrawal, partial or full (including applying
the Accumulated Value to a Paid-Up Annuity in certain circumstances), is made
from the Contract and is designed to recover those sales expenses. The charge
does not apply to Purchase Payments made six years or more prior to the
withdrawal, and it will never exceed 6% of Purchase Payments. Because the
proceeds received from such charge are not sufficient to pay such expenses,
Washington National pays the excess out of its general funds, which include
proceeds derived from the annuity rate guarantee deductions.
- 43 -
<PAGE>
Contract Maintenance Charge. On each Contract or Certificate Anniversary,
or on the date of full withdrawal or election of a Settlement Option if that
date is not the Contract or Certificate Anniversary, Washington National deducts
from the Accumulated Value of the Contract a charge for establishing and
maintaining records. The annual charge is currently $30 for each Contract and
Certificate. The charge is made pro-rata from the Accumulated Value of each
Sub-Account and the Fixed Account under the Contract, and the number of
Accumulated Units credited will be reduced accordingly. This charge is not
guaranteed, may be changed in the future and may be deducted more frequently
than annually. Washington National currently waives this charge if, on the last
day of the Contract Year, the Contract has an Accumulated Value of $20,000 or
more, or if $1,000 or more in Purchase Payments were made during the Contract
Year.
Investment Management Charge. Prior to the Transactions, an investment
management charge is made each business day against the assets of the Separate
Account at an annual rate of 0.50%, and in some Contracts was guaranteed.
Washington National has contracted with NBD Bank to act as Sub-Advisor for and
to manage the investments of the Stock Sub-Account, for which Washington
National pays NBD Bank a fee of 0.40% of the average net assets of the Stock
Sub-Account. After the Transactions, an investment advisory charge will no
longer be made against the assets of the Continuing Separate Account. Instead,
an investment advisory fee will be reflected in the net asset value of the
shares of each Portfolio of the Fund. The level of the investment advisory fee
depends on the particular Portfolio. This investment advisory fee may be
modified if approved by the Board of Trustees of the Fund and by Contract Owners
and others with an interest in the Fund.
Annuity Rate Guarantee Deductions. Both before and after annuity payments
begin, a charge is made each business day against the assets of the Separate
Account under the Contracts at an annual rate of 0.80% for annuity rate
guarantees. In this respect, the Contract Owner in the Continuing Separate
Account will not be in a different situation after the Transactions than before.
As has been the case prior to the Transactions, the contingent deferred sales
charge (described in "Contingent Deferred Sales Charge," above) may not be
- 44 -
<PAGE>
adequate to pay all the distribution costs. Prior to the Transactions, shortfall
will be borne by Washington National from its general assets, including profits
derived from the annuity rate guarantee deduction.
Financial Accounting Service Charge. Washington National provides financial
accounting services to the Separate Account under an Administrative Services
Agreement between the Separate Account and Washington National. Such services
include preparation and maintenance of all accounting, bookkeeping, financial
and other statements for the conduct of the business and operations of the
Separate Account. For providing these services, a charge is made each business
day against the assets of the Separate Account and paid to Washington National
at an annual rate of 0.35%. The charge is designed to cover the actual expenses
incurred in providing these services, and Washington National does not expect to
profit from the charge. The amount of the charge is guaranteed not to be
increased, but may be imposed on a more or less frequent basis.
Other Expenses of the Separate Account. Prior to the Transactions, the
Separate Account pays all taxes, interest, brokerage fees and commissions, fees
and expenses of legal counsel and independent auditors, custodian fees and
expenses, expenses associated with meetings of the Contract Owners, expenses
incurred in the preparation, printing and distribution of reports and
prospectuses by the Separate Account to its current Contract Owners, fees of and
expenses incurred by directors of the Separate Account who are not Washington
National's directors, officers or employees, fees and expenses associated with
the approval, qualification or registration of the Contracts, extraordinary
expenses if permitted by applicable laws and regulations, and all other fees and
expenses incurred by or on behalf of the Separate Account which are not borne by
Washington National under the advisory agreement or an administrative services
agreement or by the underwriter under a distribution agreement. These expenses
are allocated among Sub-Accounts as the Board of Directors deems is appropriate,
which is generally in proportion to the net assets of the Sub-Accounts. During
1994, charges were made against the assets of each Sub-Account of the Separate
Account at an annual rate of 0.20%. After the Transactions, a charge for other
expenses will no longer be made against the assets of the Continuing Separate
Account. Instead, the payment of other expenses will be reflected in the net
asset value of the shares of each Portfolio of the Fund. The level of these
other expenses depends on the particular Portfolio.
- 45 -
<PAGE>
Premium Taxes. Various states and municipalities impose a premium tax of up
to 3.5% upon Purchase Payments received by insurance companies. At present,
Washington National pays those taxes but reserves the right to deduct premium
taxes from Purchase Payments or to charge them against the Contracts or
Certificates to which they are attributable in the future.
Fees and Expenses of the Fund
Investment Advisory Fees. Just as the Separate Account (prior to the
Transactions) is responsible for payment of an investment management charge, the
Fund is responsible for payment of an investment advisory fee. For its services,
Scudder charges a fee which is accrued daily against the assets of each
Portfolio. The investment advisory fee charged to each Eligible Portfolio,
stated as an annual percentage of the average daily value of the net assets, is:
Bond Portfolio 0.475%
Money Market Portfolio 0.370%
Capital Growth Portfolio 0.475%
The amount of the investment advisory fee paid to Scudder (as outlined
above) is less for each of the three available Portfolios than the
0.50%-per-year investment management charge currently paid by all three
Sub-Accounts of the Separate Account to Washington National.
Other Expenses of the Fund. The Fund pays certain of its expenses and also
makes payments to Scudder and to Scudder Investor Services, Inc. and Scudder
Fund Accounting Corporation for clerical, accounting, and certain other services
- 46 -
<PAGE>
they provide to the Fund. In 1994, these expenses and payments, stated as an
annual percentage of the daily value of each Eligible Portfolio's net assets,
were:
Bond Portfolio 0.105%
Money Market Portfolio 0.190%
Capital Growth Portfolio 0.105%
Under the investment advisory agreements between the Fund, on behalf of its
Portfolios, and Scudder, the Fund is responsible for all its other expenses,
including clerical salaries; fees and expenses incurred in connection with
membership in investment company organizations; brokers' commissions; legal,
auditing and accounting expenses; taxes and governmental fees; the charges of
custodians, transfer agents and other agents; any other expenses, including
clerical expenses, of issue, sale, underwriting, distribution, redemption or
repurchase of shares; the expenses of and fees for registering or qualifying
securities for sale; the fees and expenses of the Trustees of the Fund who are
not affiliated with Scudder; the cost of preparing and distributing reports and
notices to shareholders. The Fund is also responsible for its expenses incurred
in connection with litigation, proceedings and claims and the legal obligation
it may have to indemnify its officers and Trustees with respect thereto. Such
expenses are calculated daily and will be reflected in the value of the Fund's
assets and, thus, in the net asset value of Portfolio shares held by the
Sub-Accounts of the Continuing Separate Account. Any such expenses which are not
clearly allocable to a particular Portfolio or Portfolios will be allocated
among the Portfolios in the manner determined by the Fund's Board of Trustees.
- 47 -
<PAGE>
SUPPLEMENTARY FINANCIAL INFORMATION
Condensed Financial Information for the Separate Account
As a supplement to the ten fiscal years of condensed financial information
for each Sub-Account contained in the Separate Account's prospectus dated May 1,
1995 (accompanying this Proxy Statement/Prospectus as Appendix B), the following
corresponding data are presented for the six months ended June 30, 1995:
<TABLE>
<CAPTION>
SEPARATE ACCOUNT I OF WASHINGTON NATIONAL INSURANCE COMPANY
- --------------------------------------------------------------
Selected Data per Accumulation Unit Outstanding throughout the Period (for the six months ended
June 30, 1995) (unaudited)
Short-Term
Sub-Account: Bond Portfolio Stock
------- ---------- -----
<S> <C> <C> <C>
Per accumulation unit data:
Investment income $ 0.09 $ 0.05 $ 0.04
Expenses ( 0.02) ( 0.01) ( 0.02)
------- ------- -------
NET INVESTMENT INCOME 0.07 0.04 0.02
Net realized and unrealized gain (loss) on investments 0.15 --- 0.50
------- ------- -------
Net increase (decrease) in accumulation unit value 0.22 0.04 0.52
Accumulation unit value at beginning of period 2.16 1.70 2.54
------- ------- -------
ACCUMULATION UNIT VALUE AT END OF PERIOD $ 2.38 $ 1.74 $ 3.06
====== ====== ======
Ratios:
Ratio of expenses to average net assets 1.78% 1.84% 1.87%
Ratio of net investment income to average assets 5.75 4.18 1.11
Portfolio turnover rate --- --- 3.31
Number of accumulation units outstanding at end of period
(000's omitted) 5,173 983 9,714
</TABLE>
- --------------------
See notes to financial statements in the Separate Account's Semi-Annual Report
dated June 30, 1995.
- 48 -
<PAGE>
Financial Highlights for the Fund
As a supplement to the complete fiscal years of financial highlights for
each Eligible Portfolio contained in the Fund's prospectus dated May 1, 1995
(accompanying this Proxy Statement/Prospectus as Appendix C), the following
corresponding data are presented for the six months ended June 30, 1995:
<TABLE>
<CAPTION>
SCUDDER VARIABLE LIFE INVESTMENT FUND
- -----------------------------------------
Selected Data per Share Outstanding throughout the Period
(for the six months ended June 30, 1995) (unaudited)
Money Capital
Portfolio: Bond Market Growth
---- ------ -----------
<S> <C> <C> <C>
Per Share Data (A)
Net asset value, beginning of period $ 6.48 $ 1.000 $12.23
Income from investment operations:
Net investment income .21 .028 .06
Net realized and unrealized gain (loss) on investment transactions .45 --- 1.90
------- -------- -------
Total from investment operations .66 .028 1.96
------- -------- -------
Less distributions from:
Net investment income ( .21) ( .028) ( .04)
Net realized gains on investment transactions --- --- ( .43)
-------- -------- -------
Total distributions ( .21) ( .028) ( .47)
Net asset value, end of period $ 6.93 $ 1.000 $13.72
======= ======= ======
Total Return (%) (B) 10.40 2.83 16.48
Ratios and Supplemental Data
Net assets, end of period ($ millions) 146 84 290
Ratio of operating expenses, net to average net assets (%)(C) .56 .50 .57
Ratio of net investment income to average assets (%) (C) 6.45 5.63 .92
Portfolio turnover rate (%) (C) 157.99 --- 159.11
- -------------
<FN>
(A) Per share amounts have been calculated using the monthly-average-shares-
outstanding-during-the-period method.
(B) Not annualized
(C) Annualized
See notes to financial statements in the Fund's Semi-Annual Report dated June
30, 1995.
</FN>
</TABLE>
- 49 -
<PAGE>
AVAILABILITY OF CERTAIN OTHER INFORMATION
The Separate Account and the Fund are subject to various reporting and
filing requirements pursuant to statutes administered by the SEC. The balance of
this registration statement, of which this Proxy Statement/Prospectus forms a
part, as well as reports, proxy statements, and other information filed with the
SEC by the Separate Account or the Fund, can be inspected and copied at the
public reference facilities maintained by the Commission at: 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549; 7 World Trade Center, Suite 1300, New
York, New York 10048; and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material can be obtained from the SEC at prescribed rates
by writing to the Public Reference Branch, Office of Consumer Affairs and
Information Services, Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549.
The Board of Directors of the Separate Account unanimously recommends a
vote FOR the Transactions.
OTHER MATTERS
The Board of Directors of the Separate Account knows of no other matters
which are likely to be brought before the Special Meeting. In the event any
other matters do properly come before the Special Meeting, however, the persons
named in the enclosed proxy will vote the proxies in accordance with their best
judgment.
- 50 -
<PAGE>
FORM OF PROXY
SEPARATE ACCOUNT I OF WASHINGTON NATIONAL INSURANCE COMPANY
SPECIAL MEETING OF SEPARATE ACCOUNT VOTERS -- February 15, 1996
The undersigned Separate Account Voter hereby appoints James E. Dresmal and
Craig R. Edwards, and each of them severally, as proxies with full power of
substitution, to represent the undersigned, and to cast the number of votes
which the undersigned is entitled to cast in respect of Separate Account I of
Washington National Insurance Company (the "Separate Account"), at the Special
Meeting of Separate Account Voters to be held at the office of the Separate
Account at 300 Tower Parkway in Lincolnshire, Illinois, at __:___ __.m., Central
Time, on Thursday, February 15, 1996, and at any adjournments thereof,
as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For Against Abstain
--- ------- -------
1. To approve the Transactions restructuring the Separate
Account as a unit investment trust investing in certain
Portfolios offered by Scudder Variable Life Investment Fund. |_| |_| |_|
2. To transact such other business as may properly come
before the meeting. |_| |_| |_|
</TABLE>
<PAGE>
This proxy will be voted as specified. IF NO SPECIFICATION IS MADE, THIS PROXY
WILL BE VOTED "FOR" PROPOSALS 1 and 2.
Date: _____________ ___, 1996 _____________________________________________
Signature - Please sign exactly as your
name appears below.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF THE SEPARATE ACCOUNT. IT IS
IMPORTANT THAT YOUR VARIABLE ANNUITY INTEREST BE REPRESENTED. PLEASE FILL IN,
DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENCLOSED ENVELOPE. NO
POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
<PAGE>
APPENDIX A
FORM OF ASSET TRANSFER AGREEMENT AND PLAN OF REORGANIZATION
<PAGE>
ASSET TRANSFER AGREEMENT
and
PLAN OF REORGANIZATION
for
Separate Account I
of
Washington National Insurance Company
This Asset Transfer Agreement and Plan of Reorganization (the "Agreement"),
entered into as of the _____ day of ___________, 1995, by and among Washington
National Insurance Company ("Washington National"), a stock life insurance
company organized and existing under the laws of the State of Illinois, Separate
Account I of Washington National Insurance Company (the "Separate Account"), a
separate account established and existing under the insurance laws of the State
of Illinois, and Scudder Variable Life Investment Fund (the "Fund"), a
"Massachusetts business trust" organized and existing under the laws of the
Commonwealth of Massachusetts, on behalf of each of its Bond Portfolio, Money
Market Portfolio, and Capital Growth Portfolio; WITNESSETH that,
WHEREAS, the Separate Account is currently comprised of three investment
divisions ("Sub-Accounts"), is registered with the Securities and Exchange
Commission (the "Commission") as an open-end, diversified management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
and is the funding vehicle for certain variable annuity contracts (the
"Contracts") issued by Washington National; and
WHEREAS, the Board of Directors of the Separate Account has approved a set
of transactions (the "Transactions") reorganizing the Separate Account into an
<PAGE>
unmanaged separate account (the "Continuing Separate Account"), which shall be
registered with the Commission as a unit investment trust under the 1940 Act;
and
WHEREAS, the Fund is a series-type mutual fund which is currently comprised
of six (6) investment portfolios ("Portfolios"), and is registered with the
Commission as an open-end, diversified management investment company under the
1940 Act; and
WHEREAS, each Sub-Account of the Continuing Separate Account will invest
solely in a series of the Fund's shares of beneficial interest corresponding to
a particular Portfolio of the Fund; and
WHEREAS, the Board of Directors of the Separate Account has further
determined that the registration statement of the Separate Account shall be
amended, to the extent required by law, to reflect the Transactions contemplated
by this Agreement; and
WHEREAS, the Fund does and, to the extent permitted by the 1940 Act, may
continue to serve as an investment vehicle for variable life insurance policies
and variable annuity contracts issued by unaffiliated insurance companies; and
WHEREAS, the Board of Directors of Washington National and the Board of
Trustees of the Fund have each considered and approved the actions contemplated
by this Agreement; and
WHEREAS, this Agreement is conditioned upon approval of the Transactions
described herein by vote of a majority of the outstanding voting securities of
the Separate Account, as defined in the 1940 Act and rules thereunder, at a
2
<PAGE>
meeting of the owners of the Contracts (the "Contract Owners") and other persons
entitled to vote in respect of the Separate Account (collectively, the "Separate
Account Voters"), called for that purpose, or any adjournments thereof;
NOW THEREFORE, in consideration of the mutual promises made herein, the
parties hereto agree as follows:
ARTICLE I: CLOSING DATE
SECTION 1.01. The Transactions contemplated by this Agreement shall be
effective on such date as may be mutually agreed upon by all parties to this
Agreement (the "Closing Date"). The time on the Closing Date as of which the
Transactions are consummated is referred to hereinafter as the "Effective Time."
SECTION 1.02. The parties agree to use their best efforts to obtain all
regulatory and Separate Account Voter approvals and perform all other acts
necessary or desirable to complete the Transactions as of the Closing Date.
ARTICLE II: TRANSACTIONS
SECTION 2.01. As of the Effective Time, Washington National, on behalf of
the Separate Account, will sell, assign, and transfer all cash except for a
minimal amount needed to keep bank accounts open, all securities and other
investments held or in transit, all accounts receivable for sold investments,
and all dividends and interest receivable (collectively, "portfolio assets") of
the Bond Sub-Account, the Short-Term Portfolio Sub-Account, and the Stock
Sub-Account of the Separate Account to the Fund to be held as the property of
3
<PAGE>
the Fund's Bond Portfolio, Money Market Portfolio, and Capital Growth Portfolio,
respectively.
SECTION 2.02. In exchange for the portfolio assets of the Bond Sub-Account,
the Short-Term Portfolio Sub-Account, and the Stock Sub-Account of the Separate
Account, the Fund will issue to Washington National, on behalf of each such
Sub-Account of the Continuing Separate Account, shares of beneficial interest in
the series corresponding to the Fund's Bond Portfolio, Money Market Portfolio,
and Capital Growth Portfolio, respectively, and will assume any unsatisfied
liability incurred by the Separate Account before the Effective Time to pay for
securities or other investments purchased and to pay accrued investment
management fees. The number of shares of beneficial interest in each series of
the Fund to be issued in the exchange shall be determined by dividing the value
of the net assets of each Sub-Account of the Separate Account to be transferred
(using the valuation procedures set forth in the Fund's Declaration of Trust, as
amended, prospectus or statement of additional information, and currently
effective valuation resolution as adopted by the Fund's Board of Trustees) as of
the close of trading on the first business day preceding the Closing Date, by
the per share value of the corresponding series of the Fund's shares of
beneficial interest as of the Effective Time or such other date required by law.
All such computations shall be made in cooperation with the auditors of the Fund
who will apply certain procedures designed to test such computations as agreed
by the Fund.
SECTION 2.03. As of the Effective Time, Washington National shall cause the
shares of beneficial interest in the Fund it receives pursuant to Section 2.02
of this Agreement to be duly and validly recorded and held on its records as
4
<PAGE>
assets of the Continuing Separate Account, such that the Contract Owners'
interests in each Sub-Account of the Continuing Separate Account after the
Closing Date will then be equivalent to their former interests in each
Sub-Account of the Separate Account. Washington National shall take all action
necessary to ensure that such interests in the Continuing Separate Account,
immediately following the Effective Time, are duly and validly recorded on the
Contract Owners' individual account records.
SECTION 2.04. The Fund's shares of beneficial interest to be issued
hereunder shall be issued in open account form by book entry without the
issuance of certificates. Each such share of beneficial interest that is issued
pursuant to Section 2.02 of this Agreement will be deemed to have been issued
for a consideration equal to the net asset value per share of the corresponding
Portfolio of the Fund as of the Effective Time or such other date required by
law.
SECTION 2.05. If, at any time after the Closing Date, the Continuing
Separate Account, the Fund, or Washington National shall determine that any
further conveyance, assignment, documentation, or action is necessary or
desirable to complete the Transactions contemplated by this Agreement or confirm
full title to the assets transferred, the appropriate party or parties shall
execute and deliver all such instruments and take all such actions which are
considered reasonable and necessary to complete the Transactions.
SECTION 2.06. Following the Closing Date, Washington National shall cease
charging the Continuing Separate Account for investment management services and
other expenses, although Washington National shall continue charging the
5
<PAGE>
Continuing Separate Account for annuity rate guarantees and financial accounting
services.
ARTICLE III: WARRANTIES AND CONDITIONS
SECTION 3.01. The Separate Account, Washington National, and the Fund, as
appropriate, make the following representations and warranties, which shall
survive the Closing Date and bind their respective successors and assigns (e.g.,
the Continuing Separate Account):
(a) There are no suits, actions, or proceedings pending or threatened
against any party to this Agreement which, to its knowledge, if adversely
determined, would materially and adversely affect its financial condition, the
conduct of its business, or its ability to carry out its obligations hereunder.
(b) There are no investigations or administrative proceedings by the
Commission or by any insurance or securities regulatory body of any state or
territory or of the District of Columbia pending against any party to this
Agreement which, to its knowledge, would lead to any suit, action, or proceeding
that would materially and adversely affect its financial condition, the conduct
of its business, or its ability to carry out its obligations hereunder.
(c) Should any party to this Agreement become aware, prior to the Effective
Time, of any suit, action, or proceeding, of the types described in paragraphs
(a) or (b) above, instituted or commenced against it, such party shall
immediately notify and advise all other parties to this Agreement.
6
<PAGE>
(d) Immediately prior to the Effective Time, Washington National shall have
valid and unencumbered title to the portfolio assets of the Separate Account,
except with respect to those assets for which payment has not yet been made.
(e) Each party shall make available all information concerning itself which
may be required in any application, registration statement, or other filing with
a governmental body to be made by Washington National, the Separate Account, or
the Fund or any or all of them, in connection with any of the transactions
contemplated by this Agreement and shall join in all such applications or
filings, subject to reasonable approval by its counsel. Each party represents
and warrants that all of such information so furnished shall be correct in all
material respects and that it shall not omit any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading.
(f) The Separate Account and Washington National warrant and represent that
the audited financial statements of the Separate Account as of and for the year
ended December 31, 1994, which will be furnished to the Fund prior to the
execution of this Agreement, fairly present the financial condition of the
Separate Account as of that date in conformity with generally accepted
accounting principles consistently applied.
(g) The Separate Account will provide to the Fund an unaudited statement of
assets and liabilities and the related statement of operations and statement of
changes in net assets for each semi-annual period occurring between January 1,
1995, and the Closing Date.
7
<PAGE>
(h) The Separate Account and Washington National warrant and represent that
each Sub-Account of the Separate Account has satisfied or will satisfy the
diversification requirements of, and the Contracts have or will be treated as
annuities under, Section 817(h) of the Internal Revenue Code of 1986, as
amended, and the underlying Treasury regulations for the two calendar quarters
preceding the Closing Date.
(i) From the date of this Agreement through the Closing Date, the Separate
Account and Washington National will conduct their business in accordance with
the governing Rules and Regulations of the Separate Account and in substantial
compliance with the Illinois Insurance laws and the terms of the Contracts.
(j) Other than with respect to contracts entered into in connection with
the portfolio management of the Separate Account which shall terminate on or
prior to the Closing Date, no party is engaged currently, and the execution,
delivery and performance of this Agreement by each party will not result, in a
material violation of any such party's charter, by-laws, or any material
agreement, indenture, instrument, contract, lease or other undertaking to which
such party is bound, and to such party's knowledge, the execution, delivery and
performance of this Agreement will not result in the acceleration of any
obligation, or the imposition of any penalty, under any material agreement,
indenture, instrument, contract, lease, judgment or decree to which any such
party may be a party or to which it is bound.
SECTION 3.02. The obligations of the parties hereunder shall be subject to
satisfaction of each of the following conditions:
8
<PAGE>
(a) The representations contained herein shall be true as of and at the
Effective Time with the same effect as though made at such time, and such
parties shall have performed all obligations required by this Agreement to be
performed by each of them prior to such time.
(b) The Commission shall not have issued an unfavorable advisory report
under Section 25(b) of the 1940 Act nor instituted any proceeding seeking to
enjoin consummation of the Transactions contemplated hereby.
(c) The appropriate parties shall have received orders from the Commission
providing such exemptions and approvals as they and their counsel reasonably
deem necessary, including exemptions from Sections 17(d), 26(a)(2)(C), and
27(c)(2) of the 1940 Act and Rule 17d-1 thereunder, and shall have made all
necessary filings, if any, with, and received all necessary approvals from,
state securities or insurance authorities.
(d) The Separate Account and the Fund shall have filed with the Commission
a registration statement on Form N-14 under the Securities Act of 1933, as
amended (the "1933 Act"), and such pre-effective amendments thereto as may be
necessary or desirable to effect the purposes of the Transactions; and the
appropriate parties shall have taken all actions necessary for such filings to
become effective; and no reason shall be known by the parties which would
prevent the filings from becoming effective in a timely manner.
(e) At a meeting of the Separate Account Voters called for such purpose (or
any adjournments thereof), a majority of the outstanding voting securities (as
9
<PAGE>
defined in the 1940 Act and the rules thereunder) of the Separate Account shall
have voted in favor of approving this Agreement and the Transactions
contemplated hereby.
(f) The Board of Trustees of the Fund shall have approved this Agreement
and adopted it as a valid obligation of the Fund and legally binding upon it.
(g) All of the Contracts have been offered and sold in compliance with
applicable requirements of the federal securities laws.
(h) The Fund shares to be issued pursuant to Section 2.02 of this Agreement
are duly authorized and, upon the Closing, will be validly issued and fully paid
and non-assessable and conform in all material respects to the description
thereof contained in the registration statement on Form N-14. The sale of the
Fund shares pursuant to Section 2.02 of this Agreement will be duly registered
under the 1933 Act; all reports required to be filed and fees required to be
paid in connection therewith shall have been duly and timely filed and paid; and
no stop order shall have been entered in connection therewith.
(i) Washington National and the Separate Account shall have received an
opinion of counsel to the Fund in form and substance reasonably satisfactory to
Washington National and the Separate Account to the effect that, as of the
Closing Date,
(1) the Fund has been duly organized, is existing in good standing, and is
authorized to issue shares of beneficial interest for the purposes contemplated
by this Agreement and is duly registered and in good standing as an investment
company under the 1940 Act,
10
<PAGE>
(2) the Fund's shares of beneficial interest to be issued pursuant to the
terms of this Agreement have been duly authorized and, when issued and delivered
as provided herein, will be validly issued, fully paid, and non-assessable,
(3) to counsel's knowledge and belief, all corporate and other proceedings
required to be taken by or on the part of the Fund to authorize and carry out
this Agreement and effect the Transactions have been duly and properly taken,
and
(4) this Agreement is a valid obligation of the Fund and legally binding
upon it in accordance with its terms.
(j) The Fund and the Separate Account shall have received an opinion from
counsel to Washington National (who may be in-house counsel and/or the same as
counsel to the Separate Account) in form and substance reasonably satisfactory
to the Fund and the Separate Account to the effect that, as of the Closing Date,
(1) Washington National and the Separate Account are validly organized and
established, respectively, and in good standing under the laws of the State of
Illinois and are fully empowered and qualified to carry out their business in
all jurisdictions where they do so, including to enter into this Agreement and
effect the transactions contemplated hereby,
(2) the Separate Account is duly registered and in good standing as an
investment company under the 1940 Act,
(3) the Contracts are validly issued and non-assessable,
(4) to counsel's knowledge and belief, all corporate and other proceedings
necessary and required to be taken by or on the part of Washington
11
<PAGE>
National and the Separate Account to authorize and carry out this Agreement and
to effect the Transactions have been duly and properly taken, and
(5) this Agreement is a valid obligation of Washington National and the
Separate Account and legally binding upon them in accordance with its terms.
(k) Each party shall have furnished, as reasonably requested by any other
party, other legal opinions, officers' certificates, incumbency certificates,
certified copies of board and committee resolutions, certificates of good
standing or "all fees paid" or similar certificates, and other closing
documentation as may be appropriate for a transaction of this type.
ARTICLE IV: COSTS
SECTION 4.01. Washington National shall bear all expenses incurred by it
and by the Separate Account in connection with effecting the Transactions
contemplated by this Agreement (including, without limitation, any expenses in
connection with: actions taken pursuant to Section 2.05 of this Agreement;
preparation and filing of registration statements, applications, and amendments
thereto on behalf of any and all parties hereto; and all legal, accounting, and
data processing services for Washington National and the Separate Account
necessary to effect the Transactions). The Fund shall bear the costs of
fulfilling its obligations hereunder (including, without limitation, Commission
registration fees for Fund shares, the cost of actions taken pursuant to Section
2.05 of this Agreement, and the cost of providing an opinion of counsel pursuant
to Section 3.02(j) of this Agreement).
12
<PAGE>
ARTICLE V: TERMINATION
SECTION 5.01. This Agreement may be terminated and the Transactions
abandoned at any time prior to the Effective Time, notwithstanding approval by
the Separate Account Voters,
(a) by mutual consent of the parties hereto,
(b) by any of the parties if any condition set forth in Section 3.02 of
this Agreement has not been fulfilled by the other parties, or
(c) by any of the parties if the Transactions do not occur as of
_________________ and no subsequent date can be mutually agreed upon.
SECTION 5.02. At any time prior to the Effective Time, any of the terms or
conditions of this Agreement may be waived by the party or parties entitled to
the benefit thereof if such waiver will not have a material adverse effect on
the interests of Contract Owners.
ARTICLE VI: GENERAL
SECTION 6.01. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which shall constitute one
and the same instrument.
SECTION 6.02. The Fund is organized as a Massachusetts business trust, and
references in this Agreement to the Fund mean and refer to the Trustees from
time to time serving under its Declaration of Trust on file with the Secretary
of State of the Commonwealth of Massachusetts, as the same may be amended from
13
<PAGE>
time to time, pursuant to which the Fund conducts its business. It is expressly
agreed that the obligations of the Fund hereunder shall not be binding upon any
of the Trustees, shareholders, nominees, officers, agents, or employees of the
Fund personally, but bind only the property of the Fund, as provided in the
Fund's Declaration of Trust. Moreover, no series of the Fund other than the Bond
Portfolio, the Money Market Portfolio, and the Capital Growth Portfolio shall
be responsible for the obligations of the Fund hereunder, and all persons shall
look only to the respective assets of each of the Portfolios to satisfy the
obligations of the Fund hereunder. The execution and the delivery of this
Agreement have been authorized by the Fund's Board of Trustees, on behalf of
each of the Portfolios, and this Agreement has been signed by authorized
officers of the Fund acting as such, and neither such authorization by such
Trustees, nor such execution and delivery by such officers, shall be deemed to
have been made by any of them individually or to impose any liability on any of
them personally, but shall bind only the respective property of the Portfolios,
as provided in the Fund's Declaration of Trust.
SECTION 6.03. This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of the Commonwealth of Massachusetts,
without regard to its principles of conflicts of law.
14
<PAGE>
IN WITNESS WHEREOF, as of the day and year first above written, each of the
parties has caused this Agreement to be executed on its behalf by its Chairman,
President, or Vice President and attested by its Secretary or Assistant
Secretary, all thereunto duly authorized.
WASHINGTON NATIONAL INSURANCE COMPANY
Attest:
/s/Craig R. Edwards By: /s/James E. Dresmal
- ------------------- -------------------
Craig R. Edwards James E. Dresmal
Secretary Vice President
SEPARATE ACCOUNT I OF WASHINGTON
NATIONAL INSURANCE COMPANY
Attest:
/s/Craig R. Edwards By: /s/James E. Dresmal
- ------------------- -------------------
Craig R. Edwards James E. Dresmal
Secretary Chairman of the Board of Directors
SCUDDER VARIABLE LIFE
INVESTMENT FUND (on behalf of each of its
Bond Portfolio, Money Market Portfolio,
and Capital Growth Portfolio)
Attest:
/s/Thomas F. McDonough By: /s/David B. Watts
- ---------------------- -----------------
Thomas F. McDonough David B. Watts
Secretary President
15
<PAGE>
APPENDIX B
SEPARATE ACCOUNT I OF WASHINGTON NATIONAL INSURANCE COMPANY
Prospectus dated May 1, 1995
The Separate Account's prospectus dated May 1, 1995, is incorporated herein
by reference to Appendix B of Part A of the initial registration statement on
Form N-14 for Separate Account I of Washington National Insurance Company and
Scudder Variable Life Investment Fund (File No. 33-62861), as filed with the
Commission on September 22, 1995, and will accompany the Proxy
Statement/Prospectus sent to Separate Account Voters.
<PAGE>
APPENDIX C
SCUDDER VARIABLE LIFE INVESTMENT FUND
Prospectus dated May 1, 1995
The Fund's prospectus dated May 1, 1995, immediately follows this page.
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
Two International Place
Boston, Massachusetts 02110-4103
(A Mutual Fund)
Scudder Variable Life Investment Fund (the "Fund") is an open-end management
investment company which offers shares of beneficial interest of six diversified
Portfolios, three of which are offered herein. The Money Market Portfolio seeks
stability and current income from a portfolio of money market instruments. The
Money Market Portfolio will maintain a dollar-weighted average maturity of 90
days or less in an effort to maintain a constant net asset value of $1.00 per
share. An investment in the Money Market Portfolio is neither insured nor
guaranteed by the United States Government and there can be no assurance that
the Portfolio will be able to maintain a stable net asset value of $1.00 per
share. The Bond Portfolio seeks high income from a high quality portfolio of
bonds. The Capital Growth Portfolio seeks to maximize long-term capital growth
from a portfolio consisting primarily of equity securities.
This prospectus sets forth concisely the information about the Fund, as well as
the Money Market Portfolio, Bond Portfolio and Capital Growth Portfolio
(individually or collectively hereinafter referred to as a "Portfolio" or the
"Portfolios") that a prospective investor should know before applying for
certain variable annuity contracts and variable life insurance policies offered
in the separate accounts of certain insurance companies ("Participating
Insurance Companies"). Please read it carefully and retain it for future
reference. If you require more detailed information, a Statement of Additional
Information dated May 1, 1995, as supplemented from time to time, is available
upon request without charge and may be obtained by calling a Participating
Insurance Company or by writing to broker/dealers offering the above mentioned
variable annuity contracts and variable life insurance policies, or Scudder
Investor Services, Inc., Two International Place, Boston, Massachusetts
02110-4103. The Statement of Additional Information, which is incorporated by
reference into this prospectus, has been filed with the Securities and Exchange
Commission.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
SHARES OF THE FUND ARE AVAILABLE AND ARE BEING MARKETED EXCLUSIVELY AS A
POOLED FUNDING VEHICLE FOR LIFE INSURANCE COMPANIES WRITING ALL TYPES OF
VARIABLE LIFE INSURANCE POLICIES AND VARIABLE ANNUITY CONTRACTS.
