Separate Account I of Washington National Insurance Company
300 Tower Parkway
Lincolnshire, Illinois 60069-3665
February 12, 1996
Dear WN PLAN V Variable Annuity Contract Owner:
Washington National Insurance Company is pleased to announce
improvements planned for your WN PLAN V 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:
o experienced mutual fund management
o enhanced diversification of investments
o immediate reduction in fees
o 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 you 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 March 12, 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 1:30 p.m. Central Time, on Tuesday, March 12, 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.
The proposed Transactions are discussed in detail in the remainder of the Proxy
Statement/Prospectus dated February 1, 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
Craig R. Edwards, Secretary
Separate Account I of Washington
National Insurance Company
Lincolnshire, Illinois
February 12, 1996
<PAGE>
February 1, 1996
Proxy Statement of
SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
Prospectus of and SEPARATE ACCOUNT I OF
SCUDDER VARIABLE LIFE INVESTMENT FUND WASHINGTON NATIONAL INSURANCE COMPANY
Two International Place 300 Tower Parkway
Boston, Massachusetts 02110-4103 Lincolnshire, Illinois 60069-3665
(617) 295-1000 (847) 793-3000
The variable component of your WN Plan V 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.
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 February 1, 1996, relating
to matters covered in this Proxy Statement/Prospectus has been filed with the
U.S. 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 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.
- -------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE U.S. SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISION, NOR HAS THE U.S.
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.
- -------------------------------------------------------------------------------
<PAGE>
Proxy Statement/Prospectus
TABLE OF CONTENTS
Page
----
GENERAL INFORMATION REGARDING PROXY SOLICITATION............................ 3
SYNOPSIS ................................................................... 4
PRINCIPAL RISK FACTORS...................................................... 4
THE PROPOSED TRANSACTIONS................................................... 5
DESCRIPTION OF THE TRANSACTIONS.................................... 5
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES................... 6
COMPARISON OF FEES AND EXPENSES.................................... 12
REASONS FOR THE TRANSACTIONS....................................... 17
ACTUAL AND PRO FORMA CAPITALIZATION................................ 19
COMPARATIVE PERFORMANCE............................................ 19
INFORMATION ON THE SEPARATE ACCOUNT AND THE FUND............................ 21
MANAGEMENT OF THE SEPARATE ACCOUNT AND THE FUND.................... 21
ORGANIZATION AND OPERATION OF THE FUND............................. 22
Characteristics of the Fund's Shares...................... 22
Dividends, Distributions, and Taxes....................... 23
Voting of the Fund's Shares............................... 24
Certain Ownership Interests............................... 25
DIVISIONS OF THE SEPARATE ACCOUNT AND THE FUND..................... 25
Sub-Accounts of the Separate Account...................... 25
Portfolios of the Fund.................................... 26
SALE OF THE CONTRACTS AND FUND SHARES.............................. 26
DEDUCTIONS, CHARGES, FEES, AND EXPENSES............................ 27
Deductions and Charges Under the Contracts................ 27
Fees and Expenses of the Fund............................. 28
SUPPLEMENTARY FINANCIAL INFORMATION................................ 29
Condensed Financial Information for the Separate Account.. 29
Financial Highlights for the Fund......................... 30
AVAILABILITY OF CERTAIN OTHER INFORMATION................................... 31
OTHER MATTERS............................................................... 32
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
2
<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 $25,000.
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 15,343,118.3 votes entitled to be
cast at the Special Meeting, including 4,954,931.8 votes in respect of the Bond
Sub-Account, 945,624.0 votes in respect of the Short-Term Portfolio Sub-Account,
and 9,442,562.5 votes in respect of the Stock Sub-Account.
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.,
45.0% of the Bond Sub-Account, 64.8% of the Short-Term Portfolio Sub-Account,
and 29.9% 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.
3
<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
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
4
<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 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
5
<PAGE>
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 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 will
be 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 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.
6
<PAGE>
-- 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
-- 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 net 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.
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:
7
<PAGE>
<TABLE>
<CAPTION>
<C> <C>
The Separate Account The Fund
-------------------- --------
The assets of the Bond and Stock (No comparable fundamental
Sub-Accounts will be kept fully investment restriction)
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 With respect to 75% of the value of the
total assets, the Separate Account will assets of a Portfolio, the Fund may not,
not invest more than 5% of the value of on behalf of any Portfolio, invest more
the assets in the securities of, nor than 5% of the value of the Portfolio's
acquire more than 10% of the outstanding total assets in the securities of any
voting securities of, any one issuer one issuer, except U.S. Government
except those of the United States securities, and, with respect to 100% of
Government, its agencies and the value of the total assets of a
instrumentalities. 25% of the Separate Portfolio, the Fund may not, on behalf
Account's assets may be invested in the of any Portfolio, invest more than 25%
securities of one or more issuers of the value of the Portfolio's total
without regard for those limitations. 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.
The Separate Account reserves the right The Fund may not, on behalf of any
to invest up to 10% of the total assets Portfolio, purchase and sell real estate
of each of the Sub-Accounts, other than (though it may invest in securities of
the Short-Term Portfolio Sub-Account, in companies which deal in real estate and
interests in real estate. Purchases and in other permitted investments secured
sales may be made by the Sub-Accounts, by real estate).
other than the 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 Fund may not, on behalf of any
the acquisition of a portion of an issue Portfolio, make loans to other persons,
of publicly distributed bonds, except loans of portfolio securities and
debentures, or other evidences of loans to the extent that the purchase of
indebtedness of a type customarily debt obligations in accordance with its
purchased by institutional investors and investment objectives and policies and
except that money market instruments the entry into repurchase agreements may
including repurchase agreements may be be deemed to be loans. The Fund may not,
acquired and held as permitted in on behalf of any Portfolio, enter into
accordance with the Separate Account's repurchase agreements or purchase any
investment objectives and policies. securities if, as a result thereof, more
Investments in repurchase agreements than 10% of the total assets of a
maturing in more than seven days and in Portfolio (taken at market value) would
interests in non-marketable real estate be, in the aggregate, subject to
or any other illiquid asset will not repurchase agreements maturing in more
exceed 10% of the total assets of any than seven days and invested in
Sub-Account. restricted securities or securities
which are not readily marketable.
8
<PAGE>
The Separate Account The Fund
-------------------- --------
No investment will be made in the (No comparable fundamental investment
securities of any issuer for the purpose restriction)
of exercising management or control.
Investments will not be made in (No comparable fundamental investment
restricted or foreign securities, except restriction)
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 The Fund may not, on behalf of any
mortgaged, pledged, hypothecated, or in Portfolio, pledge, mortgage, or
any manner transferred as security for hypothecate its assets, except that, to
indebtedness. 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.
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 (No comparable fundamental investment
any geographical area of the United restriction)
States (such as northeastern states,
mid-western states, etc.).
No more than 25% of the total assets of The Fund may not, on behalf of any
any Sub-Account will be invested in any Portfolio, purchase securities if such
one industry other than obligations of purchase would cause more than 25% in
the U.S. Government, its agencies and the aggregate of the market value of the
instrumentalities, or bank certificates total assets of a Portfolio at the time
of deposit, bankers' acceptances, or of such purchase to be invested in the
instruments secured by these money securities of one or more issuers having
market instruments. 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).
9
<PAGE>
The Separate Account The Fund
-------------------- --------
The Separate Account may borrow money The Fund may not, on behalf of any
for temporary or emergency purposes up Portfolio, borrow money except from
to an amount equal to 5% of the value of banks as a temporary measure for
the Separate Account at the time of extraordinary or emergency purposes
borrowing. All borrowings will be (each Portfolio is required to maintain
unsecured. 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 The Fund may not, on behalf of any
underwritten, nor will the Separate Portfolio, act as underwriter of the
Account purchase the securities of other securities issued by others, except to
issuers that might later be deemed to be the extent that the purchase of
underwritten by the Separate Account. 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.
No purchase will be made of commodities The Fund may not, on behalf of any
or commodity contracts. Portfolio, 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 The Fund may not, on behalf of any
purchases of put or call options or Portfolio, purchase securities on margin
combinations thereof will not be made. 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 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").
10
<PAGE>
The Separate Account The Fund
-------------------- --------
Investments may be made in the (Although the Fund has no comparable
securities of one or more investment fundamental investment restriction,
companies; but no Sub-Account may have Section 12(d)(1)(A) of the 1940 Act
more than 5% of its assets invested in imposes essentially these same
any one investment company, have a total limitations on each Portfolio.)
of more than 10% of 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 The Fund may not, on behalf of any
comparable fundamental investment policy Portfolio, participate on a joint or a
or restriction, Section 17(d) of the joint and several basis in any trading
1940 Act imposes essentially these same account in securities, but may for the
limitations on each Sub-Account with purpose of possibly achieving better net
respect to participation on a joint or a results on portfolio transactions or
joint and several basis in a trading lower brokerage commission rates join
account in securities. However, when with other investment company and client
Washington National believes it is in accounts managed by Scudder or its
the best interest of the Separate affiliates in the purchase or sale of
Account, transactions for the Separate portfolio securities.
Account may be executed together with
purchases or sales of the same security
for Washington National's fixed account
or for other accounts served by
Washington National.)
(No comparable fundamental investment The Fund may not, on behalf of any
policy or restriction) Portfolio, 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.
11
<PAGE>
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.
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. Following the redemption of approximately $61 million, or 46%
of the outstanding shares, from the Bond Portfolio in late December 1995, these
expenses and payments are anticipated to increase to approximately 0.195%
annually of the average daily net assets for the Bond 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
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. Following the redemption described above, Total Portfolio
Operating Expenses for the Bond Portfolio are anticipated to increase to
approximately 0.67%, which continues to compare favorably to the 0.70% figure
for the Bond Sub-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:
12
<PAGE>
<TABLE>
<CAPTION>
BOND SUB-ACCOUNT and BOND PORTFOLIO
<S> <C> <C> <C>
COMPARATIVE FEE TABLE The Continuing
(for the year ended December 31, 1994) Separate Account The Fund (A) Separate Account
(actual) (actual) (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 (D) --- 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 uring 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. Following the redemption of
approximately $61 million, or 46% of the outstanding shares, from the Bond
Portfolio in late December 1995, "Other Expenses" are anticipated to increase to
0.195% of average net assets; on a pro forma basis reflecting the investment of
the net assets of the Bond Sub-Account of the Separate Account in the Bond
Portfolio of the Fund, "Other Expenses" are anticipated to be approximately
0.175% of the average net assets of the Bond Portfolio.
(D) Following the redemption described above, Total Portfolio Operating Expenses
are anticipated to increase to approximately 0.67% of average net assets; on a
pro forma basis reflecting the investment of the Bond Sub-Account in the Bond
Portfolio, Total Portfolio Operating Expenses are anticipated to be
approximately 0.65% of average net assets.
13
<PAGE>
<TABLE>
<CAPTION>
SHORT-TERM PORTFOLIO SUB-ACCOUNT and MONEY MARKET PORTFOLIO
-----------------------------------------------------------
<S> <C> <C> <C>
COMPARATIVE FEE TABLE The Continuing
(for the year ended December 31, 1994) Separate Account The Fund (A) Separate Account
---------------- ------------ ----------------
(actual) (actual) (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 amou ts 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.
14
<PAGE>
<TABLE>
<CAPTION>
STOCK SUB-ACCOUNT and CAPITAL GROWTH PORTFOLIO
----------------------------------------------
<S> <C> <C> <C>
COMPARATIVE FEE TABLE The Continuing
(for the year ended December 31, 1994) Separate Account The Fund (A) Separate Account
---------------- ------------ ----------------
(actual) (actual) (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 o 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.
15
<PAGE>
EXAMPLE
A. You would pay the following expenses (based on expenses for the year
ended December 31, 1994) on a $1,000 investment in your Contract, assuming a 5%
annual return on assets:
1. If you surrender your Contract at the end of the applicable time
period:*
<TABLE>
<CAPTION>
The Separate Account Continuing Separate Account
------------------- ---------------------------
(actual) (pro forma)
1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BOND SUB-ACCOUNT (A) $ 73 $113 $156 $224 $ 72 $109 $149 $210
SHORT-TERM PORTFOLIO
SUB-ACCOUNT $ 73 $113 $156 $224 $ 72 $109 $149 $209
STOCK SUB-ACCOUNT $ 73 $113 $156 $224 $ 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.
2. If you do not surrender your Contract:
<TABLE>
<CAPTION>
The Separate Account Continuing Separate Account
------------------- ---------------------------
(actual) (pro forma)
1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BOND SUB-ACCOUNT (B) $ 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>
- ----------------------
(A) Following the redemption of approximately $61 million, or 46% of the
outstanding shares, from the Bond Portfolio of the Fund in late December 1995,
the pro orma expenses for the Bond Sub-Account of the Continuing Separate
Account are anticipated to be approximately $73, $112, $154, and $219 for 1, 3,
5, and 10 years, respectively.
(B) Following the redemption described above, the pro forma expenses for the
Bond Sub-Account of the Continuing Separate Account are anticipated to be
approximately $19, $58, $101, and $219 for 1, 3, 5, and 10 years, respectively.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
16
<PAGE>
B. A separate account would pay the following expenses (based on
expenses for the year ended December 31, 1994) on a $1,000 investment in the
Fund, assuming a 5% annual return on assets:**
<TABLE>
<CAPTION>
The Fund The Fund
-------- ----------
(actual) (pro forma)
1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BOND PORTFOLIO (C) $ 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.
- ------------------
(C) Adjusting for the redemption described above, the actual expenses for the
Bond Portfolio are anticipated to be approximately $7, $21, $37, and $83 and the
pro forma expenses for the Bond Portfolio (after giving effect to the
Transactions) are anticipated to be approximately $7, 21, $36, and $81 for 1, 3,
5, and 10 years, respectively.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
17
<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.
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).
18
<PAGE>
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:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CAPITALIZATION The
(as of June 30, 1995) Separate
Account The Fund The Fund
-------- -------- ---------
(actual) (actual) (pro forma)
BOND SUB-ACCOUNT and
BOND PORTFOLIO
- --------------------
Net Assets (A) $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 (B) 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>
- -------------------
(A) Following the redemption of approximately $61 million, or 46% of the
outstanding shares, from the Bond Portfolio of the Fund in late December 1995,
the actual and pro forma net assets of the Bond Portfolio are anticipated to be
approximately $73 million and $85 million, respectively, as of December 31,
1995.
(B) Following the redemption described above, the actual and pro forma
outstanding shares of the Bond Portfolio are anticipated to be approximately 10
million and 12 million, respectively, as of December 31, 1995.
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):
19
<PAGE>
<TABLE>
<CAPTION>
YIELD AND EFFECTIVE YIELD The Continuing
(for periods ended June 30, 1995) Separate Account The Fund Separate Account
---------------- --------- -----------------
<S> <C> <C> <C>
MONEY MARKET PORTFOLIO
Yield (7-day period) 4.18% 5.55% 4.37%
Effective Yield (7-day period) 4.27% 5.70% 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%
</TABLE>
** Assuming contingent deferred sales charge percentage of 0%.
(A) As the Bond Portfolio and the 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.
- --------------------------------------------------------------------------------
20
<PAGE>
Although the redemption of approximately $61 million, or 46% of the
outstanding shares, from the Bond Portfolio of the Fund in late December 1995
will increase the Bond Portfolio's expense ratio somewhat, it is not expected to
have a material effect on the performance of the Fund or the Continuing Separate
Account.
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 U.S. 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/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. As of December 1,
1995, NBD Bancorp, Inc., a Delaware corporation and bank holding company which
controls NBD Bank, had merged with First Chicago Corporation, also a Delaware
corporation and bank holding company, with First Chicago Corporation's
shareholders reportedly owning 50.1% of the merged entity, First Chicago NBD
Corporation. In mid-1996, NBD Bank itself reportedly is expected to be merged
into The First National Bank of Chicago, First Chicago NBD Corporation's lead
bank in Illinois.
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.
21
<PAGE>
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
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
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
Account) any Portfolio to be eliminated will be given at least thirty (30) days'
22
<PAGE>
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 after satisfaction
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
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 with reinvested distributions paid by such Portfolio will be held in
the corresponding Sub-Account of the Continuing Separate Account, and will be
23
<PAGE>
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.
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
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.
24
<PAGE>
Certain Ownership Interests
As of December 31, 1995, Washington National owned of record and
beneficially 45.0%, 64.8%, and 29.9% 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, the Separate Account would become both the record and beneficial owner of
14.6%, 2.1%, and 8.7% 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"), 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 55.1 and 35.5%,
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 61.2% and 37.7%,
respectively, of the Money Market Portfolio. The Mutual of America group and the
Charter National group owned of record and beneficially 62.9% and 29.9%,
respectively, of the Capital Growth Portfolio. 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 45.6%, 18.1%, 20.1%, and 12.6%, 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, and the Charter National group would own of record and
beneficially 47.0%, and 30.3%, respectively, of the Bond Portfolio of the Fund;
the Charter National group and Union Central would own of record and
beneficially 59.9% and 36.9%, 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 57.4% and 27.3%, 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 44.1%,
17.5%, 19.5%, and 12.2%, 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
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
25
<PAGE>
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
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.
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
26
<PAGE>
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.
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 "Fees and Expenses of the Fund,"
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 (discussed under
"Other Expenses of the Separate Account," below) 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.
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
27
<PAGE>
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
adequate to pay all the distribution costs. Any 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.
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%
28
<PAGE>
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 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%
Following the redemption of approximately $61 million, or 46% of the outstanding
shares, from the Bond Portfolio in late December 1995, these expenses and
payments are anticipated to increase to approximately 0.195% of the daily value
of the Bond Portfolio's net assets.
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.
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:
29
<PAGE>
<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
- ------------------------------
See notes to financial statements in the Separate Account's Semi-Annual Report
dated June 30, 1995.
</TABLE>
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/ rospectus as Appendix C), the following
corresponding data are presented for the six months ended June 30, 1995:
30
<PAGE>
<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 (D) 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
</TABLE>
- ---------------------
(A) Per share amounts have been calculated using the
monthly-average-shares-outstanding-during-the- period method.
(B) Not annualized.
(C) Annualized.
(D) Since the above figures are as of June 30, 1995, they do not reflect the
subsequent redemption of approximately $61 million, or 46% of the outstanding
shares, from the Bond Portfolio of the Fund in late December 1995. See notes to
financial statements in the Fund's Semi-Annual Report dated June 30, 1995.
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.
31
<PAGE>
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.
32
<PAGE>
APPENDIX A
FORM OF ASSET TRANSFER AGREEMENT AND PLAN OF REORGANIZATION
A form of the Asset Transfer Agreement and Plan of Reorganization to be
executed by Washington National, the Separate Account, and the Fund immediately
follows this page.
<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 ___________, 1996, 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 AccountI 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 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
<PAGE>
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 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
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
2
<PAGE>
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 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 Continuing Separate Account for annuity rate guarantees and
financial accounting services.
3
<PAGE>
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.
(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, 1995, 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.
4
<PAGE>
(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, 1996, and the Closing Date.
(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:
(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 26(a)(2)(C) and
27(c)(2) of the 1940 Act, and shall have made all necessary filings, if any,
with, and received all necessary approvals from, state securities or insurance
authorities.
5
<PAGE>
(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 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,
(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
6
<PAGE>
(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
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
7
<PAGE>
2.05 of this Agreement, and the cost of providing an opinion of counsel pursuant
to Section 3.02(j) of this Agreement).
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
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
8
<PAGE>
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.
* * *
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
Attest: COMPANY
________________________________ By: _______________________________
Craig R. Edwards James E. Dresmal
Secretary Vice President
SEPARATE ACCOUNT I OF
WASHINGTON
Attest: NATIONAL INSURANCE COMPANY
________________________________ By: ________________________________
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:
________________________________ By: ________________________________
Thomas F. McDonough David B. Watts
Secretary President
9
<PAGE>
APPENDIX B
SEPARATE ACCOUNT 1 of WASHINGTON NATIONAL INSURANCE COMPANY
Prospectus dated May 1, 1995
The Separate Account's prospectus dated May 1, 1995, immediately follows this
page.
<PAGE>
INSURANCE COMPANY
LINCOLNSHIRE, ILLINOIS 60069
A Washington National Corporation Financial Service Company
WN PLAN
DEFERRED VARIABLE ANNUITY CONTRACT
FUNDED THROUGH SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
LINCOLNSHIRE, ILLINOIS 60069
(708) 793-3000
BOND SUB-ACCOUNT
High level of current income with capital preservation
SHORT-TERM PORTFOLIO SUB-ACCOUNT
Moderate level of current income with liquidity
STOCK SUB-ACCOUNT
Long-term capital growth and income
The Deferred Variable Annuity Contracts described in this prospectus are
designed for retirement planning purposes by individuals who may or may not
qualify for special tax treatment under the Internal Revenue Code and by
tax-qualified retirement plans and trusts. The Contracts were offered on a group
and individual basis, and may be paid by a single Purchase Payment or by
periodic Purchase Payments. Purchase Payments may be allocated to one or more of
the Sub-Accounts of the Separate Account and/or to the Fixed Account. Washington
National Insurance Company is no longer selling new Contracts but is continuing
to accept Purchase Payments under existing Contracts.
This prospectus provides information about Washington National and Separate
Account I that a prospective investor should know before investing. Additional
information about Washington National, Separate Account I and the Contracts has
been filed with the Securities and Exchange Commission in a Statement of
Additional Information, dated May 1, 1995, and is available without charge upon
written or oral request to Washington National Insurance Company, Life and
Annuity Administration, 300 Tower Parkway, Lincolnshire, Illinois 60069
(telephone: (708) 793-3243). The Statement of Additional Information is
incorporated herein. To obtain, simply fill out the postcard which accompanies
this prospectus and return it to us. The Table of Contents of the Statement of
Additional Information appears on page 34 of this prospectus.
Investments in the Short-Term Portfolio, Bond and Stock Sub-Accounts are neither
insured nor guaranteed by the U.S. Government, and none of the Sub-Accounts
maintains a stable net asset value. 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. THIS PROSPECTUS SHOULD
BE READ AND RETAINED FOR FUTURE REFERENCE.
The date of this Prospectus is May 1, 1995.
<PAGE>
TABLE OF CONTENTS
Page
DEFINITIONS 4
SUMMARY 5
Separate Account I Fee Table 5
Separate Account I 6
Free Look Right 7
Purchase Payments 7
Allocation of Purchase Payments 7
Transfers of Contract Accumulated Values 7
Charges and Deductions 7
CONDENSED FINANCIAL INFORMATION 9
PERFORMANCE DATA 13
THE COMPANY 14
THE SEPARATE ACCOUNT 14
THE SUB-ACCOUNTS 15
Bond Sub-Account 15
Short-Term Portfolio Sub-Account 16
Stock Sub-Account 16
Investment Policies and Restrictions 16
Valuation of Assets 17
THE CONTRACTS 18
PRIOR TO MATURITY (ACCUMULATION PERIOD) 18
Purchase Payments 18
Sub-Account Allocations 18
Transfers of Accumulated Values 18
Accumulated Value 19
Termination of Participation 19
Cash Surrender and Withdrawals 19
Withdrawals May Be Taxable 20
Loan From 403(b) Contracts 20
Options on Discontinuance of Purchase Payments 20
Payment at Death 21
Time and Delay of Payment 21
Inquiries About Your Contract 21
AFTER MATURITY (ANNUITY PERIOD) 21
Maturity Date 21
Election of Options 22
Option 1-Income for a Fixed Period 22
Option 2-Income for Life 22
Option 3-Income of Fixed Amount 22
Option 4-Interest Income 22
Option 5-Joint and Survivor Income for Life 23
Option 6-Joint and Two-thirds
Survivor Income for Life 23
Election of Fixed or Variable Annuity Payments 23
Determination of Variable Annuity Payments 23
HOW CONTRACTS WERE SOLD 24
DEDUCTIONS AND CHARGES 24
2
<PAGE>
Annuity Rate Guarantee Deductions 24
Investment Management Charge 24
Financial Accounting Service Charge 24
Contingent Deferred Sales Charge 25
Contract Maintenance Charge 25
Expenses of Separate Account I 26
Premium Taxes 26
CHANGES AND MODIFICATIONS 26
VOTING RIGHTS 27
FEDERAL INCOME TAX MATTERS 27
How We Are Taxed 28
How You Are Taxed 28
Non-Qualified Contracts 28
Qualified Contracts 29
Other Considerations 31
MANAGEMENT 31
INVESTMENT MANAGER 32
LEGAL PROCEEDINGS 32
THE FIXED ACCOUNT 32
Fixed Account Accumulated Value 32
Amount of Each Fixed Annuity Payment 33
Time and Delay of Payment 33
Fixed Account 33
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL
INFORMATION 34
3
<PAGE>
DEFINITIONS
We, Our, Us - the Washington National Insurance Company.
You, Your - the owner of the Contract.
Accumulated Value - the value (prior to maturity) of all Accumulation Units
credited to the Contract or the Participant's Certificate under the Contract.
Accumulation Unit - a unit used to measure the value of the Contract prior to
maturity.
Annuitant - the person named to receive annuity payments.
Annuity Unit - a unit used to determine the amount of each annuity payment.
Attained Age - the Annuitant's age on the Contract Date plus the number of years
and completed months from the Contract Date.
Beneficiary - the person or entity to receive the Proceeds in the event of the
Annuitant's death.
Certificate - certifies participation and represents a Participant's interest
under a group Contract.
Contract - the group or individual Contracts offered by this prospectus.
Contract Anniversary - the same day and month as the Contract Date for each
succeeding year the Contract remains in force.
Contract Date - the effective date of the Contract and the date from which
Contract Anniversaries, Contract years and Contract months are determined.
Fixed Account - all of Our assets other than those allocated to any of Our
separate accounts.
Fixed Annuity - an annuity with payments of a stated amount which are not based
on the investment results of Separate Account I, but are guaranteed by Us.
Net Accumulated Value - The Accumulated Value reduced by any applicable
deductions and charges.
Participant - a person who participates in and for whom benefits are being
accrued under one of the group contracts offered through this prospectus. Unless
otherwise indicated, the term is used interchangeable with the term Annuitant in
this prospectus.
Proceeds - the amount We are obligated to pay under the terms of the Contract
when a full or partial withdrawal is made, when the contract matures or when the
Annuitant dies.
Purchase Payment - the amount paid to Us for the benefits under the Contract.
Separate Account I - the separate account established by Us under Illinois law,
the assets of which are kept separate from Our other assets. The Separate
Account I meets the definition of a separate account under the federal
securities laws.
Sub-Account - a Separate Account I portfolio to which Purchase Payments are
allocated. The term Sub-Account also refers to a Sub-Account Division if a
Sub-Account has Divisions.
Valuation Date - each day when the New York Stock Exchange is open for business
or when trades in the securities of any Sub-Account would materially change the
Accumulation and Annuity Unit Values of the Sub-Account.
Valuation Period - the period of time between one Valuation Date and the next
Valuation Date.
Variable Annuity - an annuity with payments which vary in amount with the
investment experience of a separate account.
Written Request - in a written form satisfactory to Us, signed by You and/or the
Participant and filed in our Home Office in Lincolnshire, Illinois.
4
<PAGE>
SUMMARY
The group and individual Variable Annuity Contracts described in this prospectus
are designed for use by retirement plans which receive favorable tax treatment
under the Internal Revenue Code, as well as by individuals and groups that are
not covered by such plans.
During the Accumulation Period, which is the time between the date a Contract is
issued and the maturity date (the date on which We begin making payments to the
Annuitant), the full amount of every Purchase Payment paid to Us is put to work.
We make no deduction for sales charges from those payments. You have a great
deal of flexibility as to how payments are applied and have the ability to move
Accumulated Values around within the available Sub-Accounts and the Fixed
Account. A brief description of these and other features of the Contract
follows. This prospectus describes generally only the variable aspects of this
Contract. For information about the fixed aspects of this Contract, see The
Fixed Account, page 32.
Separate Account I Fee Table
Short-Term
Bond Portfolio Stock
Sub-Account Sub-Account Sub-Account
-------------------------------------------------
Owner Transaction Expenses
Sales Load Imposed on
Purchases $ _ $ _ $ _
Maximum Contingent
Deferred Sales Load
(as a percentage of
Accumulated Value
Withdrawn) 6% 6% 6%
Transfer Fee $ _ $ _ $ _
Annual Contract Fee $30 Per Contract
Sub-Account Annual Expenses
(as a percentage of
average account value)
Management Fee .50% .50% .50%
Annuity Rate Guarantees .80% .80% .80%
Financial Accounting Fees .35% .35% .35%
Other Expenses (net
charged to account) .20% .20% .20%
Total Annual Expenses 1.85% 1.85% 1.85%
The purpose of this Table is to assist you in understanding the various costs
and expenses that you bear directly and indirectly. For more information on the
charges described in this Table, see Deductions and Charges on page 24.
5
<PAGE>
Examples
You would pay the following expenses on a $1000 investment, assuming a 5% annual
return on assets:
1. If you surrender your Contract at the end of the applicable time
period:*
1 year 3 years 5 years 10 years
----------------------------------
Bond Sub-Account $75 $119 $165 $221
Short-Term Portfolio Sub-Account $75 $119 $165 $221
Stock Sub-Account $75 $119 $165 $221
2. If you do not surrender your Contract:
1 year 3 years 5 years 10 years
----------------------------------
Bond Sub-Account $19 $59 $102 $221
Short-Term Portfolio Sub-Account $19 $59 $102 $221
Stock Sub-Account $19 $59 $102 $221
THESE EXAMPLES SHOULD NOT BE CONSIDERED REPRESENTATIONS OF PAST OR FUTURE
EXPENSES AND THE ACTUAL EXPENSES PAID MAY BE GREATER OR LESSER THAN THOSE SHOWN.
* These expense amounts also apply if you annuitize your Contract under
certain settlement options during the first five contract years.
Separate Account I - Separate Account I is an open-end management investment
company. There are currently three Sub-Accounts within Separate Account I, each
with its own investment objective and policies as follows:
a. Bond Sub-Account - high level of current income while preserving
capital by investing in fixed income securities. (See Bond
Sub-Account, page 15.)
b. Short-Term Portfolio Sub-Account - moderate level of current income
consistent with liquidity and preservation of capital by investing in
money market instruments. (See Short-Term Portfolio Sub-Account, page
16.) The Short-Term Portfolio Sub-Account may not be diversified.
c. Stock Sub-Account - long-term capital growth and income by investing
principally in equity type securities. (See Stock Sub-Account, page
16.)
There can be no assurance that these investment objectives will be achieved.
Investments in the Bond, Short-Term Portfolio and Stock Sub-Accounts are not
insured or guaranteed by any government, government agency or other entity, and
none of the Sub-Accounts maintains a stable net asset value per share or unit.
All Sub-Account investments are subject to two general types of risks: financial
risk, which refers to the ability of the issuer of a security to pay principal,
interest or dividends; and 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.
6
<PAGE>
The Sub-Accounts may invest in certain types of securities, subject to the
limitations set forth under Investment Policies and Restrictions on page 16,
that involve greater than usual risks. The Bond Sub-Account may invest a portion
of its assets in securities that are unrated or are rated lower than the four
highest ratings of Moody's Investors Service, Inc. and Standard & Poor's
Corporation. These securities may be subject to greater market and financial
risk than higher quality issues. (See Bond Sub-Account, page 15.) The Stock
Sub-Account will invest in equity securities for the purpose of achieving higher
returns. This objective involves a greater risk of declining values. (See Stock
Sub-Account, page 16.)
The Accumulated Value of Purchase Payments allocated to Separate Account I vary
with the investment performance of the Sub-Account(s) and are not guaranteed.
Accumulated Value of the Purchase Payments are guaranteed as to payments
allocated to the Fixed Account.
We are the issuer of the Contracts and serve as investment manager to Separate
Account I. Washington National Equity Company ("WNEC") was the principal
underwriter for Separate Account I until March 31, 1990, when WNEC deregistered
as a broker-dealer under the Securities and Exchange Act of 1934.
Free Look Right _ You may, at any time, within 10 days after receipt of the
Contract, return it to Us at Our Home Office or to the agent through whom it was
purchased, and We will cancel it. The return of the Contract will void it from
the beginning and We will refund to You from the:
a. Fixed Account - all Your Purchase Payments allocated thereto.
b. Separate Account - the Accumulated Value of amounts allocated to
Separate Account I and any deductions made from Purchase Payments.
(Currently we make no deductions from purchase payments.)
Purchase Payments - Each payment which you make must be at least $25 with no
less than $300 paid each year. You may allocate no less than $25 to the Fixed
Account or to any Sub-Account of Separate Account I at any time. You may
increase Your payments at any time, but We do reserve the right to refuse to
accept any such increases. (See Purchase Payments, page 18.)
Allocation of Purchase Payments You indicate the manner in which Your Purchase
Payments are to be allocated at the time You apply for the Contract. All or a
portion of the payment may be directed to one or more of the Sub-Accounts of
Separate Account I, to the Fixed Account or to a combination of the Fixed
Account and one or more of the Sub-Accounts. You may change Your Purchase
Payment allocation at any time without charge. (See Sub-Account Allocations,
page 18.)
Transfers of Contract Accumulated Values - Transfers of all or a part of the
Accumulated Value of the Contract are permitted. There is no charge made for
transfers, but there are some limitations. (See Transfers of Accumulated Values,
page 18.)
Charges and Deductions - We do not currently make any deductions from Your
Purchase Payments, but apply the full amount We receive in the manner which You
have indicated. During any Contract year prior to maturity, You may withdraw up
to 10% of the Accumulated Value of the Contract without a contingent deferred
sales charge. A contingent deferred sales charge, which is intended to reimburse
Us for Our expenses in the sale of the Contract, will be deducted from any
amount withdrawn in excess of 10% of the Accumulated Value of the Contract
during each Contract year. The contingent deferred sales charge is 6% of the
amount withdrawn that is subject to the charge. (You will find a detailed
description of the method of calculation and a list of the exceptions from the
7
<PAGE>
charge under Contingent Deferred Sales Charge, page 25.) Withdrawals may be
treated as taxable income and they may be subject to a penalty tax under the
Internal Revenue Code. (See How You Are Taxed, page 28.)
We deduct from the total value of each Sub-Account daily charges equal to an
annual rate of approximately .80% for the annuity rate guarantees (see Annuity
Rate Guarantee Deductions, page 24), .50% for investment management services
(see Investment Management Charge, page 24) and .35% for financial accounting
(see Financial Accounting Service Charge, page 24); the daily charge for
investment management services is subject to change, but the rates for annuity
rate guarantees and financial accounting are not.
In addition, Separate Account I pays for certain operational expenses, covering
such items as brokerage fees and commissions, fees and expenses of legal counsel
and independent auditors, and custodian fees and expenses. (See Expenses of
Separate Account I, page 26.) Currently, Separate Account I is charged daily at
an annual rate of .20% of the account value.
An annual charge of $30 for administration and contract maintenance (see
Contract Maintenance Charge, page 25) is deducted from the Accumulated Value of
each Contract on the Contract Anniversary date, or on the date of surrender if
it occurs between Contract Anniversaries. The amount and frequency of this
charge is subject to change. We currently will waive this charge if, on the
Contract Anniversary date, 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.
While We do not, at this time, make a deduction for any premium taxes which We
must pay on Purchase Payments received by Us, We reserve the right to do so in
the future. (See Premium Taxes, page 26.) We also retain the right to provide
for possible income taxes which may become payable for Separate Account I. (See
How We Are Taxed, page 28.)
8
<PAGE>
CONDENSED FINANCIAL INFORMATION
The following audited information shows the value of an Accumulation Unit and
how it has changed in the last 10 years.
<TABLE>
<CAPTION>
Selected data per accumulation
unit outstanding throughout the year
For the years
ended December 31, 1994 1993 1992
------------------------ ------------------------ ---------------------------
Sub-Account Sub-Account Sub-Account
------------------------ ------------------------ ---------------------------
Short-Term Short-Term Short-Term
Bond Portfolio Stock Bond Portfolio Stock Bond Portfolio Stock
------------------------ ------------------------ ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per accumulation
unit data:
Investment income $0.16 $0.07 $0.08 $0.16 $0.05 $0.07 $0.17 $0.06 $0.07
Expenses (0.04) (0.03) (0.04) (0.04) (0.03) (0.04) (0.04) (0.03) (0.04)
------------------------ ------------------------ ---------------------------
NET INVESTMENT
INCOME 0.12 0.04 0.04 0.12 0.02 0.03 0.13 0.03 0.03
Net realized and
unrealized
gain (loss) on
investments (0.22) -- (0.02) 0.03 -- 0.21 (0.01) -- 0.12
------------------------ ------------------------ ---------------------------
Net increase
(decrease) in
accumulation
unit value (0.10) 0.04 0.02 0.15 0.02 0.24 0.12 0.03 0.15
Accumulation unit
value at
beginning of
year 2.26 1.66 2.52 2.11 1.64 2.28 1.99 1.61 2.13
------------------------ ------------------------ ---------------------------
ACCUMULATION
UNIT VALUE
AT END OF YEAR $2.16 $1.70 $2.54 $2.26 $1.66 $2.52 $2.11 $1.64 $2.28
======================== ======================== ===========================
Ratios:
Ratio of expenses
to average
net assets 1.87% 1.85% 1.83% 1.85% 1.85% 1.81% 1.85% 1.85% 1.85%
Ratio of net
investment income
to average net
assets 5.28 2.47 1.41 5.50 1.28 1.17 6.22 1.82 1.33
Portfolio
turnover rate -- 12.20 33.66 -- 3.50 10.83 -- 4.92
Number of
accumulation units
outstanding at
end of year
(000's omitted) 5,297 1,032 9,882 5,836 980 10,202 6,457 1,065 10,457
</TABLE>
9
<PAGE>
CONDENSED FINANCIAL INFORMATION (cont.)
<TABLE>
<CAPTION>
Selected data per accumulation unit
outstanding throughout the year
For the years
ended December 31, 1991 1990 1989
------------------------ ------------------------ ---------------------------
Sub-Account Sub-Account Sub-Account
------------------------ ------------------------ ---------------------------
Short-Term Short-Term Short-Term
Bond Portfolio Stock Bond Portfolio Stock Bond Portfolio Stock
------------------------ ------------------------ ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per accumulation
unit data:
Investment income $0.16 $0.09 $0.07 $0.16 $0.11 $0.08 $0.15 $0.12 $0.06
Expenses (0.03) (0.03) (0.04) (0.03) (0.03) (0.03) (0.03) (0.03) (0.03)
------------------------ ------------------------ ---------------------------
NET INVESTMENT
INCOME 0.13 0.06 0.03 0.13 0.08 0.05 0.12 0.09 0.03
Net realized and
unrealized
gain (loss) on
investments 0.14 -- 0.34 (0.11) -- (0.14) 0.05 -- 0.15
------------------------ ------------------------ ---------------------------
Net increase
(decrease) in
accumulation
unit value 0.27 0.06 0.37 0.02 0.08 (0.09) 0.17 0.09 0.18
Accumulation unit
value at
beginning of
year 1.72 1.55 1.76 1.70 1.47 1.85 1.53 1.38 1.67
------------------------ ------------------------ ---------------------------
ACCUMULATION
UNIT VALUE
AT END OF YEAR $1.99 $1.61 $2.13 $1.72 $1.55 $1.76 $1.70 $1.47 $1.85
======================== ======================== ===========================
Ratios:
Ratio of expenses
to average
net assets 1.85% 1.86% 1.86% 1.79% 1.85% 1.83% 1.84% 1.85% 1.82%
Ratio of net
investment income
to average net
assets 7.02 3.80 1.85 7.61 5.29 2.82 7.50 6.34 1.97
Portfolio
turnover rate -- -- 5.97 10.03 -- 15.70 4.75 -- 18.91
Number of
accumulation units
outstanding at
end of year
(000's omitted) 6,616 1,130 10,564 7,308 1,505 10,693 7,503 1,496 11,111
</TABLE>
10
<PAGE>
CONDENSED FINANCIAL INFORMATION (cont.)
<TABLE>
<CAPTION>
Selected data per accumulation unit
outstanding throughout the year
For the years
ended December 31, 1988 1987 1986
------------------------ ------------------------ ---------------------------
Sub-Account Sub-Account Sub-Account
------------------------ ------------------------ ---------------------------
Short-Term Short-Term Short-Term
Bond Portfolio Stock Bond Portfolio Stock Bond Portfolio Stock
------------------------ ------------------------ ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per accumulation
unit data:
Investment income $0.14 $0.11 $0.06 $0.13 $0.08 $0.06 $0.12 $0.08 $0.04
Expenses (0.03) (0.03) (0.03) (0.02) (0.02) (0.02) (0.02) (0.02) (0.02)
------------------------ ------------------------ ---------------------------
NET INVESTMENT
INCOME 0.11 0.08 0.03 0.11 0.06 0.04 0.10 0.06 0.02
Net realized and
unrealized
gain (loss) on
investments (0.01) -- 0.04 (0.11) -- 0.07 0.06 -- 0.15
------------------------ ------------------------ ---------------------------
Net increase
(decrease) in
accumulation
unit value 0.10 0.08 0.07 -- 0.06 0.11 0.16 0.06 0.17
Accumulation unit
value at
beginning of
year 1.43 1.30 1.60 1.43 1.24 1.49 1.27 1.18 1.32
------------------------ ------------------------ ---------------------------
ACCUMULATION
UNIT VALUE
AT END OF YEAR $1.53 $1.38 $1.67 $1.43 $1.30 $1.60 $1.43 $1.24 $1.49
======================== ======================== ===========================
Ratios:
Ratio of expenses
to average
net assets 1.87% 1.84% 1.84% 1.86% 1.86% 1.91% 1.73% 1.73% 1.73%
Ratio of net
investment income
to average net
assets 7.31 5.60 1.70 7.35 4.82 1.29 7.53 5.00 1.24
Portfolio
turnover rate -- -- 47.75 15.86 -- 40.86 16.77 -- 48.18
Number of
accumulation units
outstanding at
end of year
(000's omitted) 7,382 1,569 11,618 7,101 1,571 11,588 6,555 1,005 9,026
</TABLE>
11
<PAGE>
CONDENSED FINANCIAL INFORMATION (cont.)
<TABLE>
<CAPTION>
Selected data per accumulation unit
outstanding throughout the year
For the years
ended December 31, 1985
------------------------
Sub-Account
------------------------
Short-Term
Bond Portfolio Stock
------------------------
<S> <C> <C> <C>
Per accumulation
unit data:
Investment income $0.12 $0.09 $0.05
Expenses (0.02) (0.02) (0.02)
------------------------
NET INVESTMENT
INCOME 0.10 0.07 0.03
Net realized and
unrealized
gain (loss) on
investments 0.11 -- 0.24
------------------------
Net increase
(decrease) in
accumulation
unit value 0.21 0.07 0.27
Accumulation unit
value at
beginning of
year 1.06 1.11 1.05
------------------------
ACCUMULATION
UNIT VALUE
AT END OF YEAR $1.27 $1.18 $1.32
========================
Ratios:
Ratio of expenses
to average
net assets 1.66% 1.65% 1.70%
Ratio of net
investment income
to average net
assets 9.39 6.22 2.43
Portfolio
turnover rate -- -- 52.40
Number of
accumulation units
outstanding at
end of year
(000's omitted) 4,187 983 5,436
</TABLE>
12
<PAGE>
Beginning in August 1986, Separate Account I began paying for various expenses
attributable to Separate Account I that previously had been paid voluntarily by
Us. A charge, equal to the daily allocation of the expected expenses, is
deducted from Separate Account I. Currently, the charge is equal to an annual
rate of .20% of the average net assets of Separate Account I. In the future, the
amount of the daily charge may be increased or decreased depending upon the
amount of expected expenses.
On August 26, 1983, We deposited $100,000 into Separate Account I to begin
operations. This amount was reflected as a purchase of Accumulation Units in the
Short-Term Portfolio Sub-Account and may be transferred between the Sub-Accounts
or withdrawn by Us at any time at Our discretion at the Accumulation Unit value
on the date of withdrawal. We do not expect to withdraw this amount until We
determine that it is no longer needed for the operation of Separate Account I.
During January 1985, We invested an additional $10 million in Separate Account I
by purchasing Accumulation Units in each of the three Sub-Accounts as follows:
approximately $5,000,000 of Accumulation Units in the Stock Sub-Account,
approximately $4,000,000 of Accumulation Units in the Bond Sub-Account and
approximately $1,000,000 of Accumulation Units in the Short-Term Portfolio
Sub-Account. This investment was made to enable each of the Sub-Accounts to
develop a significant portfolio and meaningful investment performance at an
earlier date than otherwise would have been possible. The Accumulation Units
purchased by Us were acquired for investment purposes and can be disposed of
only by redemption. In 1987 We withdrew $3,400,000 from the Stock Sub-Account
and $1,400,000 from the Bond Sub-Account. In 1991 We withdrew $1,000,000 from
the Bond Sub-Account and $500,000 from the Short-Term Portfolio Sub-Account. The
withdrawals were made mostly from short-term funds rather than long term assets.
In making the withdrawals, We were careful not to disturb the composition of the
Sub-Accounts' portfolios. We do not anticipate making further investments in the
Sub-Accounts of Separate Account I.
Our financial statements and those of Separate Account I may be found in the
Statement of Additional Information.
PERFORMANCE DATA
From time to time, We may advertise yields and total returns for the
Sub-Accounts of Separate Account I. In addition, We may advertise the effective
yield of the Short-Term Portfolio Sub-Account. These figures will be based on
historical information and are not intended to indicate future performance.
The yield of the Short-Term Portfolio Sub-Account refers to the annualized
income generated by an investment in that Sub-Account over a specified seven-day
period. The yield is calculated by assuming that the income generated for that
seven-day period is generated each seven-day period over a 52-week period and is
shown as a percentage of the investment. The effective yield is calculated
similarly but, when annualized, the income earned by an investment in that
Sub-Account is assumed to be reinvested. The effective yield will be slightly
higher than the yield because of the compounding effect of this assumed
reinvestment.
The yield of a Sub-Account (other than the Short-Term Portfolio Sub-Account)
refers to the annualized income generated by an investment in the Sub-Account
over a specified thirty-day period. The yield is calculated by assuming that the
income generated by the investment during that thirty-day period is generated
each thirty-day period over a twelve-month period and is shown as a percentage
of the investment.
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Yield quotations will not reflect any contingent deferred sales charges.
The total return of a Sub-Account refers to return quotations assuming an
investment has been held in the Sub-Account for various periods of time
including, but not limited to, one and five years and a period measured from the
date the Sub-Account commenced operations. When a Sub-Account has been in
operation for ten years, the total return for that period will be provided. The
total return quotations will represent the average annual compounded rates of
return that would equate an initial investment of $1,000 to the redemption value
of that investment as of the last day of each of the periods for which total
return quotations are provided. These standard total return quotations will
reflect any applicable contingent deferred sales charge.
For additional information regarding yields and total returns calculated using
the standard formats briefly described above, please refer to the Statement of
Additional Information.
We may from time to time also disclose average annual total return for
non-standard periods and/or in non-standard formats and cumulative total return
for the Sub-Accounts of Separate Account I. The non-standard average annual
total return and cumulative total return will assume that no contingent deferred
sales charge is applicable.
All non-standard performance data will only be disclosed if the standard
performance data for the required periods is also disclosed. For additional
information regarding the calculation of other performance data, please refer to
the Statement of Additional Information.
THE COMPANY
We, Washington National Insurance Company, of Lincolnshire, Illinois, are a
stock life insurance company founded in 1911 and organized under the laws of the
State of Illinois. Our Home Office is located at 300 Tower Parkway,
Lincolnshire, Illinois 60069.
We act as investment manager to Separate Account I and are registered under the
Investment Advisers Act of 1940. We are a wholly-owned subsidiary of Washington
National Corporation ("WNC"), a Delaware Corporation, located in Lincolnshire,
Illinois. WNC is a financial services corporation.
THE SEPARATE ACCOUNT
Separate Account I was established by Us as a separate account on November 5,
1982, under Illinois law. It is registered with the Securities and Exchange
Commission as an open-end management investment company under the Investment
Company Act of 1940. Registration with the Securities and Exchange Commission
does not involve supervision of management or investment practices or policies
of Separate Account I or Us by the Commission.
Separate Account I is a series type investment company currently consisting of
three Sub-Accounts, the Bond, Short-Term Portfolio and Stock Sub-Accounts. (See
The Sub-Accounts, page 15.)
We own the assets of Separate Account I, but its income, gains and losses
realized or unrealized, are credited to or charged against the assets held in
the Sub-Account for which they are held without regard to Our other income,
gains or losses. The Separate Account is not chargeable with liabilities arising
out of any other Separate Account, or other business which We may conduct. The
obligations arising under the variable annuity contract herein are Our
obligations.
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Ten percent or more of the assets of each Sub-Account are owned by Us. As of
December 31, 1994, We owned 42.13% of the Bond Sub-Account, 59.36% of 38the
Short-Term Portfolio Sub-Account, and 28.51% of the Stock Sub-Account.7
At present there are three Sub-Accounts, but this number may be increased or
decreased by Us in the future. Your Contract's investment results will depend on
the investment performance of the portfolio of the Sub-Accounts You select. 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 fundamental
policies are stated under "Investment Policies and Restrictions" and may not be
changed without the approval of a majority of the Contract owners having an
interest in the affected Sub-Account.
THE SUB-ACCOUNTS
All Sub-Account investments are subject to two general types of investment
risks: financial risk, which refers to the ability of the issuer of a security
to pay principal, interest or dividends, and 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.
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
securities issued or guaranteed by the United States Government or its agencies
and publicly traded, investment grade nonconvertible corporate debt securities
issued by United States corporations which bear one of the 4 highest bond
ratings of either Moody's Investors Services, Inc. or Standard & Poor's
Corporation. The purchase of short-term corporate debt securities (commercial
paper) will be limited to those of the highest grade of those rating services.
See the Statement of Additional Information for Moody's and Standard & Poor's
commercial paper and bond ratings.
Lower rated and unrated securities may be subject to greater market and
financial risk than higher quality, lower yielding securities.
Up to 15% of the total assets may be invested in preferred stocks, convertible
securities and securities which carry warrants to purchase equity securities,
and up to 10% in real estate.
We will not invest in common stock, but may, as a result of conversion of debt
securities or the exercise of warrants, retain for a reasonable period up to 5%
of the assets in common stocks.
A number of factors determine the yields which may be obtained on debt
instruments, such as the size of the offering, maturities, ratings and the
general economic monetary and market conditions. The market value of debt
instruments varies depending on their yields, thus changing the asset value of
the Bond Sub-Account as the general level of interest rates change.
When we believe that portfolio transactions will help Us to achieve the Bond
Sub-Account's objectives, we will execute them. As a result, the rate of
portfolio turnover may vary and portfolio securities may not be held to maturity
depending on business, economic and market conditions.
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Short-Term Portfolio Sub-Account
Objective - to obtain a moderate level of current income, consistent with
liquidity and preservation of capital. We will pursue its 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 days or less from the date of purchase. Some investments may have a stated
term or maturity date as short as one day. The average maturity of the portfolio
will vary according to the investment manager's appraisal of money market
conditions.
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. We may also invest, for defensive purposes, in
investment-grade debt securities, nonconvertible preferred stocks, government
obligations or money market instruments. We may also invest up to 10% in real
estate.
Cash may be held or investment made in high grade short-term debt securities to
provide for expenses and anticipated withdrawals and so that an orderly
investment program may be carried out in accordance with investment policies.
We will invest primarily in common stocks listed on the New York Stock Exchange
and other national securities exchanges and in those traded over the counter. We
will select stocks for their potential for long-term appreciation. Investing for
higher return involves greater risks of declining values. You should expect that
the value of the Stock Sub-Account will decline during periods when stock prices
in general decline.
Investment Policies and Restrictions
In connection with pursuing their investment objectives, the Sub-Accounts may
engage in certain investment practices. A more complete description of the
Sub-Accounts' investment policies and restrictions and the risks involved are
contained in the Statement of Additional Information. The following investment
policies and restrictions are fundamental policies and may not be changed
without the approval of a majority, as defined in the Investment Company Act of
1940, of the Contract owners having an interest in the affected Sub-Account.
a. The assets of the Bond and Stock Sub-Accounts will be kept fully
invested, except that cash may be kept on hand for the following
purposes:
1. to handle redemptions; or
2. pending investment; or
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 or 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.
b. With respect to 75% of the value of the total assets of Separate
Account I, We will not invest more than 5% of the value of the assets
in the securities of, nor will We acquire more than 10% of the
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outstanding voting securities of any one issuer except those of the
United States Government, its agencies and instrumentalities.
Twenty-five percent of Separate Account I assets may be invested in
securities of one or more issuers without regard for those
limitations.
c. We reserve the right to invest up to 10% of the total assets of each
of the Sub-Accounts, other than the Short-Term Portfolio Sub-Account,
in interests in real estate. Purchases and sales may be made by the
Sub-Accounts other than the Short-Term Portfolio Sub-Account of
securities of issuers which invest or deal in oil, gas or other
mineral exploration or development programs or real estate and real
estate trusts.
d. Loans will not be made except through the acquisition of a portion of
an issue of publicly distributed bonds, debentures, or other evidences
of indebtedness of a type customarily purchased by institutional
investors and except that money market instruments including
repurchase agreements may be acquired and held as permitted in
accordance with Our investment objectives and policies. Investments in
repurchase agreements maturing in more than seven days and in
interests in non-marketable real estate or any other illiquid asset
will not exceed 10% of the total assets of any Sub-Account.
Valuation of Assets
The portfolio instruments held in each Sub-Account are valued on each Valuation
Date as described below. A Valuation Date is each day when the New York Stock
Exchange is open for business or when trades in the securities of any
Sub-Account would materially change the Accumulation and Annuity Unit Values of
the Sub-Account.
a. Stock and Bond Sub-Accounts
1 Securities which are traded on national stock exchanges valued at
the closing price on the Valuation Date. If there are no sales on
that date, at the last current bid quotation.
2. Securities not traded on a national stock exchange valued at the
average between the bid and asked prices.
3. Any other assets for which no fair market value is available
valued as determined in good faith by or under the direction of
the Board of Directors of Separate Account I.
b. Short-Term Portfolio Sub-Account The securities are valued on an
amortized cost basis. Under this method, the security is initially
valued at cost and adjusted on each Valuation Date thereafter for
amortization of premium and accrual of discount until its maturity.
Nevertheless, the Short-Term Portfolio Sub-Account will not maintain a
stable net asset value.
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THE CONTRACTS
PRIOR TO MATURITY (ACCUMULATION PERIOD)
We offered both individual and group Contracts which may or may not be
tax-qualified. The Contracts are no longer being offered.
Purchase Payments
The first payment was due on the Contract Date. Future periodic Purchase Payment
due dates are determined by the mode or frequency You chose in the application.
If the application could be accepted in the form received, the first Purchase
Payment would be credited to purchase Accumulation Units within two business
days after receipt by Us. If, because the application was incomplete, the first
Purchase Payment was not applied to purchase Accumulation Units within five
business days after it was received by Us, the Purchase Payment would be
returned, unless You consented to Our retaining the Purchase Payment and
crediting it as soon as the necessary requirements were fulfilled.
The Contracts were issued on a periodic basis only. However, if only one payment
was made, it would be considered a single Purchase Payment deferred Variable
Annuity. If you wished Variable Annuity payments to begin immediately under an
individual Contract, You could choose to do so by paying a single Purchase
Payment of $2,000 or more, and electing one of the settlement options when
applying for the Contract.
Periodic Purchase Payments may be made every twelve, six or three months or on
one of the monthly modes which We permit. You may change the frequency of
payment on any due date.
Increases in the periodic Purchase Payment may be made only with Our consent,
and we reserve the right to refuse to accept any subsequent increased payment.
The minimum amount of Purchase Payment which we will accept, during any Contract
year, is $300.
Sub-Account Allocations
In the application for the Contract, You tell Us the portion of Your Purchase
Payments to be allocated to each Sub-Account of Separate Account I and to the
Fixed Account; this allocation may be changed at any time. The amount to be
allocated to any Sub-Account or allocated to the Fixed Account must be at least
$25. The number of Accumulation Units credited for each Sub-Account is
determined by dividing the net amount allocated to the Sub-Account by the
Accumulation Unit value for the Sub-Account for the Valuation Period during
which the Purchase Payment is received by Us.
Transfers of Accumulated Values
Transfers, requested in writing, of all or a part of the Accumulated Value of
the Contract are permitted as follows (in $100 increments only):
a. Among the Stock, Bond and Short-Term Portfolio Sub-Accounts at any
time;
b. From the Stock and Bond Sub-Accounts to the Fixed Account at any time;
c. From the Fixed Account to the Stock and Bond Sub-Accounts once every
twelve months after the first Contract Year;
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d. Not between the Fixed Account and the Short-Term Portfolio
Sub-Account; and
e. Only if amounts of $100 or more are transferred to or from the Fixed
Account or any Sub-Account.
If a partial withdrawal will reduce the Accumulated Value of the Fixed Account
or any Sub-Account to less than $300, the total Accumulated Value of that
account, rather than the requested amount, will be transferred. Transfer will be
based upon the Accumulation Unit value in effect on, and will be made as of, the
Valuation Date on which We received Your request.
We reserve the right under any Contract or Certificate to limit, suspend or
revoke the right to transfer among the Bond, Short-Term Portfolio and Stock
Sub-Accounts. From time to time, We may modify Our rules and procedures
regarding transfers.
Accumulated Value
The Accumulated Value is the sum of the Accumulated Value held in each
Sub-Account plus the Accumulated Value of any Purchase Payments allocated to the
Fixed Account. The Accumulated Value of a Sub-Account is the number of
Accumulation Units credited to the Contract times the value of the Accumulation
Unit. The Net Accumulated Value is the Accumulated Value reduced by any
applicable deductions and charges, which include any contingent deferred sales
charge, the contract maintenance charge and any premium taxes.
The value of an Accumulation Unit for each Sub-Account was established at $1 on
the first Valuation Date. The value of each Accumulation Unit for the
Sub-Accounts will vary with the investment experience of the Sub-Account.
Subsequent Accumulation Unit values for the Sub-Accounts are determined by
multiplying:
a. the Accumulation Unit value for the previous Valuation Date; by
b. the net investment factor for the current Valuation Date, which
reflects the investment performance of the Sub-Account less any
deduction and charges made against the Sub-Account.
Termination of Participation
We retain the right to terminate the Contract after the first contract year and
to pay the Accumulated Value to You if the Accumulated Value of all Sub-Accounts
and the Fixed Account is less than $300. We will notify You of Our intention to
do so and grant a period of ninety days for You to make Purchase Payments to
increase the Accumulated Value to $300. The Contract will be terminated
automatically if the Accumulated Value, after deduction of the Contract
maintenance charge, is equal or less than zero.
Cash Surrender and Withdrawals
You or the Participant, if permitted under the plan, may withdraw part or all
(surrender) of the Contract's Net Accumulated Value. From each withdrawal We
will deduct any applicable contingent deferred sales charge.
We require that:
a. A Written Request be made;
b. You tell Us the amount and from which Sub-Account(s) and/or the Fixed
Account We are to make a withdrawal;
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c. The Contract be surrendered and sent to Us if a full withdrawal is
made;
d. You withdraw at least $100; and
e. The Accumulated Value remaining in any Sub-Account or the Fixed
Account be at least $300, unless a full withdrawal is made.
Withdrawals May Be Taxable
If at the time You make a surrender or withdrawal, You have not provided Us with
an election not to have federal income taxes withheld, We must by law withhold
such taxes from the taxable portion of any surrender or withdrawal and remit
that amount to the federal government. Moreover, the Internal Revenue Code
provides that a 10% penalty tax may be imposed on certain early surrenders or
withdrawals.
Participants in the Texas Optional Retirement Program are prohibited from
withdrawing part or all of the Accumulated Value of the Contract except at
retirement or termination of employment.
Section 403(b) of the Internal Revenue Code provides for tax-deferred retirement
savings plans for employees of certain non-profit and educational organizations.
In accordance with the requirements of Section 403(b), any Contract used for a
403(b) plan will prohibit distributions of (i) elective contributions made in
years beginning after December 31, 1988, (ii) earnings on those contributions,
and (iii) earnings on amounts attributable to elective contributions held as of
the end of the last year beginning before January 1, 1989. However,
distributions of such amounts will be allowed upon death of the employee,
attainment of age 59 12, separation from service, disability or financial
hardship, except that income attributable to elective contributions may not be
distributed in the case of hardship.
Loans From 403(b) Contracts
If You have a qualified contract issued pursuant to Section 403(b) of the
Internal Revenue Code, You may take a loan of from $5,000 to $50,000 from your
contract, subject to various conditions including the following:
1) You may have only one loan outstanding at a time from all of your
403(b) contracts issued by Us.
2) Generally, the loan must be repaid within five years.
3) The current rate of interest credited on any Accumulated Value of this
contract will not be affected by any outstanding loan.
4) You will be charged a rate of interest based on Moody's Corporate Bond
Yield Average; the interest rate may be changed on the loan
anniversary date.
5) The loan may affect your withdrawal privileges.
6) Our handling of the loan will be in accordance with Section 72(p) of
the Internal Revenue Service which may limit the amount you may
borrow. (See Federal Income Tax Matters, p. 27.)
7) You will be charged a $200 loan fee in all states except Wisconsin,
which has a separate fee schedule.
Options on Discontinuance of Purchase Payments
If you discontinue Purchase Payments, you may choose one of these Options:
a. Surrender (full withdrawal) You may surrender the Contract and
withdraw all of the Net Accumulated Value;
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b. Paid-Up Annuity You may have the Contract continued so that the
Accumulation Units will provide benefits at the maturity date. This
Paid-Up Annuity may be surrendered at any time prior to maturity for
its then Net Accumulated Value.
You can resume payments at any time prior to maturity unless the Contract has
been surrendered.
Payment at Death
If the Annuitant dies prior to the date We begin to make annuity payments, We
will pay the Net Accumulated Value of the Contract, next determined on the
Valuation Date on which proof of death is received by Us. If the Beneficiary
elects to receive payments under a Settlement Option, the election must be made
within 60 days after the date of death of the annuitant in order to receive
favorable tax treatment, during which time amounts will remain as previously
allocated and will be subject to investment experience and/or interest credits.
For Contracts issued on or after January 19, 1985, federal tax law requires that
if the contract owner or any Joint contract owner dies before the maturity date,
generally the entire value of the Contract must be distributed within five (5)
years of the date of death of the contract owner. Special rules may apply to
spouses of the deceased owner. See "FEDERAL TAX MATTERS: IRS Required
Distribution" in the Statement of Additional Information for greater details.
Time and Delay of Payment
We will pay all Proceeds within seven days of the date Written Request for
withdrawal is received or the date an annuity payment or payment of death and
maturity Proceeds is due. Payments under the Contract of any Proceeds derived
from Purchase Payments made by check may be delayed until such time as the check
has cleared Your bank.
We have the right to delay payment when:
a. The New York Stock Exchange is closed, other than customary weekend
and holiday closings;
b. Trading on the New York Stock Exchange is restricted;
c. An emergency exists so that it is not reasonably practicable for
Separate Account I to dispose of securities or fairly to determine the
value of its net assets; or
d. The Securities and Exchange Commission by order may permit for the
protection of the owners of the Contracts.
Inquiries About Your Contract
If you have any questions regarding your Contract, you may write to Us at
Washington National Insurance Company, Life and Annuity Administration, 300
Tower Parkway, Lincolnshire, Illinois 60069.
AFTER MATURITY (ANNUITY PERIOD)
Maturity Date
On the maturity date, which unless otherwise changed is the date You specify in
the application, the Net Accumulated Value will be applied to the annuity option
You selected or, if requested by You, paid out as a single sum settlement.
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While the Contract is in force, You may, by Written Request, elect to have
Annuity Payments begin at an optional maturity date, which may be any Contract
Anniversary on which the Annuitant's Attained Age is fifty-five or more. Prior
to the due date of the first Annuity Payment, You may change a previously
elected optional maturity date to another optional maturity date.
Election of Options
You may elect to have all or part of the Proceeds of the Contract applied under
one of the following settlement options. You may cancel or change a previous
election, but only if You do so prior to the death of the Annuitant or the
maturity date of the Contract and only if You do so in writing. If You do not
elect a settlement option prior to the Annuitant's death, the payee may do so
provided the election is made within one year after the date of death of the
Annuitant. Any settlement option election will be subject to the limitations and
conditions set forth in the Contract.
If the Annuitant dies after annuity payments have begun, the death benefit will
be as stated under the Settlement Option provision elected. If the contract
owner dies after annuity payments have begun, the remaining interest in the
Contract must be distributed at least as rapidly as under the method of
distribution in effect at the time of the contract owner's death.
Under Options 2(A) and 6, only one payment will be made if the Annuitant and any
joint Annuitant die(s) before the second payment is made; only two payments will
be made if the death(s) occur(s) before the third payment is made; and so forth.
OPTION 1 - Income for a Fixed Period
We will pay the proceeds in equal installments over a period of from one to
thirty years.
OPTION 2 - Income for Life
We will pay a monthly income during a person's lifetime. The monthly income may
be a life annuity only, Option 2(A); a life annuity with a minimum guaranteed
period of five, ten or twenty years, Option 2(B); or an installment refund life
annuity with payments guaranteed until the number of Annuity Units in each
payment, multiplied by the number of payments made, equals the total amount
applied under the Option divided by the Annuity Unit value used to determine the
number of units in the first payment, Option 2(C).
OPTION 3 - Income of Fixed Amount
We will pay the Proceeds in equal installments in the amount and at the
intervals agreed upon until the Proceeds applied under this option, with
interest at 3% per annum, are exhausted. The final installment will be for the
remaining balance.
OPTION 4 - Interest Income
We will hold the Proceeds on deposit and pay or credit interest at the rate of
3% per annum. Payment of interest will be at such time and for such periods as
are agreeable to You and Us.
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OPTION 5 - Joint and Survivor Income for Life
We will pay an income during the lifetime of two payees, and continuing until
the death of the survivor. This option includes a minimum guaranteed period of
10 years.
OPTION 6 - Joint and Two-thirds Survivor Income for Life
When a Fixed Annuity is elected, We will pay an income (the "original amount")
during the time two payees both remain alive, and two-thirds of the original
amount during the remaining lifetime of the survivor. When a Variable Annuity is
elected, the number of units will be reduced by one-third at the death of one
payee.
Election of Fixed or Variable Annuity Payments
You may choose when annuity payments begin, to have the Net Accumulated Value
applied, except under Options 1, 3 and 4, to provide for:
a. a Fixed Annuity;
b. a Variable Annuity; or
c. a mix of the above.
If You do not make an election, the Net Accumulated Value will be paid under
Option 2(B) with payments guaranteed for a period of ten years.
The net investment factor, or a factor which reflects a guaranteed annual
investment rate of 3%, will apply if Option 3 is chosen.
Options 1, 3 and 4 are available as a Fixed Annuity only. The Net Accumulated
Value needed to provide a Fixed Annuity or a guaranteed interest rate will be
withdrawn from Separate Account I.
The Options described above are available only if We receive proper proof of age
and proof that the payee is living, the Accumulated Value is at least $2,000,
and, under the Option chosen, results in a periodic payment of at least $20.
Determination of Variable Annuity Payments
On the maturity date the Net Accumulated Value is applied to provide annuity
payments. The dollar amount of the first variable Annuity Payment is determined
based on the annuity payment rates found in the Contract for the option
selected. These rates are based on an assumed interest rate of 3.5% per year.
All variable Annuity Payments after the first will reflect the investment
experience of the Sub-Accounts in which the Net Accumulated Value was held.
After the maturity date the investments may not be transferred among the
Sub-Accounts. The dollar amount of each variable Annuity Payment after the first
may increase, decrease or remain constant, depending upon whether the investment
performance is greater than, less than or equal to the assumed interest rate of
3.5%.
Accordingly, variable Annuity Payments vary with the investment performance of
Separate Account I and the option selected. Options that involve greater
durations or frequency or life contingencies generally result in smaller
periodic payments. Periodic payments will be greater for life annuities than for
joint and survivor annuities, because they are expected to be made for a shorter
period. Also, the assumed interest rate affects the amount of the payment. If
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the assumed rate were higher than 3.5%, the initial Annuity Payment would be
greater, but subsequent payments may be more likely to decrease.
We explain in detail how variable Annuity Payments are computed in the Statement
of Additional Information.
HOW CONTRACTS WERE SOLD
The Contracts were sold by Our life insurance agents, who were licensed to sell
variable annuities and were registered representatives of WNEC, of Evanston,
Illinois (a former, wholly-owned subsidiary of WNC), which, until March 31,
1990, was registered as a broker-dealer under the Securities Exchange Act of
1934, was the principal underwriter of Separate Account I and was a member of
the National Association of Securities Dealers, Inc. (NASD). The commissions
paid to dealers do not exceed 6% of Purchase Payments.
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 Contracts are no longer being sold; however, additional Purchase
Payments will continue to be accepted in accordance with contractual provisions.
DEDUCTIONS AND CHARGES
Annuity Rate Guarantee Deductions
Although Variable Annuity payments made to Annuitants will vary in accordance
with the investment performance of the investments of Separate Account I, they
will not be affected by the mortality experience (death rate) of persons
receiving such payments. We assume this "mortality risk" by virtue of annuity
rates incorporated in the Contract which cannot be changed. To compensate Us for
assuming this risk, a charge will be made daily from Separate Account I for
annuity rate guarantees, which is equal on an annual basis to approximately .80%
of the current asset value of Separate Account I. If the deductions are
insufficient to cover the actual cost of the mortality risk, We will bear the
loss; conversely, if the deductions prove more than sufficient, the excess will
be a profit to Us. We may not increase the rate of the annuity rate guarantee
deduction. This fee will be paid to Us monthly.
Investment Management Charge
We act as investment manager for Separate Account I under an investment
management agreement between Separate Account I and Us. For providing those
services, a charge will be made daily from Separate Account I which is equal on
an annual basis to .50% of the average net assets of Separate Account I. We have
contracted with NBD Bank to act as Sub-Advisor for and to manage the investments
of the Stock Sub-Account, for which We pay NBD Bank a fee of .40% of average net
asset of the Stock Sub-Account. NBD Bank is a major stockholder of Washington
National Corporation.
Financial Accounting Service Charge
We provide financial accounting services to Separate Account I under an
Administrative Service Agreement between Separate Account I and Us. Such
services include preparation and maintenance of all accounting, bookkeeping,
financial and other statements necessary to conduct the business and operations
of Separate Account I.
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For providing these services, a charge is made daily from Separate Account I and
paid to Us monthly, which is equal on an annual basis to .35% of the average net
assets of Separate Account I. The charge is designed to cover the actual
expenses incurred in providing these services and We do 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.
Contingent Deferred Sales Charge
We do not make any deductions for sales charges from Purchase Payments when We
receive them. 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 are incurred in connection with
their sale. The contingent deferred sales charge is made only when a withdrawal,
partial or full (including applying the Accumulated Value to a Paid-Up Annuity
under certain circumstances), is made from the Contract and is designed to
recover those sales expenses. The proceeds received from such charge are not
sufficient to pay such expenses; We pay the excess out of Our general funds,
which includes proceeds derived from the annuity rate guarantee charge.
In connection with certain withdrawals, We assess a contingent deferred sales
charge. The contingent deferred sales charge is made at the rate of 6% of the
amount withdrawn and is deducted from the amount withdrawn.
In calculating the amount of any contingent deferred sales charge:
1. Any amount which You withdraw will be treated as a withdrawal of
Purchase Payments until You have withdrawn the total amount of all
Purchase Payments received within seventy-two months of the date of
withdrawal. The maximum amount which You may withdraw cannot exceed
the Contract's or Certificate's Net Accumulated Value.
2. It will be assumed that the earliest Purchase Payment(s) is (are) the
source of the first amounts withdrawn, even if amounts are withdrawn
from the Fixed Account or a Sub-Account other than that to which such
Purchase Payments were credited.
3. The total of such charge will never exceed 6% of the total Purchase
Payments.
We will not make a deduction for the contingent deferred sales charge:
1. On the first 10% of the Accumulated Value withdrawn from a Contract or
Certificate during any Contract or Certificate year. The amount which
may be withdrawn without charge is determined as of the date of the
first withdrawal during the year.
2. On Purchase Payments received more than seventy-two months prior to
the date of withdrawal.
3. If the amount withdrawn is applied to:
a. a settlement option after the Contract or Certificate has been in
effect for five or more years, or
b. Settlement Option 2, 5 or 6 at any time.
4. If the Annuitant dies.
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, We will deduct from the Accumulated Value of the
Contract a charge for establishing and maintaining records. The annual charge is
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currently $30 for each Contract and Certificate. The charge will be made
pro-rata from the Accumulated Value of each Sub-Account and the Fixed Account
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. We currently will waive 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.
Expenses of Separate Account I
Separate Account I will pay 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 Separate Account I to its current contract owners, fees of and
expenses incurred by directors of Separate Account I who are not Our 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 Separate Account I which are not borne by Us under
the advisory agreement or an administrative services agreement or by the
underwriter under a distribution agreement. These expenses will be allocated
between Sub-Accounts as the Board of Directors deems appropriate, which is
generally in proportion to the net assets of the Sub-Accounts.
Premium Taxes
Various states and municipalities impose a premium tax of up to 3.5% upon
Purchase Payments received by insurance companies. At present We will pay those
taxes, but, We reserve 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.
CHANGES AND MODIFICATIONS
We reserve the right, subject to applicable law, and the approval, if required,
of those who have the right to vote at the meetings of the contract owners of
Separate Account I, to:
a. Change Separate Account I from a management company and operate it as
a unit investment trust under the Investment Company Act of 1940, or
in any other form permitted by law;
b. Deregister Separate Account I in the event registration under the
Investment Company Act of 1940 is no longer required;
c. Combine or divide, increase or decrease the number of Sub-Accounts or
transfer assets and Contracts from one separate account or Sub-Account
to another;
d. Amend, or deliver a new Contract in exchange for the Contract, to: 1)
assure that it qualifies for the benefits which the Internal Revenue
Code provides annuity contracts; or 2) comply with the applicable law.
e. Terminate the Contract if we determine that a change in applicable law
or its interpretation makes it no longer feasible to continue the
Contract and others like it in effect.
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VOTING RIGHTS
Before annuity payments begin, the contract owners have the right to vote at the
meetings of contract owners to the extent of their interest in the Contracts on
the matters listed below. Participants have the right to instruct contract
owners as to votes attributable to their interest in Separate Account I. The
number of votes which may be cast is equal to the number of Accumulation Units
credited to their Contracts for each Sub-Account.
After annuity payments begin, Annuitants have the right to vote at the meetings
of contract owners. The number of votes which may be cast in each Sub-Account is
equal to:
a The reserve needed to meet the Contract obligations in each
Sub-Account, divided by
b. The Accumulation Unit value for that Sub-Account for that date.
As a result, the number of votes which may be cast will decrease as Annuity
Payments are made. Fractional votes will be counted.
Only those who have an interest in a Sub-Account will have voting rights on
matters which affect the Sub-Accounts. On matters which affect all Sub-Accounts
in the same way, votes will be counted as a group.
To be entitled to vote, or to instruct the contract owner as to how to vote, a
person must have been the owner, Participant or Annuitant, on a date chosen by
the Board of Directors of Separate Account I. That date will be within ninety
days of the meeting and the date on which the number of votes is determined.
At least twenty days prior to the meeting, written notice will be sent to the
persons entitled to vote. The matters which will be voted upon are:
a. Election of the Board of Directors of Separate Account I;
b. Any change in the fundamental investment policies and restrictions of
the Sub-Accounts;
c. Approval of any investment management agreement or its amendment(s);
d. Ratification of the selection of an independent auditor for Separate
Account I; and
e. Any other business which may properly come before the meeting.
The voting rights under the Contract do not entitle anyone to vote at any
meeting of Our shareholders or on matters which relate to the Fixed Account.
Votes may be cast in person or by proxy. There is no current intention to hold
routine annual contract owners meetings.
FEDERAL INCOME TAX MATTERS
BECAUSE OF THE COMPLEXITY OF THE LAW AND THE FACT THAT THE TAX CONSEQUENCES MAY
VARY ACCORDING TO THE ACTUAL STATUS OF THE CONTRACT OWNER INVOLVED AND THE TYPE
OF PLAN, IF ANY, UNDER WHICH THE CONTRACT IS PURCHASED, ANY PERSON CONTEMPLATING
THE PURCHASE OF A CONTRACT DESCRIBED HEREIN IS ADVISED TO CONSULT A QUALIFIED
TAX ADVISOR.
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It should be understood that a complete description of the federal income tax
consequences of the purchase of these Contracts cannot be made in this
prospectus and that special tax rules may be applicable with respect to certain
purchase situations not discussed here. In addition, no attempt is made here to
consider any applicable state or other tax laws. For more complete and detailed
information, a qualified tax advisor should always be consulted. The discussion
here is general in nature and is based upon Our understanding of current federal
income tax laws as they are currently interpreted. No representation is made
regarding the likelihood of continuation of current federal income tax laws or
of the current interpretations thereof by the Internal Revenue Service or the
courts.
How We Are Taxed
We are taxed as a life insurance company under Subchapter L of the Internal
Revenue Code of 1986 (the "Code"). Separate Account I is not a separate taxable
entity; its operations form a part of, and are taxed with, Our total operations.
Under existing federal income tax law, no taxes are due on interest, dividends
or capital gains realized by Separate Account I with respect to the Contracts.
We reserve the right to levy a charge to cover any taxes that might be assessed
against Separate Account I in the future due to any change in the existing
federal tax law.
How You Are Taxed
The following discussion assumes that the Contracts will qualify as annuity
contracts for federal income tax purposes. The Statement of Additional
Information discusses such qualifications.
Non-Qualified Contracts
An annuity contract owner generally is not taxed on increases in the value of a
Contract until distribution occurs, either in the form of a lump sum payment
received by withdrawing all or part of the cash value or as annuity payments
under the annuity option elected. For this purpose, the assignment or pledge of,
or the agreement to assign or pledge, any portion of the value of a Contract
will be treated as a distribution. The taxed portion of a distribution (in the
form of a lump sum payment or an annuity) is taxed as ordinary income. However,
for Purchase Payments made after February 28, 1986, an owner of a Contract who
is not a natural person (subject to limited exceptions) generally will be taxed
on any increase in the Contract's cash value over the "investment in the
contract" during the taxable year, even if no distribution occurs. The following
discussion applies to Contracts owned by natural persons.
Except as provided below, in the case of a surrender or withdrawal under a
Contract, amounts received are first treated as taxable income to the extent
that the Contract Value of the Contract immediately before the withdrawal
exceeds the "investment in the contract" at that time. Any additional amount
withdrawn is not taxable. However, in the case of a withdrawal under a Contract
issued before August 14, 1982, and allocable to an "investment in the contract"
made before that date, amounts received are treated as taxable income only to
the extent that they exceed the "investment in the contract." The "investment in
the contract" generally equals the portion, if any, of any premium paid by or on
behalf of an individual under a Contract which is not excluded from the
individual's gross income.
Although the tax consequences may vary depending on the form of annuity selected
under the Contract, the recipient of an Annuity Payment under a Contract
generally is taxed on the portion of such payment that exceeds the "investment
in the contract." For Variable Annuity Payments, the taxable portion is
determined by a formula that establishes a specific dollar amount of each
payment that is not taxed. The dollar amount is determined by dividing the
"investment in the contract" by the total number of expected periodic payments.
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For Fixed Annuity Payments, in general, there is no tax on the amount of each
payment which represents the same ratio that the "investment in the contract"
bears to the total expected value of the Annuity Payment for the term of the
payment; however, the remainder of each Annuity Payment is taxable. For
individuals whose Annuity Commencement Date is after December 31, 1986, the
entire distribution will be fully taxable once the recipient is deemed to have
recovered the dollar amount of his "investment in the contract."
There may be imposed a penalty tax on distributions equal to ten percent of the
amount treated as taxable income. The penalty tax is not imposed in certain
circumstances, which generally include: (1) distributions received on or after
the taxpayer attains age 59 12 ; (2) distributions made on or after the holder's
death or that are attributable to the taxpayer's disability; (3) distributions
received in substantially equal installments as a life annuity (subject to
special "recapture" rules if the series of payments is subsequently modified);
and (4) distributions allocable to the "investment in the contract" before
August 14, 1982.
A transfer of ownership or assignment of a Contract, the selection of certain
maturity dates, or the designation of an Annuitant or other beneficiary who is
not also the contract owner, may result in certain tax consequences to the
contract owner that are not discussed herein. A contract owner contemplating any
such transfer, assignment, selection, or designation should contact a competent
tax advisor with respect to the potential tax effects of such a transaction.
All non-qualified deferred annuity contracts entered into after October 21, 1988
that are issued by Us or an affiliated insurance company to the same contract
owner during any calendar year will be treated as one annuity contract, and
therefore aggregated for purposes of determining the amount includable in gross
income. In addition, there may be other situations in which the Treasury
Department may conclude (under its authority to issue regulations) that it would
be appropriate to aggregate two or more annuity contracts purchased by the same
contract owner.
We will withhold and remit to the U.S. Government a part of the taxable portion
of each distribution made under a Contract unless the contract owner or
Annuitant is permitted to elect not to have amounts withheld and notifies Us at
or before the time of the distribution that he or she chooses not to have any
amount withheld.
Qualified Contracts
The Contracts are designed for use with several types of qualified plans. The
following are brief descriptions of qualified plans with which Our Contracts may
be used:
a. Corporate and H.R. 10 Pension and Profit-Sharing Plans--Section 401
and 403(a) of the Code permit corporate employers to establish various
qualified plans for their employees, and self-employed individuals to
establish qualified plans for themselves and their employees. Taxation
of plan Participants depends on the specific plan. The Code governs
such plans with respect to maximum contributions, distribution dates,
non-forfeitability of interests, tax rates applicable to
distributions, and in other respects. In order to establish such a
plan, a plan document, often in prototype form preapproved by the
Internal Revenue Service, is adopted and implemented by the employer.
Such retirement plans may permit the purchaser of the Contract to
accumulate retirement savings. When issued in connection with Section
401 or 403(a) plans, a Contract will be amended to conform to the
requirements under the Code. Purchasers of a Contract for such
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purposes will be provided with supplemental information required by
the Internal Revenue Service or other appropriate agency.
b. Individual Retirement Annuities--Section 408 of the Code permits
certain individuals to contribute to an individual retirement program
known as an "Individual Retirement Annuity" or an "IRA." IRAs are
subject to limitations on eligibility, maximum contributions, time of
distribution and other features. Distributions from certain other
types of qualified plans may be "rolled over" on a tax-deferred basis
into an IRA. Sales of a Contract for use with an IRA may be subject to
special requirements of the Internal Revenue Service. Purchasers of a
Contract for such purposes will be provided with supplemental
information required by the Internal Revenue Service or other
appropriate agency. Such purchasers will have the right to revoke the
Contract within seven days of the earlier of the establishment of the
IRA or the purchase of the Contract.
c. Plans of Public School Systems and Certain Tax Exempt
Organizations--Section 403(b) of the Code permits public school
systems and certain tax-exempt organizations to establish plans that
provide retirement benefits for employees through the purchase of
annuity contracts. Such plans may permit the purchase of the Contracts
in order to provide benefits under the plans. However, distributions
from Contracts used in Section 403(b) plans are severely restricted
(see "Cash Surrender and Withdrawals" at page 19 of the prospectus).
d. Texas Optional Retirement Program--The Optional Retirement Program of
the State of Texas will contribute an amount equal to the contribution
of each Participant. If a Participant is not a "faculty member," as
defined in the Texas Education Code, at the beginning of the second
year of participation, We will return the employer's contribution to
the State. In addition, the Program prohibits Participants from
withdrawing part or all of the Accumulated Value of the Contract
except at retirement or termination of employment. Payment of Proceeds
will also be made at the death of a Participant.
e. Deferred Compensation Plans of State and Local Governments--Section
457 of the Code permits states, political subdivisions of the states,
agencies and instrumentalities of states or of political subdivisions
of states and certain tax exempt organizations to establish deferred
compensation plans for individuals who perform services for such
entities. Such entities are the legal owners of Contracts issued under
such plans. Thus, Participants will be in the position of a general
creditor of the entity rather than the actual or beneficial owner of
the assets of the plan.
Participants under such plans, as well as contract owners, annuitants and
beneficiaries, should be aware that the rights of any person to any benefits
under such plans may be subject to the terms and conditions of the plans
themselves, regardless of the terms and conditions of the Contracts. Purchasers
of Contracts for use with any qualified plan, as well as plan participants and
beneficiaries, should consult counsel and other competent advisors as to the
suitability of the Contracts to their specific needs and as to applicable Code
limitations and tax consequences.
The rules governing the tax treatment of contributions and distributions under
qualified plans, as set forth in the Code and applicable rulings and
regulations, vary according to the type of the plan and the terms and conditions
of the plan itself. Generally, in the case of a distribution to a participant or
beneficiary under a Contract purchased in connection with these plans (other
than a Section 457 deferred compensation plan), only the portion of the payment
in excess of the "investment in the contract" allocated to that payment is
subject to tax. The "investment in the contract" equals the portion of plan
contributions invested in the Contract that was not excluded from the
participant's gross income, and may be zero. In general, for withdrawals or
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surrenders, a ratable portion of the amount received is taxable, based on the
ratio of the investment in the contract to the total Contract Value. For
contracts with annuity starting dates commencing after December 31, 1986, the
amount excluded from a taxpayer's income will be limited to an aggregate cap
equal to the investment in the contract. The taxable portion of annuity payments
is generally determined under the same rules applicable to Non- Qualified
Contracts. However, special favorable tax treatment may be available for certain
distributions (including lump sum distributions). Adverse tax consequences may
result from distributions prior to age 59 12 (subject to certain exceptions),
distributions that do not conform to specified commencement and minimum
distribution rules, aggregate distributions in excess of a specified annual
amount and in certain other circumstances. Effective January 1, 1993, certain
distributions from Contracts used in plans that qualify for special tax
treatment under Sections 401(a), 403(a) and 403(b) of the Code are subject to
mandatory withholding, generally at a rate of 20% (that is, electing no
withholding is not permitted).
Other Considerations
In past years, legislation has been proposed in the U.S. Congress that would
have adversely modified the federal taxation of certain annuities. For example,
one such proposal would have changed that tax treatment of non-qualified
annuities that did not have "substantial life contingencies" by taxing income as
it is credited to the anuuity. Although as of the date of this Prospectus
Congress was not actively considering any legislation regarding the taxation of
annuities, there is always the possibility that the tax treatment of annuities
could change by legislation or other means (such as IRS regulations, revenue
rulings, judicial decisions, etc.). Moreover, it is also possible that any
change could be retroactive (that is, effective prior to the date of the
change).
Because of the complexity of the federal tax law, and the fact that tax results
will vary according to the factual status of the individual involved, tax advice
may be needed by a person contemplating purchase of a Contract or the exercise
of elections under the Contract. It should be understood that the above comments
and the discussion in the Statement of Additional Information concerning the
federal income tax consequences are not an exhaustive discussion of all tax
questions that might arise under the Contracts and that special rules are
provided with respect to situations not discussed there. No representation is
made regarding the likelihood of continuation of the present income tax laws or
of current interpretations by the Internal Revenue Service. No attempt has been
made to consider any applicable state or other tax law except with respect to
the imposition of any state premium taxes.
We do not make any guarantee regarding the tax status of any Contract, and the
"Federal Tax Matters" discussions in this prospectus and in the Statement of
Additional Information are not intended as tax advice.
MANAGEMENT
Separate Account I is managed by a Board of Directors consisting of three
outside and two inside directors. Their duties, as set forth in the Rules and
Regulations of Separate Account I, include: selection of an independent auditor;
approval of agreements providing for sales, administrative, investment
management and advisory services; review and supervision of the investment of
assets; obtaining of fidelity bond coverage; and any acts necessary to carry out
the above.
We serve as investment adviser to Separate Account I. We also advise The
Washington National Retirement Plan, which was frozen effective December 31,
1990.
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INVESTMENT MANAGER
We act as investment manager for Separate Account I under an investment
management agreement between Us and Separate Account I. The agreement provides
that We will manage the investments of Separate Account I under the direction of
the Board of Directors. For providing those services, Separate Account I will
pay Us a fee at an annual rate of .50% of the average net assets of Separate
Account I. This fee will be calculated daily and paid monthly. Our duties under
the agreement are to:
a. Decide on and place orders for the purchase and sale of securities for
the Sub-Accounts, using Our best efforts to obtain the most favorable
terms possible.
b. Regularly furnish reports at the periodic meetings of the Board of
Directors.
We are subject to the supervision of the Board of Directors. Under the
agreement, We have the right to withdraw the use of Our name by Separate Account
I. The agreement will continue in effect from its effective date and from year
to year so long as it is approved by the Board of Directors or by the contract
holders as required by the Rules and Regulations of Separate Account I, and so
long as We do not terminate it by giving sixty days written notice.
Effective January 1, 1994, We have contracted with NBD Bank, an Illinois banking
corporation having its principal office and place of business at 1603 Orrington
Avenue, Evanston, Illinois 60201 to have them manage the investment portfolio of
the Stock Sub-Account. NBD Bank is controlled by NBD Bancorp, Inc., a Delaware
corporation and bank holding company.
LEGAL PROCEEDINGS
We and certain affiliated companies have been named in various pending legal
proceedings considered to be ordinary routine litigation incidental to the
business of such companies. A number of other legal actions have been filed that
demand compensatory and punitive damages aggregating material dollar amounts.
Our management and chief legal officer believe that such litigation will not
have a material affect on the consolidated results of operations or financial
position. See Note F to Our financial statements for a description of a class
action complaint by two retired employees, relating to retirement benefits.
Separate Account I is not engaged in any litigation.
THE FIXED ACCOUNT
Purchase Payments which are allocated to the Fixed Account become part of Our
general account which supports insurance and annuity obligations. Because of
exemptive and exclusionary provisions, interests in the Fixed Account have not
been registered under the Securities Act of 1933 ("1933 Act"), nor is the Fixed
Account registered as an investment company under the Investment Company Act of
1940 ("1940 Act"). Accordingly, neither the Fixed Account nor any interests
therein are generally subject to the provisions of the 1933 or 1940 Acts.
Disclosures regarding the fixed portion of the annuity contract and the Fixed
Account have not been reviewed by the staff of the Securities and Exchange
Commission.
Fixed Account Accumulated Value-The value of a fixed Accumulation Unit was
established at $1 and is adjusted daily to reflect the rate(s) of interest being
credited to Contracts with an interest in the Fixed Account. A Calendar Year is
a period of one year from January 15 of one year through January 14 of the next
year. The Fixed Account Accumulated Value is the total of periodic Purchase
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Payments and transfers to the account, increased at rates of interest
established by Us, reduced by the total of any deductions, charges, withdrawals
and transfers from the account. We reserve the right to deduct premium or other
taxes from Purchase Payments or to charge those taxes against the Contracts to
which they are attributable. The guaranteed interest rate for the first Calendar
Year is stated in the Contract. That rate may be changed by Us at the end of the
first Calendar year and at the end of each Calendar year thereafter. We will
credit interest daily at the established rates, but interest will be compounded
annually. We will notify You of the rate of interest to be credited during the
next Calendar year.
We guarantee that the interest rate will be at least 4%.
Amount of Each Fixed Annuity Payment
a. The amount of the first Fixed Annuity payment will be equal to:
1. the amount of the Net Accumulated Value being used to purchase a
Fixed Annuity, divided by
2. $1,000, times
3. a factor from the Fixed Annuity Settlement Option Table that
appears in the Contract.
b. The dollar amount of Fixed Annuity payments remain fixed during the
annuity payment period, except under:
1. Option 4, and
2. Options 2, 3 and 5, which may be increased by interest in excess
of the guaranteed rates.
3. Option 6, under which the number of units is reduced one-third at
the death of the first payee.
Time and Delay of Payment
Fixed Account-We may delay paying the amount of any withdrawal or surrender for
up to six months after a request is received by Us.
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TABLE OF CONTENTS OF
THE STATEMENT OF ADDITIONAL INFORMATION
Page
----
GENERAL INFORMATION AND HISTORY 3
The Company 3
THE SEPARATE ACCOUNT 4
Investment Policies And Restrictions 4
Real Estate 4
Money Market Instruments 5
Turnover 5
Net Asset Value 5
THE CONTRACT 6
Ownership 6
Beneficiary 6
Assignment 6
Calculation of the Accumulation Unit Value 6
Single Sum Settlement 7
Reports 7
ANNUITY PAYMENTS 8
Election of Fixed or Variable Annuity 8
Payments
Limitations/Conditions 8
Variable Annuity Unit Value 9
Amount of Each Variable Annuity Payment 9
FEDERAL TAX MATTERS 9
Diversification Requirements 9
IRS Required Distributions 10
MANAGEMENT 11
Directors and Officers of Separate Account I 11
Remuneration of Board of Directors, Officers
and Employees 12
Principal Stockholders of Washington National
Corporation 13
INVESTMENT MANAGER 14
ADMINISTRATIVE SERVICES 16
CUSTODY AGREEMENT 16
BROKERAGE ALLOCATION 16
Securities Transactions 16
Transactions May Be Made for a Number of
Accounts at Once 17
Other Transactions With Brokers or Dealers 17
UNDERWRITERS 17
PERFORMANCE DATA 17
LEGAL MATTERS 20
STATE REGULATION 20
REGISTRATION STATEMENT 20
EXPERTS 20
FINANCIAL STATEMENTS 20
APPENDIX A: Commercial Paper and Bond Ratings A-1
APPENDIX B: Short-Term Portfolio Sub-Account B-1
Investments
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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
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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.
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------------------------------------------------------------------------------
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
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------------------------------------------------------------------------------
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
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------------------------------------------------------------------------------
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
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------------------------------------------------------------------------------
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>
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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:
6
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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.
------------------------------------------------------------------------------
POLICIES AND TECHNIQUES
APPLICABLE TO THE PORTFOLIOS
------------------------------------------------------------------------------
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
7
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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
8
<PAGE>
SCUDDER
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.
9
<PAGE>
SCUDDER
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
10
<PAGE>
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").
11
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SCUDDER
(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
------------------------------------------------------------------------------
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.
12
<PAGE>
SCUDDER
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.
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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.
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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.
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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.
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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.
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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
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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>
<TABLE>
<CAPTION>
====================================================================================================================================
SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
300 Tower Parkway
Lincolnshire, Illinois 60069
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 1:30 p.m., Central Time, on Tuesday,
March 12, 1996, and at any adjournments thereof, as follows:
P
R
O
X
Y
See Reverse
Side
====================================================================================================================================
<PAGE>
====================================================================================================================================
XXXX
Please date, sign
and return this
proxy in the
enclosed envelope
<C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
THIS PROXY WILL BE VOTED AS DIRECTED, OR IF NO DIRECTION IS INDICATED WILL BE
VOTED FOR ALL OF THE PROPOSALS.
- ------------------------------------------------------------------------------------------------------------------------------------
1. To approve the Transactions restructuring the Separate |_| FOR 2. To transact such other business as |_| FOR
Account as a unit investment trust investing in certain |_| AGAINST may properly come before the |_| AGAINST
Portfolios offered by Scudder Variable Life Investment |_| ABSTAIN meeting. |_| ABSTAIN
Fund.
Please sign your name exactly as it appears on this proxy card. (When
signing in a fiduciary capacity, such as an executor, administrator, trustee,
attorney, guardian, etc., please so indicate. Corporate and partnership proxies
should be signed by an authorized person indicating the person's title.)
------------------------------------------------------------------------------
------------------------------------------------------------------------------
SIGNATURE(S) DATE
====================================================================================================================================
</TABLE>
<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 February
1, 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.
February 1, 1996
B - 1
<PAGE>
<TABLE>
<CAPTION>
Statement Of Additional Information
TABLE OF CONTENTS
Page in the
Page in the Proxy Statement/
Statement of Prospectus
Additional Containing
Caption in the Statement of Additional Information Information Related Disclosure
<S> <C> <C>
PRO FORMA FINANCIAL STATEMENTS B - 3 5-6
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)
</TABLE>
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. The
subsequent redemption of approximately $61 million, or 46% of the outstanding
shares, from the Bond Portfolio of the Fund in late December 1995 will increase
the Bond Portfolio's expense ratio somewhat but is not expected to have a
material effect on the performance of the Fund or the Continuing Separate
Account.
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, immediately follows this page.
<PAGE>
WN Plan
DEFERRED VARIABLE ANNUITY CONTRACT
FUNDED THROUGH SEPARATE ACCOUNT I
OF
WASHINGTON NATIONAL INSURANCE COMPANY
LINCOLNSHIRE, ILLINOIS 60069
(708) 793-3000
STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 1, 1995
This is not a prospectus. It should be read with the prospectus for this product
dated May 1, 1995 which may be obtained by writing or calling Washington
National Insurance Company, Life and Annuity Administration, 300 Tower Parkway,
Lincolnshire, Illinois 60069; telephone (708) 793-3243.
The definitions used in the prospectus are incorporated in this statement.
V103 A-8
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Prospectus
Page Page
---- ----
<S> <C> <C> <C>
GENERAL INFORMATION AND HISTORY.................................................................. 3
The Company.................................................................... 3 14
THE SEPARATE ACCOUNT............................................................................. 4 14
Investment Policies and Restrictions........................................... 4 16
Real Estate.................................................................... 4
Money Market Instruments....................................................... 5
Turnover....................................................................... 5
Net Asset Value................................................................ 5
THE CONTRACT(S) 6 17
Ownership...................................................................... 6
Beneficiary.................................................................... 6
Assignment..................................................................... 6
Calculation of the Accumulation Unit Value..................................... 6
Single Sum Settlement.......................................................... 7
Reports........................................................................ 7
ANNUITY PAYMENTS 8
Election of Fixed or Variable Annuity Payments................................. 8
Limitations/Conditions......................................................... 8
Variable Annuity Unit Value.................................................... 9
Amount of Each Variable Annuity Payment........................................ 9
FEDERAL TAX MATTERS.............................................................................. 9 27
Diversification Requirements................................................... 9
IRS Required Distributions..................................................... 10
MANAGEMENT 11 31
Directors and Officers of Separate Account I................................... 11
Remuneration of Board of Directors, Officers and Employees..................... 12
Principal Stockholders of Washington National Corporation...................... 13
INVESTMENT MANAGER............................................................................... 14 31
ADMINISTRATIVE SERVICES.......................................................................... 16
CUSTODY AGREEMENT 16
BROKERAGE ALLOCATION............................................................................. 16
Securities Transactions........................................................ 16
Transactions May Be Made for a Number of Accounts at Once...................... 17
Other Transactions With Brokers or Dealers..................................... 17
UNDERWRITERS 17
PERFORMANCE DATA 17 13
LEGAL MATTERS 20
STATE REGULATION 20
REGISTRATION STATEMENT........................................................................... 20
EXPERTS 20
FINANCIAL STATEMENTS............................................................................. 20
APPENDIX A: Commercial Paper and Bond Ratings.................................................... A-1
APPENDIX B: Short-Term Portfolio Sub-Account Investments......................................... B-1
</TABLE>
Page 2
<PAGE>
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<PAGE>
GENERAL INFORMATION AND HISTORY
The Company
We, Washington National Insurance Company, are a wholly-owned subsidiary of
Washington National Corporation (WNC), a Delaware Corporation, whose executive
offices are located at 300 Tower Parkway, Lincolnshire, Illinois 60069.
We are licensed to do business in all states of the United States (except New
York) and the District of Columbia. We have total assets of over $2.8 billion.
Page 3
<PAGE>
THE SEPARATE ACCOUNT
Investment Policies and Restrictions
In addition to the investment policies and restrictions contained in the
prospectus, the Sub-Accounts have the following policies and restrictions. These
investment policies and restrictions are fundamental policies and may not be
changed without the approval of a majority of the contract owners having an
interest in the affected Sub-Account. A majority means the lesser of (A) 67% or
more of the voting securities present at a meeting, if more than 50% of the
voting securities are present, or (B) 50% of the voting securities.
a. No investment will be made in the securities of any issuer for the
purpose of exercising management or control.
b. Investments will not be made in restricted or foreign 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.
c. No securities owned or held will be mortgaged, pledged, hypothecated
or in any manner transferred as security for indebtedness.
d. Senior securities will not be issued.
e. 1. Investments will not be concentrated in any geographical area of
the United States (such as northeastern states, mid-western
states, etc.).
2. No more than 25% of the total assets of any Sub-Account will be
invested in any one industry other than obligations of the U.S.
Government, its agencies and instrumentalities or bank
certificates of deposit, bankers' acceptances or instruments
secured by these money market instruments.
f. We may borrow money for temporary or emergency purposes up to an
amount equal to 5% of the value of Separate Account I at the time of
borrowing. All borrowings will be unsecured.
g. Securities of other issuers will not be underwritten, nor will we
purchase the securities of other issuers which might later be deemed
to be underwritten by Us.
h. No purchase will be made of commodities or commodity contracts.
i. Short sales, purchases on margin, or purchases of put or call options
or combinations thereof, will not be made.
j. Investments may be made in the securities of one or more investment
companies; but no Sub-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, nor own more
than 3% of the total outstanding voting securities of any one
investment company.
Real Estate
To a limited extent, the Bond and Stock Sub-Accounts may invest in real estate.
All real estate investments are subject to some degree of risk. Because of their
non-liquid nature, real estate equity investments may limit Our ability to vary
the portfolio promptly in response to changing economic, financial and
investment conditions. Such investments may be subject to adverse changes in
Page 4
<PAGE>
general or local economic conditions, such as excessive building and increases
in unemployment, as well as other factors affecting real estate values,
including the attractiveness of the properties to tenants. Equity investments
are also subject to risks such as an inability to lease the premises on
acceptable terms, cancellation of existing leases, financial ability of tenants,
adverse changes in interest rates or the availability of long-term mortgage
funds, and changes in property tax rates or zoning laws.
Money Market Instruments
The instruments in which the Short-Term Portfolio Sub-Account will invest, the
practices it will follow and the risks involved are set forth in Appendix B.
Turnover
The turnover rate for the Bond and Stock Sub-Accounts cannot be accurately
predicted, but it is anticipated that turnover will range between 50% and 100%
per year for the Bond Sub-Account and should not exceed 75% per year for the
Stock Sub-Account. A turnover rate for the Short-Term Portfolio Sub-Account is
not applicable because of the short-term nature of its money market investments.
The turnover is calculated by dividing the lesser of purchase or sales of
Sub-Account securities by the monthly average of securities owned by the
Sub-Account during the year. Not included in this calculation are all securities
with maturity or expiration dates of one year or less at the time acquired.
During any year, conditions could dictate portfolio changes at a greater rate
than anticipated, in which case the turnover rate will not be a limiting factor.
Brokerage expenses will, however, be affected by portfolio activity.
Net Asset Value
The net asset value of the Sub-Accounts is determined as of 4:00 p.m. Eastern
Standard Time on each Valuation Date. It is calculated by determining the value
of securities owned, as described in the prospectus, for each Sub-Account,
adding any cash or other assets and subtracting all liabilities.
In the event of liquidation, You, as owner, will be entitled to receive an
amount equal to the Accumulated Value of the Accumulation Units of the
Sub-Account which are credited to the Contract. If the net asset value of the
Sub-Account is insufficient to pay the full amount, then the percentage of the
net assets which the Accumulation Units credited to the Contract bears to the
total Accumulation Units of the Sub-Account will be paid. In the event that the
net asset value of the Sub-Account exceeds the Accumulated Values of all
Contracts with Accumulation Units in the Sub-Account, the excess will be paid to
Us. Ten percent or more of the assets of each Sub-Account are owned by Us.
The Short-Term Portfolio Sub-Account determines the value of its portfolio
securities using the amortized cost method. Because the Sub-Account only invests
in high quality debt securities with a maturity of sixty days or less, it is
anticipated that the amortized cost method will result in a fair value.
Nevertheless, the Board of Directors will review the portfolio at appropriate
intervals to determine whether the net asset value calculated by the amortized
cost method deviates from its calculation using available market quotations. If
it believes the deviation may result in material dilution or other unfair
results to contract
Page 5
<PAGE>
owners, the Board may take any corrective action it determines as necessary and
appropriate. This action may include:
1. Selling portfolio securities prior to maturity to realize gains or
losses or to shorten average portfolio maturity;
2. Using available market quotations to determine the net asset value.
THE CONTRACT
Ownership
You, as the owner of the Contract, are named as owner in the application. You
may exercise all the rights and options that the Contract provides. If You are
the owner of an individual Contract, Your rights and options, while the
Annuitant is living, are subject to the rights of any irrevocable Beneficiary.
If You are not the Annuitant under an individual Contract and You die before the
Annuitant, Your estate will become the owner unless You have named a successor
owner.
Beneficiary
The Beneficiary named in the application will receive the death Proceeds unless
You, or the Participant under a group Contract, name a new Beneficiary. In that
event, We will pay the death Proceeds to the Beneficiary named in the last
change of Beneficiary request as provided in the Contract.
Assignment
It is possible to assign or transfer the Contract according to its terms. We
must receive a copy of any assignment before We may be required to take notice
of or be responsible for honoring that transfer or assignment. Assignments made
after the death of the Annuitant will be valid only with Our consent. Of course,
We are not responsible for the validity of any assignment.
However, certain restrictions exist as to the assignment or transfer of
Contracts issued under a tax-qualified plan. A Contract issued under a
tax-qualified plan must provide that it may not be sold, assigned or pledged to
any person or organization other than the insurance company issuing it, when
owned by any person other than the trustees of any trust described in Section
401(a), the custodian of a custodial account as described in Section 401(f), or
the administrator of an annuity plan described in Section 403(a) of the Internal
Revenue Code. Contracts issued pursuant to Section 403(b) or certain other plans
may also be subject to restrictions on assignments or transfers.
The assignment or transfer of the Contract may result in adverse tax
consequences.
Calculation of the Accumulation Unit Value
These are the factors which We use to determine the Accumulation Unit value for
each Valuation Date for the Sub-Accounts. The Accumulation Unit value varies
with the investment performance of the Sub-Accounts, and with the deductions and
charges made against the Sub-Accounts.
Page 6
<PAGE>
The gross investment rate is equal to:
a. investment income, plus
b. realized or unrealized capital gains, minus
c. realized or unrealized capital losses, adjusted for
d. any taxes paid or reserved on the Sub-Account (see Federal Income Tax
Matters-How We Are Taxed, page 28 of the prospectus), minus
e. liabilities and the expenses allocable to the Sub-Account (see
Investment Manager, page 31 of the prospectus), including the daily
charge for investment fees, divided by
f. the net asset value of the Sub-Account at the beginning of the
Valuation Period.
The net investment rate is:
a. the gross investment rate, minus
b. a daily charge of .000032 (.000022 for annuity rate guarantees and
.000010 for financial accounting services). (See Charges and
Deductions, page 7 of the prospectus.)
Both the gross investment rate and the net investment rate may be more or less
than 0.
The net investment factor is:
a. 1.000000, plus
b. the net investment rate.
We reserve the right to deduct premium or other taxes allocable to a Sub-Account
either in the computation of the net investment factor or as a charge against
the Contracts to which such taxes are attributable.
Single Sum Settlement
While it is in force, You, by surrendering the Contract and filing a Written
Request with Us within thirty days prior to the maturity date, may elect to
receive a single sum settlement at the maturity date equal to the Net
Accumulated Value of the Contract at that date. The election will take effect on
the maturity date, if the Annuitant is living, and the annuity payments that
would otherwise have commenced at the maturity date will not be made.
Reports
We will send You periodically, and no less than once each Contract Year prior to
the date of the first annuity payment, a statement of:
a. the number of fixed and variable Accumulation Units credited;
b. the current unit values; and
c. the total Accumulated Value.
Page 7
<PAGE>
The Payee will be sent semiannually a report containing financial statements and
a listing of portfolio securities of Separate Account I.
ANNUITY PAYMENTS
Election of Fixed or Variable Annuity Payments
You may choose, when annuity payments begin to have the Net Accumulated Value
applied, except under Options 1, 3 and 4, to provide for:
a. a Fixed Annuity;
b. a Variable Annuity; or
c. a mix of the above.
If You do not make an election, the Net Accumulated Value will be paid under
Option 2(B) with payments guaranteed for a period of ten years, with the portion
of the Accumulated Value that was held in Separate Account I applied to a
Variable Annuity and the portion held in the Fixed Account applied to a Fixed
Annuity.
The net investment factor, or a factor which reflects a guaranteed annual
investment rate of 3%, will apply if Option 3 is chosen. Options 1, 3 and 4 are
available as a Fixed Annuity only. The Net Accumulated Value needed to provide a
Fixed Annuity or a guaranteed interest rate will be withdrawn from Separate
Account I and placed in the general account of Washington National Insurance
Company. Such withdrawn amounts are not subject to annuity rate guarantee
charges or other charges made against assets in Separate Account I, except the
annual maintenance charge.
When a Fixed Annuity is elected, higher payments than those stated in the
Contract may be paid at Our discretion.
Limitations/Conditions
a. The amount applied under any settlement option must be at least $2,000
and must be sufficient to provide a periodic installment or interest
payment of at least $20.
b. An option will be available without Our consent only if the Proceeds
are payable to a natural person receiving them for his or her own
benefit.
c. We may require proof of the age of any payee under Option 2, 5 or 6.
We also may require evidence that the payee is living at the time any
payment is due.
d. The first payment under an option will be due on the date the option
becomes effective, except under Option 4 it will be due at the end of
the first payment interval.
e. If a settlement option is elected during the lifetime of the Annuitant
and prior to the Contract being in effect for five years, a contingent
deferred sales charge will be deducted. (See Contingent Deferred Sales
Charge, page 25 of the prospectus for exceptions.)
Page 8
<PAGE>
Variable Annuity Unit Value
The value of a Variable Annuity Unit for each Sub-Account was established at $1
on the first Valuation Date. Subsequent Annuity Unit values for each Sub-Account
are determined by multiplying:
a. the Annuity Unit value for the previous Valuation Date, by
b. the net investment factor for the current Valuation Date, divided by
c. a factor to reflect the assumed interest rate of 3.5% used in the
Variable Annuity Settlement Option Tables that appear in the Contract,
which are based on the Progressive Annuity Table assuming age last
birthday and births in the year 1900.
Amount of Each Variable Annuity Payment
a. The amount of the first Variable Annuity payment will be equal to:
1. the amount of the Net Accumulated Value being used to purchase a
Variable Annuity, divided by
2. 1,000, times
3. the rate of each $1,000 of Proceeds in the table for the option
chosen.
The amount under Options 2, 5 and 6 will depend on the sex(es) and age(s)
of the payee(s).
b. To determine the number of Variable Annuity Units in each payment:
1. the Net Accumulated Value for each Sub-Account is divided by
2. the Annuity Unit value for the Sub-Account.
The number of Annuity Units in each payment then remains fixed, except
under Option 6, where upon the death of either payee, the number of Annuity
Units is reduced by one-third.
c. Each payment after the first is determined by multiplying:
1. the number of Annuity Units for each Sub-Account, by
2. the Annuity Unit value for the Sub-Account.
Subsequent payments will be determined on the Valuation Date on or just
prior to the seventh calendar day before the payment is due.
FEDERAL TAX MATTERS
Diversification Requirements
Section 817(h) of the Code provides in substance that Section 72 of the Code
will not apply and We will not be treated as the owner of the assets of Separate
Account I unless the investments made by Separate Account I are "adequately
diversified" in accordance with regulations prescribed by the Treasury. Thus, if
Separate Account I is not "adequately diversified," any increase in the value of
a variable annuity contract will be taxed to the contract owner currently. We
intend to comply with the diversification requirements prescribed by the
Treasury in Treas. Reg. ss. 1.817-5, which affect how Separate Account I's
assets may be invested. Treasury has also announced that the diversification
Page 9
<PAGE>
regulations do not provide guidance concerning the extent to which owners may
direct their investments to particular divisions of a separate account. It is
not clear whether additional guidance will be provided nor whether it will be
prospective only. It is possible that if guidance is issued, the Contract may
need to be modified to comply with such guidance. For these reasons, we reserve
the right to modify the Contract as necessary to prevent the contract owner from
being considered the owner of the assets of the Separate Account.
IRS Required Distributions
In addition to the requirements of Section 817(h) of the Code, in order to be
treated as an annuity contract for federal income tax purposes, Section 72(s) of
the Code requires any Non-qualified Contract issued after January 18, 1985 to
provide that (a) if any Contract owner dies on or after the Annuity Date but
prior to the time the entire interest in the Contract has been distributed, the
remaining portion of such interest will be distributed at least as rapidly as
under the method of distribution being used as of the date of that Contract
owner's death; and (b) if any contract owner dies prior to the Annuity Date, the
entire interest in the Contract will be distributed within five years after the
date of that contract owner's death. These requirements shall be considered
satisfied if any portion of the contract owner's interest which is payable to or
for the benefit of a "designated beneficiary" is distributed over the life of
such "designated beneficiary" or over a period not extending beyond the life
expectancy of that beneficiary and such distributions begin within one year of
the contract owner's death. (The contract owner's "designated beneficiary" is
that person designated by such contract owner as a beneficiary and to whom
ownership of the Contract passes by reason of death and must be a natural
person.) However, if the contract owner's "designated beneficiary" is the
surviving spouse of the contract owner, the Contract may be continued with the
surviving spouse as the new contract owner.
The Non-qualified Contracts issued after January 18, 1985 contain provisions
which are intended to comply with the requirements of Section 72(s) of the Code,
although no regulations interpreting these requirements have yet been issued. We
intend to review such provisions and modify them if necessary to assure that
they comply with the requirements of Code Section 72(s) when clarified by
regulation or otherwise.
Other rules may apply to Qualified Contracts.
Page 10
<PAGE>
MANAGEMENT
Directors and Officers of Separate Account I
Separate Account I is managed by a Board of Directors in accordance with the
Rules and Regulations of Separate Account I.
The initials WNIC, WNC, and WNDC, refer to Washington National Insurance
Company, Washington National Corporation and Washington National Development
Company, respectively.
<TABLE>
<CAPTION>
Name and Present Position with Current Principal Business Affiliations and Principal
Business Address Separate Account I Occupations during the Past 5 Years
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Harry C. Benford, III Director Partner with law firm of Schuyler, Roche and Zwirner since
1603 Orrington Avenue January, 1985.
Evanston, IL 60201
-------------------------------------------------------------------------------------------------------------------------
Barbara A. Cremin* Director Vice President of WNIC since January, 1993. Assistant Vice
300 Tower Parkway President from January, 1992 to January, 1993. Director,
Lincolnshire, IL 60069 Life & Annuity Administration from September, 1990 to
January, 1992.
-------------------------------------------------------------------------------------------------------------------------
George J. Cyrus, Jr. Director Chairman, Cyrus Realtors since December, 1980.
2929 Central Street
Evanston, IL 60201
-------------------------------------------------------------------------------------------------------------------------
James E. Dresmal* Chairman of the Board Vice President and Chief Investment Officer of WNIC since
300 Tower Parkway and Director January, 1990. President and Director of WNDC.
Lincolnshire, IL 60069
-------------------------------------------------------------------------------------------------------------------------
Craig R. Edwards Secretary and Counsel Vice President, Corporate Counsel and Secretary of WNIC
300 Tower Parkway since May, 1992. Vice President and Investment Counsel
Lincolnshire, IL 60069 July, 1991 to May, 1992; Investment Counsel July, 1989 to
July, 1991.
-------------------------------------------------------------------------------------------------------------------------
William P. Zeh Director Private investor.
1160 Breckenridge
Lake Forest, IL 60045
<FN>
* Directors who are interested persons of Separate Account I as defined in the Investment Company Act of 1940.
</FN>
</TABLE>
Members of the Board of Directors who are not directors, officers or employees
of WNIC receive from Separate Account I an annual retainer of $1,000, a meeting
fee of $350 per meeting and are reimbursed for their travel expenses in
attending meetings of the Board of Directors. During 1994, the Members of the
Board of Directors of Separate Account I received as a group $4,050 in
compensation. There was one meeting of the Board in 1994.