PROSPECTUS
May 1, 1995
<PAGE>
SCUDDER
<TABLE>
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
TABLE OF CONTENTS
-------------------------------------------------------------------------------------------------------------------
Page
INVESTMENT CONCEPT OF THE FUND 1
FINANCIAL HIGHLIGHTS 2
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS 5
Money Market Portfolio 5
Bond Portfolio 5
Capital Growth Portfolio 6
POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS 7
Repurchase Agreements 7
Convertible Securities 7
Mortgage and Other Asset-Backed Securities 8
Foreign Securities 8
When-Issued Securities 9
Indexed Securities 9
Loans of Portfolio Securities 9
Zero Coupon Securities 9
Derivatives 10
Options 10
Options on Securities Indexes 10
Futures Contracts 10
Forward Foreign Currency Exchange Contracts 11
INVESTMENT RESTRICTIONS 11
INVESTMENT ADVISER 12
Portfolio Management 13
Money Market Portfolio 13
Bond Portfolio 13
Capital Growth Portfolio 13
DISTRIBUTOR 13
PURCHASES AND REDEMPTIONS 14
NET ASSET VALUE 14
PERFORMANCE INFORMATION 15
Money Market Portfolio 15
Bond Portfolio 15
All Portfolios 15
VALUATION OF PORTFOLIO SECURITIES 15
Money Market Portfolio 15
Other Portfolios 16
TAX STATUS, DIVIDENDS AND DISTRIBUTIONS 16
SHAREHOLDER COMMUNICATIONS 17
ADDITIONAL INFORMATION 17
Fund Organization and Shareholder Indemnification 17
Other Information 17
TRUSTEES AND OFFICERS 19
</TABLE>
<PAGE>
SCUDDER
------------------------------------------------------------------------------
INVESTMENT CONCEPT OF THE FUND
------------------------------------------------------------------------------
Scudder Variable Life Investment Fund (the "Fund") is an open-end, registered
management investment company comprised of six diversified series. Additional
Portfolios may be created from time to time. The Fund is intended to be the
funding vehicle for variable annuity contracts ("VA contracts") and variable
life insurance policies ("VLI policies") to be offered by the separate accounts
of certain life insurance companies ("Participating Insurance Companies"). The
Fund currently does not foresee any disadvantages to the holders of VA contracts
and VLI policies arising from the fact that the interests of the holders of such
contracts and policies may differ. Nevertheless, the Fund's Trustees intend to
monitor events in order to identify any material irreconcilable conflicts which
may possibly arise and to determine what action, if any, should be taken in
response thereto. The VA contracts and the VLI policies are described in the
separate prospectuses issued by the Participating Insurance Companies. The Fund
assumes no responsibility for such prospectuses.
Individual VA contract holders and VLI policyholders are not the "shareholders"
of the Fund. Rather, the Participating Insurance Companies and their separate
accounts are the shareholders or investors (the "Shareholders"), although such
companies may pass through voting rights to their VA contract and VLI
policyholders.
1
<PAGE>
SCUDDER
------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
------------------------------------------------------------------------------
Money Market Portfolio
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements.
If you would like more detailed information concerning the Portfolio's
performance, a complete portfolio listing and audited financial statements are
available in the Fund's Annual Report dated December 31, 1994 and may be
obtained without charge by calling a Participating Insurance Company or by
writing to broker/dealers offering the previously mentioned variable annuity
contracts and variable life insurance policies, or Scudder Investor Services,
Inc.
<TABLE>
Six For the Period
Months July 16, 1985
Ended (commencement
Years Ended December 31, December of operations
__________________________________________________________________ 31, to June 30,
1994 1993 1992 1991 1990 1989 1988 1987 1986(e) 1986
__________________________________________________________________ ______ ________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000(b)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income (a) .037 .025 .033 .057 .076 .088 .068 .060 .026 .064
Less distributions from
net investment income (.037) (.025) (.033) (.057) (.076) (.088) (.068) (.060) (.026) (.064)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value,
end of period $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return (%) 3.72 2.54 3.33 5.81 7.83 8.84 7.08 5.95 2.59(d) 6.59(d)
Ratios and
Supplemental Data
Net assets, end of
period ($ millions) 90 49 34 28 32 15 11 8 3 --
Ratio of operating
expenses, net to
average daily net
assets (%) (a) .56 .66 .64 .67 .69 .72 .75 .75 .75(c) .60(c)
Ratio of net investment
income to average
daily net assets (%) 3.80 2.55 3.26 5.67 7.57 8.53 6.99 6.06 5.10(c) 6.75(c)
(a) Portion of expenses
reimbursed $ -- $ -- $ -- $ -- $ -- $ .001 $ .003 $.006 $ .022 $ .133
(b) Original capital
(c) Annualized
(d) Not annualized
(e) On August 22, 1986, the Trustees voted to change the year end of the Fund
from June 30 to December 31.
</TABLE>
2
<PAGE>
SCUDDER
------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
------------------------------------------------------------------------------
Bond Portfolio
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements.
If you would like more detailed information concerning the Portfolio's
performance, a complete portfolio listing and audited financial statements are
available in the Fund's Annual Report dated December 31, 1994 and may be
obtained without charge by calling a Participating Insurance Company or by
writing to broker/dealers offering the previously mentioned variable annuity
contracts and variable life insurance policies, or Scudder Investor Services,
Inc.
<TABLE>
Six For the Period
Months July 16, 1985
Ended (commencement
Years Ended December 31, December of operations
__________________________________________________________________ 31, to June 30,
1994 1993 1992 1991 1990 1989 1988 1987 1986(e) 1986
__________________________________________________________________ ______ ________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 7.42 $ 7.19 $ 7.37 $6.73 $ 6.72 $ 6.39 $ 6.47 $6.67 $ 6.56 $6.00(b)
------ ------ ------ ----- ------ ------ ------ ----- ------ -----
Income from investment
operations:
Net investment
income (a) .43 .48 .49 .52 .53 .54 .54 .49 .23 .45
Net realized and
unrealized gain
(loss) on
investment
transactions (.77) .38 (.02) .61 (.02) .18 (.19) (.40) .08 .44
---- --- ---- --- ---- --- ---- ---- --- ---
Total from investment
operations (.34) .86 .47 1.13 .51 .72 .35 .09 .31 .89
---- --- --- ---- --- --- --- --- --- ---
Less distributions from:
Net investment income (.43) (.48) (.46) (.47) (.50) (.39) (.43) (.29) (.17) (.33)
Net realized gains on
on investment
transactions (.17) (.15) (.19) (.02) -- -- -- -- (.03) --
---- ---- ---- ---- ----
Total distributions (.60) (.63) (.65) (.49) (.50) (.39) (.43) (.29) (.20) (.33)
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net asset value,
end of period $ 6.48 $ 7.42 $ 7.19 $7.37 $ 6.73 $ 6.72 $ 6.39 $6.47 $ 6.67 $6.56
====== ====== ====== ===== ====== ====== ====== ===== ====== =====
Total Return (%) (4.79) 12.38 7.01 17.61 8.06 11.65 5.46 1.22 4.90(d) 15.11(d)
Ratios and
Supplemental Data
Net assets, end of
period ($ millions) 142 129 113 74 42 22 3 3 1 --
Ratio of operating
expenses, net to
average net
assets (%) (a) .58 .61 .63 .69 .73 .75 .75 .75 .75(c) .60(c)
Ratio of net investment
income to average
net assets (%) 6.43 6.59 6.89 7.51 8.05 8.04 7.86 7.53 6.88(c) 7.48(c)
Portfolio turnover
rate (%) 96.55 125.15 87.00 115.86 71.02 103.41 245.23 186.05 23.82(c) 6.27(c)
(a) Portion of expenses
reimbursed $ -- $ -- $ -- $ -- $ -- $ .01 $ .04 $ .08 $ .21 $.80
(b) Original capital
(c) Annualized
(d) Not annualized
(e) Per share amounts, for each of the periods identified, have been calculated
using the monthly average shares outstanding during the period
method.
(f) On August 22, 1986, the Trustees voted to change the year end of the Fund
from June 30 to December 31.
</TABLE>
3
<PAGE>
SCUDDER
------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
------------------------------------------------------------------------------
Capital Growth Portfolio
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements.
If you would like more detailed information concerning the Portfolio's
performance, a complete portfolio listing and audited financial statements are
available in the Fund's Annual Report dated December 31, 1994 and may be
obtained without charge by calling a Participating Insurance Company or by
writing to broker/dealers offering the previously mentioned variable annuity
contracts and variable life insurance policies, or Scudder Investor Services,
Inc.
<TABLE>
Six For the Period
Months July 16, 1985
Ended (commencement
Years Ended December 31, December of operations
__________________________________________________________________ 31, to June 30,
1994 1993 1992 1991 1990 1989 1988 1987 1986(e) 1986
__________________________________________________________________ ______ ________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $14.95 $12.71 $12.28 $8.99 $10.21 $ 8.53 $ 7.06 $7.67 $ 7.93 $6.00(b)
------ ------ ------ ----- ------ ------ ------ ----- ------ -----
Income from investment
operations:
Net investment
income (a) .06 .06 .11 .16 .25 .35 .16 .15 .09 .19
Net realized and
unrealized gain
(loss) on investment
transactions (1.42) 2.52 .66 3.35 (1.00) 1.58 1.40 (.28) (.07) 1.87
----- ---- --- ---- ----- ---- ---- ---- ---- ----
Total from investment
operations (1.36) 2.58 .77 3.51 (.75) 1.93 1.56 (.13) .02 2.06
----- ---- --- ---- ---- ---- ---- ---- --- ----
Less distributions from:
Net investment
income (.05) (.07) (.11) (.22) (.24) (.25) (.09) (.09) (.07) (.13)
Net realized gains
on investment
transactions (1.31) (.27) (.23) -- (.23) -- -- (.39) (.21) --
----- ---- ---- ---- ---- ----
Total distributions (1.36) (.34) (.34) (.22) (.47) (.25) (.09) (.48) (.28) (.13)
----- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net asset value,
end of period $12.23 $14.95 $12.71 $12.28 $ 8.99 $10.21 $ 8.53 $7.06 $ 7.67 $ 7.93
====== ====== ====== ====== ====== ====== ====== ===== ====== =======
Total Return (%) (9.67) 20.88 6.42 39.56 (7.45) 22.75 22.07 (1.88) .26(d) 34.66(d)
Ratios and
Supplemental Data
Net assets, end of
period ($ millions) 257 257 167 108 45 45 17 10 1 --
Ratio of operating
expenses, net to
average net
assets (%) (a) .58 .60 .63 .71 .72 .75 .75 .75 .75(c) .60(c)
Ratio of net investment
income to average
net assets (%) .47 .46 .95 1.49 2.71 3.51 2.17 1.68 2.21(c) 2.95(c)
Portfolio turnover
rate (%) 66.44 95.31 56.29 58.88 61.39 63.96 129.75 113.34 38.78(c) 86.22(c)
(a) Portion of expenses
reimbursed $ -- $ -- $ -- $ -- $ -- $ .01 $ .01 $ .04 $ .20 $.81
(b) Original capital
(c) Annualized
(d) Not annualized
(e) Per share amounts, for each of the periods identified, have been calculated using the monthly average shares outstanding
during the period method.
(f) On August 22, 1986, the Trustees voted to change the year end of the Fund from June 30 to December 31.
</TABLE>
4
<PAGE>
SCUDDER
------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND
POLICIES OF THE PORTFOLIOS
------------------------------------------------------------------------------
Each type of Portfolio has a different investment objective which it pursues
through separate investment policies, as described below. The differences in
objectives and policies among the Portfolios can be expected to affect the
degree of market and financial risk to which each Portfolio is subject and the
return of each Portfolio. The investment objectives and policies of each
Portfolio may, unless otherwise specifically stated, be changed by the Trustees
of the Fund without a vote of the Shareholders. There is no assurance that the
objectives of any Portfolio will be achieved.
MONEY MARKET PORTFOLIO
The Money Market Portfolio seeks to maintain the stability of capital and,
consistent therewith, to maintain the liquidity of capital and to provide
current income. The Portfolio seeks to maintain a constant net asset value of
$1.00 per share, although there can be no assurance that this will be achieved.
The Portfolio uses the amortized cost method of securities valuation.
The Money Market Portfolio purchases money market securities such as U.S.
Treasury, agency and instrumentality obligations, finance company and corporate
commercial paper, bankers' acceptances and certificates of deposit of domestic
and foreign banks (i.e., banks which at the time of their most recent annual
financial statements show total assets in excess of $1 billion), including
foreign branches of domestic banks, which involve different risks than those
associated with investments in certificates of deposit of domestic banks, and
corporate obligations. The Money Market Portfolio may also enter into repurchase
agreements. The Money Market Portfolio may also invest in certificates of
deposit issued by banks and savings and loan institutions which had at the time
of their most recent annual financial statements total assets of less than $1
billion, provided that (i) the principal amounts of such certificates of deposit
are insured by an agency of the U.S. Government, (ii) at no time will the
Portfolio hold more than $100,000 principal amount of certificates of deposit of
any one such bank, and (iii) at the time of acquisition, no more than 10% of the
Portfolio's assets (taken at current value) are invested in certificates of
deposit of such banks having total assets not in excess of $1 billion.
Investments are limited to those that are dollar-denominated and at the time of
purchase are rated, or judged by the Fund's investment adviser, Scudder, Stevens
& Clark, Inc. (the "Adviser"), subject to the supervision of the Trustees, to be
equivalent to those rated high quality (i.e., rated in the two highest
categories) by any two nationally-recognized rating services such as Moody's
Investors Service, Inc. ("Moody's") and Standard & Poor's ("S&P"). In addition,
the Adviser seeks through its own credit analysis to limit investments to high
quality instruments presenting minimal credit risks. The portfolio is subject to
certain additional quality and diversification restrictions which are set forth
in the Fund's Statement of Additional Information.
The remaining maturity of each investment in the Money Market Portfolio is 397
calendar days or less. The dollar-weighted average maturity of the Portfolio's
investments varies with money market conditions, but is always 90 days or less.
As a money market fund with a short-term maturity, the Portfolio's income
fluctuates with changes in interest rates, but its price to the public or
"offering price," is expected to remain fixed at $1.00 per share.
BOND PORTFOLIO
The Bond Portfolio pursues a policy of investing for a high level of income
consistent with a high quality portfolio of debt securities. Under normal
circumstances, the Portfolio invests at least 65% of its assets in bonds,
including those of the U.S. Government and its agencies, and those of
corporations and other notes and bonds paying high current income. It will
attempt to moderate the effect of market price fluctuation relative to that of a
long-term bond by investing in securities with varying maturities and by
entering into futures contracts on debt securities and related options for
hedging purposes.
The Portfolio is actively managed. The Portfolio may invest in a broad range of
short-, intermediate-, and long-term securities. Proportions among maturities
and types of securities may vary depending upon the prospects for income
relative to the outlook for the economy and the securities markets, the quality
of available investments, the level of interest rates, and other factors. The
Portfolio may also invest in preferred stocks consistent with the Portfolio's
objectives.
The Bond Portfolio may purchase corporate notes and bonds including
issues convertible into common stock and obligations of municipalities.
It may purchase U.S. Government securities and obligations of federal
agencies that are not backed by the full faith and credit of the U.S.
5
<PAGE>
SCUDDER
Government, such as obligations of Federal Home Loan Banks, Farm Credit Banks
and the Federal Home Loan Mortgage Corporation. In addition, it may purchase
obligations of international agencies such as the International Bank for
Reconstruction and Development, and the Inter-American Development Bank.
Other eligible investments include foreign securities, such as non-U.S.
dollar-denominated foreign debt securities and U.S. dollar-denominated foreign
debt securities (such as those issued by the Dominion of Canada and its
provinces) including, without limitation, Eurodollar Bonds and Yankee Bonds,
mortgage and other asset-backed securities, and money market instruments
such as commercial paper, and bankers' acceptances and certificates of deposit
issued by domestic and foreign branches of U.S. banks. The Portfolio may also
enter into repurchase agreements and may invest in zero coupon securities.
The Bond Portfolio is of high quality. No purchase will be made if, as a result
thereof, less than 50% of the Portfolio's net assets would be invested in debt
obligations, including money market instruments, that (a) are issued or
guaranteed by the U.S. Government, (b) are rated at the time of purchase within
the two highest ratings categories by any of the nationally-recognized rating
services or (c) if not rated, are judged by the Adviser to be of a quality
comparable to obligations rated as described in (b) above. Not less than 80% of
the debt obligations in which the Portfolio invests will, at the time of
purchase, be rated within the three highest ratings categories of any such
service or, if not rated, will be judged to be of comparable quality by the
Adviser. The Fund may invest up to 20% of its assets in bonds rated below A but
no lower than B by Moody's or S&P, or unrated securities judged by the Adviser
to be of comparable quality. Debt securities which are rated below
investment-grade (that is, rated below Baa by Moody's or below BBB by S&P and
commonly referred to as "junk bonds") and unrated securities of comparable
quality, which usually entail greater risk (including the possibility of default
or bankruptcy of the issuers of such securities), generally involve greater
volatility of price and risk of loss of principal and income, and may be less
liquid than securities in the higher rating categories. Securities rated B
involve a high degree of speculation with respect to the payment of principal
and interest. Should the rating of any security held by the Portfolio be
downgraded after the time of purchase, the Adviser will determine whether it is
in the best interest of the Portfolio to retain or dispose of the security.
During the year ended December 31, 1994, the average monthly dollar-weighted
market value of the bonds held by the Portfolio, by ratings categories, was as
follows: 72.0% in AAA/Aaa securities, 1.0% in AA/Aa securities, 19.0% in A
securities, 4.0% in BBB/Baa securities, 2.0% in BB/Ba securities and 2.0% in
unrated securities, respectively. Future asset composition may vary.
The Portfolio may, for hedging purposes, purchase forward foreign currency
exchange contracts and foreign currencies in the form of bank deposits. The
Portfolio may also purchase other foreign money market instruments, including,
but not limited to, bankers' acceptances, certificates of deposit, commercial
paper, short-term government obligations and repurchase agreements.
Except for limitations imposed by the Bond Portfolio's investment restrictions
(see "INVESTMENT RESTRICTIONS"), there is no limit as to the proportions of the
Portfolio which may be invested in any of the eligible investments; however, it
is a policy of the Portfolio that its non-governmental investments will be
spread among a variety of companies and will not be concentrated in any
industry.
The Bond Portfolio cannot guarantee a gain or eliminate the risk of loss. The
net asset value of the Portfolio's shares will fluctuate with changes in the
market price of the Portfolio's investments, which tend to vary inversely with
changes in prevailing interest rates and, to a lesser extent, changes in foreign
currency exchange rates. As interest rates fall, the prices of debt securities
tend to rise and vice versa.
CAPITAL GROWTH PORTFOLIO
The Capital Growth Portfolio seeks to maximize long-term capital growth through
a broad and flexible investment program. The Portfolio invests in marketable
securities, principally common stocks and, consistent with its objective of
long-term capital growth, preferred stocks. However, in order to reduce risk, as
market or economic conditions periodically warrant, the Portfolio may also
invest up to 25% of its assets in short-term debt instruments.
In its examination of potential investments, the Adviser considers, among other
things, the issuer's financial strength, management reputation, absolute size
and overall industry position.
Equity investments can have diverse financial characteristics, and the Trustees
believe that the opportunity for capital growth may be found in many different
sectors of the market at any particular time. In contrast to the specialized
investment policies of some capital appreciation funds, the Portfolio is
therefore free to invest in a wide range of marketable securities offering the
potential for growth. This enables the Portfolio to pursue investment values in
various sectors of the stock market including:
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1. Companies that generate or apply new technologies, new and improved
distribution techniques, or new services, such as those in the business
equipment, electronics, specialty merchandising, and health service
industries.
2. Companies that own or develop natural resources, such as energy
exploration or precious metals companies.
3. Companies that may benefit from changing consumer demands and
lifestyles, such as financial service organizations and
telecommunications companies.
4. Foreign companies.
While emphasizing investments in companies with above-average growth prospects,
the Portfolio may also purchase and hold equity securities of companies that may
have only average growth prospects, but seem undervalued due to factors thought
to be of a temporary nature which may cause their securities to be out of favor
and to trade at a price below their potential value.
The Portfolio, as a matter of nonfundamental policy, may invest up to 20% of its
net assets in intermediate to longer term debt securities when management
anticipates that the total return on debt securities is likely to equal or
exceed the total return on common stocks over a selected period of time. The
Portfolio may purchase investment-grade debt securities, which are those rated
Aaa, Aa, A or Baa by Moody's, or AAA, AA, A or BBB by S&P, or, if unrated, of
equivalent quality as determined by the Adviser. Bonds that are rated Baa by
Moody's or BBB by S&P have some speculative characteristics. The Portfolio's
intermediate to longer term debt securities may also include those which are
rated below investment grade, as long as no more than 5% of its net assets are
invested in such securities. As interest rates fall the prices of debt
securities tend to rise and vice versa. Should the rating of any security held
by the Portfolio be downgraded after the time of purchase, the Adviser will
determine whether it is in the best interest of the Portfolio to retain or
dispose of the security.
The Portfolio may, for hedging purposes, purchase forward foreign currency
exchange contracts and foreign currencies in the form of bank deposits. The
Portfolio may also purchase other foreign money market instruments, including,
but not limited to, bankers' acceptances, certificates of deposit, commercial
paper, short-term government obligations and repurchase agreements.
The Capital Growth Portfolio cannot guarantee a gain or eliminate the risk of
loss. The net asset value of the shares of the Portfolio will increase or
decrease with changes in the market price of the Portfolio's investments and, to
a lesser extent, changes in foreign currency exchange rates.
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POLICIES AND TECHNIQUES
APPLICABLE TO THE PORTFOLIOS
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Except as otherwise noted below, the following description of additional
investment policies and techniques is applicable to all of the Portfolios.
REPURCHASE AGREEMENTS
As a means of earning income for periods as short as overnight, the Fund, on
behalf of a Portfolio, may enter into repurchase agreements with U.S. and
foreign banks, and any broker-dealer which is recognized as a reporting
government securities dealer, if the creditworthiness of the bank or
broker-dealer has been determined by the Adviser to be of a sufficiently high
quality. Under a repurchase agreement, a Portfolio acquires securities, subject
to the seller's agreement to repurchase those securities at a specified time and
price. Securities subject to a repurchase agreement are held in a segregated
account and the seller agrees to maintain the market value of such securities at
least equal to 100.5% of the repurchase price on a daily basis. If the seller
under a repurchase agreement becomes insolvent and the Fund has failed to
perfect its interest in the underlying securities, the Fund might be deemed
an unsecured creditor of the seller and may encounter delay and incur costs
before being able to sell the security. Also, if a seller defaults, the
value of such securities might decline before the Fund is able to dispose of
them. The Trustees have set standards of counterparty creditworthiness and
monitor compliance with such standards.
CONVERTIBLE SECURITIES
The Bond Portfolio and the Capital Growth Portfolio may each invest in
convertible securities (bonds, notes, debentures, preferred stocks and other
securities convertible into common stocks) which may offer higher income than
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the common stocks into which they are convertible. The convertible securities in
which each Portfolio may invest include fixed income or zero coupon debt
securities, which may be converted or exchanged at a stated or determinable
exchange ratio into underlying shares of common stock. Prior to their
conversion, convertible securities may have characteristics similar to
non-convertible securities.
While convertible securities generally offer lower yields than non-convertible
debt securities of similar quality, their prices may reflect changes in the
value of the underlying common stock. Although to a lesser extent than with debt
securities generally, the market value of convertible securities tends to
decline as interest rates increase and, conversely, tends to increase as
interest rates decline. Convertible securities entail less credit risk than the
issuer's common stock. The ratings of the convertible securities in which the
Portfolios invest will be comparable to the ratings of the Portfolios' fixed
income securities.
MORTGAGE AND OTHER ASSET-BACKED SECURITIES
The Bond Portfolio may invest in mortgage-backed securities, which are
securities representing interests in pools of mortgage loans. These securities
provide shareholders with payments consisting of both interest and principal as
the mortgages in the underlying mortgage pools are paid off.
The timely payment of principal and interest on mortgage-backed securities
issued or guaranteed by the Government National Mortgage Association ("GNMA") is
backed by GNMA and the full faith and credit of the U.S. Government. These
guarantees, however, do not apply to the market value or yield of
mortgage-backed securities or to the value of Portfolio shares. Also, GNMA and
other mortgage-backed securities may be purchased at a premium over the maturity
value of the underlying mortgages. This premium is not guaranteed and will be
lost if prepayment occurs. In addition, the Portfolio may invest in
mortgage-backed securities issued by other issuers, such as the Federal National
Mortgage Association, ("FNMA"), which are not guaranteed by the U.S. Government.
Moreover, the Portfolio may invest in debt securities which are secured with
collateral consisting of mortgage-backed securities, such as collateralized
mortgage obligations ("CMOs"), and in other types of mortgage-related
securities.
Unscheduled or early payments on the underlying mortgages may shorten the
securities' effective maturities and lessen their growth potential. The
Portfolio may agree to purchase or sell these securities with payment and
delivery taking place at a future date. A decline in interest rates may lead to
a faster rate of repayment of the underlying mortgages, and expose the Portfolio
to a lower rate of return upon reinvestment. To the extent that such
mortgage-backed securities are held by the Portfolio, the prepayment right of
mortgagors may limit the increase in net asset value of the Portfolio because
the value of the mortgage-backed securities held by the Portfolio may not
appreciate as rapidly as the price of non-callable debt securities.
The Portfolio may also invest in securities representing interests in pools of
certain other consumer loans, such as automobile loans or credit card
receivables. In some cases, principal and interest payments are partially
guaranteed by a letter of credit from a financial institution. Asset-backed
securities are subject to the risk of prepayment and the risk that the
underlying loans will not be repaid.
FOREIGN SECURITIES
The Bond Portfolio and the Capital Growth Portfolio may each invest without
limit, except as may be applicable to debt securities generally, in U.S.
dollar-denominated foreign debt securities (including those issued by the
Dominion of Canada and its provinces and other debt securities which meet the
criteria applicable to a Portfolio's domestic investments), and in certifi-
cates of deposit issued by foreign banks and foreign branches of United
States banks, to any extent deemed appropriate by the Adviser. The Bond
Portfolio may invest up to 20% of its assets in non-U.S. dollar-denominated
foreign debt securities. The Capital Growth Portfolio may invest up to 25% of
its assets in non-U.S. dollar-denominated equity securities of foreign
issuers. Global investing involves considerations not typically found in invest-
ing in U.S. markets. These considerations, which may favorably
or unfavorably affect a Portfolio's performance, include changes in
exchange rates and exchange rate controls (which may include suspension of
the ability to transfer currency from a given country), costs incurred
in conversions between currencies, devaluations in the currencies in which a
Portfolio's securities are denominated, non-negotiable brokerag commis-
sions, less publicly available information, different accounting
standards, lower trading volume and greater market volatility, the difficulty of
enforcing obligations in other countries, less securities regulation, different
tax provisions (including withholding on dividends paid to the Fund), war,
expropriation, political and social instability and diplomatic developments.
Further, the settlement period of securities transactions in foreign markets may
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be longer than in domestic markets and payment for securities may be required
before delivery. These considerations generally are more of a concern in
developing countries. For example, the possibility of revolution and the
dependence on foreign economic assistance may be greater in these countries than
in developed countries. The Adviser seeks to mitigate the risks associated with
these considerations through diversification and active professional management.
WHEN-ISSUED SECURITIES
A Portfolio may from time to time purchase securities on a "when-issued" or
"forward delivery" basis. Debt securities are often issued on this basis. The
price of such securities, which may be expressed in yield terms, is fixed at the
time a commitment to purchase is made, but delivery and payment for such
securities take place at a later date. During the period between purchase and
settlement, no payment is made by a Portfolio and no interest accrues to the
Portfolio. To the extent that assets of a Portfolio are held in cash pending the
settlement of a purchase of securities, that Portfolio would earn no income;
however, it is the Fund's intention that each Portfolio will be fully invested
to the extent practicable and subject to the policies stated above. While
when-issued or forward delivery securities may be sold prior to the settlement
date, the Portfolio intends to purchase such securities with the purpose of
actually acquiring them unless a sale appears desirable for investment reasons.
At the time a Portfolio makes the commitment to purchase a security on a
when-issued or forward delivery basis, it will record the transaction and
reflect the amount due and the value of the security in determining the net
asset value of a Portfolio. The market value of the when-issued or forward
delivery securities may be more or less than the purchase price payable at the
settlement date. The Fund does not believe that a Portfolio's net asset value or
income will be adversely affected by the purchase of securities on a when-issued
or forward delivery basis. Each Portfolio will establish a segregated account
with its custodian in which it will maintain cash, U.S. Government securities
and other high-grade debt obligations at least equal in value to commitments for
when-issued or forward delivery securities. Such segregated securities either
will mature or, if necessary, be sold on or before the settlement date.
INDEXED SECURITIES
The Bond Portfolio may invest in indexed securities, the value of which is
linked to currencies, interest rates, commodities, indices or other financial
indicators ("reference instruments"). The interest rate or (unlike most
fixed-income securities) the principal amount payable at maturity of an indexed
security may be increased or decreased, depending on changes in the value of the
reference instrument. Indexed securities may be positively or negatively
indexed, so that appreciation of the reference instrument may produce an
increase or a decrease in the interest rate or value at maturity of the
security. In addition, the change in the interest rate or value at maturity of
the security may be some multiple of the change in the value of the reference
instrument. Thus, in addition to the credit risk of the security's issuer, the
Fund will bear the market risk of the reference instrument.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend the portfolio securities of any Portfolio (other than the
Money Market Portfolio) provided: (1) the loan is secured continuously by
collateral consisting of U.S. Government securities, or cash or cash equivalents
adjusted daily to have a market value at least equal to the current market value
of the securities loaned; (2) the Fund may at any time call the loan and regain
the securities loaned; (3) the Portfolio will receive any interest or dividends
paid on the loaned securities; and (4) the aggregate market value of securities
loaned will not at any time exceed one-third of the total assets of the
Portfolio. In addition, it is anticipated that the Portfolio may share with
the borrower some of the income received on the collateral for the loan or
that it will be paid a premium for the loan. Before a Portfolio enters into
a loan, the Adviser considers all relevant facts and circumstances including
the creditworthiness of the borrower.
ZERO COUPON SECURITIES
The Bond Portfolio may invest in zero coupon securities, including U.S.
Government securities and privately stripped coupons on and receipts for U.S.
Government securities. These securities pay no cash income but are issued at
substantial discounts from their value at maturity. When held to maturity, their
entire return, which consists of the accretion of discount, comes from the
difference between their issue price and their maturity value. Because they do
not pay interest until maturity, zero coupon securities tend to be subject to
greater interim fluctuation of market value in response to changes in interest
rates than interest-paying securities of similar maturities.
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DERIVATIVES
The following descriptions of Options, Options on Securities Indexes, Futures
Contracts and Forward Foreign Currency Exchange Contracts discuss types of
derivatives in which certain of the Portfolios may invest.
OPTIONS
The Fund may write covered call options on securities of any Portfolio (other
than the Money Market Portfolio) in an attempt to earn income. The Capital
Growth Portfolio may also write put options to a limited extent on its portfolio
securities in an attempt to earn additional income on its portfolio, consistent
with its investment objectives, and it may purchase call and put options for
hedging purposes. Risks associated with writing put options include the possible
inability to effect closing transactions at favorable prices. In addition, the
Fund may engage in over-the-counter options transactions with broker-dealers who
make markets in these options. Over-the-counter options purchased by the Fund
and portfolio securities "covering" the Fund's obligation pursuant to an
over-the-counter option may be deemed to be illiquid and may not be readily
marketable. The Adviser will monitor the creditworthiness of dealers with whom
the Fund enters into such options transactions under the general supervision of
the Fund's Trustees. The Fund may forego the benefit of appreciation in its
Portfolios on securities sold pursuant to call options.
OPTIONS ON SECURITIES INDEXES
The Capital Growth Portfolio may purchase put and call options on securities
indexes to hedge against the risk of unfavorable price movements adversely
affecting the value of the Portfolio's securities. Options on securities indexes
are similar to options on securities except that settlement is made in cash.
Unlike a securities option, which gives the holder the right to purchase or sell
a specified security at a specified price, an option on a securities index gives
the holder the right to receive a cash "exercise settlement amount" equal to (i)
the difference between the exercise price of the option and the value of the
underlying stock index on the exercise date, multiplied by (ii) a fixed "index
multiplier." In exchange for undertaking the obligation to make such cash
payment, the writer of the securities index option receives a premium.
Gains or losses on the Portfolio's transactions in securities index options
depend on price movements in the stock market generally (or, for narrow market
indexes, in a particular industry or segment of the market) rather than the
price movements of individual securities held by the Portfolio of the Fund. In
this respect, purchasing a stock index put option is analogous to the purchase
of a put on a securities index futures contract.
The Portfolio may sell securities index options prior to expiration in order to
close out its positions in securities index options which it has purchased. The
Portfolio may also allow options to expire unexercised.
FUTURES CONTRACTS
To protect against the effects of adverse changes in interest rates (sometimes
known as "hedging"), the Bond Portfolio may, to a limited extent, enter into
futures contracts on debt securities. Such futures contracts obligate the Fund,
at maturity, to purchase or sell certain debt securities. The Bond Portfolio and
the Capital Growth Portfolio may each enter into securities index futures
contracts to protect against changes in securities market prices. Each of
these two Portfolios may purchase and write put and call options on futures
contracts of the type which such Portfolio is authorized to enter into and
may engage in related closing transactions. This type of option must be traded
on a U.S. or foreign exchange or board of trade.
When interest rates are rising or stock or security prices are falling, futures
contracts can offset a decline in the value of a Portfolio's current portfolio
securities. When rates are falling or stock or security prices are rising, these
contracts can secure better rates or prices for a Portfolio than might later be
available in the market when it makes anticipated purchases.
The Fund will engage in transactions in futures contracts and options thereon
only in an effort to protect a Portfolio against a decline in the value of the
Portfolio's securities or an increase in the price of securities that the
Portfolio intends to acquire. Also, the initial margin deposits for futures
contracts and premiums paid for related options may not be more than 5% of a
Portfolio's total assets. These transactions involve brokerage costs and require
the Fund to segregate assets, such as cash, U.S. Government securities and
high-grade debt obligations, of a Portfolio to cover contracts which would
require it to purchase securities. A Portfolio may lose the expected benefit of
the transactions if interest rates or stock prices move in an unanticipated
manner. Such unanticipated changes in interest rates or stock prices may also
result in poorer overall performance in a Portfolio than if the Fund had not
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entered into any futures transactions for that Portfolio. A Portfolio would be
required to make and maintain "margin" deposits in connection with transactions
in futures contracts.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Bond Portfolio and the Capital Growth Portfolio may each enter into forward
foreign currency exchange contracts ("forward contracts") to the extent of 15%
of the value of their respective total assets, for hedging purposes. A forward
contract is a contract individually negotiated and privately traded by currency
traders and their customers. A forward contract involves an obligation to
purchase or sell a specific currency for an agreed price at a future date, which
may be any fixed number of days from the date of the contract. The agreed price
may be fixed or with a specified range of prices.