Page 11
<PAGE>
Remuneration of Board of Directors, Officers and Employees of Separate Account I
The following table shows the compensation paid to all directors of
Separate Account I during 1994:
<TABLE>
<CAPTION>
Total Compensation
Aggregate Pension or Retirement Estimated From Registrant and
Name of Person, Compensation From Benefits Accrued As Annual Benefits Fund Complex Paid to
Position Registrant Part of Fund Expenses Upon Retirement Directors
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Harry C. Benford, III $1,350 $ 0 $ 0 $1,350
Director
- ----------------------------------------------------------------------------------------------------------------------
Barbara A. Cremin Director $ 0 $ 0 $ 0 $ 0
- ----------------------------------------------------------------------------------------------------------------------
George J. Cyrus Jr $1,350 $ 0 $ 0 $1,350
Director
- ----------------------------------------------------------------------------------------------------------------------
James E. Dresmal Chairman $ 0 $ 0 $ 0 $ 0
of the Board and Director
- ----------------------------------------------------------------------------------------------------------------------
William P. Zeh $1,350 $ 0 $ 0 $1,350
Director
</TABLE>
Members of the Board of Directors who are not directors, officers or employees
of Washington National Insurance Company receive from Separate Account I an
annual retainer of $1,000, a meeting fee of $350 per meeting and reimbursement
for their travel expenses in attending meetings of the Board of Directors.
During 1994, the Members of the Board of Directors of Separate Account I
received as a group $4,050 in compensation. There was one meeting of the Board
in 1994.
Page 12
<PAGE>
Principal Stockholders of Washington National Corporation
The following table sets forth the stock ownership of all persons known by WNC
to be the beneficial owners of more than 5% of each class of the outstanding
voting stock of WNC (exclusive of treasury stock) as of April 17, 1995.
Number of Shares Beneficially Owned (1)
---------------------------------------
Name and Address of Beneficial Owner Number Percentage
- --------------------------------------------------------------------------------
George P. Kendall, Jr. (2)
300 Tower Parkway
Lincolnshire, Illinois 60069 1,544,592 12.69%
- --------------------------------------------------------------------------------
NBD Bank (3)
1603 Orrington Avenue
Evanston, Illinois 60201 1,389,055 11.41%
- --------------------------------------------------------------------------------
Shufro, Rose & Ehrman (4)
745 Fifth Avenue
New York, New York 10151 686,200 5.64%
- --------------------------------------------------------------------------------
SunTrust Banks, Inc. (5)
25 Park Place, N.E.
Atlanta, GA 30303 1,498,350 12.32%
- --------------------------------------------------------------------------------
(1) The table includes common stock which could be acquired within 60 days by
exercise of a stock option. The table does not include the beneficial
ownership of WNC's preferred stock. The only person known to the Company to
own beneficially more than 5% of the outstanding shares of the preferred
stock is Melvin S. Cutler, Cutler Associates Investments, Inc., P.O. Box
15049, Worcester, Massachusetts 01615, who beneficially owned, as of June
30, 1994, 21,000 shares, or 14.5%, of the preferred stock according to a
Schedule 13G filed with the Securities and Exchange Commission on such
date. Such shares, if fully converted into shares of Common Stock, would
constitute less than 1% of the outstanding shares of common stock.
(2) George P. Kendall, Jr. beneficially owns 1,544,592 shares of common stock,
including 1,327,603 shares reported above under NBD Bank's beneficial
ownership total. The 1,327,603 shares are held by various trusts (including
the G. R. Kendall Foundation and Trust) with respect to which George P.
Kendall, Jr. and NBD Bank, as well as other members of the Kendall family,
share voting and investment power as co-trustees of such trusts. Excluding
these 1,327,603 shares, George P. Kendall, Jr., beneficially owns 216,989
shares, or 1.78% of the outstanding shares.
(3) According to a Schedule 13G filed with the Securities and Exchange
Commission on February 9, 1995 by its parent company, NBD Bancorp, Inc.,
NBD Bank beneficially owned on such date 1,389,055 shares of common stock.
NBD Bank indicated that on such date it had sole voting power over 19,475
shares, shared voting power over 1,369,580 shares, sole investment power
over 34,926 shares and shared investment power over 1,352,754 shares.
Included in NBD Bank's beneficial ownership total are 545,169 shares held
by the G.R. Kendall Foundation and Trust over which NBD Bank shares voting
and investment power in its capacity as co-trustee with, among others,
George P. Kendall, Jr., a director of WNC.
Page 13
<PAGE>
(4) According to its Schedule 13G filed with the Securities and Exchange
Commission on February 14, 1995, Shufro, Rose & Ehrman beneficially owned
on such date 686,200 shares of common stock. Shufro, Rose & Ehrman
indicated that on such date it had sole voting power over 70,740 shares and
sole investment power over 686,200 shares.
(5) According to a Schedule 13G filed with the Securities and Exchange
Commission on February 3, 1995, SunTrust Banks, Inc., beneficially owned on
such date 1,498,350 shares of common stock. SunTrust Banks, Inc., indicated
that on such date it had sole voting power over 728,450 shares, sole
investment power over 1,497,600 and shared investment power over 750
shares.
INVESTMENT MANAGER
We act as investment manager for Separate Account I under an investment
management agreement between Us and Separate Account I. The agreement provides
that We will manage the investments of Separate Account I under the direction of
the Board of Directors. Our fees as investment adviser are .50% of the average
net assets of Separate Account I. The fees are calculated daily and paid
monthly. Each Sub-Account pays a pro rata portion of the advisory fee based on
its average net assets. For the last three years, Separate Account I has paid Us
$196,785, $200,155, and $170,429 for 1994, 1993, and 1992 respectively, in
advisory fees; during such respective years, Separate Account I paid Us $61,636,
$67,275, and $61,020 for the Bond Sub-Account; $ 8,400, $8,532, and $8,192 for
the Short-Term Portfolio Sub-Account; and $126,749, $124,348, and $101,217 for
the Stock Sub-Account.
Our duties under the agreement are to:
a. Make all determinations with respect to and place the orders for the
purchase and sale of securities for the Sub-Accounts. Such
determinations and services include determining the manner in which
voting rights, rights to consent to corporate action and any other
rights pertaining to securities should be exercised, subject to the
supervision of the Board of Directors.
b. Regularly furnish reports at the periodic meetings of the Board of
Directors and as may reasonably be requested by the Board of
Directors, of:
1. the decisions which We have made with respect to the investment
of the assets of Separate Account I and the purchase and sale of
securities,
2. the reasons for such decisions, and
3. the extent to which those decisions have been implemented.
c. Place all orders for the execution of the securities transactions
using Our best efforts to obtain the best securities prices available
and place all such orders subject to and in accordance with any
directions which the Board of Directors may issue from time to time.
Under the agreement We have the right to withdraw the use of Our name by
Separate Account I.
The agreement will continue in effect from its effective date and from year to
year except that, with respect to each Sub-Account:
a. The agreement will continue in effect for a period more than two years
from its effective date as long as it is specifically approved at
least annually by the Board of Directors by a majority of the votes in
Page 14
<PAGE>
the Sub-Account and is also approved by the vote of a majority of the
members of the Board of Directors who are not interested persons.
b. The agreement will terminate automatically if it is assigned or if a
majority of the votes of the Sub-Account do not approve the agreement
at the first annual meeting of Contract owners.
c. The agreement may be terminated by the Board of Directors of Separate
Account I or by a majority of the votes in the Sub-Account at any time
with 60 days written notice to Us without the payment of any penalty.
d. The agreement may be terminated by Us at any time with 60 days written
notice to Separate Account I without the payment of any penalty.
Under the agreement We will pay or reimburse Separate Account I for the
following costs associated with the furnishing of investment management
services: costs associated with the furnishing of office space, heat, telephone
service, light, power and other utilities, furnishings, advisory and research
services, salaries of personnel, reports to the Board of Directors of Separate
Account I and fidelity bond coverage. Separate Account I will pay 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 Separate Account I to its
current contract owners, fees of and expenses incurred by directors of Separate
Account I who are not Our 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 Separate Account I which are
not borne by Us under the agreement or an administrative services agreement or
by the underwriter under a distribution agreement.
The agreement, as amended in 1993, authorizes us to contract with one or more
other entities to provide investment advisory services, as sub-advisor, to one
or more of the Sub-Accounts. It also provides that the advisory fee paid to us
by any affected Sub-Account will be reduced by the amount of any fee the
Sub-Account pays to any such sub-advisor. Pursuant to that provision, We have
entered into a Sub-Investment Advisory Agreement (the "Sub-Agreement"),
effective January 1, 1994, with the Bank Trust Division of NBD Bank ("NBD"), an
Illinois banking corporation, pursuant to which NBD provides certain investment
advisory and management services for the Stock Sub-Account. NBD is responsible
for selecting portfolio securities for the Stock Sub-Account and for placing
purchase and sale orders. NBD's primary business is the provision of trust and
investment services to a wide range of individuals, corporations and other
entities. NBD currently has approximately $1.4 billion under management for
approximately 1,500 client accounts. The Sub-Agreement may be terminated at any
time without penalty upon 60 days notice by us or the Board of Directors, with 6
months notice by NBD, or by vote of a majority of the outstanding voting
securities of the Stock Sub-Account. The Sub-Agreement will continue in effect
subject to the same conditions and exceptions as the agreement with us, except
that the Sub-Agreement automatically terminates in the event of the termination
of the agreement with us.
As compensation for services provided, and expenses assumed, under the
Sub-Agreement, NBD will receive an investment management fee at an annual rate
of .40% of the Stock Sub-Account's average net assets.
NBD is a wholly-owned subsidiary of NBD Bancorp, Inc., which beneficially owns
an aggregate of 1,389,055 shares, or 11.41% of WNC. NBD also serves as trustee
for certain of our other accounts.
Page 15
<PAGE>
ADMINISTRATIVE SERVICES
We have entered into agreements with Boston Financial Data Services, Inc.
(BFDS), Vantage Computer Systems, Inc. (Vantage), Investors Fiduciary Trust
Company of Kansas City, Missouri (IFTC) and Financial Administrative Services,
Inc. (FAS), under which they have agreed to perform certain administrative
services for Separate Account I and the Sub-Accounts. IFTC keeps records of all
investment information with respect to the Sub-Accounts. Our original contract
for administrative services was entered into with Data-Sys-Tance (DST) of Kansas
City, Missouri, but this agreement was assigned to BFDS in July 1985. In May
1991, We entered into an agreement with Vantage to provide administrative
services on an interim basis. Pursuant to an agreement with FAS dated February
26, 1990, FAS assumed the handling of all matters in connection with contract
issue and administration as of August 1, 1991. We will be entering into an
agreement with our subsidiary, United Presidential Life Insurance Company (UPI)
of Kokomo, Indiana to provide administrative services beginning in mid-1995.
In the last three years the total fees paid by us to IFTC were $133,686,
$132,565, and $111,064 for 1994, 1993 and 1992 respectively. The total fees paid
to FAS were $301,495, $314,513, and $362,377 in 1994, 1993 and 1992
respectively.
Neither We, Separate Account I nor any of Our affiliates have any connection
other than that described herein with BFDS, Vantage, DST, FAS or IFTC.
CUSTODY AGREEMENT
Since May 1, 1991, Bank of America Illinois, Chicago, Illinois 60697, has been
the custodian of the securities and other assets of Separate Account I and
receives remuneration based on its standard schedule of fees under an agreement
with Separate Account I and Us. The Federal Reserve Bank of Chicago, Depository
Trust Company of New York, and Mellon Securities Trust Company, New York act as
securities depositories of such securities under agreements with Bank of America
Illinois and such securities depositories attend to the collection of principal
and income and payment for and collection of proceeds of securities bought and
sold by Separate Account I.
BROKERAGE ALLOCATION
Securities Transactions
We have responsibility for placing orders for the purchase and sale of
securities for Separate Account I under an investment management agreement. In
meeting this responsibility, Our objective is to obtain the most favorable
prices and execution of orders possible. As a guide to assist Us in evaluating
commissions, We have established, and maintain, benchmarks as to the rates which
are prudent and as to what the market dictates. In the case of fixed income
securities, transactions are presented to a number of brokers for competitive
bids before orders are placed. Where equity securities are being bought and
sold, commissions are negotiated. We do not expect to use any one particular
broker or dealer but, subject to obtaining the best prices and executions,
brokers who provide statistical information and supplemental research to Us for
pricing and appraisal services may receive orders for transactions although
their commissions may be slightly higher. It is not possible to determine the
exact value of such statistical information and supplemental research, because
such information and research are used by Us for the benefit of all Our
investment accounts and no allocation of services or costs is made nor is such
an allocation possible.
Page 16
<PAGE>
Transactions May Be Made for a Number of Accounts at Once
At times, transactions for Separate Account I may be executed together with
purchases or sales of the same security for Our Fixed Account or for other
accounts served by Us. When making concurrent transactions for several accounts
at once, We try to allocate executions and prices among them fairly.
Transactions of this type are executed only when We believe it is in the best
interest of Separate Account I. However, the possibility exists that concurrent
transactions may work out to Separate Account I's disadvantage.
Other Transactions With Brokers or Dealers
In addition to using brokers and dealers to execute portfolio securities
transactions for accounts We manage, We may enter into other types of business
transactions with brokers or dealers. These other transactions are unrelated to
allocation of any Sub-Account's portfolio transactions. In the last three years
We paid out total brokerage fees of $7,695, $4,748, and $8,294 for 1994, 1993
and 1992 respectively.
UNDERWRITERS
Washington National Equity Company (WNEC), a Delaware Corporation, was a
wholly-owned subsidiary of WNC prior to WNEC's dissolution on June 29, 1990. It
acted as principal underwriter to Separate Account I. WNEC was a registered
broker-dealer under the Securities and Exchange Act of 1934 until March 31,
1990, and was a member of the National Association of Securities Dealers, Inc.
(NASD).
Variable annuity contracts are no longer offered for sale. No underwriting
commissions were paid by Us to WNEC since 1991, due to WNEC's dissolution.
PERFORMANCE DATA
Short-Term Portfolio Sub-Account Yields
The Short-Term Portfolio Sub-Account will attempt, consistent with safety of
principal, to achieve the highest possible yield from its investments. The
manner in which the Sub-Account's yield quotation will be derived is similar to
the way in which the yields of money market mutual funds are calculated. The
Short-Term Portfolio Sub-Account's annualized yield for a seven-day period will
be computed by determining the "net change in value" of a hypothetical account
(Contract) having a balance of one Accumulation Unit at the beginning of the
period, dividing the net change in account (Contract) Accumulated Value by the
Accumulated Value at the beginning of the base period to obtain the base period
return, subtracting a hypothetical charge reflecting deductions from contract
owner accounts, and multiplying the difference by 365/7 with the resulting yield
carried to the nearest hundredth of one percent. For the purposes of calculating
the yield, net changes in the value of an account (Contract) will consist of the
increases in the Accumulation Unit value after adjustment to exclude realized
gains or losses or unrealized appreciation or depreciation on portfolio
investments. The seven-day yield for the Short-Term Portfolio Sub-Account for
the period ended December 31, 1994, was 3.89%. The effective yield for the same
period was 3.96%.
Page 17
<PAGE>
Yield as determined in any appropriate fashion with respect to the Short-Term
Portfolio Sub-Account normally will fluctuate, sometimes substantially, on a
daily basis and is affected by changes in interest rates on money market
instruments, average portfolio maturities, the types and quality of portfolio
securities held and the expenses of the Sub-Account. Therefore, the yield for
any given past period should not be considered as representative of the yield
for any future period.
Other Sub-Account Yields
We may from time to time disclose the current annualized yield of one or more of
the Sub-Accounts (except the Short-Term Portfolio Sub-Account) for thirty-day
periods. The annualized yield of a Sub-Account refers to the income generated by
the Sub-Account over a specified thirty-day period. Because the yield is
annualized, the yield generated by a Sub-Account during the thirty-day period is
assumed to be generated each thirty-day period. The yield is computed by
dividing the net investment income per accumulation unit earned during the
period by the price per unit on the last day of the period, according to the
following formula:
YIELD = 2[(a - b + 1)^6 - 1]
-----
cd
Where:
a = net investment income earned during the period by the Sub-Account;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of accumulation units outstanding during
the period; and
d = the maximum offering price per accumulation unit on the last day of
the period.
Net investment income will be determined in accordance with rules established by
the Securities and Exchange Commission. Accrued expenses will include all
recurring fees that are charged to all owner accounts. The yield calculations do
not reflect the effect of any contingent deferred sales charges that may be
applicable to a particular Contract. The contingent deferred sales charge is
equal to 6% of the amount withdrawn attributable to Purchase Payments received
not more than seventy-two months prior to the date of withdrawal.
The yield on amounts held in the Sub-Accounts normally will fluctuate over time.
Therefore, the disclosed yield for any given past period is not an indication or
representation of future yields or rates of return. The Sub-Account's actual
yield will be affected by the types and quality of portfolio securities held by
the Sub-Account and its operating expenses.
For the thirty-day period ended December 31, 1994, the Bond Sub-Account's yield
was 5.85%.
Page 18
<PAGE>
Total Return Calculations
We may from time to time also disclose average annual total returns for one or
more of the Sub-Accounts for various periods of time. Average annual total
return quotations are computed by finding the average annual compounded rates of
return over one, five and ten-year periods or the life of the Sub-Account that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P (1 - T)^n = ERV
Where:
P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value of a hypothetical $1,000 payment (made
at the beginning of the one, five or ten year period) at the end
of the one, five, or ten-year period (or fractional portion
thereof).
All recurring fees that are charged to all owner accounts are recognized in the
ending redeemable value. The average annual total return calculations will
reflect the effect of contingent deferred sales charges that may be applicable
to a particular period.
For the one, five and ten-year periods ended December 31, 1994, respectively,
the average annual total returns for the Bond Sub-Account were -9.65%, 3.82% and
7.30%; and for the Stock Sub-Account were -4.72%, 5.52% and 9.16%.
We may from time to time also disclose average annual total returns in a
non-standard format in conjunction with the standard format described above. The
non-standard format will be identical to the standard format except that the
contingent deferred sales charge percentage will be assumed to be 0%. Using the
non-standard format, for the one, five and ten-year periods ended December 31,
1994 respectively, the average annual total returns for the Bond Sub-Account
were -4.49%, 4.83% and 7.30%; and for the Stock Sub-Account were 0.72%, 6.47%
and 9.16%.
We may from time to time also disclose cumulative total returns in conjunction
with the standard format described above. The cumulative returns will be
calculated using the following formula assuming that the contingent deferred
sales charge percentage will be 0%.
CTR = (ERV / P) - 1
Where:
CTR = the cumulative total return net of Sub-Account recurring charges
for the period;
ERV = ending redeemable value of a hypothetical $1,000 payment (made
at the beginning of the one, five, or ten-year period) at the end
of the one, five, or ten-year period (or fractional portion
thereof); and
P = a hypothetical initial payment of $1,000.
Page 19
<PAGE>
All non-standard performance data will only be advertised if the standard
performance data for the required period is also disclosed.
LEGAL MATTERS
Sutherland, Asbill & Brennan in Washington, D.C. has provided advice with
respect to certain matters relating to federal securities and tax laws.
STATE REGULATION
Washington National Insurance Company, an Illinois Company, is subject to
regulation by the Illinois Director of Insurance. An annual statement is filed
with the Director on or before March 1st of each year covering Our operations
for the preceding year and Our financial condition on December 31st of such
year. Our books and accounts are subject to review and examination by the
Illinois Insurance Department at all times and a full examination of Our
operations is conducted at periodic intervals. In addition, We are subject to
the insurance laws and regulations of the other jurisdictions in which We are
licensed to operate.
REGISTRATION STATEMENT
A registration statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended. This Prospectus does
not include all of the information contained in the registration statements, its
amendments and exhibits, which were also filed.
EXPERTS
The consolidated financial statements of Washington National Insurance Company
and subsidiaries and the financial statements of Separate Account I of
Washington National Insurance Company appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, to the extent indicated in their reports thereon also appearing
elsewhere herein and in the Registration Statement. Such financial statements
have been included herein in reliance upon such reports given upon the authority
of such firm as experts in accounting and auditing.
FINANCIAL STATEMENTS
The consolidated financial statements of Washington National Insurance Company
and subsidiaries included herein should be distinguished from the financial
statements of Separate Account I and should be considered only as bearing upon
the ability of Washington National Insurance Company to meet its obligations
under the Contracts.
Page 20
<PAGE>
<TABLE>
<CAPTION>
Index to Financial Statements
Separate Account I of Washington National Insurance Company
Page
----
<S> <C>
Report of Independent Auditors................................................................... 22
Statement of Assets and Liabilities.............................................................. 23
Portfolio of Investments......................................................................... 24
Statement of Operations.......................................................................... 29
Statement of Changes in Net Assets............................................................... 30
Notes to Financial Statements.................................................................... 32
Supplementary Information-Selected Per Accumulation Unit Data and Ratios......................... 35
Washington National Insurance Company and Subsidiaries
Report of Independent Auditors................................................................... 37
Consolidated Balance Sheet....................................................................... 37
Statement of Consolidated Operations and Retained Earnings....................................... 39
Statement of Consolidated Cash Flows............................................................. 40
Notes to Consolidated Financial Statements....................................................... 42
</TABLE>
Page 21
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Contract Owners and Board of Directors
Separate Account I of Washington
National Insurance Company
We have audited the accompanying statements of assets and liabilities, including
the portfolio of investments, of Separate Account I of Washington National
Insurance Company (comprising, respectively, the Bond, Short-Term Portfolio, and
Stock Sub-Accounts) as of December 31, 1994, and the related statements of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the selected per
accumulation unit data and ratios for each of the five years in the period then
ended. These financial statements and per accumulation unit data and ratios are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and per accumulation unit data and
ratios based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and per accumulation
unit data and ratios are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1994, by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and selected per accumulation unit data
and ratios referred to above present fairly, in all material respects, the
financial position of each of the respective Sub-Accounts constituting Separate
Account I of Washington National Insurance Company at December 31, 1994, the
results of their operations for the year then ended, the changes in their net
assets for each of the two years in the period then ended, and the selected per
accumulation unit data and ratios for each of the five years in the period then
ended, in conformity with generally accepted accounting principles.
Chicago, Illinois /s/Ernst & Young LLP
February 3, 1995
Page 22
<PAGE>
SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1994
<TABLE>
<CAPTION>
Sub-Account
----------------------------------------------------
Short-Term
Bond Portfolio Stock
----------------------------------------------------
ASSETS
<S> <C> <C> <C>
Investments, at fair value (cost: Bond-$11,761,173;
Short-Term-$1,752,688; Stock-$18,357,713)-Note C $11,283,360 $1,752,688 $25,015,674
Cash 2,375 1,334 5,023
Dividends and interest receivable 169,168 2,628 63,841
Other receivables 9,159 -- 39,332
----------------------------------------------------
11,464,062 1,756,650 25,123,870
LIABILITIES
Payable to Washington National Insurance Company-Note B 16,979 2,338 37,140
----------------------------------------------------
NET ASSETS $11,447,083 $1,754,312 $25,086,730
====================================================
Accumulation units outstanding 5,296,628 1,031,762 9,882,431
====================================================
Accumulation unit value $2.16 $1.70 $2.54
----- ----- -----
</TABLE>
See notes to financial statements.
Page 23
<PAGE>
SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
PORTFOLIO OF INVESTMENTS
December 31, 1994
<TABLE>
<CAPTION>
Principal Fair
Description Amount Value
- ------------------------------------------------------------------------- ------------- ------------
<S> <C> <C>
BOND SUB-ACCOUNT
U.S. Government and Government Agency Obligations--26.3%
U.S. Treasury, 8% note, due 1-15-97 $ 500,000 $ 502,580
U.S. Treasury, 7% note, due 4-15-99 500,000 484,530
Government Trust Certificate, 9.25% certificate, due 11-15-01 500,000 519,510
Federal Home Loan Mortgage Corporation, 6.2% debenture,
due 9-8-08 500,000 402,030
Federal Home Loan Mortgage Corporation, 8.75% participation
certificates, pool 160043, due 4-1-08 174,717 172,225
Federal Home Loan Mortgage Corporation, 9.25% participation
certificates, pool 160055, due 8-1-08 102,433 103,156
Federal Home Loan Mortgage Corporation, 10.25% participation
certificates, pool 160095, due 11-1-09 44,342 46,097
Federal Home Loan Mortgage Corporation, 10.75% participation
certificates, pool 170033, due 7-1-10 62,413 66,332
Federal Home Loan Mortgage Corporation, 10% participation
certificates, pool 170152, due 1-1-16 35,830 37,318
Government National Mortgage Association, 7.5% participation
certificates, pool 327726, due 8-15-22 732,544 679,662
------------
TOTAL U.S. GOVERNMENT AND GOVERNMENT AGENCY
OBLIGATIONS (cost--$3,144,527) 3,013,440
Corporate Bonds--53.3%
Comerica, Inc., 7.125% note, due 12-1-13 500,000 425,965
Morgan Stanley Group, 6.375% note, due 12-1-03 500,000 421,240
Nationsbank Corporation, 6.625% note, due 1-15-98 500,000 476,535
Hoechst Celanese Corporation, 9.625% note, due 9-1-99 500,000 512,865
DuPont De Nemours, 9.15% note, due 4-15-00 500,000 518,635
General Motors Corporation, 9.625% debentures, due 12-1-00 500,000 518,455
Banc One Corporation, 7.25% note, due 8-1-02 500,000 466,415
Aon Corporation, 6.7% note, due 6-15-03 500,000 446,430
Equifax Inc., 6.5% note, due 6-15-03 500,000 442,695
NCNB Texas National Bank, 9.5% note, due 6-1-04 500,000 527,715
Corestates Capital Corporation, 6.625% note, due 3-15-05 500,000 427,020
Pacificorp, 6.75% 1st mtg & collateral trust, due 4-1-05 500,000 444,835
General Telephone Company of the Northwest, Inc., 8.25% first
mortgage bonds, Series W, due 2-1-07 500,000 477,115
------------
TOTAL CORPORATE BONDS (cost--$6,452,646) 6,105,920
</TABLE>
See notes to financial statements.
Percentages shown are based on total net assets of each Sub-account.
Page 24
<PAGE>
SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
PORTFOLIO OF INVESTMENTS -- Continued
<TABLE>
<CAPTION>
Principal Fair
Description Amount Value
- ------------------------------------------------------------------------- ------------- ------------
<S> <C> <C>
Floating Rate Demand Notes - 18.9%
Household Finance Corporation, 6.00%, due on demand 500,000 $ 500,000
Goldman Sachs, 5.66%, due on demand 500,000 500,000
Associates Corporation of North America, 5.66%, due on demand 558,000 558,000
General Electric Credit Corporation, 5.41%, due on demand 606,000 606,000
------------
TOTAL FLOATING RATE DEMAND NOTES (cost--$2,164,000) 2,164,000
------------
TOTAL INVESTMENTS--BOND SUB-ACCOUNT--98.5% (cost--$11,761,173) $ 11,283,360
============
SHORT-TERM PORTFOLIO SUB-ACCOUNT
Commercial Paper--68.1%
Chevron Oil Finance Company, 5.90%, due 2-27-95 $ 200,000 $ 198,099
American Express Credit Corporation, 5.85%, due 1-25-95 200,000 199,188
Commercial Credit Company, 5.75%, due 1-27-95 200,000 199,137
Prudential Funding Company, 5.70%, due 1-20-95 200,000 199,367
John Deere Credit Company, 5.67%, due 1-17-95 200,000 199,464
Philip Morris Company, 5.67%, due 1-18-95 200,000 199,433
------------
------------
TOTAL COMMERCIAL PAPER (cost--$1,194,688) 1,194,688
Floating Rate Demand Notes--31.8%
Household Finance Corporation, 6.00%, due on demand 200,000 200,000
Associates Corporation of North America, 5.66%, due on demand 200,000 200,000
General Electric Credit Corporation, 5.41%, due on demand 158,000 158,000
------------
TOTAL FLOATING RATE DEMAND NOTES (cost--$558,000) 558,000
------------
TOTAL INVESTMENTS--SHORT-TERM PORTFOLIO SUB-
ACCOUNT--99.9% (cost--$1,752,688) $ 1,752,688
============
Number of Fair
Shares Value
------------- ------------
STOCK SUB-ACCOUNT
Common Stocks--94.2%
Automobile--2.3%
General Motor Corporation 15,000 $ 577,500
Banks--4.8%
Banc One Corporation 14,456 366,821
PNC Bank Corporation 18,000 380,250
Huntington Bancshare 26,533 454,378
------------
1,201,449
</TABLE>
See notes to financial statements.
Percentages shown are based on total net assets of each Sub-account.
Page 25
<PAGE>
SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
PORTFOLIO OF INVESTMENTS -- Continued
<TABLE>
<CAPTION>
Number of Fair
Description Shares Value
------------- ------------
<S> <C> <C>
STOCK SUB-ACCOUNT--Continued
Common Stocks--94.2% -- Continued
Beverages--2.6%
Anheuser-Busch 13,200 $ 671,550
Brokerage Firms--2.9%
Merrill Lynch 20,200 722,150
Consumer Products--5.2%
Newell Company 16,000 336,000
Rubbermaid, Inc. 10,000 287,500
Warner Lambert 9,000 693,000
------------
1,316,500
Drugs--4.7%
Bristol-Myers Squibb 7,100 410,912
Merck & Co. 20,400 777,750
------------
1,188,662
Electrical--5.7%
Emerson Electric 10,100 631,250
General Electric 15,600 795,600
------------
1,426,850
Electronics and Instruments--6.2%
Avnet, Inc. 17,700 654,900
Hewlett-Packard Company 9,000 898,875
------------
1,553,775
Entertainment--2.3%
Walt Disney Company 12,800 590,400
Financial--2.4%
Federal National Mortgage Association 8,500 619,438
Foods--3.9%
CPC International 12,600 670,950
Sysco Corporation 12,000 309,000
------------
979,950
Industrial--8.7%
WMX Technologies, Inc. 12,000 315,000
Parker-Hannifin 15,800 718,900
Pitney Bowes, Inc. 13,600 431,800
Sherwin Williams 21,600 715,500
------------
2,181,200
</TABLE>
See notes to financial statements.
Percentages shown are based on total net assets of each Sub-account.
Page 26
<PAGE>
SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
PORTFOLIO OF INVESTMENTS -- Continued
<TABLE>
<CAPTION>
Number of Fair
Description Shares Value
- ------------------------------------------------------------------------- ------------- ------------
<S> <C> <C>
STOCK SUB-ACCOUNT -- Continued
Common Stocks--94.2% -- Continued
Insurance--4.7%
Aetna Life and Casualty Company 6,200 $ 292,175
General Re 4,400 544,500
Lincoln National Corporation 10,000 350,000
------------
1,186,675
Mines and Minerals--2.3%
Minnesota Mining and Manufacturing Company 11,000 587,125
Oil--11.3%
Amoco Corporation 11,000 650,375
Chevron Corporation 18,600 830,025
Exxon Corporation 11,600 704,700
Mobil Corporation 7,600 640,300
------------
2,825,400
Radio and Television--2.3%
Interpublic Group Company 16,000 514,000
Restaurants--3.7%
McDonald's Corporation 31,400 918,450
Technology--7.8%
Intel Corporation 11,000 701,250
Motorola Incorporated 15,600 902,850
Texas Instruments Incorporated 4,800 359,400
------------
1,963,500
Telephone--3.3%
Bell Atlantic Corporation 10,500 522,375
Pacific Telesis Group 10,800 307,800
------------
830,175
Utilities--7.1%
Central & Southwest 19,600 443,450
Duke Power 12,400 472,750
Northeast Utilities 17,400 376,275
Pennsylvania Power and Light Company 17,800 338,200
SCE Corp 10,000 146,250
------------
1,776,925
------------
TOTAL COMMON STOCKS (cost--$16,973,713) 23,631,674
</TABLE>
See notes to financial statements.
Percentages shown are based on total net assets of each Sub-account.
Page 27
<PAGE>
SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
PORTFOLIO OF INVESTMENTS -- Continued
<TABLE>
<CAPTION>
Principal Fair
Description Amount Value
- ------------------------------------------------------------------------- ------------- ------------
<S> <C> <C>
Floating Rate Demand Notes--5.5%
Household Finance Corporation, 6.00%, due on demand 33,000 $ 33,000
Associates Corporation of North America, 5.66%, due on demand 537,000 537,000
General Electric Credit Corporation, 5.41%, due on demand 814,000 814,000
------------
TOTAL FLOATING RATE DEMAND NOTES (cost--$1,384,000) 1,384,000
------------
TOTAL INVESTMENTS--STOCK SUB-ACCOUNT--99.7% (cost--
$18,357,713) $ 25,015,674
============
</TABLE>
See notes to financial statements.
Percentages shown are based on total net assets of each Sub-account.
Page 28
<PAGE>
SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
STATEMENT OF OPERATIONS
Year Ended December 31, 1994
<TABLE>
<CAPTION>
Sub-Account
-------------------------------------------------------------
Short-Term
Bond Portfolio Stock
------------ ----------- -----------
<S> <C> <C> <C>
Investment income:
Interest $ 873,260 $ 72,869 $ 75,481
Dividends -- -- 741,497
Other -- -- 10,121
------------ ----------- -----------
873,260 72,869 827,099
Expenses--Note B:
Mortality and expense assurance 97,244 13,491 201,789
Investment advisory and management fee 60,777 8,432 126,119
Accounting service fee 42,544 5,903 88,283
General and administrative expenses 28,308 3,373 51,514
------------ ----------- -----------
228,873 31,199 467,705
------------ ----------- -----------
NET INVESTMENT INCOME 644,387 41,670 359,394
Realized and unrealized gains (losses):
Net realized gains 26,252 237,338
Unrealized gains (losses)--Note C
Beginning of year 728,923 7,071,529
End of year (477,813) 6,657,961
------------ -----------
Net unrealized loss (1,206,736) (413,568)
------------ -----------
NET REALIZED AND UNREALIZED
LOSS ON INVESTMENTS (1,180,484) (176,230)
------------ ----------- -----------
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS $ (536,097) $ 41,670 $ 183,164
============ =========== ===========
</TABLE>
See notes to financial statements.
Page 29
<PAGE>
SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31, 1994
-------------------------------------------------------------
Sub-Account
-------------------------------------------------------------
Short-Term
Bond Portfolio Stock
------------ ----------- -----------
<S> <C> <C> <C>
ADDITIONS (DEDUCTIONS)
From operations
Net investment income $ 644,387 $ 41,670 $ 359,394
Net realized gain 26,252 -- 237,338
Net unrealized loss (1,206,736) -- (413,568)
------------ ------------ ------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS (536,097) 41,670 183,164
From capital transactions-Note A
Net proceeds from units sold 406,807 51,010 1,055,215
Cost of units redeemed (992,431) (134,122) (2,092,462)
Net asset value of units transferred,
including exchanges with the Fixed Account (592,255) 170,143 233,261
------------ ------------ ------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL
TRANSACTIONS (1,177,879) 87,031 (803,986)
------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS (1,713,976) 128,701 (620,822)
Net assets at beginning of year 13,161,059 1,625,611 25,707,552
------------ ------------ ------------
NET ASSETS AT END OF YEAR $ 11,447,083 $ 1,754,312 $ 25,086,730
============ ============ ============
ANALYSIS OF CHANGES IN UNITS OUTSTANDING
Units sold 185,686 30,089 420,378
Units redeemed (454,958) (80,108) (831,402)
Units transferred (270,163) 101,699 91,183
------------ ------------ ------------
INCREASE (DECREASE) IN UNITS OUTSTANDING (539,435) 51,680 (319,841)
Units outstanding at beginning of year 5,836,063 980,082 10,202,272
------------ ------------ ------------
UNITS OUTSTANDING AT END OF YEAR 5,296,628 1,031,762 9,882,431
============ ============ ============
</TABLE>
See notes to financial statements.
Page 30
<PAGE>
SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31, 1993
-------------------------------------------------------------
Sub-Account
-------------------------------------------------------------
Short-Term
Bond Portfolio Stock
------------ ----------- -----------
<S> <C> <C> <C>
ADDITIONS (DEDUCTIONS)
From operations
Net investment income $ 738,165 $ 21,759 $ 295,247
Net realized gain (loss) 151,265 -- (90,544)
Net unrealized gain 2,152 -- 2,241,023
------------ ------------ ------------
INCREASE IN NET ASSETS FROM OPERATIONS 891,582 21,759 2,445,726
From capital transactions-Note A
Net proceeds from units sold 400,778 43,723 1,184,427
Cost of units redeemed (1,610,829) (73,925) (2,308,288)
Net asset value of units transferred,
including exchanges with the Fixed Account (152,258) (109,822) 513,076
------------ ------------ ------------
DECREASE IN NET ASSETS FROM CAPITAL TRANSACTIONS (1,362,309) (140,024) (610,785)
------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS (470,727) (118,265) 1,834,941
Net assets at beginning of year 13,631,786 1,743,876 23,872,611
------------ ------------ ------------
NET ASSETS AT END OF YEAR $ 13,161,059 $ 1,625,611 $ 25,707,552
============ ============ ============
ANALYSIS OF CHANGES IN UNITS OUTSTANDING
Units sold 181,794 26,452 483,077
Units redeemed (733,115) (44,810) (948,643)
Units transferred (69,298) (66,618) 210,388
------------ ------------ ------------
DECREASE IN UNITS OUTSTANDING (620,619) (84,976) (255,178)
Units outstanding at beginning of year 6,456,682 1,065,058 10,457,450
------------ ------------ ------------
UNITS OUTSTANDING AT END OF YEAR 5,836,063 980,082 10,202,272
============ ============ ============
</TABLE>
See notes to financial statements.
Page 31
<PAGE>
SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
December 31, 1994
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Account: The Separate Account I of Washington National Insurance Company
(the "Separate Account") is a segregated investment account of Washington
National Insurance Company ("WNIC"). WNIC is a wholly-owned subsidiary of
Washington National Corporation. The Separate Account is registered as an
open-end diversified management investment company pursuant to the provisions of
the Investment Company Act of 1940. The Separate Account no longer issues new
contracts. There are three Sub-Accounts within the Separate Account, each with
its own investment objectives and policies as follows:
Bond Sub-Account -- high level of current income while preserving capital
by investing in fixed income securities.
Short-Term Portfolio Sub-Account -- moderate level of current income
consistent with liquidity and preservation of capital by investing in one
or more types of short-term instruments.
Stock Sub-Account -- long-term capital growth and income by investing
principally in equity-type securities.
In addition, a contract holder may elect to invest in a fixed annuity held by
WNIC, called the Fixed Account.
WNIC is a contract holder of the Separate Account. At December 31, 1994, the
fair value of WNIC's investments were $4,822,598, $1,041,313, and $7,151,985 in
the Bond, Short-Term Portfolio, and Stock Sub-Accounts, respectively.
During 1994, WNIC has made no deposits or withdrawals.
Valuation of Investments: Securities traded on a national securities exchange
are valued at the closing price as of the valuation date. Investments traded in
the over-the-counter market are valued at the average between the bid and ask
prices. Commercial paper is valued at amortized cost and other short-term
investments are valued at cost. Differences, if any, from fair value are not
considered material in relation to net assets.
Investment Transactions and Income: Security transactions are accounted for on
the trade date (date the order to buy or sell is executed). Interest income is
recorded on the accrual basis and dividend income is recorded on the ex-dividend
date. Realized gains and losses on investments are determined on a first-in,
first-out basis.
Accumulation Unit Valuation: Accumulation unit values reflect the net asset
value of each Sub-Account and are computed daily.
Page 32
<PAGE>
SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- Continued
December 31, 1994
NOTE B -- DEDUCTIONS AND CHARGES
Deductions and charges are made from the Separate Account and paid to WNIC as
follows:
o As a fee for administration and contract maintenance, WNIC deducts $30
annually from the accumulated value of each contract on the contract
anniversary or on the date of surrender if it occurs between contract
anniversaries. This fee does not apply to contracts for individual
retirement accounts, or to contracts which at the end of any contract
anniversary have received at least $1,000 of payments or in which the
accumulated value is at least $20,000.
o As compensation for annuity rate guarantees, WNIC deducts an amount,
computed on a daily basis, which is equal on an annual basis to .8% of
the average net asset value of the Separate Account.
o As a fee for managing and administering the investment activities of the
Separate Account, WNIC deducts an amount, computed on a daily basis,
equal to an annual rate of .5% of the average net asset value of each
Sub-Account.
o As compensation for providing financial accounting services to the
Separate Account, WNIC deducts an amount, computed on a daily basis,
equal to an annual rate of .35% of the average net asset value of the
Separate Account.
o As reimbursement for incurring various other general and administrative
expenses attributable to the Separate Account, WNIC deducts an amount,
computed on a daily basis, equal to an annual rate of .2% of the average
net asset value of the Separate Account. A component of these expenses is
the fee paid to the Separate Account's Board of Directors. Only members
of the Board of Directors who are not directors, officers, or employees
of WNIC receive an annual retainer of $1,000, and a meeting fee of $350.
During 1994, the Separate Account's three external directors each
received $1,350.
o A contingent deferred sales charge of 6% is made on any amounts withdrawn
which are in excess of 10% of the contract's accumulated value on the
date of the first withdrawal during the respective contract year, except
that no such charge is made for withdrawals of purchase payments received
more than 72 months prior to the date of withdrawal and no such charge is
made if the withdrawal amount is applied to a settlement option after the
contract has been in force for five years or if the contract contains
life contingencies.
Page 33
<PAGE>
SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- Continued
December 31, 1994
NOTE C -- INVESTMENTS
The aggregate cost of purchases and sales of investments other than United
States Government obligations and short-term notes was:
Proceeds
Cost of From
Investments Investments
Sub-Account Acquired Sold
-------------------- ------------------ ---------------
Bond $ - $ 807,884
Stock 3,087,196 2,886,600
The total unrealized gain or loss on investments at December 31, 1994 consisted
of unrealized appreciation of $123,229 and $7,263,885 and unrealized
depreciation of $601,042 and $605,924 in the Bond and Stock Sub-Accounts,
respectively.
NOTE D -- FEDERAL INCOME TAXES
The operations of the Separate Account form a part of, and are taxed with, the
operations of WNIC, which under the Internal Revenue Code is taxed as a "life
insurance company." The Separate Account is not taxed as a regulated investment
company under Subchapter M of the Code. Under existing federal income tax law,
no taxes are payable on the investment income or on the realized gains of the
Separate Account.
Page 34
<PAGE>
SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
SUPPLEMENTARY INFORMATION--SELECTED PER ACCUMULATION UNIT DATA AND RATIOS
Selected data per accumulation unit
outstanding throughout the year
<TABLE>
<CAPTION>
For the year ended December 31, 1994 1993 1992
-------------------------- -------------------------- --------------------------
Sub-Account Sub-Account Sub-Account
-------------------------- -------------------------- --------------------------
Short-Term Short-Term Short-Term
Bond Portfolio Stock Bond Portfolio Stock Bond Portfolio Stock
-------------------------- -------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per accumulation unit data:
Investment income $ 0.16 $ 0.07 $ 0.08 $ 0.16 $ 0.05 $ 0.07 $ 0.17 $ 0.06 $ 0.07
Expenses (0.04) (0.03) (0.04) (0.04) (0.03) (0.04) (0.04) (0.03) (0.04)
------------------------ ------------------------ ------------------------
NET INVESTMENT INCOME 0.12 0.04 0.04 0.12 0.02 0.03 0.13 0.03 0.03
Net realized and unrealized
gain (loss) on investments (0.22) -- (0.02) 0.03 -- 0.21 (0.01) -- 0.12
------------------------ ------------------------ ------------------------
Net increase (decrease) in
accumulation unit value (0.10) 0.04 0.02 0.15 0.02 0.24 0.12 0.03 0.15
Accumulation unit value at
beginning of year 2.26 1.66 2.52 2.11 1.64 2.28 1.99 1.61 2.13
------------------------ ------------------------ ------------------------
ACCUMULATION UNIT VALUE
AT END OF YEAR $ 2.16 $ 1.70 $ 2.54 $ 2.26 $ 1.66 $ 2.52 $ 2.11 $ 1.64 $ 2.28
======================== ======================== ========================
Ratios:
Ratio of expenses to average
net assets 1.87% 1.85% 1.83% 1.85% 1.85% 1.81% 1.85% 1.85% 1.85%
Ratio of net investment income
to average net assets 5.28 2.47 1.41 5.50 1.28 1.17 6.22 1.82 1.33
Portfolio turnover rate -- -- 12.20 33.66 -- 3.50 10.83 -- 4.92
Number of accumulation units
outstanding at end of year
(000's omitted) 5,297 1,032 9,882 5,836 980 10,202 6,457 1,065 10,457
</TABLE>
See notes to financial statements.
Page 35
<PAGE>
SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
SUPPLEMENTARY INFORMATION--SELECTED PER ACCUMULATION UNIT DATA AND
RATIOS (cont.)
Selected data per accumulation unit
outstanding throughout the year
<TABLE>
<CAPTION>
For the year ended December 31, 1991 1990
---------------------------- ---------------------------
Sub-Account Sub-Account
-------------------------- --------------------------
Short-Term Short-Term
Bond PortfolioStock Bond Portfolio Stock
-------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Per accumulation unit data:
Investment income $ 0.16 $ 0.09 $ 0.07 $ 0.16 $ 0.11 $ 0.08
Expenses (0.03) (0.03) (0.04) (0.03) (0.03) (0.03)
-------------------------- --------------------------
NET INVESTMENT INCOME 0.13 0.06 0.03 0.13 0.08 0.05
Net realized and unrealized
gain (loss) on investments 0.14 -- 0.34 (0.11) -- (0.14)
-------------------------- --------------------------
Net increase (decrease) in 0.02 0.08 (0.09)
accumulation unit value 0.27 0.06 0.37
Accumulation unit value at
beginning of year 1.72 1.55 1.76 1.70 1.47 1.85
-------------------------- --------------------------
ACCUMULATION UNIT VALUE
AT END OF YEAR $ 1.99 $ 1.61 $ 2.13 $ 1.72 $ 1.55 $ 1.76
========================== ==========================
Ratios:
Ratio of expenses to average
net assets 1.85% 1.86% 1.86% 1.79% 1.85% 1.83%
Ratio of net investment income
to average net assets 7.02 3.80 1.85 7.61 5.29 2.82
Portfolio turnover rate -- -- 5.97 10.03 -- 15.70
Number of accumulation units
outstanding at end of year
(000's omitted) 6,616 1,130 10,564 7,308 1,505 10,693
</TABLE>
See notes to financial statements.
Page 36
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholder
Washington National Insurance Company
- --------------------------------------------------------------------------------
We have audited the accompanying consolidated balance sheets of Washington
National Insurance Company and subsidiaries as of December 31, 1994 and 1993,
and the related consolidated statements of operations, shareholder's equity,
and cash flows for each of the three years in the period ended December 31,
1994. The financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Washington
National Insurance Company and subsidiaries at December 31, 1994 and 1993, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles.
As discussed in Note A, the Company changed its method of accounting for
certain investments in debt and equity securities in 1994, postemployment
benefits in 1993, and income taxes and postretirement benefits other than
pensions in 1992.
/s/Ernst & Young LLP
Chicago, Illinois
February 13, 1995
37
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEET
(000s omitted)
<CAPTION>
December 31, 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS Investments
Fixed maturities-
Available for sale at fair value (cost: $1,768,181) $1,649,453 $ --
Held to maturity at cost (fair value: $112,368; $134,448) 113,116 128,184
Held for sale at cost (fair value: $1,708,677) -- 1,632,609
Mortgage loans on real estate 357,641 391,667
Real estate 26,835 38,879
Policy loans 54,368 52,285
Equities at fair value (cost: $13,218; $15,723) 13,047 15,714
Other long-term 17,293 20,686
Short-term 51,642 67,352
Total Investments 2,283,395 2,347,376
Cash 3,669 7,021
Deferred acquisition costs 293,850 256,956
Reinsurance recoverables and prepaid premiums 54,842 56,314
Accrued investment income 33,084 32,386
Insurance premiums in course of collection 14,857 25,159
Property and equipment 22,988 26,151
Goodwill 19,092 20,983
Separate Account 42,178 44,589
Other 38,402 24,457
----------------------------------------------------------------------------------------------
TOTAL ASSETS $2,806,357 $2,841,392
- -----------------------------------------------------------------------------------------------------------------
LIABILITIES Policy liabilities $2,354,818 $2,331,471
General expenses and other liabilities 119,069 117,056
Mortgage payable 1,907 2,434
Short-term notes payable 1,175 2,800
Income taxes (1994 current: $430) (15,874) 5,631
Minority interest 44,157 25,707
Separate Account 42,178 44,589
----------------------------------------------------------------------------------------------
TOTAL LIABILITIES 2,547,430 2,529,688
- -----------------------------------------------------------------------------------------------------------------
SHAREHOLDER'S Common Stock ($5.00 par value; Authorized - 5,250,000
EQUITY shares; Issued and outstanding - 5,007,370 shares) 68,274 87,865
Retained earnings 250,198 226,639
Unrealized losses on investments (56,897) (9)
Unfunded pension loss (2,648) (2,791)
----------------------------------------------------------------------------------------------
TOTAL SHAREHOLDER'S EQUITY 258,927 311,704
----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $2,806,357 $2,841,392
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
38
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS
(000s omitted)
<CAPTION>
Year Ended December 31, 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES Insurance premiums and policy charges $468,386 $438,822 $380,970
Net investment income 181,524 183,430 187,010
Realized investment gains (losses) (1,425) 896 (4,954)
Other 8,142 6,324 6,925
-------------------------------------------------------------------------------------------------
TOTAL REVENUES 656,627 629,472 569,951
- -------------------------------------------------------------------------------------------------------------------
BENEFITS AND Insurance benefits paid or provided 435,802 420,358 409,840
EXPENSES Insurance and general expenses 137,239 129,584 105,003
Amortization of deferred acquisition costs 38,053 37,943 27,120
-------------------------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 611,094 587,885 541,963
- -------------------------------------------------------------------------------------------------------------------
EARNINGS Income before income taxes, minority interest,
and cumulative effect of changes in
accounting principles 45,533 41,587 27,988
INCOME TAXES 13,062 10,728 9,671
MINORITY INTEREST 2,937 389 --
-------------------------------------------------------------------------------------------------
Income before cumulative effect of changes
in accounting principles 29,534 30,470 18,317
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING
PRINCIPLES---NET OF RELATED TAX EFFECTS -- (1,550) (15,196)
-------------------------------------------------------------------------------------------------
NET INCOME $ 29,534 $ 28,920 $ 3,121
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
39
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(000s omitted)
<CAPTION>
Year Ended December 31, 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING Net income $ 29,534 $ 28,920 $ 3,121
ACTIVITIES Adjustments to reconcile to net cash provided
by operating activities
Increase in policy liabilities 48,998 80,440 82,513
Deferred acquisition costs (3,894) (15,282) (30,788)
Change in premiums in course of collection 10,302 (12,077) 6,963
Change in reinsurance receivable (11,387) 4,587 --
Changes in accounting principles - net of tax -- 1,550 15,196
Other, net 7,838 21,359 13,910
------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 81,391 109,497 90,915
- -------------------------------------------------------------------------------------------------------------------
INVESTING Proceeds from sales
ACTIVITIES Fixed maturities - available for sale 113,375 -- --
Fixed maturities -- 261,313 123,549
Equities, mortgage loans, real estate, and other 18,239 55,354 68,854
Proceeds from maturities and redemptions
Fixed maturities - available for sale 155,684 -- --
Fixed maturities - held to maturity 17,313 -- --
Fixed maturities -- 266,217 435,506
Equities, mortgage loans, real estate, and other 58,666 73,763 85,864
Cost of purchases
Fixed maturities - available for sale (399,418) -- --
Fixed maturities - held to maturity (5,000) -- --
Fixed maturities -- (726,358) (775,858)
Equities, mortgage loans, real estate, and other (26,068) (40,661) (110,046)
Increase in policy loans (2,083) (784) (1,815)
Purchases of property and equipment (2,008) (7,824) (5,369)
Net (increase) decrease in short-term investments 15,710 (4,350) 38,562
------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (55,590) (123,330) (140,753)
- -------------------------------------------------------------------------------------------------------------------
FINANCING Policyholder account deposits 143,627 142,871 174,841
ACTIVITIES Policyholder account withdrawals (169,278) (124,795) (128,815)
Sale of Common Stock by subsidiary -- 25,382 --
Change in short-term notes payable -- (11,950) 11,114
Repayment of mortgage and long-term notes payable (527) (9,536) (822)
Proceeds from mortgage and long-term notes payable -- -- 4,400
Dividends to parent (2,975) (7,710) (9,915)
------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (29,153) 14,262 50,803
- -------------------------------------------------------------------------------------------------------------------
CHANGE IN INCREASE (DECREASE) IN CASH (3,352) 429 965
CASH CASH AT BEGINNING OF YEAR 7,021 6,592 5,627
------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 3,669 $ 7,021 $ 6,592
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
40
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
(000s omitted)
<CAPTION>
Year Ended December 31, 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCK Balance at beginning of year $ 87,865 $ 87,865 $ 87,865
AND ADDITIONAL Subsidiary stock issuance (19,591) -- --
--------------------------------------------------------------------------------------
PAID-IN Capital Balance at end of year 68,274 87,865 87,865
- ------------------------------------------------------------------------------------------------------------------
RETAINED Balance at beginning of year 226,639 205,429 212,223
EARNINGS Net income 29,534 28,920 3,121
Dividends to parent (5,975) (7,710) (9,915)
--------------------------------------------------------------------------------------
Balance at end of year 250,198 226,639 205,429
- ------------------------------------------------------------------------------------------------------------------
NET UNREALIZED
GAINS (LOSSES) ON Balance at beginning of year (9) 111 (3,248)
INVESTMENTS Effect of change in accounting principle 39,424 -- --
Change during year (96,312) (120) 3,359
--------------------------------------------------------------------------------------
Balance at end of year (56,897) (9) 111
- ------------------------------------------------------------------------------------------------------------------
UNFUNDED PENSION Balance at beginning of year (2,791) (1,269) (2,498)
LOSS Change during year 143 (1,522) 1,229
--------------------------------------------------------------------------------------
Balance at end of year (2,648) (2,791) (1,269)
- ------------------------------------------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY TOTAL SHAREHOLDER'S EQUITY AT END OF YEAR $258,927 $311,704 $292,136
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A
Significant Accounting Policies and Practices
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP) and include the
accounts and operations of Washington National Insurance Company and its
subsidiaries (WNIC or the Company). WNIC is a wholly owned subsidiary of
Washington National Corporation (WNC). Significant intercompany transactions
have been eliminated.
RECLASSIFICATIONS
Certain amounts in the 1993 and 1992 financial statements have been
reclassified to conform to the 1994 presentation.
MINORITY INTEREST
During the fourth quarter of 1993, United Presidential Corporation (UPC), an
insurance subsidiary of WNIC, issued and sold common stock to WNC, representing
a 28.7% interest in UPC. The shares were sold based on UPC's statutory book
value, which was less than UPC's GAAP book value. As a result of this
difference, an adjustment of $19,591,000 was recorded to WNIC's additional
paid-in capital to reflect the decrease in WNIC's GAAP-basis carrying value of
UPC. The operations of UPC are consolidated in the accompanying financial
statements, with WNC's interest in UPC represented by a minority interest.
NEW ACCOUNTING STANDARDS
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) 115, "Accounting for Certain Investments in Debt
and Equity Securities," issued by the Financial Accounting Standards Board
(FASB) in 1993. The statement requires the Company to segregate its fixed
maturity portfolio into three separate classifications: investments held to
maturity, trading securities, and investments available for sale.
Investments held to maturity are those fixed maturities that the Company
has a positive intent and ability to hold to maturity. These securities are
carried at amortized cost less write-downs for other-than-temporary
impairments. Trading securities consist of those fixed maturity and equity
securities held for short periods of time and are carried on the balance sheet
at fair value, with any change in value reported as a component of income.
Available for sale investments consist of those securities that do not meet the
criteria of either investments held to maturity or trading securities and are
carried on the balance sheet at fair value. Changes in fair values of
available for sale securities, after adjustment of deferred acquisition costs
(DAC) and minority interest, are reported as unrealized gains or losses
directly in shareholder's equity and, accordingly, have no effect on net
income. The DAC offsets represent valuation adjustments or reinstatements of
DAC that would have been required as charges or credits to operations had such
unrealized amounts been realized. The effect of the adjustment to market value
and the change to DAC is tax effected. If a decrease in the value of fixed
maturity investments is other than temporary, the loss is recognized as a
realized loss. The effect of the adoption of this standard on shareholder's
equity is as follows:
- ---------------------------------------------------------------------
(000s omitted) 12/31/94 1/1/94
- ---------------------------------------------------------------------
Fair value adjustment to available
for sale fixed maturity securities $(118,728) $ 74,273
DAC adjustments 33,000 (18,630)
Deferred tax adjustments 24,543 (13,999)
Minority interest 4,385 (2,220)
- ---------------------------------------------------------------------
Net unrealized gain (loss) on
fixed maturities available for sale $ (56,800) $ 39,424
- ---------------------------------------------------------------------
At December 31, 1994, the unrealized loss was primarily due to the increase
in interest rates in 1994.
In 1993, these securities were primarily classified as held for sale and
carried at the lower of market or amortized cost, less other-than-temporary
impairments.
42
<PAGE>
The Company foresees that this standard will continue to result in an
increase in the volatility of shareholder's equity as the standard does not
permit a corresponding adjustment to the liabilities that these assets support.
In October 1994, the FASB issued SFAS 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments." The statement
requires increased disclosure of information on derivative financial
instruments such as forward, futures, swap, and option contracts. The Company
does not have any such instruments. However, the Company does have certain
financial commitments to extend credit and fund investments that fall under the
disclosure requirements of this statement and these are discussed in Note F.
Effective December 1994, the Company adopted the American Institute of
Certified Public Accountants (AICPA) Statement of Position (SOP) 94-5,
"Disclosure of Certain Matters in the Financial Statements of Insurance
Enterprises." This SOP requires additional disclosure on statutory accounting
that is included in Note G.