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INVESTMENT RESTRICTIONS
------------------------------------------------------------------------------
Unless specified to the contrary, the following restrictions may not be changed
with respect to any Portfolio without the approval of the majority of
outstanding voting securities of that Portfolio (which, under the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules thereunder and
as used in this prospectus, means the lesser of (1) 67% of the shares of that
Portfolio present at a meeting if the holders of more than 50% of the
outstanding shares of that Portfolio are present in person or by proxy, or (2)
more than 50% of the outstanding shares of that Portfolio). Any investment
restrictions which involve a maximum percentage of securities or assets shall
not be considered to be violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition or encumbrance of securities
or assets of, or borrowings by or on behalf of, a Portfolio.
The Fund may not, on behalf of any Portfolio:
(1)with respect to 75% of the value of the total assets of a Portfolio,
invest more than 5% of the value of the Portfolio's total assets in the
securities of any one issuer, except U.S. Government securities and,
with respect to 100% of the value of the total assets of a Portfolio,
the Fund may not invest more than 25% of the value of the Portfolio's
total assets in the securities of any one issuer, except U.S.
Government securities;
(2)pledge, mortgage or hypothecate its assets, except that, to secure
borrowings permitted by the investment restriction (8) below, it may
pledge securities having a market value at the time of pledge not
exceeding 15% of the value of a Portfolio's total assets and except in
connection with the writing of covered call options and the purchase
and sale of futures contracts and options on futures contracts;
(3)make loans to other persons, except loans of portfolio securities and
except to the extent that the purchase of debt obligations in
accordance with its investment objectives and policies and the entry
into repurchase agreements may be deemed to be loans;
(4)enter into repurchase agreements or purchase any securities if, as a
result thereof, more than 10% of the total assets of a Portfolio (taken
at market value) would be, in the aggregate, subject to repurchase
agreements maturing in more than seven days and invested in restricted
securities or securities which are not readily marketable;
(5)purchase the securities of any issuer if such purchase would cause more
than 10% of the voting securities of such issuer to be held by a
Portfolio;
(6)purchase securities if such purchase would cause more than 25% in the
aggregate of the market value of the total assets of a Portfolio at the
time of such purchase to be invested in the securities of one or more
issuers having their principal business activities in the same
industry, provided that there is no limitation in respect to
investments in obligations issued or guaranteed by the U.S. Government
or its agencies or instrumentalities (for the purposes of this
restriction, telephone companies are considered to be a separate
industry from gas and electric public utilities, and wholly-owned
finance companies are considered to be in the industry of their parents
if their activities are primarily related to financing the activities
of the parents).
(7)purchase or sell any put or call options or any combination thereof,
except that the Fund may purchase and sell options on futures contracts
on debt securities, options on securities indexes and securities index
futures contracts and write covered call option contracts on securities
owned by a Portfolio, and may also purchase call options for the
purpose of terminating its outstanding obligations with respect to
securities upon which covered call option contracts have been written
(i.e., "closing purchase transactions").
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(8)borrow money except from banks as a temporary measure for extraordinary
or emergency purposes (each Portfolio is required to maintain asset
coverage (including borrowings) of 300% for all borrowings) and no
purchases of securities for a Portfolio will be made while borrowings
of that Portfolio exceed 5% of the Portfolio's assets (the payment of
interest on borrowings by a Portfolio will reduce that Portfolio's
income). In addition, the Board of Trustees has adopted a policy
whereby each Portfolio of the Fund may borrow up to 10% of its total
assets; provided, however, that each Portfolio may borrow up to 25% of
its total assets for extraordinary or emergency purposes, including the
facilitation of redemptions.
"Value" for the purposes of all investment restrictions shall mean the value
used in determining a Portfolio's net asset value (see "NET ASSET VALUE").
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INVESTMENT ADVISER
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The Fund retains the investment advisory firm of Scudder, Stevens & Clark, Inc.,
a Delaware corporation, Two International Place, Boston, Massachusetts
02110-4103, to manage each Portfolio's daily investment and business affairs
subject to the policies established by the Trustees. The Trustees have overall
responsibility for the management of the Fund under Massachusetts law. The
Adviser is one of the most experienced investment counsel firms in the United
States. It was established in 1919 and pioneered the practice of providing
investment counsel to individual clients on a fee basis. The principal source of
the Adviser's income is professional fees received from providing continuing
investment advice, and the firm derives no income from brokerage, insurance or
underwriting of securities. Today, it provides investment counsel for many
individuals and institutions, including insurance companies, colleges,
industrial corporations, and financial and banking organizations. Directly or
through affiliates, the Adviser provides investment advice to over 50 mutual
fund portfolios.
For its advisory services to the Portfolios, the Adviser receives compensation
monthly at the following annual rates for each Portfolio:
Percent of the average
daily net asset values
Portfolio of each Portfolio
- --------- ----------------------
Money Market Portfolio .370%
Bond Portfolio .475%
Capital Growth Portfolio .475%
Under the investment advisory agreements between the Fund, on behalf of each
Portfolio, and the Adviser, the Fund is responsible for all its other expenses,
including clerical salaries; fees and expenses incurred in connection with
membership in investment company organizations; brokers' commissions; legal,
auditing and accounting expenses; taxes and governmental fees; the charges of
custodians, transfer agents and other agents; any other expenses, including
clerical expenses, of issue, sale, underwriting, distribution, redemption or
repurchase of shares; the expenses of and fees for registering or qualifying
securities for sale; the fees and expenses of the Trustees of the Fund who are
not affiliated with the Adviser; the cost of preparing and distributing reports
and notices to shareholders. The Fund is also responsible for its expenses
incurred in connection with litigation, proceedings and claims and the legal
obligation it may have to indemnify its officers and Trustees with respect
thereto. The Adviser, through Scudder Investor Services, Inc., a wholly-owned
subsidiary of the Adviser, places portfolio transactions on behalf of the Fund's
Portfolios. In so doing, the Adviser seeks to obtain the most favorable net
results. Subject to the foregoing, the Adviser may consider sales of variable
life insurance policies and variable annuity contracts for which the Fund is an
investment option, as a factor in the selection of firms to execute portfolio
transactions.
In addition to payments for investment advisory services provided by the
Adviser, the Trustees, consistent with the Fund's investment advisory agreements
and underwriting agreement, have approved payments to the Adviser, Scudder
Investor Services, Inc. and Scudder Fund Accounting Corporation for clerical,
accounting and certain other services they may provide the Fund.
For a period of five years from the date of execution of a Participation
Agreement with the Fund, and from year to year thereafter as agreed by the Fund
and the Participating Insurance Company, each of the Participating Insurance
Companies have agreed to contribute to the capital of the Fund to the extent
that the annual operating expenses of any Portfolio of the Fund exceed 3/4 of 1%
of the average daily net assets of that Portfolio for any year of the Fund.
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Other Participating Insurance Companies will be required to enter into similar
arrangements with the Fund. The obligation of each Participating Insurance
Company in relation to the total capital contribution due to a Portfolio will be
the proportion that the average value of the shares of such Portfolio held
during the year by a separate account or separate accounts of such company (or
$1 million, if greater) bears to such average daily net assets. To date, Charter
National Life Insurance Company, Mutual of America Life Insurance Company and
Banner Life Insurance Company have been Participating Insurance Companies for
the past eight, six and five years, respectively, and have made arrangements
with the Adviser to continue their participation.
PORTFOLIO MANAGEMENT
Each Portfolio is managed by a team of Scudder investment professionals who each
play an important role in the Portfolio's management process. Team members work
together to develop investment strategies and select securities for the
Portfolios. They are supported by Scudder's large staff of economists, research
analysts, traders, and other investment specialists who work in Scudder's
offices across the United States and abroad. Scudder believes its team approach
benefits Fund investors by bringing together many disciplines and leveraging
Scudder's extensive resources.
MONEY MARKET PORTFOLIO
Lead Portfolio Manager Robert T. Neff has led Money Market Portfolio's
day-to-day management since 1985. Mr. Neff joined Scudder in 1972 and has more
than 20 years of experience managing short-term fixed-income assets. Nicca
Alcantara, Portfolio Manager, has responsibility for the Portfolio's day-to-day
investments. Ms. Alcantara, who came to Scudder in 1984, has worked as a
portfolio manager since 1989 and joined the team in 1990. Prior to becoming a
portfolio manager, Ms. Alcantara worked as an account assistant in Scudder's
Reserve Asset Management Group. Stephen L. Akers, Portfolio Manager, joined the
team in 1995 and has managed several fixed-income portfolios since joining
Scudder in 1984.
BOND PORTFOLIO
Lead Portfolio Manager Ruth Heisler has had responsibility for overseeing the
Portfolio's day-to-day operations and has guided the Portfolio's investment
strategy since 1988. Ms. Heisler, who has over 40 years of fixed-income
investing experience, joined the team in 1986. William M. Hutchinson, Port-
folio Manager, helps set Scudder's overall fixed-income investment strategy.
Mr. Hutchinson, who has 21 years of investment experience, came to Scudder
in 1986 as a portfolio manager and joined the team in 1987. Renee L. Ross,
Portfolio Manager, has been a member of the team since 1988. Ms. Ross, who
joined Scudder in 1981, has nine years of experience as a portfolio manager
and focuses on fixed-income analysis and investing.
CAPITAL GROWTH PORTFOLIO
Lead Portfolio Manager Steven P. Aronoff assumed responsibility for setting
Capital Growth Portfolio's stock investing strategy and overseeing the Port-
folio's day-to-day operations in 1995. Mr. Aronoff, who joined Scudder
in 1969 and the team in 1989, has 27 years of experience in stock research
and investing, including six years of experience as a full-time portfolio
manager. William F. Gadsden, Portfolio Manager, joined the team in 1989 and
Scudder in 1983. Mr. Gadsden has 13 years of investment experience. Julia D.
Cox, Portfolio Manager, a member of the team since 1985, has been involved in
the investment industry since 1969 and at Scudder since 1980. Ms. Cox, who
has 15 years' experience as a portfolio manager, offers expertise on financial
and technology stocks.
------------------------------------------------------------------------------
DISTRIBUTOR
------------------------------------------------------------------------------
The Fund has an underwriting agreement with Scudder Investor Services, Inc. (the
"Distributor"), a wholly-owned subsidiary of Scudder, Stevens & Clark, Inc.
Located at Two International Place, Boston, Massachusetts 02110-4103, the
Distributor is a Massachusetts corporation formed in 1947. Under the principal
underwriting agreement between the Fund and the Distributor, the Fund is
responsible for the payment of all fees and expenses in connection with the
preparation and filing of any registration statement and prospectus covering the
issue and sale of shares, and the registration and qualification of shares for
sale with the Securities and Exchange Commission and in the various states,
including registering the Fund as a broker or dealer. The Fund will also pay the
fees and expenses of preparing, printing and mailing prospectuses annually to
existing shareholders and any notice, proxy statement, report, prospectus or
other communication to shareholders of the Fund, printing and mailing
13
<PAGE>
SCUDDER
confirmations of purchases of shares, any issue taxes or any initial transfer
taxes, a portion of toll-free telephone service for shareholders, wiring funds
for share purchases and redemptions (unless paid by the shareholder who
initiates the transaction), printing and postage of business reply envelopes and
a portion of the computer terminals used by both the Fund and the Distributor.
The Distributor will pay for printing and distributing prospectuses or reports
prepared for its use in connection with the offering of the shares, and
preparing, printing and mailing any other literature or advertising in
connection with the offering of the shares to the Participating Insurance
Companies. The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under Federal and state
laws, a portion of the toll-free telephone service and of computer terminals,
and of any activity which is primarily intended to result in the sale of shares
issued by the Fund, unless a Plan pursuant to Rule 12b-1 under the 1940 Act, as
amended, is in effect which provides that the Fund shall bear some or all of
such expenses.
As agent, the Distributor currently offers shares of each Portfolio of the Fund
continuously to the separate accounts of Participating Insurance Companies in
all states in which it is registered or where permitted by applicable law. The
underwriting agreement provides that the Distributor accepts orders for shares
at net asset value, as no sales commission or load is charged. The Distributor
has made no firm commitment to acquire shares of the Fund.
NOTE:
Although the Fund does not currently have a 12b-1 Plan and shareholder approval
would be required in order to adopt one, the underwriting agreement provides
that the Fund will also pay those fees and expenses permitted to be paid or
assumed by the Fund pursuant to a 12b-1 Plan, if adopted by the Fund,
notwithstanding any other provision to the contrary in the underwriting
agreement, and the Fund or a third party will pay those fees and expenses not
specifically allocated to the Distributor in the underwriting agreement.
------------------------------------------------------------------------------
PURCHASES AND REDEMPTIONS
------------------------------------------------------------------------------
The separate accounts of the Participating Insurance Companies place orders to
purchase and redeem shares of each Portfolio based on, among other things, the
amount of premium payments to be invested and surrender and transfer requests to
be effected on that day pursuant to VA contracts and VLI policies. Orders
received by the Fund or its agent are effected on days on which the New York
Stock Exchange (the "Exchange") is open for trading. For orders received before
the close of regular trading on the Exchange (normally 4 p.m., eastern time),
such purchases and redemptions of the shares of each Portfolio are effected at
the respective net asset values per share determined as of the close of regular
trading on the Exchange on that same day except that, in the case of the Money
Market Portfolio, purchases will not be effected until the next determination of
net asset value after federal funds have been made available to the Fund (see
"NET ASSET VALUE"). Payment for redemptions will be made by State Street Bank
and Trust Company on behalf of the Fund and the relevant Portfolios within seven
days thereafter. No fee is charged the shareholders when they redeem Portfolio
shares.
The Fund may suspend the right of redemption of shares of any Portfolio and may
postpone payment for any period: (i) during which the Exchange is closed, other
than customary weekend and holiday closings or during which trading on the
Exchange is restricted; (ii) when the Securities and Exchange Commission
determines that a state of emergency exists which may make payment or transfer
not reasonably practicable; (iii) as the Securities and Exchange Commission may
by order permit for the protection of the security holders of the Fund; or (iv)
at any time when the Fund may, under applicable laws and regulations, suspend
payment on the redemption of its shares.
Should any conflict between VA contract and VLI policy holders arise which would
require that a substantial amount of net assets be withdrawn from the Fund,
orderly portfolio management could be disrupted to the potential detriment of
such contract and policy holders.
------------------------------------------------------------------------------
NET ASSET VALUE
------------------------------------------------------------------------------
Scudder Fund Accounting Corporation, a wholly-owned subsidiary of the Adviser,
determines net asset value per share as of the close of regular trading on the
Exchange, normally 4 p.m., eastern time, on each day the Exchange is open for
14
<PAGE>
trading. Net asset value per share is calculated for purchases and redemptions
for each Portfolio by dividing the current market value (amortized cost value in
the case of the Money Market Portfolio) of total Portfolio assets, plus other
assets, less all liabilities, by the total number of shares outstanding.
------------------------------------------------------------------------------
PERFORMANCE INFORMATION
------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
From time to time, quotations of the Money Market Portfolio's "yield" and
"effective yield" may be included in advertisements, sales literature or reports
to shareholders or prospective investors. Both yield figures are based on the
historical performance of the Portfolio and show the performance of a
hypothetical investment and are not intended to indicate future performance. The
yield of the Money Market Portfolio refers to the net investment income
generated by the Portfolio over a specified seven-day period (the ending date of
which will be stated). Included in "net investment income" is the amortization
of market premium or accretion of market and original issue discount. This
income is then "annualized." That is, the amount of income generated by the
Portfolio during that week is assumed to be generated during each week over a
52-week period and is shown as a percentage. The effective yield is expressed
similarly but, when annualized, the income earned by an investment in the
Portfolio is assumed to be reinvested. The effective yield will be slightly
higher than the yield because of the compounding effect of this assumed
reinvestment. Yield and effective yield for the Portfolio will vary based on,
among other things, changes in market conditions, the level of interest rates
and the level of the Portfolio's expenses.
BOND PORTFOLIO
From time to time, quotations of the Bond Portfolio's yield may be included in
advertisements, sales literature or reports to shareholders or prospective
investors. Yield figures are based on historical performance of the Bond
Portfolio and show the performance of a hypothetical investment and are not
intended to indicate future performance. The yield of the Bond Portfolio refers
to net investment income generated by the Bond Portfolio over a specified
thirty-day (or one month) period. This income is then "annualized." That is, the
amount of income generated by the Bond Portfolio during that thirty-day (or one
month) period is assumed to be generated over a 12-month period and is shown as
a percentage of net asset value.
ALL PORTFOLIOS
From time to time, quotations of a Portfolio's total return may be included in
advertisements, sales literature or reports to shareholders or prospective
investors. Total return figures are based on historical performance of the
Portfolio and show the performance of a hypothetical investment and are not
intended to indicate future performance. The total return of a Portfolio refers
to return assuming an investment has been held in the Portfolio for one year,
five years and for the life of the Portfolio (the ending date of which will be
stated). The total return quotations may be expressed in terms of average annual
or cumulative rates of return for all periods quoted. Average annual total
return refers to the average annual compound rate of return of an investment in
a Portfolio. Cumulative total return represents the cumulative change in value
of an investment in a Portfolio. Both will assume that all dividends and capital
gains distributions were reinvested.
Yield and total return for a Portfolio will vary based on, among other things,
changes in market conditions and the level of the Portfolio's expenses.
------------------------------------------------------------------------------
VALUATION OF PORTFOLIO SECURITIES
------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
Pursuant to a Rule of the Securities and Exchange Commission, the Money Market
Portfolio will be valued at amortized cost. Under the amortized cost method of
valuation, securities are valued at cost plus constant accretion/amortization to
maturity of any discount/premium every day.
By using amortized cost valuation, the Fund seeks to maintain a constant net
asset value of $1.00 per share for the Money Market Portfolio, despite minor
shifts in the market value of its portfolio securities. The yield on a
15
<PAGE>
SCUDDER
shareholder's investment may be more or less than that which would be recognized
if the net asset value per share of the Money Market Portfolio were not constant
and were permitted to fluctuate with the market value of the portfolio
securities of the Money Market Portfolio. However, as a result of certain
procedures adopted by the Fund, the Adviser believes any difference will
normally be minimal.
OTHER PORTFOLIOS
An exchange-traded equity security (not subject to resale restrictions) is
valued at its most recent sale price as of the close of regular trading on the
Exchange on each day the Exchange is open for trading. Lacking any sales, the
security is valued at the calculated mean between the most recent bid quotation
and the most recent asked quotation. An unlisted equity security which is traded
on the NASDAQ system is valued at the most recent sale price or, if there are no
such sales, the security is valued at the high or "inside" bid quotation
supplied through such system. Debt securities, other than short-term securities,
are valued at prices supplied by the Fund's pricing agent. Short-term securities
with remaining maturities of sixty days or less are valued by the amortized cost
method, which the Trustees believe approximates market value. Foreign currency
forward contracts are valued at the value of the underlying currency at the
prevailing currency exchange rate. Securities for which current market
quotations are not readily available are valued at fair value as determined in
good faith by the Trustees, although the actual calculations may be made by
persons acting pursuant to the direction of the Trustees. Please refer to the
section entitled "NET ASSET VALUE" in the Fund's Statement of Additional
Information for more information concerning valuation of portfolio securities.
------------------------------------------------------------------------------
TAX STATUS, DIVIDENDS AND DISTRIBUTIONS
------------------------------------------------------------------------------
The Internal Revenue Code of 1986 (the "Code") provides that each portfolio of a
series fund is to be treated as a separate taxpayer. Accordingly, each Portfolio
of the Fund intends to qualify as a separate regulated investment company under
Subchapter M of the Code.
Each Portfolio of the Fund intends to comply with the diversification
requirements of Code Section 817(h). By meeting this and other requirements, the
Participating Insurance Companies, rather than the holders of VA contracts and
VLI policies, should be subject to tax on distributions received with respect to
Portfolio shares. For further information concerning federal income tax
consequences for the holders of the VA contracts and VLI policies, such holders
should consult the prospectus used in connection with the issuance of their
particular contracts or policies.
As a regulated investment company, each Portfolio generally will not be subject
to tax on its ordinary income and net realized capital gains to the extent such
income and gains are distributed in conformity with applicable distribution
requirements under the Code to the separate accounts of the Participating
Insurance Companies which hold its shares. Distributions of income and the
excess of net short-term capital gain over net long-term capital loss will be
treated as ordinary income and distributions of the excess of net long-term
capital gain over net short-term capital loss will be treated as long-term
capital gain by the Participating Insurance Companies. Participating Insurance
Companies should consult their own tax advisers as to whether such distributions
are subject to federal income tax if they are retained as part of policy
reserves.
The Money Market Portfolio will declare a dividend of its net investment income
daily and distribute such dividend monthly. Distributions will be made shortly
after the first business day of each month following declaration of the
dividend. The Bond Portfolio and the Capital Growth Portfolio will declare and
distribute dividends from their net investment income, if any, quarterly, in
January, April, July and October. Each of these Portfolios will distribute its
capital gains, if any, within three months of the fiscal year-end. For all
Portfolios, dividends declared in October, November or December with a record
date in such a month will be deemed to have been received by shareholders on
December 31 if paid during January of the following year. All distributions will
be reinvested in shares of such Portfolios unless an election is made on behalf
of a separate account to receive distributions in cash. Participating Insurance
Companies will be informed about the amount and character of distributions from
the relevant Portfolio for federal income tax purposes.
16
<PAGE>
SCUDDER
------------------------------------------------------------------------------
SHAREHOLDER COMMUNICATIONS
------------------------------------------------------------------------------
Owners of policies and contracts issued by Participating Insurance Companies for
which shares of one or more Portfolios are the investment vehicle will receive
from the Participating Insurance Companies unaudited semi-annual financial
statements and audited year-end financial statements certified by the Fund's
independent public accountants. Each report will show the investments owned by
the Fund and the market values thereof as determined by the Trustees and will
provide other information about the Fund and its operations.
Participating Insurance Companies with inquiries regarding the Fund may call the
Fund's underwriter, Scudder Investor Services, Inc. at 1-617-295-1000 or write
Scudder Investor Services, Inc., Two International Place, Boston, Massachusetts
02110-4103.
------------------------------------------------------------------------------
ADDITIONAL INFORMATION
------------------------------------------------------------------------------
FUND ORGANIZATION AND SHAREHOLDER INDEMNIFICATION
The Fund was organized in the Commonwealth of Massachusetts as a "Massachusetts
business trust" on March 15, 1985. The Fund's shares of beneficial interest are
presently divided into six separate series. Additional series may be created
from time to time.
Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. The Declaration of Trust contains an express disclaimer of shareholder
liability in connection with the Fund property or the acts, obligations or
affairs of the Fund. The Declaration of Trust also provides for indemnification
out of the Fund property of any shareholder held personally liable for the
claims and liabilities to which a shareholder may become subject by reason of
being or having been a shareholder. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Fund itself would be unable to meet its obligations. The Trustees
believe that, in view of the above, the risk of personal liability of
shareholders is remote.
OTHER INFORMATION
The activities of the Fund are supervised by the Trustees.
Although the Fund does not intend to hold annual meetings, shareholders of the
Fund have certain rights, as set forth in the Declaration of Trust of the Fund,
including the right to call a meeting of shareholders for the purpose of voting
on the removal of one or more Trustees. Shareholders have one vote for each
share held. Fractional shares have fractional votes.
As of December 31, 1994, Aetna Life Insurance and Annuity Company owned 9.58%,
American Skandia Life Assurance Corporation owned 4.53%, AUSA Life Insurance
Company owned 0.08%, Banner Life Insurance Company owned 0.53%, Charter National
Life Insurance Company owned 45.29%, Fortis Benefits Life Insurance Company
owned 0.05%, Intramerica Life Insurance Company owned 3.59%, Lincoln Benefit
Life Insurance Company owned 0.04%, Mutual of America Life Insurance Company
owned 19.96%, Paragon Life Insurance Company owned 0.03%, Providentmutual Life
and Annuity Company of America owned 0.18%, Safeco Life Insurance Companies
owned 0.55%, The Union Central Life Insurance Company owned 15.52% and United of
Omaha owned 0.07% of the Fund's outstanding shares.
Each Portfolio of the Fund has a December 31 fiscal year end.
Portfolio securities of the Fund are held separately, pursuant to a custodian
agreement, by State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, as custodian.
Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts 02107-
2291, is the transfer and dividend paying agent for the Fund.
The firm of Dechert Price & Rhoads, Boston, Massachusetts, is counsel for the
Fund.
The Fund's Statement of Additional Information and this prospectus omit certain
information contained in the Registration Statement which the Fund has filed
with the Securities and Exchange Commission under the Securities Act of 1933,
17
<PAGE>
SCUDDER
and reference is hereby made to the Registration Statement and its amendments,
for further information with respect to the Fund and the securities offered
hereby. The Registration Statement and its amendments, are available for
inspection by the public at the Securities and Exchange Commission in
Washington, D.C.
18
<PAGE>
SCUDDER
------------------------------------------------------------------------------
TRUSTEES AND OFFICERS
------------------------------------------------------------------------------
David B. Watts*
President and Trustee
Dr. Kenneth Black, Jr.
Trustee; Regents' Professor Emeritus
of Insurance, Georgia State University
Peter B. Freeman
Trustee; Corporate Director and Trustee
Dr. J. D. Hammond
Trustee; Dean, Smeal College of Business
Administration, Pennsylvania State University
Daniel Pierce*
Vice President and Trustee
Pamela A. McGrath*
Vice President and Treasurer
Thomas S. Crain*
Vice President
Jerard K. Hartman*
Vice President
Richard A. Holt*
Vice President
Thomas W. Joseph*
Vice President
David S. Lee*
Vice President
Steven M. Meltzer*
Vice President
Edward J. O'Connell*
Vice President and Assistant Treasurer
Randall K. Zeller*
Vice President
Thomas F. McDonough*
Secretary
Kathryn L. Quirk*
Vice President and Assistant Secretary
Coleen Downs Dinneen*
Assistant Secretary
*Scudder, Stevens & Clark, Inc.
19
<PAGE>
PART B
INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
SEPARATE ACCOUNT I OF WASHINGTON NATIONAL INSURANCE COMPANY
and
SCUDDER VARIABLE LIFE INVESTMENT FUND
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Proxy Statement/Prospectus dated January __, 1996,
pertaining to a proposed set of transactions (the "Transactions") reorganizing
Separate Account I of Washington National Insurance Company (the "Separate
Account"). A copy of that Proxy Statement/Prospectus may be obtained by calling
(800) 933-5432 or by writing Washington National Insurance Company, Life and
Annuity Administration, 300 Tower Parkway, Lincolnshire, Illinois 60069-3665.
Pursuant to the Transactions, the Separate Account, which is currently a
management investment company, will be reconstituted as a unit investment trust
(the "Continuing Separate Account") and remain subdivided into three
Sub-Accounts. Each of the Sub-Accounts of the Continuing Separate Account will
invest in a corresponding portfolio of Scudder Variable Life Investment Fund
("the Fund"), a mutual fund whose shares are sold only to insurance company
separate accounts as the funding vehicle for variable annuity contracts and
variable life insurance policies. The Bond Portfolio, the Money Market
Portfolio, and the Capital Growth Portfolio of the Fund will represent the
continuation of the investment portfolios of the Bond Sub-Account, the
Short-Term Portfolio Sub-Account, and the Stock Sub-Account, respectively, of
the Separate Account immediately prior to the Transactions.
January ___, 1996
B - 1
<PAGE>
<TABLE>
<CAPTION>
Statement Of Additional Information
TABLE OF CONTENTS
<C> <C> <C>
Page in the
Page in the Proxy Statement/
Statement of Prospectus
Additional Containing
Caption in the Statement of Additional Information Information Related Disclosure
- -------------------------------------------------- ----------- ------------------
PRO FORMA FINANCIAL STATEMENTS B - 3 9 - 11
</TABLE>
APPENDIX A -- STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1995, FOR
SEPARATE ACCOUNT I OF WASHINGTON NATIONAL INSURANCE COMPANY
(containing audited financial statements for the year
ended December 31, 1994)
APPENDIX B -- SEMI-ANNUAL REPORT DATED JUNE 30, 1995, FOR SEPARATE
ACCOUNT I OF WASHINGTON NATIONAL INSURANCE COMPANY
(containing unaudited financial statements for the six
months ended June 30, 1995)
APPENDIX C -- STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1995, FOR
SCUDDER VARIABLE LIFE INVESTMENT FUND
APPENDIX D -- ANNUAL REPORT DATED DECEMBER 31, 1994, FOR SCUDDER
VARIABLE LIFE INVESTMENT FUND (containing audited
financial statements for the year ended December 31, 1994)
APPENDIX E -- SEMI-ANNUAL REPORT DATED JUNE 30, 1995, FOR SCUDDER
VARIABLE LIFE INVESTMENT FUND (containing unaudited
financial statements for the six months ended June 30, 1995)
B - 2
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
Separate Account I of Washington National Insurance Company (the "Separate
Account") is a diversified open-end management investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act"), that is
comprised of three investment divisions ("Sub-Accounts"), which invest directly
in securities and other instruments according to each Sub-Account's respective
investment objectives. Scudder Variable Life Investment Fund (the "Fund") is a
diversified open-end management investment company registered under the 1940 Act
that is comprised of six investment divisions ("Portfolios"), which invest
directly in securities and other instruments according to each Portfolio's
respective investment objectives. The Transactions involve the transfer of the
net assets of each Sub-Account of the Separate Account to a corresponding
Portfolio of the Fund in exchange for shares of beneficial interest in that
Portfolio. The basic effect is that the Separate Account as restructured
pursuant to the Transactions (the "Continuing Separate Account") will no longer
hold investments directly but rather will hold similar investments indirectly
through the vehicle of the Fund (i.e., three "Eligible Portfolios" thereof). And
those investments will be managed by a different investment adviser (Scudder,
Stevens & Clark, Inc.) instead of Washington National Insurance Company.
Pro forma financial statements of the Eligible Portfolios of the Fund have
not been prepared because the net asset value of each Sub-Account of the
Separate Account did not exceed ten percent of the net asset value of the
corresponding Eligible Portfolio of the Fund as of October 31, 1995.
B - 3
<PAGE>
APPENDIX A
SEPARATE ACCOUNT I OF WASHINGTON NATIONAL INSURANCE COMPANY
Statement of Additional Information dated
May 1, 1995
The Separate Account's statement of additional information dated May 1,
1995, is incorporated herein by reference to Appendix A of Part B of the initial
registration statement on Form N-14 for Separate Account I of Washington
National Insurance Company and Scudder Variable Life Investment Fund (File No.
33-62861), as filed with the Commission on September 22, 1995, and will
accompany the Statement of Additional Information sent to Separate Account
Voters.
<PAGE>
APPENDIX B
SEPARATE ACCOUNT I OF WASHINGTON NATIONAL INSURANCE COMPANY
Semi-Annual Report dated June 30, 1995
The Separate Account's semi-annual report dated June 30, 1995, is
incorporated herein by reference to Appendix B of Part B of the of the initial
registration statement on Form N-14 for Separate Account 1 of Washington
National Insurance Company and Scudder Variable Life Investment Fund (File No.
33-62861), as filed with the Commission on September 22, 1995, and will
accompany the Statement of Additional Information sent to Separate Account
Voters.
<PAGE>
APPENDIX C
SCUDDER VARIABLE LIFE INVESTMENT FUND
Statement of Additional Information dated May 1,
1995
The Fund's statement of additional information dated May 1, 1995,
immediately follows this page.
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
Two International Place
Boston, Massachusetts 02110-4103
An open-end management investment company which currently offers shares
of beneficial interest of
six diversified Portfolios, three of which are offered herein, which seek,
respectively, (i) stability and current income from a portfolio of money
market instruments,
(ii) high income from a high quality portfolio of bonds, and
(iii) long-term capital growth from a
a portfolio consisting primarily of equity securities
(A Mutual Fund)
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1995
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the prospectus of Scudder Variable Life Investment
Fund dated May 1, 1995, as may be amended from time to time, a copy of which may
be obtained without charge by calling a Participating Insurance Company or by
writing to broker/dealers offering certain variable annuity contracts and
variable life insurance policies, or Scudder Investor Services, Inc., Two
International Place, Boston, Massachusetts 02110-4103.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES....................................................................................1
Money Market Portfolio.......................................................................................1
Bond Portfolio...............................................................................................2
Capital Growth Portfolio.....................................................................................3
POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS..................................................................4
Repurchase Agreements........................................................................................4
Zero Coupon Securities.......................................................................................5
Mortgage-Backed Securities and Mortgage Pass-Through Securities..............................................6
Collateralized Mortgage Obligations ("CMOs").................................................................7
FHLMC Collateralized Mortgage Obligations....................................................................7
Other Mortgage-Backed Securities.............................................................................8
Other Asset-Backed Securities................................................................................8
Municipal Obligations........................................................................................9
Convertible Securities.......................................................................................9
Depositary Receipts.........................................................................................10
Foreign Securities..........................................................................................10
Limitations on Holdings of Foreign Securities...............................................................11
Indexed Securities..........................................................................................12
When-Issued Securities......................................................................................12
Loans of Portfolio Securities...............................................................................12
Borrowing...................................................................................................13
Options.....................................................................................................13
Securities Index Options....................................................................................15
Futures Contracts...........................................................................................15
Futures on Debt Securities..................................................................................15
Limitations on the Use of Futures Contracts and Options on Futures..........................................17
Foreign Currency Transactions...............................................................................18
High Yield, High Risk Securities............................................................................20
Combined Transactions.......................................................................................20
Risks of Specialized Investment Techniques Abroad...........................................................20
INVESTMENT RESTRICTIONS..............................................................................................21
PURCHASES AND REDEMPTIONS............................................................................................21
INVESTMENT ADVISER AND DISTRIBUTOR...................................................................................22
Investment Adviser..........................................................................................22
Personal Investments by Employees of the Adviser............................................................25
Distributor.................................................................................................25
MANAGEMENT OF THE FUND...............................................................................................26
Trustees and Officers.......................................................................................26
Remuneration................................................................................................27
NET ASSET VALUE......................................................................................................28
TAX STATUS...........................................................................................................30
DIVIDENDS AND DISTRIBUTIONS..........................................................................................33
Money Market Portfolio......................................................................................33
Other Portfolios............................................................................................34
i
<PAGE>
TABLE OF CONTENTS
Page
PERFORMANCE INFORMATION..............................................................................................34
Money Market Portfolio......................................................................................34
Bond Portfolio..............................................................................................35
All Portfolios..............................................................................................35
Comparison of Portfolio Performance.........................................................................37
SHAREHOLDER COMMUNICATIONS...........................................................................................40
ORGANIZATION AND CAPITALIZATION......................................................................................40
General.....................................................................................................40
Shareholder and Trustee Liability...........................................................................42
ALLOCATION OF PORTFOLIO BROKERAGE....................................................................................42
PORTFOLIO TURNOVER...................................................................................................43
EXPERTS..............................................................................................................43
COUNSEL..............................................................................................................44
ADDITIONAL INFORMATION...............................................................................................44
FINANCIAL STATEMENTS.................................................................................................44
APPENDIX
Description of Bond Ratings
Description of Commercial Paper Ratings
ii
</TABLE>
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
(See "INVESTMENT CONCEPT OF THE FUND" and
"INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS"
in the Fund's prospectus.)
Scudder Variable Life Investment Fund (the "Fund") is an open-end,
diversified registered management investment company established as a
Massachusetts business trust. The Fund is a series fund consisting of six
diversified series, three of which, the Money Market Portfolio, Bond Portfolio
and Capital Growth Portfolio (individually or collectively hereinafter referred
to as a "Portfolio" or the "Portfolios") are offered herein. Additional
portfolios may be created from time to time. The Fund is intended to be the
funding vehicle for variable annuity contracts ("VA contracts") and variable
life insurance policies ("VLI policies") to be offered to the separate accounts
of certain life insurance companies ("Participating Insurance Companies").
Each Portfolio has a different investment objective which it pursues
through separate investment policies, as described below. The differences in
objectives and policies among the Portfolios can be expected to affect the
degree of market and financial risk to which each Portfolio is subject and the
return of each Portfolio. The investment objectives and policies of each
Portfolio may, unless otherwise specifically stated, be changed by the Trustees
of the Fund without a vote of the shareholders. There is no assurance that the
objectives of any Portfolio will be achieved.
Money Market Portfolio
The Money Market Portfolio seeks to maintain the stability of capital
and, consistent therewith, to maintain the liquidity of capital and to provide
current income. The Portfolio seeks to maintain a constant net asset value of
$1.00 per share, although there can be no assurance that this will be achieved.
The Portfolio will use the amortized cost method of securities valuation.
The Money Market Portfolio purchases U.S. Treasury bills, notes and
bonds; obligations of agencies and instrumentalities of the U.S. Government;
domestic and foreign bank certificates of deposit; bankers' acceptances; finance
company and corporate commercial paper; and repurchase agreements and corporate
obligations. Investments are limited to those that are dollar-denominated and at
the time of purchase are rated, or judged by the Fund's investment adviser,
Scudder, Stevens & Clark, Inc. (the "Adviser"), subject to the supervision of
the Trustees, to be equivalent to those rated high quality (i.e., rated in the
two highest categories) by any two nationally-recognized rating services such as
Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's ("S&P"). In
addition, the Adviser seeks through its own credit analysis to limit investments
to high quality instruments presenting minimal credit risks. Securities eligible
for investment by the Money Market Portfolio which are rated in the highest
category by at least two rating services (or by one rating service, if no other
rating service has issued a rating with respect to that security) are known as
"first tier securities." Securities rated in the top two categories which are
not first tier securities are known as "second tier securities." Investments in
commercial paper and finance company paper will be limited to securities which,
at the time of purchase, will be rated A-1 or A-2 by S&P or Prime 1 or Prime 2
by Moody's or the equivalent by any nationally-recognized rating service or
judged to be equivalent by the Adviser. Obligations which are subject to
repurchase agreements will be limited to those of the type and quality described
above. The Money Market Portfolio may also hold cash. Shares of the Portfolio
are not insured by an agency of the U.S. Government. Securities and instruments
in which the Portfolio may invest may be issued by the U.S. Government, its
agencies and instrumentalities, corporations, trusts, banks, finance companies
and other business entities.
The Money Market Portfolio may invest in certificates of deposit and
bankers' acceptances of large domestic banks (i.e., banks which at the time of
their most recent annual financial statements show total assets in excess of $1
billion) including foreign branches of such domestic banks, which involve
different risks than those associated with investments in certificates of
deposit of domestic banks, and of smaller banks as described below. The
Portfolio will invest in U.S. dollar-denominated certificates of deposit and
bankers' acceptances of foreign banks if such banks meet the stated
qualifications. Although the Portfolio recognizes that the size of a bank is
important, this fact alone is not necessarily indicative of its
creditworthiness. Investment in certificates of deposit and bankers' acceptances
issued by foreign banks and foreign branches of domestic banks involves
investment risks that are different in some respects from those associated with
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investments in certificates of deposit and bankers' acceptances issued by
domestic banks. (See "Foreign Securities" in this Statement of Additional
Information for further risks of foreign investment.)
The Money Market Portfolio may also invest in certificates of deposit
issued by banks and savings and loan institutions which had at the time of their
most recent annual financial statements total assets of less than $1 billion,
provided that (i) the principal amounts of such certificates of deposit are
insured by an agency of the U.S. Government, (ii) at no time will the Portfolio
hold more than $100,000 principal amount of certificates of deposit of any one
such bank, and (iii) at the time of acquisition, no more than 10% of the
Portfolio's assets (taken at current value) are invested in certificates of
deposit of such banks having total assets not in excess of $1 billion.
The assets of the Money Market Portfolio consist entirely of cash items
and investments having a remaining maturity date of 397 calendar days or less
from date of purchase. The Portfolio will be managed so that the average
maturity of all instruments in the portfolio (on a dollar-weighted basis) will
be 90 days or less. The average maturity of the Portfolio's investments varies
according to the Adviser's appraisal of money market conditions.
To ensure diversity of the Portfolio's investments, as a matter of
non-fundamental policy the Portfolio will not invest more than 5% of its total
assets in the securities of a single issuer, other than the U.S. Government. The
Portfolio may, however, invest more than 5% of its total assets in the first
tier securities of a single issuer for a period of up to three business days
after purchase, although the Portfolio may not make more than one such
investment at any time. The Portfolio may not invest more than 5% of its total
assets in securities which were second tier securities when acquired by the
Portfolio. Further, the Portfolio may not invest more than the greater of (1) 1%
of its total assets, or (2) one million dollars, in the securities of a single
issuer which were second tier securities when acquired by the Portfolio.
The net investment income of the Portfolio is declared as a dividend to
shareholders daily and distributed monthly in cash or reinvested in additional
shares.
Bond Portfolio
The Bond Portfolio pursues a policy of investing for a high level of
income consistent with a high quality portfolio of debt securities. Under normal
circumstances the Portfolio invests at least 65% of its assets in bonds
including those of the U.S. Government and its agencies and those of
corporations and other notes and bonds paying high current income. The Portfolio
may also invest in preferred stocks consistent with the Portfolio's objectives.
It will attempt to moderate the effect of market price fluctuation relative to
that of a long-term bond by investing in securities with varying maturities and
making use of futures contracts on debt securities and related options for
hedging purposes.
The Bond Portfolio may purchase corporate notes and bonds including
issues convertible into common stock and obligations of municipalities. It may
purchase U.S. Government securities and obligations of federal agencies that are
not backed by the full faith and credit of the U.S. Government, such as
obligations of Federal Home Loan Banks, Farm Credit Banks and the Federal Home
Loan Mortgage Corporation. The Portfolio may also purchase obligations of
international agencies such as the International Bank for Reconstruction and
Development and the Inter-American Development Bank. Other eligible investments
include foreign securities, including non-U.S. dollar-denominated foreign debt
securities and U.S. dollar-denominated foreign debt securities (such as those
issued by the Dominion of Canada and its provinces), including without
limitation, Eurodollar Bonds and Yankee Bonds, mortgage and other asset-backed
securities and money market instruments such as commercial paper and bankers'
acceptances and certificates of deposit issued by domestic and foreign branches
of U.S. banks. The Portfolio may also enter into repurchase agreements and may
invest in zero coupon securities. The Portfolio invests in a broad range of
short-, intermediate-, and long-term securities. Proportions among maturities
and types of securities may vary depending upon the prospects for income
relative to the outlook for the economy and the securities markets, the quality
of available investments, the level of interest rates, and other factors.
The Bond Portfolio is of high quality. No purchase will be made if as a
result thereof less than 50% of the Portfolio's net assets would be invested in
debt obligations, including money market instruments, that (a) are issued or
guaranteed by the U.S. Government, (b) are rated at the time of purchase within
the two highest ratings categories by any of the nationally-recognized rating
services or (c) if not rated, are judged by the Adviser to be of a quality
comparable to obligations rated as described in (b) above. Not less than 80% of
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the debt obligations in which the Portfolio invests will, at the time of
purchase, be rated within the three highest ratings categories of any such
service or, if not rated, will be judged to be of comparable quality by the
Adviser. The Fund may invest up to 20% of its assets in bonds rated below A but
no lower than B by Moody's or S&P or in unrated securities judged by the Adviser
to be of comparable quality. Debt securities which are rated below
investment-grade (that is, rated below Baa by Moody's or below BBB by S&P) and
unrated securities of comparable quality, which usually entail greater risk
(including the possibility of default or bankruptcy of the issuers of such
securities), generally involve greater volatility of price and risk of loss of
principal and income, and may be less liquid than securities in the higher
rating categories. Securities rated B involve a high degree of speculation with
respect to the payment of principal and interest. Should the rating of any
security held by the Portfolio be down-graded after the time of purchase, the
Adviser will determine whether it is in the best interest of the Portfolio to
retain or dispose of the security. During the year ended December 31, 1994, the
average monthly dollar-weighted market value of the bonds held by the Portfolio
was as follows: 72.0% in AAA/Aaa securities, 1.0% in AA/Aa securities, 19.0% in
A securities, 4.0% in BBB/Baa securities, 2.0% in BB/Ba securities and 2.0% in
unrated securities, respectively. (See "High Yield, High Risk Securities.")
Future asset composition may vary.
See the Appendix to this Statement of Additional Information for a more
complete description of the ratings assigned by ratings organizations and their
respective characteristics.
Except for limitations imposed by the Bond Portfolio's investment
restrictions, there is no limit as to the proportions of the Portfolio which may
be invested in any of the eligible investments; however, it is a policy of the
Portfolio that its non-governmental investments will be spread among a variety
of companies and will not be concentrated in any industry.
The Bond Portfolio may invest in securities of the Government National
Mortgage Agency, a Government corporation within the U.S. Department of Housing
and Urban Development ("GNMAs"). GNMAs are mortgaged-backed securities
representing part ownership of a pool of mortgage loans. These loans, which are
issued by lenders such as mortgage bankers, commercial banks and savings and
loan associations, are either insured by the Federal Housing Administration
(FHA) or guaranteed by the Veterans Administration (VA). Once approved by GNMA,
the timely payment of interest and principal is guaranteed by the full faith and
credit of the U.S. Government.
The Bond Portfolio cannot guarantee a gain or eliminate the risk of
loss. The net asset value of the Portfolio's shares will fluctuate with changes
in the market prices of the Portfolio's investments, which tend to vary
inversely with changes in prevailing interest rates and, to a lesser extent,
changes in foreign currency exchange rates. As interest rates fall, the prices
of debt securities tend to rise and vice versa.
Capital Growth Portfolio
The Capital Growth Portfolio seeks to maximize long-term capital growth
through a broad and flexible investment program. The Portfolio invests in
marketable securities, principally common stocks and, consistent with its
objective of long-term capital growth, preferred stocks. However, in order to
reduce risk, as market or economic conditions periodically warrant, the
Portfolio may also invest up to 25% of its assets in short-term debt
instruments.
Important considerations to the Adviser in its examination of potential
investments include certain qualitative considerations such as a company's
financial strength, management reputation, absolute size and overall industry
position.
Equity investments can have diverse financial characteristics, and the
Trustees believe that the opportunity for capital growth may be found in many
different sectors of the market at any particular time. In contrast to the
specialized investment policies of some capital appreciation funds, the
Portfolio is therefore free to invest in a wide range of marketable securities
offering the potential for growth. This enables the Portfolio to pursue
investment values in various sectors of the stock market, including:
1. Companies that generate or apply new technologies, new and
improved distribution techniques, or new services, such as
those in the business equipment, electronics, specialty
merchandising, and health service industries.
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2. Companies that own or develop natural resources, such as
energy exploration or precious metals companies.
3. Companies that may benefit from changing consumer demands and
lifestyles, such as financial service organizations and
telecommunications companies.
4. Foreign companies.
While emphasizing investments in companies with above-average growth
prospects, the Portfolio may also purchase and hold equity securities of
companies that may have only average growth prospects, but seem undervalued due
to factors thought to be of a temporary nature which may cause their securities
to be out of favor and to trade at a price below their potential value.
The Portfolio, as a matter of nonfundamental policy, may invest up to
20% of its net assets in intermediate to longer term debt securities when
management anticipates that the total return on debt securities is likely to
equal or exceed the total return on common stocks over a selected period of
time. The Portfolio may purchase investment-grade debt securities, which are
those rated Aaa, Aa, A or Baa by Moody's, or AAA, AA, A or BBB by S&P, or, if
unrated, of equivalent quality as determined by the Adviser. Bonds that are
rated Baa by Moody's or BBB by S&P have some speculative characteristics. The
Portfolio's intermediate to longer term debt securities may also include those
which are rated below investment grade as long as no more than 5% of its net
assets are invested in such securities. As interest rates fall the prices of
debt securities tend to rise and vice versa. Should the rating of a security
held by the Portfolio be downgraded after the time of purchase, the Adviser will
determine whether it is in the best interest of the Portfolio to retain or
dispose of the security. (See "High Yield, High Risk Securities".)
The Capital Growth Portfolio cannot guarantee a gain or eliminate the
risk of loss. The net asset value of the shares of the Portfolio will increase
or decrease with changes in the market price of the Portfolio's investments and,
to a lesser extent, changes in foreign currency exchange rates.
POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS
(See "POLICIES AND TECHNIQUES APPLICABLE TO THE
PORTFOLIOS" in the Fund's prospectus.)
Except as otherwise noted below, the following description of
additional investment policies and techniques is applicable to all of the
Portfolios.
Repurchase Agreements
On behalf of a Portfolio, the Fund may enter into repurchase agreements
with member banks of the Federal Reserve System, any foreign bank and any
broker-dealer which is recognized as a reporting government securities dealer if
the creditworthiness of the bank or broker-dealer has been determined by the
Adviser to be at least equal to that of issuers of commercial paper rated within
the two highest categories assigned by Moody's or S&P. A repurchase agreement
with a member bank of the Federal Reserve System, which provides a means for the
Portfolio to earn income on funds for periods as short as overnight, is an
arrangement through which the Portfolio acquires a U.S. Government or other high
quality short-term debt obligation (the "Obligation") and the seller agrees, at
the time of sale, to repurchase the Obligation at a specified time and price. A
repurchase agreement with foreign banks may be available with respect to
government securities of the particular foreign jurisdiction. The repurchase
price may be higher than the purchase price, the difference being income to the
Portfolio, or the purchase and repurchase prices may be the same, with interest
at a stated rate due to the Portfolio together with the repurchase price on
repurchase. In either case, the income to the Portfolio is unrelated to the
interest rate on the Obligation subject to the repurchase agreement. For
purposes of the Investment Company Act of 1940 (the "1940 Act"), a repurchase
agreement is deemed to be a loan from the Portfolio to the seller of the
Obligation subject to the repurchase agreement and is therefore subject to the
Portfolio's investment restriction applicable to loans. It is not clear whether
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<PAGE>
a court would consider the Obligation purchased by the Portfolio subject to a
repurchase agreement as being owned by the Portfolio or as being collateral for
a loan by the Portfolio to the seller. In the event of the commencement of
bankruptcy or insolvency proceedings of the seller of the Obligation before
repurchase of the Obligation under a repurchase agreement, the Portfolio may
encounter delay and incur costs before being able to sell the security. Delays
may involve loss of interest or decline in price of the Obligation. If the court
characterizes the transaction as a loan and the Portfolio has not perfected a
security interest in the Obligation, the Portfolio may be required to return the
Obligation to the seller's estate and be treated as an unsecured creditor of the
seller. As an unsecured creditor, the Portfolio would be at the risk of losing
some or all of the principal and income involved in the transaction. As with any
unsecured debt instrument purchased for the Portfolio, the Fund seeks to
minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the obligor, in this case the seller of the Obligation.
Apart from the risk of bankruptcy or insolvency proceedings, there is also the
risk that the seller may fail to repurchase the security. However, if the market
value of the Obligation subject to the repurchase agreement becomes less than
the repurchase price (including interest), the Portfolio will direct the seller
of the Obligation to deliver additional securities so that the market value of
all securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that the Portfolio will be unsuccessful in
seeking to impose on the seller a contractual obligation to deliver additional
securities.
Zero Coupon Securities
The Bond Portfolio may invest in zero coupon securities which pay no
cash income and are sold at substantial discounts from their value at maturity.
When held to maturity, their entire income, which consists of accretion of
discount, comes from the difference between the issue price and their value at
maturity. Zero coupon securities are subject to greater market value
fluctuations from changing interest rates than debt obligations of comparable
maturities which make current distributions of interest (cash). Zero coupon
convertible securities offer the opportunity for capital appreciation (or
depreciation) as increases (or decreases) in market value of such securities
closely follow the movements in the market value of the underlying common stock.
Zero coupon convertible securities generally are expected to be less volatile
than the underlying common stocks because zero coupon convertible securities are
usually issued with shorter maturities (15 years or less) and with options
and/or redemption features exercisable by the holder of the obligation entitling
the holder to redeem the obligation and receive a defined cash payment.
Zero coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of securities firms and
banks have stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" ("TIGRS") and Certificate of Accrual on Treasuries
("CATS"). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates or other evidences of ownership of the U.S.
Treasury securities has stated that for federal tax and securities purposes, in
their opinion purchasers of such certificates, such as the Portfolios, most
likely will be deemed the beneficial holders of the underlying U.S.
government securities.
The Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupons and corpus payments on Treasury securities through the Federal
Reserve book-entry record-keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program,
the Portfolio will be able to have its beneficial ownership of zero coupon
securities recorded directly in the book-entry record-keeping system in lieu of
having to hold certificates or other evidences of ownership of the underlying
U.S. Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold in such bundled form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells
itself.
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Mortgage-Backed Securities and Mortgage Pass-Through Securities
The Bond Portfolio may also invest in mortgage-backed securities, which
are interests in pools of mortgage loans, including mortgage loans made by
savings and loan institutions, mortgage bankers, commercial banks, and others.
Pools of mortgage loans are assembled as securities for sale to investors by
various governmental, government-related, and private organizations as further
described below. The Portfolio may also invest in debt securities which are
secured with collateral consisting of mortgage-backed securities (see
"Collateralized Mortgage Obligations"), and in other types of mortgage-related
securities.
A decline in interest rates may lead to a faster rate of repayment of
the underlying mortgages, and expose the Portfolio to a lower rate of return
upon reinvestment. To the extent that such mortgage-backed securities are held
by the Portfolio, the prepayment right will tend to limit to some degree the
increase in net asset value of the Portfolio because the value of the
mortgage-backed securities held by the Portfolio may not appreciate as rapidly
as the price of non-callable debt securities.
Interests in pools of mortgage-backed securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by repayments of principal resulting
from the sale of the underlying property, refinancing, or foreclosure, net of
fees or costs which may be incurred. Some mortgage-related securities such as
securities issued by the Government National Mortgage Association ("GNMA") are
described as "modified pass-through." These securities entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
certain fees, at the scheduled payment dates regardless of whether or not the
mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
GNMA. GNMA is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks, and mortgage bankers) and backed by
pools of FHA-insured or VA-guaranteed mortgages. These guarantees, however, do
not apply to the market value or yield of mortgage-backed securities or to the
value of Portfolio shares. Also, GNMA securities often are purchased at a
premium over the maturity value of the underlying mortgages. This premium is not
guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) mortgages from a list of approved seller/servicers which include state
and federally-chartered savings and loan associations, mutual savings banks,
commercial banks, credit unions, and mortgage bankers. Pass-through securities
issued by FNMA are guaranteed as to timely payment of principal and interest by
FNMA but are not backed by the full faith and credit of the U.S. Government.
FHLMC is a corporate instrumentality of the U.S. Government and was
created by Congress in 1970 for the purpose of increasing the availability of
mortgage credit for residential housing. Its stock is owned by the twelve
Federal Home Loan Banks. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal, but PCs are not backed by the full faith and credit of the U.S.
Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers, and other secondary market issuers also
create pass-through pools of conventional mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments. However, timely payment of interest
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and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance, and
letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers, and the mortgage poolers. Such insurance and
guarantees and the creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets the Portfolio's investment
quality standards. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. The Portfolio may buy mortgage-related securities without
insurance or guarantees, if through an examination of the loan experience and
practices of the originators/servicers and poolers, the Adviser determines that
the securities meet the Portfolio's quality standards. Although the market for
such securities is becoming increasingly liquid, securities issued by certain
private organizations may not be readily marketable.
Collateralized Mortgage Obligations ("CMOs")
A CMO is a hybrid between a mortgage-backed bond and a mortgage
pass-through security. Similar to a bond, interest and prepaid principal are
paid, in most cases, semiannually. CMOs may be collateralized by whole mortgage
loans but are more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, FHLMC, or FNMA, and their income
streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
In a typical CMO transaction, a corporation issues multiple series,
(e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are
used to purchase mortgages or mortgage pass-through certificates ("Collateral").
The Collateral is pledged to a third party trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on
the Bonds in the order A, B, C, Z. The Series A, B, and C bonds all bear current
interest. Interest on the Series Z Bond is accrued and added to principal and a
like amount is paid as principal on the Series A, B, or C Bond currently being
paid off. When the Series A, B, and C Bonds are paid in full, interest and
principal on the Series Z Bond begins to be paid currently. With some CMOs, the
issuer serves as a conduit to allow loan originators (primarily builders or
savings and loan associations) to borrow against their loan portfolios.
FHLMC Collateralized Mortgage Obligations
FHLMC CMOs are debt obligations of FHLMC issued in multiple classes
having different maturity dates which are secured by the pledge of a pool of
conventional mortgage loans purchased by FHLMC. Unlike FHLMC PCs, payments of
principal and interest on the CMOs are made semiannually, as opposed to monthly.
The amount of principal payable on each semiannual payment date is determined in
accordance with FHLMC's mandatory sinking fund schedule, which, in turn, is
equal to approximately 100% of FHA prepayment experience applied to the mortgage
collateral pool. All sinking fund payments in the CMOs are allocated to the
retirement of the individual classes of bonds in the order of their stated
maturities. Payment of principal on the mortgage loans in the collateral pool in
excess of the amount of FHLMC's minimum sinking fund obligation for any payment
date are paid to the holders of the CMOs as additional sinking fund payments.
Because of the "pass-through" nature of all principal payments received on the
collateral pool in excess of FHLMC's minimum sinking fund requirement, the rate
at which principal of the CMOs is actually repaid is likely to be such that each
class of bonds will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage
loans during any semiannual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.
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Criteria for the mortgage loans in the pool backing the CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.
Other Mortgage-Backed Securities
The Adviser expects that governmental, government-related, or private
entities may create mortgage loan pools and other mortgage-related securities
offering mortgage pass-through and mortgage-collateralized investments in
addition to those described above. The mortgages underlying these securities may
include alternative mortgage instruments, that is, mortgage instruments whose
principal or interest payments may vary or whose terms to maturity may differ
from customary long-term fixed rate mortgages. The Bond Portfolio will not
purchase mortgage-backed securities or any other assets which, in the opinion of
the Adviser, are illiquid if, as a result, more than 10% of the value of the
Portfolio's total assets will be illiquid. As new types of mortgage-related
securities are developed and offered to investors, the Adviser will, consistent
with the Portfolio's investment objectives, policies, and quality standards,
consider making investments in such new types of mortgage-related securities.
Other Asset-Backed Securities
The securitization techniques used to develop mortgaged-backed
securities are now being applied to a broad range of assets. Through the use of
trusts and special purpose corporations, various types of assets, including
automobile loans, computer leases and credit card receivables, are being
securitized in pass-through structures similar to the mortgage pass-through
structures described above or in a structure similar to the CMO structure.
Consistent with the Bond Portfolio's investment objectives and policies, the
Portfolio may invest in these and other types of asset-backed securities that
may be developed in the future. In general, the collateral supporting these
securities is of shorter maturity than mortgage loans and is less likely to
experience substantial prepayments with interest rate fluctuations.
Several types of asset-backed securities have already been offered to
investors, including Certificates for Automobile ReceivablesSM ("CARSSM").
CARSSM represent undivided fractional interests in a trust ("Trust") whose
assets consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARSSM are passed through monthly to certificate holders, and
are guaranteed up to certain amounts and for a certain time period by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the Trust. An investor's return on CARSSM may be affected by early
prepayment of principal on the underlying vehicle sales contracts. If the letter
of credit is exhausted, the Trust may be prevented from realizing the full
amount due on a sales contract because of state law requirements and
restrictions relating to foreclosure sales of vehicles and the obtaining of
deficiency judgments following such sales or because of depreciation, damage to
or loss of a vehicle, the application of federal and state bankruptcy and
insolvency laws, or other factors. As a result, certificate holders may
experience delays in payments or losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security interest in the related assets. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. There is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection, and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
results from payment of the insurance obligations on at least a portion of the
assets in the pool. This protection may be provided through guarantees, policies
or letters of credit obtained by the issuer or sponsor from third parties,
through various means of structuring the transaction or through a combination of
such approaches. The Bond Portfolio will not pay any additional or separate fees
for credit support. The degree of credit support provided for each issue is
generally based on historical information respecting the level of credit risk
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associated with the underlying assets. Delinquency or loss in excess of that
anticipated, or failure of the credit support could adversely affect the return
on an investment in such a security.
The Bond Portfolio may also invest in residual interests in
asset-backed securities. In the case of asset-backed securities issued in a
pass-through structure, the cash flow generated by the underlying assets is
applied to make required payments on the securities and to pay related
administrative expenses. The residual in an asset-backed security pass-through
structure represents the interest in any excess cash flow remaining after making
the foregoing payments. The amount of residual cash flow resulting from a
particular issue of asset-backed securities will depend on, among other things,
the characteristics of the underlying assets, the coupon rates on the
securities, prevailing interest rates, the amount of administrative expenses and
the actual prepayment experience on the underlying assets. Asset-backed security
residuals not registered under the Securities Act of 1933 may be subject to
certain restrictions on transferability. In addition, there may be no liquid
market for such securities.
The availability of asset-backed securities may be affected by
legislative or regulatory developments. It is possible that such developments
may require the Bond Portfolio to dispose of any then existing holdings of such
securities.
Municipal Obligations
The Bond Portfolio may invest in municipal obligations, which are
issued by or on behalf of states, territories, and possessions of the U.S., and
their political subdivisions, agencies, and instrumentalities, and the District
of Columbia to obtain funds for various public purposes. The interest on these
obligations is generally exempt from federal income tax in the hands of most
investors. The two principal classifications of municipal obligations are
"notes" and "bonds." The return on municipal obligations is ordinarily lower
than that of taxable obligations. The Bond Portfolio may acquire municipal
obligations when, due to disparities in the debt securities markets, the
anticipated total return on such obligations is higher than that on taxable
obligations. The Bond Portfolio has no current intention of purchasing
tax-exempt municipal obligations that would amount to greater than 5% of the
Portfolio's total assets.
Convertible Securities
The Bond Portfolio and the Capital Growth Portfolio may each invest in
convertible securities; that is, bonds, notes, debentures, preferred stocks and
other securities which are convertible into common stock. Investments in
convertible securities can provide an opportunity for capital appreciation
and/or income through interest and dividend payments by virtue of their
conversion or exchange features.
The convertible securities in which the Bond Portfolio and the Capital
Growth Portfolio may invest include fixed-income or zero coupon debt securities
which may be converted or exchanged at a stated or determinable exchange ratio
into underlying shares of common stock. The exchange ratio for any particular
convertible security may be adjusted from time to time due to stock splits,
dividends, spin-offs, other corporate distributions or scheduled changes in the
exchange ratio. Convertible securities and convertible preferred stocks, until
converted, have general characteristics similar to both debt and equity
securities. Although to a lesser extent than with debt securities generally, the
market value of convertible securities tends to decline as interest rates
increase and, conversely, tends to increase as interest rates decline. In
addition, because of the conversion or exchange feature, the market value of
convertible securities typically changes as the market value of the underlying
common stocks changes, and, therefore, also tends to follow movements in the
general market for equity securities. A unique feature of convertible securities
is that as the market price of the underlying common stock declines, convertible
securities tend to trade increasingly on a yield basis, and so may not
experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock increases, the
prices of the convertible securities tend to rise as a reflection of the value
of the underlying common stock, although typically not as much as the underlying
common stock. While no securities investments are without risk, investments in
convertible securities generally entail less risk than investments in common
stock of the same issuer.
As fixed income securities, convertible securities are investments
which provide for a stream of income (or in the case of zero coupon securities,
accretion of income) with generally higher yields than common stocks. Of course,
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like all fixed income securities, there can be no assurance of income or
principal payments because the issuers of the convertible securities may default
on their obligations. Convertible securities generally offer lower yields than
non-convertible securities of similar quality because of their conversion or
exchange features.
Convertible securities are generally subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar
non-convertible securities.
Convertible securities may be issued as fixed income obligations that
pay current income or as zero coupon notes and bonds, including Liquid Yield
Option Notes ("LYONs"). Zero coupon securities pay no cash income and are sold
at substantial discounts from their value at maturity. When held to maturity,
their entire income, which consists of accretion of discount, comes from the
difference between the purchase price and their value at maturity. Zero coupon
convertible securities offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follows the
movements in the market value of the underlying common stock. Zero coupon
convertible securities are generally expected to be less volatile than the
underlying common stocks as they are usually issued with short to medium length
maturities (15 years or less) and are issued with options and/or redemption
features exercisable by the holder of the obligation entitling the holder to
redeem the obligation and receive a defined cash payment.
Depositary Receipts
The Capital Growth Portfolio may invest indirectly in securities of
foreign issuers through sponsored or unsponsored American Depositary Receipts
("ADRs"), Global Depositary Receipts ("GDRs"), International Depositary Receipts
("IDRs") and other types of Depositary Receipts (which, together with ADRs, GDRs
and IDRs are hereinafter referred to as "Depositary Receipts"). Depositary
Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted. In addition, the issuers
of the stock of unsponsored Depositary Receipts are not obligated to disclose
material information in the United States and, therefore, there may not be a
correlation between such information and the market value of the Depositary
Receipts. ADRs are typically issued by a United States bank or trust company
which evidence ownership of underlying securities issued by a foreign
corporation. GDRs are typically issued by foreign banks or trust companies,
although they also may be issued by United States banks or trust companies, and
evidence ownership of underlying securities issued by either a foreign or a
United States corporation. Generally, Depositary Receipts in registered form are
designed for use in the United States securities markets and Depositary Receipts
in bearer form are designed for use in securities markets outside the United
States. For purposes of the Capital Growth Portfolio's investment policies, the
Portfolio's investments in ADRs, GDRs and other types of Depositary Receipts
will be deemed to be investments in the underlying securities. Depositary
Receipts other than those denominated in U.S. dollars will be subject to foreign
currency exchange rate risk. Certain Depositary Receipts may not be listed on an
exchange and therefore may be illiquid securities.
Foreign Securities
The Bond Portfolio and the Capital Growth Portfolio (collectively, the
"Non-Money Market Portfolios") may each invest, without limit, except as
applicable to debt securities generally, in U.S. dollar-denominated foreign debt
securities (including those issued by the Dominion of Canada and its provinces
and other debt securities which meet the criteria applicable to the Portfolio's
domestic investments), and in certificates of deposit issued by foreign banks
and foreign branches of United States banks, to any extent deemed appropriate by
the Adviser. The Bond Portfolio may invest up to 20% of its assets in non-U.S.
dollar-denominated foreign debt securities. The Capital Growth Portfolio may
invest up to 25% of its assets in non-U.S. dollar-denominated equity securities
of foreign issuers.
Investors should recognize that investing in foreign securities
involves certain special considerations, including those set forth below, which
are not typically associated with investing in U.S. securities and which may
favorably or unfavorably affect the Non-Money Market Portfolios' performance. As
foreign companies are not generally subject to uniform accounting and auditing
and financial reporting standards, practices and requirements comparable to
those applicable to domestic companies, there may be less publicly available
information about a foreign company than about a domestic company. Many foreign
stock markets, while growing in volume of trading activity, have substantially
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less volume than the New York Stock Exchange (the "Exchange"), and securities of
some foreign companies are less liquid and more volatile than securities of
domestic companies. Similarly, volume and liquidity in most foreign bond markets
are less than the volume and liquidity in the U.S. and at times, volatility of
price can be greater than in the U.S. Further, foreign markets have different
clearance and settlement procedures and in certain markets there have been times
when settlements have been unable to keep pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of the Portfolios are
uninvested and no return is earned thereon. The inability of the Portfolios to
make intended security purchases due to settlement problems could cause the
Portfolios to miss attractive investment opportunities. Inability to dispose of
portfolio securities due to settlement problems either could result in losses to
the Portfolios due to subsequent declines in value of the portfolio security or,
if the Portfolios have entered into a contract to sell the security, could
result in possible liability to the purchaser. Fixed commissions on some foreign
stock exchanges are generally higher than negotiated commissions on U.S.
exchanges, although the Portfolios will endeavor to achieve the most favorable
net results on its portfolio transactions. Further, the Portfolios may encounter
difficulties or be unable to pursue legal remedies and obtain judgments in
foreign courts. There is generally less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the U.S. It may be more difficult for the Portfolios' agents to keep
currently informed about corporate actions such as stock dividends or other
matters which may affect the prices of portfolio securities. Communications
between the U.S. and foreign countries may be less reliable than within the
U.S., thus increasing the risk of delayed settlements of portfolio transactions
or loss of certificates for portfolio securities. In addition, with respect to
certain foreign countries, there is the possibility of nationalization,
expropriation, the imposition of withholding or confiscatory taxes, political,
social, or economic instability, devaluations in the currencies in which a
Portfolio's securities are denominated or diplomatic developments which could
affect U.S. investments in those countries. Investments in foreign securities
may also entail certain risks, such as possible currency blockages or transfer
restrictions, and the difficulty of enforcing rights in other countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
These considerations generally are more of a concern in developing
countries. For example, the possibility of revolution and the dependence on
foreign economic assistance generally is greater in these countries than in
developed countries. The management of the Non-Money Market Portfolios seeks to
mitigate the risks associated with these considerations through diversification
and active professional management. Although investments in companies domiciled
in developing countries may be subject to potentially greater risks than
investments in developed countries, the Portfolios will not invest in any
securities of issuers located in developing countries if the securities, in the
judgment of the Adviser, are speculative.
To the extent that the Non-Money Market Portfolios invest in foreign
securities, the Portfolios' share price could reflect the movements of both the
different stock and bond markets in which it is invested and the currencies in
which the investments are denominated; the strength or weakness of the U.S.
dollar against foreign currencies could account for part of the Portfolios'
investment performance.
Limitations on Holdings of Foreign Securities
Each Portfolio that invests in foreign securities shall invest in no
less than five foreign countries; provided that, (i) if foreign securities
comprise less than 80% of the value of the Portfolio's net assets, the Portfolio
shall invest in no less than four foreign countries; (ii) if foreign securities
comprise less than 60% of the value of the Portfolio's net assets, the Portfolio
shall invest in no less than three foreign countries; (iii) if foreign
securities comprise less than 40% of the value of the Portfolio's net assets,
the Portfolio shall invest in no less than two foreign countries; and (iv) if
foreign securities comprise less than 20% of the value of the Portfolio's net
assets the Portfolio may invest in a single foreign country.