SFAS 114, "Accounting by Creditors for Impairment of a Loan," and its
amendments, will be adopted by the Company effective January 1, 1995. The
standard provides measurement criteria for determining the carrying value when
it is probable that a loan has been impaired and for disclosing of information
about investments in impaired loans. A loan is considered impaired when it is
probable that the Company will not collect all amounts due under the
contractual terms. The impairment is recognized by a valuation allowance which
may be subsequently increased or decreased based on changes in the measurement
criteria. The statement applies to essentially all loans in the Company's
mortgage loan portfolio. The adoption will not have a material impact on the
financial statements.
CUMULATIVE EFFECT OF ACCOUNTING CHANGES
Net income in 1993 was reduced by a one-time cumulative effect adjustment of
$1,550,000, net of taxes of $834,000, for the adoption of SFAS 112 "Employers'
Accounting for Postemployment Benefits." Net income in 1992 includes one-time
cumulative effect adjustments of a reduction of $20,126,000, net of taxes of
$10,368,000, for the adoption of SFAS 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions," and an increase of $4,930,000 for
the adoption of SFAS 109, "Accounting for Income Taxes."
INVESTMENTS
FIXED MATURITIES. Fixed maturity investments are securities that mature more
than one year after issuance. They include bonds, notes, and redeemable
preferred stocks. Investments in fixed maturities are intended to be used by
WNIC as part of its asset/liability matching strategy. Effective in 1994 with
the adoption of SFAS 115, the Company classifies its fixed maturity investments
into available for sale investments and held to maturity investments.
EQUITY SECURITIES. Equity securities include an investment of WNIC's funds
in its Separate Account, nonredeemable preferred stocks, and common stocks. The
Separate Account investment is carried at cost. The stocks of non-related
companies are carried at fair value derived from either a major securities
exchange or the National Association of Securities Dealers Automated Quotation
System. Unreahzed gains and losses on these securities are recorded directly in
shareholder's equity. Other-than-temporary declines below cost are recorded as
realized losses.
MORTGAGE LOANS ON REAL ESTATE. Mortgage loans on real estate are carried at
unpaid principal net of unearned discount and allowance for possible loan
losses. Allowance for mortgage loan losses is based on an evaluation of the
mortgage loan portfolio, past credit loss experience, and current economic
conditions. Loans considered permanently impaired are written down to their net
realizable value.
REAL ESTATE INVESTMENTS. Real estate investments are principally carried at
cost less allowances for depreciation and possible losses. Foreclosed real
estate is considered available for sale and is recorded at the lower of current
carrying value or fair value less estimated costs of disposal.
OTHER LONG-TERM INVESTMENTS. Other long-term investments consist
principally of venture capital investments and are carried at cost less
other-than-temporary impairments.
SHORT-TERM INVESTMENTS. Short-term investments include commercial paper,
variable demand notes, and money market funds and are carried at cost, which
approximates market value.
INVESTMENT INCOME. Interest on fixed maturities, loans, and notes is
recorded as income as it is earned. Income is adjusted for any amortization of
43
<PAGE>
premium or discount on these investments including adjustments resulting from
prepayments or expected changes in prepayments on mortgage- backed securities.
Income on impaired loans, real estate, and other long-term investments is
recorded principally on a cash basis. Dividends are recorded as income on
ex-dividend dates. Investment expenses are accrued as incurred.
REALIZED INVESTMENT GAINS OR LOSSES. When an investment is sold, its
selling price may be higher or lower than its carrying value. Using the
specific identification method, the difference between the selling price and
the carrying value is recorded as a realized gain or loss. Investments that
have declined in fair value below costs for which the decline is judged to be
other-than- temporary, are written down to their estimated fair value. Write
downs and allowances for losses on mortgage loans are included in realized
investment losses.
DEPRECIATION
Provisions for depreciation of real estate investments and home office
properties are computed using primarily the straight-line method over the
estimated useful lives. Accumulated depreciation on real estate investments at
December 31 was $24,777,000 and $24,184,000 in 1994 and 1993, respectively.
Accumulated depreciation on home office property and equipment at December 31
was $2,434,000 and $1,101,000 in 1994 and 1993, respectively.
INSURANCE PREMIUMS AND POLICY CHARGES
Insurance premiums and policy charges include reinsurance premiums assumed and
are net of reinsurance ceded. Health insurance premiums are earned and
recognized pro rata over the terms of the policies. Premiums for traditional
life insurance products are recognized as revenues when due. Revenues for
certain interest-sensitive products consist of charges earned and assessed
against policy account balances during the period for the cost of insurance,
policy initiation fees, policy administration expenses, and surrender charges.
DEFERRED ACQUISITION COSTS
Costs directly associated with the acquisition of new business are generally
deferred and amortized. For traditional life insurance and health insurance
products, costs are amortized over the premium-paying period of the products
based on assumptions used in calculating policy benefitreserves. For certain
interest-sensitive products, costs are generally amortized over the estimated
lives of the products in relation to the present value of estimated gross
profits from surrender charges and investment, mortality, and expense margins.
Amortization for the products is adjusted periodically to reflect differences
in actual and assumed gross profits.
DAC is increased for the estimated effect of realizing unrealized
investment losses and decreased for the estimated effect of realizing
unrealized investment gains. The offset to these amounts is recorded directly
to shareholder's equity.
The unamortized cost of purchased insurance in force is included in DAC.
Amortization is primarily in relation to the present value of estimated gross
profits over the estimated twenty-two year remaining life of the related
insurance in force with interest rates ranging from 7.5% to 8.5%.
The changes in the unamortized cost of purchased insurance in force for the
years ended December 31 follow:
- ------------------------------------------------------------------------
(000s omitted) 1994 1993 1992
- ------------------------------------------------------------------------
Balance at beginning of year $41,902 $47,039 $33,996
Interest on unamortized
balance 3,136 3,436 4,016
Amortization (6,026) (8,573) (8,486)
Effect of unrealized
investment losses 6,270 -- --
Change in accounting
principle for income taxes -- -- 17,513
- ------------------------------------------------------------------------
Balance at end of year $45,282 $41,902 $47,039
- ------------------------------------------------------------------------
The estimated percentage of the December 31, 1994 balance before the effect
of unrealized investment losses to be amortized over the next five years
follows:
- ------------------------------------------------------------------------
1995 14.6%
1996 14.4%
1997 14.0%
1998 13.1%
1999 12.9%
- ------------------------------------------------------------------------
POLICY LIABILITIES
Liabilities for future policy benefits for traditional life insurance products
are determined using the present value of future net premiums, benefits and
expenses, and the net level valuation method, based on estimates of future
investment yield, mortality, and withdrawal rates, adjusted to provide for
44
<PAGE>
possible adverse deviation. Interest rate assumptions are graded and ranged from
4.5% to 7.5%. Withdrawal assumptions are based principally on experience and
vary by issue age, type of coverage, and duration.
Liabilities for future policy benefits of certain interest-sensitive
products are policy account balances before applicable surrender charges, plus
certain deferred policy initiation fees that are recognized as income over the
term of the policies, plus a provision for the return of the cost of insurance
charges. Policy benefits and claims that are charged to expense include
interest credited to policy account balances, benefit claims incurred in the
period in excess of related policy account balances, and provision for the
return of the cost of insurance charges. Credited interest rates for these
products ranged from 4.0% to 7.3% at December 31, 1994.
Liabilities for policy and contract claims are determined using case-basis
evaluations and statistical analyses. These liabilities represent estimates of
the ultimate expected cost of incurred claims. Any required revisions in these
estimates are included in operations in the period when the revisions are made.
GOODWILL
The cost of purchased businesses in excess of net assets acquired is reported
as goodwill and is amortized on a straight-line basis over thirty-five years.
Goodwill is evaluated based on the prospect of continued growth and the
long-term nature of the insurance policies sold. The asset value is considered
appropriate. Accumulated amortization of goodwill was $6,038,000 and $5,332,000
at December 31, 1994 and 1993, respectively.
SEPARATE ACCOUNT
Separate Account assets and liabilities are principally carried at fair value
and represent funds that are separately administered for annuity contracts for
which the contract holders bear the investment risk. Investment income and
realized gains and losses allocable to Separate Accounts generally accrue to
the contract holders and are excluded from the Consolidated Statement of
Operations.
INCOME TAXES
The accounting policies of WNIC result in deferred taxes being provided for
significant temporary differences between financial statement and tax return
bases, using the asset and liability method. These differences result primarily
from policy reserves, DAC, certain investments, and reserves for postretirement
benefits. WNIC and its subsidiaries file a consolidated life/nonlife federal
income tax return with its parent,WNC.
REINSURANCE
WNIC reinsures a portion of its life insurance, annuity, and health insurance
risks with other insurance companies to minimize its exposure to loss. The
Company's policy on claim exposure for the life insurance and annuity business
is to retain a maximum of $300,000 of life insurance exposure on any one
individual ($400,000 with accidental death coverage). For group insurance
products, the Company limits its paid-claim exposure in any one calendar year
to $750,000 per claim for major medical coverage and $250,000 per claim for
individual stop-loss. The Company retains a maximum of 50% of each long-term
disability and long-term care claim, and limits its group term life insurance
exposure to $200,000 per life ($400,000 with accidental death coverage). The
Company's reinsurance for individual health insurance claims is designed to
protect the Company from an excessive amount of claims over $250,000 on an
individual claim basis.
Substantially all of the reinsurance ceded by the Company is to entities
rated "A" or better by A. M. Best, or to entities required to maintain assets
in an independent trust fund whose fair value is sufficient to discharge the
obligations of the reinsurer. To the extent that any reinsurance company is
unable to meet its obligations under the agreements, WNIC remains liable.
Benefit amounts paid directly by the Company for insurance claims covered
under reinsurance ceded agreements are recorded as reinsurance recoverables to
the extent not already reimbursed. The cost of reinsurance related to
long-duration contracts is accounted for over the life of the underlying
reinsured policies using assumptions consistent with those used to account for
the underlying policies.
Substantially all of the reinsurance assumed by the Company as of December
31, 1994 relates to individual health insurance. It is on a 50% or 100%
coinsurance basis and is accounted for in a manner similar to the direct
business.
45
<PAGE>
NOTE B
Investments
FIXED MATURITIES
A comparison of amortized cost to fair value of fixed maturity investments by
category at December 31, 1994 and 1993 follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(000s omitted) Cost (a) Gains Losses Value
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturities 1994
- -------------------------------------------------------------------------------------------------------------
Available for sale
United States government obligations $ 74,293 $ 265 $ 4,577 $ 69,981
Obligations of states and political subdivisions 75,555 1,215 5,286 71,484
Public utilities 131,184 20 13,650 117,554
Industrial and miscellaneous 798,018 5,091 53,406 749,703
Mortgage-backed securities 655,286 3,232 49,315 609,203
Other 33,845 63 2,380 31,528
- -------------------------------------------------------------------------------------------------------------
Total available for sale 1,768,181 9,886 128,614 1,649,453
- -------------------------------------------------------------------------------------------------------------
Held to maturity
United States government obligations 251 -- -- 251
Obligations of states and political subdivisions 22,109 860 45 22,924
Industrial and miscellaneous 86,027 845 2,591 84,281
Mortgage-backed securities 4,529 181 -- 4,710
Other 200 2 -- 202
- -------------------------------------------------------------------------------------------------------------
Total held to maturity 113,116 1,888 2,636 112,368
- -------------------------------------------------------------------------------------------------------------
Total fixed maturities $1,881,297 $11,774 $131,250 $1,761,821
- -------------------------------------------------------------------------------------------------------------
1993
- -------------------------------------------------------------------------------------------------------------
Held for sale
United States government obligations $ 52,010 $ 3,784 $ 93 $ 55,701
Obligations of states and political subdivisions 55,947 3,888 538 59,297
Public utilities 137,132 5,501 1,701 140,932
Industrial and miscellaneous 655,068 41,643 849 695,862
Mortgage-backed securities 695,246 24,410 1,571 718,085
Other 37,206 2,382 788 38,800
- -------------------------------------------------------------------------------------------------------------
Total held for sale 1,632,609 81,608 5,540 1,708,677
- -------------------------------------------------------------------------------------------------------------
Held to maturity
United States government obligations 3,636 2 -- 3,638
Obligations of states and political subdivisions 27,182 1,817 -- 28,999
Industrial and miscellaneous 90,566 3,918 -- 94,484
Mortgage-backed securities 6,540 507 -- 7,047
Other 260 20 -- 280
- -------------------------------------------------------------------------------------------------------------
Total held to maturity 128,184 6,264 -- 134,448
- -------------------------------------------------------------------------------------------------------------
Total fixed maturities $1,760,793 $87,872 $ 5,540 $1,843,125
- -------------------------------------------------------------------------------------------------------------
<FN>
(a) Amortized cost is net of other-than-temporary impairments in 1994 and 1993 and an allowance for
high-yield bonds in 1993.
</FN>
</TABLE>
Fixed maturities had an increase (decrease) in unrealized gains (the excess
of fair value over amortized cost) of $(201,808,000), $25,438,000 and
$(4,245,000) in 1994, 1993, and 1992, respectively.
46
<PAGE>
The amortized cost and fair value of fixed maturities at December 31, 1994,
by contractual maturity, follow. Expected maturities differ from contractual
maturities as borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
- ------------------------------------------------------
Amortized Fair
(000s omitted) Cost Value
- ------------------------------------------------------
Available for sale:
Fixed maturities, excluding
mortgage-backed securities
Due in 1995 $ 3,599 $ 3,583
Due in 1996 - 1999 114,384 114,093
Due in 2000 - 2004 397,876 375,100
Due after 2004 597,036 547,474
Mortgage-backed securities 655,286 609,203
- ------------------------------------------------------
Total available for sale $1,768,181 $1,649,453
- ------------------------------------------------------
Held to maturity:
Fixed maturities, excluding
mortgage-backed securities
Due in 1995 $ 1,150 $ 1,159
Due in 1996 - 1999 34,366 34,353
Due in 2000 - 2004 35,929 36,101
Due after 2004 37,142 36,045
Mortgage-backed securities 4,529 4,710
Total held to maturity $ 113,116 $ 112,368
- ------------------------------------------------------
Total fixed maturities $1,881,297 $1,761,821
- ------------------------------------------------------
At December 31, 1994, gross unrealized gains and losses on investments in
equity securities amounted to $88,000 and $259,000, respectively.
MORTGAGE LOANS
A rollforward of the allowance for mortgage loan losses follows:
- ------------------------------------------------------
(000s omitted) 1994 1993
- ------------------------------------------------------
Balance at January 1 $12,031 $11,618
Net additions 1,501 3,475
Deductions 5,500 3,062
- ------------------------------------------------------
Balance at December 31 $ 8,032 $12,031
- ------------------------------------------------------
INVESTMENT GAINS AND LOSSES
Details of realized investment gains (losses) for years ended December 31
follow:
- -----------------------------------------------------------
(000s omitted) 1994 1993 1992
- -----------------------------------------------------------
Fixed maturities:
Gross gains $ 2,026 $ 21,513 $ 9,798
Gross losses (3,760) (12,481) (4,177)
- -----------------------------------------------------------
Total fixed maturities (1,734) 9,032 5,621
Equity securities 1,447 383 (1,746)
Mortgage loans (82) 2,047 (4,934)
Real estate and other (1,056) (10,566) (3,895)
- -----------------------------------------------------------
Realized investment gains
(losses) $(1,425) $ 896 $(4,954)
- -----------------------------------------------------------
INVESTMENT INCOME
Major sources of net investment income for the years ended December 31 follow:
- ------------------------------------------------------
(000s omitted) 1994 1993 1992
- ------------------------------------------------------
Fixed maturities $147,396 $141,809 $136,409
Equity securities 301 1,505 3,530
Mortgage loans 34,982 42,030 49,147
Real estate and other 7,880 11,401 11,180
Policy loans 3,459 3,460 3,369
Short-term investments 2,326 2,123 3,872
- ------------------------------------------------------
Gross investment income 196,344 202,328 207,507
- ------------------------------------------------------
Investment expenses 14,820 18,898 20,497
- ------------------------------------------------------
Net investment income $181,524 $183,430 $187,010
- ------------------------------------------------------
Investment expenses consist primarily of real estate expenses.
As of December 31, 1994, the carrying value of investments that produced no
income for the previous twelve month period was $16,880,000 or less than 1% of
invested assets.
OTHER
During 1994, 1993, and 1992, non-cash investing activities totaled $4,009,000,
$4,869,000, and $14,302,000, respectively and consisted of real estate acquired
through foreclosure of mortgage loans and in 1994 a venture capital
distribution of common stock.
47
<PAGE>
NOTE C
Income Taxes
Components of WNIC's deferred tax liabilities and assets at December 31 follow:
- ----------------------------------------------------------------
(000s omitted) 1994 1993
- ----------------------------------------------------------------
Deferred tax liabilities:
DAC $ 97,322 $ 85,114
Accrued bond discount 1,312 1,038
Joint ventures and venture
capital investments 1,025 1,525
Other 2,791 2,749
- ----------------------------------------------------------------
Total deferred tax liabilities 102,450 90,426
Deferred tax assets:
Policy liability adjustments 63,349 66,091
Unrealized investment losses 41,452 --
Liabilities for employee benefits 13,643 13,788
Realized investment losses 11,449 15,448
Other 4,459 4,233
- ----------------------------------------------------------------
Total deferred tax assets 134,352 99,560
Valuation allowance (15,598) (14,765)
- ----------------------------------------------------------------
Deferred tax assets, net of
valuation allowance 118,754 84,795
- ----------------------------------------------------------------
Net deferred tax (assets) liabilities $(16,304) $ 5,631
- ----------------------------------------------------------------
The nature of WNIC's deferred tax assets and liabilities is such that the
general reversal pattern for these temporary differences is expected to result
in a full realization of WNIC's deferred tax assets other than capital gain or
loss items.
At December 31, 1994, WNIC had capital loss carryforwards for tax return
purposes of $1,394,000 that expire in 1996. For financial reporting purposes, a
valuation allowance of $15,598,000 has been recognized to offset the deferred
tax assets related to those carryforwards, investment loss reserves, and other
capital loss related deferred tax assets not expected to be realized. The
valuation allowance was increased by $833,000 in 1994 and reduced by $3,276,000
in 1993.
The Omnibus Budget Reconciliation Act of 1993 changed WNIC's prevailing
federal income tax rate from 34% to 35% effective January 1, 1993.
The following reconciles the difference between the actual tax provision
and the amounts obtained by applying the statutory federal income tax ratesof
35% for 1994 and 1993 and 34% for 1992 to the income or loss before income
taxes and cumulative effect of changes in accounting principles:
- ------------------------------------------------------------------------
(000s omitted) 1994 1993 1992
- ------------------------------------------------------------------------
Income tax at statutory rate
applied to income before
taxes and cumulative effect
of changes in accounting
principles $14,909 $14,419 $ 9,516
Tax benefit (expense) not
recognized on certain
GAAP-basis capital
gains or losses (2,205) (2,870) 1,551
Investment income not taxed (733) (1,035) (1,514)
Amortization of purchase
accounting adjustments 247 247 333
Other 844 (33) (215)
- ------------------------------------------------------------------------
Provision for income taxes $13,062 $10,728 $ 9,671
- ------------------------------------------------------------------------
Comprised of:
Current expense $ 9,361 $ 4,476 $10,010
Deferred expense (benefit) 3,701 6,252 (339)
- ------------------------------------------------------------------------
Income tax expense $13,062 $10,728 $ 9,671
- ------------------------------------------------------------------------
Prior to 1984, WNIC and UPI were required to accumulate certain untaxed
amounts in a memorandum "policyholders' surplus account." Under the Tax Reform
Act of 1984, the "policyholders' surplus account" balances were "capped" at
December 31, 1983 and the balances will be taxed only to the extent distributed
to shareholders or when they exceed certain prescribed limits. WNIC does not
intend to make any taxable distributions or exceed the prescribed limits in the
foreseeable future; therefore, no income tax provision has been made for those
purposes. However, if such taxes were assessed, the amount of tax payable would
be $19,851,000. As of December 31, 1994, the combined "policyholders' surplus
account" approximates $56,717,000.
Under current and prior law, income of WNIC taxed on a current basis is
accumulated in a shareholder's surplus account and can be distributed without
tax. At December 31, 1994, this combined shareholder's surplus was
$256,043,000.
Federal income taxes paid by WNIC were $8,120,000, $4,100,000, and
$8,700,000 in 1994, 1993, and 1992, respectively.
48
<PAGE>
NOTE D
Reinsurance
The effect of reinsurance on premiums and policy charges for the years ended
December 31 follows:
- -------------------------------------------------------------------------
(000s omitted) 1994 1993 1992
- -------------------------------------------------------------------------
Direct premiums and policy
charges $473,443 $470,617 $440,574
Reinsurance assumed 56,640 31,022 2,570
Reinsurance ceded (61,697) (62,817) (62,174)
- -------------------------------------------------------------------------
Premiums and policy
charges $468,386 $438,822 $380,970
- -------------------------------------------------------------------------
Reinsurance benefits ceded were $22,850,000, $22,685,000, and
$22,516,000, in 1994, 1993, and 1992, respectively.
As a result of past divestitures, the Company reinsures 100% of certain
supplemental health insurance, life insurance, and annuity business with
unaffiliated companies. At December 31, 1994, 50% of WNIC's total reinsurance
recoverables were ceded to Combined Life Insurance Company of America, and 16%
were ceded to American Founders Life Insurance Company. In addition, 16% of
reinsurance ceded was to UNUM Life Insurance Company in the normal course of
business.
For 1994, 42% and 57% of reinsurance premiums assumed were from Harvest
Life Insurance Company (Harvest Life) and National Casualty Company (National
Casualty), respectively. These reinsurance agreements provide that the Company
will reinsure blocks of individual major medical business issued by National
Casualty and Harvest Life on a 50% and 100% coinsurance basis, respectively. The
Company also administers 100% of the National Casualty business.
The Company uses yearly renewable term reinsurance at its subsidiary
United Presidential Life Insurance Company (UPI) to maintain statutory
profitability and other statutory financial requirements while sustaining UPI's
growth. At December 31, 1994, such reinsurance, all entered into prior to 1994,
net of related taxes, had contributed $9,044,000 of statutory capital to UPI.
These transactions do not materially impact the Company's GAAP financial
statements.
NOTE E
Defined Benefit and Contribution Plans
RETIREMENT PLANS
The Company has three qualified defined contribution retirement plans: a
non-contributory money-purchase retirement plan, a non-contributory
discretionary profit sharing plan, and a contributory 401(k) plan. The plans
cover substantially all employees who have met the prescribed requirements for
participation. The Company contribution to the money-purchase retirement plan
is 3% of each employee's compensation plus an additional 3% of compensation in
excess of the Social Security wage base. The Company contribution to the profit
sharing plan is at the discretion of WNIC's and UPI's Boards of Directors in
consultation with WNC's Board of Directors and is based on financial
performance. Employees may contribute up to 12% of compensation to the 401(k)
plan. The Company matches employee contributions dollar for dollar up to a
maximum of 3% of compensation. The net pension expense for the defined
contribution plans in 1994, 1993, and 1992 was $3,006,000, $3,760,000, and
$2,808,000, respectively. The Company has a non-qualified supplemental
retirement plan under which benefits are paid to certain employees equal to the
amounts by which the qualified plan benefits are reduced due to provisions of
the Internal Revenue Code (IRC). At December 31, 1994 and 1993, the unfunded
liability for the supplemental retirement plan was immaterial.
Both WNIC and UPI have a defined benefit retirement plan that covers
certain grandfathered employees and agents. Both plans have been amended to
terminate the accrual of future benefits, which resulted in the Company
recording a curtailment gain. Benefits are based principally on years of service
and compensation. Generally, the funding policies are to contribute annually at
least the minimum amounts required by the IRC. Contributions are intended to
provide benefits attributed to service to date.
49
<PAGE>
A summary of the components of the net periodic pension expense (income)
for the defined benefit retirement plans follows:
- --------------------------------------------------------------
(000s omitted) 1994 1993 1992
- --------------------------------------------------------------
Interest cost on projected
benefit obligations $ 1,824 $ 1,923 $ 2,275
Service cost for benefits earned -- 99 300
Actual return on plan assets (419) (2,035) (5,167)
Net amortization and deferral (2,054) (642) 2,996
Curtailment gain -- (491) --
- --------------------------------------------------------------
Net periodic pension
expense (income) $ (649) $(1,146) $ 404
- --------------------------------------------------------------
The defined benefit retirement plans' funded status and amounts reported in
WNIC's consolidated balance sheets as part of other liabilities at December 31
follow:
- -----------------------------------------------------------------
(000s omitted) 1994 1993
- -----------------------------------------------------------------
Actuarial present value of
accumulated benefit obligations:
Vested $(23,759) $(28,696)
Non-vested (118) (254)
- -----------------------------------------------------------------
Accumulated benefit obligations $(23,877) $(28,950)
- -----------------------------------------------------------------
Projected benefit obligations for
service provided to date $(23,877) $(28,950)
Plan assets at fair value 22,794 26,429
- -----------------------------------------------------------------
Projected benefit obligations in
excess of plan assets (1,083) (2,521)
- -----------------------------------------------------------------
Comprised of:
Prepaid pension cost 1,526 512
Unrecognized investment and
actuarial net loss (7,835) (9,566)
Unrecognized transition asset 5,226 6,533
- -----------------------------------------------------------------
Total $ (1,083) $ (2,521)
- -----------------------------------------------------------------
The unrecognized transition asset in the preceding schedule is the amount
by which the plans' net assets exceeded the actuarial present value of
projected benefit obligations, net of amortization, as of January 1, 1985, the
date current pension accounting standards were adopted. The transition asset is
being amortized by credits to income over a fourteen-year period. In addition,
the excess of actual investment and actuarial gains and losses realized over
those expected are deferred and, when the cumulative deferred amounts exceed
certain limits, will be amortized at a rate consistent with a fourteen-year
amortization period. Costs created by plan amendments that are associated with
prior employee service are also deferred and amortized over fourteen years.
GAAP requires employers to recognize a minimum liability at least equal to
the unfunded accumulated benefit obligation. When the accrued or prepaid
pension cost is less than the minimum liability, an adjustment is made to the
liability with the offset directly to shareholder's equity. At December 31,
1994 and 1993, the pretax adjustment was $2,769,000 and $3,033,000,
respectively.
The weighted-average discount rates used in calculating the projected
benefit obligations at December 31, 1994 and 1993 were 7.5% and 6.7%,
respectively. The expected weighted-average rate of return on plan assets was
7.6% in 1994 and 7.5% in 1993 and 1992.
Plan assets are invested principally in mutual funds, bonds, and stocks.
Assets of the WNIC retirement plan include Common and Preferred Stock of WNC of
$8,580,000 and $10,863,000, at fair value, at December 31, 1994 and 1993,
respectively. Dividends of $492,000 were received on the WNC Common and
Preferred Stock in both 1994 and 1993. No WNC shares were purchased or sold
during 1994 or 1993.
POSTRETIREMENT BENEFITS
In addition to WNIC's retirement programs, medical and life insurance benefits
are provided to eligible retired employees under the WNIC Group Insurance Plan.
The plan was amended effective December 31, 1992 to limit future eligibility.
Active WNIC employees who were at least age 50 on December 31, 1992 are
eligible for medical and life insurance benefits after reaching a combination
of age and service requirements. The plan pays a stated percentage of most
medical expenses reduced for deductibles and payments made by government
programs or other group coverage. Retirees contribute to the plan based on a
schedule which averages 13% for single coverage and 21% for dependent coverage
of the benefits paid. Active WNIC employees who were not at least age 50 on
December 31, 1992 are eligible for $10,000 of life insurance benefits under the
plan after reaching a combination of age and service requirements. The 1992
plan curtailment resulted in a gain of $4,033,000 recorded as part of
operations in that year. The Company has reserved the right to change or
eliminate these benefits at any time.
50
<PAGE>
In December 1993, the Company established a Voluntary Employees'
Beneficiary Association (VEBA) trust under section 501(c)(9) of the IRC.
Prior to this time, postretirement benefits were unfunded. In December 1994 and
1993, the Company contributed $1,600,000 and $1,100,000, respectively, to the
VEBA trust. The amounts funded were based on the difference between the net
periodic postretirement benefit expense as measured by statutory accounting
rules and the retiree medical claims incurred during the respective periods,
subject to certain IRC limitations. Assets of the VEBA trust were invested in
two-year U. S. Treasury notes and corporate demand notes at December 31, 1994.
Components of the net periodic postretirement benefit expense for the year
ended December 31 follow:
- -------------------------------------------------------
(000s omitted) 1994 1993 1992
- -------------------------------------------------------
Interest cost $1,994 $2,061 $ 2,198
Service cost 56 61 557
Return on plan assets (28) -- --
Net amortization and deferral 227 (14) --
Curtailment gain -- -- (4,033)
- -------------------------------------------------------
Net periodic postretirement
benefit expense (income) $2,249 $2,108 $(1,278)
- -------------------------------------------------------
The funded status of the plan and the amounts recognized in WNIC's
consolidated balance sheet at December 31 follow:
- ----------------------------------------------------------
(000s omitted) 1994 1993
- ----------------------------------------------------------
Accumulated postretirement
benefit obligation:
Retirees $(25,022) $(26,080)
Fully eligible active plan
participants (846) (1,300)
Other active plan participants (661) (1,269)
- ----------------------------------------------------------
Total accumulated postretirement
benefit obligation (26,529) (28,649)
Fair value of plan assets 2,726 1,100
- ----------------------------------------------------------
Accumulated postretirement benefit
obligation in excess of plan assets $(23,803) $(27,549)
- ----------------------------------------------------------
Comprised of:
Accrued postretirement benefit
expense $(24,392) $(26,198)
Unrecognized net gain (loss) 393 (1,561)
Unrecognized prior service cost 196 210
- ----------------------------------------------------------
Total $(23,803) $(27,549)
- ----------------------------------------------------------
The accumulated postretirement benefit obligation is based on actuarial
assumptions for the weighted-average discount rate and the health care cost
trend rate. The weighted-average discount rate was 7.5% in 1994 and 7.0% in
1993. The health care cost trend rate used in 1994 was 12% for pre-65 and 10%
for post-65 participants, graded evenly to 5% in 15 years. The health care cost
trend rate in 1993 was 14% graded evenly to 6% in 29 years. The
weighted-average expected long-term rate of return on plan assets net of
estimated taxes on investment income was 4.62% in 1994. The estimated income
tax rate for the VEBA trust was 34% in 1994. The health care cost trend rate
assumption has a significant effect on the amounts reported. Increasing the
trend rate by 1% per year would increase the accumulated postretirement benefit
obligation by $2,215,000 and $2,825,000 at December 31, 1994 and 1993,
respectively, and the aggregate of the service and interest cost components of
the net periodic postretirement benefit expense for 1994 and 1993 by $196,000
and $200,000, respectively.
NOTE F:
Commitments and Contingencies
LEASES
WNIC has noncancelable operating leases primarily for office space and office
equipment, the most significant of which is a twenty-year lease of WNIC's home
office building with a related party as lessor. Future minimum lease payments
required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year at December 31, 1994 follows:
- -------------------------------------------------------------
(000s omitted)
- -------------------------------------------------------------
1995 $ 8,401
1996 7,607
1997 6,980
1998 5,265
1999 4,389
Thereafter 48,522
- -------------------------------------------------------------
Total minimum lease commitments $81,164
- -------------------------------------------------------------
Rental expenses were $6,189,000, $6,900,000, and $2,871,000, in 1994, 1993,
and 1992, respectively.
51
<PAGE>
FINANCIAL COMMITMENTS AND GUARANTEES
The Company has entered into financial guarantees which are financial
instruments with off-balance sheet credit risk. The exposure to credit risk is
represented by the amount the Company, under certain circumstances, would
contractually have to pay out. These financial instruments were entered into
for the fee income and the potential to share in future capital appreciation of
the underlying assets.
A financial guarantee is a conditional commitment to guarantee the payment
of an obligation by an unrelated entity to a third party. At December 31, 1994,
the Company had two financial guarantees totaling $15,206,000 which are
collateralized by the underlying real estate and related assets compared to
guarantees totaling $24,132,000 at December 31, 1993. In the event of a sale or
refinancing, the Company is entitled to share in the appreciation of the
collateral.
The financial guarantees are scheduled to expire in 1995 and 1997. The
Company has not funded any of its financial guarantees to date, and feels it
has adequate reserves for potential losses in the future.
LITIGATION
WNIC has been named in various pending legal proceedings considered to be
ordinary routine litigation incidental to the business of such companies. A
number of other legal actions have been filed that demand compensatory and
punitive damages aggregating material dollar amounts. WNIC believes that such
suits are substantially without merit and that valid defenses exist. WNIC's
management and its chief legal officer believe that such litigation will not
have a material effect on the WNIC consolidated results of operations or
financial position.
In September 1994, two retired employees filed a lawsuit in the United
States District Court for the Northern District of Illinois against WNIC, WNC,
and the three individual trustees of the Washington National Insurance Company
Home Office Group Insurance Plan (the Plan). The plaintiffs purport to act as
members of a class consisting of all employees of WNIC and WNC who retired or
tendered their irrevocable notice of retirement on or before July 24, 1989 and
who are eligible to receive benefits under the Plan.
The complaint is brought under the Employee Retirement Income Security Act
and alleges that WNIC, WNC, and the trustees have taken andthreatened to take
actions to modify, amend or terminate the Plan in violation of written and oral
promises and representations and the terms of the Plan. The alleged violations
include changing the method for computing claims payable under the Plan,
requiring retired employees to contribute to the payment of premiums for their
Medicare supplemental health insurance coverage, and maintaining that WNIC, WNC
and the trustees have reserved the right to modify or terminate benefits under
the Plan. Plaintiffs seek a declaration of their rights under the Plan, with
respect to these actions, an award of attorneys' fees and other relief, and a
certification of the class.
WNIC, WNC, and the trustees believe that valid defenses exist and intend to
contest vigorously the material allegations made in the complaint.
STATE GUARANTY FUNDS
Under insolvency or guaranty laws in most states in which the Company operates,
insurers can be assessed for policyholder losses incurred by insolvent
insurance companies. At present, most insolvency or guaranty laws provide for
assessments based on the amount of insurance underwritten in a given
jurisdiction. The Company paid $2,850,000, $2,500,000, and $1,800,000 in state
guaranty fund assessments in 1994, 1993, and 1992, respectively, and had
accrued liabilities of $3,128,000 and $2,800,000 for future assessments at
December 31, 1994 and 1993, respectively. Mandatory assessments can be
partially recovered through a reduction in future premium taxes in some states.
The Company's accounting policy with regard to payments to state guaranty
funds is to treat as an asset any such payments in those states where current
law allows an offset against future premium taxes. At December 31, 1994 and
1993, other assets included $5,464,000 and $5,100,000, respectively, of
deferred payments to state guaranty funds. Generally, these amounts will be
used to offset future premium tax payments over periods from five to ten years.
In the event of a change in the state laws pertaining to prior tax offsets,
such amounts might become unrecoverable.
NOTE G
Statutory Financial Information
WNIC and its insurance subsidiary prepare statutory financial statements in
accordance with accounting principles and practices prescribed or permitted
52
<PAGE>
by the insurance department of their state of domicile. Prescribed statutory
accounting practices currently include state laws, regulations, and general
administrative rules applicable to all insurance enterprises domiciled in a
particular state, as well as practices described in National Association of
Insurance Commissioners' (NAIC) publications. Permitted practices include
practices not prescribed, but allowed, by the domiciliary state insurance
department. The prescribed and permitted statutory accounting practices followed
by WNIC's insurance subsidiary differs from GAAP.
Current statutory practice does not address reserves for certain endowment
features of several life insurance products marketed by one of the Company's
subsidiaries. The subsidiary uses a practice permitted by its state of domicile
and discounts the future benefit using mortality and interest rate assumptions.
The NAIC is currently working on a project to codify statutory accounting
practices (SAP). This process will result in a single source of SAP, possibly
eliminating the concept of permitted practices.
STATUTORY TO GAAP RECONCILIATION
A reconciliation of SAP capital and surplus to GAAP shareholder's equity at
December 31 follows:
- ------------------------------------------------------------------
(000s omitted) 1994 1993
- ------------------------------------------------------------------
SAP capital and surplus $ 221,270 $ 206,841
DAC 293,850 256,956
Adjustments to policy liabilities (119,521) (126,325)
Godwill 19,092 20,983
Asset valuation and interest
maintenance reserves 29,005 30,666
Deferred income taxes 16,304 (5,631)
Postretirement and pension
liabilities (28,313) (31,113)
Unrealized loss on fixed maturities (118,728) --
Minority interest (44,157) (25,707)
Other, net (9,875) (14,966)
- ------------------------------------------------------------------
GAAP shareholder's equity $ 258,927 $ 311,704
- ------------------------------------------------------------------
A reconciliation of SAP net income to GAAP net income (loss) for the years
ended December 31 follows:
- -------------------------------------------------------------------------
(000s omitted) 1994 1993 1992
- -------------------------------------------------------------------------
SAP net income $18,633 $10,954 $ 36
DAC 3,894 15,282 30,788
Cumulative effect of changes
in accounting principles -- (1,550) (15,196)
Adjustments to policy
benefits 1,270 401 (14,812)
Financial reinsurance -- (3,500) (7,500)
Deferred income taxes (3,700) (6,262) 339
Other 9,437 13,595 9,466
- -------------------------------------------------------------------------
GAAP net income $29,534 $28,920 $ 3,121
- -------------------------------------------------------------------------
DIVIDENDS FROM SUBSIDIARIES
Regulatory restrictions limit the dollar amount of dividends available for
distribution to WNIC from UPI without prior approval by regulatory authorities.
The amount of dividends available is based on the greater of: a) 10% of the
insurance subsidiary's statutory capital and surplus as of the preceding year
end; or b) the insurance subsidiary's statutory net income from operations for
the preceding year. Based on these restrictions, WNIC's insurance subsidiary is
permitted a maximum of $5,687,000 in dividend distributions to WNIC in 1995. In
1994, WNIC declared dividends of $5,975,000 to its parent WNC of which
$3,000,000 will be paid in 1995.
NOTE H
Borrowings and Credit Arrangements
BORROWINGS
Borrowings of $3,082,000 at December 31, 1994 consist of a mortgage on
investment real estate with an interest rate of 6.5% that matures in April,
1998 and a non-interest bearing promissory note for $1,175,000 payable to WNC
in June 1995. Payments of $1,679,000, $672,000, $655,000, and $296,000 will be
required in 1995, 1996, 1997, and 1998, respectively. For the mortgage loan,
the property, with a carrying value of $11,922,000, is pledged as collateral.
Interest paid on borrowings by WNIC was $405,000, $1,670,000, and
$1,306,000, in 1994, 1993, and 1992, respectively.
53
<PAGE>
CREDIT ARRANGEMENTS
WNIC has a line of credit with one bank for short-term borrowings amounting to
$10,000,000, all unused at December 31, 1994. The line of credit arrangement is
renewable annually, but credit can be withdrawn at the bank's option.
In addition, WNIC has six letters of credit with varying terms and
conditions totaling $2,395,000. As of December 31, 1994, the entire amount was
unused.
NOTE I
Policy Liabilities
WNIC's policy liabilities at December 31 follow:
- ---------------------------------------------------------
(000s omitted) 1994 1993
- ---------------------------------------------------------
Future policy
benefits-annuities $1,278,252 $1,250,225
Future policy
benefits-life 790,894 800,447
Policy and contract
claims 213,572 206,963
Unearned premiums 332,20 34,649
Other 38,880 39,187
- ---------------------------------------------------------
Total policy liabilities $2,354,818 $2,331,471
- ---------------------------------------------------------
Activity in the liability for unpaid claims (a component of policy and
contract claims) and claim adjustment expense (a component of general expenses
and other liabilities) follows:
- ------------------------------------------------------
(000s omitted) 1994 1993 1992
- ------------------------------------------------------
Balance at January 1 $210,348 $202,322 $195,538
Less: reinsurance
recoverables 11,547 11,956 14,039
- ------------------------------------------------------
Net balance at January 1 198,801 190,366 181,499
Incurred relating to:
Current year 291,209 260,144 227,604
Prior years (31,296) (26,638) (20,231)
- ------------------------------------------------------
Total incurred 259,913 233,506 207,373
Paid relating to:
Current year 179,762 151,989 124,379
Prior years 75,342 73,082 74,127
- ------------------------------------------------------
Total paid 255,104 225,071 198,506
- ------------------------------------------------------
Net balance at December 31 203,610 198,801 190,366
- ------------------------------------------------------
Add: reinsurance
recoverables 11,741 11,547 11,956
- ------------------------------------------------------
Balance at December 31 $215,351 $210,348 $202,322
- ------------------------------------------------------
NOTE J
Fair Value of Financial Instruments
VALUATION METHODS AND ASSUMPTIONS
The disclosure of fair value information about certain financial instruments is
based primarily on quoted market prices. In cases where quoted market prices
are not available, fair values are based on estimates using present value or
other valuation techniques. These estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
the immediate settlement of the instrument.
The fair values of short-term investments, venture capital partnerships,
and accrued investment income approximate the carrying amounts reported in the
balance sheets.
Fair values for fixed maturity and equity securities are based on quoted
market prices, where available. For fixed maturity securities not actively
traded, fair values are estimated using values obtained from independent
pricing services or, in the case of private placements, are estimated by
discounting expected future cash flows using a current market rate applicable
to the yield, credit quality, and maturity of the investments.
Fair values for mortgage loans and policy loans are estimated using
discounted cash flow analyses, based on interest rates currently being offered
for similar loans to borrowers with similar credit ratings. A pricing cap is
put on mortgage loans that carry significant above-market interest rate yields
to reflect the prepayment risk.
Fair values for liabilities under investment-type insurance contracts are
estimated using discounted cash flow calculations, based on interest rates
currently being offered for similar contracts with similar maturities.
The fair value of the mortgage payable is estimated by discounting cash
flows, using current incremental borrowing rates for similar types of borrowing
arrangements.
Fair values for real estate development guarantees are based on estimates
of fees to guarantee similar developments. Fair values for lending commitments
are based on the commitment fees of the loans in question.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of certain financial instruments along with their corresponding
carrying values at December 31, 1994 and 1993 follow. As the fair value of all
54
<PAGE>
WNIC's assets and liabilities are notpresented, this information in the
aggregate does not represent the underlying value of WNIC. WNIC does not own any
financial instruments held or issued for trading purposes.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1994 1993
------------------------ ----------------------
Fair Carrying Fair Carrying
(000s omitted) Value Value Value Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Fixed maturities
Available for sale (a) $1,649,453 $1,649,453 $1,708,677 $1,632,609
Held to maturity 112,368 113,116 134,448 128,184
Equity securities 13,047 13,047 15,714 15,714
Mortgage loans on real estate 366,373 357,641 411,250 391,667
Policy loans 52,600 54,368 50,340 52,285
Liabilities
Investment-type insurance contracts 1,174,017 1,203,608 1,224,550 1,226,238
Mortgage payable 1,854 1,907 2,438 2,434
Off-balance sheet
Real estate development guarantees (b) 80 -- 500 --
Lending commitments 105 -- 358 --
- ------------------------------------------------------------------------------------------------------------
<FN>
(a) Classified as held for sale in 1993.
(b) See Note F for further discussion of guarantees.
</FN>
</TABLE>
NOTE K
Segment Information
WNIC has three business segments: life insurance and annuities; health
insurance (previously reported as the individual health insurance and group
products segments); and corporate and other. The segments are based on WNIC's
insurance products and organization. The corporate and other segment includes
realized investment gains and losses, a curtailment gain in 1992 of $4,033,000
resulting from a change to WNIC's postretirement health benefits program, and
operations that do not specifically support one of the other segments. Assets
not individually identifiable by segment are allocated, generally, based on
the amount of segment liabilities. Depreciation expense and capital
expenditures are not material. Revenues, income or loss before income taxes
and cumulative effect of changes in accounting principles (net of minority
interest in the life insurance and annuities segment), and assets by segment
for the years ended and at December 31 follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
(000s omitted) 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Life insurance and annuities $ 229,732 $ 228,950 $ 233,488
Health insurance 420,982 394,562 338,810
Corporate and other 5,913 5,960 (2,347)
- -------------------------------------------------------------------------------------------------------------
Consolidated total $ 656,627 $ 629,472 $ 569,951
- -------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and cumulative effect:
Life insurance and annuities $ 33,177 $ 28,128 $ 21,856
Health insurance 5,895 11,500 7,007
Corporate and other 3,524 1,570 (875)
- -------------------------------------------------------------------------------------------------------------
Consolidated total $ 42,596 $ 41,198 $ 27,988
- -------------------------------------------------------------------------------------------------------------
Assets:
Life insurance and annuities $2,274,005 $2,291,529 $2,184,660
Health insurance 321,481 344,245 306,698
Corporate and other 210,871 205,618 219,423
- -------------------------------------------------------------------------------------------------------------
Consolidated total $2,806,357 $2,841,392 $2,710,781
- -------------------------------------------------------------------------------------------------------------
</TABLE>
55
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
APPENDIX A
COMMERCIAL PAPER AND BOND RATINGS
Standard & Poor's Corporation (Standard & Poor's) and Moody's Investors Service,
Inc. ("Moody's") ratings:
Commercial Paper Ratings
Standard & Poor's commercial paper ratings are graded into four categories,
ranging from "A" for the highest quality obligations to "D" for the lowest. The
"A," "A-1" and "A-2" categories are described as follows:
"A" Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined
with the designations 1, 2 and 3 to indicate the relative degree of safety.
"A-1" This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be noted with a plus (+)
sign designation.
"A-2" Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as overwhelming as
for issues designated "A-1."
Moody's employs three designations all judged to be investment grade, to
indicate the relative repayment capacity of rated issuers. The two highest
designations are as follows:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
* Leading market positions in well-established industries.
* High rates of return on funds employed.
* Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
* Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
* Well-established access to a range of financial markets and assured sources
of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
A-1
<PAGE>
Bond Ratings
Standard & Poor's
AAA Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small
degree.
A Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than 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 bonds in this category than for bonds
in higher rated categories.
BB, B, CCC, CC Debt rated BB, CCC, or CC is regarded, on balance, as
predominately speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. "BB'
indicates the lowest degree of speculation and "CC' the highest 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.
C This rating is reserved for income bonds on which no interest is being
paid.
D Debt rated D is in default, and payment of interest and/or repayment
of principal is in arrears.
NR Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.
Plus (+) or Minus (-): The ratings from "AA" to "BB" may be modified by the
addition of a plus or minus to show relative standing within the major rating
categories.
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge". Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as an Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A-2
<PAGE>
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B Bonds which 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.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
A-3
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
APPENDIX B
SHORT-TERM PORTFOLIO SUB-ACCOUNT INVESTMENTS
The Short-Term Portfolio Sub-Account and the other Sub-Accounts may invest in
these liquid, short-term debt securities:
1. U.S. Treasury Bills and other obligations issued or guaranteed by the
U.S. Government and its agencies or instrumentalities. These are debt
securities (including bills, certificates of indebtedness, notes, and
bonds) issued or guaranteed by the U.S. Treasury or by an agency or
instrumentality of the U.S. Government that is established under the
authority of an act of Congress. Such agencies or instrumentalities
include, but are not limited to, the Federal National Mortgage
Association, the Federal Farm Credit Bank, and the Federal Home Loan
Bank. Although all obligations of agencies and instrumentalities are
not direct obligations of the U.S. Treasury, payment of the interest
and principal on them is generally backed directly or indirectly by
the U.S. Government. This support can range from the backing of the
full faith and credit of the United States, to U.S. Treasury
guarantees, or to the backing solely of the issuing instrumentality
itself.
2. Certificates of deposit, bankers' acceptances and time deposits of
banks having assets (as most recently reported) in excess of $1
billion. Certificates of deposit issued by U.S. branches of foreign
banks are eligible for purchase if the branches are subject to state
banking laws, Federal Reserve reporting requirements and have a
minimum U.S. deposit size of $1 billion. Certificates of deposit
issued by foreign branches of U.S. banks may also be purchased if the
dollar deposit of the branch exceeds $1 billion. Certificates of
deposit issued for foreign branches of U.S. banks are not governed by
U.S. banking and securities laws and may be influenced by future
political and economic developments and governmental restrictions. The
term "certificates of deposit" includes both Eurodollar certificates
of deposit, which are traded in the over-the-counter market, and
Eurodollar time deposits, for which there is generally not a market.
"Eurodollars" are dollars deposited in banks outside the United
States. An investment in Eurodollar instruments involves risks that
are different in some respects from an investment in debt obligations
of domestic issuers, including future political and economic
developments such as possible expropriation or confiscatory taxation
that might adversely affect the payment of principal and interest on
the Eurodollar instruments. In addition, there might be less publicly
available information about a foreign bank than about a domestic bank,
and such foreign banks may not be subject to the same accounting,
auditing, and financial standards and requirements as domestic banks.
Finally, in the event of default, judgments against a foreign issuer
might be difficult to obtain or enforce. "Certificates of deposit" are
certificates evidencing the indebtedness of a commercial bank to repay
funds deposited with it for a definite period of time (usually from
fourteen days to one year). "Bankers' acceptances" are credit
instruments evidencing the obligation of a bank to pay a draft which
has been drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the face amount
of the instrument upon maturity. "Time deposits" are non-negotiable
deposits in a bank for a fixed period of time.
3. Commercial paper issued by domestic corporations which at the date of
investment is rated "high quality" by Moody's or Standard & Poor's,
provided that in no event will the Sub-Account purchase commercial
paper rated lower than Prime-2 by Moody's or A-2 by Standard & Poor's
or, if not rated, issued by domestic corporations which have an
outstanding senior long-term debt issue rated Aa or better by Moody's
or AA or better by Standard & Poor's. See Appendix A for an
explanation of the ratings issued by Moody's and Standard & Poor's.
B-1
<PAGE>
"Commercial paper" consists of short-term (usually from 1 to 270 days)
unsecured promissory notes issued by corporations in order to finance
their current operations.
4. Other corporate obligations issued by domestic corporations which at
the date of investment are rated Aa or better by Moody's or AA or
better by Standard & Poor's. See Appendix A for rating information.
"Corporate obligations" are bonds and notes issued by corporations and
other business organizations, including business trusts, in order to
finance their long-term credit needs.
5. Variable amount demand master notes issued by domestic corporations
which, at the date of investment, either (a) have an outstanding
senior long-term debt issue rated Aa or better by Moody's or AA or
better by Standard & Poor's or (b) do not have rated long-term debt
outstanding but have commercial paper rated at least Prime-2 by
Moody's or A-2 by Standard & Poor's. Variable amount demand master
notes are unsecured obligations that permit the investment by the
Sub-Account of amounts that may fluctuate daily, at varying rates of
interest pursuant to direct arrangements between the Sub-Account and
the issuing corporation. Although callable on demand by the
Sub-Account, these obligations are not marketable to third parties.
They will not be purchased unless the investment adviser has
determined that the issuer's liquidity is such as to enable it to pay
the principal and interest immediately upon demand.
Repurchase Agreements
We may enter into repurchase agreements with member banks of the Federal Reserve
System or with government securities dealers recognized by the Federal Reserve
Board. In a repurchase agreement transaction, a buyer invests the cash for
negotiated periods at prevailing market rates by purchasing securities from a
securities dealer or commercial bank and agreeing to resell such securities to
the seller at a later date at a specified price. Upon resale, the buyer receives
the Proceeds, plus an amount which represents interest on the Proceeds. The
period of maturity is usually quite short, possibly overnight or a few days,
although it may extend over a number of months. The resale price is in excess of
the purchase price, reflecting an agreed-upon market rate effective for the
period of time the Sub-Account's money is invested in the security, and is not
related to the coupon rate of the purchased security. Repurchase agreements may
be considered loans of money to the seller of the underlying security, which are
collateralized by the securities underlying the repurchase agreement. The
Sub-Account will not enter into repurchase agreements unless the agreement is
"fully collateralized," i.e., the value of the securities is, and during the
entire term of the agreement remains, at least equal to the amount of the "loan"
including accrued interest. The Sub-Account will take possession of the
securities underlying the agreement and will value them daily to assure that
this condition is met. The Sub-Account will make payment for such securities
only upon physical delivery of the certificates or evidence of book-entry
transfer to the account of the safekeeper of securities.
The Sub-Account has established standards for the parties with whom it will
enter into repurchase agreements which it believes are reasonably designed to
assure that such a party presents no serious risk of becoming involved in
bankruptcy proceedings within the time frame contemplated by the repurchase
agreement. In the event that a seller defaults on a repurchase agreement, the
Sub-Account may incur a loss on disposition in market value of the collateral;
and, if a party with whom the Sub-Account had entered into a repurchase
agreement becomes involved in bankruptcy proceedings, the Sub-Account's ability
to realize on the collateral may be limited or delayed.
B-2
<PAGE>
Reverse Repurchase Agreements
The Sub-Account may enter into reverse repurchase agreements with banks, which
agreements have the characteristics of borrowing and involve the sale of
securities held by the Sub-Account with an agreement to repurchase the
securities at an agreed upon price and date, which reflect a rate of interest
paid for the use of funds for the period. Generally, the effect of such a
transaction is that the Sub-Account can recover all or most of the cash invested
in the securities involved during the term of the reverse repurchase agreement,
while in many cases it will be able to keep some of the interest income
associated with those securities. Such transactions are only advantageous if the
Sub-Account has an opportunity to earn a greater rate of interest on the cash
derived from the transaction than the interest cost of obtaining that cash. The
Sub-Account may be unable to realize a return from the use of the proceeds equal
to or greater than the interest required to be paid. Opportunities to achieve
this advantage may not always be available, and the Sub-Account intends only to
use the reverse repurchase technique when it appears to be to its advantage to
do so. The use of reverse repurchase agreements may exaggerate any increase or
decrease in the value of the Sub-Account's securities. The Sub-Account's
custodian bank will maintain in a separate account securities of the Sub-Account
that have a value equal to or greater than the Sub-Account's commitments under
reverse repurchase agreements. The value of the securities subject to reverse
repurchase agreements will not exceed 10% of the value of the Sub-Account's
total assets.
When Issued and Delayed Delivery Securities
From time to time, in the ordinary course of business, the Short-Term Portfolio
Sub-Account may purchase securities on a when-issued or delayed delivery basis,
i.e., delivery and payment can take place a month or more after the date of the
transaction. The purchase price and the interest rate payable on the securities
are fixed on the transaction date. The securities so purchased are subject to
market fluctuation, and no interest accrues to the Sub-Account until delivery
and payment take place. At the time the Sub-Account makes the commitment to
purchase securities on a when-issued or delayed delivery basis, it will record
the transaction and thereafter reflect the value, each day, of such securities
in determining its net asset value. The Sub-Account will make commitments for
when-used transactions only with the intention of actually acquiring the
securities and, to facilitate such acquisitions, the Sub-Account's custodian
bank will maintain in a separate account securities of the Sub-Account having a
value equal to or greater than such commitments. On delivery dates for such
transactions, the Sub-Account will meet its obligations from maturities or sales
of the securities held in the Separate Account and/or from the then available
cash flow. If the Sub-Account chooses to dispose of the right to acquire a
when-issued security prior to its acquisition, it could, as with the disposition
of any other obligation, incur a gain or loss due to market fluctuation. No
when-issued commitments will be made if, as a result, more than 15% of the
Sub-Account's net assets would be so committed.
Risk Factors
Because of the variability of interest rates and the risks inherent in
investment in money market instruments and other securities, there can be no
assurance that the investment objective will be obtained. To the extent that
investments are made in the instruments of nongovernmental issuers, these
assets, despite favorable credit ratings, are subject to some risk of default.
Moreover, investment yields on relatively short-term obligations such as will
comprise the portfolio, are subject to substantial and rapid fluctuation. The
value of the assets generally will vary inversely to changes in interest rates.
If interest rates increase after an issue is purchased, the security, if sold
prior to maturity, may return less than its cost. Current yield levels should
not be considered representative of yields for any future period of time.
B-3
<PAGE>
Moreover, should many contract owners change from this Sub-Account to other
Sub-Accounts at about the same time, the Sub-Account might have to sell
portfolio securities at a time when it would be disadvantageous to do so, and at
a lower price than if such securities were held to maturity.
B-4
<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, immediately
follows this page.
<PAGE>
SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
June 30, 1995
Statement of Assets and Liabilities 1
Portfolio of Investments 2
Statement of Operations 6
Statement of Changes in Net Assets 7
Notes to Financial Statements 8
Supplementary Information -- Selected Per Accumulation
Unit Data and Ratios 11
<PAGE>
SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
June 30, 1995
<TABLE>
<CAPTION>
Sub-Account
-------------------------------------------------------------
Short-Term
Bond Portfolio Stock
----------------- ----------------- -----------------
ASSETS
<S> <C> <C> <C>
Investments, at fair value (cost: Bond-$11,919,151:
Short-Term-$1,720,201: Stock-$18,382,903) - Note C $12,254,915 $1,720,201 $29,913,490
Cash 3,539 629 7,055
Dividends and interest receivable 182,382 3,626 53,704
Other receivables 8,290 --- 43,151
----------------- ----------------- -----------------
12,449,126 1,724,456 30,017,400
LIABILITIES
Payable to Washington National Insurance Company) - Note B 126,245 18,359 288,933
----------------- ----------------- -----------------
126,245 18,359 288,933
----------------- ----------------- -----------------
NET ASSETS $12,322,881 $1,706,097 $29,728,467
================= ================= =================
Accumulation units outstanding 5,172,649 982,975 9,713,617
================= ================= =================
Accumulation unit value $2.38 $1.74 $3.06
===== ===== =====
See notes to financial statements.