Each Portfolio shall invest no more than 20% of the value of its net
assets in securities of issuers located in any one country; provided that an
additional 15% of the value of each Portfolio's net assets may be invested in
securities of issuers located in any one of the following countries: Australia,
Canada, France, Japan, the United Kingdom and Germany; and provided further that
100% of a Portfolio's assets may be invested in securities of issuers located in
the United States.
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Indexed Securities
The Bond Portfolio may invest in indexed securities, the value of which
is linked to currencies, interest rates, commodities, indices or other financial
indicators ("reference instruments"). Most indexed securities have maturities of
three years or less.
Indexed securities differ from other types of debt securities in which
the Fund may invest in several respects. First, the interest rate or, unlike
other debt securities, the principal amount payable at maturity of an indexed
security may vary based on changes in one or more specified reference
instruments, such as an interest rate compared with a fixed interest rate or the
currency exchange rates between two currencies (neither of which need be the
currency in which the instrument is denominated). The reference instrument need
not be related to the terms of the indexed security. For example, the principal
amount of a U.S. dollar denominated indexed security may vary based on the
exchange rate of two foreign currencies. An indexed security may be positively
or negatively indexed; that is, its value may increase or decrease if the value
of the reference instrument increases. Further, the change in the principal
amount payable or the interest rate of an indexed security may be a multiple of
the percentage change (positive or negative) in the value of the underlying
reference instrument(s).
Investment in indexed securities involves certain risks. In addition to
the credit risk of the security's issuer and the normal risks of price changes
in response to changes in interest rates, the principal amount of indexed
securities may decrease as a result of changes in the value of reference
instruments. Further, in the case of certain indexed securities in which the
interest rate is linked to a reference instrument, the interest rate may be
reduced to zero, and any further declines in the value of the security may then
reduce the principal amount payable on maturity. Finally, indexed securities may
be more volatile than the reference instruments underlying indexed securities.
When-Issued Securities
A Portfolio may from time to time purchase securities on a
"when-issued" or "forward delivery" basis. Debt securities are often issued on
this basis. The price of such securities, which may be expressed in yield terms,
is fixed at the time a commitment to purchase is made, but delivery and payment
for the when-issued or forward delivery securities take place at a later date.
During the period between purchase and settlement, no payment is made by the
Portfolio and no interest accrues to the Portfolio. To the extent that assets of
a Portfolio are held in cash pending the settlement of a purchase of securities,
that Portfolio would earn no income; however, it is the Fund's intention that
each Portfolio will be fully invested to the extent practicable and subject to
the policies stated above. While when-issued or forward delivery securities may
be sold prior to the settlement date, the Portfolio intends to purchase such
securities with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time the Fund makes the commitment on
behalf of a Portfolio to purchase a security on a when-issued or forward
delivery basis, it will record the transaction and reflect the amount due and
the value of the security in determining the Portfolio's net asset value. The
market value of the when-issued or forward delivery securities may be more or
less than the purchase price payable at settlement date. The Fund does not
believe that a Portfolio's net asset value or income will be adversely affected
by the purchase of securities on a when-issued or forward delivery basis. Each
Portfolio will establish a segregated account in which it will maintain cash,
U.S. Government securities and other high-grade debt obligations at least equal
in value to commitments for when-issued or forward delivery securities. Such
segregated securities either will mature or, if necessary, be sold on or before
the settlement date.
Loans of Portfolio Securities
The Fund may lend the portfolio securities of any Portfolio (other than
the Money Market Portfolio) provided: (1) the loan is secured continuously by
collateral consisting of U.S. Government securities, cash or cash equivalents
adjusted daily to have market value at least equal to the current market value
of the securities loaned; (2) the Fund may at any time call the loan and regain
the securities loaned; (3) the Portfolio will receive any interest or dividends
paid on the loaned securities; and (4) the aggregate market value of securities
loaned will not at any time exceed one-third of the total assets of the
Portfolio. In addition, it is anticipated that the Portfolio may share with the
borrower some of the income received on the collateral for the loan or that it
will be paid a premium for the loan. Before the Portfolio enters into a loan,
the Adviser considers all relevant facts and circumstances including the
creditworthiness of the borrower.
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Borrowing
The Board of Trustees has adopted a policy whereby each Portfolio of
the Fund may borrow up to 10% of its total assets; provided, however, that each
Portfolio may borrow up to 25% of its total assets for extraordinary or
emergency purposes, including the facilitation of redemptions. A Portfolio may
only borrow money from banks as a temporary measure for extraordinary or
emergency purposes (each Portfolio is required to maintain asset coverage
(including borrowings) of 300% for all borrowings) and no purchases of
securities for a Portfolio will be made while borrowings of that Portfolio
exceed 5% of the Portfolio's assets. Borrowings by the Fund increase exposure to
capital risk. In addition, borrowed funds are subject to interest costs that may
offset or exceed the return earned on investment of such funds.
Options
The Fund may, on behalf of any Portfolio (excluding the Money Market
Portfolio), write covered call options on the portfolio securities of such
Portfolio in an attempt to enhance investment performance. A call option is a
contract generally having a duration of nine months or less which gives the
purchaser of the option, in return for a premium paid, the right to buy, and the
writer the obligation to sell, the underlying security at the exercise price at
any time upon the assignment of an exercise notice prior to the expiration of
the option, regardless of the market price of the security during the option
period. A covered call option is an option written on a security which is owned
by the writer throughout the option period.
The Fund will write, on behalf of a Portfolio, covered call options
both to reduce the risks associated with certain of its investments and to
increase total investment return. In return for the premium income, the
Portfolio will give up the opportunity to profit from an increase in the market
price of the underlying security above the exercise price so long as its
obligations under the contract continue, except insofar as the premium
represents a profit. Moreover, in writing the option, the Portfolio will retain
the risk of loss should the price of the security decline, which loss the
premium is intended to offset in whole or in part. Unlike the situation in which
the Fund owns securities not subject to a call option, the Fund, in writing call
options, must assume that the call may be exercised at any time prior to the
expiration of its obligations as a writer, and that in such circumstances the
net proceeds realized from the sale of the underlying securities pursuant to the
call may be substantially below the prevailing market price. The Fund may forego
the benefit of appreciation in its Portfolios on securities sold pursuant to
call options.
When the 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, generally ranging up to nine months. Some of the options
which the Fund writes may be of the European type which means they may be
exercised only at a specified time. If the option expires unexercised, the
Portfolio will realize income in an amount equal to the premium received for the
written option. If the option is exercised, a decision over which the 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, the 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.
The Capital Growth Portfolio may write covered call and put options to
a limited extent on its portfolio securities in an attempt to earn additional
income on its portfolio, consistent with its investment objectives. The
Portfolio may forego the benefits of appreciation on securities sold or
depreciation on securities acquired pursuant to call and put options written by
the Portfolio. The Portfolio has no current intention of writing options on more
than 5% of its net assets.
When the Fund, on behalf of the Capital Growth Portfolio, writes a 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. Some of the European type options which the Fund writes may be
exercised only at a specified time. 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 the Portfolio
has no control, the Portfolio must purchase the underlying security from the
option holder at the exercise price. By writing a put option, the Portfolio, in
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exchange for the net premium received, accepts the risk of a decline in the
market value of the underlying security below the exercise price. With respect
to each put option it writes, the Portfolio will have deposited in a separate
account with its custodian U.S. Treasury obligations, high-grade debt securities
or cash equal in value to the exercise price of the put option, will have
purchased a put option with a higher exercise price that will expire no earlier
than the put option written or will have used some combination of these two
methods. The Fund on behalf of the Portfolio, will only write put options
involving securities for which a determination is made that it wishes to acquire
the securities at the exercise price at the time the option is written.
The Portfolio may terminate its obligation as a 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."
When the Portfolio writes an option, an amount equal to the net premium
received by the Portfolio is included in the liability section of the Portfolio
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.
The Portfolio may purchase call options on any securities in which it
may invest 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. The 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.
The Capital Growth Portfolio will 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 the Portfolio, in exchange
for the premium paid, to sell a security, which may or may not be held by the
Portfolio, at a specified price during the option period. The purchase of
protective puts is designed merely to offset or hedge against a decline in the
market value of the Portfolio's portfolio securities. Put options may also be
purchased by the Portfolio for the purpose of affirmatively benefiting from a
decline in the price of securities which the Portfolio does not own. The
Portfolio would ordinarily recognize a gain if the value of the securities
decreased below the exercise price sufficiently to cover the premium and would
recognize a loss if the value of the securities remained at or above the
exercise price. Gains and losses on the purchase of protective put options would
tend to be offset by countervailing changes in the value of underlying portfolio
securities.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying securities
markets that cannot be reflected in the option markets. Exchange markets in
securities options are a relatively new and untested concept. 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 Fund may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. At present, approximately
thirty broker-dealers make these markets and the Adviser will consider risk
factors such as their creditworthiness when determining a broker-dealer with
which to engage in options transactions. 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. Written over-the-counter
options purchased by the Fund and portfolio securities "covering" the Fund's
obligation pursuant to an over-the-counter option may be deemed to be illiquid
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and may not be readily marketable. The Adviser will monitor the creditworthiness
of dealers with whom the Fund enters into such options transactions under the
general supervision of the Fund's Trustees.
Securities Index Options
The Capital Growth Portfolio may purchase call and put options on
securities indexes for the purpose of hedging against the risk of unfavorable
price movements adversely affecting the value of the Portfolio's securities.
Options on securities indexes are similar to options on stock except that the
settlement is made in cash.
Unlike a securities option, which gives the holder the right to
purchase or sell a specified security at a specified price, an option on a
securities index gives the holder the right to receive a cash "exercise
settlement amount" equal to (i) the difference between the exercise price of the
option and the value of the underlying securities index on the exercise date,
multiplied by (ii) a fixed "index multiplier." In exchange for undertaking the
obligation to make such cash payment, the writer of the securities index option
receives a premium.
A securities index fluctuates with changes in the market values of the
securities so included. Some securities index options are based on a broad
market index such as the S&P 500 or the N.Y.S.E. Composite Index, or a narrower
market index such as the S&P 100. Indices are also based on an industry or
market segment such as the AMEX Oil and Gas Index or the Computer and Business
Equipment Index. Options on securities indexes are currently traded on exchanges
including the Chicago Board Options Exchange, Philadelphia Exchange, New York
Stock Exchange, and American Stock Exchange.
The effectiveness of hedging through the purchase of securities index
options will depend upon the extent to which price movements in the portion of
the securities portfolio being hedged correlate with price movements in the
selected securities index. Perfect correlation is not possible because the
securities holdings of the Portfolio will not exactly match the composition of
the securities indexes on which options are written. In addition, the purchase
of securities index options involves essentially the same risks as the purchase
of options on futures contracts. The principal risk is that the premium and
transactions costs paid by the Portfolio in purchasing an option will be lost as
a result of unanticipated movements in prices of the securities comprising the
securities index on which the option is written. Options on securities indexes
also entail the risk that a liquid secondary market to close out the option will
not exist, although the Portfolio will generally only purchase or write such an
option if the Adviser believes the option can be closed out.
Futures Contracts
The Fund may, on behalf of the Bond Portfolio, purchase and sell
futures contracts on debt securities to hedge against anticipated changes in
interest rates that might otherwise have an adverse effect upon the value of the
Portfolio's debt securities. In addition, the Fund may, on behalf of the
Non-Money Market Portfolios, purchase and sell securities index futures to hedge
the equity securities of a Portfolio with regard to market (systematic) risk as
distinguished from stock-specific risk. Each of these two Portfolios may also
purchase and write put and call options on futures contracts of the type which
such Portfolio is authorized to enter into and may engage in related closing
transactions. All of such futures on debt securities, stock index futures and
related options will be traded on exchanges that are licensed and regulated by
the Commodity Futures Trading Commission ("CFTC") or on appropriate foreign
exchanges, to the extent permitted by law.
Futures on Debt Securities
A futures contract on a debt security is a binding contractual
commitment which, if held to maturity, will result in an obligation to make or
accept delivery, during a particular future month, of securities having a
standardized face value and rate of return. By purchasing futures on debt
securities--assuming a "long" position--the Fund, on behalf of a Portfolio, will
legally obligate itself to accept the future delivery of the underlying security
and pay the agreed price. By selling futures on debt securities--assuming a
"short" position--it will legally obligate itself to make the future delivery of
the security against payment of the agreed price. Open futures positions on debt
securities will be valued at the most recent settlement price, unless such price
does not appear to the Trustees to reflect the fair value of the contract, in
which case the positions will be valued by or under the direction of the
Trustees.
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Positions taken in the futures markets are normally not held to
maturity, but are instead liquidated through offsetting transactions which may
result in a profit or a loss. While futures positions taken by the Fund on
behalf of a Portfolio will usually be liquidated in this manner, the Fund may
instead make or take delivery of the underlying securities whenever it appears
economically advantageous to the Portfolio to do so. A clearing corporation
associated with the exchange on which futures are traded assumes responsibility
for closing-out and guarantees that the sale and purchase obligations will be
performed with regard to all positions that remain open at the termination of
the contract.
Hedging by use of futures on debt securities seeks to establish more
certainly than would otherwise be possible the effective rate of return on
portfolio securities. A Portfolio may, for example, take a "short" position in
the futures market by selling contracts for the future delivery of debt
securities held by the Portfolio (or securities having characteristics similar
to those held by the Portfolio) in order to hedge against an anticipated rise in
interest rates that would adversely affect the value of the Portfolio's
portfolio securities. When hedging of this character is successful, any
depreciation in the value of portfolio securities will be substantially offset
by appreciation in the value of the futures position.
On other occasions, the Portfolio may take a "long" position by
purchasing futures on debt securities. This would be done, for example, when the
Fund intends to purchase for the Portfolio particular securities when it has the
necessary cash, but expects the rate of return available in the securities
markets at that time to be less favorable than rates currently available in the
futures markets. If the anticipated rise in the price of the securities should
occur (with its concomitant reduction in yield), the increased cost to the
Portfolio of purchasing the securities will be offset, at least to some extent,
by the rise in the value of the futures position taken in anticipation of the
subsequent securities purchase.
Stock Index Futures. A stock index futures contract does not require the
physical delivery of securities, but merely provides for profits and losses
resulting from changes in the market value of the contract to be credited or
debited at the close of each trading day to the respective accounts of the
parties to the contract. On the contract's expiration date a final cash
settlement occurs and the futures positions are simply closed out. Changes in
the market value of a particular stock index futures contract reflect changes in
the specified index of equity securities on which the future is based. That
index is designed to reflect overall price trends in the market for equity
securities.
Stock index futures may be used to hedge the equity securities of the
Capital Growth Portfolio with regard to market (systematic) risk (involving the
market's assessment of over-all economic prospects), as distinguished from
stock-specific risk (involving the market's evaluation of the merits of the
issuer of a particular security). By establishing an appropriate "short"
position in stock index futures, the Fund may seek to protect the value of the
equity of the Portfolio's securities against an overall decline in the market
for equity securities. Alternatively, in anticipation of a generally rising
market, the Fund can seek on behalf of the Portfolio to avoid losing the benefit
of apparently low current prices by establishing a "long" position in stock
index futures and later liquidating that position as particular equity
securities are in fact acquired. To the extent that these hedging strategies are
successful, the Portfolio will be affected to a lesser degree by adverse overall
market price movements, unrelated to the merits of specific portfolio equity
securities, than would otherwise be the case.
Options on Futures. For bona fide hedging purposes, the Fund may also purchase
and write, on behalf of each of the Bond Portfolio and the Capital Growth
Portfolio, call and put options on futures contracts, which are traded on
exchanges that are licensed and regulated by the CFTC or on any foreign exchange
for the purpose of options trading, to the extent permitted by law. A "call"
option on a futures contract gives the purchaser the right, in return for the
premium paid, to purchase a futures contract (assume a "long" position) at a
specified exercise price at any time before the option expires. A "put" option
gives the purchaser the right, in return for the premium paid, to sell a futures
contract (assume a "short" position), for a specified exercise price, at any
time before the option expires.
Upon the exercise of a "call," the writer of the option is obligated to
sell the futures contract (to deliver a "long" position to the option holder) at
the option exercise price, which will presumably be lower than the current
market price of the contract in the futures market. Upon exercise of a "put,"
the writer of the option is obligated to purchase the futures contract (deliver
a "short" position to the option holder) at the option exercise price, which
will presumably be higher than the current market price of the contract in the
futures market. When a person exercises an option and assumes a long futures
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position, in the case of a "call," or a short futures position, in the case of a
"put," his gain will be credited to his futures margin account, while the loss
suffered by the writer of the option will be debited to his account. However, as
with the trading of futures, most participants in the options markets do not
seek to realize their gains or losses by exercise of their option rights.
Instead, the holder of an option will usually realize a gain or loss by buying
or selling an offsetting option at a market price that will reflect an increase
or a decrease from the premium originally paid.
Options on futures can be used by a Portfolio to hedge substantially
the same risks as might be addressed by the direct purchase or sale of the
underlying futures contracts. If the Portfolio purchases an option on a futures
contract, it may obtain benefits similar to those that would result if it held
the futures position itself. But in contrast to a futures transaction, in which
only transaction costs are involved, benefits received in an option transaction
will be reduced by the amount of the premium paid as well as by transaction
costs. In the event of an adverse market movement, however, the Portfolio will
not be subject to a risk of loss on the option transaction beyond the price of
the premium it paid plus its transaction costs, and may consequently benefit
from a favorable movement in the value of its portfolio securities that would
have been more completely offset if the hedge had been effected through the use
of futures.
If a Portfolio writes options on futures contracts, the Portfolio will
receive a premium but will assume a risk of adverse movement in the price of the
underlying futures contract comparable to that involved in holding a futures
position. If the option is not exercised, the Portfolio will gain the amount of
the premium, which may partially offset unfavorable changes in the value of
securities held in or to be acquired for the Portfolio. If the option is
exercised, the Portfolio will incur a loss in the option transaction, which will
be reduced by the amount of the premium it has received, but which may partially
offset favorable changes in the value of its portfolio securities.
While the holder or writer of an option on a futures contract may
normally terminate its position by selling or purchasing an offsetting option of
the same series, the Portfolio's ability to establish and close out options
positions at fairly established prices will be subject to the maintenance of a
liquid market. A Portfolio will not purchase or write options on futures
contracts unless, in the Adviser's opinion, the market for such options has
sufficient liquidity that the risks associated with such options transactions
are not at unacceptable levels.
Limitations on the Use of Futures Contracts and Options on Futures
All of the futures contracts and options on futures transactions into
which the Fund will enter will be for bona fide hedging or other appropriate
risk management purposes as permitted by CFTC regulations and to the extent
consistent with requirements of the Securities and Exchange Commission (the
"SEC").
To ensure that its futures and options transactions meet this standard,
the Fund will enter into them only for the purposes or with the intent specified
in CFTC regulations, subject to the requirements of the SEC. The Fund will
further seek to assure that fluctuations in the price of the futures contracts
and options on futures that it uses for hedging purposes will be substantially
correlated to fluctuations in the price of the securities held by a Portfolio or
which it expects to purchase, though there can be no assurance that this result
will be achieved. The Fund will sell futures contracts or acquire puts to
protect against a decline in the price of securities that a Portfolio owns. The
Fund will purchase futures contracts or calls on futures contracts to protect a
Portfolio against an increase in the price of securities the Fund intends later
to purchase for the Portfolio before it is in a position to do so.
As evidence of this hedging intent, the Fund expects that on 75% or
more of the occasions on which it purchases a long futures contract or call
option on futures for a Portfolio the Fund will effect the purchase of
securities in the cash market or take delivery as it closes out a Portfolio's
futures position. In particular cases, however, when it is economically
advantageous to the Portfolio, a long futures position may be terminated (or an
option may expire) without the corresponding purchase of securities.
As an alternative to literal compliance with the bona fide hedging
definition, a CFTC definition now permits the Fund to elect to comply with a
different test, under which its long futures positions will not exceed the sum
of (a) cash or cash equivalents segregated for this purpose, (b) cash proceeds
on existing investments due within thirty days and (c) accrued profits on the
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particular futures or options positions. However, the Fund will not utilize this
alternative unless it is advised by counsel that to do so is consistent with the
requirements of the SEC.
Futures on debt securities and stock index futures are at present
actively traded on exchanges that are licensed and registered by the CFTC, or
consistent with the CFTC regulations on foreign exchanges. Portfolios will incur
brokerage fees in connection with their futures and options transactions, and
will be required to deposit and maintain funds with brokers as margin to
guarantee performance of futures obligations. In addition, while futures
contracts and options on futures will be purchased and sold to reduce certain
risks, those transactions themselves entail certain other risks. Thus, while a
Portfolio may benefit from the use of futures and options on futures,
unanticipated changes in interest rates or stock price movements may result in a
poorer overall performance for the Portfolio than if it had not entered into any
futures contracts or options transactions. Moreover, in the event of an
imperfect correlation between the futures position and the portfolio position
which is intended to be protected, the desired protection may not be obtained
and the Portfolio may be exposed to risk of loss.
Each Portfolio, in dealing in futures contracts and options on futures,
is subject to the 300% asset coverage requirement for borrowings set forth under
"Investment Restrictions" in the Fund's prospectus. The Trustees have also
adopted a policy (which is not fundamental and may be modified by the Trustees
without a shareholder vote) that, immediately after the purchase or sale of a
futures contract or option thereon, the value of the aggregate initial margin
with respect to all futures contracts and premiums on options on futures
contracts entered into by a Portfolio will not exceed 5% of the fair market
value of the Portfolio's total assets. Additionally, the value of the aggregate
premiums paid for all put and call options held by the Portfolio will not exceed
2% of its net assets. A futures contract for the receipt of a debt security and
long index futures will be offset by assets of the Portfolio held in a
segregated account in an amount equal to the total market value of the futures
contracts less the amount of the initial margin for the contracts.
Foreign Currency Transactions
The Non-Money Market Portfolios may enter into forward foreign currency
exchange contracts ("forward contracts") for hedging purposes. These Portfolios
may also, for hedging purposes, purchase foreign currencies in the form of bank
deposits as well as other foreign money market instruments, including but not
limited to, bankers' acceptances, certificates of deposit, commercial paper,
short-term government and corporate obligations and repurchase agreements.
Because investments in foreign companies usually will involve
currencies of foreign countries, and because the Non-Money Market Portfolios
temporarily may hold funds in bank deposits in foreign currencies during the
completion of investment programs, the value of their assets as measured in U.S.
dollars may be affected favorably or unfavorably by changes in foreign currency
exchange rates and exchange control regulations, and they may incur costs in
connection with conversions between various currencies. Although the Non-Money
Market Portfolios value their assets daily in terms of U.S. dollars, they do not
intend to convert their holdings of foreign currencies into U.S. dollars on a
daily basis. They will do so from time to time, and investors should be aware of
the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Non-Money
Market Portfolios at one rate, while offering a lesser rate of exchange should
the Non-Money Market Portfolios desire to resell that currency to the dealer.
The Non-Money Market Portfolios will conduct their foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market, or through entering into forward contracts
to purchase or sell foreign currencies.
A forward contract involves an obligation 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 agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades.
Upon the maturity of a forward contract a Portfolio may either accept
or make delivery of the currency specified in the contract or, at or prior to
maturity, enter into a closing purchase transaction involving the purchase or
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sale of an offsetting contract. Closing purchase transactions with respect to
forward contracts are usually effected with the currency trader who is a party
to the original forward contract.
A Portfolio may enter into forward contracts under certain
circumstances. When a Portfolio enters into a contract for the purchase or sale
of a security denominated in a foreign currency, or when a Portfolio anticipates
the receipt in a foreign currency of dividends or interest payments on such a
security which it holds, the Portfolio may desire to "lock in" the U.S. dollar
price of the security or the U.S. dollar equivalent of such dividend or interest
payment, as the case may be. By entering into a forward contract for the
purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying transactions, the Portfolio will attempt to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
Additionally, when management of a Portfolio believes that the currency
of a particular foreign country may suffer a substantial decline against the
U.S. dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of the Portfolio's securities denominated in such foreign currency. 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 those securities between the date on which the
contract is entered into and the date it matures. The precise projection of
short-term currency market movements is not possible, and short-term hedging
provides a means of fixing the dollar value of a portion of the Portfolio's
foreign assets.
The Non-Money Market Portfolios do not intend to enter into such
forward contracts to protect the value of their portfolio securities on a
regular continuous basis, and will not do so if, as a result, a Portfolio will
have more than 15% of the value of its total assets committed to the
consummation of such contracts. A Portfolio also will not enter into such
forward contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate the Portfolio to deliver an amount
of foreign currency in excess of the value of the Portfolio's securities or
other assets denominated in that currency. Under normal circumstances,
consideration of the prospect for currency parities will be incorporated into
the long-term investment decisions made with regard to overall diversification
strategies. However, the Non-Money Market Portfolios believe that it is
important to have the flexibility to enter into such forward or foreign currency
futures contracts when each determines that the best interests of the Portfolio
will be served.
Except when a Portfolio enters into a forward contract for the purpose
of the purchase or sale of a security denominated in a foreign currency, State
Street Bank and Trust Company (the "Custodian"), will place cash or liquid
securities into a segregated account of the Portfolio in an amount equal to the
value of the Portfolio's total assets committed to the consummation of forward
contracts (or the Portfolio's forward contracts will be otherwise covered
consistent with applicable regulatory policies) and foreign currency futures
contracts that require the Portfolio to purchase foreign currencies. If the
value of the securities placed in the segregated account declines, additional
cash or securities will be placed in the account on a daily basis so that the
value of the account will equal the amount of the Portfolio's commitments with
respect to such contracts.
The Non-Money Market Portfolios generally will not enter into a forward
contract with a term of greater than one year. It also should be realized that
this method of protecting the value of a Portfolio's securities against a
decline in the value of a currency does not eliminate fluctuations in the
underlying prices of the securities. It simply establishes a rate of exchange
which the Portfolio can achieve at some future point in time.
While the Non-Money Market Portfolios will enter into forward contracts
to reduce currency exchange rate risks, transactions in such contracts involve
certain other risks. Thus, while a Portfolio may benefit from such transactions,
unanticipated changes in currency prices may result in a poorer overall
performance for the Portfolio than if it had not engaged in any such
transaction. Moreover, there may be imperfect correlation between the value of
the Portfolio's holdings of securities denominated in a particular currency and
forward or futures contracts entered into by the Portfolio. Such imperfect
correlation may prevent the Portfolio from achieving a complete hedge or expose
the Portfolio to risk of foreign exchange loss.
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High Yield, High Risk Securities
The Bond Portfolio and the Capital Growth Portfolio may each invest in
below investment grade securities (rated Ba and lower by Moody's and BB and
lower by S&P) or unrated securities. Such securities carry a high degree of risk
and are considered speculative. The lower the ratings of such debt securities,
the greater their risks render them like equity securities. See the Appendix to
this Statement of Additional Information for a more complete description of the
ratings assigned by ratings organizations and their respective characteristics.
As economic downturn may disrupt the high yield market and impair the
ability of issuers to repay principal and interest. Also, an increase in
interest rates could adversely affect the value of such obligations held by a
Portfolio. Prices and yields of high yield securities will fluctuate over time
and may affect a Portfolio's net asset value. In addition, investments in high
yield zero coupon or pay-in-kind bonds, rather than income-bearing high yield
securities, may be more speculative and may be subject to greater fluctuations
in value due to changes in interest rates.
The trading market for high yield securities may be thin to the extent
that there is no established retail secondary market or because of a decline in
the value of such securities. A thin trading market may limit the ability of the
Trustees to value high yield securities accurately in a Portfolio and to dispose
of those securities. Adverse publicity and investor perceptions may decrease the
values and liquidity of high yield securities. These securities may also involve
special registration responsibilities, liabilities and costs.
Credit quality in the high yield securities market can change suddenly
and unexpectedly, and even recently-issued credit ratings may not fully reflect
the actual risks posed by a particular high yield security. For these reasons,
it is the policy of the Adviser not to rely exclusively on ratings issued by
established credit rating agencies, but to supplement such ratings with its own
independent and on-going review of credit quality. The achievement of the
Portfolios' investment objectives may be more dependent on the Adviser's credit
analysis than is the case for higher quality bonds. Should the rating of a
portfolio security be downgraded the Adviser will determine whether it is in the
best interest of that Portfolio to retain or dispose of the security.
Prices for below investment grade securities may be affected by
legislative and regulatory developments. For example, new federal rules require
savings and loan institutions gradually to reduce their holdings of this type of
security. Also, Congress has from time to time considered legislation which
would restrict or eliminate the corporate tax deduction for interest payments in
these securities and regulate corporate restructurings. Such legislation may
significantly depress the prices of outstanding securities of this type.
Combined Transactions
Each Portfolio may enter into multiple transactions, including multiple
options transactions, multiple futures transactions, multiple foreign currency
transactions (including forward contracts) and any combination of futures,
options and foreign currency transactions ("component" transactions), instead of
a single transaction, as part of a single hedging strategy when, in the opinion
of the Adviser, it is in the best interest of a Portfolio to do so. A combined
transaction, while part of a single hedging strategy, may not offset fully the
risks of each component transaction and, therefore, may contain elements of risk
that are present in each of its component transactions. (See above for the risk
characteristics of certain transactions.)
Risks of Specialized Investment Techniques Abroad
The above described specialized investment techniques when conducted
abroad may not be regulated as effectively as in the United States; may not
involve a clearing mechanism and related guarantees, and are subject to the risk
of governmental actions affecting trading in, or the prices of, foreign
securities. The value of such positions also could be adversely affected by: (i)
other complex foreign political, legal and economic factors; (ii) lesser
availability than in the United States of data on which to make trading
decisions; (iii) delays in the Fund's ability to act upon economic events
occurring in foreign markets during on-business 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.
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INVESTMENT RESTRICTIONS
(See "INVESTMENT RESTRICTIONS" in the Fund's prospectus.)
Unless specified to the contrary, the following restrictions may not be
changed with respect to any Portfolio without the approval of the majority of
outstanding voting securities of that Portfolio (which, under the 1940 Act, as
amended, and the rules thereunder and as used in this Statement of Additional
Information, means the lesser of (1) 67% of the shares of that Portfolio present
at a meeting if the holders of more than 50% of the outstanding shares of that
Portfolio are present in person or by proxy, or (2) more than 50% of the
outstanding shares of that Portfolio). Any investment restrictions which involve
a maximum percentage of securities or assets shall not be considered to be
violated unless an excess over the percentage occurs immediately after, and is
caused by, an acquisition or encumbrance of securities or assets of, or
borrowings by or on behalf of, a Portfolio.
In addition to the investment restrictions set forth in the Fund's
prospectus, the Fund may not, on behalf of any Portfolio:
(1) purchase and sell real estate (though it may invest in
securities of companies which deal in real estate and in other
permitted investments secured by real estate) or commodities
or commodities contracts, except (a) debt securities futures
contracts and securities index futures contracts and options
thereon, and (b) in the case of the International Portfolio,
foreign currency futures contracts;
(2) participate on a joint or a joint and several basis in any
trading account in securities, but may for the purpose of
possibly achieving better net results on portfolio
transactions or lower brokerage commission rates join with
other investment company and client accounts managed by
Scudder, Stevens & Clark or its affiliates in the purchase or
sale of portfolio securities;
(3) purchase or retain securities of an issuer any of whose
officers, directors, trustees or security holders is an
officer or Trustee of the Fund or a member, officer, director
or trustee of the investment adviser of the Fund if one or
more of such individuals owns beneficially more than one-half
of one percent (1/2 of 1%) of the shares or securities or both
(taken at market value) of such issuer and such individuals
owning more than one-half of one percent (1/2 of 1%) of such
shares or securities together own beneficially more than 5% of
such shares or securities or both;
(4) purchase securities on margin or make short sales unless, by
virtue of its ownership of other securities, it has the right
to obtain securities equivalent in kind and amount to the
securities sold and, if the right is conditional, the sale is
made upon the same conditions;
(5) issue senior securities, except as appropriate to evidence
indebtedness which a Portfolio is permitted to incur pursuant
to the Investment Restrictions set forth in the Fund's
prospectus and except for shares of various additional series
which may be established by the Trustees; or
(6) act as underwriter of the securities issued by others, except
to the extent that the purchase of securities in accordance
with its investment objective and policies directly from the
issuer thereof and the later disposition thereof may be deemed
to be underwriting.
"Value" for the purposes of all investment restrictions shall mean the
value used in determining a Portfolio's net asset value. (See "NET ASSET
VALUE").
PURCHASES AND REDEMPTIONS
(See "PURCHASES AND REDEMPTIONS" in the Fund's prospectus.)
The separate accounts of the Participating Insurance Companies purchase
and redeem shares of each Portfolio based on, among other things, the amount of
premium payments to be invested and surrender and transfer requests to be
effected on that day pursuant to variable annuity contracts and variable life
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insurance policies but only on days on which the New York Stock Exchange (the
"Exchange") is open for trading. Such purchases and redemptions of the shares of
each Portfolio are effected at their respective net asset values per share
determined as of the close of regular trading on the Exchange (normally 4 p.m.
eastern time) on that same day except that, in the case of the Money Market
Portfolio, purchases will not be effected until the next determination of net
asset value after federal funds have been made available to the Fund. (See "NET
ASSET VALUE"). Payment for redemptions will be made by State Street Bank and
Trust Company on behalf of the Fund and the applicable Portfolios within seven
days thereafter. No fee is charged the separate accounts of the Participating
Insurance Companies when they redeem Fund shares.
The Fund may suspend the right of redemption of shares of any Portfolio
and may postpone payment for any period: (i) during which the Exchange is closed
other than customary weekend and holiday closings or during which trading on the
Exchange is restricted; (ii) when the SEC determines that a state of emergency
exists which may make payment or transfer not reasonably practicable, (iii) as
the SEC may by order permit for the protection of the security holders of the
Fund or (iv) at any other time when the Fund may, under applicable laws and
regulations, suspend payment on the redemption of its shares.
Should any conflict between VA contract and VLI policy holders arise
which would require that a substantial amount of net assets be withdrawn from
the Fund, orderly portfolio management could be disrupted to the potential
detriment of such contract and policy holders.
INVESTMENT ADVISER AND DISTRIBUTOR
(See "INVESTMENT ADVISER" and "DISTRIBUTOR" in the Fund's
prospectus.)
Investment Adviser
The Fund has an investment advisory agreement for the Money Market
Portfolio, Bond Portfolio and Capital Growth Portfolio (the "Agreement"). This
Agreement is with the investment counsel firm of Scudder, Stevens & Clark, Inc.,
a Delaware corporation, doing business under the name Scudder, Stevens & Clark.
This organization is one of the most experienced investment counsel firms in the
United States. It currently manages in excess of $90 billion in assets for its
clients, including: more than $50 billion in U.S. and foreign bonds, and over $9
billion in balanced portfolios for over 3,000 institutional and private
accounts. In addition, the assets of Scudder's international investment company
clients exceed $6 billion. Scudder, Stevens & Clark, Inc. was established in
1919 and pioneered the practice of providing investment counsel to individual
clients on a fee basis. In 1928, it introduced the first no-load mutual fund to
the public. The Adviser has been a leader in international investment management
and trading for over 40 years.