</TABLE>
- 1 -
<PAGE>
SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
PORTFOLIO OF INVESTMENTS (UNAUDITED)
June 30, 1995
<TABLE>
<CAPTION>
Principal Fair
Description Amount Value
----------------- ----------------
<S> <C> <C>
BOND SUB-ACCOUNT
U.S. Government and Government Agency Obligations--25.7%
U.S. Treasury, 8% note, due 1-15-97 $ 500,000 $ 515,000
U.S. Treasury, 7% note, due 4-15-99 500,000 520,000
Government Trust Certificate, 9.25% certificate, due 11-15-01 500,000 550,000
Federal Home Loan Mortgage Corporation, 6.2% debenture,
due 9-8-08 500,000 470,000
Federal Home Loan Mortgage Corporation, 8.75% participation
certificates, pool 160043, due 4-1-08 162,677 168,354
Federal Home Loan Mortgage Corporation, 9.25% participation
certificates, pool 160055, due 8-1-08 97,656 102,149
Federal Home Loan Mortgage Corporation, 10.25% participation
certificates, pool 160095, due 11-1-09 42,005 45,098
Federal Home Loan Mortgage Corporation, 10.75% participation
certificates, pool 170033, due 7-1-10 58,006 62,384
Federal Home Loan Mortgage Corporation, 10% participation
certificates, pool 170152, due 1-1-16 34,085 36,840
Government National Mortgage Association, 7.5% participation
certificates, pool 327726, due 8-15-22 697,602 701,090
----------------
TOTAL U.S. GOVERNMENT AND GOVERNMENT AGENCY
OBLIGATIONS (cost--$3,085,866) 3,170,915
Corporate Bonds--58.5%
Comerica, Inc., 7.125% note, due 12-1-13 500,000 470,000
Morgan Stanley Group, 6.375% note, due 12-1-03 500,000 480,000
Nationsbank Corporation, 6.625% note, due 1-15-98 500,000 505,000
Hoechst Celanese Corporation, 9.625% note, due 9-1-99 500,000 535,000
DuPont De Nemours, 9.15% note, due 4-15-00 500,000 555,000
General Motors Corporation, 9.625% debentures, due 12-1-00 500,000 565,000
Banc One Corporation, 7.25% note, due 8-1-02 500,000 510,000
Aon Corporation, 6.7% note, due 6-15-03 500,000 495,000
Equifax Inc., 6.5% note, due 6-15-03 500,000 485,000
NCNB Texas National Bank, 9.5% note, due 6-1-04 500,000 580,000
Corestates Capital Corporation, 6.625% note, due 3-15-05 500,000 490,000
Pacificorp, 6.75% 1st mtg & collateral trust, due 4-1-05 500,000 495,000
General Telephone Company of the Northwest, Inc., 8.25% first
mortgage bonds, Series W, due 2-1-07 500,000 515,000
American Home Products, 7.70% note, due 2-15-00 500,000 525,000
----------------
TOTAL CORPORATE BONDS (cost--$6,954,285) 7,205,000
Floating Rate Demand Notes -- 15.3%
Household Finance Corporation, 6.09%, due on demand 500,000 500,000
Goldman Sachs, 6.16%, due on demand 500,000 500,000
Associate Corporation of North America, 5.92%, due on demand 414,000 414,000
General Electric Credit Corporation, 5.94%, due on demand 465,000 465,000
----------------
TOTAL FLOATING RATE DEMAND NOTES (cost--$1,879,000) 1,879,000
TOTAL INVESTMENTS--BOND SUB-ACCOUNT--99.5% (cost--$11,919,151) $ 12,254,915
================
See notes to financial statements.
Percentages shown are based on total net assets of each Sub-account.
</TABLE>
- 2 -
<PAGE>
SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
PORTFOLIO OF INVESTMENTS (UNAUDITED) -- Continued
<TABLE>
<CAPTION>
Principal Fair
Description Amount Value
----------------- ----------------
<S> <C> <C>
SHORT-TERM PORTFOLIO SUB-ACCOUNT
Commercial Paper--58.4%
American Express Credit Corporation, 5.85%, due 7-12-95 $ 200,000 $ 199,643
John Deere Credit Company, 5.93%, due 8-03-95 200,000 198,913
IBM Credit Corporation, 5.96%, due 7-26-95 200,000 199,172
Prudential Funding Corporation, 5.93%, due 7-05-95 200,000 199,868
Texaco Incorporated, 5.92%, due 7/13/95 200,000 199,605
----------------
TOTAL COMMERCIAL PAPER (cost--$997,201) 997,201
Floating Rate Demand Notes--42.4%
Household Finance Corporation, 6.09%, due on demand 200,000 200,000
Goldman Sachs, 6.16%, due on demand 200,000 200,000
Associate Corporation of North America, 5.92%, due on demand 201,000 201,000
General Electric Credit Corporation, 5.94%, due on demand 122,000 122,000
----------------
TOTAL FLOATING RATE DEMAND NOTES (cost--$723,000) 723,000
----------------
TOTAL INVESTMENTS--SHORT-TERM PORTFOLIO SUB-ACCOUNT--100.8% $ 1,720,201
(cost--$1,720,201) ================
Number of Fair
Shares Value
----------------- ----------------
STOCK SUB-ACCOUNT
Common Stocks--96.2%
Automobile--2.2%
General Motors Corporation 15,000 $ 652,500
Banks--3.4%
Banc One Corporation 14,456 466,206
Huntington Bancshare 26,533 550,560
----------------
1,016,766
Beverages--2.5%
Anheuser-Busch 13,200 750,750
Brokerage Firms--3.6%
Merrill Lynch 20,200 1,060,500
Consumer Products--5.3%
Newell Company 16,000 390,000
Rubbermaid, Inc. 15,000 416,250
Warner Lambert 9,000 777,375
----------------
1,583,625
Drugs--5.0%
Bristol-Myers Squibb 7,100 483,688
Merck & Co. 20,400 1,002,150
----------------
1,485,838
See notes to financial statements.
Percentages shown are based on total net assets of each Sub-account.
</TABLE>
- 3 -
<PAGE>
SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
PORTFOLIO OF INVESTMENTS (UNAUDITED) -- Continued
<TABLE>
<CAPTION>
Number of Fair
Description Shares Value
----------------- ----------------
<S> <C> <C>
STOCK SUB-ACCOUNT--Continued
Common Stocks--96.2% -- Continued
Electrical--5.4%
Emerson Electric 10,100 $ 722,150
General Electric 15,600 879,450
----------------
1,601,600
Electronics and Instruments--7.4%
Avnet, Inc. 17,700 854,025
Hewlett-Packard Company 18,000 1,341,000
----------------
2,195,025
Entertainment--2.4%
Walt Disney Company 12,800 710,400
Financial--4.6%
Federal National Mortgage Association 8,500 803,250
Fleet Financial Group 15,000 556,875
----------------
1,360,125
Foods--4.8%
CPC International 12,600 778,050
Sysco Corporation 22,000 649,000
----------------
1,427,050
Industrial--8.4%
WMX Technologies, Inc. 12,000 340,500
Parker-Hannifin 23,700 859,125
Pitney Bowes, Inc. 13,600 520,200
Sherwin Williams 21,600 769,500
----------------
2,489,325
Insurance--4.8%
Aetna Life and Casualty Company 6,200 389,825
General Reinsurance Corporation 4,400 589,050
Lincoln National Corporation 10,000 437,500
----------------
1,416,375
Mines and Minerals--2.1%
Minnesota Mining and Manufacturing Company 11,000 631,125
Oil--10.6%
Amoco Corporation 11,000 732,875
Chevron Corporation 18,600 862,575
Exxon Corporation 11,600 819,250
Mobil Corporation 7,600 729,600
----------------
3,144,300
Radio and Television--2.0%
Interpublic Group Incorporated 16,000 600,000
Restaurants--4.1%
McDonald's Corporation 31,400 1,228,525
See notes to financial statements.
Percentages shown are based on total net assets of each Sub-account.
</TABLE>
- 4 -
<PAGE>
SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
PORTFOLIO OF INVESTMENTS (UNAUDITED) -- Continued
<TABLE>
<CAPTION>
Number of Fair
Description Shares Value
----------------- ----------------
<S> <C> <C>
STOCK SUB-ACCOUNT -- Continued
Common Stocks--96.2% -- Continued
Technology--8.2%
Intel Corporation 22,000 $ 1,392,886
Motorola Incorporated 15,600 1,047,150
----------------
2,440,036
Telephone--2.9%
Bell Atlantic Corporation 10,500 588,000
Pacific Teleisis Group 10,800 288,900
----------------
876,900
Utilities--6.5%
Central & Southwest 19,600 514,500
Duke Power 12,400 514,600
Northeast Utilities 17,400 391,500
Pennsylvania Power and Light Company 17,800 344,875
SCE Corp 10,000 171,250
----------------
1,936,725
TOTAL COMMON STOCKS (cost--$17,076,903) 28,607,490
Principal
Amount
Floating Rate Demand Notes--4.4%
Household Finance Corporation, 6.09%, due on demand $ 33,000 33,000
Associate Corporation of North America, 5.92%, due on demand 623,000 623,000
General Electric Credit Corportion, 5.94%, due on demand 650,000 650,000
----------------
TOTAL FLOATING RATE DEMAND NOTES (cost--$1,306,000) 1,306,000
----------------
TOTAL INVESTMENTS--STOCK SUB-ACCOUNT--100.6% (cost--$18,382,903) $ 29,913,490
================
See notes to financial statements.
Percentages shown are based on total net assets of each Sub-account.
</TABLE>
- 5 -
<PAGE>
SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
STATEMENT OF OPERATIONS (UNAUDITED)
Six Months Ended June 30, 1995
<TABLE>
<CAPTION>
Sub-Account
--------------------------------------------------------------------
Short-Term
Bond Portfolio Stock
----------------- ----------------- -------------------
<S> <C> <C> <C>
Investment income:
Interest $ 446,670 $ 52,274 $ 36,660
Dividends - - 370,331
Other - - 235
----------------- ----------------- -------------------
446,670 52,274 407,226
Expenses--Note B:
Mortality and expense assurance 47,250 6,925 108,883
Investment advisory and management fee 29,531 4,328 68,052
Accounting service fee 20,672 3,029 47,637
General and administrative expenses 7,850 1,731 30,857
----------------- ----------------- -------------------
105,303 16,013 255,429
----------------- ----------------- -------------------
NET INVESTMENT INCOME 341,367 36,261 151,797
Realized and unrealized gains (losses):
Net realized gains 279 62,269
Unrealized gains (losses)--Note C:
Beginning of year (477,813) 6,657,961
End of year 335,763 11,530,591
----------------- -------------------
Net unrealized gain 813,576 4,872,630
----------------- -------------------
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS 813,855 4,934,899
----------------- ----------------- -------------------
INCREASE IN NET ASSETS
FROM OPERATIONS $ 1,155,222 $ 36,261 $ 5,086,696
================= ================= ===================
See notes to financial statements.
</TABLE>
- 6 -
<PAGE>
SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended June 30, 1995 (Unaudited)
---------------------------------------------------------------------
Sub-Account
---------------------------------------------------------------------
Short-Term
Bond Portfolio Stock
-------------------- ------------------- --------------------
ADDITIONS (DEDUCTIONS)
<S> <C> <C> <C>
From operations
Net investment income $ 341,367 $ 36,261 $ 151,797
Net realized gain (loss) 279 - 62,269
Net unrealized gain (loss) 813,576 - 4,872,630
-------------------- ------------------- --------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS 1,155,222 36,261 5,086,696
From capital transactions-Note A
Net proceeds from units sold 261,676 20,872 757,330
Cost of units redeemed (403,468) (30,801) (1,227,620)
Net asset value of units transferred, including
exchanges with the Fixed Account (137,632) (74,547) 25,331
-------------------- ------------------- --------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL TRANSACTIONS (279,424) (84,476) (444,959)
-------------------- ------------------- --------------------
NET INCREASE (DECREASE) IN NET ASSETS 875,798 (48,215) 4,641,737
Net assets at beginning of year 11,447,083 1,754,312 25,086,730
-------------------- ------------------- --------------------
NET ASSETS AT END OF YEAR $ 12,322,881 $ 1,706,097 $ 29,728,467
==================== =================== ====================
ANALYSIS OF CHANGES IN UNITS OUTSTANDING
Units sold 114,162 12,489 269,284
Units redeemed (177,267) (17,914) (442,991)
Units transferred (60,874) (43,362) 4,893
-------------------- ------------------- -------------------
INCREASE (DECREASE) IN UNITS OUTSTANDING (123,979) (48,787) (168,814)
Units outstanding at beginning of year 5,296,628 1,031,762 9,882,431
-------------------- ------------------- --------------------
UNITS OUTSTANDING AT END OF YEAR 5,172,649 982,975 9,713,617
==================== =================== ====================
Year Ended December 31, 1994
--------------------------------------------------------------------
Sub-Account
--------------------------------------------------------------------
Short-Term
Bond Portfolio Stock
-------------------- -------------------- --------------------
ADDITIONS (DEDUCTIONS)
From operations
Net investment income $ 644,387 $ 41,670 $ 359,394
Net realized gain (loss) 26,252 - 237,338
Net unrealized gain (loss) (1,206,736) - (413,568)
-------------------- -------------------- --------------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS (536,097) 41,670 183,164
From capital transactions-Note A
Net proceeds from units sold 406,807 51,010 1,055,215
Cost of units redeemed (992,431) (134,122) (2,092,462)
Net asset value of units transferred, including
exchanges with the Fixed Account (592,255) 170,143 233,261
-------------------- -------------------- --------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL TRANSACTIONS (1,177,879) 87,031 (803,986)
-------------------- -------------------- --------------------
NET INCREASE (DECREASE) IN NET ASSETS (1,713,976) 128,701 (620,822)
Net assets at beginning of year 13,161,059 1,625,611 25,707,552
-------------------- -------------------- --------------------
NET ASSETS AT END OF YEAR $ 11,447,083 $ 1,754,312 $ 25,086,730
==================== ==================== ====================
ANALYSIS OF CHANGES IN UNITS OUTSTANDING
Units sold 185,686 30,089 420,378
Units redeemed (454,958) (80,108) (831,402)
Units transferred (270,163) 101,699 91,183
-------------------- -------------------- --------------------
INCREASE (DECREASE) IN UNITS OUTSTANDING (539,435) 51,680 (319,841)
Units outstanding at beginning of year 5,836,063 980,082 10,202,272
-------------------- -------------------- ---------------------
UNITS OUTSTANDING AT END OF YEAR 5,296,628 1,031,762 9,882,431
==================== ==================== =====================
See notes to financial statements.
</TABLE>
- 7 -
<PAGE>
SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
June 30, 1995
Unaudited
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Account: The Separate Account I of Washington National Insurance Company
(the "Separate Account") is a segregated investment account of Washington
National Insurance Company ("WNIC"). WNIC is a wholly-owned subsidiary of
Washington National Corporation. The Separate Account is registered as an
open-end diversified management investment company pursuant to the provisions of
the Investment Company Act of 1940. The Separate Account no longer issues new
contracts. There are three Sub-Accounts within the Separate Account, each with
its own investment objectives and policies as follows:
Bond Sub-Account -- high level of current income while preserving capital by
investing in fixed income securities.
Short-Term Portfolio Sub-Account -- moderate level of current income
consistent with liquidity and preservation of capital by investing in one or
more types of short-term instruments.
Stock Sub-Account -- long-term capital growth and income by investing
principally in equity-type securities.
In addition, a contract holder may elect to invest in a fixed annuity held by
WNIC, called the Fixed Account.
WNIC is a contract holder of the Separate Account. At June 30, 1995, the fair
value of WNIC's investments were $5,306,670, $1,063,305, and $8,625,633 in the
Bond, Short-Term Portfolio, and Stock Sub-Accounts, respectively. During 1995,
WNIC has made no deposits or withdrawals.
Valuation of Investments: Securities traded on a national securities exchange
are valued at the closing price as of the valuation date. Investments traded in
the over-the-counter market are valued at the average between the bid and ask
prices. Commercial paper is valued at amortized cost and other short-term
investments are valued at cost. Differences, if any, from fair value are not
considered material in relation to net assets.
Investment Transactions and Income: Security transactions are accounted for on
the trade date (date the order to buy or sell is executed). Interest income is
recorded on the accrual basis and dividend income is recorded on the ex-dividend
date. Realized gains and losses on investments are determined on a first-in,
first-out basis.
Accumulation Unit Valuation: Accumulation unit values reflect the net asset
value of each Sub-Account and are computed daily.
- 8 -
<PAGE>
SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
June 30, 1995
Unaudited
NOTE B -- DEDUCTIONS AND CHARGES
Deductions and charges are made from the Separate Account and paid to WNIC as
follows:
* As a fee for administration and contract maintenance, WNIC deducts $30
annually from the accumulated value of each contract on the contract
anniversary or on the date of surrender if it occurs between contract
anniversaries. This fee does not apply to contracts for individual retirement
accounts, or to contracts which at the end of any contract anniversary have
received at least $1,000 of payments or in which the accumulated value is at
least $20,000.
* As compensation for annuity rate guarantees, WNIC deducts an amount, computed
on a daily basis, which is equal on an annual basis to .8% of the average net
asset value of the Separate Account.
* As a fee for managing and administering the investment activities of the
Separate Account, WNIC deducts an amount, computed on a daily basis, equal to
an annual rate of .5% of the average net asset value of each Sub-Account.
* As compensation for providing financial accounting services to the Separate
Account, WNIC deducts an amount, computed on a daily basis, equal to an
annual rate of .35% of the average net asset value of the Separate Account.
* As reimbursement for incurring various other general and administrative
expenses attributable to the Separate Account, WNIC deducts an amount,
computed on a daily basis, equal to an annual rate of .2% of the average net
asset value of the Separate Account. A component of these expenses is the fee
paid to the Separate Account's Board of Directors. Only members of the Board
of Directors who are not directors, officers, or employees of WNIC receive an
annual retainer of $1,000, and a meeting fee of $350. As of June 30, 1995,
the Separate Account's three external directors each received $1,450.
* A contingent deferred sales charge of 6% is made on any amounts withdrawn
which are in excess of 10% of the contract's accumulated value on the date of
the first withdrawal during the respective contract year, except that no such
charge is made for withdrawals of purchase payments received more than 72
months prior to the date of withdrawal and no such charge is made if the
withdrawal amount is applied to a settlement option after the contract has
been in force for five years or if the contract contains life contingencies.
- 9 -
<PAGE>
SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS - Continued
June 30, 1995
Unaudited
NOTE C -- INVESTMENTS
The aggregate cost of purchases and sales of investments other than United
States Government obligations and short-term notes was:
Proceeds
Cost of From
Investments Investments
Sub-Account Acquired Sold
------------ ------------ -----------
Bond $499,370 $ -
Stock 907,750 866,833
The total unrealized gain or loss on investments at June 30, 1995 consisted of
unrealized appreciation of $436,433 and $11,632,390 and unrealized depreciation
of $100,669 and $101,803 in the Bond and Stock Sub-Accounts, respectively.
NOTE D -- FEDERAL INCOME TAXES
The operations of the Separate Account form a part of, and are taxed with, the
operations of WNIC, which under the Internal Revenue Code is taxed as a "life
insurance company." The Separate Account is not taxed as a regulated investment
company under Subchapter M of the Code. Under existing federal income tax law,
no taxes are payable on the investment income or on the realized gains of the
Separate Account.
- 10 -
<PAGE>
SEPARATE ACCOUNT I OF
WASHINGTON NATIONAL INSURANCE COMPANY
SUPPLEMENTARY INFORMATION--SELECTED PER ACCUMULATION UNIT DATA AND RATIOS
Selected data per accumulation unit
outstanding throughout the year
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1995
(Unaudited)
---------------------------------------------------
Sub-Account
---------------------------------------------------
Short-Term
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 year 2.16 1.70 2.54
-------------- ---------------- -------------
ACCUMULATION UNIT VALUE
AT END OF YEAR $ 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 net assets 5.75 4.18 1.11
Portfolio turnover rate - - 3.31
Number of accumulation units
outstanding at end of year
(000's omitted) 5,173 983 9,714
</TABLE>
<TABLE>
<CAPTION>
1994
---------------------------------------------------
Sub-Account
---------------------------------------------------
Short-Term
Bond Portfolio Stock
-------------- ---------------- -------------
<S> <C> <C> <C>
Per accumulation unit data:
Investment income $ 0.16 $ 0.07 $ 0.08
Expenses (0.04) (0.03) (0.04)
-------------- ---------------- -------------
NET INVESTMENT INCOME 0.12 0.04 0.04
Net realized and unrealized
gain (loss) on investments (0.22) - (0.02)
-------------- ---------------- -------------
Net increase (decrease) in
accumulation unit value (0.10) 0.04 0.02
Accumulation unit value at
beginning of year 2.26 1.66 2.52
-------------- ---------------- -------------
ACCUMULATION UNIT VALUE
AT END OF YEAR $ 2.16 $ 1.70 $ 2.54
============== ================ =============
Ratios:
Ratio of expenses to average
net assets 1.87% 1.85% 1.83%
Ratio of net investment income
to average net assets 5.28 2.47 1.41
Portfolio turnover rate 0.00 0.00 12.20
Number of accumulation units
outstanding at end of year
(000's omitted) 5,297 1,032 9,882
</TABLE>
<TABLE>
<CAPTION>
1993
---------------------------------------------------
Sub-Account
---------------------------------------------------
Short-Term
Bond Portfolio Stock
-------------- ---------------- -------------
<S> <C> <C> <C>
Per accumulation unit data:
Investment income $ 0.16 $ 0.05 $ 0.07
Expenses (0.04) (0.03) (0.04)
-------------- ---------------- ---------------
NET INVESTMENT INCOME 0.12 0.02 0.03
Net realized and unrealized
gain (loss) on investments 0.03 - 0.21
-------------- ---------------- ---------------
Net increase (decrease) in
accumulation unit value 0.15 0.02 0.24
Accumulation unit value at
beginning of year 2.11 1.64 2.28
-------------- ---------------- ---------------
ACCUMULATION UNIT VALUE
AT END OF YEAR $ 2.26 $ 1.66 $ 2.52
============== ================ ===============
Ratios:
Ratio of expenses to average
net assets 1.85% 1.85% 1.81%
Ratio of net investment income
to average net assets 5.50 1.28 1.17
Portfolio turnover rate 33.66 - 3.50
Number of accumulation units
outstanding at end of year
(000's omitted) 5,836 980 10,202
</TABLE>
<TABLE>
<CAPTION>
1992
------------------------------------------------------
Sub-Account
------------------------------------------------------
Short-Term
Bond Portfolio Stock
-------------- ---------------- ----------------
<S> <C> <C> <C>
Per accumulation unit data:
Investment income $ 0.17 $ 0.06 $ 0.07
Expenses (0.04) (0.03) (0.04)
-------------- ---------------- ----------------
NET INVESTMENT INCOME 0.13 0.03 0.03
Net realized and unrealized
gain (loss) on investments (0.01) - 0.12
-------------- ---------------- ----------------
Net increase (decrease) in
accumulation unit value 0.12 0.03 0.15
Accumulation unit value at
beginning of year 1.99 1.61 2.13
-------------- ---------------- ----------------
ACCUMULATION UNIT VALUE
AT END OF YEAR $ 2.11 $ 1.64 $ 2.28
============== ================ ================
Ratios:
Ratio of expenses to average
net assets 1.85% 1.85% 1.85%
Ratio of net investment income
to average net assets 6.22 1.82 1.33
Portfolio turnover rate 10.83 - 4.92
Number of accumulation units
outstanding at end of year
(000's omitted) 6,457 1,065 10,457
</TABLE>
<TABLE>
<CAPTION>
1991
------------------------------------------------------
Sub-Account
------------------------------------------------------
Short-Term
Bond Portfolio Stock
-------------- ---------------- ----------------
<S> <C> <C> <C>
Per accumulation unit data:
Investment income $ 0.16 $ 0.09 $ 0.07
Expenses (0.03) (0.03) (0.04)
-------------- ---------------- ----------------
NET INVESTMENT INCOME 0.13 0.06 0.03
Net realized and unrealized
gain (loss) on investments 0.14 - 0.34
-------------- ---------------- ----------------
Net increase (decrease) in
accumulation unit value 0.27 0.06 0.37
Accumulation unit value at
beginning of year 1.72 1.55 1.76
-------------- ---------------- ----------------
ACCUMULATION UNIT VALUE
AT END OF YEAR $ 1.99 $ 1.61 $ 2.13
============== ================ ================
Ratios:
Ratio of expenses to average
net assets 1.85% 1.86% 1.86%
Ratio of net investment income
to average net assets 7.02 3.80 1.85
Portfolio turnover rate - - 5.97
Number of accumulation units
outstanding at end of year
(000's omitted) 6,616 1,130 10,564
</TABLE>
See notes to financial statements.
- 11 -
<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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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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<PAGE>
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
22
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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
31
<PAGE>
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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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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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
<PAGE>
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
<PAGE>
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
<PAGE>
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, immediately follows this page.
<PAGE>
Scudder Variable Life Investment Fund
Annual Report
December 31, 1994
An open-end management investment company that offers shares of beneficial
interest in six types of diversified portfolios.
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Letter from the Fund's President 2
Money Market Portfolio Management Discussion 3
Bond Portfolio Management Discussion 4
Bond Portfolio Summary 5
Balanced Portfolio Management Discussion 6
Balanced Portfolio Summary 7
Growth and Income Portfolio Management Discussion 8
Growth and Income Portfolio Summary 9
Capital Growth Portfolio Management Discussion 10
Capital Growth Portfolio Summary 11
International Portfolio Management Discussion 12
International Portfolio Summary 13
Investment Portfolios, Financial Statements, and Financial
Highlights
Money Market Portfolio 14
Bond Portfolio 20
Balanced Portfolio 27
Growth and Income Portfolio 37
Capital Growth Portfolio 45
International Portfolio 55
Notes to Financial Statements 66
Report of Independent Accountants 69
Tax Information 69
</TABLE>
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
LETTER FROM THE FUND'S PRESIDENT
Dear Shareholders,
The world's financial markets were shaken repeatedly in 1994 by a
variety of events. Rising global interest rates, losses for investors in
highly leveraged derivatives, and some unsettling economic and political
developments -- including mounting U.S./Chinese tensions and the Mexican
currency crisis -- created a challenging environment for global stock and
bond investors.
We face 1995 with more optimism. In the coming year, we expect a
combination of factors, including the U.S. Federal Reserve's tightening
efforts, to keep the economy and inflation on a moderate course, not only
in the United States but globally as well. Meanwhile, corporate profits
around the world continue to grow, and business investment is at an
all-time high, which should translate into greater economic capacity down
the road. We believe these developments ultimately will be viewed as
positive by the financial markets.
For bond investors, the rise in interest rates in the past year has
meant generally falling prices but also higher income from these
investments at a time when inflation has remained relatively stable.
Although we believe the bulk of interest-rate increases is now behind us,
interest rates and investment income could rise somewhat further in 1995,
as central banks continue in their efforts to stem inflation and as
countries around the world compete for much-needed global investment
capital.
Additional increases in interest rates may spark episodes of difficult
adjustment for financial markets. We encourage you to examine your
portfolio periodically to ensure that your asset allocation and fund
choices remain appropriate for your investment time frame and financial
goals. The past year demonstrated that virtually all investments, whether
conservative or aggressive, can perform poorly, prompting many investors to
move to the sidelines. Conservative investments such as money market
instruments naturally have a place in any well-balanced portfolio.
Experience has shown us that investors who have participated in the stock
and bond markets historically have accumulated far more wealth over time
than those who chose to protect their savings above all else.
Thank you for choosing Scudder Variable Life Investment Fund to help
meet your investment needs. We hope we can continue to merit your
confidence in the year ahead.
Sincerely,
/s/David B. Watts
David B. Watts
President,
Scudder Variable Life Investment Fund
2
<PAGE>
MONEY MARKET PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
Interest rates rose steadily throughout the past year, increasing
borrowing costs for mortgages and credit cards and depressing bond prices,
which move in the opposite direction of interest rates. Despite a shaky
environment for bond and stock investors, the Money Market Portfolio
benefited from rising investment income, while its share price remained
constant at $1.00. Of course, past performance is no guarantee of future
results and the Portfolio's yield may fluctuate.
On December 31, 1994, the Portfolio's 7-day net annualized yield was
5.20%. Factoring in the effect of compounding, the 7-day effective yield
was 5.23%, up sharply from 2.72% a year ago. The Portfolio provided a 3.72%
total return for the year ended December 31, 1994, reflecting reinvested
distributions of $0.037 per share.
(CALLOUT NEXT TO CHART) - The continued rise in short-term interest rates
during 1994 pushed up your Portfolio's yield from 2.72% to 5.23%.
(CHART DATA)
<TABLE>
<CAPTION>
Interest Rates
Commercial Federal 3-Month
Paper Funds Treasury
Bill
<S> <C> <C> <C>
12/93 3.36 2.96 3.08
3/94 3.86 3.34 3.52
6/94 4.57 4.25 4.18
9/94 5.02 4.73 4.64
12/94 6.26 5.45 5.69
</TABLE>
Portfolio Strategy Took Advantage of Rising Interest Rates
We emphasized shorter average maturities throughout the year,
anticipating continued upward pressure on interest rates. By year's end,
the average maturity of the Portfolio was 35 days, down from its 44-day
average a year ago. By holding shorter-maturity money market securities as
rates rise, we can quickly deploy proceeds from maturing investments to
higher-yielding instruments.
Corporate commercial paper remained a significant component of the
Portfolio, and, as always, we continued our high standards of security
selection.
Looking ahead, we believe the Federal Reserve may push short-term
interest rates up a bit further if economic growth remains strong. As a
result, we intend to maintain our current strategy of favoring relatively
shorter-term money market securities. While it's impossible to predict when
interest rates will actually peak, any evidence suggesting that rates could
be ready to decline will prompt us to begin lengthening maturities in order
to achieve a high relative yield.
Thank you for your interest in the Money Market Portfolio.
Sincerely,
Your Portfolio Management Team
/s/Robert T. Neff /s/Nicca B. Alcantara
Robert T. Neff Nicca B. Alcantara
Lead Portfolio Manager
3
<PAGE>
BOND PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
The Bond Portfolio's performance in 1994 reflected a year in which
interest rates rose persistently across the maturity spectrum. When
interest rates rise, bond prices decline, since existing bonds are deemed
less attractive than newly issued, higher-yielding securities. Rising
interest rates also resulted in a higher income stream for the Portfolio,
but it was not sufficient to offset the drop in share price experienced
during the year. Net asset value per share declined $0.94, from $7.42 at
the beginning of 1994 to $6.48 on December 31, 1994. The Portfolio also
distributed to shareholders income dividends totaling $0.425 per share and
a capital gain distribution of $0.172 per share. Combined, price changes
plus the distributions provided a -4.79% total return for the year ended
December 31, compared with -4.54% for the 24 corporate bond funds tracked
by Lipper Analytical Services, Inc., an independent firm that tracks
performance of variable annuity investment options.
In the first half of the year, the portion of the Portfolio's holdings
in U.S. government obligations was increased from one third to over half
the portfolio in the face of rising interest rates. Later in the year,
however, this portion was decreased in favor of higher-yielding
mortgage-backed securities. Higher interest rates slowed the pace of
mortgage refinancings, which helped increase and stabilize the income
stream from these securities, making them more attractive holdings. We also
continued to focus on short- and long-term bonds. Quickly maturing
short-term bonds allow us to replace them with new higher-yielding debt
obligations, while providing some price stability. Longer-maturity holdings
generally provide higher relative income.
(CALLOUT NEXT TO THE PREVIOUS PARAGRAPH) - We increased our holdings of
mortgage-backed securities in the latter part of the year, while
maintaining our focus on both short- and long-term maturities.
Looking ahead, we believe the Federal Reserve may continue to push
interest rates higher, although the Fed's six rate hikes in 1994 should
represent the bulk of the monetary tightening efforts. Moreover, the
economy is growing at a moderate pace (we believe a slowdown in growth is
possible in the latter half of 1995), and inflation appears under control--a
scenario that should keep interest rates from rising much beyond current
levels. As a result, we believe the Portfolio's mix of short- and long-term
income holdings positions us well for the year ahead.
Sincerely,
Your Portfolio Management Team
/s/Ruth Heisler /s/Renee L. Ross
Ruth Heisler Renee L. Ross
Lead Portfolio Manager
/s/William M. Hutchinson
William M. Hutchinson
4
<PAGE>
Bond Portfolio
Portfolio Summary as of December 31, 1994
- -----------------------------------------------------------------
Growth of a $10,000 Investment
- -----------------------------------------------------------------
Bond Portfolio
- ----------------------------------------
Total Return
Period Growth -------------
Ended of Average
12/31/94 $10,000 Cumulative Annual
- --------- ------- ---------- -------
1 Year $ 9,521 -4.79% -4.79%
5 Year $14,552 45.52% 7.79%
Life of
Fund* $20,940 109.40% 8.12%
LB Aggregate Bond Index
- --------------------------------------
Total Return
Period Growth -------------
Ended of Average
12/31/94 $10,000 Cumulative Annual
- --------- ------- ---------- -------
1 Year $ 9,708 -2.92% -2.92%
5 Year $14,464 44.64% 7.66%
Life of
Fund* $23,376 133.76% 9.43%
*The Fund commenced operations on July 16, 1985.
Index comparisons begin July 31, 1985.
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
Yearly periods ended December 31
Bond Portfolio
Year Amount
- ---------------------
7/31/85* 10000
85 10737
86 12054
87 12201
88 12867
89 14366
90 15524
91 18258
92 19537
93 21956
94 20905
LB Aggregate Bond Index
Year Amount
- ----------------------
7/31/85* 10000
85 11043
86 12729
87 13080
88 14111
89 16161
90 17610
91 20428
92 21940
93 24079
94 23376
The Lehman Brothers (LB) Aggregate Bond Index is an unmanaged market
value-weighted measure of treasury issues, agency issues, corporate
bond issues and mortgage securities. Index returns assume reinvestment
of dividends and, unlike Fund returns, do not reflect any fees or
expenses.
All performance is historical, assumes reinvestment of all dividends
and capital gains, and is not indicative of future results. Investment
return and principal value will fluctuate, so an investor's shares,
when redeemed, may be worth more or less than when purchased. Total
returns in some periods were higher due to maintenance of the Fund's
expenses. See Financial Highlights for the Bond Portfolio.
- -------------------------------------------------------------------
ASSET QUALITY
- -------------------------------------------------------------------
By Quality
- -------------------
AAA 72%
AA 1%
A 19% As rising interest rates slowed
BBB 4% home-mortgage refinancings,
BB 2% mortgage-backed securities provided
NR 2% more dependable income and thus were
---- more attractive.
100%
====
- -------------------
Average Quality: AAA
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- -------------------------------------------------------------------
MATURITY
- -------------------------------------------------------------------
Less than 1 year 13%
1 up to 3 years 31%
3 up to 5 years 8%
5 up to 10 years 15%
10 years or greater 33%
----
100%
====
Weighted average effective maturity: 8 years
- -------------------------------------------------------------------
DIVERSIFICATION
- -------------------------------------------------------------------
U.S. Treasury Obligations 49%
Corporate Bonds 17%
Asset-Backed Securities 13%
U.S. Government Guaranteed
Mortgages 8%
Foreign Bonds 8%
U.S. Government Agency
Pass-Thrus 3%
Collateralized Mortgage
Obligations 2%
----
100%
====
5
<PAGE>
BALANCED PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
The Balanced Portfolio posted a total return of -2.05% for the year
ended December 31, 1994, compared with a 2.19% return on average for the 18
balanced funds tracked by Lipper Analytical Services, Inc. Lipper is an
independent firm that tracks performance of variable annuity investment
options. The Portfolio's loss reflected a period in which bond prices
declined across all maturities. Stock prices also experienced volatility
through much of the year. Stocks, as measured by the unmanaged S&P 500
Index, returned just 1.32% in 1994, while the unmanaged Lehman Brothers
Aggregate Bond Index declined 2.92%.
(CALLOUT NEXT TO THE PREVIOUS PARAGRAPH) - The Portfolio benefited from
healthcare-related stock holdings and increased exposure to mortgage-backed
securities in the latter part of 1994.
One of the most significant factors affecting the investment markets
in 1994 was the Federal Reserve's repeated increases in the federal funds
rate. These actions accelerated a trend of higher interest rates that had
begun in October 1993, when signs of stronger economic growth began to fuel
fears of rising inflation. Rising interest rates took their toll on bond
prices as inflation-wary investors demanded higher yields from long-term
debt instruments. Stock prices suffered because of the potentially negative
earnings impact of higher corporate borrowing costs and a slower economy.
The Balanced Portfolio seeks to provide a balance of growth and income
by investing in both quality stocks and fixed-income securities. As of
December 31, 62% of the portfolio was invested in stocks, 31% in
fixed-income securities, and the remainder in cash.
Recently, the Portfolio benefited from its healthcare-related stock
holdings, including Schering-Plough, United Healthcare, and Eli Lilly. Many
healthcare companies have improved their competitive positions through
alliances, acquisitions, and restructurings. These actions, plus the fact
that no federal healthcare bill was passed in 1994, helped boost prices of
well-positioned healthcare companies. Meanwhile, as the near-term outlook
for some emerging economies became less certain, we completely sold our
holdings in Compania de Telefonos de Chile, Telefonos de Mexico, and Hong
Kong Telecommunications at a profit.
Bond holdings were adjusted in the latter months of 1994 by increasing
the Portfolio's percentage of mortgage-backed securities. Rising interest
rates slowed home refinancings, which made income from these securities
more stable.
While some slowing in economic growth is likely later in the year, low
inflation and the longer-term expansion of the global economy should
continue to benefit both stocks and bonds.
Importantly, as of January 1995, the Portfolio's management team
consists of Lead Portfolio Manager Bruce F. Beaty along with William F.
Gadsden, Renee L. Ross, and Ruth Heisler. Howard Ward, who had served as
Lead Portfolio Manager, has left Scudder. We thank him for his
contributions and wish him well in the future.
Sincerely,
Your Portfolio Management Team
/s/Bruce F. Beaty /s/Ruth Heisler
Bruce F. Beaty Ruth Heisler
Lead Portfolio Manager
/s/Renee L. Ross /s/William F. Gadsden
Renee L. Ross William F. Gadsden
6
<PAGE>
Balanced Portfolio
Portfolio Summary as of December 31, 1994
- -----------------------------------------------------------------
Growth of a $10,000 Investment
- -----------------------------------------------------------------
Balanced Portfolio
- ----------------------------------------
Total Return
Period Growth -------------
Ended of Average
12/31/94 $10,000 Cumulative Annual
- --------- ------- ---------- -------
1 Year $ 9,795 -2.05% -2.05%
5 Year $14,016 40.16% 6.99%
Life of
Fund* $24,677 146.77% 10.02%
S&P 500 Index (60%) and LBAB Index (40%)
- --------------------------------------
Total Return
Period Growth -------------
Ended of Average
12/31/94 $10,000 Cumulative Annual
- --------- ------- ---------- -------
1 Year $ 9,997 -0.03% -0.03%
5 Year $14,946 49.46% 8.36%
Life of
Fund* $29,132 191.32% 12.02%
*The Fund commenced operations on July 16, 1985.
Index comparisons begin July 31, 1985.
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
Yearly periods ended December 31
Balanced Portfolio
Year Amount
- ---------------------
7/31/85* 10000
85 11318
86 13209
87 12988
88 14833
89 17725
90 17385
91 22067
92 23604
93 25363
94 24843
S&P 500 Index
Year Amount
- ----------------------
7/31/85* 10000
85 11257
86 13358
87 14059
88 16394
89 21589
90 20919
91 27292
92 29371
93 32331
94 32758
LBAB Index
Year Amount
- ----------------------
7/31/85* 10000
85 11043
86 12729
87 13080
88 14111
89 16161
90 17610
91 20428
92 21940
93 24079
94 23376
The Standard & Poor's (S&P) 500 Index is an unmanaged capitalization-
weighted measure of 500 widely held common stocks listed on the New
York Stock Exchange, American Stock Exchange, and Over-The-Counter
market and The Lehman Brothers Aggregate Bond (LBAB) Index is an
unmanaged market value-weighted measure of treasury issues, agency
issues, corporate bond issues and mortgage securities. Index returns
assume reinvestment of dividends and, unlike Fund returns, do not
reflect any fees or expenses.
All performance is historical, assumes reinvestment of all dividends
and capital gains, and is not indicative of future results. Investment
return and principal value will fluctuate, so an investor's shares,
when redeemed, may be worth more or less than when purchased. Total
returns in some periods were higher due to maintenance of the Fund's
expenses. See Financial Highlights for the Balanced Portfolio. The
Balanced Portfolio, with its current name and investment objective,
commenced operations on May 1, 1993. Performance figures include the
performance of its predecessor, the Managed Diversified Portfolio.
Since adopting its current objectives, the cumulative and average
annual returns are 4.96% and 2.94%, respectively.
- -------------------------------------------------------------------
EQUITY HOLDINGS
- -------------------------------------------------------------------
Sector breakdown of the Five Largest Equity Holdings
Portfolio's equity holdings -----------------------------------
1. General Electric Co.
Consumer Staples 16% Leading producer of electrical
Financial 12% equipment
Health 11% 2. American Telephone & Telegraph Co.
Technology 10% Telecommunication services and
Durables 9% business systems
Media 9% 3. Mellon Bank Corp.
Manufacturing 9% Commercial banking and
Energy 8% financial services
Consumer Discretionary 7% 4. PepsiCo Inc.
Other 9% Soft drinks, snack foods and
---- food services
100% 5. Motorola Inc.
==== Manufacturer of semiconductors
and communication products
- -------------------------------------------------------------------
FIXED INCOME HOLDINGS
- -------------------------------------------------------------------
By Asset Type
- --------------------------------------------
U.S. Treasury Obligations 31%
Corporate Bonds 22%
Cash Equivalents 19%
Asset-Backed Securities 11%
U.S. Gov't Guaranteed Mortgages 6%
U.S. Government Agency Pass-Thrus 5%
Foreign Bonds 4%
Collateralized Mortgage Obligations 2%
----
100%
====
By Quality
- --------------------------------------------
AAA 69%
AA 3%
A 13%
BBB 12%
BB 2%
NR 1%
----
100%
====
7
<PAGE>
GROWTH AND INCOME PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
Growth and Income Portfolio commenced operations on May 2, 1994. In
the eight months through December 31, 1994, the Portfolio's total return
was 4.91%, outpacing the 3.98% return of the unmanaged Standard & Poor's
500 Index for the same period.
The Portfolio seeks long-term growth of capital, current income, and
growth of income by investing primarily in common stocks, preferred stocks,
and securities convertible into common stocks. Our disciplined investment
approach focuses on stocks that pay higher-than-average dividends (at least
20% above the market average) and have good prospects for earnings and
dividend growth.
(CALLOUT NEXT TO THE PREVIOUS PARAGRAPH) - During the period, Growth and
Income Portfolio took gains in some economically sensitive stocks and
invested the proceeds in select growth stocks such as consumer-staple
companies.
The S&P 500's flat return masked no less than six rallies and
corrections. Much of the volatility reflected investors' alternating views
that the economic expansion would be choked off by persistently rising
interest rates, or, conversely, that higher rates reflected a stronger,
more inflation-prone economy.
The positive return of the Portfolio in this environment resulted from
some gratifying successes. Still, some of the strategies that initially
worked to our advantage began to work against us later in the year. Most
significant was the overweighted position in manufacturing stocks (16% of
the equity portfolio versus 13% of the S&P 500). This group generally
outperformed the market during the first part of the year. However, by the
fourth quarter, manufacturing stocks became the biggest detractors of
portfolio performance, as investor's fears of an imminent economic slowdown
came to the fore.
We expect investment challenges to continue in the new year. However,
we believe well-positioned manufacturing companies will prosper in the
current global growth environment despite their recent underperformance,
while financial stocks are in a position to benefit from eventual stability
or even declines in interest rates. We are also investing in
consumer-staple companies that have embarked upon new strategies to succeed
in an era of intense competition, price cutting, inventory reductions, and
the growth of private labels. Recent additions include Philip Morris,
Heinz, and Tambrands.
Our aim in managing the Portfolio is to participate during periods of
rising equity prices while shielding the Portfolio from turbulent markets.
We believe the Portfolio remains positioned to provide exposure to the
long-term benefits of the equity market, while our emphasis on
high-yielding stocks should help provide a measure of price stability.
Sincerely,
Your Portfolio Management Team
/s/Robert T. Hoffman /s/Kathleen T. Millard
Robert T. Hoffman Kathleen T. Millard
Lead Portfolio Manager
/s/Benjamin W. Thorndike
Benjamin W. Thorndike
8
<PAGE>
Growth and Income Portfolio
Portfolio Summary as of December 31, 1994
- -----------------------------------------------------------------
Growth of a $10,000 Investment
- -----------------------------------------------------------------
Growth and Income Portfolio
- ----------------------------------------
Total Return
Period Growth -------------
Ended of Average
12/31/94 $10,000 Cumulative Annual
- --------- ------- ---------- -------
Life of
Fund* $10,491 4.91% --%
S&P 500 Index
- --------------------------------------
Total Return
Period Growth -------------
Ended of Average
12/31/94 $10,000 Cumulative Annual
- --------- ------- ---------- -------
Life of
Fund* $10,398 3.98% --%
*The Fund commenced operations on May 2, 1994.
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
Growth and Income Portfolio
Year Amount
- ---------------------
5/2/94* 10000
5/94 10250
6/94 10100
7/94 10317
8/94 10883
9/94 10750
10/94 10776
11/94 10340
12/94 10491
S&P 500 Index
Year Amount
- ----------------------
5/2/94* 10000
5/94 10164
6/94 9915
7/94 10241
8/94 10660
9/94 10400
10/94 10633
11/94 10246
12/94 10398
The Standard & Poor's (S&P) 500 Index is an unmanaged capitalization-
weighted measure of 500 widely held common stocks listed on the New
York Stock Exchange, American Stock Exchange, and Over-The-Counter
market. Index returns assume reinvestment of dividends and, unlike
Fund returns, do not reflect any fees or expenses.
All performance is historical, assumes reinvestment of all dividends
and capital gains, and is not indicative of future results. Investment
return and principal value will fluctuate, so an investor's shares,
when redeemed, may be worth more or less than when purchased. Total
returns were higher due to maintenance of the Fund's expenses. See
Financial Highlights for the Growth and Income Portfolio.
- -------------------------------------------------------------------
DIVERSIFICATION
- -------------------------------------------------------------------
Equity Securities 90%
Cash Equivalents 10%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
Sector breakdown of the Portfolio's equity holdings
Manufacturing 16%
Financial 14%
Health 13% Growth and Income Portfolio has
Energy 11% increased its focus on consumer-
Consumer Staples 9% staples companies that stand to
Durables 9% benefit despite the industry's
Communications 5% intense competition, price-
Consumer Discretionary 4% cutting, and the growth of private
Utilities 3% labels.
Other 6%
----
90%
====
- --------------------------------------------------------------------------
TEN LARGEST EQUITY HOLDINGS
- --------------------------------------------------------------------------
1. United Technologies Corp.
Aerospace, climate control systems and elevators
2. Eli Lilly Co.
Leading pharmaceutical company
3. Baxter International Inc.
Manufacturer and distributor of hospital and laboratory
products and services
4. Alltel Corp.
Telecommunications and data processing services
5. Warner-Lambert Co.
Drugs, toiletries and food products
6. First Bank System Inc.
Commercial banking in Minnesota and the northcentral U.S.
7. Xerox Corp.
Leading manufacturer of copiers and duplicators
8. Boise Cascade Corp.
Manufacturer of forest products
9. Meditrust SBI (REIT)
Owner of health care facilities
10. Murphy Oil Corp.
International integrated oil company
9
<PAGE>
CAPITAL GROWTH PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
Two major trends influenced the stock market during much of 1994:
strong economic activity and persistently rising interest rates, due in
part to monetary tightening by the Federal Reserve. The struggle between
these opposing forces caused considerable unease among investors, and stock
prices were volatile throughout the year. In this environment, Capital
Growth Portfolio's net asset value per share declined to $12.23 on December
31, 1994, from $14.95 on December 31, 1993. However, the price change was
offset somewhat by $0.05 per share in income dividends and $1.31 per share
in capital gains distributions. The Portfolio recorded a -9.67% total
return for the year, compared with 1.32% for the unmanaged Standard &
Poor's 500 Index, and a -1.00% return for the 70 growth funds tracked by
Lipper Analytical Services, Inc. Lipper is an independent firm that tracks
performance of variable annuity investment options.
(CALLOUT NEXT TO THE PREVIOUS PARAGRAPH) - Capital Growth Portfolio is
positioned for 1995 with holdings that include cable, retail,
telecommunications, entertainment, healthcare, and financial stocks.
The Portfolio's performance trailed the Index in part because of its
holdings in the cable and retail industries. Cable stocks dropped due to
renewed FCC regulation of basic cable rates and the collapse of some
high-profile mergers. In addition, some retail holdings suffered in
anticipation of disappointing Christmas sales. Looking forward, the cable
industry should benefit from an improved regulatory environment, new
opportunities from substantially increased channel capacity, and
prospective joint ventures and mergers.
Several major developments influenced the domestic portion of the
Portfolio during the year. ITT proposed the acquisition of Caesar's World,
which we later sold at a substantial profit. We purchased United
Healthcare, U.S. HealthCare, and Baxter International in light of the
improved outlook for the healthcare industry and these companies in
particular. And the Portfolio's financial holdings were increased through
the purchase of AMBAC and MBIA, two municipal-bond insurers.
The Portfolio's investment in foreign stocks increased during the year
in part through the purchase of ENDESA, a leading Spanish utility company.
We also added to our holdings in Nokia, a rapidly growing Finnish
manufacturer of cellular telephones. In late December, all Latin American
stock markets declined sharply following the devaluation of the Mexican
peso. We used this opportunity to purchase two of the largest telephone
companies in Argentina--Telefonica de Argentina and Telecom Argentina--as
well as Telespe, a Brazilian telephone company.
Looking forward, we believe the market's overall valuation remains
reasonable, given 1994's rise in corporate earnings and our expectation for
further earnings gains in 1995. We are also encouraged by the moderate
outlook for U.S. inflation and economic activity in the new year. In view
of these prospects, we believe the Portfolio is well positioned to benefit
shareholders over time.
Sincerely,
Your Portfolio Management Team
/s/William F. Gadsden /s/Steven P. Aronoff
William F. Gadsden Steven P. Aronoff
Lead Portfolio Manager
/s/Julia D. Cox
Julia D. Cox
10
<PAGE>
Capital Growth Portfolio
Portfolio Summary as of December 31, 1994
- -----------------------------------------------------------------
Growth of a $10,000 Investment
- -----------------------------------------------------------------
Capital Growth Portfolio
- ----------------------------------------
Total Return
Period Growth -------------
Ended of Average
12/31/94 $10,000 Cumulative Annual
- --------- ------- ---------- -------
1 Year $ 9,033 -9.67% -9.67%
5 Year $15,008 50.08% 8.46%
Life of
Fund* $29,783 197.83% 12.22%
S&P 500 Index
- --------------------------------------
Total Return
Period Growth -------------
Ended of Average
12/31/94 $10,000 Cumulative Annual
- --------- ------- ---------- -------
1 Year $10,132 1.32% 1.32%
5 Year $15,174 51.74% 8.69%
Life of
Fund* $32,758 227.58% 13.43%
*The Fund commenced operations on July 16, 1985.
Index comparisons begin July 31, 1985.
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
Yearly Periods Ended December 31
Capital Growth Portfolio
Year Amount
- ---------------------
7/31/85* 10000
85 11245
86 13752
87 13492
88 16469
89 20215
90 18708
91 26108
92 27785
93 33587
94 30339
S&P 500 Index
Year Amount
- ---------------------
7/31/85* 10000
85 11257
86 13358
87 14059
88 16394
89 21589
90 20919
91 27292
92 29371
93 32331
94 32758
The Standard & Poor's (S&P) 500 Index is an unmanaged capitalization-
weighted measure of 500 widely held common stocks listed on the New
York Stock Exchange, American Stock Exchange, and Over-The-Counter
market. Index returns assume reinvestment of dividends and, unlike
Fund returns, do not reflect any fees or expenses.
All performance is historical, assumes reinvestment of all dividends
and capital gains, and is not indicative of future results. Investment
return and principal value will fluctuate, so an investor's shares,
when redeemed, may be worth more or less than when purchased. Total
returns in some periods were higher due to maintenance of the Fund's
expenses. See Financial Highlights for the Capital Growth Portfolio.
- -------------------------------------------------------------------
DIVERSIFICATION
- -------------------------------------------------------------------
Equity Securities 95%
Cash Equivalents 5%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
Sector breakdown of the Portfolio's equity holdings
Media 18%
Consumer Discretionary 15% A proposed acquisition in the
Communications 12% gaming industry and a major
Technology 10% telecommunications merger benefited
Financial 10% Capital Growth Portfolio.
Health 7%
Durables 7%
Utilities 4%
Energy 4%
Other 8%
----
95%
====
- --------------------------------------------------------------------------
TEN LARGEST EQUITY HOLDINGS
- --------------------------------------------------------------------------
1. Time Warner Inc.
Publishing, broadcasting, and video entertainment company
2. Tele-Communications Inc.
Cable TV systems and microwave services
3. Comcast Corp.
Cable TV, sound and telecommunication systems
4. Rogers Communications Inc.
Cable TV and cellular telephones in Canada
5. Intel Corp.
Semiconductor memory circuits
6. Chrysler Corp.
Leading automobile manufacturer
7. American Telephone & Telegraph Co.
Telecommunication services and business systems
8. Century Telephone Enterprises
Telecommunication services
9. Astra AB
Pharmaceutical company
10. Microsoft Corp.
Computer operating systems software
11
<PAGE>
INTERNATIONAL PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
We are pleased to report relatively strong performance during a
troublesome year for the world's financial markets. For the 12 months ended
December 31, 1994, International Portfolio returned -0.85%. By comparison,
the unmanaged Morgan Stanley Capital International's Europe, Australia, the
Far East and Canada Index returned 7.36%, owing to its large exposure to
Japan compared with that of the Fund. During the year, the Japanese yen
surged against the U.S. dollar, while Japanese stocks also rallied. The
combination produced a U.S. dollar return of 20.7% for Japan, though other
Asian markets fell 16.1% on average. In Mexico, the December devaluation of
the peso caused market declines throughout Latin America, although the
effect on the Portfolio was limited. European and American markets ended
the year little changed.
(CALLOUT NEXT TO THE PREVIOUS PARAGRAPH) - During the year, we invested in
companies benefiting from the global economic expansion, including those
involved in the production and exploration of oil and natural gas.
During the year, we sought and invested in companies benefiting from
heightened economic activity worldwide. In Germany, for example, the
industrial sector has made significant gains in competitiveness and
profitability and now appears to be leading the European economic recovery.
Germany's economic activity thus far has been driven by exports, and recent
additions to the portfolio include such exporters as Henkel, a household
detergent and adhesives producer; BASF, a diversified chemicals
manufacturer; and Volkswagen.
We also maintained our focus on energy-related companies benefiting
from a jump in worldwide demand for oil and other raw materials. In view of
this trend, we added to our positions in oil and gas exploration and
production companies, including Ampol Exploration Ltd. in Australia and
Total SA in France.
Also, we further reduced our holdings of Japanese retailers,
completely eliminating our position in Autobacs Seven Co., Ltd., once one
of our largest holdings. Concerns about sluggish consumer spending and
increased competition have dimmed our enthusiasm for Japanese retail
stocks. Our Japanese holdings now largely represent major exporting firms
like Canon and Hitachi, as well as capital goods companies that we believe
are positioned for global expansion and likely to benefit from a declining
yen.
Given ongoing political and economic uncertainties in many parts of
the world, we will seek to use additional market volatility to our
advantage by purchasing fundamentally strong companies at discounted
prices.
Sincerely,
Your Portfolio Management Team
/s/Carol L. Franklin /s/Nicholas Bratt
Carol L. Franklin Nicholas Bratt
Lead Portfolio Manager
12
<PAGE>
International Portfolio
Portfolio Summary as of December 31, 1994
- -----------------------------------------------------------------
Growth of a $10,000 Investment
- -----------------------------------------------------------------
International Portfolio
- ----------------------------------------
Total Return
Period Growth -------------
Ended of Average
12/31/94 $10,000 Cumulative Annual
- --------- ------- ---------- -------
1 Year $ 9,915 -.85% -.85%
5 Year $13,633 36.33% 6.39%
Life of
Fund* $19,595 95.95% 9.18%
MSCI EAFE & Canada Index
- --------------------------------------
Total Return
Period Growth -------------
Ended of Average
12/31/94 $10,000 Cumulative Annual
- --------- ------- ---------- -------
1 Year $10,736 7.36% 7.36%
5 Year $10,730 7.30% 1.42%
Life of
Fund* $13,915 39.15% 4.45%
*The Fund commenced operations on May 1, 1987.
Index comparisons begin May 31, 1987.
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
Yearly Periods Ended December 31
International Portfolio
Year Amount
- ---------------------
5/31/87* 10000
87 8997
88 10502
89 14470
90 13363
91 14893
92 14433
93 19896
94 19727
MSCI EAFE & Canada Index
Year Amount
- ---------------------
5/31/87* 10000
87 9138
88 11682
89 12968
90 9980
91 11186
92 9824
93 12961
94 13915
The Morgan Stanley Capital International (MSCI) Europe, Australia,
the Far East (EAFE) & Canada Index is an unmanaged capitalization-
weighted measure of stock markets in Europe, Australia, the Far East
and Canada. Index returns assume dividends reinvested net of
withholding tax and, unlike Fund returns, do not reflect any fees or
expenses.
All performance is historical, assumes reinvestment of all dividends
and capital gains, and is not indicative of future results. Investment
return and principal value will fluctuate, so an investor's shares,
when redeemed, may be worth more or less than when purchased. Total
returns in some periods were higher due to maintenance of the Fund's
expenses. See Financial Highlights for the International Portfolio.
- -------------------------------------------------------------------
DIVERSIFICATION
- -------------------------------------------------------------------
By Region (Excluding Cash Equivalents)
- --------------------------------------
Europe 50%
Japan 28%
Pacific Basin 14%
Latin America 5%
Canada 3%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
By Asset Type
- --------------------------------------
Equity Holdings 90%
Cash Equivalents 10%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
TEN LARGEST EQUITY HOLDINGS
- --------------------------------------------------------------------------
1. Autoliv AB
Swedish manufacturer of safety airbags for automobiles
2. SAP AG
German computer software manufacturer
3. Canon Inc.
Leading Japanese producer of visual image and information
equipment
4. NGK Spark Plug Co., Ltd.
Leading Japanese manufacturer of automotive spark plugs
5. Kyocera Corp.
Leading Japanese ceramic packaging manufacturer
6. Sony Corp.
Japanese consumer electronic products manufacturer
7. Hitachi Ltd.
Japanese general electronics manufacturer
8. Hitachi Metals, Ltd.
Major Japanese producer of high-quality specialty steels
9. Outokumpu Oy
Metals and minerals in Finland
10. Schering AG
German pharmaceutical and chemical producer
13
<PAGE>
<TABLE>
MONEY MARKET PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Value ($)
Portfolio Amount ($) (Note A)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------
4.5% REPURCHASE AGREEMENT
------------------------------------------------------------------------------------
4,030,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 12/30/94 at 5.875%, to be repurchased at
$4,032,631 on 1/3/95, collateralized by a $4,074,000
U.S. Treasury Note, 6.25%, 8/31/96 (Cost $4,030,000). . 4,030,000
------------
------------------------------------------------------------------------------------
48.1% COMMERCIAL PAPER
------------------------------------------------------------------------------------
CONSUMER STAPLES 3.3%
Food & Beverage 3,000,000 H.J. Heinz Co., 5.95%, 1/27/95 . . . . . . . . . . . . 2,987,108
------------
COMMUNICATIONS 3.3%
Telephone/
Communications 3,000,000 AT&T Corp., 6.02%, 2/8/95 . . . . . . . . . . . . . . 2,980,937
------------
FINANCIAL 34.7%
Banks 6.7% 3,000,000 Bankers Trust New York Corp., 5.08%, 1/13/95 . . . . . 2,994,920
3,000,000 J.P. Morgan & Co., Inc., 6.05%, 3/1/95 . . . . . . . . 2,970,254
------------
5,965,174
------------
Business Finance 3.3% 3,000,000 Receivables Capital Corp., 5.95%, 1/24/95 . . . . . . 2,988,596
------------
Consumer Finance 7.9% 3,000,000 American Express Credit Corp., 5.88%, 2/2/95 . . . . . 3,000,000
4,000,000 General Electric Capital Corp., 5.78%, 1/31/95 . . . . 4,000,000
------------
7,000,000
------------
Other Financial
Companies 16.8% 3,000,000 American General Finance Corp., 5.81%, 1/27/95 . . . . 3,000,000
3,000,000 Associates Corp. of North America, 5.68%, 1/18/95 . . 3,000,000
3,000,000 Corporate Asset Funding Co., 6.05%, 2/10/95 . . . . . 2,979,833
3,000,000 New Center Asset Trust, 5.65%, 1/13/95 . . . . . . . . 2,994,350
3,000,000 Rincon Securities Inc., 5.75%, 1/17/95 . . . . . . . . 2,992,333
------------
14,966,516
------------
DURABLES 3.4%
Construction/
Agricultural Equipment 3,000,000 John Deere Capital Corp., 5.78%, 1/24/95 . . . . . . . 3,000,000
------------
MANUFACTURING 3.4%
Chemicals 3,000,000 E.I. du Pont de Nemours & Co., 5.9%, 1/24/95 . . . . . 2,988,692
------------
TOTAL COMMERCIAL PAPER (Cost $42,877,023) . . . . . . 42,877,023
------------
------------------------------------------------------------------------------------
11.0% U.S. TREASURY OBLIGATIONS
------------------------------------------------------------------------------------
5,000,000 U.S. Treasury Bill, 4.71%, 1/5/95 . . . . . . . . . . 4,997,383
2,000,000 U.S. Treasury Bill, 3.41%, 1/12/95 . . . . . . . . . . 1,997,916
3,000,000 U.S. Treasury Bill, 6.75%, 12/14/95 . . . . . . . . . 2,804,957
------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $9,800,256). . . . . . . . . . . . . . . . . . 9,800,256
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Value ($)
Portfolio Amount ($) (Note A)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
---------------------------------------------------------------------------------------
36.4% U.S. GOVERNMENT AGENCY OBLIGATIONS
---------------------------------------------------------------------------------------
5,000,000 Federal Farm Credit Bank, Discount Note, 5.6%, 1/4/95 . . . 4,997,667
3,000,000 Federal Home Loan Bank, Discount Note, 4.93%, 1/13/95 . . . 2,995,070
5,000,000 Federal Home Loan Mortgage Corp., Discount Note,
5.9%, 1/3/95 . . . . . . . . . . . . . . . . . . . . . . 4,998,361
5,000,000 Federal Home Loan Mortgage Corp., Discount Note,
5.78%, 1/17/95 . . . . . . . . . . . . . . . . . . . . . 4,987,155
5,000,000 Federal Home Loan Mortgage Corp., Discount Note,
5.62%, 1/23/95 . . . . . . . . . . . . . . . . . . . . . 4,982,828
4,500,000 Federal Home Loan Mortgage Corp., Discount Note,
6.17%, 4/4/95 . . . . . . . . . . . . . . . . . . . . . . 4,428,274
5,000,000 Federal National Mortgage Association Discount Note,
5.8%, 1/9/95 . . . . . . . . . . . . . . . . . . . . . . 4,993,556
-----------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(Cost $32,382,911) . . . . . . . . . . . . . . . . . . . 32,382,911
-----------
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO - 100% (Cost $89,090,190)(a) . . . . . . . . . 89,090,190
===========
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Cost for federal income tax purposes is $89,090,190.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
<TABLE>
MONEY MARKET PORTFOLIO
FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
<S> <C> <C>
DECEMBER 31, 1994
- ------------------------------------------------------------------------------------------------
ASSETS
Investments, at value (amortized cost $89,090,190) (Note A) . . . . . $ 89,090,190
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 890
Receivables:
Portfolio shares sold . . . . . . . . . . . . . . . . . . . . . . 1,382,184
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,037
------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . 90,534,301
LIABILITIES
Payables:
Due to Adviser (Note B) . . . . . . . . . . . . . . . . . . . . . $ 30,056
Accrued expenses (Note B) . . . . . . . . . . . . . . . . . . . . 6,333
---------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . 36,389
------------
Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . $ 90,497,912
============
NET ASSETS
Net assets consist of:
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 90,497,912
------------
Net assets, at value . . . . . . . . . . . . . . . . . . . . . . . . $ 90,497,912
============
NET ASSET VALUE, offering and redemption price per share
($90,497,912 -:- 90,497,912 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) . . $1.00
=====
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1994
- ------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,175,974
Expenses (Note A):
Management fee (Note B) . . . . . . . . . . . . . . . . . . $269,963
Administrative fees (Note B) . . . . . . . . . . . . . . . 40,297
Accounting fees (Note B) . . . . . . . . . . . . . . . . . 17,630
Trustees' fees (Note B) . . . . . . . . . . . . . . . . . . 9,886
Custodian fees . . . . . . . . . . . . . . . . . . . . . . 21,111
Federal registration . . . . . . . . . . . . . . . . . . . 18,186
Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,785
Auditing . . . . . . . . . . . . . . . . . . . . . . . . . 9,984
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,641 407,483
-------- -----------
Net investment income . . . . . . . . . . . . . . . . . . . . 2,768,491
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS . . . . . . $ 2,768,491
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
<TABLE>
MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
INCREASE (DECREASE) IN NET ASSETS 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income and net increase in net assets
resulting from operations . . . . . . . . . . . . . . . . . $ 2,768,491 $ 899,874
------------- -------------
Distributions to shareholders from net investment income
($.037 and $.025 per share, respectively . . . . . . . . . . . (2,768,491) (899,874)
------------- -------------
Portfolio share transactions at net asset value of $1.00 per share:
Proceeds from shares sold . . . . . . . . . . . . . . . . . . 186,827,297 98,111,621
Net asset value of shares issued to shareholders in
reinvestment of distributions from net investment income . 2,768,491 899,874
Cost of shares redeemed . . . . . . . . . . . . . . . . . . . (147,877,533) (83,950,201)
------------- -------------
Net increase in net assets from Portfolio share transactions . 41,718,255 15,061,294
------------- -------------
INCREASE IN NET ASSETS . . . . . . . . . . . . . . . . . . . . . 41,718,255 15,061,294
Net assets at beginning of period . . . . . . . . . . . . . . . . 48,779,657 33,718,363
------------- -------------
NET ASSETS AT END OF PERIOD . . . . . . . . . . . . . . . . . . . $ 90,497,912 $ 48,779,657
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL
STATEMENTS.
<CAPTION>
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
(Note B) . . . . . . . $ -- $ -- $ -- $ -- $ -- $ .001 $ .003 $ .006 $ .022 $ .133
<FN>
(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.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
<TABLE>
BOND PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1994
- ----------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
48.7% U.S. TREASURY OBLIGATIONS
------------------------------------------------------------------------------------
3,230,000 U.S. Treasury Bill, 5.78%, 5/18/95 . . . . . . . . . 3,156,582
4,200,000 U.S. Treasury Bond, 7.25%, 5/15/16 . . . . . . . . . 3,883,698
4,520,000 U.S. Treasury Bond, 7.875%, 2/15/21 . . . . . . . . 4,463,500
4,360,000 U.S. Treasury Note, 3.875%, 10/31/95 . . . . . . . . 4,245,550
13,555,000 U.S. Treasury Note, 4%, 1/31/96 . . . . . . . . . . 13,086,946
9,110,000 U.S. Treasury Note, 5.125%, 3/31/96 . . . . . . . . 8,855,193
8,510,000 U.S. Treasury Note, 6%, 6/30/96 . . . . . . . . . . 8,326,524
6,905,000 U.S. Treasury Note, 6.875%, 7/31/99 . . . . . . . . 6,646,063
3,200,000 U.S. Treasury Note, 7.25%, 5/15/04 . . . . . . . . . 3,072,992
8,100,000 U.S. Treasury Separate Trading Registered Interest
and Principal Securities, 11/15/09 (8.04**) . . . . 2,507,841
12,700,000 U.S. Treasury Separate Trading Registered Interest
and Principal Securities, 11/15/10 (8.05**) . . . . 3,628,263
18,740,000 U.S. Treasury Separate Trading Registered Interest
and Principal Securities, 2/15/12 (8.07**) . . . . . 4,837,918
8,050,000 U.S. Treasury Separate Trading Registered Interest
and Principal Securities, 5/15/15 (8.09**) . . . . . 1,600,984
-----------
TOTAL U.S. TREASURY OBLIGATIONS (Cost $70,751,577) . 68,312,054
-----------
------------------------------------------------------------------------------------
8.3% U.S. GOV'T GUARANTEED MORTGAGES
------------------------------------------------------------------------------------
9,077,233 Government National Mortgage Association, 8%, 7/15/24* . . 8,677,199
3,266,168 Government National Mortgage Association, 6.5%, 8/15/08* . 2,984,461
-----------
TOTAL U.S. GOV'T GUARANTEED MORTGAGES
(Cost $12,203,049) . . . . . . . . . . . . . . . . . . 11,661,660
-----------
------------------------------------------------------------------------------------
3.3% U.S. GOVERNMENT AGENCY PASS-THRUS
------------------------------------------------------------------------------------
4,976,332 Federal National Mortgage Association, 7.5%, 10/1/24*
(Cost $4,731,404) . . . . . . . . . . . . . . . . . . . 4,646,651
----------
------------------------------------------------------------------------------------
1.7% COLLATERALIZED MORTGAGE OBLIGATIONS
------------------------------------------------------------------------------------
2,000,000 Federal Home Loan Mortgage Corp., REMIC, 7%, 7/15/06 . . . 1,835,620
272,776 Federal National Mortgage Association, REMIC,
8.5%, 4/25/18 . . . . . . . . . . . . . . . . . . . . . 273,883
220,406 Resolution Trust Corp., Series 1992-7, Class A-2B,
8.35%, 6/25/29 . . . . . . . . . . . . . . . . . . . . . 219,821
----------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $2,321,803) . . . . . . . . . . . . . . . . . . . . . 2,329,324
----------
-----------------------------------------------------------------------------------
8.2% FOREIGN BONDS - U.S. $ DENOMINATED
-----------------------------------------------------------------------------------
1,000,000 ABN-AMRO Bank NV, 7.75%, 5/15/23 . . . . . . . . . . . . . 891,990
1,500,000 Banco Nacional de Comercio Exterior SNC, 9.875%, 6/24/96 . 1,462,500
750,000 Fomento Economico Mexicano S.A., 9.5%, 7/22/97 . . . . . . 671,250
1,000,000 Government of Malaysia, 9.875%, 9/27/00 . . . . . . . . . 1,058,350
1,000,000 Gruma SA de C.V., 9.75%, 3/9/98 . . . . . . . . . . . . . 915,000
2,000,000 Kingdom of Thailand, 8.25%, 3/15/02 . . . . . . . . . . . 1,963,240
2,000,000 Korea Development Bank, 9.6%, 12/1/00 . . . . . . . . . 2,070,620
450,000 Nacional Financiera SNC, 6%, 12/19/96 . . . . . . . . . . 409,500
400,000 Nacional Financiera SNC, 9.375%, 7/15/02 . . . . . . . . . 338,000
1,000,000 Nippon Telegraph & Telephone Corp., 9.5%, 7/27/98 . . . . 1,038,660
750,000 Petroleos Mexicanos, 8.25%, 2/4/98 . . . . . . . . . . . . 680,625
----------
TOTAL FOREIGN BONDS - U.S. $ DENOMINATED
(Cost $11,930,619) . . . . . . . . . . . . . . . . . . . 11,499,735
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------
13.0% ASSET-BACKED SECURITIES
---------------------------------------------------------------------------------
<S> <C> <C> <C>
AUTOMOBILE RECEIVABLES 0.7% 1,000,000 Premier Auto Trust, Series 1994-3, 6.8%, 12/2/99 . . . 972,500
----------
CREDIT CARD RECEIVABLES 9.2% 1,500,000 Chase Manhattan Credit Card Trust, 1991 "A", 7.65%,
11/15/98 . . . . . . . . . . . . . . . . . . . . . . . 1,497,645
3,000,000 Discover Credit Card Trust, Series 1992-A, 5.5%,
5/16/98 . . . . . . . . . . . . . . . . . . . . . . . 2,941,860
1,000,000 First Chicago Master Trust, Series 1991-D, 8.4%, 6/15/98 1,003,120
3,500,000 First USA Credit Corp., Series 1992-A, 5.2%, 6/15/98 . . 3,387,335
2,500,000 Standard Credit Card Trust, Series 1990-3B, 9.85%,
7/10/97 . . . . .. . . . . . . . . . . . . . . . . . . 2,575,000
1,500,000 Standard Credit Card Trust, Series 1990-6B, 9.625%,
9/10/97 . . . . . . . . . . . . . . . . . . . . . . . 1,540,770
----------
12,945,730
----------
HOME EQUITY LOANS 1.9% 2,000,000 Contimortgage Home Equity Loan Trust, Series 1994-5 A1,
9.07%, 5/15/06 . . . . . . . . . . . . . . . . . . . . 2,011,250
668,573 United Companies Financial Corp., Home Loan Trust,
Series 1993 B1, 6.075%, 7/25/14* . . . . . . . . . . 617,803
----------
2,629,053
----------
MANUFACTURED HOUSING
RECEIVABLES 1.2% 1,757,845 Green Tree Financial Corp., Securitized Series 1994B,
7.85%, 7/15/04* . . . . . . . . . . . . . . . . . . 1,713,899
----------
TOTAL ASSET-BACKED SECURITIES (Cost $18,967,489) . . . 18,261,182
----------
---------------------------------------------------------------------------------
16.8% CORPORATE BONDS
---------------------------------------------------------------------------------
CONSUMER DISCRETIONARY 1.4% 2,000,000 Dayton Hudson Corp., 8.6%, 1/15/12 . . . . . . . . . . 1,979,160
----------
CONSUMER STAPLES 0.7% 1,000,000 Seagram & Sons Inc., 9%, 8/15/21 . . . . . . . . . . . 1,020,450
----------
FINANCIAL 3.5% 1,000,000 Banc One Corp., 8.74%, 9/15/03 . . . . . . . . . . . . 1,012,830
1,000,000 BankAmerica Corp., 7.75%, 7/15/02 . . . . . . . . . . 949,950
1,000,000 Golden West Financial Corp., 6%, 10/1/03 . . . . . . . 843,890
1,000,000 Grand Metropolitan Investment Corp., 8.625%, 8/15/01 . . 1,006,640
1,000,000 Household Finance Corp., 9.25%, 2/15/95 . . . . . . . 1,003,080
----------
4,816,390
----------
MEDIA 1.3% 2,000,000 Time Warner Inc., 9.125%, 1/15/13 . . . . . . . . . . . 1,801,880
----------
DURABLES 2.1% 750,000 Caterpillar Inc., 9.75%, 6/1/19 . . . . . . . . . . . . 792,105
5,000,000 General Motors Acceptance Corp., Zero Coupon, 12/1/12. . 1,095,450
1,000,000 Lockheed Corp., 9%, 1/15/22 . . . . . . . . . . . . . . 1,023,790
----------
2,911,345
----------
MANUFACTURING 2.2% 1,000,000 ARCO Chemical Co., 9.375%, 12/15/05 . . . . . . . . . . 1,045,140
1,000,000 Dow Chemical Co., 9%, 5/15/10 . . . . . . . . . . . . 1,014,920
1,000,000 Monsanto Co., 8.7%, 10/15/21 . . . . . . . . . . . . . . 1,006,170
----------
3,066,230
----------
TECHNOLOGY 1.3% 2,000,000 Loral Corp., 8.375%, 6/15/24 . . . . . . . . . . . . . 1,848,560
----------
ENERGY 3.6% 2,000,000 Atlantic Richfield Co., 8.25%, 2/1/22 . . . . . . . . . 1,925,000
2,000,000 Atlantic Richfield Co., 9.125%, 8/1/31 . . . . . . . . 2,070,860
1,000,000 Enron Corp., 10%, 6/1/98 . . . . . . . . . . . . . . . 1,037,900
----------
5,033,760
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
<TABLE>
BOND PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
METALS AND MINERALS 0.7% 1,000,000 Alcan Aluminum Ltd., 9.4%, 6/1/95 . . . . . . 1,009,380
-----------
TOTAL CORPORATE BONDS (Cost $24,059,681) . . . 23,487,155
-----------
- ----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO -- 100.0%
(Cost $144,965,622)(a) . . . . . . . . . . . 140,197,761
===========
- ----------------------------------------------------------------------------------------------------------------
<FN>
* Effective maturities will be shorter due to amortization and prepayments.
** Yield; bond equivalent yield to maturity; not a coupon rate (unaudited).
(a) At December 31, 1994, the net unrealized depreciation on investments based on cost for federal
income tax purposes of $145,233,462 was as follows:
Aggregate gross unrealized appreciation for all investments in which there is an excess
of market value over tax cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 311,092
Aggregate gross unrealized depreciation for all investments in which there is an excess
of tax cost over market value . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,346,793)
------------
Net unrealized depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (5,035,701)
============
- -------------------------------------------------------------------------------------------------------------
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 realized net taxable capital gains of each succeeding year
until fully utilized or until December 31, 2002, whichever occurs first.
- -------------------------------------------------------------------------------------------------------------
From November 1, 1994 through December 31, 1994, the Bond Portfolio incurred approximately $934,894 of
net realized capital losses which the Portfolio intends to elect to defer and treat as arising in the
fiscal year ended December 31, 1995.
- -------------------------------------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term investments and U.S. Government
securities), for the year ended December 31, 1994, aggregated $26,330,691 and $28,463,557,
respectively. Purchases and sales of U.S. Government securities for the year ended December 31, 1994,
aggregated $127,013,697 and $98,526,029, respectively.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
22
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------------------------
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
- ------------------------------------------------------------------------------------------------
DECEMBER 31, 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost $144,965,622) (Note A) . . $140,197,761
Receivables:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,288,634
Investments sold . . . . . . . . . . . . . . . . . . . . . . . . 716,464
Portfolio shares sold . . . . . . . . . . . . . . . . . . . . . 49,355
------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . 143,252,214
LIABILITIES
Payables:
Due to custodian bank . . . . . . . . . . . . . . . . . . . . . $ 2,424
Investments purchased . . . . . . . . . . . . . . . . . . . . . 736,188
Portfolio shares redeemed . . . . . . . . . . . . . . . . . . . 29,285
Due to Adviser (Note B) . . . . . . . . . . . . . . . . . . . . 60,086
Accrued expenses (Note B) . . . . . . . . . . . . . . . . . . . 19,619
--------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . 847,602
------------
Net assets, at market value . . . . . . . . . . . . . . . . . . . . $142,404,612
============
NET ASSETS
Net assets consist of:
Undistributed net investment income . . . . . . . . . . . . . . $ 2,188,157
Net unrealized depreciation on investments . . . . . . . . . . . (4,767,861)
Accumulated net realized loss . . . . . . . . . . . . . . . . . (5,356,061)
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 150,340,377
------------
Net assets, at market value . . . . . . . . . . . . . . . . . . . . $142,404,612
============
NET ASSET VALUE, offering and redemption price per share
($142,404,612 -:- 21,973,579 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) . $6.48
=====
</TABLE>
The accompanying notes are an integral part of the financial statements.
23
<PAGE>
<TABLE>
BOND PORTFOLIO
- ---------------------------------------------------------------------------------------------------
<CAPTION>
STATEMENT OF OPERATIONS
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1994
- ---------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,603,254
Expenses (Note A):
Management fee (Note B) . . . . . . . . . . . . . . . . . . $ 650,361
Administrative fees (Note B) . . . . . . . . . . . . . . . 40,238
Accounting fees (Note B) . . . . . . . . . . . . . . . . . 22,187
Trustees' fees (Note B) . . . . . . . . . . . . . . . . . . 10,111
Custodian fees . . . . . . . . . . . . . . . . . . . . . . 32,442
Auditing . . . . . . . . . . . . . . . . . . . . . . . . . 14,153
Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,717
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,757 796,966
---------- ------------
Net investment income . . . . . . . . . . . . . . . . . . . . 8,806,288
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized loss from:
Investments . . . . . . . . . . . . . . . . . . . . . . . . (5,510,934)
Foreign currency related transactions . . . . . . . . . . . (96,214) (5,607,148)
----------
Net unrealized appreciation (depreciation) during the period on:
Investments . . . . . . . . . . . . . . . . . . . . . . . . (9,676,517)
Foreign currency related transactions . . . . . . . . . . . 3,936 (9,672,581)
---------- ------------
Net loss on investment transactions . . . . . . . . . . . . . (15,279,729)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS . . . . . . $ (6,473,441)
=============
</TABLE>
The accompanying notes are an integral part of the financial statements.
24
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- ----------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
----------------------------------
INCREASE (DECREASE) IN NET ASSETS 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,806,288 $ 7,642,963
Net realized gain (loss) from investment transactions . . . . . . . . . . (5,607,148) 3,118,124
Net unrealized appreciation (depreciation) on investment
transactions during the period . . . . . . . . . . . . . . . . . . . . (9,672,581) 2,512,942
------------- -------------
Net increase (decrease) in net assets resulting from operations . . . . . . . (6,473,441) 13,274,029
------------- -------------
Distributions to shareholders from:
Net investment income ($.43 and $.48 per share, respectively) . . . . . . (8,525,294) (7,359,412)
------------- -------------
Net realized gain from investment transactions
($.17 and $.15 per share, respectively) . . . . . . . . . . . . . . . . (3,161,229) (2,268,442)
------------- -------------
Portfolio share transactions:
Proceeds from shares sold . . . . . . . . . . . . . . . . . . . . . . . . 86,578,280 60,028,541
Net asset value of shares issued to shareholders in
reinvestment of distributions . . . . . . . . . . . . . . . . . . . . . 11,686,523 9,627,854
Cost of shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . (66,398,542) (57,355,192)
------------- -------------
Net increase in net assets from Portfolio share transactions . . . . . . . . 31,866,261 12,301,203
------------- -------------
INCREASE IN NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,706,297 15,947,378
Net assets at beginning of period . . . . . . . . . . . . . . . . . . . . . . 128,698,315 112,750,937
------------- -------------
NET ASSETS AT END OF PERIOD (including undistributed net investment
income of $2,188,157 and $2,203,911, respectively) . . . . . . . . . . . . $ 142,404,612 $ 128,698,315
============= =============
OTHER INFORMATION
INCREASE (DECREASE) IN PORTFOLIO SHARES
Shares outstanding at beginning of period . . . . . . . . . . . . . . . . . 17,350,092 15,685,339
------------- -------------
Shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,843,292 8,119,378
Shares issued to shareholders in reinvestment of distributions . . . . . . 1,713,654 1,324,202
Shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,933,459) (7,778,827)
------------- -------------
Net increase in Portfolio shares . . . . . . . . . . . . . . . . . . . . . 4,623,487 1,664,753
------------- -------------
Shares outstanding at end of period . . . . . . . . . . . . . . . . . . . . . 21,973,579 17,350,092
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
25
<PAGE>
<TABLE>
BOND PORTFOLIO
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER
PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS.
SIX FOR THE PERIOD
MONTHS JULY 16, 1985
ENDED (COMMENCEMENT
YEARS ENDED DECEMBER 31, (E) DECEMBER OF OPERATIONS
----------------------------------------------------------------------- 31, TO JUNE 30,
1994 1993 1992 1991 1990 1989 1988 1987 1986(e)(f) 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)
<FN>
(a) Portion of expenses
reimbursed (Note B) . . . $ -- $ -- $ -- $ -- $ -- $ .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.
</FN>
</TABLE>
26
<PAGE>
<TABLE>
BALANCED PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1994
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
3.9% REPURCHASE AGREEMENT
---------------------------------------------------------------------------------------
1,810,000 Repurchase Agreement with Donaldson, Lufkin &
Jenrette dated 12/30/94 at 5.875%, to be repurchased
at $1,811,182 on 1/3/95, collateralized by a $1,871,000
U.S. Treasury Note, 4.25%, 11/30/95 (Cost $1,810,000) . . . . 1,810,000
----------
---------------------------------------------------------------------------------------
3.3% COMMERCIAL PAPER
---------------------------------------------------------------------------------------
1,500,000 American Express Credit Corp., 5.755%, 1/3/95
(Cost $1,500,000) . . . . . . . . . . . . . . . . . . . . . 1,500,000
----------
---------------------------------------------------------------------------------------
11.7% U.S. TREASURY OBLIGATIONS
---------------------------------------------------------------------------------------
700,000 U.S. Treasury Bill, 5.78%, 5/18/95 . . . . . . . . . . . . 684,089
340,000 U.S. Treasury Bond, 7.875%, 2/15/21 . . . . . . . . . . . . 335,750
300,000 U.S. Treasury Bond, 8.125%, 5/15/21 . . . . . . . . . . . . 304,782
300,000 U.S. Treasury Note, 4.125%, 6/30/95 . . . . . . . . . . . . 296,484
550,000 U.S. Treasury Note, 5.125%, 3/31/96 . . . . . . . . . . . . 534,616
300,000 U.S. Treasury Note, 6%, 6/30/96 . . . . . . . . . . . . . . 293,532
900,000 U.S. Treasury Note, 5.25%, 7/31/98 . . . . . . . . . . . . . 828,000
600,000 U.S. Treasury Note, 5.875%, 3/31/99 . . . . . . . . . . . . 557,436
500,000 U.S. Treasury Note, 7.25%, 5/15/04 . . . . . . . . . . . . . 480,155
940,000 U.S. Treasury Separate Trading Registered Interest and
Principal Securities, 11/15/09 (8.04**) . . . . . . . . . . 291,033
1,300,000 U.S. Treasury Separate Trading Registered Interest and
Principal Securities, 11/15/10 (8.05**) . . . . . . . . . . 371,397
1,460,000 U.S. Treasury Separate Trading Registered Interest and
Principal Securities, 2/15/12 (8.07**) . . . . . . . . . . 376,914
----------
TOTAL U.S. TREASURY OBLIGATIONS (Cost $5,549,036) . . . . . 5,354,188
----------
---------------------------------------------------------------------------------------
2.2% U.S. GOV'T GUARANTEED MORTGAGES
---------------------------------------------------------------------------------------
504,253 Government National Mortgage Association, 8%, 10/15/24(a) . . 482,030
535,899 Government National Mortgage Association, 8.75%,
12/15/24(a) . . . . . . . . . . . . . . . . . . . . . . . . 523,841
----------
TOTAL U.S. GOV'T GUARANTEED MORTGAGES (Cost $999,135) . . . 1,005,871
----------
---------------------------------------------------------------------------------------
2.1% U.S. GOVERNMENT AGENCY PASS-THRUS
---------------------------------------------------------------------------------------
497,633 Federal National Mortgage Association, 7.5%, 10/1/24(a) . . . 464,665
494,944 Federal National Mortgage Association, 9%, 10/1/24(a) . . . . 497,419
----------
TOTAL U.S. GOVERNMENT AGENCY PASS-THRUS
(Cost $976,204) . . . . . . . . . . . . . . . . . . . . . . 962,084
----------
---------------------------------------------------------------------------------------
0.7% COLLATERALIZED MORTGAGE OBLIGATIONS
---------------------------------------------------------------------------------------
272,776 Federal National Mortgage Association, REMIC,
8.5%, 4/25/18 . . . . . . . . . . . . . . . . . . . . . . . 273,883
55,101 Resolution Trust Corp., Series 1992-7, Class A-2B,
8.35%, 6/25/29 . . . . . . . . . . . . . . . . . . . . . . 54,955
----------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost $319,229) . . 328,838
----------
---------------------------------------------------------------------------------------
1.5% FOREIGN BONDS - U.S. $ DENOMINATED
---------------------------------------------------------------------------------------
250,000 ABN-AMRO Bank NV, 7.75%, 5/15/23 . . . . . . . . . . . . . . 222,997
250,000 Fomento Economico Mexicano S.A., 9.5%, 7/22/97 . . . . . . . 223,750
</TABLE>
The accompanying notes are an integral part of the financial statements.
27
<PAGE>
<TABLE>
BALANCED PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
265,000 Petroleos Mexicanos, 8.25%, 2/4/98 . . . . . . . . . . . . . . 240,487
----------
TOTAL FOREIGN BONDS - U.S. $ DENOMINATED
(Cost $750,280) . . . . . . . . . . . . . . . . . . . . . . . 687,234
----------
---------------------------------------------------------------------------------------
4.1% ASSET-BACKED SECURITIES
---------------------------------------------------------------------------------------
AUTOMOBILE RECEIVABLES 0.5%
250,000 Premier Auto Trust, Series 1994-3, 6.8%, 12/2/99 . . . . . . . 243,125
----------
CREDIT CARD RECEIVABLES 2.7%
250,000 Chase Manhattan Credit Card Trust, 1991 "A",
7.65%, 11/15/98 . . . . . . . . . . . . . . . . . . . . . . . 249,607
250,000 Discover Credit Card Trust, Series 1992-A, 5.5%, 5/16/98 . . . 245,155
250,000 First Chicago Master Trust, Series 1991-D, 8.4%, 6/15/98 . . . 250,780
250,000 First USA Credit Corp., Series 1992-A, 5.2%, 6/15/98 . . . . . 241,952
250,000 Standard Credit Card Trust, Series 1990-6B, 9.625%, 9/10/97 . . 256,795
----------
1,244,289
----------
HOME EQUITY LOANS 0.9%
250,000 Contimortgage Home Equity Loan Trust, Series 1994-5 A1,
9.07%, 5/15/06 . . . . . . . . . . . . . . . . . . . . . . . 251,406
167,143 United Companies Financial Corp., Home Loan Trust,
Series 1993 B1, 6.075%, 7/25/14(a) . . . . . . . . . . . . . 154,451
----------
405,857
----------
TOTAL ASSET-BACKED SECURITIES (Cost $1,946,600) . . . . . . . . 1,893,271
----------
---------------------------------------------------------------------------------------
8.3% CORPORATE BONDS
---------------------------------------------------------------------------------------
CONSUMER STAPLES 0.4%
250,000 Seagram Ltd., 6.875%, 9/1/23 . . . . . . . . . . . . . . . . . 200,600
----------
MEDIA 2.0%
500,000 News America Holdings Inc., 9.25%, 2/1/13 . . . . . . . . . . 486,385
500,000 Time Warner Inc., 9.125%, 1/15/13 . . . . . . . . . . . . . . 450,470
----------
936,855
----------
DURABLES 1.6%
500,000 Caterpillar Inc., 8%, 2/15/23 . . . . . . . . . . . . . . . . 465,920
250,000 Lockheed Corp., 9%, 1/15/22 . . . . . . . . . . . . . . . . . 255,947
----------
721,867
----------
MANUFACTURING 0.6%
250,000 Corning Inc., 8.75%, 7/15/99 . . . . . . . . . . . . . . . . . 250,892
----------
TECHNOLOGY 1.0%
500,000 Loral Corp., 8.375%, 6/15/24 . . . . . . . . . . . . . . . . . 462,140
----------
ENERGY 1.6%
500,000 Atlantic Richfield Co., 8.25%, 2/1/22 . . . . . . . . . . . . 481,250
250,000 Enron Corp., 10%, 6/1/98 . . . . . . . . . . . . . . . . . . . 259,475
----------
740,725
----------
METALS AND MINERALS 0.6%
250,000 Alcan Aluminum Ltd., 9.4%, 6/1/95 . . . . . . . . . . . . . . 252,345
----------
UTILITIES 0.5%
250,000 Commonwealth Edison Co., 9.05%, 10/15/99 . . . . . . . . . . . 244,942
----------
TOTAL CORPORATE BONDS (Cost $4,011,595) . . . . . . . . . . . 3,810,366
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
28
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
62.2% COMMON STOCKS
- -----------------------------------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY 4.1%
Department &
Chain Stores 2.9% 12,466 Home Depot, Inc. . . . . . . . . . . . . . . . 573,436
3,300 J.C. Penney Inc. . . . . . . . . . . . . . . . 147,263
16,000 Wal-Mart Stores Inc. . . . . . . . . . . . . . 340,000
6,500 Walgreen Co. . . . . . . . . . . . . . . . . . 284,375
----------
1,345,074
----------
Restaurants 0.8% 13,000 McDonald's Corp. . . . . . . . . . . . . . . . 380,250
----------
Specialty Retail 0.4% 5,900 Toys "R" Us Inc.* . . . . . . . . . . . . . . . 179,950
----------
CONSUMER STAPLES 9.8%
Consumer Electronic &
Photographic Products 0.8% 4,200 Duracell International Inc. . . . . . . . . . 182,175
4,100 Whirlpool Corp. . . . . . . . . . . . . . . . 206,025
----------
388,200
----------
Food & Beverage 6.6% 8,800 Albertson's Inc. . . . . . . . . . . . . . . . 255,200
8,500 CPC International Inc. . . . . . . . . . . . . 452,625
11,000 ConAgra Inc. . . . . . . . . . . . . . . . . . 343,750
9,100 General Mills, Inc. . . . . . . . . . . . . . 518,700
5,000 Kellogg Co. . . . . . . . . . . . . . . . . . 290,625
19,500 PepsiCo Inc. . . . . . . . . . . . . . . . . . 706,875
17,600 Sara Lee Corp. . . . . . . . . . . . . . . . . 444,400
----------
3,012,175
----------
Package Goods/
Cosmetics 2.4% 5,000 Colgate-Palmolive Co. . . . . . . . . . . . . 316,875
3,000 Gillette Co. . . . . . . . . . . . . . . . . 224,250
9,100 Procter & Gamble Co. . . . . . . . . . . . . 564,200
----------
1,105,325
----------
HEALTH 7.0%
Health Industry Services 0.7% 3,000 U.S. HealthCare, Inc. . . . . . . . . . . . . 123,750
3,700 United Healthcare Corp. . . . . . . . . . . . 166,963
----------
290,713
----------
Hospital Management 1.1% 14,000 Columbia/HCA Healthcare Corp. . . . . . . . . . 511,000
----------
Pharmaceuticals 5.2% 6,600 Abbott Laboratories . . . . . . . . . . . . . . 215,325
9,500 Baxter International Inc. . . . . . . . . . . . 268,375
9,200 Eli Lilly Co. . . . . . . . . . . . . . . . . . 603,750
2,900 Johnson & Johnson . . . . . . . . . . . . . . . 158,775
8,000 Schering-Plough Corp. . . . . . . . . . . . . . 592,000
7,200 Warner-Lambert Co. . . . . . . . . . . . . . 554,400
----------
2,392,625
----------
COMMUNICATIONS 2.0%
Cellular Telephone 0.3% 4,300 AirTouch Communications, Inc.* . . . . . . . . 125,237
----------
Telephone/
Communications 1.7% 15,500 American Telephone & Telegraph Co. . . . . . . 778,875
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
29
<PAGE>
<TABLE>
BALANCED PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL 7.4%
Banks 3.9% 8,830 Banc One Corp. . . . . . . . . . . . . . . . . 224,061
24,450 Mellon Bank Corp. . . . . . . . . . . . . . . 748,781
17,300 Norwest Corp. . . . . . . . . . . . . . . . . 404,388
15,100 State Street Boston Corp. . . . . . . . . . . 432,238
----------
1,809,468
----------
Insurance 2.4% 5,500 American International Group, Inc. . . . . . . 539,000
6,000 EXEL, Ltd. . . . . . . . . . . . . . . . . . . 237,000
5,700 MBIA Inc. . . . . . . . . . . . . . . . . . . 319,913
----------
1,095,913
----------
Other Financial
Companies 1.1% 7,000 Federal National Mortgage Association . . . . . 510,125
----------
MEDIA 5.6%
Advertising 0.7% 9,500 Interpublic Group of Companies Inc. . . . . . 305,188
----------
Broadcasting &
Entertainment 3.8% 5,300 CBS Inc. . . . . . . . . . . . . . . . . . . . 293,487
3,600 Capital Cities/ABC Inc. . . . . . . . . . . . 306,900
9,000 Time Warner Inc. . . . . . . . . . . . . . . . 316,125
8,400 Turner Broadcasting System Inc. "B" . . . . . 137,550
7,000 Viacom Inc. "B"* . . . . . . . . . . . . . . . 284,375
9,100 Walt Disney Co. . . . . . . . . . . . . . . . 419,737
----------
1,758,174
----------
Cable Television 0.8% 7,000 Comcast Corp. "A" . . . . . . . . . . . . . . . 109,812
12,000 Tele-Communications Inc. "A"* . . . . . . . . 261,000
----------
370,812
----------
Print Media 0.3% 2,800 News Corp. Ltd. (ADR) . . . . . . . . . . . . . 38,850
5,600 News Corp. Ltd. (ADR) (New(b)) . . . . . . . . 87,500
----------
126,350
----------
SERVICE INDUSTRIES 2.1%
EDP Services 1.5% 6,000 Automatic Data Processing, Inc. . . . . . . . 351,000
3,500 First Data Corp. . . . . . . . . . . . . . . . 165,813
4,400 General Motors Corp. "E" . . . . . . . . . . . 169,400
----------
686,213
----------
Miscellaneous
Commercial Services 0.4% 6,800 Sysco Corp. . . . . . . . . . . . . . . . . . . 175,100
----------
Printing/Publishing 0.2% 2,300 Reuters Holdings PLC "B" (ADR) . . . . . . . . 100,913
----------
DURABLES 5.6%
Aerospace 0.6% 5,500 Boeing Co. . . . . . . . . . . . . . . . . . . 257,125
----------
Automobiles 1.8% 7,000 Chrysler Corp. . . . . . . . . . . . . . . . . 343,000
10,400 Ford Motor Co. . . . . . . . . . . . . . . . . 291,200
5,400 Magna International, Inc. "A" . . . . . . . . 207,225
----------
841,425
----------
Construction/
Agricultural Equipment 1.3% 6,200 Caterpillar Inc. . . . . . . . . . . . . . . . 341,775
4,000 Deere & Co. . . . . . . . . . . . . . . . . . 265,000
----------
606,775
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
30
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Telecommunications
Equipment 1.5% 5,700 L.M. Ericsson Telephone Co. "B" (ADR) . . . . . 314,213
5,300 Nokia AB Oy (ADR) . . . . . . . . . . . . . . 397,500
----------
711,713
----------
Tires 0.4% 7,300 Cooper Tire & Rubber Co. . . . . . . . . . . . 172,462
----------
MANUFACTURING 5.6%
Diversified
Manufacturing 3.7% 4,300 Dover Corp. . . . . . . . . . . . . . . . . 221,988
17,200 General Electric Co. . . . . . . . . . . . . . 877,200
8,500 Minnesota Mining & Manufacturing Co. . . . . . 453,688
2,000 TRW Inc. . . . . . . . . . . . . . . . . . . . 132,000
----------
1,684,876
----------
Electrical Products 1.2% 4,200 ASEA AB (ADR) . . . . . . . . . . . . . . . . . 302,925
4,000 Emerson Electric Co. . . . . . . . . . . . . . 250,000
----------
552,925
----------
Machinery/Components/
Controls 0.7% 7,000 Parker-Hannifin Group . . . . . . . . . . . . . 318,500
----------
TECHNOLOGY 6.3%
Computer Software 0.9% 3,600 Microsoft Corp.* . . . . . . . . . . . . . . . 220,050
2,300 Oracle Systems Corp.* . . . . . . . . . . . . 101,488
2,200 Sybase Inc.* . . . . . . . . . . . . . . . . . 114,400
----------
435,938
----------
Diverse Electronic
Products 2.4% 13,200 General Motors Corp. "H" . . . . . . . . . . . 460,350
11,500 Motorola Inc. . . . . . . . . . . . . . . . . 665,563
----------
1,125,913
----------
Electronic Components/
Distributors 0.2% 2,500 Molex Inc. Class A . . . . . . . . . . . . . . 77,500
----------
Electronic Data
Processing 1.4% 6,000 Compaq Computers Corp.* . . . . . . . . . . . . 237,000
3,900 Hewlett-Packard Co. . . . . . . . . . . . . . 389,513
----------
626,513
----------
Office/Plant
Automation 0.3% 3,600 Cisco Systems, Inc.* . . . . . . . . . . . . . 126,450
----------
Semiconductors 1.1% 3,100 Intel Corp. . . . . . . . . . . . . . . . . . 198,013
3,800 Texas Instruments Inc. . . . . . . . . . . . . 284,525
----------
482,538
----------
ENERGY 5.1%
Engineering 1.4% 8,800 Fluor Corp. . . . . . . . . . . . . . . . . . 379,500
9,500 Foster Wheeler Corp. . . . . . . . . . . . . . 282,625
----------
662,125
----------
Oil Companies 2.5% 4,300 Chevron Corp. . . . . . . . . . . . . . . . . 191,887
2,700 Exxon Corp. . . . . . . . . . . . . . . . . . 164,025
4,000 Mobil Corp. . . . . . . . . . . . . . . . . . 337,000
2,200 Royal Dutch Petroleum Co. (New York shares) . . 236,500
</TABLE>
The accompanying notes are an integral part of the financial statements.
31
<PAGE>
<TABLE>
BALANCED PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
7,500 Unocal Corp. . . . . . . . . . . . . . . . . . . 204,375
----------
1,133,787
----------
Oil/Gas Transmission 1.2% 17,900 Enron Corp. . . . . . . . . . . . . . . . . . . 545,950
----------
METALS AND MINERALS 1.1%
Steel & Metals 8,000 Allegheny Ludlum Corp. . . . . . . . . . . . . . 150,000
6,500 Nucor Corp. . . . . . . . . . . . . . . . . . . 360,750
----------
510,750
----------
CONSTRUCTION 0.5%
Forest Products 8,500 Louisiana-Pacific Corp. . . . . . . . . . . . . 231,625
----------
TOTAL COMMON STOCKS (Cost $28,280,262) . . . . . 28,552,570
----------
- ----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO -- 100.0%
(Cost $46,142,341)(c) . . . . . . . . . . . . 45,904,422
==========
- ----------------------------------------------------------------------------------------------------------------
<FN>
* Non-income producing security.
** Yield; bond equivalent yield to maturity; not a coupon rate (unaudited).
(a) Effective maturities will be shorter due to amortization and prepayments.
(b) New shares issued in 1994, eligible for a pro rata share of 1994 dividends.
(c) At December 31, 1994, the net unrealized depreciation on investments based on cost for
federal income tax purposes of $46,262,282 was as follows:
Aggregate gross unrealized appreciation for all investments in which there is an
excess of market value over tax cost . . . . . . . . . . . . . . . . . . . . . . . $ 1,587,277
Aggregate gross unrealized depreciation for all investments in which there is an
excess of tax cost over market value . . . . . . . . . . . . . . . . . . . . . . . (1,945,137)
-----------
Net unrealized depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (357,860)
===========
- ------------------------------------------------------------------------------------------------------------------
From November 1, 1994 through December 31, 1994, the Balanced Portfolio incurred approximately $275,417
of net realized capital losses which the Portfolio intends to elect to defer and treat as arising in the
fiscal year ended December 31, 1995.
- ------------------------------------------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term investments and U.S. Government
securities), for the year ended December 31, 1994, aggregated $39,687,868 and $39,382,956, respectively.
Purchases and sales of U.S. Government securities for the year ended December 31, 1994, aggregated
$6,419,661 and $5,027,416, respectively.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
32
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------------------------
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost $46,142,341) (Note A) . . . . $ 45,904,422
Receivables:
Dividends and interest . . . . . . . . . . . . . . . . . . . . . . 301,078
Investments sold . . . . . . . . . . . . . . . . . . . . . . . . . 238,822
Portfolio shares sold . . . . . . . . . . . . . . . . . . . . . . 15,771
------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . 46,460,093
LIABILITIES
Payables:
Due to custodian bank . . . . . . . . . . . . . . . . . . . . . . $ 4,397
Investments purchased . . . . . . . . . . . . . . . . . . . . . . 332,064
Portfolio shares redeemed . . . . . . . . . . . . . . . . . . . . 536,788
Due to Adviser (Note B) . . . . . . . . . . . . . . . . . . . . . 49,281
Accrued expenses (Note B) . . . . . . . . . . . . . . . . . . . . 12,988
-----------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . 935,518
------------
Net assets, at market value . . . . . . . . . . . . . . . . . . . . . $ 45,524,575
============
NET ASSETS
Net assets consist of:
Undistributed net investment income . . . . . . . . . . . . . , . $ 392,285
Unrealized depreciation on investments . . . . . . . . . . . . . . (237,919)
Accumulated net realized loss . . . . . . . . . . . . . . . . . . (103,434)
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 45,473,643
------------
Net assets, at market value . . . . . . . . . . . . . . . . . . . . . $ 45,524,575
============
NET ASSET VALUE, offering and redemption price per share
($45,524,575 -:- 5,076,236 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) . . $8.97
=====
</TABLE>
The accompanying notes are an integral part of the financial statements.
33
<PAGE>
<TABLE>
BALANCED PORTFOLIO
- ------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Income:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,163,654
Dividends (net of foreign taxes withheld of $4,976) . . . . 646,047
-----------
1,809,701
Expenses (Note A):
Management fee (Note B) . . . . . . . . . . . . . . . . . . $ 218,621
Administrative fees (net of $7,119 not imposed) (Note B) . 38,204
Accounting fees (Note B) . . . . . . . . . . . . . . . . . 20,005
Trustees' fees (Note B) . . . . . . . . . . . . . . . . . . 9,645
Custodian fees . . . . . . . . . . . . . . . . . . . . . . 36,314
Auditing . . . . . . . . . . . . . . . . . . . . . . . . . 8,241
Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,419
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,928 345,377
----------- -----------
Net investment income . . . . . . . . . . . . . . . . . . . . 1,464,324
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized loss from:
Investments . . . . . . . . . . . . . . . . . . . . . . . . (56,422)
Foreign currency related transactions . . . . . . . . . . . (14,258) (70,680)
-----------
Net unrealized appreciation (depreciation) during the period on:
Investments . . . . . . . . . . . . . . . . . . . . . . . . (2,374,851)
Foreign currency related transactions . . . . . . . . . . . 741 (2,374,110)
----------- -----------
Net loss on investment transactions . . . . . . . . . . . . . (2,444,790)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS . . . . . . $ (980,466)
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
34
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- ---------------------------------------------------------------------------------------------------
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
INCREASE (DECREASE) IN NET ASSETS 1994 1993
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income . . . . . . . . . . . . . . . . . . . . . . $ 1,464,324 $ 1,256,776
Net realized gain (loss) from investment transactions . . . . . . (70,680) 3,496,626
Net unrealized depreciation on investment transactions
during the period . . . . . . . . . . . . . . . . . . . . . . . (2,374,110) (1,774,580)
------------ ------------
Net increase (decrease) in net assets resulting from operations . . . (980,466) 2,978,822
------------ ------------
Distributions to shareholders from:
Net investment income ($.30 and $.28 per share, respectively) . . (1,442,472) (1,153,730)
------------ ------------
Net realized gains from investment transactions
($.77 and $.23 per share, respectively) . . . . . . . . . . . . (3,525,834) (897,228)
------------ ------------
Portfolio share transactions:
Proceeds from shares sold . . . . . . . . . . . . . . . . . . . . 14,384,876 12,283,985
Net asset value of shares issued to shareholders in
reinvestment of distributions . . . . . . . . . . . . . . . . . 4,968,306 2,050,958
Cost of shares redeemed . . . . . . . . . . . . . . . . . . . . . (12,950,121) (7,234,223)
------------ ------------
Net increase in net assets from Portfolio share transactions . . . . 6,403,061 7,100,720
------------ ------------
INCREASE IN NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . 454,289 8,028,584
Net assets at beginning of period . . . . . . . . . . . . . . . . . . 45,070,286 37,041,702
------------ ------------
NET ASSETS AT END OF PERIOD (including undistributed net
investment income of $392,285 and $366,737, respectively) . . . . $ 45,524,575 $ 45,070,286
============ ============
OTHER INFORMATION
INCREASE (DECREASE) IN PORTFOLIO SHARES
Shares outstanding at beginning of period . . . . . . . . . . . . . . 4,407,727 3,695,913
------------ ------------
Shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,539,383 1,226,706
Shares issued to shareholders in reinvestment of distributions . . 532,133 207,183
Shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . (1,403,007) (722,075)
------------ ------------
Net increase in Portfolio shares . . . . . . . . . . . . . . . . . 668,509 711,814
------------ ------------
Shares outstanding at end of period . . . . . . . . . . . . . . . . . 5,076,236 4,407,727
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
35
<PAGE>
<TABLE>
BALANCED PORTFOLIO
FINANCIAL HIGHLIGHTS
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER
PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS.
<CAPTION>
SIX FOR THE PERIOD
MONTHS JULY 16, 1985
ENDED (COMMENCEMENT
YEARS ENDED DECEMBER 31, (e) DECEMBER OF OPERATIONS
---------------------------------------------------------------------- 31, TO JUNE 30,
1994 1993 1992 1991 1990 1989 1988 1987 1986(e)(f) 1986
--------------------------------------------------------------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period. . . $10.23 $10.02 $ 9.85 $ 8.10 $ 8.75 $ 7.62 $ 6.88 $ 7.35 $ 7.58 $ 6.00(b)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income (a) . . . . . . .29 .30 .29 .35 .42 .40 .33 .34 .15 .31
Net realized and
unrealized gain (loss)
on investment
transactions . . . . . (.48) .42 .36 1.77 (.59) 1.06 .64 (.45) (.11) 1.50
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations . . . . . . (.19) .72 .65 2.12 (.17) 1.46 .97 (.11) .04 1.81
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions from:
Net investment
income . . . . . . . . (.30) (.28) (.29) (.37) (.43) (.33) (.23) (.23) (.18) (.23)
Net realized gains
on investment
transactions . . . . . (.77) (.23) (.19) -- (.05) -- -- (.13) (.09) --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions . . . (1.07) (.51) (.48) (.37) (.48) (.33) (.23) (.36) (.27) (.23)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period . . . . . $ 8.97 $10.23 $10.02 $ 9.85 $ 8.10 $ 8.75 $ 7.62 $ 6.88 $ 7.35 $ 7.58
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%) . . . . (2.05) 7.45 6.96 26.93 (1.91) 19.50 14.21 (1.68) .46(d) 30.60(d)
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
period ($ millions). . . 46 45 37 25 16 18 11 12 1 --
Ratio of operating
expenses, net to
average net
assets (%) (a) . . . . .75 .75 .75 .75 .75 .75 .75 .75 .75(c) .60(c)
Ratio of net investment
income to average
net assets (%) . . . . 3.19 3.01 3.01 4.00 5.15 4.74 4.48 4.42 4.20(c) 4.87(c)
Portfolio turnover
rate (%) . . . . . . . 101.64 133.95* 51.66 62.03 49.03 77.98 109.95 111.00 28.86(c) 64.12(c)
<FN>
(a) Portion of expenses
reimbursed (Note B) $ -- $ -- $ -- $ .01 $ -- $ .01 $ .03 $ .03 $ .17 $ .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.
* On May 1, 1993, the Portfolio adopted its present name and investment objective which is a balance of growth and income
from a diversified portfolio of equity and fixed income securities. Prior to that date, the Portfolio was known as the
Managed Diversified Portfolio and its investment objective was to realize a high level of long-term total rate of
return consistent with prudent investment risk. The portfolio turnover rate increased due to implementing the present
investment objective. Financial highlights for the nine periods ended December 31, 1993 should not be considered
representative of the present Portfolio.