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice, and the firm derives no
income from brokerage or underwriting of securities. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations. In addition, it manages Montgomery Street Income Securities,
Inc., Scudder California Tax Free Trust, Scudder Cash Investment Trust, Scudder
Development Fund, Scudder Equity Trust, Scudder Fund, Inc., Scudder Funds Trust,
Scudder Global Fund, Inc., Scudder GNMA Fund, Scudder Portfolio Trust, Scudder
Institutional Fund, Inc., Scudder International Fund, Inc., Scudder Investment
Trust, Scudder Municipal Trust, Scudder Mutual Funds, Inc., Scudder New Asia
Fund, Inc., Scudder New Europe Fund, Inc., Scudder State Tax Free Trust, Scudder
Tax Free Money Fund, Scudder Tax Free Trust, Scudder U.S. Treasury Money Fund,
Scudder Variable Life Investment Fund, Scudder World Income Opportunities Fund,
Inc., The Argentina Fund, Inc., The Brazil Fund, Inc., The First Iberian Fund,
Inc., The Korea Fund, Inc., The Japan Fund, Inc. and The Latin America Dollar
Income Fund, Inc. Some of the foregoing companies or trusts have two or more
series.
The Adviser also provides investment advisory services to the mutual
funds which comprise the AARP Investment Program from Scudder. The AARP
Investment Program from Scudder has assets aggregating over $11 billion and
includes the AARP Growth Trust, AARP Income Trust, AARP Tax Free Income Trust
and AARP Cash Investment Funds.
Certain investments may be appropriate for the Fund and for other
clients advised by the Adviser. Investment decisions for the Fund and other
clients are made with a view to achieving their respective investment objectives
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and after consideration of such factors as their current holdings, availability
of cash for investment and the size of their investments generally. Frequently,
a particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Adviser to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by the Fund. Purchase and sale orders for the Fund may be combined with
those of other clients of the Adviser in the interest of the most favorable net
results to the Fund.
The Adviser maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Adviser receives published
reports and statistical compilations from issuers and other sources, as well as
analyses from brokers and dealers who may execute portfolio transactions for the
Adviser's clients. However, the Adviser regards this information and material as
an adjunct to its own research activities. Scudder's international investment
management team travels the world, researching hundreds of companies. In
selecting the securities in which the Fund may invest, the conclusions and
investment decisions of the Adviser with respect to the Fund are based primarily
on the analyses of its own research department.
Under the Agreement, the Adviser regularly provides the Fund with
investment research, advice and supervision and furnishes continuously an
investment program consistent with the investment objectives and policies of
each Portfolio, and determines, for each Portfolio, what securities shall be
purchased, what securities shall be held or sold, and what portion of a
Portfolio's assets shall be held uninvested, subject always to the provisions of
the Fund's Declaration of Trust and By-Laws, and of the 1940 Act and to a
Portfolio's investment objectives, policies and restrictions, and subject
further to such policies and instructions as the Trustees may from time to time
establish. The Adviser also advises and assists the officers of the Fund in
taking such steps as are necessary or appropriate to carry out the decisions of
its Trustees and the appropriate committees of the Trustees regarding the
conduct of the business of the Fund.
The Adviser pays the compensation and expenses of all affiliated
Trustees and executive employees of the Fund and makes available, without
expense to the Fund, the services of such affiliated persons as may duly be
elected Trustees of the Fund, subject to their individual consent to serve and
to any limitations imposed by law, and pays the Fund's office rent and provides
investment advisory, research and statistical facilities and all clerical
services relating to research, statistical and investment work. For its advisory
services the Adviser receives compensation monthly at the following annual rates
for each Portfolio:
<TABLE>
<CAPTION>
% of the average
daily net asset
values of each Dollar Amount
Portfolio Portfolio 1992 1993 1994
<S> <C> <C> <C> <C>
Money Market Portfolio .370% $134,330 $130,455 $269,963
Bond Portfolio .475% 438,085 550,565 650,361
Capital Growth Portfolio .475% 617,103 955,017 1,199,585
</TABLE>
Under the Agreement, the Fund is responsible for all its other
expenses, including clerical salaries; fees and expenses incurred in connection
with membership in investment company organizations; brokers' commissions;
legal, auditing and accounting expenses; taxes and governmental fees; the
charges of custodians, transfer agents and other agents; any other expenses,
including clerical expenses, of issue, sale, underwriting, distribution,
redemption or repurchase of shares; the expenses of and fees for registering or
qualifying securities for sale; the fees and expenses of the Trustees of the
Fund who are not affiliated with the Adviser; and the cost of preparing and
distributing reports and notices to shareholders. The Fund may arrange to have
third parties assume all or part of the expense of sale, underwriting and
distribution of its shares. (See "Distributor" for expenses paid by Scudder
Investor Services, Inc.) The Fund is also responsible for its expenses incurred
in connection with litigation, proceedings and claims and the legal obligation
it may have to indemnify its officers and Trustees with respect thereto.
23
<PAGE>
In addition to payments for investment advisory services provided by
the Adviser, the Trustees, consistent with the Fund's investment advisory
agreements and underwriting agreement, have approved payments to the Adviser and
Scudder Investor Services, Inc. for clerical, accounting and certain other
services they may provide the Fund. Effective October 1, 1994, the Trustees
authorized the elimination of these administrative expenses. Under a new
agreement, effective October 1, 1994, the Trustees authorized the Fund, on
behalf of each Portfolio, to pay Scudder Fund Accounting Corporation, a
wholly-owned subsidiary of the Adviser, for determining the daily net asset
value per share and maintaining the portfolio and general accounting records of
the Fund.
For the year ended December 31, 1992, such compensation amounted to
$38,079 for the Money Market Portfolio, $39,565 for the Bond Portfolio and
$40,654 for the Capital Growth Portfolio.
For the year ended December 31, 1993, such compensation amounted to
$48,886 for the Money Market Portfolio, $54,341 for the Bond Portfolio and
$59,589 for the Capital Growth Portfolio.
For the year ended December 31, 1994, such compensation amounted to
$40,297 for the Money Market Portfolio, $40,238 for the Bond Portfolio and
$38,204 for the Capital Growth Portfolio.
The Agreement dated November 14, 1986 (for the Money Market Portfolio,
Bond Portfolio and Capital Growth Portfolio) will remain in effect until
September 30, 1995. The Agreement will continue in effect from year to year
thereafter only if its continuance is approved annually by the vote of a
majority of those Trustees who are not parties to such Agreement or "interested
persons" of the Adviser or the Fund cast in person at a meeting called for the
purpose of voting on such approval and either by vote of a majority of the
Trustees or a majority of the outstanding securities of such Portfolio. The
Agreement for the Money Market Portfolio, Bond Portfolio and Capital Growth
Portfolio was last approved by such Trustees (including a majority of the
Trustees who are not such "interested persons") on August 12, 1994. The
Agreement may be terminated at any time without payment of penalty by either
party on sixty days' written notice, and automatically terminates in the event
of its assignment.
The Agreement also provides that the Fund may use any name derived from
the name "Scudder, Stevens & Clark" only as long as such Agreement remains in
effect.
In reviewing the terms of the Agreement and in discussions with the
Adviser concerning the Agreement, Trustees who are not "interested persons" of
the Fund are represented by independent counsel at the Fund's expense.
The Agreement provides that the Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with matters to which the Agreement relates, except a loss resulting
from willful misfeasance, bad faith or gross negligence on the part of the
Adviser in the performance of its duties or from reckless disregard by the
Adviser of its obligations and duties under the Agreement.
Each Participating Insurance Company has agreed with the Adviser to
reimburse the Adviser for a period of five years to the extent that the
aggregate annual advisory fee paid on behalf of all Portfolios with respect to
the average daily net asset value of the shares of all Portfolios held in that
Participating Insurance Company's general or separate account (or those of
affiliates) is less than $25,000 in any year. It is expected that insurance
companies which become Participating Insurance Companies in the future will be
required to enter into similar arrangements.
For a period of five years from the date of execution of a
Participation Agreement with the Fund, the Participating Insurance Companies
have agreed to contribute to the capital of the Fund to the extent that the
annual operating expenses of any Portfolio of the Fund exceed 0.75 of 1% of that
Portfolio's average daily net assets for any year of the Fund. The obligation of
each Participating Insurance Company in relation to the total capital
contribution due to a Portfolio is the proportion that the average value of the
shares of such Portfolio held during the year by a separate account or separate
accounts of such Company (or $1,000,000, if greater) bears to such average daily
net assets. The Adviser may advance some or all of such capital contribution to
the Fund prior to receiving payment therefor from a Participating Insurance
Company, but it is under no obligation to do so; if the Adviser does advance
such capital contribution to the Fund and does not receive payment therefor, it
will be entitled to be repaid such amounts by the Fund. It is expected that
insurance companies which become Participating Insurance Companies in the future
24
<PAGE>
will be required to enter into similar arrangements. These arrangements may be
modified or terminated in the future. To date, Charter National Life Insurance
Company, Mutual of America Life Insurance Company and Banner Life Insurance
Company have been Participating Insurance Companies for the past eight, six and
five years, respectively, and have made arrangements with the Adviser to
continue their participation.
Officers and employees of the Adviser from time to time may have
transactions with various banks, including the Fund's custodian bank. It is the
Adviser's opinion that the terms and conditions of those transactions were not
influenced by existing or potential custodial or other Fund relationships.
None of the Trustees or officers of the Fund may have dealings with the
Fund as principals in the purchase or sale of securities.
Personal Investments by Employees of the Adviser
Employees of the Adviser are permitted to make personal securities
transactions, subject to requirements and restrictions set forth in the
Adviser's Code of Ethics. The Code of Ethics contains provisions and
requirements designed to identify and address certain conflicts of interest
between personal investment activities and the interests of investment advisory
clients such as the Portfolios. Among other things, the Code of Ethics, which
generally complies with standards recommended by the Investment Company
Institute's Advisory Group on Personal Investing, prohibits certain types of
transactions absent prior approval, imposes time periods during which personal
transactions may not be made in certain securities, and requires the submission
of duplicate broker confirmations and monthly reporting of securities
transactions. Additional restrictions apply to portfolio managers, traders,
research analysts and others involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
Distributor
The Fund has an underwriting agreement with Scudder Investor Services,
Inc. (the "Distributor"), a wholly-owned subsidiary of the Adviser, Two
International Place, Boston, Massachusetts 02110-4103. The Fund's underwriting
agreement dated July 12, 1985, will remain in effect until September 30, 1995,
and from year to year thereafter only if its continuance is approved annually by
a majority of the Trustees who are not parties to such agreement or "interested
persons" of any such party and either by vote of a majority of the Trustees or a
majority of the outstanding voting securities of the Fund.
Under the principal underwriting agreement between the Fund and the
Distributor, the Fund is responsible for the payment of all fees and expenses in
connection with the preparation and filing of any registration statement and
prospectus covering the issue and sale of shares, and the registration and
qualification of shares for sale with the SEC in the various states, including
registering the Fund as a broker or dealer. The Fund will also pay the fees and
expenses of preparing, printing and mailing prospectuses annually to existing
shareholders and any notice, proxy statement, report, prospectus or other
communication to shareholders of the Fund, printing and mailing confirmations of
purchases of shares, any issue taxes or any initial transfer taxes, a portion of
toll-free telephone service for shareholders, wiring funds for share purchases
and redemptions (unless paid by the shareholder who initiates the transaction),
printing and postage of business reply envelopes and a portion of the computer
terminals used by both the Fund and the Distributor.
The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of the shares to
the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of the shares to the public. The
Distributor will pay all fees and expenses in connection with its qualification
and registration as a broker or dealer under Federal and state laws, a portion
of the toll-free telephone service and of computer terminals, and of any
activity which is primarily intended to result in the sale of shares issued by
the Fund, unless a 12b-l Plan is in effect which provides that the Fund shall
bear some or all of such expenses. The Distributor has entered into agreements
with broker-dealers authorized to offer and sell VA contracts and VLI policies
on behalf of the Participating Insurance Companies under which agreements the
broker-dealers have agreed to be responsible for the fees and expenses of any
prospectus, statement of additional information and printed information
25
<PAGE>
supplemental thereto of the Fund distributed in connection with their offer of
VA contracts and VLI policies.
As agent, the Distributor currently offers shares of each Portfolio on
a continuous basis to the separate accounts of Participating Insurance Companies
in all states in which the Portfolio or the Fund may from time to time be
registered or where permitted by applicable law. The underwriting agreement
provides that the Distributor accepts orders for shares at net asset value
without sales commission or load being charged. The Distributor has made no firm
commitment to acquire shares of any Portfolio.
Note: Although the Fund does not currently have a 12b-1 Plan and shareholder
approval would be required in order to adopt one, the underwriting
agreement provides that the Fund will also pay those fees and expenses
permitted to be paid or assumed by the Fund pursuant to a 12b-1 Plan,
if any, adopted by the Fund, notwithstanding any other provision to the
contrary in the underwriting agreement, and the Fund or a third party
will pay those fees and expenses not specifically allocated to the
Distributor in the underwriting agreement.
MANAGEMENT OF THE FUND
Trustees and Officers
<TABLE>
<CAPTION>
Position with
Underwriter, Scudder
Investor Services,
Name and Address Position with Fund Principal Occupation** Inc.
- ---------------- ------------------ ---------------------- -----------------------
<S> <C> <C> <C>
David B. Watts*@+ President and Trustee Managing Director of Scudder, Assistant Treasurer
Stevens & Clark, Inc.
Dr. Kenneth Black, Jr. Trustee Regents' Professor Emeritus of ----
Educational Foundation, Inc. Insurance, Georgia State
35 Broad Street University
11th Floor, Room 1144
Atlanta, GA 30303
Peter B. Freeman@ Trustee Corporate Director and Trustee ----
100 Alumni Avenue
Providence, RI 02906
Dr. J. D. Hammond Trustee Dean, Smeal College of Business ----
801 Business Administration, Pennsylvania
Administration Bldg. State University
Pennsylvania State University
University Park, PA 16802
Daniel Pierce*@+ Vice President and Chairman of the Board and Vice President,
Trustee Managing Director of Scudder, Director and Assistant
Stevens & Clark, Inc. Treasurer
Pamela A. McGrath+ Vice President and Principal of Scudder, Stevens & ----
Treasurer Clark, Inc.
26
<PAGE>
Position with
Underwriter, Scudder
Investor Services,
Name and Address Position with Fund Principal Occupation** Inc.
- ---------------- ------------------ ---------------------- -----------------------
Thomas S. Crain++ Vice President Managing Director of Scudder, ----
Stevens & Clark, Inc.
Jerard K. Hartman# Vice President Managing Director of Scudder, ----
Stevens & Clark, Inc.
Richard A. Holt*** Vice President Managing Director of Scudder, ----
Stevens & Clark, Inc.
Thomas W. Joseph+ Vice President Principal of Scudder, Stevens & Vice President,
Clark, Inc. Director, Treasurer
and Assistant Clerk
David S. Lee+ Vice President Managing Director of Scudder, President, Assistant
Stevens & Clark, Inc. Treasurer and Director
Steven M. Meltzer+ Vice President Principal of Scudder, Stevens & ----
Clark, Inc.
Edward J. O'Connell# Vice President and Principal of Scudder, Stevens & Assistant Treasurer
Assistant Treasurer Clark, Inc.
Randall K. Zeller# Vice President Managing Director of Scudder, ----
Stevens & Clark, Inc.
Thomas F. McDonough+ Secretary Principal of Scudder, Stevens & Clerk
Clark, Inc.
Kathryn L. Quirk# Vice President and Managing Director of Scudder, Vice President
Assistant Secretary Stevens & Clark, Inc.
Coleen Downs Dinneen+ Assistant Secretary Vice President of Scudder, Assistant Clerk
Stevens & Clark, Inc.
* Messrs. Watts and Pierce are considered by the Fund and its counsel to be Trustees who are "interested
persons" of the Adviser or of the Fund (within the meaning of the 1940 Act, as amended).
** Unless otherwise stated, all the officers and Trustees have been associated with their respective
companies for more than five years, but not necessarily in the same capacity.
@ Peter B. Freeman, Daniel Pierce and David B. Watts are members of the Executive Committee, which has
the power to declare dividends from ordinary income and distributions of realized capital gains to the
same extent as the Board is so empowered.
+ Address: Two International Place, Boston, Massachusetts 02110-4103
# Address: 345 Park Avenue, New York, New York 10154
++ Address: 600 Vine Street - Suite 2000, Cincinnati, Ohio 45202
*** Address: 111 E. Wacker Drive - Suite 2200, Chicago, Illinois 60601
</TABLE>
Certain of the Trustees and officers of the Fund also serve in similar
capacities with other Scudder Funds.
27
<PAGE>
Remuneration
Several of the officers and Trustees of the Fund may also be officers
of the Adviser, the Distributor, Scudder Service Corporation, Scudder Trust
Company or Scudder Fund Accounting Corporation which receive fees paid by the
Fund. The Fund pays no direct remuneration to any officer of the Fund. However,
each of the Trustees who is not affiliated with the Adviser will be paid by the
Fund. Of these unaffiliated Trustees, Drs. Black and Hammond each receive an
annual Trustee's fee of $2,000 per Portfolio and a fee of $200 per Portfolio for
each Trustees' meeting attended or for each meeting held for the purpose of
considering arrangements between the Fund and the Adviser, while Mr. Freeman
receives fees of $1,250 per Portfolio and $125 per Portfolio, respectively. Drs.
Black and Hammond also receive $100 per Portfolio per committee meeting attended
(other than audit committee, for which each receives a fee of $200 per
Portfolio), while Mr. Freeman receives fees of $75 per Portfolio and $125 per
Portfolio, respectively. A total of $58,473 was paid for Trustees' fees and
expenses, including legal counsel to the Trustees, in the year ended December
31, 1994.
The following Compensation Table, provides in tabular form, the
following data.
Column (1) All Trustees who receive compensation from the Fund.
Column (2) Aggregate compensation received by a Trustee from all series of the
Fund -Scudder Variable Life Investment Fund, which is comprised of Money Market
Portfolio, Bond Portfolio, Balanced Portfolio, Growth and Income Portfolio,
Capital Growth Portfolio and International Portfolio.
Columns (3) and (4) Pension or retirement benefits accrued or proposed to be
paid by the Fund. Scudder Variable Life Investment Fund does not pay its
Trustees such benefits.
Column (5) Total compensation received by a Trustee from Money Market Portfolio,
Bond Portfolio, Balanced Portfolio, Growth and Income Portfolio, Capital Growth
Portfolio and International Portfolio, plus compensation received from all funds
managed by the Adviser for which a Trustee serves. The total number of funds
from which a Trustee receives such compensation is also provided in column (5).
<TABLE>
<CAPTION>
Compensation Table
for the year ended December 31, 1994
=========================== ============================= =================== ================= ====================
(1) (2) (3) (4) (5)
Pension or
Retirement Total Compensation
Aggregate Compensation from Benefits Accrued Estimated From the Fund and
Name of Person, the Scudder Variable Life As Part of Fund Annual Benefits Fund Complex Paid
Position Investment Fund* Expenses Upon Retirement to Trustee
=========================== ============================= =================== ================= ====================
<S> <C> <C> <C> <C>
Dr. Kenneth Black, Jr., $ 14,400 N/A N/A $ 14,400
Trustee (6 funds)
Peter B. Freeman, Trustee $ 9,600 N/A N/A $ 141,843.83
(31 funds)
Dr. J.D. Hammond, $ 14,400 N/A N/A $ 14,400
Trustee (6 funds)
* Scudder Variable Life Investment Fund consists of six Portfolios: Money Market
Portfolio, Bond Portfolio, Balanced Portfolio, Growth and Income Portfolio,
Capital Growth Portfolio and International Portfolio.
</TABLE>
28
<PAGE>
NET ASSET VALUE
(See "NET ASSET VALUE" and "VALUATION OF PORTFOLIO SECURITIES"
in the Fund's prospectus)
The net asset value of shares of each Portfolio of the Fund is computed
as of the close of regular trading on the Exchange on each day the Exchange is
open for trading (the "Value Time"). The Exchange is scheduled to be closed on
the following holidays: New Year's Day, Presidents Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving and Christmas. Net asset value
per share is determined by dividing the value of the total assets of a Fund,
less all liabilities, by the total number of shares outstanding.
The valuation of the Money Market Portfolio securities is based upon
their amortized cost, which does not take into account unrealized securities
gains or losses. This method involves initially valuing an instrument at its
cost 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. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Money Market Portfolio would receive if it
sold the instrument. During periods of declining interest rates, the quoted
yield on shares of the Money Market Portfolio may tend to be higher than a like
computation made by a fund with identical investments utilizing a method of
valuation based upon market prices and estimates of market prices for all of its
portfolio instruments. Thus, if the use of amortized cost by the Portfolio
resulted in a lower aggregate portfolio value on a particular day, a prospective
investor in the Money Market Portfolio would be able to obtain a somewhat higher
yield if he purchased shares of the Money Market Portfolio on that day, than
would result/from investment in a fund utilizing solely market values, and
existing investors in the Money Market Portfolio would receive less investment
income. The converse would apply in a period of rising interest rates.
An exchange-traded equity security (not subject to resale restrictions)
is valued at its most recent sale price as of the Value Time. Lacking any sales,
the security is valued at the calculated mean between the most recent bid
quotation and the most recent asked quotation (the "Calculated Mean"). If there
are no bid and asked quotations, the security is valued at the most recent bid
quotation. An unlisted equity security which is traded on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") system is
valued at the most recent sale price. If there are no such sales, the security
is valued at the high or "inside" bid quotation. The value of an equity security
not quoted on the NASDAQ System, but traded in another over-the-counter market,
is the most recent sale price. If there are no such sales, the security is
valued at the Calculated Mean. If there is no Calculated Mean, the security is
valued at the most recent bid quotation.
Debt securities, other than short-term securities, are valued at prices
supplied by the Fund's pricing agent which reflect broker/dealer supplied
valuations and electronic data processing techniques. Short-term securities with
remaining maturities of sixty days or less are valued by the amortized cost
method, which the Board believes approximates market value. If it is not
possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If no such bid quotation is available, the Adviser may
calculate the price of that debt security, subject to limitations established by
the Board.
Option contracts on securities, currencies, futures and other financial
instruments traded on an exchange are valued at their most recent sale price on
the exchange. If no sales are reported, the value is the Calculated Mean, or if
the Calculated Mean is not available, the most recent bid quotation in the case
of purchased options, or the most recent asked quotation in the case of written
options. Option contracts traded over-the-counter are valued at the most recent
bid quotation in the case of purchased options and at the most recent asked
quotation in the case of written options. Futures contracts are valued at the
most recent settlement price. Foreign currency forward contracts are valued at
the value of the underlying currency at the prevailing currency exchange rate.
If a security is traded on more than one exchange, or on one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
29
<PAGE>
If, in the opinion of the Fund's Valuation Committee, the value of an
asset as determined in accordance with these procedures does not represent the
fair market value of the asset, the value of the asset is taken to be an amount
which, in the opinion of the Valuation Committee, represents fair market value
on the basis of all available information. The value of other portfolio holdings
owned by the Fund is determined in a manner which, in the discretion of the
Valuation Committee most fairly reflects fair market value of the property on
the valuation date.
Following the valuations of securities or other portfolio assets in
terms of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rates on the valuation date.
TAX STATUS
(See "TAX STATUS, DIVIDENDS AND DISTRIBUTIONS" in the Fund's
prospectus.)
Each Portfolio of the Fund has elected to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). Such qualification does not involve governmental
supervision or management of investment practices or policy.
Each Portfolio intends to comply with the provisions of Section 817(h)
of the Code relating to diversification requirements for variable annuity,
endowment and life insurance contracts. Specifically, each Portfolio intends to
comply with either (i) the requirement of Section 817(h)(1) of the Code that its
assets be adequately diversified, or (ii) the "Safe Harbor for Diversification"
specified in Section 817(h)(2) of the Code, or (iii) the diversification
requirement of Section 817(h)(1) of the Code by having all or part of its assets
invested in U.S. Treasury securities which qualify for the "Special Rule for
Investments in United States Obligations" specified in Section 817(h)(3) of the
Code.
A regulated investment company qualifying under Subchapter M of the
Code is required to distribute to its shareholders at least 90 percent of its
investment company taxable income and generally is not subject to federal income
tax to the extent that it distributes annually its investment company taxable
income and net realized capital gains in the manner required under the Code.
Investment company taxable income of a Portfolio generally is made up
of dividends, interest, certain currency gains and losses and net-short-term
capital gains in excess of net long-term capital losses, less expenses. Net
realized capital gains of a Portfolio for a fiscal year are computed by taking
into account any capital loss carryforward of the Portfolio.
At December 31, 1994, the Bond Portfolio had a net tax basis capital
loss carryforward of approximately $4,153,327 which may be applied against any
net taxable capital gains of each succeeding year until fully utilized or until
December 31, 2002, whichever occurs first.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by a Portfolio for reinvestment,
requiring federal income taxes to be paid thereon by the Portfolio, such
Portfolio intends to elect to treat such capital gains as having been
distributed to shareholders. As a result, each shareholder will report such
capital gains as long-term capital gains, will be able to claim its share of
federal income taxes paid by the Portfolio on such gains as a credit against its
own federal income tax liability, and will be entitled to increase the adjusted
tax basis of its shares of the Portfolio by the difference between its pro rata
share of such gains and its tax credit.
Distributions of investment company taxable income are taxable to
shareholders as ordinary income.
Distributions of the excess of net long-term capital gain over net
short-term capital loss are taxable to shareholders as long-term capital gain,
regardless of the length of time the shares of the relevant Portfolio have been
held by such shareholders. Any loss realized upon the redemption of shares held
at the time of redemption for six months or less will be treated as a long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gain during such six-month period.
30
<PAGE>
Distributions of investment company taxable income and net realized
capital gains will be taxable as described above, whether reinvested in
additional shares or in cash. Shareholders electing to receive distributions in
the form of additional shares will have a cost basis for federal income tax
purposes in each share so received equal to the net asset value of a share on
the reinvestment date.
All distributions of investment company taxable income and net realized
capital gain, whether reinvested in additional shares or in cash, must be
reported by each shareholder on its federal income tax return. Dividends
declared in October, November or December with a record date in such a month
will be deemed to have been received by shareholders on December 31 if paid
during January of the following year. Redemptions of shares may result in tax
consequences (gain or loss) to the shareholder and are also subject to these
reporting requirements.
Distributions by a Portfolio (except the Money Market Portfolio) result
in a reduction in the net asset value of the Portfolio's shares. Should a
distribution reduce the net asset value below a shareholder's cost basis, such
distribution would nevertheless be taxable to the shareholder as ordinary income
or capital gain as described above, even though, from an investment standpoint,
it may constitute a partial return of capital. In particular, investors should
consider the tax implications of buying shares just prior to a distribution. The
price of shares purchased at that time includes the amount of the forthcoming
distribution. Those purchasing just prior to a distribution will then receive a
partial return of capital upon the distribution, which will nevertheless be
taxable to them.
If the Capital Growth Portfolio invests in stock of certain foreign
investment companies, the Portfolio may be subject to U.S. federal income
taxation on a portion of any "excess distribution" with respect to, or gain from
the disposition of, such stock. The tax would be determined by allocating such
distribution or gain ratably to each day of the Portfolio's holding period for
the stock. The distribution or gain so allocated to the taxable year of the
Portfolio, other than the taxable year of the excess distribution or
disposition, would be taxed to the Portfolio at the highest ordinary income rate
in effect for such year, and the tax would be further increased by an interest
charge to reflect the value of the tax deferral deemed to have resulted from the
ownership of the foreign company's stock. Any amount of distribution or gain
allocated to the taxable year of the distribution or disposition would be
included in a Portfolio's investment company taxable income and, accordingly,
would not be taxable to a Portfolio to the extent distributed by a Portfolio as
a dividend to its shareholders.
Proposed regulations have been issued which may allow the Capital
Growth Portfolio to make an election to mark to market its shares of these
foreign investment companies in lieu of being subject to U.S. federal income
taxation. At the end of each taxable year to which the election applies, the
Capital Growth Portfolio would report as ordinary income the amount by which the
fair market value of the foreign company's stock exceeds the Capital Growth
Portfolio's adjusted basis in these shares. No mark to market losses would be
recognized. The effect of the election would be to treat excess distributions
and gain on dispositions as ordinary income which is not subject to a fund level
tax when distributed to shareholders as a dividend. Alternatively, the Portfolio
may elect to include as income and gain its share of the ordinary earnings and
net capital gain of certain foreign investment companies in lieu of being taxed
in the manner described above.
Equity options (including options on stock and options on narrow-based
stock indexes) and over-the-counter options on debt securities written or
purchased by a Portfolio will be subject to tax under Section 1234 of the Code.
In general, no loss is recognized by a Portfolio upon payment of a premium in
connection with the purchase of a put or call option. The character of any gain
or loss recognized (i.e., long-term or short-term) will generally depend in the
case of a lapse or sale of the option on the Portfolio's holding period for the
option and in the case of an exercise of a put option on the Portfolio's holding
period for the underlying security. The purchase of a put option may constitute
a short sale for federal income tax purposes, causing an adjustment in the
holding period of the underlying security or a substantially identical security
of the Portfolio. If the Portfolio writes a put or call option, no gain is
recognized upon its receipt of a premium. If the option lapses or is closed out,
any gain or loss is treated as a short-term capital gain or loss. If a call
option written by a Portfolio is exercised, the character of the gain or loss
depends on the holding period of the underlying security. The exercise of a put
option written by a Portfolio is not a taxable transaction for the Portfolio.
Many futures contracts, certain foreign currency forward contracts
entered into by a Portfolio and all listed nonequity options written or
purchased by the Portfolio (including options on debt securities, options on
futures contracts, options on securities indexes and options on broad-based
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stock indexes) will be governed by Section 1256 of the Code. Absent a tax
election to the contrary, gain or loss attributable to the lapse, exercise or
closing out of any such position generally will be treated as 60% long-term and
40% short-term and on the last trading day of the fiscal year, all outstanding
Section 1256 positions will be marked to market (i.e. treated as if such
positions were closed out at their closing price on such day), with any
resulting gain or loss recognized as 60% long-term and 40% short-term. Under
Section 988 of the Code, discussed below, foreign currency gain or loss from
foreign currency-related forward contracts, certain futures and options and
similar financial instruments entered into or acquired by a Portfolio will be
treated as ordinary income. Under certain circumstances, entry into a futures
contract to sell a security may constitute a short sale for federal income tax
purposes, causing an adjustment in the holding period of the underlying security
or a substantially identical security owned by the Portfolio.
Subchapter M of the Code requires that each Portfolio realize less than
30% of its annual gross income from the sale or other disposition of stock,
securities and certain options, futures and forward contracts held for less than
three months. Certain options, futures and forward activities of a Portfolio may
increase the amount of gains realized by a Portfolio that are subject to the 30%
limitation. Accordingly, the amount of such transactions that a Portfolio may
undertake may be limited.
Positions of a Portfolio which consist of at least one stock and at
least one stock option or other position with respect to a related security
which substantially diminishes the Portfolio's risk of loss with respect to such
stock could be treated as a "straddle" which is governed by Section 1092 of the
Code, the operation of which may cause deferral of losses, adjustments in the
holding periods of stock or securities and conversion of short-term capital
losses into long-term capital losses. An exception to these straddle rules
exists for any "qualified covered call options" on stock written by a Portfolio.
Positions of a Portfolio which consist of at least one position not
governed by Section 1256 and at least one futures contract, foreign currency
forward contract or nonequity option governed by Section 1256 which
substantially diminishes the Portfolio's risk of loss with respect to such other
position will be treated as a "mixed straddle." Although mixed straddles are
subject to the straddle rules of Section 1092 of the Code, certain tax elections
exist for them which reduce or eliminate the operation of these rules. Each
Portfolio will monitor its transactions in options and futures and may make
certain tax elections in connection with these investments.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time a Portfolio accrues receivables or
liabilities denominated in a foreign currency and the time the Portfolio
actually collects such receivables or pays such liabilities generally are
treated as ordinary income or ordinary loss. Similarly, on disposition of debt
securities denominated in a foreign currency and on disposition of certain
futures contracts, forward contracts and options, gains or losses attributable
to fluctuations in the value of foreign currency between the date of acquisition
of the security or contract and the date of disposition are also treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"Section 988" gains or losses, may increase or decrease the amount of a
Portfolio's investment company taxable income to be distributed to its
shareholders as ordinary income.
If a Portfolio holds zero coupon securities or other securities which
are issued at a discount, a portion of the difference between the issue price of
zero coupon securities and the face value ("original issue discount") will be
treated as income to the Portfolio each year, even though the Portfolio will not
receive cash interest payments from these securities. This original issue
discount (imputed income) will comprise a part of the investment company taxable
income of the Portfolio which must be distributed to shareholders in order to
maintain the qualification of the Portfolio as a regulated investment company
and to avoid federal income tax at the Portfolio level. Shareholders will be
subject to income tax on such original issue discount, whether or not they elect
to receive their distributions in cash. If a Portfolio acquires a debt
instrument at a market discount, a portion of the gain recognized, if any, on
disposition of such instrument may be treated as ordinary income.
Dividend and interest income received by the Portfolios from sources
outside the U.S. may be subject to withholding and other taxes imposed by such
foreign jurisdictions. Tax conventions between certain countries and the U.S.
may reduce or eliminate these foreign taxes, however, and foreign countries
generally do not impose taxes on capital gains respecting investments by foreign
investors.
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Each Portfolio will be required to report to the Internal Revenue
Service all distributions of investment company taxable income and capital gains
as well as gross proceeds from the redemption or exchange of shares, except in
the case of certain exempt shareholders, which include most corporations. Under
the backup withholding provisions of Section 3406 of the Code, distributions of
taxable income and capital gains and proceeds from the redemption or exchange of
the shares of a regulated investment company may be subject to withholding of
federal income tax at the rate of 31% in the case of non-exempt shareholders who
fail to furnish the investment company with their taxpayer identification
numbers and with required certifications regarding their status under the
federal income tax law. Withholding may also be required if a Portfolio is
notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. Participating Insurance Companies
that are corporations should furnish their taxpayer identification numbers and
certify their status as corporations in order to avoid possible erroneous
application of backup withholding.
Shareholders of the Portfolios may be subject to state and local taxes
on distributions received from such Portfolios and on redemptions of their
shares.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution.
The Fund is organized as a Massachusetts business trust, and neither
the Fund nor the Portfolios are liable for any income or franchise tax in the
Commonwealth of Massachusetts providing each Portfolio continues to qualify as a
regulated investment company under Subchapter M of the Code.
The foregoing discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. persons. Each shareholder which is not a
U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the Portfolio, including the possibility that such a shareholder
may be subject to a U.S. withholding tax at a rate of 30% (or at a lower rate
under an applicable income tax treaty) on amounts constituting ordinary income
received by it, where such amounts are treated as income from U.S. sources under
the Code.