</FN>
</TABLE>
36
<PAGE>
<TABLE>
GROWTH AND INCOME PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1994
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
2.9% REPURCHASE AGREEMENT
-----------------------------------------------------------------------------
598,000 Repurchase Agreement with Donaldson, Lufkin &
Jenrette dated 12/30/94 at 5.875%, to be
repurchased at $598,390 on 1/3/95, collateralized
by a $557,000 U.S. Treasury Bond, 9.125%, 5/15/09
(Cost $598,000) . .. . . . . . . . . . . . . . . . . 598,000
---------
-----------------------------------------------------------------------------
7.3% COMMERCIAL PAPER
-----------------------------------------------------------------------------
1,000,000 American Express Credit Corp., 5.755%, 1/3/95 . . . 1,000,000
500,000 General Electric Capital Corp., 5.005%, 1/6/95 . . 500,000
---------
TOTAL COMMERCIAL PAPER (Cost $1,500,000) . . . . . 1,500,000
---------
-----------------------------------------------------------------------------
0.5% CONVERTIBLE BONDS
-----------------------------------------------------------------------------
FINANCIAL
Banks 0.2% 25,000 Credit Suisse, 4.875%, 11/19/02 . . . . . . . . . . 33,125
---------
Other Financial
Companies 0.3% 40,000 First Financial Management, 5%, 12/15/99 . . . . . 42,200
21,000 Jardine Strategic Holdings, 7.5%, 5/7/49 . . . . . 23,940
---------
66,140
---------
TOTAL CONVERTIBLE BONDS (Cost $96,350) . . . . . . 99,265
---------
-----------------------------------------------------------------------------
4.3% CONVERTIBLE PREFERRED STOCKS
-----------------------------------------------------------------------------
Shares
-----------------------------------------------------------------------------
HEALTH 1.3%
Health Industry Services 11,300 FHP International Corp., Series A, 5% . . . . . . . 276,850
---------
SERVICE INDUSTRIES 1.3%
EDP Services 4,700 General Motors Corp., Series C, Cum. $3.25
(convertible into GM "E") . . . . . . . . . . . . . 269,662
---------
DURABLES 0.9%
Automobiles 2,100 Ford Motor Co., Series A, Cum. $4.20 . . . . . . . 193,200
---------
MANUFACTURING 0.8%
Containers & Paper 0.7% 5,000 Boise Cascade Corp. "E", Cum. $1.79 . . . . . . . . 133,125
---------
Industrial Specialty 0.1% 500 Corning Inc., 6% . . . . . . . . . . . . . . . . . 23,375
---------
TOTAL CONVERTIBLE PREFERRED STOCKS (Cost $920,649) . 896,212
---------
-----------------------------------------------------------------------------
85.0% COMMON STOCKS
-----------------------------------------------------------------------------
CONSUMER DISCRETIONARY 3.6%
Department &
Chain Stores 6,800 Edison Brothers Stores, Inc. . . . . . . . . . . . 125,800
3,800 J.C. Penney Inc. . . . . . . . . . . . . . . . . . 169,575
10,300 Rite Aid Corp. . . . . . . . . . . . . . . . . . . 240,763
4,500 Sears, Roebuck & Co. . . . . . . . . . . . . . . . . 207,000
---------
743,138
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
37
<PAGE>
<TABLE>
GROWTH AND INCOME PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONSUMER STAPLES 9.3%
Alcohol & Tobacco 2.8% 3,500 American Brands Inc. . . . . . . . . . . . . 131,250
4,500 Anheuser Busch Companies, Inc. . . . . . . . . 228,937
3,800 Philip Morris Companies Inc. . . . . . . . . . 218,500
----------
578,687
----------
Food & Beverage 3.6% 4,800 General Mills, Inc. . . . . . . . . . . . . . 273,600
7,900 H.J. Heinz Co. . . . . . . . . . . . . . . . . 290,325
6,000 Quaker Oats Co. . . . . . . . . . . . . . . . 184,500
----------
748,425
----------
Package Goods/
Cosmetics 2.9% 4,600 Avon Products . . . . . . . . . . . . . . . . 274,850
1,400 Clorox Co. . . . . . . . . . . . . . . . . . . 82,425
6,400 Tambrands Inc. . . . . . . . . . . . . . . . . 247,200
----------
604,475
----------
HEALTH 11.5%
Health Industry
Services 0.5% 3,000 McKesson Corp. . . . . . . . . . . . . . . . 97,875
----------
Pharmaceuticals 11.0% 4,000 American Home Products Corp. . . . . . . . . 251,000
14,700 Baxter International Inc. . . . . . . . . . . 415,275
3,600 Bristol-Myers Squibb Co. . . . . . . . . . . . 208,350
4,700 Carter-Wallace Inc. . . . . . . . . . . . . . 61,100
7,500 Eli Lilly Co. . . . . . . . . . . . . . . . . 492,188
4,000 Schering-Plough Corp. . . . . . . . . . . . . 296,000
3,400 Smithkline-Beecham PLC (ADR) . . . . . . . . . 116,450
4,700 Warner-Lambert Co. . . . . . . . . . . . . . . 361,900
5,600 Zeneca Group PLC . . . . . . . . . . . . . . . 76,989
----------
2,279,252
----------
COMMUNICATIONS 4.7%
Telephone/ 12,900 Alltel Corp. . . . . . . . . . . . . . . . . 388,612
Communications 3,600 Compania Telefonica Nacional de Espana SA (ADR) 126,450
2,300 Compania de Telefonos de Chile, SA (ADR) . . . 181,125
9,300 Hong Kong Telecommunications Ltd. (ADR) . . . 177,862
800 Telecom Argentina S.A. "B" (ADR) . . . . . . . 41,400
900 Telefonica de Argentina (ADR) . . . . . . . . 47,700
----------
963,149
----------
FINANCIAL 13.9%
Banks 5.5% 6,400 Chemical Banking Corp. . . . . . . . . . . . 229,600
11,400 CoreStates Financial Corp. . . . . . . . . . . 296,400
10,800 First Bank System Inc. . . . . . . . . . . . . 359,100
4,400 J.P. Morgan & Co., Inc. . . . . . . . . . . . 246,400
----------
1,131,500
----------
Insurance 2.0% 5,200 EXEL, Ltd. . . . . . . . . . . . . . . . . . 205,400
6,200 Lincoln National Corp. . . . . . . . . . . . . 217,000
----------
422,400
----------
Other Financial
Companies 1.9% 13,100 Great Western Financial Corp. . . . . . . . . 209,600
5,500 Student Loan Marketing Association . . . . . . 178,750
----------
388,350
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
38
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Real Estate 4.5% 9,100 Health Care Property Investment Inc. (REIT) . 274,137
6,800 McArthur/Glen Realty Corp. (REIT) . . . . . . 112,200
9,900 Meditrust SBI (REIT) . . . . . . . . . . . . . 299,475
7,000 Nationwide Health Properties Inc. (REIT) . . . 250,250
---------
936,062
---------
SERVICE INDUSTRIES 1.4%
Miscellaneous
Commercial Services 0.5% 4,200 Fleming Companies Inc. . . . . . . . . . . . 97,650
---------
Miscellaneous
Consumer Services 0.4% 2,600 H & R Block Inc. . . . . . . . . . . . . . . 96,525
---------
Printing/Publishing 0.5% 3,900 Deluxe Corp. . . . . . . . . . . . . . . . . 103,350
---------
DURABLES 7.7%
Aerospace 6.4% 2,600 AAR Corp. . . . . . . . . . . . . . . . . . . 34,775
3,400 Lockheed Corp. . . . . . . . . . . . . . . . . 246,925
7,000 Rockwell International Corp. . . . . . . . . . 250,250
10,000 Thiokol Corp. . . . . . . . . . . . . . . . . 278,750
8,100 United Technologies Corp. . . . . . . . . . . 509,288
---------
1,319,988
---------
Automobiles 1.3% 7,200 Dana Corp. . . . . . . . . . . . . . . . . . 168,300
1,900 Eaton Corp. . . . . . . . . . . . . . . . . . 94,050
---------
262,350
---------
MANUFACTURING 15.3%
Chemicals 3.5% 2,700 Dow Chemical Co. . . . . . . . . . . . . . . 181,575
5,200 E.I. du Pont de Nemours & Co. . . . . . . . . 292,500
10,000 Lyondell Petrochemical Co. . . . . . . . . . . 258,750
---------
732,825
---------
Containers & Paper 3.4% 7,400 Boise Cascade Corp. . . . . . . . . . . . . . 197,950
7,000 Federal Paper Board Co., Inc. . . . . . . . . 203,000
3,000 Kimberly Clark de Mexico S.A. "A" (ADR) . . . 69,750
4,800 Kimberly-Clark Corp. . . . . . . . . . . . . . 242,400
---------
713,100
Diversified ---------
Manufacturing 1.9% 5,100 Dresser Industries Inc. . . . . . . . . . . . 96,262
4,400 TRW Inc. . . . . . . . . . . . . . . . . . . . 290,400
---------
386,662
---------
Electrical Products 0.8% 2,500 Thomas & Betts Corp. . . . . . . . . . . . . 167,813
---------
Machinery/
Components/Controls 1.9% 4,300 Parker-Hannifin Group . . . . . . . . . . . . 195,650
5,700 Timken Co. . . . . . . . . . . . . . . . . . . 200,925
---------
396,575
---------
Office Equipment/
Supplies 1.7% 3,500 Xerox Corp. . . . . . . . . . . . . . . . . . 346,500
---------
Specialty Chemicals 2.1% 6,200 Betz Laboratories Inc. . . . . . . . . . . . 274,350
6,200 Witco Corp. . . . . . . . . . . . . . . . . . 152,675
---------
427,025
---------
TECHNOLOGY 0.4%
Military Electronics 2,100 E-Systems, Inc. . . . . . . . . . . . . . . . 87,412
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
39
<PAGE>
<TABLE>
GROWTH AND INCOME PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ENERGY 11.4%
Engineering 1.4% 11,300 McDermott International Inc. . . . . . . . . 279,675
----------
Oil & Gas Production 0.6% 3,400 Louisiana Land & Exploration Co. . . . . . . . 123,675
----------
Oil Companies 7.9% 200 Amoco Corp. . . . . . . . . . . . . . . . . . 11,825
3,600 Exxon Corp. . . . . . . . . . . . . . . . . . 218,700
7,000 Murphy Oil Corp. . . . . . . . . . . . . . . . 297,500
4,700 Pennzoil Co. . . . . . . . . . . . . . . . . . 207,388
3,200 Repsol SA (ADR) . . . . . . . . . . . . . . . 87,200
2,100 Royal Dutch Petroleum Co. (New York shares). . 225,750
5,548 Societe Nationale Elf Aquitaine (ADR) . . . . 195,567
7,100 Total SA (ADR) . . . . . . . . . . . . . . . . 209,450
8,600 YPF SA "D" (ADR) . . . . . . . . . . . . . . . 183,825
----------
1,637,205
----------
Oil/Gas Transmission 0.4% 2,900 El Paso Natural Gas Co. . . . . . . . . . . . 88,450
----------
Oilfield Services/
Equipment 1.1% 6,700 Halliburton Co. . . . . . . . . . . . . . . . 221,937
----------
METALS AND MINERALS 2.3%
Steel & Metals 12,000 Freeport McMoRan Copper & Gold, Inc. "A" . . . 255,000
13,500 Oregon Steel Mills Inc. . . . . . . . . . . . 210,938
----------
465,938
----------
TRANSPORTATION 0.4%
Marine Transportation 3,300 Alexander & Baldwin Inc. . . . . . . . . . . 73,425
----------
UTILITIES 3.1%
Electric Utilities 6,000 CINergy Corp. . . . . . . . . . . . . . . . . 140,250
2,000 CMS Energy Corp. . . . . . . . . . . . . . . . 45,750
8,200 Centerior Energy Corp. . . . . . . . . . . . . 72,775
2,100 Empresa Nacional de Electricidad SA (ADR) . . 85,050
900 PacifiCorp. . . . . . . . . . . . . . . . . . 16,313
3,900 Pacific Gas & Electric Co. . . . . . . . . . . 95,063
100 Southern Company . . . . . . . . . . . . . . . 2,000
7,900 Unicom Corp. . . . . . . . . . . . . . . . . . 189,600
----------
646,801
----------
TOTAL COMMON STOCKS (Cost $17,874,439) . . . 17,568,194
----------
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO -- 100.0%
(Cost $20,989,438)(a) . . . . . . . . . . . . 20,661,671
==========
- -------------------------------------------------------------------------------------------------------------------
<FN>
(a) At December 31, 1994, the net unrealized depreciation on investments based on cost
for federal income tax purposes of $21,010,030 was as follows:
Aggregate gross unrealized appreciation for all investments in which there is an
excess of market value over tax cost . . . . . . . . . . . . . . . . . . . . . . . . $ 365,754
Aggregate gross unrealized depreciation for all investments in which there is an
excess of tax cost over market value . . . . . . . . . . . . . . . . . . . . . . . . (714,113)
----------
Net unrealized depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (348,359)
==========
- -------------------------------------------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term investments), for the
period May 2, 1994 (commencement of operations) to December 31, 1994, aggregated
$20,678,084 and $1,912,191, respectively.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
40
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost $20,989,438) (Note A) . . $20,661,671
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 609
Receivables:
Investments sold . . . . . . . . . . . . . . . . . . . . . . . 126,754
Dividends and interest . . . . . . . . . . . . . . . . . . . . 66,596
Portfolio shares sold . . . . . . . . . . . . . . . . . . . . 38,675
-----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . 20,894,305
LIABILITIES
Payables:
Investments purchased . . . . . . . . . . . . . . . . . . . . $793,868
Due to Adviser (Note B) . . . . . . . . . . . . . . . . . . . 12,027
Accrued expenses (Note B) . . . . . . . . . . . . . . . . . . 13,568
--------
Total liabilities . . . . . . . . . . . . . . . . . . . . . 819,463
-----------
Net assets, at market value . . . . . . . . . . . . . . . . . . . $20,074,842
===========
NET ASSETS
Net assets consist of:
Undistributed net investment income . . . . . . . . . . . . . $ 164,132
Unrealized depreciation on investments . . . . . . . . . . . . (327,767)
Accumulated net realized gain . . . . . . . . . . . . . . . . 125,538
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 20,112,939
-----------
Net assets, at market value . . . . . . . . . . . . . . . . . . . $20,074,842
===========
NET ASSET VALUE, offering and redemption price per share
($20,074,842 -:- 3,204,882 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) $6.26
=====
</TABLE>
The accompanying notes are an integral part of the financial statements.
41
<PAGE>
<TABLE>
GROWTH AND INCOME PORTFOLIO
- -------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------------------------
FOR THE PERIOD MAY 2, 1994
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Income:
Dividends (net of foreign taxes withheld of $3,279) . . . . $ 242,508
Interest . . . . . . . . . . . . . . . . . . . . . . . . . 60,432
------------
302,940
Expenses (Note A):
Management fee (Note B) . . . . . . . . . . . . . . . . . . $ 32,724
Administrative fees (Note B) . . . . . . . . . . . . . . . 25,179
Accounting fees (Note B) . . . . . . . . . . . . . . . . . 14,437
Trustees' fees (Note B) . . . . . . . . . . . . . . . . . . 4,498
Custodian fees . . . . . . . . . . . . . . . . . . . . . . 19,912
Auditing . . . . . . . . . . . . . . . . . . . . . . . . . 3,918
Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
Federal registration . . . . . . . . . . . . . . . . . . . 6,976
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,429
-----------
Total expenses before waivers . . . . . . . . . . . . . . . 112,235
Waived expenses by the Adviser (Note B) . . . . . . . . . . (60,313)
-----------
Expenses, net . . . . . . . . . . . . . . . . . . . . . . . 51,922
------------
Net investment income . . . . . . . . . . . . . . . . . . . . 251,018
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments . . . . . . . . . . . . . . . . . . . . . . . . 125,538
Foreign currency related transactions . . . . . . . . . . . (773) 124,765
-----------
Net unrealized depreciation on investments during the period . (327,767)
------------
Net loss on investment transactions . . . . . . . . . . . . . (203,002)
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS . . . . . . $ 48,016
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
42
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
FOR THE PERIOD
MAY 2, 1994
(COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Operations:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 251,018
Net realized gain from investment transactions . . . . . . . . . . . . . . . . . . . . . . 124,765
Net unrealized depreciation on investment transactions during the period . . . . . . . . . (327,767)
-------------
Net increase in net assets resulting from operations . . . . . . . . . . . . . . . . . . . . 48,016
-------------
Distributions to shareholders from net investment income ($0.04 per share) . . . . . . . . . (86,114)
-------------
Portfolio share transactions:
Proceeds from shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,441,709
Net asset value of shares issued to shareholders in reinvestment of distributions . . . . 86,114
Cost of shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,415,483)
-------------
Net increase in net assets from Portfolio share transactions . . . . . . . . . . . . . . . . 20,112,340
-------------
INCREASE IN NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,074,242
Net assets at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600
-------------
NET ASSETS AT END OF PERIOD (including undistributed net investment income of $164,132) . . . $ 20,074,842
=============
OTHER INFORMATION
INCREASE (DECREASE) IN PORTFOLIO SHARES
Shares outstanding at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . 100
-------------
Shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,576,097
Shares issued to shareholders in reinvestment of distributions . . . . . . . . . . . . . . 13,561
Shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (384,876)
-------------
Net increase in Portfolio shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,204,782
-------------
Shares outstanding at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,204,882
=============
</TABLE>
The accompanying notes are an integral part of the financial statements.
43
<PAGE>
<TABLE>
GROWTH AND INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD (E) AND OTHER PERFORMANCE
INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS.
<CAPTION>
For the Period
May 2, 1994
(commencement
of operations)
to December 31,
1994
---------------
<S> <C>
Net asset value, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6.00(b)
------
Income from investment operations:
Net investment income (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Net realized and unrealized gain (loss) on investment transactions . . . . . . . . . . . . .17(f)
------
Total from investment operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
------
Less distributions from net investment income . . . . . . . . . . . . . . . . . . . . . . . . (.04)
------
Net asset value, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6.26
======
TOTAL RETURN (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.91(d)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Ratio of operating expenses, net to average net assets (%) (a) . . . . . . . . . . . . . . . .75(c)
Ratio of net investment income to average net assets (%) . . . . . . . . . . . . . . . . . . 3.63(c)
Portfolio turnover rate (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28.41(c)
<FN>
(a) Portion of expenses waived (Note B) . . . . . . . . . . . . . . . . . . . . . . . . . . $ .03
(b) Original capital
(c) Annualized
(d) Not annualized
(e) Per share amounts have been calculated using the monthly average shares outstanding during the period method.
(f) The amount shown for a share outstanding throughout the period does not accord with the change in the aggregate gains and
losses in the portfolio securities during the period because of the timing of sales and purchases of Portfolio shares in
relation to fluctuating market values during the period.
</FN>
</TABLE>
44
<PAGE>
<TABLE>
CAPITAL GROWTH PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1994
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
------------------------------------------------------------------------------------
4.8% REPURCHASE AGREEMENT
------------------------------------------------------------------------------------
12,504,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 12/30/94 at 5.875%, to be repurchased at
$12,512,162 on 1/3/95, collateralized by a $12,740,000
U.S. Treasury Note, 6.875%, 7/31/99 (Cost $12,504,000) 12,504,000
----------
------------------------------------------------------------------------------------
0.3% CONVERTIBLE BONDS
------------------------------------------------------------------------------------
FINANCIAL
Banks 1,000,000 Banco Nacional de Mexico, 7%, 12/15/99
(Cost $1,226,250) . . . . . . . . . . . . . . . . . . . 795,000
----------
------------------------------------------------------------------------------------
2.2% CONVERTIBLE PREFERRED STOCKS
------------------------------------------------------------------------------------
Shares
------------------------------------------------------------------------------------
DURABLES
Automobiles 43,000 Chrysler Corp., $4.625 (Cost $5,490,623) . . . . . . . . 5,901,750
-----------
------------------------------------------------------------------------------------
0.3% PREFERRED STOCKS
------------------------------------------------------------------------------------
FINANCIAL
Banks 8,000 First Nationwide Bank, non-cum. 11.5% (Cost $808,000). . . 783,000
-----------
------------------------------------------------------------------------------------
90.9% COMMON STOCKS
------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY 14.6%
Apparel & Shoes 0.6% 46,200 Jones Apparel Group, Inc.* . . . . . . . . . . . . . . . 1,189,650
15,600 Luxottica Group SpA (ADR) . . . . . . . . . . . . . . . . 532,350
----------
1,722,000
----------
Department &
Chain Stores 2.8% 241,500 Charming Shoppes Inc. . . . . . . . . . . . . . . . . . . 1,599,937
55,200 Consolidated Stores Corp.* . . . . . . . . . . . . . . . . 1,028,100
144,000 Filene's Basement Corp.* . . . . . . . . . . . . . . . . . 666,000
55,600 Fred Meyer Inc.* . . . . . . . . . . . . . . . . . . . . . 1,709,700
40,000 Limited Inc. . . . . . . . . . . . . . . . . . . . . . . . 725,000
71,700 Wal-Mart Stores Inc. . . . . . . . . . . . . . . . . . . . 1,523,625
----------
7,252,362
----------
Hotels & Casinos 5.3% 108,000 Carnival Corp., Class A . . . . . . . . . . . . . . . . . 2,295,000
122,100 Circus Circus Enterprises Inc.* . . . . . . . . . . . . . 2,838,825
5,000 Club Mediterranee* . . . . . . . . . . . . . . . . . . . . 418,461
146,750 Mirage Resorts Inc.* . . . . . . . . . . . . . . . . . . . 3,008,375
58,500 President Riverboat Casinos* . . . . . . . . . . . . . . . 519,188
55,200 Promus Companies Inc.* . . . . . . . . . . . . . . . . . . 1,711,200
88,200 Royal Caribbean Cruises Ltd. . . . . . . . . . . . . . . . 2,513,700
40,400 Station Casinos Inc.* . . . . . . . . . . . . . . . . . . 525,200
----------
13,829,949
----------
Recreational Products 2.8% 112,000 Acclaim Entertainment Inc.* . . . . . . . . . . . . . . . 1,610,000
38,200 Bally Gaming International Inc.* . . . . . . . . . . . . 405,875
111,800 Electronic Arts Inc.* . . . . . . . . . . . . . . . . . . 2,152,150
202,800 International Game Technology Inc. . . . . . . . . . . . . 3,143,400
----------
7,311,425
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
45
<PAGE>
<TABLE>
CAPITAL GROWTH PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Specialty Retail 3.1% 196,800 Fingerhut Companies, Inc. . . . . . . . . . . 3,050,400
95,000 Home Shopping Network Inc.* . . . . . . . . . 950,000
104,300 Intelligent Electronics, Inc. . . . . . . . . 834,400
40,000 Spiegel Inc. "A" . . . . . . . . . . . . . . . 405,000
96,000 Toys "R" Us Inc.* . . . . . . . . . . . . . . 2,928,000
----------
8,167,800
----------
CONSUMER STAPLES 1.2%
Food & Beverage 0.9% 72,000 Panamerican Beverages Inc. "A" . . . . . . . . 2,277,000
----------
Package Goods/
Cosmetics 0.3% 56,600 American Safety Razor Co.* . . . . . . . . . . 778,250
----------
HEALTH 7.3%
Biotechnology 0.7% 44,000 Biogen Inc.* . . . . . . . . . . . . . . . . 1,837,000
----------
Health Industry
Services 1.6% 52,000 Beverly Enterprises Inc.* . . . . . . . . . . 747,500
40,000 U.S. HealthCare, Inc. . . . . . . . . . . . . 1,650,000
40,000 United Healthcare Corp. . . . . . . . . . . . 1,805,000
----------
4,202,500
----------
Hospital Management 0.6% 40,000 Columbia/HCA Healthcare Corp. . . . . . . . . 1,460,000
----------
Medical Supply &
Specialty 0.0% 3,500 Sunrise Medical, Inc.* . . . . . . . . . . . . 96,688
----------
Pharmaceuticals 4.4% 7,500 Astra AB "A" (Free) . . . . . . . . . . . . . 193,795
171,050 Astra AB "B" (Free) . . . . . . . . . . . . . 4,362,258
55,000 Baxter International Inc. . . . . . . . . . . 1,553,750
80,000 Carter-Wallace Inc. . . . . . . . . . . . . . 1,040,000
1,300 Schering AG . . . . . . . . . . . . . . . . . 853,215
27,000 Schering-Plough Corp. . . . . . . . . . . . . 1,998,000
20,000 Warner-Lambert Co. . . . . . . . . . . . . . . 1,540,000
----------
11,541,018
----------
COMMUNICATIONS 12.5%
Cellular Telephone 2.3% 63,000 AirTouch Communications, Inc.* . . . . . . . 1,834,875
52,175 Associated Group, Inc. "A"* . . . . . . . . . 1,226,112
52,175 Associated Group, Inc. "B"* . . . . . . . . . 1,226,112
27,500 Grupo Iusacell S.A. de CV "L" (ADR)* . . . . . 512,187
84,000 NEXTEL Communications Inc. "A"* . . . . . . . 1,207,500
----------
6,006,786
----------
Telephone/
Communications 10.2% 110,800 American Telephone & Telegraph Co. . . . . . 5,567,700
186,900 Century Telephone Enterprises . . . . . . . . 5,513,550
7,900 Indonesia Satellite Corp. (ADR)* . . . . . . . 282,425
60,000 Mobile Telecommunications Technology Corp.* . 1,170,000
305 Nippon Telegraph & Telephone Corp. . . . . . . 2,697,029
75,132 Southwestern Bell Corp. . . . . . . . . . . . 3,033,455
31,800 Telecom Argentina S.A. "B" (ADR) . . . . . . . 1,645,650
3,402,000 Telecomunicacoes de Sao Paulo S.A. (pfd.) . . 483,992
36,000 Telefonica de Argentina (ADR) . . . . . . . . 1,908,000
96,000 Telephone & Data Systems, Inc. . . . . . . . . 4,428,000
----------
26,729,801
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
46
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCIAL 9.6%
Banks 2.8% 40,000 Chemical Banking Corp. . . . . . . . . . . . . 1,435,000
40,000 Citicorp . . . . . . . . . . . . . . . . . . . 1,655,000
16,875 First Commerce Corp. . . . . . . . . . . . . . 371,250
2,000 First Empire State Corp. . . . . . . . . . . . 272,000
40,000 GP Financial Corp. . . . . . . . . . . . . . . 825,000
103,000 MBNA Corp. . . . . . . . . . . . . . . . . . . 2,407,625
9,000 Mercantile Bancorporation Inc. . . . . . . . . 281,250
-----------
7,247,125
-----------
Insurance 4.8% 36,000 AMBAC Inc. . . . . . . . . . . . . . . . . . . 1,341,000
60,000 EXEL, Ltd. . . . . . . . . . . . . . . . . . . 2,370,000
31,300 General Re Corp. . . . . . . . . . . . . . . . 3,873,375
37,800 Liberty Corp. . . . . . . . . . . . . . . . . 959,175
20,000 MBIA Inc. . . . . . . . . . . . . . . . . . . 1,122,500
52,500 Mid Ocean Limited* . . . . . . . . . . . . . . 1,430,625
125,000 Western National Corp. . . . . . . . . . . . . 1,609,375
-----------
12,706,050
-----------
Other Financial
Companies 1.4% 44,000 Federal National Mortgage Association . . . . 3,206,500
9,000 Nichiei Co., Ltd. . . . . . . . . . . . . . . 578,139
-----------
3,784,639
-----------
Real Estate 0.6% 115,000 Price Enterprises, Inc.* . . . . . . . . . . . 1,480,625
-----------
MEDIA 17.7%
Broadcasting &
Entertainment 6.6% 52,000 BET Holdings Inc. "A"* . . . . . . . . . . . . 786,500
32,800 Jacor Communications, Inc. "A"* . . . . . . . 434,600
23,500 Savoy Pictures Entertainment Inc.* . . . . . . 152,750
368,700 Time Warner Inc. . . . . . . . . . . . . . . . 12,950,588
4,000 Viacom Inc. "A"* . . . . . . . . . . . . . . . 166,500
69,207 Viacom Inc. "B"* . . . . . . . . . . . . . . . 2,811,534
50,000 Viacom Inc. Rights* . . . . . . . . . . . . . 56,250
-----------
17,358,722
-----------
Cable Television 10.8% 622,850 Comcast Corp. (Special) "A" . . . . . . . . . 9,770,959
535,000 Rogers Communications Inc. "B"* . . . . . . . 7,151,132
518,307 Tele-Communications Inc. "A"* . . . . . . . . 11,273,177
-----------
28,195,268
-----------
Print Media 0.3% 14,300 Scholastic Corp.* . . . . . . . . . . . . . . . 729,300
-----------
SERVICE INDUSTRIES 0.6%
Investment 42,000 Franklin Resources Inc. . . . . . . . . . . . 1,496,250
-----------
DURABLES 4.5%
Automobiles 2.4% 44,000 Autoliv AB (Free)* . . . . . . . . . . . . . 1,693,549
60,000 Collins & Aikman Corp.* . . . . . . . . . . . 510,000
151,200 Ford Motor Co. . . . . . . . . . . . . . . . . 4,233,600
-----------
6,437,149
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
47
<PAGE>
<TABLE>
CAPITAL GROWTH PORTFOLIO
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Telecommunications
Equipment 1.9% 40,000 DSC Communications Corp.* . . . . . . . . . . 1,435,000
22,000 Nokia AB Oy (ADR) . . . . . . . . . . . . . . 1,650,000
12,600 Nokia AB Oy (Preference)* . . . . . . . . . . 1,856,696
---------
4,941,696
---------
Tires 0.2% 20,000 Cooper Tire & Rubber Co. . . . . . . . . . . 472,500
---------
MANUFACTURING 2.3%
Containers & Paper 0.6% 92,000 Stone Container Corp.* . . . . . . . . . . . 1,587,000
---------
Diversified
Manufacturing 0.4% 60,000 Canadian Pacific Ltd. . . . . . . . . . . . . 900,000
---------
Electrical Products 1.1% 100,000 Philips NV (New York shares) . . . . . . . . 2,937,500
---------
Machinery/
Components/Controls 0.2% 35,000 Daewoo Heavy Industries Ltd.* . . . . . . . . 545,213
700 Daewoo Heavy Industries Ltd. (New(b))* . . . . 10,993
---------
556,206
---------
TECHNOLOGY 9.1%
Computer Software 2.7% 52,600 Informix Corp.* . . . . . . . . . . . . . . . 1,689,775
74,150 Microsoft Corp.* . . . . . . . . . . . . . . . 4,532,419
1,400 SAP AG . . . . . . . . . . . . . . . . . . . . 926,075
---------
7,148,269
---------
Diverse Electronic
Products 1.0% 46,000 Motorola Inc. . . . . . . . . . . . . . . . . 2,662,250
---------
EDP Peripherals 0.6% 60,000 Adaptec Inc.* . . . . . . . . . . . . . . . . 1,417,500
---------
Electronic Components/
Distributors 1.5% 41,000 Kyocera Corp. . . . . . . . . . . . . . . . . 3,041,152
2,000 Kyocera Corp. (ADR) . . . . . . . . . . . . . 298,000
371 Samsung Electronics Co., Ltd. (GDS) . . . . . 22,770
4,202 Samsung Electronics Co., Ltd.(a) . . . . . . . 620,668
174 Samsung Electronics Co., Ltd. (New(b))(a) . . 25,347
---------
4,007,937
---------
Electronic Data
Processing 0.6% 20,000 International Business Machines Corp. . . . . 1,470,000
---------
Office/Plant
Automation 1.1% 80,000 Cisco Systems, Inc.* . . . . . . . . . . . . 2,810,000
---------
Semiconductors 1.6% 40,000 Advanced Micro Devices Inc.* . . . . . . . . 995,000
50,000 Intel Corp. . . . . . . . . . . . . . . . . . 3,193,750
---------
4,188,750
---------
ENERGY 4.3%
Oil & Gas Production 2.0% 20,000 Anadarko Petroleum Corp. . . . . . . . . . . 770,000
40,000 Apache Corp. . . . . . . . . . . . . . . . . . 1,000,000
82,500 Perez Companc S.A. "B" . . . . . . . . . . . . 339,883
59,000 Perez Companc S.A. "B" (ADR) . . . . . . . . . 486,750
78,800 Triton Energy Corp.* . . . . . . . . . . . . . 2,679,200
---------
5,275,833
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
48
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------------------------------------
% of Market
Portfolio Shares Value ($)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Oil Companies 2.0% 40,000 Chevron Corp . . . . . . . . . . . . . . . . 1,785,000
160,000 YPF SA "D" (ADR) . . . . . . . . . . . . . . 3,420,000
-----------
5,205,000
-----------
Oilfield Services/
Equipment 0.3% 168,800 Global Marine Inc.* . . . . . . . . . . . . 611,900
-----------
METALS AND MINERALS 1.4%
Steel & Metals 43,200 Allegheny Ludlum Corp. . . . . . . . . . . . 810,000
7,400 Oregon Steel Mills Inc. . . . . . . . . . . 115,625
25,000 Pohang Iron & Steel Co., Ltd. . . . . . . . . 731,250
148,000 Usinas Siderurgicas de Minas Gerais
S/A (pfd.) (ADR) . . . . . . . . . . . . . 1,961,000
-----------
3,617,875
-----------
CONSTRUCTION 1.6%
Building Materials 0.7% 6,400 Mannesmann AG (Bearer) . . . . . . . . . . . 1,742,958
-----------
Building Products 0.3% 40,000 USG Corp.* . . . . . . . . . . . . . . . . . 780,000
-----------
Homebuilding 0.6% 99,000 Hovnanian Enterprises Inc. "A"* . . . . . . . 532,125
69,900 Kaufman & Broad Home Corp. . . . . . . . . . . 899,963
20,000 Toll Brothers Inc.* . . . . . . . . . . . . . 197,500
-----------
1,629,588
-----------
UTILITIES 4.2%
Electric Utilities 20,000 CMS Energy Corp. . . . . . . . . . . . . . . 457,500
30,000 Centerior Energy Corp. . . . . . . . . . . . . 266,250
10,000 Central Costanera SA (ADR) . . . . . . . . . . 265,000
7,156,000 Companhia Energetica de Minas Gerais (pfd.) . 650,545
69,900 Destec Energy Inc.* . . . . . . . . . . . . . 742,687
50,000 Empresa Nacional de Electricidad SA (ADR) . . 2,025,000
30,000 Illinova Corp. . . . . . . . . . . . . . . . . 652,500
25,000 Korea Electric Power Co. . . . . . . . . . . . 861,196
58,000 Midlands Electricity PLC . . . . . . . . . . . 739,750
50,000 National Power PLC . . . . . . . . . . . . . . 383,412
99,000 Public Service Co. of New Mexico* . . . . . . 1,287,000
25,000 Shandong Huaneng Power Co. (ADR)* . . . . . . 240,625
50,000 Southern Electric PLC . . . . . . . . . . . . 630,477
30,000 TNP Enterprises Inc. . . . . . . . . . . . . . 446,250
60,000 Unicom Corp. . . . . . . . . . . . . . . . . . 1,440,000
-----------
11,088,192
-----------
TOTAL COMMON STOCKS (Cost $240,313,574) . . . 237,698,661
-----------
------------------------------------------------------------------------
1.5% WARRANTS
------------------------------------------------------------------------
TECHNOLOGY
Semiconductors 284,600 Intel Corp. Warrants (expire 3/14/98)*
(Cost $3,317,369) . . . . . . . . . . . . 3,948,825
-----------
- --------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO -- 100.0%
(Cost $263,659,816)(c) . . . . . . . . . . 261,631,236
===========
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
49
<PAGE>
CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
* Non-income producing security.
(a) Security valued in good faith by the Valuation Committee of the Trustees.
The cost and market value of this security at December 31, 1994
aggregated $260,462 and $646,015 (.25% of net assets), respectively.
(b) New shares issued during 1994, eligible for a pro rata share of 1994
dividends.
(c) At December 31, 1994, the net unrealized depreciation on investments based
on cost for federal income tax purposes of $263,612,803 was as follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of market value
over tax cost . . . . . . . . . . . . . . . . . . . . . . . $ 18,361,493
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost
over market value . . . . . . . . . . . . . . . . . . . . . (20,343,060)
-------------
Net unrealized depreciation. . . . . . . . . . . . . . . . . $ (1,981,567)
=============
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments), for the year ended December 31, 1994, aggregated
$190,827,357 and $162,561,433, respectively.
The accompanying notes are an integral part of the financial statements.
50
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost $263,659,816) (Note A) . . . $261,631,236
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,276
Receivables:
Investments sold . . . . . . . . . . . . . . . . . . . . . . . . . 2,981,543
Portfolio shares sold . . . . . . . . . . . . . . . . . . . . . . 561,600
Dividends and interest . . . . . . . . . . . . . . . . . . . . . . 282,241
------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . 265,506,896
LIABILITIES
Payables:
Investments purchased . . . . . . . . . . . . . . . . . . . . . . $8,801,508
Portfolio shares redeemed . . . . . . . . . . . . . . . . . . . . 25,873
Due to Adviser (Note B) . . . . . . . . . . . . . . . . . . . . . 104,624
Accrued expenses (Note B) . . . . . . . . . . . . . . . . . . . . 44,136
----------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . 8,976,141
------------
Net assets, at market value . . . . . . . . . . . . . . . . . . . . . $256,530,755
============
NET ASSETS
Net assets consist of:
Undistributed net investment income . . . . . . . . . . . . . . . $ 507,243
Unrealized depreciation on:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . (2,028,580)
Foreign currency related transactions . . . . . . . . . . . . . (4,400)
Accumulated net realized gain . . . . . . . . . . . . . . . . . . 8,707,226
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 249,349,266
------------
Net assets, at market value . . . . . . . . . . . . . . . . . . . . . $256,530,755
============
NET ASSET VALUE, offering and redemption price per share
($256,530,755 -:- 20,979,934 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) . . $12.23
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
51
<PAGE>
<TABLE>
CAPITAL GROWTH PORTFOLIO
- ------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Income:
Dividends (net of foreign taxes withheld of $37,041) . . . $ 2,191,376
Interest . . . . . . . . . . . . . . . . . . . . . . . . . 460,519
------------
2,651,895
Expenses (Note A):
Management fee (Note B) . . . . . . . . . . . . . . . . . . $ 1,199,585
Administrative fees (Note B) . . . . . . . . . . . . . . . 45,253
Accounting fees (Note B) . . . . . . . . . . . . . . . . . 31,685
Trustees' fees (Note B) . . . . . . . . . . . . . . . . . . 11,212
Custodian fees . . . . . . . . . . . . . . . . . . . . . . 98,462
Auditing . . . . . . . . . . . . . . . . . . . . . . . . . 25,795
Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,798
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,731 1,456,521
------------ ------------
Net investment income . . . . . . . . . . . . . . . . . . . . 1,195,374
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments . . . . . . . . . . . . . . . . . . . . . . . . 8,768,082
Foreign currency related transactions . . . . . . . . . . . (26,177) 8,741,905
------------
Net unrealized depreciation during the period on:
Investments . . . . . . . . . . . . . . . . . . . . . . . . (35,951,742)
Foreign currency related transactions . . . . . . . . . . . (46) (35,951,788)
------------ ------------
Net loss on investment transactions . . . . . . . . . . . . . (27,209,883)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS . . . . . . (26,014,509)
============
The accompanying notes are an integral part of the financial statements.
</TABLE>
52
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
INCREASE (DECREASE) IN NET ASSETS 1994 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . $ 1,195,374 $ 933,809
Net realized gain from investment transactions . . . . . . . . . . . 8,741,905 23,896,099
Net unrealized appreciation (depreciation) on investment
transactions during the period . . . . . . . . . . . . . . . . . (35,951,788) 13,526,410
------------- ------------
Net increase (decrease) in net assets resulting from operations (26,014,509) 38,356,318
------------- ------------
Distributions to shareholders from:
Net investment income ($0.05 and $0.07 per share, respectively). . . (889,382) (1,052,879)
------------- ------------
Net realized gain from investment transactions
($1.31 and $0.27 per share, respectively) . . . . . . . . . . . . (23,981,060) (3,623,212)
------------- ------------
Portfolio share transactions:
Proceeds from shares sold . . . . . . . . . . . . . . . . . . . . . 157,574,508 137,863,548
Net asset value of shares issued to shareholders in
reinvestment of distributions . . . . . . . . . . . . . . . . . . 24,870,442 4,676,091
Cost of shares redeemed . . . . . . . . . . . . . . . . . . . . . . (131,982,527) (86,357,046)
------------- ------------
Net increase in net assets from Portfolio share transactions . . . . . 50,462,423 56,182,593
------------- ------------
INCREASE (DECREASE) IN NET ASSETS . . . . . . . . . . . . . . . . . . . (422,528) 89,862,820
Net assets at beginning of period . . . . . . . . . . . . . . . . . . . 256,953,283 167,090,463
============= ============
NET ASSETS AT END OF PERIOD (including undistributed net
investment income of $507,243 and $238,541, respectively). . . . . . $256,530,755 $256,953,283
------------- ------------
OTHER INFORMATION
INCREASE (DECREASE) IN PORTFOLIO SHARES
Shares outstanding at beginning of period . . . . . . . . . . . . . . . 17,184,932 13,146,981
------------- ------------
Shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,319,350 10,095,666
Shares issued to shareholders in reinvestment of distributions . . . 1,905,054 375,250
Shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . (10,429,402) (6,432,965)
------------- ------------
Net increase in Portfolio shares . . . . . . . . . . . . . . . . . . 3,795,002 4,037,951
------------- ------------
Shares outstanding at end of period . . . . . . . . . . . . . . . . . . 20,979,934 17,184,932
============= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
53
<PAGE>
<TABLE>
CAPITAL GROWTH PORTFOLIO
FINANCIAL HIGHLIGHTS
- ----------------------------------------------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER
PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS.
<CAPTION>
Six For the Period
Months July 16, 1985
Ended (commencement
Years Ended December 31, (e) December of operations)
---------------------------------------------------------------- 31, to June 30,
1994 1993 1992 1991 1990 1989 1988 1987 1986(e)(f) 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)
<FN>
(a) Portion of expenses
reimbursed (Note B) $ -- $ -- $ -- $ -- $ -- $ .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.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
54
<PAGE>
<TABLE>
INTERNATIONAL PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Market
Portfolio Amount Value ($)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
3.9% REPURCHASE AGREEMENT
------------------------------------------------------------------------------------------
U.S.$ 18,230,000 Repurchase Agreement with Donaldson, Lufkin &
Jenrette, dated 12/30/94 at 5.875%, to be
repurchased at $18,241,900 on 1/3/95,
collateralized by a $17,463,000
U.S. Treasury Note, 8.5%, 7/15/97 (Cost $18,230,000) . . 18,230,000
-----------
1.9% COMMERCIAL PAPER
------------------------------------------------------------------------------------------
U.S.$ 5,000,000 General Electric Capital Corp., 5.78%, 1/31/95 . . . . . . 5,000,000
U.S.$ 1,110,000 J.P. Morgan & Co., Inc., 6.05%, 3/1/95 . . . . . . . . . 1,098,994
U.S.$ 3,000,000 Rincon Securities Inc., 6.08%, 1/9/95 . . . . . . . . . . 2,995,947
-----------
TOTAL COMMERCIAL PAPER (Cost $9,094,941) . . . . . . . . . 9,094,941
-----------
3.9% SHORT-TERM NOTES
------------------------------------------------------------------------------------------
U.S.$ 6,390,000 Federal Home Loan Mortgage Corp., Discount Note,
5.76%, 1/24/95 . . . . . . . . . . . . . . . . . . . . . 6,366,485
U.S.$ 12,000,000 Federal National Mortgage Association, Discount Note,
5.8%, 1/9/95 . . . . . . . . . . . . . . . . . . . . . . 11,984,533
-----------
TOTAL SHORT-TERM NOTES (Cost $18,351,018) . . . . . . . . 18,351,018
-----------
0.1% BONDS
------------------------------------------------------------------------------------------
DM 350,000 Deutsche Bank AG, 8%, 4/11/00 . . . . . . . . . . . . . . 230,389
DM 23,000 Deutsche Bank AG (PC), 9%, 12/31/02 . . . . . . . . . . . . 16,105
DM 33,000 Deutsche Bank AG (PC), 8.75%, 12/31/03 . . . . . . . . . . 22,777
-----------
TOTAL BONDS (Cost $220,601) . . . . . . . . . . . . . . . . 269,271
-----------
0.6% CONVERTIBLE BONDS
------------------------------------------------------------------------------------------
U.S.$ 1,900,000 Henderson Land Development Co., Ltd., 4%, 10/27/96
(Property developer) . . . . . . . . . . . . . . . . . . . 1,805,000
U.S.$ 1,050,000 Ssangyong Oil Refining Co., Ltd., 3.75%, 12/31/08
(Major oil refiner) . . . . . . . . . . . . . . . . . . . 1,115,625
-----------
TOTAL CONVERTIBLE BONDS (Cost $2,955,694) . . . . . . . . 2,920,625
-----------
2.1% PREFERRED STOCKS
------------------------------------------------------------------------------------------
Shares
GERMANY 1.8%
8,000 Henkel KGAA (Household detergent and adhesives producer). . 2,922,139
10,000 SAP AG (Computer software manufacturer) . . . . . . . . . . 5,666,161
-----------
8,588,300
-----------
ITALY 0.3%
700,000 Fiat SpA (Multi-industry, automobiles)* . . . . . . . . . 1,609,741
-----------
TOTAL PREFERRED STOCKS (Cost $6,985,179) . . . . . . . . . 10,198,041
-----------
87.5% COMMON STOCKS
------------------------------------------------------------------------------------------
ARGENTINA 1.1%
200,000 Perez Companc S.A. "B" (ADR) (Industrial conglomerate). . . 1,650,000
170,000 YPF SA "D" (ADR) (Petroleum company) . . . . . . . . . . . 3,633,750
-----------
5,283,750
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
55
<PAGE>
<TABLE>
INTERNATIONAL PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AUSTRALIA 3.8%
1,556,504 Ampol Exploration Ltd. (Oil and gas
exploration company) . . . . . . . . . . . . . . . . 4,199,267
290,319 Broken Hill Proprietary Co. Ltd. (Petroleum,
minerals and steel) . . . . . . . . . . . . . . . . 4,411,390
240,000 CRA Ltd. (Mining, manufacturing and development) . . . 3,311,885
383,759 Coca Cola Amatil Ltd. (Soft drink bottler
and distributor) . . . . . . . . . . . . . . . . . 2,439,587
2,090,535 M.I.M. Holdings Ltd. (Nonferrous metals and coal) . . 3,484,495
------------
17,846,624
------------
BELGIUM 0.3%
3,200 Solvay & Cie. SA (Chemical producer) . . . . . . . . . 1,524,049
------------
BRAZIL 3.0%
5,178,870 Centrais Eletricas Brasileiras S/A "B"
(pfd.) (Electric utility) . . . . . . . . . . . . . 1,797,624
3,077,425 Companhia Cervejaria Brahma (pfd.) (Leading beer
producer and distributor) . . . . . . . . . . . 1,013,152
19,421,000 Companhia Vale do Rio Doce (pfd.) (Diverse mining and
industrial complex) . . . . . . . . . . . . . . . 3,691,595
26,360,657 Lojas Americanas S.A. (pfd.) (Discount department
store chain) . . . . . . . . . . . . . . . . . . . 778,060
12,000,000 Petroleo Brasileiro S/A (pfd.) (Petroleum company) . . 1,515,797
40,040,000 Telecomunicacoes Brasileiras S.A. (pfd.)
(Telecommunication services) . . . . . . . . 1,791,636
2,600,000,000 Usinas Siderurgicas de Minas Gerais S/A (pfd.)
(Non-coated flat products and electrolytic
galvanized products) . . . . . . . . . . . . . . . . 3,530,106
------------
14,117,970
------------
CANADA 2.4%
200,445 Canadian Pacific Ltd. (Transportation and natural
resource conglomerate) . . . . . . . . . . . . . . . 2,982,919
100,000 Imperial Oil Ltd.(Producer and refiner of natural gas
and petroleum products in Canada) . . . . . . . . . 3,297,095
71,800 Magna International, Inc. "A" (Manufacturer of
automotive parts) . . . . . . . . . . . . . . . . . 2,755,325
159,000 Rogers Communications Inc. "B" (Cable TV and
cellular telephones in Canada)* . . . . . . . . . . 2,125,290
------------
11,160,629
------------
DENMARK 0.3%
35,000 Unidanmark A/S "A" (Bank holding company)*. . . . . . 1,346,309
------------
FINLAND 2.6%
78,000 Metsa-Serla Oy "B" (Tissue paper producer) . . . . . 3,425,097
29,000 Nokia AB Oy (Preference) (Leading manufacturer of
cellular telephones) . . . . . . . . . . . . . . 4,273,349
247,000 Outokumpu Oy "A" (Metals and minerals)* . . . . . . 4,536,607
94,000 Outokumpu Oy Warrants (expire 6/28/96)* . . . . . . 83,347
------------
12,318,400
------------
FRANCE 5.9%
9,300 Carrefour (Hypermarket and food retailing) . . . . . 3,851,638
14,138 Castorama-Dubois Investissements (Retailer,
wholesaler and distributor) . . . . . . . . . . . 1,765,596
10,736 Cetelem (Consumer finance company) . . . . . . . . 1,919,655
10,000 Continentale d'Equipement Electrique (Protection
equipment for electrical networks) . . . . . . . 820,071
19,300 ECIA - Equipements et Composants pour l'Industrie
Automobile (Manufacturer of automobile parts and
accessories) . . . . . . . . . . . . . . . . . . . 2,507,807
88,000 Michelin "B" (Leading tire manufacturer)* . . . . . 3,201,348
12,226 S.A.G.A. (Major freight forwarding, logistics
and cargo handling operator) . . . . . . . . . . 1,052,979
2,980 Salomon S.A. (Manufacturer of sports equipment) 1,191,219
34,952 Elf Aquitaine (Petroleum company) . . . . . . . . 2,459,924
15,420 Elf Aquitaine (ADR) . . . . . . . . . . . . . . . 543,555
</TABLE>
The accompanying notes are an integral part of the financial statements.
56
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
20,000 Television Francaise (Television broadcasting).......... 1,813,144
70,473 Total SA "B" (International oil and gas exploration,
development and production) .......................... 4,093,002
54,687 Valeo SA (Automobile and truck components) ............. 2,722,575
----------
27,942,513
----------
GERMANY 6.8%
20,000 BASF AG (Diversified manufacturer of chemicals for
industrial use) ..................................... 4,123,778
6,000 Daimler-Benz AG (Automobile and truck manufacturer) .... 2,950,534
8,698 Deutsche Bank AG (Bank) ............................... 4,041,535
46 Deutsche Bank AG Warrants (expire 6/30/95)* ............ 4,987
330 Deutsche Bank AG Warrants (expire 6/30/97)* ............ 8,455
18,500 Hoechst AG (Chemical producer) ......................... 4,023,426
14,860 Mannesmann AG (Bearer) (Diversified construction
and technology company) .............................. 4,046,930
6,900 Schering AG (Pharmaceutical and chemical producer) ..... 4,528,605
3,027 Siemens AG (Bearer) (Manufacturer of electrical and
electronic equipment) ................................ 1,267,802
12,720 VEBA AG (Electric utility, distributor of oil and
chemicals) ......................................... 4,432,771
10,000 Volkswagen AG (Leading automobile manufacturer) ........ 2,749,185
----------
32,178,008
----------
HONG KONG 2.4%
266,000 Cheung Kong Holdings Ltd. (Real estate company) ........ 1,082,908
288,000 China Light & Power Co., Ltd. (Electric utility) ....... 1,232,026
209,787 HSBC Holdings Ltd. (Bank) ............................. 2,263,937
288,000 Hong Kong & China Gas Co., Ltd. (Gas utility) .......... 465,267
24,000 Hong Kong & China Gas Co., Ltd. Warrants
(expire 12/31/95)* .................................. 4,560
330,000 Hong Kong Electric Holdings, Ltd.
(Electric utility and real estate) ................... 902,036
732,000 Hutchison Whampoa, Ltd. (Container terminal and real
estate company) ...................................... 2,989,493
435,000 Hysan Development Co. (Real estate developer)........... 862,973
620,000 Johnson Electric Holdings Ltd. (Designer and
manufacturer of micrometers for domestic and
commercial uses) .................................... 1,422,294
----------
11,225,494
----------
INDONESIA 0.8%
200,000 Indocement Tunggal (Foreign registered)
(Cement producer) .................................... 575,523
50,400 Indonesia Satellite Corp. (ADR) (International
telecommunication services)* ......................... 1,801,800
402,000 Kalbe Farma (Foreign registered) (Pharmaceutical
producer and distributor) ............................ 1,655,186
----------
4,032,509
----------
ITALY 3.6%
71,170 Assicurazioni Generali SpA (Life and property
insurance company) .................................. 1,673,943
350,000 Istituto Mobiliare Italiano SpA (Banking and financial
services) ............................................ 2,151,356
2,500,000 Istituto Nazionale delle Assicurazione (Insurance
company)* ............................................ 3,321,517
670,000 La Rinascente SpA di Risparmio (Department store chain) 1,891,862
134,000 La Rinascente SpA di Risparmio Warrants
(expire 12/31/99)* .................................. 41,307
134,000 La Rinascente SpA Warrants (expire 12/31/99)* .......... 105,746
65,000 Luxottica Group SpA (ADR) (Manufacturer and marketer
of eyeglasses) ....................................... 2,218,125
964,000 Societa Finanziaria Telefonica Torino SpA (Telephone
utility and telecommunication equipment manufacturer) 2,840,888
1,130,000 Telecom Italia SpA (Telecommunication services) ........ 2,939,951
----------
17,184,695
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
57
<PAGE>
<TABLE>
INTERNATIONAL PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
JAPAN 25.8%
1,000 Amano Corp. (Time-management systems) . . . . . . . . . 14,855
125,000 Bridgestone Corp. (Leading automobile tire
manufacturer) . . . . . . . . . . . . . . . . . . . . 1,957,242
318,000 Canon Inc. (Leading producer of visual image and
information equipment) . . . . . . . . . . . . . . . 5,394,158
65,000 Cox Co., Ltd. (Men's and ladies' wear chain
store operator) . . . . . . . . . . . . . . . . . . 1,285,255
490 DDI Corp. (Long distance telephone and
cellular operator). . . . . . . . . . . . . . . . . . 4,229,650
400,000 Fujitsu Ltd. (Leading manufacturer of computers) . . . 4,055,003
190,000 Hitachi Construction Machinery Co., Ltd. (Leading
maker of hydraulic shovels) . . . . . . . . . . . . . 2,498,243
477,000 Hitachi Ltd. (General electronics manufacturer) . . . . 4,735,050
380,000 Hitachi Metals, Ltd. (Major producer of high-quality
specialty steels) . . . . . . . . . . . . . . . . . . 4,653,217
88,000 Horipro Inc. (Growing entertainment production company) 2,172,840
74,000 Ito-Yokado Co., Ltd. (Leading supermarket operator) . . 3,958,848
465,000 Itochu Corp. (Leading general trading company). . . . . 3,313,761
20,000 Japan Associated Finance Co. (Venture capital company). 3,111,513
87,000 Japan Radio Co., Ltd. (Manufacturer of wireless
telecommunication equipment) . . . . . . . . . . . . 1,292,382
550,000 Kawasaki Steel Corp. (Major integrated steelmaker)* . 2,302,017
29,000 Keyence Corp. (Specialized manufacturer of sensors) . 3,289,170
68,000 Kyocera Corp. (Leading ceramic packaging manufacturer). 5,043,862
45,000 Mabuchi Motor Co., Ltd. (Manufacturer of DC motors) . . 3,387,534
210,000 Matsushita Electrical Industrial Co., Ltd. (Consumer
electronic products manufacturer) . . . . . . . . . . 3,456,790
395,000 NGK Spark Plug Co., Ltd. (Leading manufacturer of
automotive spark plugs) . . . . . . . . . . . . . . . 5,193,717
540,000 NSK Ltd. (Leading manufacturer of bearings and other
machinery parts) . . . . . . . . . . . . . . . . . . 4,281,843
49,000 Nichiei Co., Ltd. (Finance company for small and
medium size firms) . . . . . . . . . . . . . . . . . 3,147,646
210,000 Nippon Shokubai Corp., Ltd. (Specialty chemical
producer) . . . . . . . . . . . . . . . . . . . . . . 2,044,565
600,000 Nisshin Steel Co., Ltd. (Blast furnace steelmaker) . . 3,023,186
90,000 Pioneer Electronics Corp. (Leading manufacturer of
audio equipment) . . . . . . . . . . . . . . . . . . 2,168,022
50,000 SMC Corp. (Leading maker of pneumatic equipment) . . . 2,845,528
56,000 Secom Co., Ltd. (Electronic security system operator) . 3,484,894
40,000 Seven-Eleven Japan Co., Ltd. (Leading convenience
store operator) . . . . . . . . . . . . . . . . . . . 3,215,899
250,000 ShinMaywa Industries, Ltd. (Leading maker of dump
trucks and other specialty vehicles) . . . . . . . . 2,559,470
84,000 Sony Corp. (Consumer electronic products manufacturer). 4,763,625
400,000 Sumitomo Corp. (Leading general trading company, with
offices, subsidiaries and affiliates throughout
the world) . . . . . . . . . . . . . . . . . . . . . 4,095,152
21,000 Sumitomo Electric Industries, Ltd. (ADR) (Leading
maker of electric wires and cables) . . . . . . . . . 2,992,500
197,000 Sumitomo Forestry Co., Ltd. (Forestry and house building) 3,163,706
850,000 Sumitomo Metal Industries, Ltd. (Leading integrated
crude steel producer)* . . . . . . . . . . . . . . . 2,755,696
315,000 Suzuki Motor Corp. (Leading minicar and motorcycle
producer) . . . . . . . . . . . . . . . . . . . . . . 3,699,187
94,000 Takuma Co., Ltd. (Leading maker of boilers, garbage
incinerators and water treatment plants) . . . . . . 1,698,284
555,000 Toshiba Corp. (General electronics manufacturer) . . . 4,027,552
32,000 Tsutsumi Jewelry Co., Ltd. (Manufacturer, wholesaler
and retailer of jewelry) . . . . . . . . . . . . . . 2,922,814
-----------
122,234,676
-----------
KOREA 0.6%
2,000 Korea International Trust IDR (Investment company)(a)* 117,000
22,000 Samsung Electronics Co., Ltd. (GDS) (Major electronics
manufacturer) . . . . . . . . . . . . . . . . . . . . 1,072,500
33,000 Samsung Electronics Co., Ltd. (GDS) (New(b)) . . . . . 1,485,000
The accompanying notes are an integral part of the financial statements.
</TABLE>
58
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2,278 Samsung Electronics Co., Ltd. (GDS) (New(b)) . . . . . . . . . 139,812
----------
2,814,312
----------
MALAYSIA 2.0%
294,000 Aokam Perdana Bhd. (Forest products company) . . . . . . . . . 1,819,150
315,000 Malayan Banking Bhd. (Leading banking and financial
services group) . . . . . . . . . . . . . . . . . . . . . . . 1,899,745
870,000 Technology Resources Industries (Mobile telephone
operator)* . . . . . . . . . . . . . . . . . . . . . . . . . 2,776,777
194,000 Telekom Malaysia Bhd. (Telecommunication services) . . . . . . 1,314,353
250,000 Westmont Bhd. (Investment holding company) . . . . . . . . . . 1,556,687
----------
9,366,712
----------
MEXICO 0.5%
100,000 Grupo Carso, S.A. de CV (ADR) (Diversified industrial
group)* . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500,000
32,000 Panamerican Beverages Inc. "A" (Soft drink bottler) . . . . . 1,012,000
----------
2,512,000
----------
NETHERLANDS 4.1%
30,000 AEGON Insurance Group NV (Insurance company) . . . . . . . . . 1,918,313
24,000 Akzo-Nobel NV (Chemical producer) . . . . . . . . . . . . . . 2,770,666
204,870 Elsevier NV (International publisher of scientific,
professional, business, and consumer information books) . . . 2,136,152
69,106 Getronics NV (Computer and software distributor) . . . . . . . 2,519,966
16,000 Heineken Holdings NV "A" (Brewery) . . . . . . . . . . . . . . 2,163,258
50,448 Internationale-Nederlanden Groep CVA (Banking
and insurance holding company) . . . . . . . . . . . . . . . 2,383,050
122,000 Philips N.V. (Leading manufacturer of electrical equipment). . 3,612,420
26,935 Wolters Kluwer CVA (Publisher) . . . . . . . . . . . . . . . . 1,992,312
----------
19,496,137
----------
NORWAY 0.6%
271,889 Saga Petroleum "A" (Free) (Oil and gas producer) . . . . . . . 2,955,097
----------
PHILIPPINES 0.8%
10,115 Philippine Long Distance Telephone Co.
(Telecommunication services) . . . . . . . . . . . . . . . . 557,589
600,000 San Miguel Corp. "B" (Brewery) . . . . . . . . . . . . . . . . 3,124,491
----------
3,682,080
----------
PORTUGAL 0.3%
30,192 Jeronimo Martins (Food producer and retailer) . . . . . . . . 1,293,590
----------
SINGAPORE 0.3%
195,000 Sembawang Corp. (Ship repair and maritime
services group) . . . . . . . . . . . . . . . . . . . . . . . 1,458,319
----------
SPAIN 2.2%
37,400 Acerinox, S.A. (Stainless steel producer). . . . . . . . . . . 3,906,933
21,800 Banco Santander, S.A. (Leading regional bank). . . . . . . . . 834,735
7,266 Banco Santander, S.A. (New(b)) . . . . . . . . . . . . . . . . 269,387
160,000 Compania Telefonica Nacional de Espana S.A.
(Telecommunication services) . . . . . . . . . . . . . . . . 1,890,218
133,000 Repsol SA (Integrated oil company) . . . . . . . . . . . . . . 3,607,293
----------
10,508,566
----------
SWEDEN 4.0%
99,000 Astra AB "A" (Free) (Pharmaceutical company) . . . . . . . . . 2,558,088
600 Astra AB "B" (Free) . . . . . . . . . . . . . . . . . . . . . 15,302
155,000 Autoliv AB (Free) (Manufacturer of safety airbags for
automobiles)* . . . . . . . . . . . . . . . . . . . . . . . 5,965,911
35,000 L.M. Ericsson Telephone Co. "B" (ADR) (Leading
manufacturer of cellular telephone equipment) . . . . . . . . 1,929,375
65,000 Mo och Domsjo AB "B" (Free) (Manufacturer of newsprint,
paperboard, and various sawn timber products)* . . . . . . . 3,026,694
</TABLE>
The accompanying notes are an integral part of the financial statements.