For further information concerning federal income tax consequences for
the holders of the VA contracts and VLI policies, shareholders should consult
the prospectus used in connection with the issuance of their particular
contracts or policies. Shareholders should consult their tax advisers about the
application of the provisions of tax law described in this statement of
additional information in light of their particular tax situations.
DIVIDENDS AND DISTRIBUTIONS
(See "TAX STATUS, DIVIDENDS AND DISTRIBUTIONS" in the Fund's
prospectus.)
Money Market Portfolio
The net investment income of the Money Market Portfolio is determined
as of the close of regular trading on the Exchange (normally 4 p.m. eastern
time) on each day on which the Exchange is open for business. All of the net
income so determined normally will be declared as a dividend to shareholders of
record as of the close of regular trading on such Exchange after the purchase
and redemption of shares. Unless the business day before a weekend or holiday is
the last day of an accounting period, the dividend declared on that day will
include an amount in respect of the Portfolio's income for the subsequent
non-business day or days. No daily dividend will include any amount of net
income in respect of a subsequent semi-annual accounting period. Dividends
commence on the next business day after the date of purchase. Dividends will be
invested in additional shares of the Portfolio at the net asset value per share,
normally $1.00, determined as of the first business day of each month unless
payment of the dividend in cash has been requested.
Net investment income of the Money Market Portfolio consists of all
interest income accrued on portfolio assets less all expenses of the Portfolio
and amortized market premium. Accreted market discount is included in interest
income. The Portfolio does not anticipate that it will normally realize any
long-term capital gains with respect to its portfolio.
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<PAGE>
Normally the Money Market Portfolio will have a positive net income at
the time of each determination thereof. Net income may be negative if an
unexpected liability must be accrued or a loss realized. If the net income of
the Portfolio determined at any time is a negative amount, the net asset value
per share will be reduced below $1.00 unless one or more of the following steps
are taken: the Trustees have the authority (1) to reduce the number of shares in
each shareholder's account, (2) to offset each shareholder's pro rata portion of
negative net income from the shareholder's accrued dividend account or from
future dividends, or (3) to combine these methods in order to seek to maintain
the net asset value per share at $1.00. The Fund may endeavor to restore the
Portfolio's net asset value per share to $1.00 by not declaring dividends from
net income on subsequent days until restoration, with the result that the net
asset value per share will increase to the extent of positive net income which
is not declared as a dividend.
Should the Money Market Portfolio incur or anticipate, with respect to
its portfolio, any unusual or unexpected significant expense or loss which would
affect disproportionately the Portfolio's income for a particular period, the
Trustees would at that time consider whether to adhere to the dividend policy
described above or to revise it in light of the then prevailing circumstances in
order to ameliorate to the extent possible the disproportionate effect of such
expense or loss on then existing shareholders. Such expenses or losses may
nevertheless result in a shareholder's receiving no dividends for the period
during which the shares are held and in receiving upon redemption a price per
share lower than that which was paid. Similarly, should the Money Market
Portfolio incur or anticipate any unusual or unexpected significant income,
appreciation or gain which would affect disproportionately the fund's income for
a particular period, the Trustees or the Executive Committee of the Trustees may
consider whether to adhere to the dividend policy described above or to revise
it in light of the then prevailing circumstances in order to ameliorate to the
extent possible the disproportionate effect of such income, appreciation or gain
on the dividend received by existing shareholders. Such actions may reduce the
amount of the daily dividend received by existing shareholders.
Other Portfolios
Each of the Bond Portfolio and the Capital Growth Portfolio has
followed the practice of declaring and distributing a dividend of investment
company taxable income, if any, quarterly, in January, April, July and October.
Each Portfolio has distributed its net capital gain within three months of the
end of each fiscal year. Both dividends and capital gain distributions will be
reinvested in additional shares of such a Portfolio unless an election is made
on behalf of a separate account to receive dividends and capital gain
distributions in cash.
PERFORMANCE INFORMATION
(See "Performance Information" in the Fund's prospectus)
From time to time, quotations of a Portfolio's performance may be
included in advertisements, sales literature or reports to shareholders or
prospective investors. These performance figures may be calculated in the
following manner:
Money Market Portfolio
A. Yield is the net annualized yield based on a specified seven
calendar days calculated at simple interest rates. Yield is
calculated by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account
having a balance of one share at the beginning of the period
subtracting a hypothetical charge reflecting deductions from
shareholder accounts and dividing the difference by the value
of the account at the beginning of the base period to obtain
the base period return. The yield is annualized by multiplying
the base period return by 365/7. The yield figure is stated to
the nearest hundredth of one percent. The yield of the Money
Market Portfolio for the seven-day period ended December 31,
1994, was 5.20%.
B. Effective yield is the net annualized yield for a specified
seven calendar days assuming a reinvestment of the income or
compounding. Effective yield is calculated by the same method
as yield except the yield figure is compounded by adding 1,
raising the sum to a power equal to 365 divided by 7, and
subtracting one from the result, according to the following
formula:
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<PAGE>
Effective Yield = [(Base Period Return + 1)^(365/7)] - 1.
The effective yield of the Portfolio for the seven-day period
ended December 31, 1994, was 5.23%.
As described above, yield and effective yield are based on historical
earnings and show the performance of a hypothetical investment and are not
intended to indicate future performance. Yield and effective yield will vary
based on changes in market conditions and the level of expenses.
In connection with communicating its yield or effective yield to
current or prospective shareholders, the Money Market Portfolio also may compare
these figures to the performance of other mutual funds tracked by mutual fund
rating services or to other unmanaged indexes which may assume reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs.
From time to time, in marketing pieces and other fund literature, the
Fund's yield and performance over time may be compared to the performance of
broad groups of comparable mutual funds, bank money market deposit accounts and
fixed-rate insured certificates of deposit (CDs), or unmanaged indexes of
securities that are comparable to money market funds in their terms and intent,
such as Treasury bills, bankers' acceptances, negotiable order of withdrawal
accounts, and money market certificates. Most bank CDs differ from money market
funds in several ways: the interest rate is fixed for the term of the CD, there
are interest penalties for early withdrawal of the deposit, and the deposit
principal is insured by the FDIC.
Bond Portfolio
Yield is the net annualized yield based on a specified 30-day (or one
month) period assuming a semiannual compounding of income. Yield is
calculated by dividing the net investment income per share earned
during the period by the maximum offering price per share on the last
day of the period, according to the following formula:
YIELD = 2[((a-b)/cd + 1)^6 - 1] Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day
of the period.
Yield for the 30-day period ended December 31, 1994
Bond Portfolio 7.51%
All Portfolios
A. Average Annual Total Return is the average annual compound
rate of return for the periods of one year and five years (or
such shorter periods as may be applicable dating from the
commencement of the Portfolio's operations) all ended on the
date of a recent calendar quarter.
Average annual total return quotations reflect changes in the
price of a Portfolio's shares and assume that all dividends
and capital gains distributions during the respective periods
were reinvested in Portfolio shares. Average annual total
return is calculated by finding the average annual compound
rates of return of a hypothetical investment over such
periods, according to the following formula (average annual
total return is then expressed as a percentage):
T = (ERV/P)^(1/n) - 1
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<PAGE>
Where:
P = a hypothetical initial investment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value: ERV is
the value, at the end of the
applicable period, of a
hypothetical $1,000 investment
made at the beginning of the
applicable period.
Average Annual Total Return for periods ended December 31, 1994
One Year Five Years Life of Fund
Money Market Portfolio 3.72% 4.63% 5.72%(1)
Bond Portfolio -4.79 7.79 8.12 (1)
Capital Growth Portfolio -9.67 8.46 12.22 (1)
(1) For the period beginning July 16, 1985 (commencement of operations)
B. Cumulative Total Return is the cumulative rate of return on a
hypothetical initial investment of $1,000 for a specified
period. Cumulative total return quotations reflect changes in
the price of a Fund's shares and assume that all dividends and
capital gains distributions during the period were reinvested
in Fund shares. Cumulative total return is calculated by
finding the cumulative rates of return of a hypothetical
investment over such periods, according to the following
formula (cumulative total return is then expressed as a
percentage):
C = (ERV/P) - 1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is
the value, at the end of the
applicable period, of a
hypothetical $1,000 investment
made at the beginning of the
applicable period.
Cumulative Total Return for periods ended December 31, 1994
One Year Five Years Life of Fund
Money Market Portfolio 3.72% 25.39% 69.31% (1)
Bond Portfolio -4.79 45.52 109.40 (1)
Capital Growth Portfolio -9.67 50.08 197.83 (1)
(1) For the period beginning July 16, 1985 (commencement of operations)
As described above, average annual total return, cumulative total
return and yield are based on historical earnings and are not intended to
indicate future performance. Average annual total return, cumulative total
return and yield for a Portfolio will vary based on changes in market conditions
and the level of the Portfolio's expenses.
In connection with communicating its total return or yield to current
or prospective shareholders, the Fund also may compare these figures for a
Portfolio to the performance of other mutual funds tracked by mutual fund rating
services or to other unmanaged indexes which may assume reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs.
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<PAGE>
Quoted yields on shares of the Fund's Portfolios will be of limited
usefulness to policy and contract holders for comparable purposes because such
quoted yields will be more than yields on participating contracts and policies
due to charges imposed at the separate account level.
Comparison of Portfolio Performance
From time to time, in marketing and other fund literature, the
performance of the Fund's Portfolios may be compared to the performance of broad
groups of mutual funds which are used in conjunction with variable annuities and
have with similar investment goals, as tracked by independent organizations.
Among these organizations, Lipper Analytical Services, Inc., Morningstar, Inc.
and the Variable Annuity Research and Data Service (V.A.R.D.S.R) may be cited.
When independent tracking results are used, a Portfolio will be compared to
Lipper's appropriate fund category, that is, by investment objective and
portfolio holdings. For instance, growth Portfolios will be compared to funds
within Lipper's growth fund category; income Portfolios will be compared to
funds within Lipper's income fund category; and so on. Rankings may be listed
among one or more of the asset-size classes as determined by Lipper.
Lipper, Morningstar and V.A.R.D.S.R track and rank the performance of
variable annuities in each of the major investment categories. Performance
comparisons and rankings by Lipper, Morningstar and V.A.R.D.S.R are based on
total return and assume reinvestment of income and capital gains, but do not
take into account sales charges, redemption fees or certain other expenses
charged at the separate account level.
Statistical and other information, as provided by the Social Security
Administration, may be used in marketing materials pertaining to retirement
planning in order to estimate future payouts of social security benefits.
Estimates may be used on demographic and economic data.
Comparison of the quoted non-standardized performance of various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effect of the methods used to calculate performance when comparing
performance of the Portfolios with performance quoted with respect to other
investment companies or types of investments.
From time to time, in marketing and other Fund literature, each
Portfolio's performance may be compared to the performance of broad groups of
comparable mutual funds or unmanaged indexes of comparable securities.
Evaluations of performance made by independent sources may also be used in
advertisements concerning each Portfolio, including reprints of, or selections
from, editorials or articles about these Portfolios.
The Bond Portfolio and the Capital Growth Portfolio may invest in
foreign securities. The following graph illustrates the historical risks and
returns of selected indices which track the performance of various combinations
of United States and international securities for the ten year period ended
December 31, 1994; results for other periods may vary. The graph uses ten year
annualized international returns represented by the Morgan Stanley Capital
International Europe, Australia and Far East (EAFE) Index and ten year
annualized United States returns represented by the S&P 500 Index. Risk is
measured by the standard deviation in overall portfolio performance within each
index. Performance of an index is historical, and does not represent the
performance of a Fund, and is not a guarantee of future results.
37
<PAGE>
(X-Y SCATTER CHART TITLE)
---------------------------------------------------------------
EFFICIENT FRONTIER
MSCI EAFE vs. S&P 500 (12/31/84-12/31/94)
---------------------------------------------------------------
[GRAPHIC OMITTED]
X-Y scatter chart placed here plotting total return versus standard deviation
for pairings of percentages of S&P 500 and MSCI EAFE. Data plotted from (100%
S&P , 0% MSCI EAFE) to (0% S&P, 100% MSCI EAFE) in 10% increments.
Source: Lipper Analytical Services, Inc. (Data as of 12/31/94)
Evaluation of Fund performance and other relevant statistical
information made by independent sources may also be used in advertisements
concerning the Fund, including reprints of, or selections from, editorials or
articles about this Fund. Sources for Fund performance information and articles
about the Fund may include the following:
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by Masterfund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
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<PAGE>
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
IBC/Donoghue's Money Fund Report, a weekly publication of the Donoghue
Organization, Inc., of Holliston, Massachusetts, reporting on the performance of
the nation's money market funds, summarizing money market fund activity and
including certain averages as performance benchmarks, specifically "Donoghue's
Money Fund Average," and "Donoghue's Government Money Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
Investor's Daily, a daily newspaper that features financial, economic, and
business news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morgan Stanley International, an integrated investment banking firm that
compiles statistical information.
Morningstar, Inc., a company that, among other activities, analyzes, rates and
ranks mutual funds and variable annuities.
Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance, risk and portfolio
characteristics.
Mutual Funds, a monthly magazine devoted to mutual fund investing.
The New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter, published by Sheldon Jacobs,
that includes mutual fund performance data and recommendations for the mutual
fund investor.
No-Load Fund*X, a monthly newsletter, published by DAL Investment Company, Inc.,
that reports on mutual fund performance, rates funds and discusses investment
strategies for the mutual fund investor.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
39
<PAGE>
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
Smart Money, a national personal finance magazine published monthly by Dow Jones
and Company, Inc. and The Hearst Corporation. Focus is placed on ideas for
investing, spending and saving.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
U.S. News and World Report, a national business weekly that periodically reports
mutual fund performance data.
Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
Wiesenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records and price ranges.
Working Woman, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Worth, a national publication put out 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
Your Money, a bimonthly magazine featuring articles about personal investing and
money management.
SHAREHOLDER COMMUNICATIONS
Owners of policies and contracts issued by Participating Insurance
Companies for which shares of one or more Portfolios are the investment vehicle
will receive from the Participating Insurance Companies unaudited semi-annual
financial statements and audited year-end financial statements certified by the
Fund's independent public accountants. Each report will show the investments
owned by the Fund and the market values thereof as determined by the Trustees
and will provide other information about the Fund and its operations.
Participating Insurance Companies with inquiries regarding the Fund may
call the Fund's underwriter, Scudder Investor Services, Inc., at 617-295-1000 or
write Scudder Investor Services, Inc., Two International Place, Boston,
Massachusetts 02110-4103.
ORGANIZATION AND CAPITALIZATION
(See "ADDITIONAL INFORMATION - Shareholder
Indemnification" in the Fund's prospectus.)
General
The Fund is an open-end investment company established under the laws
of The Commonwealth of Massachusetts by Declaration of Trust dated March 15,
1985.
As of December 31, 1994, AEtna Life Insurance and Annuity Company (151
Farmington Avenue PPH3, Hartford, CT 06156), owned of record and beneficially
9.58% of the Fund's total outstanding shares; and American Skandia Life
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<PAGE>
Assurance Corporation (1 Corporation Drive, Shelton, CT 06484), owned of record
and beneficially 37.69% of the Bond Portfolio, 0.05% of the Capital Growth
Portfolio, 0.14% of the Balanced Portfolio and 0.28% of the International
Portfolio; they owned of record and beneficially 4.53% of the Fund's total
outstanding shares; and AUSA Life Insurance Company (4 Manhattanville Road,
Purchase, NY 10577) owned of record and beneficially 0.33% of the International
Portfolio; they owned of record and beneficially 0.08% of the Fund's total
outstanding shares; and Banner Life Insurance Company of Rockville, MD (1701
Research Blvd., Rockville, MD 20850) owned of record and beneficially 0.16% of
the Money Market Portfolio, 0.35% of the Bond Portfolio, 6.84% of the Balanced
Portfolio, 0.44% of the International Portfolio, 0.01% of the Growth and Income
Portfolio and 1.09% of the Capital Growth Portfolio; they owned of record and
beneficially 0.53% of the Fund's total outstanding shares; and Charter National
Life Insurance Company (8301 Maryland Avenue, St. Louis, MO 63105, a Missouri
corporation) and its subsidiary, Intramerica Life Insurance Company (1 Blue
Hills Plaza, Pearl River, NY 10965), owned of record and beneficially 71.43% of
the Money Market Portfolio, 12.96% of the Bond Portfolio, 86.16% of the Balanced
Portfolio, 29.73% of the Capital Growth Portfolio, 99.97% of the Growth and
Income Portfolio and 21.59% of the International Portfolio; they owned of record
and beneficially 48.88% of the Fund's total outstanding shares. In 1991, Charter
National Life Insurance Company purchased the Colonial Penn Group, Inc., which
indirectly owns Intramerica, a New York domestic life insurer. On November 1,
1992, First Charter Life Insurance Company ("First Charter"), a subsidiary of
Charter National Life Insurance Company, was merged with and into Intramerica.
As the company surviving the merger, Intramerica acquired legal ownership of all
of First Charter's assets, including the Variable Account, and became
responsible for all of First Charter's liabilities and obligations. As a result
of the merger, all Contracts issued by First Charter before the merger became
Contracts issued by Intramerica after the merger. Fortis Benefits Insurance
Company (Norwest Bank, Sixth and Marquette-MS0063, Minneapolis, MN 55479) owned
of record and beneficially 0.21% of the International Portfolio; they owned of
record and beneficially 0.05% of the Fund's total outstanding shares; and
Lincoln Benefit Life Insurance Company (134 South 13th Street, Lincoln, NE
68508) owned of record and beneficially 0.06% of the Bond Portfolio and 1.16% of
the Balanced Portfolio; they owned of record and beneficially 0.04% of the
Fund's total outstanding shares; and Mutual of America Life Insurance Company of
New York (666 5th Avenue, New York, NY 10103, a New York corporation) and its
subsidiary, American Life Insurance Company (666 5th Avenue, New York, NY
10103), owned of record and beneficially 47.43% of the Bond Portfolio, 65.04% of
the Capital Growth Portfolio and 29.55% of the International Portfolio; they
owned of record and beneficially 19.96% of the Fund's total outstanding shares;
and Paragon Life Insurance Company (100 South Brentwood, St. Louis, MO 63105)
owned of record and beneficially 0.01% of the Money Market Portfolio, 0.02% of
the Bond Portfolio, 0.07% of the Capital Growth Portfolio, 0.21% of the Balanced
Portfolio, 0.03% of the International Portfolio and 0.02% of the Growth and
Income Portfolio; they owned of record and beneficially 0.03% of the Fund's
total outstanding shares; and Providentmutual Life and Annuity Company of
America, (300 Continental Drive, Newark, DE 19713) owned of record and
beneficially 1.49% of the Bond Portfolio; they owned of record and beneficially
0.18% of the Fund's total outstanding shares; and Safeco Life Insurance
Companies (15411 N.E. 51st Street, Redmond, WA 98052), owned of record and
beneficially 5.49% of the Balanced Portfolio and 1.69% of the International
Portfolio; they owned of record and beneficially 0.55% of the Fund's total
outstanding shares; and The Union Central Life Insurance Company (1876 Waycross
Road, Cincinnati, OH 45240) owned of record and beneficially 28.25% of the Money
Market Portfolio, 4.02% of the Capital Growth Portfolio and 5.52% of the
International Portfolio; they owned of record and beneficially 15.52% of the
Fund's total outstanding shares; and United of Omaha Life Insurance Company
(Mutual of Omaha Plaza, Law Division, 3301 Dodge Street, Omaha, NE 68131) owned
of record and beneficially 0.15% of the Money Market Portfolio; they owned of
record and beneficially 0.07% of the Fund's total outstanding shares.
Shares entitle their holders to one vote per share; however, separate
votes will be taken by each Portfolio on matters affecting an individual
Portfolio. For example, a change in investment policy for the Money Market
Portfolio would be voted upon only by shareholders of the Money Market
Portfolio. Additionally, approval of the investment advisory agreement covering
a Portfolio is a matter to be determined separately by each Portfolio. Approval
by the shareholders of one Portfolio is effective as to that Portfolio. Shares
have noncumulative voting rights, which means that holders of more than 50% of
the shares voting for the election of Trustees can elect all Trustees and, in
such event, the holders of the remaining shares voting for the election of
Trustees will not be able to elect any person or persons as Trustees. Shares
have no preemptive or subscription rights, and are transferable.
Shareholders have certain rights, as set forth in the Declaration of
Trust of the Fund, including the right to call a meeting of shareholders for the
purpose of voting on the removal of one or more Trustees. Such removal can be
effected upon the action of two-thirds of the outstanding shares of beneficial
interest of the Fund.
41
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Shareholder and Trustee Liability
The Fund is an entity of the type commonly known as a "Massachusetts
business trust". Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the trust. The Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Fund. Notice
of such disclaimer will normally be given in each agreement, obligation, or
instrument entered into or executed by the Fund or the Trustees. The Declaration
of Trust provides for indemnification out of the Fund property of any
shareholder held personally liable for the obligations of the Fund. The
Declaration of Trust also provides that the Fund shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the Fund and satisfy any judgment thereon. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund itself would be unable to meet its obligations.
The Trustees believe that, in view of the above, the risk of personal liability
of shareholders is remote.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, 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.
ALLOCATION OF PORTFOLIO BROKERAGE
To the maximum extent feasible, the Adviser places orders for portfolio
transactions through its affiliate, the Distributor, which in turn places orders
on behalf of the Fund with the issuer, underwriters or other brokers and
dealers. The Distributor will receive no commissions, fees or other remuneration
for this service. Allocation of brokerage is supervised by the Adviser.
The Fund's purchases and sales of portfolio securities of the Money
Market Portfolio and the Bond Portfolio and of debt securities acquired for the
other Portfolios, are generally placed by the Adviser with primary market makers
for these securities on a net basis, without any brokerage commission being paid
by the Fund. Trading does, however, involve transaction costs. Transactions with
dealers serving as primary market makers reflect the spread between the bid and
asked prices. Purchases of underwritten issues may be made which will include an
underwriting fee paid to the underwriter. Transactions in equity securities
generally involve the payment of a brokerage commission.
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for any Portfolio is to obtain the most favorable net
results taking into account such factors as price, commission (negotiable in the
case of U.S. stock exchange transactions but which is generally fixed in the
case of foreign exchange transactions), if any, size of order, difficulty of
execution and skill required of the executing broker/dealer. Subject to the
foregoing, the Adviser may consider sales of variable life insurance policies
and variable annuity contracts for which the Fund is an investment option as a
factor in the selection of firms to execute portfolio transactions. The Adviser
seeks to evaluate the overall reasonableness of brokerage commissions paid
through the familiarity of the Distributor with commissions charged on
comparable transactions, as well as by comparing commissions paid by the Fund to
reported commissions paid by others. The Adviser reviews on a routine basis
commission rates, execution and settlement services performed, making internal
and external comparisons.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
brokers and dealers who supply market quotations to the custodian of the Fund
for valuation purposes, or who supply research, market and statistical
information to the Adviser. The term "research, market and statistical
information" includes advice as to the value of securities, the advisability of
investing in, purchasing or selling securities; and the availability of
securities or purchasers or sellers of securities; and furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts. The Adviser is not
authorized when placing portfolio transactions for the Fund to pay a brokerage
commission (to the extent applicable) in excess of that which another broker
might have charged for effecting the same transaction solely on account of the
receipt of research, market or statistical information. Subject to the
foregoing, the Adviser may consider sales of variable life insurance policies
and variable annuity contracts for which the Fund is an investment option, as a
factor in the selection of firms to execute portfolio transactions. Except for
42
<PAGE>
implementing the policy stated above, there is no intention to place portfolio
transactions with any particular brokers or dealers or groups thereof. In
effecting transactions in over-the-counter securities, orders are placed with
the principal market-makers for the securities being traded unless, in the
opinion of the Adviser, after exercising care, it appears that more favorable
results are available otherwise.
Subject also to obtaining the most favorable net results, the Adviser
may place brokerage transactions with Bear, Stearns & Co. A credit against the
custodian fee due to State Street Bank and Trust Company equal to one-half of
the commission on any such transaction will be given with respect to the
applicable Portfolio on any such transaction. During the fiscal year ended
December 31, 1994, no such credit was applied against the custodian fee.
Although certain research, market and statistical information from
brokers and dealers is useful to the Fund and the Adviser, it is the opinion of
the Adviser that such information is only supplementary to the Adviser's own
research effort, since the information must still be analyzed, weighed, and
reviewed by the Adviser's staff. Such information may be useful to the Adviser
in providing services to clients other than the Fund and not all such
information is used by the Adviser in connection with the Fund. Conversely, such
information provided to the Adviser by brokers and dealers through whom other
clients of the Adviser effect securities transactions may be useful to the
Adviser in providing services to the Fund.
In the years ended December 31, 1992, 1993 and 1994, the Fund paid
brokerage commissions of $468,796, $1,084,463 and $2,006,264, respectively. In
the year ended December 31, 1994, the Capital Growth Portfolio paid brokerage
commissions of $420,391. In the year ended December 31, 1994, $388,483 (92.47%)
of the total brokerage commissions paid by the Capital Growth Portfolio resulted
from orders placed, consistent with the policy of obtaining the most favorable
net results, with brokers and dealers who provided supplementary research
information to the Portfolios or the Adviser. The amount of such transactions
aggregated $208,703,545 for the Capital Growth Portfolio (93.13% of all
brokerage transactions). The balance of such brokerage was not allocated to any
particular broker or dealer with regard to the above-mentioned or other special
factors.
The Trustees will periodically review whether the recapture for the
benefit of the Fund of some portion of the brokerage commissions or similar fees
paid by the Fund on portfolio transactions is legally permissible and advisable.
No recapture arrangements are currently in effect.
PORTFOLIO TURNOVER
The average annual portfolio turnover rate for each Portfolio, i.e. the
ratio of the lesser of annual sales or purchases to the monthly average value of
the portfolio (excluding from both the numerator and the denominator securities
with maturities at the time of acquisition of one year or less), for the years
ended December 31, 1993 and 1994, respectively, was:
December 31,
1993 1994
Bond Portfolio 125.15% 96.55%
Capital Growth Portfolio 95.31 66.44
Under the above definition, the Money Market Portfolio will have no
portfolio turnover. Purchases and sales, for these Portfolios, are made for the
Portfolio whenever necessary, in management's opinion, to meet the Portfolio's
objective.
EXPERTS
The Financial Highlights of the Fund included in the prospectus and the
Financial Statements incorporated by reference in this Statement of Additional
Information have been audited by Coopers & Lybrand L.L.P., One Post Office
Square, Boston, Massachusetts 02109, independent accountants, and have been so
included or incorporated by reference in reliance upon the accompanying report
of said firm, which report is given upon their authority as experts in
accounting and auditing.
43
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COUNSEL
The firm of Dechert Price & Rhoads, Ten Post Office Square, Suite 1230,
Boston, Massachusetts 02109, is counsel for the Fund.
ADDITIONAL INFORMATION
The activities of the Fund are supervised by its Trustees, who are
elected by shareholders. Shareholders have one vote for each share held.
Fractional shares have fractional votes.
Portfolio securities of the Fund are held separately, pursuant to a
custodian agreement, by State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110, as custodian.
Scudder Fund Accounting Corporation ("SFAC"), Two International Place,
Boston, Massachusetts 02110-4103, a wholly-owned subsidiary of the Adviser,
computes net asset value for the Portfolios. Money Market Portfolio pays SFAC an
annual fee equal to 0.020% of the first $150 million of average daily net
assets, 0.0060% of such assets in excess of $150 million and 0.0035% of such
assets in excess of $1 billion, plus holding and transaction charges for this
service. Bond Portfolio and Capital Growth Portfolio each pay SFAC an annual fee
equal to 0.025% of the first $150 million of average daily net assets, 0.0075%
of such assets in excess of $150 million and 0.0045% of such assets in excess of
$1 billion, plus holding and transaction charges for this service.
Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts,
02107-2291, is the transfer and dividend paying agent for the Fund.
The Fund has a December 31 fiscal year end.
The name "Scudder Variable Life Investment Fund" is the designation of
the Trustees for the time being under a Declaration of Trust dated March 15,
1985, as amended from time to time, and all persons dealing with the Fund must
look solely to the property of the Fund for the enforcement of any claims
against the Fund as neither the Trustees, officers, agents or shareholders
assume any personal liability for obligations entered into on behalf of the
Fund. Upon the initial purchase of shares, the shareholder agrees to be bound by
the Fund's Declaration of Trust, as amended from time to time. The Declaration
of Trust is on file at the Massachusetts Secretary of State's Office in Boston,
Massachusetts.
The Fund's prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement which the Fund has
filed with the SEC under the Securities Act of 1933 and reference is hereby made
to the Registration Statement, and its amendments, for further information with
respect to the Fund and the securities offered hereby. The Registration
Statement, and its amendments, are available for inspection by the public at the
SEC in Washington, D.C.
FINANCIAL STATEMENTS
The financial statements, including the investment portfolio of Scudder
Variable Life Investment Fund, together with the Report of Independent
Accountants, Financial Highlights and notes to financial statements are
incorporated by reference and attached hereto in the Annual Report to the
Shareholders of the Fund dated December 31, 1994, and are hereby deemed to be a
part of this Statement of Additional Information.
44
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APPENDIX
Description of Bond Ratings
Moody's Investors Service, Inc.
Aaa: Bonds that 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 that 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 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 than in Aaa
securities.
A: Bonds that are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa: Bonds that 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 that 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.
B: Bonds that are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Standard & Poor's Corporation
AAA: Bonds rated AAA are highest grade debt obligations. This rating
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A: Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB: Bonds 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
debt in this category than in higher rated categories.
Bonds rated BB and B are regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
<PAGE>
indicates the least degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB: Bonds rated BB have less near-term vulnerability to default than
other speculative issues. However, they face 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. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB-rating.
B: Bonds rated B have a greater vulnerability to default but currently
have the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB-rating.
Description of Commercial Paper Ratings
Moody's Investors Service, Inc.
P-1: Moody's Commercial Paper ratings are opinions of the ability
of issuers to repay punctually senior debt obligations which
have an original maturity not exceeding one year. The
designation "Prime-1" or "P-1" indicates the highest quality
repayment capacity of the rated issue.
Standard & Poor's Corporation
A-1: Standard & Poor's Commercial Paper ratings are current
assessments of the likelihood of timely payment of debt
considered short-term in the relevant market. The A-1
designation indicates the degree of safety regarding timely
payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a
plus (+) sign designation.
<PAGE>
APPENDIX D
SCUDDER VARIABLE LIFE INVESTMENT FUND
Annual Report dated December 31, 1994
The Fund's annual report dated December 31, 1994, is incorporated by
reference to Appendix D of Part B of the initial registration statement on Form
N-14 for Separate Account 1 of Washington National Insurance Company and Scudder
Variable Life Investment Fund (File No. 33-62861), as filed with the Commission
on September 22, 1995, and will accompany the Statement of Additional
Information sent to Separate Account Voters.
<PAGE>
APPENDIX E
SCUDDER VARIABLE LIFE INVESTMENT FUND
Semi-Annual Report dated June 30, 1995
The Fund's semi-annual report dated June 30, 1995, is incorporated by
reference to Appendix E of the Part B of the initial registration statement on
Form N-14 for Separate Account 1 of Washington National Insurance Company and
Scudder Variable Life Investment Fund (File No. 33-62861), as filed with the
Commission on September 22, 1995, and will accompany the Statement of Additional
Information sent to Separate Account Voters.
<PAGE>
PART C
OTHER INFORMATION
<PAGE>
Item 15. Indemnification
---------------
a) Separate Account I of Washington National Insurance Company:
------------------------------------------------------------
Pursuant to an Indemnification Agreement, the members of the Board of
Directors and the officers of Separate Account I of Washington National
Insurance Company (the "Separate Account") are indemnified by Washington
National Insurance Company and Washington National Corporation against claims
and liabilities to which such persons may become subject by reason of having
acted as a member of such Board of Directors or an officer so long as the
following conditions are met:
1. The person acted in good faith and in a reasonable manner believed to
be in or not opposed to the best interests of the Separate Account;
and
2. If the proceeding was criminal, the person had no reasonable cause to
believe his or her conduct was unlawful.
In the absence of an adjudication that a member of the Board of Directors
or an officer committed no willful misfeasance, gross negligence or reckless
disregard of duty, the person will be indemnified only if a determination has
been made by a majority of the members of the Board of Directors not involved in
the proceeding, or by written opinion of independent counsel, that such
indemnification would be appropriate.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to members of the Board of Directors and
officers of the Separate Account pursuant to the provisions described in the
Indemnification Agreement, the Separate Account has been advised that in the
opinion of the SEC such indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than payment by the Separate
Account of expenses incurred or paid by a member of the Board of Directors,
officer or controlling person of the Separate Account in the successful defense
of any action, suit or proceeding) is asserted by such member of the Board of
Directors or officer in connection with the securities being registered, the
Separate Account will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(b) Scudder Variable Life Investment Fund:
--------------------------------------
A policy of insurance covering Scudder, Stevens & Clark, Inc., its
subsidiaries including Scudder Investor Services, Inc., and all of the
registered investment companies advised by Scudder, Stevens & Clark, Inc.
insures Trustees and officers of Scudder Variable Life Investment Fund (the
"Fund") and others against liability arising by reason of an alleged breach of
duty caused by any negligent act, error or accidental omission in the scope of
their duties.
Article IV, Sections 4.1 - 4.3 of the Fund's Declaration of Trust provide
as follows:
Section 4.1. No Personal Liability of Shareholders, Trustees,
etc. No Shareholder shall be subject to any personal liability
whatsoever to any Person in connection with Fund Property or
the acts, obligations or affairs of the Fund. No Trustee,
officer, employee or agent of the Fund shall be subject to any
personal liability whatsoever to any Person, other than to the
Fund or its Shareholders, in connection with Fund Property or
the affairs of the Fund, save only that arising from bad
faith, willful misfeasance, gross negligence or reckless
disregard of his duties with respect to such Person; and all
such Persons shall look solely to the Fund Property for
satisfaction of claims of any nature arising in connection
C-1
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with the affairs of the Fund. If any Shareholder, Trustee,
officer, employee, or agent, as such, of the Fund, is made a
party to any suit or proceeding to enforce any such liability
of the Fund, he shall not, on account thereof, be held to
any personal liability. The Fund shall indemnify and hold
each Shareholder harmless from and against all claims and
liabilities, to which such Shareholder may become subject
by reason of his being or having been a Shareholder, and
shall reimburse such Shareholder for all legal and other
expenses reasonably incurred by him in connection with
any such claim or liability. The rights accruing to a
Shareholder under this Section 4.1 shall not exclude any
other right to which such Shareholder may be lawfully
entitled, nor shall anything herein contained
restrict the right of the Fund to indemnify or reimburse a
Shareholder in any appropriate situation even though not
specifically provided herein.
Section 4.2. Non-Liability of Trustees, etc. No Trustee,
officer, employee or agent of the Fund shall be liable to the
Fund, its Shareholders, or to any Shareholder, Trustee,
officer, employee, or agent thereof 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 his own bad faith, willful misfeasance,
gross negligence or reckless disregard of the duties involved
in the conduct of his office.
Section 4.3. Mandatory Indemnification. (a) Subject to the
exceptions and limitations contained in paragraph (b) below:
(i) every person who is, or has been, a Trustee or
officer of the Fund shall be indemnified by the Fund
to the fullest extent permitted by law against all
liability and against all expenses reasonably
incurred or paid by him in connection with any claim,
action, suit or proceeding in which he becomes
involved as a party or otherwise by virtue of his
being or having been a Trustee or officer and against
amounts paid or incurred by him in the settlement
thereof;
(ii) the words "claim," "action," "suit," or
"proceeding" shall apply to all claims, actions,
suits or proceedings (civil, criminal, or other,
including appeals), actual or threatened; and the
words "liability" and "expenses" shall include,
without limitation, attorneys' fees, costs,
judgments, amounts paid in settlement, fines,
penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a
Trustee or officer:
(i) against any liability to the Fund or the
Shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office;
(ii) with respect to any matter as to which he shall
have been finally adjudicated not to have acted in
good faith in the reasonable belief that his action
was in the best interest of the Fund;
(iii) in the event of a settlement or other
disposition not involving a final adjudication as
provided in paragraph (b)(i) resulting in a payment
by a Trustee or officer, unless there has been a
determination that such Trustee or officer did not
engage in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties
involved in the conduct of his office;
(A) by the court or other body approving the
settlement or other disposition; or
C - 2
<PAGE>
(B) based upon a review of readily available
facts (as opposed to a full trial- type
inquiry) by (x) vote of a majority of the
Disinterested Trustees acting on the matter
(provided that a majority of the
Disinterested Trustees then in office act on
the matter) or (y) written opinion of
independent legal counsel.
(c) The rights of indemnification herein provided may be
insured against by policies maintained by the Fund, shall be
severable, shall not affect any other rights to which any
Trustee or officer may now or hereafter be entitled, shall
continue as to a person who has ceased to be such Trustee or
officer and shall inure to the benefit of the heirs,
executors, administrators and assigns of such a person.
Nothing contained herein shall affect any rights to
indemnification to which personnel of the Fund other than
Trustees and officers may be entitled by contract or otherwise
under law.
(d) Expenses of preparation and presentation of a defense to
any claim, action, suit, or proceeding of the character
described in paragraph (a) of this Section 4.3 shall be
advanced by the Fund prior to final disposition thereof upon
receipt of an undertaking by or on behalf of the recipient, to
repay such amount if it is ultimately determined that he is
not entitled to indemnification under this Section 4.3,
provided that either:
(i) such undertaking is secured by a surety bond or
some other appropriate security provided by the
recipient, or the Fund shall be insured against
losses arising out of any such advances; or
(ii) a majority of the Disinterested Trustees acting
on the matter (provided that a majority of the
Disinterested Trustees act on the matter) or an
independent legal counsel in a written opinion shall
determine, based upon a review of readily available
facts (as opposed to a full trial-type inquiry), that
there is reason to believe that the recipient
ultimately will be found entitled to indemnification.
As used in this Section 4.3, a "Disinterested Trustee" is one
who is not (i) an "Interested Person" of the Trust (including
anyone who has been exempted from being an "Interested Person"
by any rule, regulation or order of the Commission), or (ii)
involved in the claim, action, suit or proceeding.
(c) Participation Agreement:
The Participation Agreement (a Form of which is attached as Exhibit 5(b)
hereto) between Scudder Variable Life Investment Fund (the "Fund") and
Washington National Insurance Company ("Washington National") contains cross-
indemnification provisions pursuant to which: (a) Washington National agrees to
indemnify and hold harmless the Fund and each of its Trustees and officers and
each person, if any, who controls the Fund within the meaning of Section 15 of
the Securities Act of 1933 (the "Act") against any and all losses, claims,
damages, liabilities or litigation (including legal and other expenses), arising
out of the acquisition of any of the Fund's shares of beneficial interest
("Shares") by any person, to which the Fund or such Trustees, officers or
controlling person may become subject under the Act, under any other statute, at
common law or otherwise, which may be based on certain acts, statements, or
omissions; and (b) the Fund agrees to indemnify and hold harmless Washington
National and each of its Directors and officers and each person, if any, who
controls Washington National within the meaning of Section 15 of the Act against
any and all losses, claims, damages, liabilities or litigation (including legal
and other expenses) to which it or such Directors, officers or controlling
person may become subject under the Act, under any other statute, at common law
or otherwise, arising out of the acquisition of any Shares by any person which
may be based on certain acts, statements, or omissions.
C - 3
<PAGE>
(d) Reimbursement Agreement:
The Reimbursement Agreement (a Form of which is attached as Exhibit 17(c)
hereto) between Scudder, Stevens, & Clark, Inc. ("SS&C") and Washington National
Insurance Company ("Washington National") contains cross-indemnification
provisions pursuant to which: (a) Washington National agrees to indemnify and
hold harmless SS&C and each of its Directors and officers and each person, if
any, who controls SS&C within the meaning of Section 15 of the Securities Act of
1933 (the "Act") or any person, controlled by or under common control with SS&C
against any and all losses, claims, damages, liabilities or litigation
(including legal and other expenses) to which SS&C or such Directors, officers
or controlling person may become subject under the Act, under any other statute,
at common law or otherwise, arising out of the acquisition of any of the Fund's
shares of beneficial interest ("Shares") by any person which may be based on
certain acts, statements, or omissions; (b) SS&C agrees to indemnify and hold
harmless Washington National and each of its Directors and officers and each
person, if any, who controls Washington National within the meaning of Section
15 of the Act against any and all losses, claims, damages, liabilities or
litigation (including legal and other expenses) to which it or such Directors,
officers or controlling person may become subject under the Act, under any other
statute, at common law or otherwise, arising out of the acquisition of any
Shares by any person which may be based on certain acts, statements, or
omissions; and (c) SS&C agrees to indemnify and hold harmless Washington
National and each of its Directors and officers against any and all losses,
claims, damages, liabilities or litigation arising from the imposition of
additional federal income taxes on Washington National or any policyholder under
certain circumstances.
Item 16. Exhibits.
(1) (a) Resolution of Executive Committee of Board of Directors of
Washington National Insurance Company establishing Separate
Account I of Washington National Insurance Company a1/
(b) (i) Declaration of Trust of Scudder Variable Life
Investment Fund dated March 15, 1985 b1/
(ii) Amendment to the Declaration of Trust of Scudder
Variable Life Investment Fund dated March 10, 1988
b7/
(iii) Establishment and Designation of Series of Shares of
Beneficial Interest, without Par Value b1/
(iv) Establishment and Designation of Series of Shares of
Beneficial Interest, without Par Value b3/
(v) Establishment and Designation of Series of Shares of
Beneficial Interest, without Par Value, with respect
to the Managed International Portfolio b5/
(vi) Amended Establishment and Designation of Series of
Shares of Beneficial Interest, without Par Value
dated April 15, 1988 b7/
(vii) Amended Establishment and Designation of Series of
Shares of Beneficial Interest, without Par Value
dated April 30, 1993 b9/
(viii) Abolition of Series b9/
C - 4
<PAGE>
(ix) Amended Establishment and Designation of Series of
Shares of Beneficial Interest, without Par Value,
with respect to the Growth and Income Portfolio
dated February 11, 1994 b10/
(2) (a) Rules and Regulations of Separate Account I of Washington
National Insurance Company, as amended a2/
(b) (i) By-Laws of Scudder Variable Life Investment Fund
dated March 15, 1985 b1/
(ii) Amendment to the By-Laws of Scudder Variable Life
Investment Fund dated November 13, 1991 b8/
(3) (a) (Not applicable to Separate Account I of Washington National
Insurance Company)
(b) (Not applicable to Scudder Variable Life Investment Fund)
(4) Form of Asset Transfer Agreement and Plan of Reorganization, (incorporated
by reference from Appendix A to the Proxy Statement/Prospectus forming a
part of this Registration Statement*)
(5) (a) (i) Non Qualified Individual Variable Annuity Contract a3/
(ii) Tax Qualified Individual Variable Annuity Contract a3/
(iii) Non Qualified Group Allocated Variable Annuity
Contract a3/
(iv) Certificate for Non Qualified Group Allocated Variable
Annuity Contract a3/
(v) Tax Qualified Group Allocated Variable Annuity
Contract a3/
(vi) Certificate for Tax Qualified Group Allocated Variable
Annuity Contract a3/
(vii) Tax Qualified Group Unallocated Variable Annuity
Contract a3/
(viii) Certificate for Tax Qualified Group Unallocated
Variable Annuity Contract a3/
(ix) Total and Permanent Disability Benefit Rider on Form
ED30-1 for Non Qualified and Tax Qualified Individual
Variable Annuity Contracts a2/
(x) Tax Qualification Amendment on Form V32-1 for Tax
Qualified Individual Variable Annuity Contracts a2/
(xi) Tax Qualification Amendment on Form V33-1 for Tax
Qualified Individual Variable Annuity Contract a3/
(xii) Individual Retirement Annuity Rider on Form OFA7-2 for
Tax Qualified Individual Variable Annuity Contract a2/
(xiii) Tax Qualification Amendment on Form V36-1 for Tax
Qualified Group Variable Annuity Contract a2/
(xiv) Tax Qualification Amendment on Form V42-1 for Tax
Qualified Group Variable Annuity Contract a3/
(xv) Amendment for Contracts under Texas Optional
Retirement Program a3/
C - 5
<PAGE>
(xvi) Distribution on Death of the Contract Owner Rider on
Form ED 188 a7/
(xvii) Tax Qualification Amendment on Form V38-1 a7/
(xviii) Tax Qualified Amendment (Joint and Survivor Annuity)
on Form OFA20-1 a7/
(xix) Amendment to Contracts regarding assignment and option
restriction on Form TDA-V32-1 a7/
(xx) Individual Retirement Annuity Rider on Form V116-2 a7/
(xxi) Annuity Loan Rider for certain states on Form ED224-1
a8/
(xxii) Annuity Loan Rider for Wisconsin only on Form ED224A
a8/
(b) Form of Participation Agreement between Scudder Variable Life
Investment Fund and Washington National Insurance Company**
(6) (a) (i) Investment Management Agreement dated July 26, 1983
between Washington National Insurance Company and
Separate Account I of Washington National
Insurance Company a2/
(ii) Investment Sub-Advisory Agreement, effective January
1, 1994, between NBD Bank and Washington National
Insurance Company a12/
(b) (i) Investment Advisory Agreement between Scudder Variable
Life Investment Fund and Scudder, Stevens & Clark Ltd.
dated November 14, 1986 b4/
(ii) Investment Advisory Agreement between the Registrant
and Scudder, Stevens & Clark, Inc. with respect to the
Managed International Portfolio b6/
(iii) Investment Advisory Agreement between the Registrant
and Scudder, Stevens & Clark, Inc. with respect to the
Growth and Income Portfolio dated May 1, 1994 b11/
(7) (a) (i) Distribution Agreement dated July 26, 1983 between
Separate Account I of Washington National Insurance
Company and Washington National Equity Company a2/
(ii) Agreement dated July 26, 1983 between Washington
National Insurance Company and Washington National
Equity Company a2/
(iii) Form of Agent Agreement among Washington National
Insurance Company, Washington National Equity Company
and agents a2/
(b) (i) Underwriting Agreement between Scudder Variable Life
Investment Fund and Scudder Investor Services, Inc.,
dated July 12, 1985 b2/
(ii) Participating Contract and Policy Agreement between
Scudder, Investor Services, Inc. and Participating
Insurance Companies b2/
(iii) Participating Contract and Policy Agreement between
Scudder Investor Services, Inc. and Carillon
Investments, Inc. dated February 18, 1992 b9/
C - 6
<PAGE>
(iv) Participating Contract and Policy Agreement between
Scudder Investor Services, Inc. and AEtna Life
Insurance and Annuity Company dated April 27, 1992 b9/
(v) Participating Contract and Policy Agreement between
Scudder Investor Services, Inc. and PNMR Securities,
Inc. dated December 1, 1992 b9/
(vi) Prototype Participating Contract and Policy Agreement
b10/
(8) (a) (Not applicable to Separate Account I of Washington National
Insurance Company)
(b) (Not applicable to Scudder Variable Life Investment Fund)
(9) (a) Custody Agreement dated May 1991 among Washington National
Insurance Company, Separate Account I of Washington National
Insurance Company and Continental Bank, N.A. a11/
(b) (i) Custodian Contract between Scudder Variable Life
Investment Fund and State Street Bank and Trust
Company dated August 22, 1985 b2/
(ii) Fee schedule for Exhibit 9(b)(i) b7/
(iii) Amendment to the Custodian Contract dated February
17, 1987 b7/
(iv) Amendment to the Custodian Contract dated
February 17, 1987 b7/
(v) Amendment to the Custodian Contract dated August
13, 1987 b7/
(vi) Amendment to the Custodian Contract dated August
12, 1988 b7/
(vii) Amendment to the Custodian Contract dated August
9, 1991 b8/
(viii) Fee schedule for Exhibit 9(b)(i) b11/
(10) (a) (Not applicable to Separate Account I of Washington National
Insurance Company)
(b) (Not applicable to Scudder Variable Life Investment Fund)
(11) (a) Opinion of counsel and consent to its use as to the legality
of the securities being registered by Separate Account I of
Washington National Insurance Company**
(b) Opinion of counsel and consent to its use as to the legality
of the securities being registered by Scudder Variable Life
Investment Fund (to be filed with the Rule 24f-2 Notice of
Scudder Variable Life Investment Fund)
(12) Opinion of counsel and consent to its use, supporting the tax matters
and consequences to Contract Owners discussed in Part A of this
registration statement**
(13) (a) (i) Administrative Services Agreement dated July 26,
1983 between Separate Account I of Washington
National Insurance Company and Washington National
Insurance Company a2/
(ii) Indemnification Agreement dated July 20, 1983 for
Directors and Officers of Separate Account I of
Washington National Insurance Company a2/
C - 7
<PAGE>
(iii) Service Agreement dated October 21, 1983 between
Washington National Insurance Company and DST
Systems, Inc. a3/
(iv) Recordkeeping Agency Agreement between Washington
National Insurance Company and Investors Fiduciary
Trust Company a2/
(v) Service Agreement dated February 26, 1990 between
Washington National Insurance Company and
Financial Administrative Services, Inc. a10/
(b) (i) Transfer, Dividend Disbursing and Plan Agency
Agreement between Scudder Variable Life Investment
Fund and State Street Bank and Trust Company dated
July 12, 1985 b2/
(ii) Fee schedule for Exhibit 13(b)(i) b2/
(iii) Transfer Agency and Service Agreement between
Scudder Variable Life Investment Fund and Scudder
Service Corporation dated April 6, 1992 b9/
(iv) Participation Agreement between the Registrant and
Security Equity Life Insurance Company dated
September 10, 1985 b2/
(v) Amendment to Participation Agreement between the
Registrant and Security Equity Life Insurance
Company dated July 21, 1987 b6/
(vi) Participation Agreement between the Registrant
and Charter National Life Insurance Company dated
June 9, 1986 b6/
(vii) Amendment to Participation Agreement between the
Registrant and Charter National Life Insurance
Company dated July 20, 1987 b6/
(viii) Amendment to Participation Agreement between the
Registrant and Charter National Life Insurance
Company dated May 2, 1988 b7/
(ix) Amendment to Participation Agreement between the
Registrant and Charter National Life Insurance
Company dated June 30, 1991 b8/
(x) Participation Agreement between the Registrant and
The Union Central Life Insurance Company dated
February 18, 1992 b9/
(xi) Participation Agreement between the Registrant and
AEtna Life Insurance and Annuity Company dated
April 27, 1992 b9/
(xii) Participation Agreement between the Registrant and
Safeco Life Insurance Companies dated December 31,
1992 b9/
(xiii) Prototype Participation Agreement - Form A b10/
(xiv) Prototype Participation Agreement - Form B b10/
(xv) First Amendment to the Fund Participation
Agreement between AEtna Life Insurance and Annuity
Company and the Fund dated February 19, 1993 b10/
(xvi) Second Amendment to the Fund Participation
Agreement between AEtna Life Insurance and Annuity
Company and the Fund dated August 13, 1993 b10/
C - 8
<PAGE>
(xvii) First Amendment to the Participation Agreement
between Mutual of America Life Insurance Company,
The American Life Insurance Company of New York
and the Fund dated August 13, 1993. b10/
(xviii) First Amendment to the Participation Agreement
between The Union Central Life Insurance Company
and the Fund dated September 30, 1993. b10/
(xix) Accounting Services Agreement between Scudder
Variable Life Investment Fund and Scudder Investor
Services, Inc. dated August 1, 1989 b11/
(xx) Fund Accounting Services Agreement between Scudder
Variable Life Investment Fund, on behalf of the
Money Market Portfolio, and Scudder Fund
Accounting Corporation dated October 1, 1994 b11/
(xxi) Fund Accounting Services Agreement between Scudder
Variable Life Investment Fund, on behalf of the
Bond Portfolio, and Scudder Fund Accounting
Corporation dated October 1, 1994 b11/
(xxii) Fund Accounting Services Agreement between the
Registrant, on behalf of the Balanced Portfolio,
and Scudder Fund Accounting Corporation dated
October 1, 1994 b11/
(xxiii) Fund Accounting Services Agreement between the
Registrant, on behalf of the Growth and Income
Portfolio, and Scudder Fund Accounting Corporation
dated October 1, 1994 b11/
(xxiv) Fund Accounting Services Agreement between Scudder
Variable Life Investment Fund, on behalf of the
Capital Growth Portfolio, and Scudder Fund
Accounting Corporation dated October 1, 1994 b11/
(xxv) Fund Accounting Services Agreement between the
Registrant, on behalf of the International
Portfolio, and Scudder Fund Accounting Corporation
dated October 1, 1994 b11/
(14) (a) Consent of Ernst & Young LLP**
(b) Consent of Coopers & Lybrand L.L.P.**
(15) (Not applicable)
(16) (a) Powers of Attorney executed by certain Directors of Separate
Account I of Washington National Insurance Company*
(b) Powers of Attorney executed by certain Trustees of Scudder
Variable Life Investment Fund**
(17) (a) Copy of earlier declaration by Separate Account I of Washington
National Insurance Company registering an indefinite number of
securities pursuant to Rule 24f-2 under the Investment Company
Act of 1940**
(b) Copy of earlier declaration by Scudder Variable Life Investment
Fund registering an indefinite amount of securities pursuant to
Rule 24f-2 under the Investment Company Act of 1940 b12/
(c) Form of Reimbursement Agreement between Scudder, Stevens & Clark,
Inc. and Washington National Insurance Company**
C - 9
<PAGE>
- -------------
* Filed herewith.
** Incorporated herein by reference to the initial registration statement on
Form N-14 for Separate Account I of Washington National Insurance Company
and Scudder Variable Life Investment Fund (File 33-62861), filed with the
Commission on September 22, 1995.
a1/ Incorporated herein by reference to the initial registration statement on
Form N-3 for Separate Account I of Washington National Insurance Company (File
No. 2-81129), filed with the Commission on December 30, 1982.
a2/ Incorporated herein by reference to Pre-Effective Amendment No. 1 to the
registration statement on Form N-3 for Separate Account I of Washington National
Insurance Company (File No. 2-81129), filed with the Commission on July 29,
1983.
a3/ Incorporated herein by reference to Pre-Effective Amendment No. 2 to the
registration statement on Form N-3 for Separate Account I of Washington National
Insurance Company (File No. 2-81129), filed with the Commission on October 31,
1983.
a4/ Incorporated herein by reference to Post-Effective Amendment No. 2 to the
registration statement on Form N-3 for Separate Account I of Washington National
Insurance Company (File No. 2-81129), filed with the Commission on May 1, 1985.
a5/ Incorporated herein by reference to Post-Effective Amendment No. 3 to the
registration statement on Form N-3 for Separate Account I of Washington National
Insurance Company (File No. 2-81129), filed with the Commission on May 20, 1985.
a6/ Incorporated herein by reference to Post-Effective Amendment No. 5 to the
registration statement on Form N-3 for Separate Account I of Washington National
Insurance Company (File No. 2-81129), filed with the Commission on March 2,
1987.
a7/ Incorporated herein by reference to Post-Effective Amendment No. 6 to the
registration statement on Form N-3 for Separate Account I of Washington National
Insurance Company (File No. 2-81129), filed with the Commission on April 22,
1987.
a8/ Incorporated herein by reference to Post-Effective Amendment No. 7 to the
registration statement on Form N-3 for Separate Account I of Washington National
Insurance Company (File No. 2-81129), filed with the Commission on April 29,
1988.
a9/ Incorporated herein by reference to Post-Effective Amendment No. 10 to the
registration statement on Form N-3 for Separate Account I of Washington National
Insurance Company (File No. 2-81129), filed with the Commission on April 27,
1990.
a10/ Incorporated herein by reference to Post-Effective Amendment No. 11 to the
registration statement on Form N-3 for Separate Account I of Washington National
Insurance Company (File No. 2-81129), filed with the Commission on April 29,
1991.
a11/ Incorporated herein by reference to Post-Effective Amendment No. 12 to the
registration statement on Form N-3 for Separate Account I of Washington National
Insurance Company (File No. 2-81129), filed with the Commission on April 30,
1992.
a12/ Incorporated herein by reference to Post-Effective Amendment No. 14 to the
registration statement on Form N-3 for Separate Account I of Washington National
Insurance Company (File No. 2-81129), filed with the Commission on April 26,
1994.
a13/ Incorporated herein by reference to Post-Effective Amendment No. 15 to the
registration statement on Form N-3 for Separate Account I of Washington National
Insurance Company (File No. 2-81129), filed with the Commission on April 25,
1995.
C - 10
<PAGE>
b1/ Incorporated herein by reference to Pre-Effective Amendment No. 4 to the
registration statement on Form N-1A for Scudder Variable Life Investment Fund
(File No. 2-96461), filed with the Commission on July 11, 1985.
b2/ Incorporated herein by reference to Post-Effective Amendment No. 1 to the
registration statement on Form N-1A for Scudder Variable Life Investment Fund
(File No. 2-96461), filed with the Commission on January 2, 1986.
b3/ Incorporated herein by reference to Post-Effective Amendment No. 2 to the
registration statement on Form N-1A for Scudder Variable Life Investment Fund
(File No. 2-96461) filed with the Commission on March 3, 1986.
b4/ Incorporated herein by reference to Post-Effective Amendment No. 5 to the
registration statement on Form N-1A for Scudder Variable Life Investment Fund
(File No. 2-96461), filed with the Commission on January 30, 1987.
b5/ Incorporated herein by reference to Post-Effective Amendment No. 7 to the
registration statement on Form N-1A for Scudder Variable Life Investment Fund
(File No. 2-96461), filed with Commission on April 30, 1987.
b6/ Incorporated herein by reference to Post-Effective Amendment No. 8 to the
registration statement on Form N-1A for Scudder Variable Life Investment Fund
(File No. 2-96461), filed with Commission on March 4, 1988.
b7/ Incorporated herein by reference to Post-Effective Amendment No. 9 to the
registration statement on Form N-1A for Scudder Variable Life Investment Fund
(File No. 2-96461), filed with the Commission on March 3, 1989.
b8/ Incorporated herein by reference to Post-Effective Amendment No. 12 to the
registration statement on Form N-1A for Scudder Variable Life Investment Fund
(File No. 2-96461), filed with the Commission on March 2, 1992.
b9/ Incorporated herein by reference to Post-Effective Amendment No. 13 to the
registration statement on Form N-1A for Scudder Variable Life Investment Fund
(File No. 2-96461), filed with the Commission on March 2, 1993.
b10/ Incorporated herein by reference to Post-Effective Amendment No. 14 to the
registration statement on Form N-1A for Scudder Variable Life Investment Fund
(File No. 2-96461), filed with the Commission on March 2, 1994.
b11/ Incorporated herein by reference to Post-Effective Amendment No. 15 to the
registration statement on Form N-1A for Scudder Variable Life Investment Fund
(File No. 2-96461), filed with the Commission on November 1, 1994.
b12/ Incorporated herein by reference to the initial registration statement on
Form N-14 for Scudder Variable Life Investment Fund (File No. 33-45797), filed
with the Commission on February 18, 1992.
C - 11
<PAGE>
Item 17. Undertakings.
(1) The undersigned registrant agrees that prior to any public reoffering of the
securities registered through the use of a prospectus which is a part of this
registration statement by any person or party who is deemed to be an underwriter
within the meaning of Rule 145(c) of the Securities Act [17 CFR 230.145c], the
reoffering prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The undersigned registrant agrees that every prospectus that is filed under
paragraph (1) above will be filed as a part of an amendment to the registration
statement and will not be used until the amendment is effective, and that, in
determining any liability under the 1933 Act, each post-effective amendment
shall be deemed to be a new registration statement for the securities offered
therein, and the offering of the securities at that time shall be deemed to be
the initial bona fide offering of them.
C - 12
<PAGE>
SIGNATURES
----------
As required by the Securities Act of 1933, this registration statement has
been signed on behalf of Separate Account I of Washington National Insurance
Company in the Village of Lincolnshire and State of Illinois on the 29 day of
November, 1995.
SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
By: /s/ Craig R. Edwards
------------------------
Craig R. Edwards, Secretary and Counsel
As required by the Securities Act of 1933, this registration statement has
been signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
- --------- ----- ----
_________________________* Chairman of the Board of ________________
James E. Dresmal Directors and Director
(Principal Executive,
Financial, and Accounting
Officer)
_________________________* Director ________________
Harry C. Benford, III
_________________________* Director ________________
George J. Cyrus, Jr.
/s/ Barbara Cremin Director November 29, 1995
_________________________
Barbara A. Cremin
_________________________* Director ________________
William P. Zeh
* By: /s/ Barbara Cremin
------------------------
Barbara A. Cremin, Attorney-in-Fact and Agent, on November 29, 1995,
pursuant to the Power of Attorney filed as Exhibit 16(a) hereto.
<PAGE>
SIGNATURES
----------
As required by the Securities Act of 1933, the Registrant has duly caused
this amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston and the
Commonwealth of Massachusetts on the 28th day of November, 1995.
SCUDDER VARIABLE LIFE INVESTMENT FUND
By /s/Thomas F. McDonough
----------------------
Thomas F. McDonough, Secretary
As required by the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/David B. Watts
- --------------
David B. Watts* President (Principal November 28, 1995
Executive Officer)
and Trustee
/s/Daniel Pierce
- -------------
Daniel Pierce* Vice President and November 28, 1995
Trustee
/s/Dr. Kenneth Black, Jr.
- ----------------------
Dr. Kenneth Black, Jr.* Trustee November 28, 1995
/s/Peter B. Freeman
- ----------------
Peter B. Freeman* Trustee November 28, 1995
/s/Dr. J. D. Hammond
- -----------------
Dr. J. D. Hammond* Trustee November 28, 1995
- --------------------
Rosita P. Chang Trustee
/s/Pamela A. McGrath
- -----------------
Pamela A. McGrath Treasurer (Principal November 28, 1995
Financial and
Accounting Officer)
and Vice President
* By: /s/Thomas F. McDonough
-------------------
Thomas F. McDonough, Attorney-in-Fact and Agent, on November 28, 1995,
pursuant to the Power of Attorney previously filed.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
<C> <C> <C>
Exhibit
Number Page
(16) (a) Powers of Attorney executed by certain Directors of Separate Acount I of Washington
National Insurance Company
</TABLE>
Exhibit (16)(a)
POWER OF ATTORNEY
The undersigned Director of Separate Account I of Washington National
Insurance Company, a "separate account" under Illinois insurance law (the
"Separate Account"), hereby constitutes and appoints James E. Dresmal, Barbara
A. Cremin, and Craig R. Edwards and each of them (with full power to each of
them to act alone), his true and lawful attorney-in-fact and agent, with full
power of substitution to each, for him and on his behalf and in his name, place,
and stead, to execute and file any of the documents referred to below relating
to: (i) registration under the Securities Act of 1933, as amended (the "1933
Act"), of the variable annuity contracts issued by Washington National Insurance
Company and funded by the Separate Account; (ii) registration under the
Investment Company Act of 1940, as amended (the "1940 Act"), of the Separate
Account; or (iii) registration under the 1933 Act of a set of transactions
whereby the investment company classification of the Separate Account under the
1940 Act will be changed from a management company to a unit investment trust.
Such documents shall include, but shall not be limited to, registration
statements on any form or forms under the 1933 Act or the 1940 Act, and any and
all amendments and supplements thereto, with all exhibits and all instruments
necessary or appropriate in connection therewith, each of said attorneys-in-fact
and agents and his or her substitutes being empowered to act with or without the
others or other, and to have full power and authority to do or cause to be done
in the name and on behalf of the undersigned each and every act and thing
requisite and necessary or appropriate with respect thereto to be done in and
about the premises in order to effectuate the same, as fully to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, may do or
cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand, this
28th day of November, 1995.
/s/James E. Dresmal
---------------------------------------
James E. Dresmal
<PAGE>
POWER OF ATTORNEY
The undersigned Director of Separate Account I of Washington National
Insurance Company, a "separate account" under Illinois insurance law (the
"Separate Account"), hereby constitutes and appoints James E. Dresmal, Barbara
A. Cremin, and Craig R. Edwards and each of them (with full power to each of
them to act alone), his true and lawful attorney-in-fact and agent, with full
power of substitution to each, for him and on his behalf and in his name, place,
and stead, to execute and file any of the documents referred to below relating
to: (i) registration under the Securities Act of 1933, as amended (the "1933
Act"), of the variable annuity contracts issued by Washington National Insurance
Company and funded by the Separate Account; (ii) registration under the
Investment Company Act of 1940, as amended (the "1940 Act"), of the Separate
Account; or (iii) registration under the 1933 Act of a set of transactions
whereby the investment company classification of the Separate Account under the
1940 Act will be changed from a management company to a unit investment trust.
Such documents shall include, but shall not be limited to, registration
statements on any form or forms under the 1933 Act or the 1940 Act, and any and
all amendments and supplements thereto, with all exhibits and all instruments
necessary or appropriate in connection therewith, each of said attorneys-in-fact
and agents and his or her substitutes being empowered to act with or without the
others or other, and to have full power and authority to do or cause to be done
in the name and on behalf of the undersigned each and every act and thing
requisite and necessary or appropriate with respect thereto to be done in and
about the premises in order to effectuate the same, as fully to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, may do or
cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand, this
21st day of November, 1995.
/s/Harry C. Benford, III
---------------------------------------
Harry C. Benford, III
<PAGE>
POWER OF ATTORNEY
The undersigned Director of Separate Account I of Washington National
Insurance Company, a "separate account" under Illinois insurance law (the
"Separate Account"), hereby constitutes and appoints James E. Dresmal, Barbara
A. Cremin, and Craig R. Edwards and each of them (with full power to each of
them to act alone), his true and lawful attorney-in-fact and agent, with full
power of substitution to each, for him and on his behalf and in his name, place,
and stead, to execute and file any of the documents referred to below relating
to: (i) registration under the Securities Act of 1933, as amended (the "1933
Act"), of the variable annuity contracts issued by Washington National Insurance
Company and funded by the Separate Account; (ii) registration under the
Investment Company Act of 1940, as amended (the "1940 Act"), of the Separate
Account; or (iii) registration under the 1933 Act of a set of transactions
whereby the investment company classification of the Separate Account under the
1940 Act will be changed from a management company to a unit investment trust.
Such documents shall include, but shall not be limited to, registration
statements on any form or forms under the 1933 Act or the 1940 Act, and any and
all amendments and supplements thereto, with all exhibits and all instruments
necessary or appropriate in connection therewith, each of said attorneys-in-fact
and agents and his or her substitutes being empowered to act with or without the
others or other, and to have full power and authority to do or cause to be done
in the name and on behalf of the undersigned each and every act and thing
requisite and necessary or appropriate with respect thereto to be done in and
about the premises in order to effectuate the same, as fully to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, may do or
cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand, this
22nd day of November, 1995.
/s/George J. Cyrus, Jr.
---------------------------------------
George J. Cyrus, Jr.
<PAGE>
POWER OF ATTORNEY
The undersigned Director of Separate Account I of Washington National
Insurance Company, a "separate account" under Illinois insurance law (the
"Separate Account"), hereby constitutes and appoints James E. Dresmal, Barbara
A. Cremin, and Craig R. Edwards and each of them (with full power to each of
them to act alone), his true and lawful attorney-in-fact and agent, with full
power of substitution to each, for him and on his behalf and in his name, place,
and stead, to execute and file any of the documents referred to below relating
to: (i) registration under the Securities Act of 1933, as amended (the "1933
Act"), of the variable annuity contracts issued by Washington National Insurance
Company and funded by the Separate Account; (ii) registration under the
Investment Company Act of 1940, as amended (the "1940 Act"), of the Separate
Account; or (iii) registration under the 1933 Act of a set of transactions
whereby the investment company classification of the Separate Account under the
1940 Act will be changed from a management company to a unit investment trust.
Such documents shall include, but shall not be limited to, registration
statements on any form or forms under the 1933 Act or the 1940 Act, and any and
all amendments and supplements thereto, with all exhibits and all instruments
necessary or appropriate in connection therewith, each of said attorneys-in-fact
and agents and his or her substitutes being empowered to act with or without the
others or other, and to have full power and authority to do or cause to be done
in the name and on behalf of the undersigned each and every act and thing
requisite and necessary or appropriate with respect thereto to be done in and
about the premises in order to effectuate the same, as fully to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, may do or
cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand, this
28th day of November, 1995.
/s/Barbara A. Cremin
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Barbara A. Cremin
<PAGE>
POWER OF ATTORNEY
The undersigned Director of Separate Account I of Washington National
Insurance Company, a "separate account" under Illinois insurance law (the
"Separate Account"), hereby constitutes and appoints James E. Dresmal, Barbara
A. Cremin, and Craig R. Edwards and each of them (with full power to each of
them to act alone), his true and lawful attorney-in-fact and agent, with full
power of substitution to each, for him and on his behalf and in his name, place,
and stead, to execute and file any of the documents referred to below relating
to: (i) registration under the Securities Act of 1933, as amended (the "1933
Act"), of the variable annuity contracts issued by Washington National Insurance
Company and funded by the Separate Account; (ii) registration under the
Investment Company Act of 1940, as amended (the "1940 Act"), of the Separate
Account; or (iii) registration under the 1933 Act of a set of transactions
whereby the investment company classification of the Separate Account under the
1940 Act will be changed from a management company to a unit investment trust.
Such documents shall include, but shall not be limited to, registration
statements on any form or forms under the 1933 Act or the 1940 Act, and any and
all amendments and supplements thereto, with all exhibits and all instruments
necessary or appropriate in connection therewith, each of said attorneys-in-fact
and agents and his or her substitutes being empowered to act with or without the
others or other, and to have full power and authority to do or cause to be done
in the name and on behalf of the undersigned each and every act and thing
requisite and necessary or appropriate with respect thereto to be done in and
about the premises in order to effectuate the same, as fully to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, may do or
cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand, this
21st day of November, 1995.
/s/William P. Zeh
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William P. Zeh