59
<PAGE>
<TABLE>
INTERNATIONAL PORTFOLIO
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
144,000 S.K.F. AB "B" (Free) (Manufacturer of
roller bearings)* . . . . . . . . . . . . . . . 2,373,983
175,000 Volvo AB "B" (Free) (Automobile manufacturer). . . 3,297,199
------------
19,166,552
------------
SWITZERLAND 4.4%
7,000 Alusuisse-Lonza Holdings AG (Registered)
(Manufacturer of aluminum, chemicals, and paper
packaging products) . . . . . . . . . . . . . . 3,501,737
5,180 Brown, Boveri & Cie. AG (Bearer) (Manufacturer of
electrical equipment) . . . . . . . . . . . . . 4,458,594
5 Brown, Boveri & Cie. AG (Registered) . . . . . . 825
3,335 CS Holdings (Bearer) (Bank) . . . . . . . . . . . 1,426,357
5 CS Holdings (Bearer) Warrants (expire 12/16/94)* . 35
3,623 Holderbank Financiere Glaris AG (Bearer)
(Cement company) . . . . . . . . . . . . . . . 2,742,119
2,514 Nestle SA (Registered) (Food manufacturer) . . . 2,394,286
1,710 SGS Holdings SA (Bearer) (Trade inspection
company) . . . . . . . . . . . . . . . . . . 2,363,845
4,000 Sulzer Brothers Ltd. (Registered) (Multi-industry
company) . . . . . . . . . . . . . . . . . . . 2,767,786
5,038 Swiss Bank Corp. (Bearer) (Switzerland's second
largest universal bank) . . . . . . . . . . . . 1,392,871
65 Swiss Bank Corp. Warrants (expire 6/30/95)* . . . 782
143 Swiss Bank Corp. Warrants (expire 6/30/98)* . . . 1,693
100 Swiss Reinsurance (Registered) (Life,
accident and health insurance company) . . . . 60,259
-----------
21,111,189
-----------
THAILAND 1.1%
15,500 American Standard Sanitaryware (Foreign
registered)(Manufacturer of bathroom fixtures). 209,918
716,000 Sinpinyo Fund #4 (Foreign registered)
(Investment company)* . . . . . . . . . . . . . 855,606
525,220 Thai Farmers Bank (Foreign registered)
(Commercial bank) . . . . . . . . . . . . . . . 4,267,870
-----------
5,333,394
-----------
TURKEY 0.3%
670,000 Migros Turkey (Retailer) . . . . . . . . . . . . 1,281,137
-----------
UNITED KINGDOM 7.5%
192,000 BAA PLC (Owner and operator of U.S. and
U.K. airports) . . . . . . . . . . . . . . . . 1,421,221
600,000 British Gas PLC (Integrated gas utility) . . . . 2,938,967
300,000 British Petroleum PLC (Major integrated world
oil company) . . . . . . . . . . . . . . . . . 1,997,653
278,310 Cable and Wireless PLC (International
telecommunication services in the United
Kingdom and Hong Kong) . . . . . . . . . . . . 1,641,985
110,175 Cadbury Schweppes PLC (Candy, soft drinks and
other food products) . . . . . . . . . . . . . 744,845
236,000 Carlton Communications PLC (Television post
production products and services) . . . . . . . 3,312,864
310,400 Cookson Group PLC (Industrial materials
manufacturer) . . . . . . . . . . . . . . . . 1,117,246
710,218 Hanson PLC (Industrial management company) . . . 2,567,455
1,320,427 Lasmo PLC (Oil production and exploration)* . . 3,058,266
170,000 Midlands Electricity PLC (Electric companies) . . 2,168,307
255,000 PowerGen PLC (Electric utility) . . . . . . . . 2,138,967
304,628 RTZ Corp. PLC (Mining and finance company) . . . 3,947,292
439,200 Reuters Holdings PLC (International
news agency) . . . . . . . . . . . . . . . . . 3,216,676
449,140 SmithKline Beecham "A" (Manufacturer of ethical
drugs and healthcare products) . . . . . . . . 3,187,559
389,000 Waste Management International PLC (Waste
collection and disposal services)* . . . . . . 2,179,374
-----------
35,638,677
-----------
TOTAL COMMON STOCKS (Cost $393,294,522) . . . . 415,013,388
-----------
- -------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO -- 100.0%
(Cost $449,131,955)(c) . . . . . . . . . . . . 474,077,284
===========
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
60
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
<S> <C>
* Non-income producing security.
(a) 1000 shares = 1 IDR unit for Korea International Trust.
(b) New shares issued during 1994, eligible for a pro rata share of 1994 dividends.
(c) At December 31, 1994, the net unrealized appreciation on investments based on
cost for federal income tax purposes of $450,408,637 was as follows:
Aggregate gross unrealized appreciation for all investments in which there is
an excess of market value over tax cost .................................. $ 44,572,806
Aggregate gross unrealized depreciation for all investments in which there is
an excess of tax cost over market value .................................. (20,904,159)
------------
Net unrealized appreciation .................................................. $ 23,668,647
============
<FN>
- ------------------------------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term investments), for the year
ended December 31, 1994, aggregated $339,886,045 and $119,463,911, respectively.
</FN>
</TABLE>
<TABLE>
- -------------------------------------------------------------------------------------
At December 31, 1994, sector diversification of the International Portfolio's
equity holdings was as follows:
<CAPTION>
SECTOR DIVERSIFICATION EQUITY HOLDINGS MARKET VALUE
---------------------- --------------- ------------
<S> <C> <C>
Manufacturing 20% $ 85,601,911
Metals and Minerals 11 47,139,503
Durables 11 45,968,873
Financial 10 43,726,124
Energy 8 34,126,324
Service Industries 6 27,823,821
Consumer Discretionary 6 24,507,581
Consumer Staples 6 24,038,995
Communications 5 21,784,847
Technology 5 19,982,304
Other 12 53,431,771
----- ------------
TOTAL EQUITY HOLDINGS 100% $428,132,054
===== ============
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
COMMITMENTS:
As of December 31, 1994, the International Portfolio entered into the following
forward foreign currency exchange contracts resulting in net unrealized depreciation of $1,493,469.
<CAPTION>
NET UNREALIZED
APPRECIATION/
SETTLETLEMENT DEPRECIATION
CONTRACTS TO DELIVER IN EXCHANGE FOR DATE (U.S.$)
---------------------------- ----------------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
U.S. Dollars 859,643 Swiss Francs 1,141,175 1/4/95 11,916
U.S. Dollars 2,026,217 British Pound 1,310,874 1/12/95 25,228
Japanese Yen 34,195,236 U.S. Dollars 340,639 1/4/95 (2,583)
Japanese Yen 30,231,846 U.S. Dollars 303,171 1/5/95 (270)
Swiss Francs 1,513,105 U.S. Dollars 1,140,245 1/5/95 (15,370)
Japanese Yen 25,040,429 U.S. Dollars 251,194 1/6/95 (141)
British Pounds 234,529 U.S. Dollars 361,644 1/12/95 (5,381)
Japanese Yen 768,110,000 U.S. Dollars 7,000,000 1/24/95 (731,369)
Japanese Yen 757,890,000 U.S. Dollars 7,000,000 1/25/95 (629,394)
Japanese Yen 2 208,822,000 U.S. Dollars 22,000,000 4/28/95 (490,002)
Japanese Yen 1, 911,000,000 U.S. Dollars 20,000,000 7/10/95 343,897
---------
(1,493,469)
=========
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
Transactions in written put option contracts during the year ended December 31, 1994 were:
<CAPTION>
PREMIUMS
NUMBER OF CONTRACTS RECEIVED ($)
---------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1993........................... -- --
Contracts written .................................... 920 79,336
Contracts expired .................................... (920) (79,336)
---------------------------------------------
Outstanding at December 31, 1994 .......................... -- --
====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
61
<PAGE>
<TABLE>
INTERNATIONAL PORTFOLIO
FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost $449,131,955) (Note A) . . . $474,077,284
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,912
Forward foreign currency exchange contracts to buy, at market
(contract cost $2,885,860) (Note A) . . . . . . . . . . . . . . . 2,923,004
Receivable on forward foreign currency exchange contracts to sell
(Note A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,396,893
Other receivables:
Investments sold . . . . . . . . . . . . . . . . . . . . . . . . . 2,420,638
Portfolio shares sold . . . . . . . . . . . . . . . . . . . . . . 1,413,511
Foreign taxes recoverable . . . . . . . . . . . . . . . . . . . . 416,034
Dividends and interest . . . . . . . . . . . . . . . . . . . . . . 205,882
------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . 539,979,158
LIABILITIES
Payables:
Investments purchased . . . . . . . . . . . . . . . . . . . . . . $ 4,596,407
Portfolio shares redeemed . . . . . . . . . . . . . . . . . . . . 52,950
Due to Adviser (Note B) . . . . . . . . . . . . . . . . . . . . . 357,742
Accrued expenses (Note B) . . . . . . . . . . . . . . . . . . . . 122,094
Forward foreign currency exchange contracts to buy
(Note A) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,885,860
Forward foreign currency exchange contracts to sell,
at market (contract cost $58,396,893) (Note A) . . . . . . . . 59,927,506
-----------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . 67,942,559
------------
Net assets, at market value . . . . . . . . . . . . . . . . . . . . . $472,036,599
============
NET ASSETS
Net assets consist of:
Undistributed net investment income . . . . . . . . . . . . . . . $ 722,015
Unrealized appreciation (depreciation) on:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 24,945,329
Foreign currency related transactions . . . . . . . . . . . . . (1,505,831)
Accumulated net realized gain . . . . . . . . . . . . . . . . . . 1,548,747
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 446,326,339
------------
Net assets, at market value . . . . . . . . . . . . . . . . . . . . . $472,036,599
============
NET ASSET VALUE, offering and redemption price per share
($472,036,599 -:- 44,139,826 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) . . $10.69
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
62
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Income:
Dividends (net of foreign taxes withheld of $909,141) . . . $ 4,589,934
Interest (net of foreign taxes withheld of $52,996) . . . . 1,791,616
-----------
6,381,550
Expenses (Note A):
Management fee (Note B) . . . . . . . . . . . . . . . . . . $ 3,363,597
Administrative fees (Note B) . . . . . . . . . . . . . . . 45,272
Accounting fees (Note B) . . . . . . . . . . . . . . . . . 96,548
Trustees' fees (Note B) . . . . . . . . . . . . . . . . . . 13,121
Custodian fees . . . . . . . . . . . . . . . . . . . . . . 469,330
Auditing . . . . . . . . . . . . . . . . . . . . . . . . . 50,810
Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,064
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 112,281 4,171,023
----------- -----------
Net investment income . . . . . . . . . . . . . . . . . . . . 2,210,527
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments . . . . . . . . . . . . . . . . . . . . . . . . 4,033,919
Options . . . . . . . . . . . . . . . . . . . . . . . . . . 28,258
Foreign currency related transactions . . . . . . . . . . . (391,175) 3,671,002
-----------
Net unrealized depreciation during the period on:
Investments . . . . . . . . . . . . . . . . . . . . . . . . (13,368,706)
Foreign currency related transactions . . . . . . . . . . . (1,498,201) (14,866,907)
----------- -----------
Net loss on investment transactions . . . . . . . . . . . . . (11,195,905)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS . . . . . . $(8,985,378)
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
63
<PAGE>
<TABLE>
INTERNATIONAL PORTFOLIO
- ---------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
Increase (Decrease) in Net Assets 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . $ 2,210,527 $ 1,092,953
Net realized gain from investment transactions . . . . . . . . . . . 3,671,002 823,463
Net unrealized appreciation (depreciation) on investment
transactions during the period . . . . . . . . . . . . . . . . . (14,866,907) 37,190,760
------------- -------------
Net increase (decrease) in net assets resulting from operations . . . . (8,985,378) 39,107,176
------------- -------------
Distributions to shareholders:
From net investment income ($.07 and $.14 per share, respectively) . (1,958,854) (1,135,018)
------------- -------------
In excess of net investment income ($.12 per share) . . . . . . . . -- (914,392)
------------- -------------
Portfolio share transactions:
Proceeds from shares sold . . . . . . . . . . . . . . . . . . . . . 313,276,872 150,601,515
Net asset value of shares issued to shareholders in
reinvestment of distributions . . . . . . . . . . . . . . . . . . 1,958,854 2,049,410
Cost of shares redeemed . . . . . . . . . . . . . . . . . . . . . . (70,378,561) (16,376,694)
------------- -------------
Net increase in net assets from Portfolio share transactions . . . . . 244,857,165 136,274,231
------------- -------------
INCREASE IN NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . 233,912,933 173,331,997
Net assets at beginning of period . . . . . . . . . . . . . . . . . . . 238,123,666 64,791,669
------------- -------------
NET ASSETS AT END OF PERIOD (including undistributed net investment
income of $722,015 and $1,007,330, respectively) . . . . . . . . . . $472,036,599 $238,123,666
============= =============
OTHER INFORMATION
INCREASE (DECREASE) IN PORTFOLIO SHARES
Shares outstanding at beginning of period . . . . . . . . . . . . . . . 21,943,195 7,975,250
------------- -------------
Shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,463,330 15,488,679
Shares issued to shareholders in reinvestment of distributions . . . 177,916 252,390
Shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . (6,444,615) (1,773,124)
------------- -------------
Net increase in Portfolio shares . . . . . . . . . . . . . . . . . . 22,196,631 13,967,945
------------- -------------
Shares outstanding at end of period . . . . . . . . . . . . . . . . . . 44,139,826 21,943,195
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
64
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
AND OTHER PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS.
<CAPTION>
FOR THE PERIOD
MAY 1, 1987
(COMMENCEMENT
Years Ended December 31, OF OPERATIONS) TO
------------------------------------------------------------ DECEMBER 31,
1994(e) 1993(e) 1992(e) 1991(e) 1990(e) 1989(e) 1988 1987
------------------------------------------------------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period . . . . . . . $10.85 $ 8.12 $ 8.47 $ 7.78 $ 8.46 $ 6.14 $ 5.26 $ 6.00(b)
------ ------ ------ ------ ------ ------ ------ -------
Income from investment
operations:
Net investment income (a) . . . . .06 .09 .10 .12 .25 .10 .09 --
Net realized and unrealized
gain (loss) on investment
transactions . . . . . . . . . . (.15) 2.90 (.36) .77 (.89) 2.22(f) .79 (.64)
------ ----- ----- ----- ----- ----- ----- -----
Total from investment
operations . . . . . . . . . . . (.09) 2.99 (.26) .89 (.64) 2.32 .88 (.64)
------ ----- ----- ----- ----- ----- ----- -----
Less distributions:
From net investment income . . . (.07) (.14) (.09) (.20) (.04) -- -- --
In excess of net investment income -- (.12) -- -- -- -- -- --
From net realized gains on
investment transactions . . . . -- -- -- -- -- -- -- (.10)
------ ----- ----- ----- ----- ----- ----- -----
Total distributions . . . . . . . . (.07) (.26) (.09) (.20) (.04) -- -- (.10)
------ ----- ----- ----- ----- ----- ----- -----
Net asset value, end of period . . $10.69 $10.85 $ 8.12 $ 8.47 $ 7.78 $ 8.46 $ 6.14 $5.26
====== ====== ====== ====== ====== ====== ====== =====
TOTAL RETURN (%) . . . . . . . . . (.85) 37.82 (3.08) 11.45 (7.65) 37.79 16.73 (10.64)(d)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
($ millions) . . . . . . . . . . . 472 238 65 41 35 17 3 2
Ratio of operating expenses,
net to average net assets (%) (a) 1.08 1.20 1.31 1.39 1.38 1.50 1.50 1.50(c)
Ratio of net investment income
to average net assets (%) . . . . .57 .91 1.23 1.43 2.89 1.30 1.59 .02(c)
Portfolio turnover rate (%) . . . . 33.52 20.36 34.42 45.01 26.67 57.69 110.42 146.08(c)
(a) Portion of expenses
reimbursed (Note B) . . . . . . $ -- $ -- $ -- $ -- $ -- $ .02 $ .14 $ .07
<FN>
(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) Includes provision for federal income tax of $.03 per share.
The accompanying notes are an integral part of the financial statements.
</FN>
</TABLE>
65
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
NOTES TO FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------
A. SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------------------------------------------
Scudder Variable Life Investment Fund (the "Fund") is organized as a
Massachusetts business trust and is registered under the Investment Company Act
of 1940, as amended, as an open-end, diversified management investment company.
Its shares of beneficial interest are divided into six separate diversified
series, called "Portfolios." The Portfolios are comprised of the Money Market
Portfolio, Bond Portfolio, Balanced Portfolio, Growth and Income Portfolio
(which commenced operations on May 2, 1994), Capital Growth Portfolio, and
International Portfolio.
The Fund is intended to be the funding vehicle for variable annuity contracts
and variable life insurance policies to be offered by the separate accounts of
certain life insurance companies ("Participating Insurance Companies"). As of
December 31, 1994, ownership breakdown of the Portfolios by each Participating
Insurance Company is as follows:
<TABLE>
<CAPTION>
PORTFOLIOS
GROWTH
PARTICIPATING MONEY AND CAPITAL INTERNA-
INSURANCE COMPANIES MARKET BOND BALANCED INCOME GROWTH TIONAL
- ------------------------------------ -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Aetna Life Insurance & Annuity Co. ..... --% --% --% --% --% 40.4%
American Skandia Life Assurance Co...... -- 37.7 0.1 -- 0.1 0.3
AUSA Life Insurance Co. ................ -- -- -- -- -- 0.3
Banner Life Insurance Co................ 0.2 0.3 6.8 -- 1.1 0.4
Charter National Life Insurance Co...... 66.5 11.7 80.5 87.9 27.3 19.8
Fortis Benefits Insurance Co............ -- -- -- -- -- 0.2
Intramerica Life Insurance Co........... 4.9 1.3 5.7 12.1 2.4 1.8
Lincoln Benefit Life Co................. -- 0.1 1.2 -- -- --
Mutual of America Life Insurance Co..... -- 47.4 -- -- 65.0 29.6
Paragon Life Insurance Co............... -- -- 0.2 -- 0.1 --
Providentmutual Life and Annuity Co
of America.............................. -- 1.5 -- -- -- --
Safeco Life Insurance Co................ -- -- 5.5 -- -- 1.7
Union Central Life Insurance Co. ....... 28.3 -- -- -- 4.0 5.5
United of Omaha Life Insurance Co. ..... 0.1 -- -- -- -- --
-------------------------------------------------------------------
100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ======= ======= =======
</TABLE>
The policies described below are followed consistently by the Fund in the
preparation of the financial statements for its Portfolios in conformity with
generally accepted accounting principles.
SECURITY VALUATION. The Money Market Portfolio values all securities utilizing
the amortized cost method permitted in accordance with Rule 2a-7 under the
Investment Company Act of 1940, as amended, and pursuant to which the Portfolio
must adhere to certain conditions. Under this method, which does not take into
account unrealized gains or losses on securities, an instrument is initially
valued at its cost and thereafter assumes a constant accretion/amortization to
maturity of any discount/premium.
Securities in each of the remaining Portfolios are valued in the following
manner:
Portfolio securities which are traded on U.S. or foreign stock exchanges are
valued at the most recent sale price reported on the exchange on which the
security is traded most extensively. If no sale occurred, the security is then
valued at the calculated mean between the most recent bid and asked quotations.
If there are no such bid and asked quotations, the most recent bid quotation is
used. Securities quoted on the National Association of Securities Dealers
Automatic Quotation ("NASDAQ") System, for which there have been sales, are
valued at the most recent sale price reported on such system. If there are no
such sales, the value is the high or "inside" bid quotation. Securities which
are not quoted on the NASDAQ System but are traded in another over-the-counter
market are valued at the most recent sale price on such market. If no sale
occurred, the security is then valued at the calculated mean between the most
recent bid and asked quotations. If there are no such bid and asked quotations,
the most recent bid quotation shall be used.
66
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Portfolio debt securities with remaining maturities greater than sixty days are
valued by pricing agents approved by the officers of the Fund, which quotations
reflect broker/dealer-supplied valuations and electronic data processing
techniques. If the pricing agents are unable to provide such quotations, the
most recent bid quotation supplied by a bona fide market maker shall be used.
Short-term investments having a maturity of sixty days or less are valued at
amortized cost.
All other securities are valued at their fair value as determined in good faith
by the Valuation Committee of the Trustees.
OPTIONS. The International Portfolio may purchase and write (sell)
exchange-listed and over-the-counter call and put options on securities and
other financial instruments. Exchange traded options are valued at the last
sale price or, in the absence of a sale, the mean between the closing bid and
asked quotations or at the most recent asked quotation (if written) or the most
recent bid quotation (if purchased) if no bid and asked quotations are
available. Over-the-counter options are valued at the most recent asked
quotation (if written) or the most recent bid quotation (if purchased).
FOREIGN CURRENCY TRANSLATIONS. The books and records of the Portfolios are
maintained in U.S. dollars. Foreign currency transactions are translated into
U.S. dollars on the following basis:
(i) market value of investment securities, other assets and liabilities
at the daily rates of exchange, and
(ii) purchases and sales of investment securities, dividend and interest
income and certain expenses at the rates of exchange prevailing on
the respective dates of such transactions.
The Portfolios do not isolate that portion of gains and losses on investments
which is due to changes in foreign exchange rates from that which is due to
changes in market prices of the investments. Such fluctuations are included
with the net realized and unrealized gains and losses from investments.
Net realized and unrealized gain (loss) from foreign currency related
transactions includes gains and losses between trade and settlement dates on
securities transactions, gains and losses arising from the sales of foreign
currency, and gains and losses between the ex and payment dates on dividends,
interest, and foreign withholding taxes.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. In connection with portfolio
purchases and sales of securities denominated in a foreign currency, the
non-money market Portfolios may enter into forward foreign currency exchange
contracts ("contracts"). During the period, to hedge a portion of the
International Portfolio's Japanese Yen currency exposure, the International
Portfolio entered into Japanese Yen forward exchange contracts. Contracts are
recorded at market value. Certain risks may arise upon entering into these
contracts from the potential inability of counterparties to meet the terms of
their contracts. Realized and unrealized gains and losses arising from such
transactions are included in net realized and unrealized gain (loss) from
foreign currency related transactions.
REPURCHASE AGREEMENTS. The Fund on behalf of each Portfolio may enter into
repurchase agreements with U.S. and foreign banks and broker/dealers whereby
the Fund, through its custodian, receives delivery of the underlying
securities, the amount of which at the time of purchase and each subsequent
business day is required to be maintained at such a level that the market
value, depending on the maturity of the repurchase agreement and the underlying
collateral, is equal to at least 100.5% of the resale price.
FEDERAL INCOME TAXES. Each Portfolio is treated as a single corporate taxpayer
as provided for in the Internal Revenue Code of 1986, as amended. It is each
Portfolio's policy to comply with the requirements of the Internal Revenue Code
which are applicable to regulated investment companies and to distribute all of
its investment company taxable income to the separate accounts of the
Participating Insurance Companies which hold its shares. Accordingly, the
Portfolios paid no federal income taxes and no provision for federal income
taxes was required.
DISTRIBUTION OF INCOME AND GAINS. All of the net investment income of the Money
Market Portfolio is declared as a dividend to shareholders of record as of the
close of business each day and is paid to shareholders monthly. Dividends from
the Bond Portfolio, Balanced Portfolio, Growth and Income Portfolio, and the
Capital Growth Portfolio are declared and paid quarterly in April, July,
October and January. All of the net investment income of the International
Portfolio normally will be declared and distributed as a dividend annually.
During any particular year, net realized gains from investment
67
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
- --------------------------------------------------------------------------------
transactions for each Portfolio, in excess of available capital loss
carryforwards, would be taxable to the Portfolio if not distributed and,
therefore, will be distributed to the Participating Insurance Companies.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax
regulations which may differ from generally accepted accounting principles. The
differences primarily relate to investments in forward contracts, passive
foreign investment companies, post October loss deferral, non-taxable
distributions, and certain securities sold at a loss. As a result, net
investment income (loss) and net realized gain (loss) on investment
transactions for a reporting period may differ significantly from distributions
during such period. Accordingly, the Portfolios may periodically make
reclassifications among certain of its capital accounts without impacting the
net asset value of each Portfolio. The Portfolios use the specific
identification method for determining realized gain or loss on investments for
both financial and federal income tax reporting purposes.
EXPENSES. Each Portfolio is charged for those expenses which are directly
attributable to it, such as management fees and custodian fees, while other
expenses (reports to shareholders, legal and audit fees) are allocated based on
relative net asset value among the Portfolios.
OTHER. Investment security transactions are accounted for on a trade date
basis. Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income is recorded on the accrual basis. All
original issue discounts are accreted for both tax and financial reporting
purposes.
B. RELATED PARTIES
- --------------------------------------------------------------------------------
Under the Fund's Investment Advisory Agreement (the "Agreement") with Scudder,
Stevens and Clark, Inc. (the "Adviser"), the Fund agrees to pay the Adviser a
fee, based on average daily net assets, equal to an annual rate of 0.37% for
the Money Market Portfolio, 0.475% for the Bond Portfolio, 0.475% for the
Balanced Portfolio, 0.475% for the Growth and Income Portfolio, 0.475% for the
Capital Growth Portfolio, and 0.875% for the International Portfolio.
The Trustees authorized the Fund to pay the Adviser and Scudder Investor
Services, Inc. ("Investor Services"), a wholly-owned subsidiary of the Adviser,
for certain administrative expenses of the Fund in accordance with the
Agreement. Effective October 1, 1994, the Trustees authorized the elimination
of these administrative expenses.
The Trustees authorized the Fund on behalf of each Portfolio to pay Investor
Services for determining the daily net asset value per share and maintaining
the portfolio and general accounting records of the Fund. Effective October 1,
1994, under a new agreement, the Trustees authorized the Fund to pay Scudder
Fund Accounting Corp., a wholly-owned subsidiary of the Adviser, for such
services.
Related fees for such services are detailed in each Portfolio's statement of
operations.
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 Companies, each of the Participating Insurance
Companies has agreed to reimburse the Fund to the extent that the annual
operating expenses of any Portfolio of the Fund, other than the International
Portfolio, exceed three-quarters of one percent (0.75 of 1%) of that
Portfolio's average annual net assets. The Participating Insurance Companies
have agreed to reimburse the Fund to the extent that such expenses of the
International Portfolio exceed one and one-half percent (1.50 of 1%) of the
Portfolio's average annual net assets. The Adviser may advance some or all of
such reimbursement to the Fund prior to receiving payment therefore from a
Participating Insurance Company, but it is under no obligation to do so. If the
Adviser does advance such reimbursement to the Fund and does not receive
payment therefore, it will be entitled to be repaid such amounts by the Fund.
The amount due to the Adviser represents unpaid management fee, administrative
fees and accounting fees. In addition to the reimbursement by Participating
Insurance Companies noted above, until April 30, 1996, the Adviser has agreed
to waive part or all of its fees for the Growth and Income Portfolio to the
extent that the Portfolio's expenses will be maintained at 0.75%.
The Fund pays each Trustee not affiliated with the Adviser and not a Trustee of
other Scudder affiliated funds $7,500 annually plus specified amounts for
attended board and committee meetings. The Fund pays each Trustee not
affiliated with the Adviser and who is a Trustee of other Scudder affiliated
funds $5,000 annually plus specified amounts for attended board and committee
meetings. Allocated Trustees' fees for each Portfolio for the year ended
December 31, 1994 are detailed in each Portfolio's statement of operations.
68
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
TO THE TRUSTEES AND SHAREHOLDERS OF SCUDDER VARIABLE LIFE INVESTMENT FUND:
We have audited the accompanying statements of assets and liabilities of
Scudder Variable Life Investment Fund (comprised of the six Portfolios
identified in Note A), including the investment portfolios, as of December 31,
1994, and the related statements of operations, the statements of changes in
net assets, and the financial highlights for each of the periods indicated
therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1994 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Scudder Variable Life Investment Fund (comprised of the six Portfolios
identified in Note A) as of December 31, 1994, the results of their operations,
the changes in their net assets, and their financial highlights for each of the
periods indicated therein in conformity with generally accepted accounting
principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
February 3, 1995
69
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
TAX INFORMATION
- --------------------------------------------------------------------------------
Pursuant to section 852 of the Internal Revenue Code, the Balanced Portfolio,
Capital Growth Portfolio, and International Portfolio designate $292,083,
$5,511,650, and $1,548,747, respectively, as capital gain dividends for the
year ended December 31, 1994.
70
<PAGE>
Celebrating 75 Years of Serving Investors
Established in 1919 by Theodore Scudder, Sidney Stevens, and F. Haven
Clark, Scudder, Stevens & Clark was the first independent investment
counsel firm in the United States. Since its birth, Scudder's pioneering
spirit and commitment to professional long-term investment management have
helped shape the investment industry. In 1928, we introduced the nation's
first no-load mutual fund. Today we offer 36 pure no load(tm) funds,
including the first international mutual fund offered to U.S. investors.
Over the years, Scudder's global investment perspective and dedication
to research and fundamental investment disciplines have helped Scudder
become one of the largest and most respected investment managers in the
world. Though times have changed since our beginnings, we remain committed
to our long-standing principles: managing money with integrity and
distinction; keeping the interests of our clients first; providing access
to investments and markets that may not be easily available to individuals;
and making investing as simple and convenient as possible through friendly,
comprehensive service.
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.
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
<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, immediately follows this
page.
<PAGE>
Scudder Variable Life
Investment Fund
Semiannual Report
June 30, 1995
An open-end management investment company that offers shares of beneficial
interest in six types of diversified portfolios.
<PAGE>
Scudder Variable Life Investment Fund
Contents
Letter from the Fund's President .......................................... 2
Money Market Portfolio Management Discussion .............................. 3
Bond Portfolio Management Discussion ...................................... 4
Bond Portfolio Summary .................................................... 5
Balanced Portfolio Management Discussion .................................. 6
Balanced Portfolio Summary ................................................ 7
Growth and Income Portfolio Management Discussion ......................... 8
Growth and Income Portfolio Summary ....................................... 9
Capital Growth Portfolio Management Discussion ............................ 10
Capital Growth Portfolio Summary .......................................... 11
International Portfolio Management Discussion ............................. 12
International Portfolio Summary ........................................... 13
Investment Portfolios, Financial Statements, and Financial Highlights
Money Market Portfolio ........................................... 14
Bond Portfolio ................................................... 20
Balanced Portfolio ............................................... 27
Growth and Income Portfolio ...................................... 37
Capital Growth Portfolio ......................................... 45
International Portfolio .......................................... 54
Notes to Financial Statements ............................................. 64
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
LETTER FROM THE FUND'S PRESIDENT
Dear Shareholders,
Stock and bond prices worldwide improved dramatically in the first half
of this year as concerns about inflationary economic growth all but disappeared.
Economic growth in the United States and Europe has shown signs of weakening in
recent months, allowing stock investors to focus on the strong corporate
earnings increases that have characterized the past few years. Bond investors,
believing that inflation is no longer a current concern, have pushed prices
higher and interest rates lower. In the United States, the Federal Reserve
assured investors that this was the case with a quarter of a percentage point
reduction in the federal funds rate in early July.
While growth in capital markets is always welcome, rapid increases in
asset prices often warn of excess. A 20% rise in the U.S. stock market in six
months, for example, is not reflective of an economy late in its expansionary
cycle. Indeed, the recent surge in mergers and acquisitions suggests that
corporations have exhausted the benefits of downsizing and are looking to other
means of generating profits. At a minimum, we think it will be difficult for the
markets to repeat in the next six months their performance in the first half of
this year, and caution investors not to be surprised by any near-term
corrections.
Longer term, however, we believe that investment prospects around the
world are fundamentally positive. In our view, the driver of capital market
returns over the next five years will be disinflationary growth, dominated by
such forces as technological innovation, deregulation, and monetary restraint.
While both stock and bond markets will offer opportunity, those industries and
companies that flexibly accommodate change should offer above-average returns.
However, emerging markets and industries that truly emerge are likely to produce
the highest returns of all. A global disinflationary growth environment runs
counter to much of our previous economic experience. With an approach to
investment management grounded in innovative independent research, Scudder's
portfolio managers and analysts will continually assess the changing economic
landscape to try to identify those investment opportunities that provide
financial reward for shareholders with an appropriate level of risk.
In closing, I am pleased to announce that Stephen L. Akers has joined
the Money Market Portfolio's management team and that Bruce F. Beaty has joined
the Capital Growth Portfolio's management team, replacing Steven P. Aronoff and
Julia D. Cox. Stephen joined Scudder in 1984 and is the Director of Scudder's
Reserve Asset Management Group, managing several portfolios. Bruce joined
Scudder in 1991 as a member of Scudder's Global Equity Group, concentrating on
research and investment in U.S. equities, and has 15 years' experience in stock
analysis and investing.
Thank you for choosing Scudder Variable Life Investment Fund to help
meet your investment needs.
Sincerely,
/s/David B. Watts
David B. Watts
President,
Scudder Variable Life Investment Fund
2
<PAGE>
MONEY MARKET PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
We are pleased to report that Money Market Portfolio provided investors
with a stable $1.00 share price during the first half of 1995 and a 5.55% 7-day
net annualized yield as of June 30. The Portfolio also returned a competitive
2.83% for the same period, compared with 2.73% for the 85 money market funds
tracked by Lipper Analytical Services. While money markets generally offer
higher yields than insured bank savings accounts, it is important to keep in
mind that the Portfolio's yield will continue to fluctuate with prevailing
interest rates.
After rising for much of 1994, long-term interest rates have declined
thus far in 1995. The Federal Reserve's series of rate hikes last year reassured
investors that inflation was under control. Shortly after the close of the June
30 semiannual period, the Fed reduced short-term interest rates by 1/4 of a
percentage point, providing further evidence that inflation is not currently a
threat to the economy. Given this year's interest rate environment, Money Market
Portfolio has extended its average maturity to 52 days at the close of the
six-month period, in contrast with 35 days six months earlier. Additional
interest rate declines will be the impetus for further adjustments of the
Portfolio's average maturity as we strive to provide both competitive yields and
price stability for shareholders.
Corporate commercial paper constituted a significant portion of the
Portfolio throughout the period. These securities, which provide companies with
short-term funds at a lower rate than is typically offered by banks, continue to
provide attractive relative yields. At the end of the period, commercial paper
accounted for approximately 60% of the Portfolio.
If, in the coming months, the economy continues to slow and inflation
remains under control, we intend to favor longer-term money market securities to
"lock in" higher interest rates. As always, our focus will remain on quality as
we select short-term money market investments to maintain Money Market
Portfolio's stable share price and competitive yield.
Sincerely,
Your Portfolio Management Team
/s/Robert T. Neff /s/Stephen L. Akers
Robert T. Neff Stephen L. Akers
Lead Portfolio Manager
/s/Nicca B. Alcantara
Nicca B. Alcantara
3
<PAGE>
BOND PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
The unmanaged Lehman Brothers Aggregate Bond Index provided a total
return of 11.44% for the six months ended June 30, the strongest first-half
return since the index was created in the early 1970s. The dramatic rally in
bonds so far this year reflects a much more benign interest rate environment
than existed last year. Indeed, the recent easing of interest rates by the
Federal Reserve, coming after a series of rate hikes in 1994, testifies to their
confidence in the current trend of slow economic growth and low inflation. While
interest rates have eased in many parts of the globe, the U.S. market provided
stronger overall returns (as measured by ten-year bonds) than those of its G-7
partners Canada, France, Germany, Italy, Japan, and the United Kingdom.
The Bond Portfolio returned 10.40% during the period and provided a
6.89% 30-day net annualized SEC yield as of June 30. Performance, while strong,
reflects the fact that managed bond portfolios typically underperform the market
averages in periods of strong price appreciation. Unlike the indexes, bond
portfolios need to maintain some cash reserves at all times, which acts as a
drag on performance during market rallies.
As the interest rate environment improved starting late last year, we
began to increase the Portfolio's duration. As of June 30, 1995, the average
duration stood at 5.22 years, compared with 5.09 years on December 31, 1994. The
longer duration allows the Portfolio to participate more fully in the bond price
rally while capturing higher relative yields. We also de-emphasized our position
in mortgage-backed securities during the period, which aided overall Portfolio
performance. These securities tend to underperform other types of bonds during
periods of strong price appreciation, because as yields decline the risk of
mortgage prepayment increases. Another contributor to performance was our
corporate bond holdings, where strong security selection resulted in solid price
appreciation during the period.
Our current outlook calls for the possibility of further interest rate
declines over the next year to year-and-a-half. Evidence now suggests that
weaker economic growth and low inflation exists in most of the industrialized
world, which makes the global environment more conducive to easier monetary
policy and lower rates. Even so, after such unusually strong bond market returns
in the first half, we will be watching for periods of price corrections, which
could result from profit-taking or a spate of higher growth later this year. In
the coming months, we intend to maintain or slightly increase duration, and
focus more on intermediate-term securities, which currently offer solid values
in our opinion. We view the Portfolio's current positioning, with its emphasis
on both competitive yields and price appreciation, as appropriate in the current
environment.
Sincerely,
Your Portfolio Management Team
/s/Ruth Heisler /s/Renee L. Ross
Ruth Heisler Renee L. Ross
Lead Portfolio Manager
/s/William M. Hutchinson
William M. Hutchinson
4
<PAGE>
Bond Portfolio
Portfolio Summary as of June 30, 1995
- -----------------------------------------------------------------
Growth of a $10,000 Investment
- -----------------------------------------------------------------
Bond Portfolio
- ----------------------------------------
Total Return
Period Growth -------------
Ended of Average
6/30/95 $10,000 Cumulative Annual
- --------- ------- ---------- -------
1 Year $11,142 11.42% 11.42%
5 Year $15,701 57.01% 9.44%
Life of
Fund* $23,117 131.17% 8.78%
LB Aggregate Bond Index
- --------------------------------------
Total Return
Period Growth -------------
Ended of Average
6/30/95 $10,000 Cumulative Annual
- --------- ------- ---------- -------
1 Year $11,255 12.55% 12.55%
5 Year $15,676 56.76% 9.40%
Life of
Fund* $26,052 160.52% 10.14%
*The Fund commenced operations on July 16, 1985.
Index comparisons begin July 31, 1985.
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
Yearly periods ended June 30
Bond Portfolio
Year Amount
- ---------------------
7/31/85* 10000
86 11492
87 11935
88 12656
89 13817
90 14699
91 16171
92 18573
93 21202
94 20713
95 23079
LB Aggregate Bond Index
Year Amount
- ----------------------
7/31/85* 10000
86 12043
87 12708
88 13731
89 15409
90 16619
91 18397
92 20980
93 23453
94 26052
The Lehman Brothers (LB) Aggregate Bond Index is an unmanaged market
value-weighted measure of treasury issues, agency issues, corporate
bond issues and mortgage securities. Index returns assume reinvestment
of dividends and, unlike Fund returns, do not reflect any fees or
expenses.
All performance is historical, assumes reinvestment of all dividends
and capital gains, and is not indicative of future results. Investment
return and principal value will fluctuate, so an investor's shares,
when redeemed, may be worth more or less than when purchased. Total
returns in some periods were higher due to maintenance of the Fund's
expenses. See Financial Highlights for the Bond Portfolio.
- -------------------------------------------------------------------
ASSET QUALITY
- -------------------------------------------------------------------
By Quality
- -------------------
AAA 74%
AA 3% Despite the period's various changes
A 14% in asset allocation, Bond Portfolio
BBB 8% has maintained its high overall credit
NR 1% quality, with over 90% of its holdings
---- rated A or higher.
100%
====
- -------------------
Average Quality: AAA
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- -------------------------------------------------------------------
EFFECTIVE MATURITY
- -------------------------------------------------------------------
Less than 1 year 15%
1 up to 3 years 22%
3 up to 8 years 22%
8 up to 10 years 11%
10 years or greater 30%
----
100%
====
Weighted average effective maturity: 9 years
- -------------------------------------------------------------------
DIVERSIFICATION
- -------------------------------------------------------------------
U.S. Treasury Obligations 52%
Corporate Bonds 19%
Foreign Bonds 8%
Asset-Backed Securities 8%
U.S. Government Guaranteed
Mortgages 7%
U.S. Government Agency
Pass-Thrus 4%
Collateralized Mortgage
Obligations 2%
----
100%
====
5
<PAGE>
BALANCED PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
A combination of positive factors--including strong corporate earnings,
moderate inflation, declining interest rates, and strong flows into mutual
funds--drove overall market results in the year's first two quarters. The
unmanaged S&P 500 Index returned 20.21% while the bond market, as measured by
the unmanaged Lehman Brothers Aggregate Bond Index, returned 11.44% in the first
half of the year. The Balanced Portfolio provided a total return of 15.22% for
the semiannual period ended June 30, 1995. The Portfolio's performance compares
well with the 13.30% average total return for the 26 balanced funds tracked by
Lipper Analytical Services.
Our strategy in the stock portion of the Portfolio continues to focus
on the purchase of large- and medium-capitalization growth stocks with
attractively valued growth of earnings relative to the market and industry
peers. Portfolio concentration in the first half of the year has remained in
financial service, consumer staples, healthcare, and technology issues. These
groups posted strong performance for the period, with financial holdings
benefiting from declining interest rates, healthcare holdings reaping the
rewards of restructuring, and technology companies enjoying strong product
demand. Despite significant gains in several holdings--including Nokia,
Ericsson, Motorola, Intel, and Texas Instruments--we are mindful that demand for
computers and related technology is unpredictable, and that heightened
performance expectations are vulnerable to disappointment. Fortunately, the
long-term outlook for further earnings growth in this sector remains positive.
As for the income portion of the Portfolio, we have focused on a
slightly longer duration (4.85 years as of June 30 versus 4.77 years at
year-end) to take advantage of the price increases and yield declines that have
accompanied the current environment of falling interest rates. Other shifts
reflective of the trend toward lower rates include a de-emphasis of
mortgage-backed securities and an increase in intermediate-term holdings, the
latter of which we expect to continue to implement over the next few months.
Mortgage-backed securities typically underperform during periods of falling
interest rates, due to the higher risk of prepayment. Our focus on
intermediate-term maturities stems from their attractive yields and price
appreciation potential. Looking ahead, we believe that the Portfolio's
well-balanced equity and bond strategies are positioned to provide solid
absolute and relative performance over time.
Sincerely,
Your Portfolio Management Team
/s/Bruce F. Beaty /s/Ruth Heisler
Bruce F. Beaty Ruth Heisler
Lead Portfolio Manager
/s/Renee L. Ross /s/William F. Gadsden
Renee L. Ross William F. Gadsden
6
<PAGE>
Balanced Portfolio
Portfolio Summary as of June 30, 1995
- -----------------------------------------------------------------
Growth of a $10,000 Investment
- -----------------------------------------------------------------
Balanced Portfolio
- ----------------------------------------
Total Return
Period Growth -------------
Ended of Average
6/30/95 $10,000 Cumulative Annual
- --------- ------- ---------- -------
1 Year $11,909 19.09% 19.09%
5 Year $15,783 57.83% 9.56%
Life of
Fund* $28,434 184.34% 11.06%
S&P 500 Index (60%) and LBAB Index (40%)
- --------------------------------------
Total Return
Period Growth -------------
Ended of Average
6/30/95 $10,000 Cumulative Annual
- --------- ------- ---------- -------
1 Year $12,160 21.60% 21.60%
5 Year $17,024 70.24% 11.22%
Life of
Fund* $34,055 240.55% 13.03%
*The Fund commenced operations on July 16, 1985.
Index comparisons begin July 31, 1985.
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
Yearly periods ended June 30
Balanced Portfolio
Year Amount
- ---------------------
7/31/85* 10000
86 13147
87 14545
88 14579
89 16925
90 18136
91 18546
92 21701
93 24108
94 24036
95 28625
S&P 500 Index
Year Amount
- ----------------------
7/31/85* 10000
86 13602
87 17024
88 15850
89 19106
90 22257
91 23902
92 27108
93 30803
94 31236
95 39379
LBAB Index
Year Amount
- ----------------------
7/31/85* 10000
86 12043
87 12708
88 13731
89 15409
90 16619
91 18397
92 20980
93 23453
94 23147
95 26052
The Standard & Poor's (S&P) 500 Index is an unmanaged capitalization-
weighted measure of 500 widely held common stocks listed on the New
York Stock Exchange, American Stock Exchange, and Over-The-Counter
market and The Lehman Brothers Aggregate Bond (LBAB) Index is an
unmanaged market value-weighted measure of treasury issues, agency
issues, corporate bond issues and mortgage securities. Index returns
assume reinvestment of dividends and, unlike Fund returns, do not
reflect any fees or expenses.
All performance is historical, assumes reinvestment of all dividends
and capital gains, and is not indicative of future results. Investment
return and principal value will fluctuate, so an investor's shares,
when redeemed, may be worth more or less than when purchased. Total
returns in some periods were higher due to maintenance of the Fund's
expenses. See Financial Highlights for the Balanced Portfolio. The
Balanced Portfolio, with its current name and investment objective,
commenced operations on May 1, 1993. Performance figures include the
performance of its predecessor, the Managed Diversified Portfolio.
Since adopting its current objectives, the cumulative and average
annual returns are 20.94% and 9.17%, respectively.
- -------------------------------------------------------------------
EQUITY HOLDINGS
- -------------------------------------------------------------------
Sector breakdown of the Five Largest Equity Holdings
Portfolio's equity holdings -----------------------------------
- ---------------------------
Technology 15% 1. Federal National Mortgage Association
Financial 14% Insurer and holder of mortgage loans
Consumer Staples 14% 2. Columbia/HCA Healthcare Corp.
Health 12% Leading hospital management company
Consumer Discretionary 8% 3. American International Group, Inc.
Energy 8% Major international insurance holding
Durables 7% 4. Eli Lilly Co.
Media 7% Leading pharmaceutical company
Manufacturing 7% 5. Motorola Inc.
Other 8% Manufacturer of semiconductors and
---- communication products
100%
====
- -------------------------------------------------------------------
FIXED INCOME HOLDINGS
- -------------------------------------------------------------------
By Asset Type
- --------------------------------------------
U.S. Treasury Obligations 44%
Cash Equivalents 19%
Corporate Bonds 17%
U.S. Gov't Guaranteed Mortgages 6%
Asset-Backed Securities 6%
Foreign Bonds 5%
U.S. Government Agency Pass-Thrus 2%
Collateralized Mortgage Obligations 1%
----
100%
====
By Quality
- --------------------------------------------
AAA 77%
AA 2%
A 9%
BBB 12%
----
100%
====
7
<PAGE>
GROWTH AND INCOME PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
For the six months ended June 30, 1995, the Growth and Income Portfolio
provided a total return of 15.46%, reflecting the strong overall performance of
U.S. stocks: the unmanaged S&P 500 Index returned 20.21% for the same period.
Manufacturing and durable goods holdings--sectors that are overweighted
in the Portfolio compared with the Index--made the most significant contribution
to performance, led by such standouts as United Technologies, Rockwell, and
Lockheed. Specialty chemicals companies Betz Labs and Witco also provided strong
gains. Financial stocks have continued their strong recovery from the difficult
interest rate environment of 1994, and the Portfolio's overweighting in such
stocks as Sallie Mae, Chemical Bank, and Bankers Trust also boosted returns.
Sallie Mae, in particular, now with a new group of board members who call
themselves "The Committee to Restore Value to Sallie Mae," has enjoyed a sharp
recovery this year, up 46.5% for the six-month period. The Portfolio also
benefited from its limited exposure to consumer stocks in the leisure, retail,
and entertainment industries. After several years of robust spending, American
consumers have tightened their purse strings, suppressing the earnings of many
consumer-goods-oriented companies--the second-worst performing group in the
quarter just ended.
Although the Portfolio's performance this year has been strong on an
absolute basis, it has not kept pace with the S&P benchmark, in part because of
our commitment to energy stocks, which generally have underperformed. Despite
recent price weakness, we believe the longer-term outlook for energy stocks is
positive, given the burgeoning demand for energy by mature and developing
economies around the world. Another factor in the Portfolio's relative
underperformance was the absence of technology stocks, which as a group have led
the market rally in 1995. These stocks are often characterized by a high degree
of price volatility and minimal or nonexistent dividends. By contrast, our
investment approach is based on selecting stocks with a combination of
attractive fundamental qualities and high-paying dividends relative to the
S&P--a strategy designed to provide competitive returns in strong markets and
above-market performance in weak ones. We believe this approach will continue to
serve investors well in the future, as it has in the past.
Sincerely,
Your Portfolio Management Team
/s/Robert T. Hoffman /s/Kathleen T. Millard
Robert T. Hoffman Kathleen T. Millard
Lead Portfolio Manager
/s/Benjamin W. Thorndike
Benjamin W. Thorndike
8
<PAGE>
Growth and Income Portfolio
Portfolio Summary as of June 30, 1995
- -----------------------------------------------------------------
Growth of a $10,000 Investment
- -----------------------------------------------------------------
Growth and Income Portfolio
- ----------------------------------------
Total Return
Period Growth -------------
Ended of Average
6/30/95 $10,000 Cumulative Annual
- --------- ------- ---------- -------
1 Year $11,993 19.93% 19.93%
Life of
Fund* $12,113 21.13% 17.94%
S&P 500 Index
- --------------------------------------
Total Return
Period Growth -------------
Ended of Average
6/30/95 $10,000 Cumulative Annual
- --------- ------- ---------- -------
1 Year $12,607 26.07% 26.07%
Life of
Fund* $12,500 25.00% 21.18%
*The Fund commenced operations on May 2, 1994.
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
Growth and Income Portfolio
Year Amount
- ---------------------
5/2/94* 10000
6/94 10100
9/94 10750
12/94 10491
3/95 11175
6/95 12113
S&P 500 Index
Year Amount
- ----------------------
5/2/94* 10000
6/94 9915
9/94 10400
12/94 10398
3/95 11411
6/95 12500
The Standard & Poor's (S&P) 500 Index is an unmanaged capitalization-
weighted measure of 500 widely held common stocks listed on the New
York Stock Exchange, American Stock Exchange, and Over-The-Counter
market. Index returns assume reinvestment of dividends and, unlike
Fund returns, do not reflect any fees or expenses.
All performance is historical, assumes reinvestment of all dividends
and capital gains, and is not indicative of future results. Investment
return and principal value will fluctuate, so an investor's shares,
when redeemed, may be worth more or less than when purchased. Total
returns were higher due to maintenance of the Fund's expenses. See
Financial Highlights for the Growth and Income Portfolio.
- -------------------------------------------------------------------
DIVERSIFICATION
- -------------------------------------------------------------------
Equity Securities 98%
Cash Equivalents 2%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
Sector breakdown of the Portfolio's equity holdings
Financial 18%
Manufacturing 16%
Health 15% Growth and Income Portfolio benefited
Energy 11% from its relatively large weightings
Consumer Staples 11% in the manufacturing and durable goods
Durables 8% sectors, with notable performance coming
Utilities 5% from United Technologies, Rockwell, and
Service Industries 5% Lockheed Martin.
Communications 4%
Other 5%
----
98%
====
- --------------------------------------------------------------------------
TEN LARGEST EQUITY HOLDINGS
- --------------------------------------------------------------------------
1. United Technologies Corp.
Aerospace, climate control systems and elevators
2. Eli Lilly Co.
Leading pharmaceutical company
3. Baxter International Inc.
Manufacturer and distributor of hospital and laboratory
products and services
4. Student Loan Marketing Association
Student loan financing programs
5. TRW Inc.
Defense electronics, automotive parts and systems
6. Xerox Corp.
Leading manufacturer of copiers and duplicators
7. First Bank System Inc.
Commercial banking in Minnesota and the northcentral U.S.
8. Warner-Lambert Co.
Drugs, toiletries and food products
9. E.I. du Pont de Nemours & Co.
Chemical producer
10. Lockheed Martin Corp.
Manufacturer of aircraft, missiles and space equipment
9
<PAGE>
CAPITAL GROWTH PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
Strong corporate earnings and declining interest rates pushed stock
prices to record highs in the first half of 1995. Capital Growth Portfolio's net
asset value rose $1.49 per share to $13.72 on June 30. In addition, the
Portfolio distributed $0.035 per share in income and $0.425 per share in capital
gains to shareholders, contributing to a total return of 16.48% for the period.
The positive forces influencing stock market activity in recent months
will continue, in our opinion, to drive share prices for the balance of 1995. In
recent months, the Portfolio has benefited from significant appreciation in its
cable and technology holdings, with the strongest performance coming from such
semiconductor stocks as Intel, up 98% for the period. Intel was the Portfolio's
largest holding on June 30. Another important contributor to performance during
the period was the financial services sector, which benefited from a greatly
improved interest rate environment. Portfolio positions were added in American
International Group, PMI Group, and Fannie Mae.
Alternatively, the Portfolio's historically high concentrations in
media and communications companies have been reduced. While we believe that the
long-term outlook for these companies remains quite positive, near-term
regulatory and competitive concerns no longer justify significant overweighting.
Similarly, in the gaming sector, which has continued to disappoint due to legal
difficulties and increased competition, we reduced or sold holdings in Bally
Gaming, Circus Circus, Mirage Resorts, and President Casinos. We continue to
favor the technology sector. But within the context of this large area we have
and will continue to adjust the Portfolio's mix of investments. Selling into the
recent rally, we took profits in such companies as Informix and Advanced Micro
Devices, and purchased Hewlett-Packard. Overall, the technology, financial, and
healthcare sectors continue to be areas of focus for the Portfolio.
In the coming months, we expect a general slowing of economic growth
around the world and therefore have emphasized those industries and companies
where we believe earnings growth is sustainable. Fortunately, we are encouraged
by the relative health of U.S. corporations and the benign inflationary
environment. We believe Capital Growth Portfolio is well-positioned to benefit
shareholders over time.
Sincerely,
Your Portfolio Management Team
/s/William F. Gadsden /s/Bruce F. Beaty
William F. Gadsden Bruce F. Beaty
Lead Portfolio Manager
10
<PAGE>
Capital Growth Portfolio
Portfolio Summary as of June 30, 1995
- -----------------------------------------------------------------
Growth of a $10,000 Investment
- -----------------------------------------------------------------
Capital Growth Portfolio
- ----------------------------------------
Total Return
Period Growth -------------
Ended of Average
6/30/95 $10,000 Cumulative Annual
- --------- ------- ---------- -------
1 Year $12,031 20.31% 20.31%
5 Year $17,148 71.48% 11.39%
Life of
Fund* $34,692 246.92% 13.30%
S&P 500 Index
- --------------------------------------
Total Return
Period Growth -------------
Ended of Average
6/30/95 $10,000 Cumulative Annual
- --------- ------- ---------- -------
1 Year $12,607 26.07% 26.07%
5 Year $17,693 76.93% 12.08%
Life of
Fund* $39,379 293.79% 14.83%
*The Fund commenced operations on July 16, 1985.
Index comparisons begin July 31, 1985.
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
Yearly Periods Ended June 30
Capital Growth Portfolio
Year Amount
- ---------------------
7/31/85* 10000
86 13718
87 17198
88 16314
89 19072
90 20609
91 21176
92 25087
93 29636
94 29374
95 35340
S&P 500 Index
Year Amount
- ---------------------
7/31/85* 10000
86 13602
87 17024
88 15850
89 19106
90 22257
91 23902
92 27108
93 30803
94 31236
95 39379
The Standard & Poor's (S&P) 500 Index is an unmanaged capitalization-
weighted measure of 500 widely held common stocks listed on the New
York Stock Exchange, American Stock Exchange, and Over-The-Counter
market. Index returns assume reinvestment of dividends and, unlike
Fund returns, do not reflect any fees or expenses.
All performance is historical, assumes reinvestment of all dividends
and capital gains, and is not indicative of future results. Investment
return and principal value will fluctuate, so an investor's shares,
when redeemed, may be worth more or less than when purchased. Total
returns in some periods were higher due to maintenance of the Fund's
expenses. See Financial Highlights for the Capital Growth Portfolio.
- -------------------------------------------------------------------
DIVERSIFICATION
- -------------------------------------------------------------------
Equity Securities 94%
Cash Equivalents 6%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
Sector breakdown of the Portfolio's equity holdings
Technology 19%
Financial 14% The Portfolio's historically high
Health 11% concentrations in media and communications
Media 11% companies have beenr reduced, since
Energy 8% current valuations and fundamental
Consumer Discretionary 6% prospects no longer justify a substantial
Durables 5% overweighting in our opinion.
Communications 5%
Service Industries 4%
Other 11%
----
94%
====
- --------------------------------------------------------------------------
TEN LARGEST EQUITY HOLDINGS
- --------------------------------------------------------------------------
1. Intel Corp.
Semiconductor memory circuits
2. Time Warner Inc.
Publishing, broadcasting, and video entertainment company
3. Columbia/HCA Healthcare Corp.
Leading hospital management company
4. Federal National Mortgage Association
Insurer and holder of mortgage loans
5. Hewlett-Packard Co.
Measurement and test instruments, computer systems
6. Texas Instruments Inc.
Semiconductors and electronic equipment
7. Tele-Communications Inc.
Cable TV systems and microwave services
8. American International Group, Inc.
Major international insurance holding company
9. Capital Cities/ABC Inc.
TV and radio broadcasting, cable programming and publishing
10. Amoco Corp.
International oil company
11
<PAGE>
INTERNATIONAL PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
A noticeably more positive investment environment in recent months and
the strong performance of several portfolio holdings combined to provide a 4.25%
total return for International Portfolio in the six months ended June 30, 1995.
The Portfolio's return compares favorably with the 2.95% return of the unmanaged
Morgan Stanley Capital International Europe, Australia, and Far East plus Canada
Index, as well as with the 3.58% average return of the 58 international funds
tracked by Lipper Analytical Services.
Throughout the six-month period, we continued to enhance investments in
European markets while trimming the Portfolio's exposure to Japan. This strategy
served the Portfolio well, as Finland, Sweden, and Switzerland were among the
best-performing stock markets in the world, returning 30.0%, 16.7%, and 23.2%,
respectively. Meanwhile, Japan returned -8.2% during the period, beset by the
strong yen, a deflationary spiral, trade conflict with the United States, and
ineffectual government policy. Despite the many excellent companies in Japan, we
intend to maintain a cautious approach to Japanese investments until the
Japanese government pursues meaningful policies to address its economic
difficulties. Also, as the likelihood of a weakening yen increased, we increased
our currency hedges on the Portfolio's remaining Japanese investments. Roughly
25% of the Portfolio's Japanese holdings was hedged back to the dollar as of
June 30.
With the proceeds from our sales in Japan we invested in several
European companies that are enjoying the benefits of strong earnings and
negligible inflation, including stocks of financial companies. Central banks in
Europe and elsewhere have shifted from an anti-inflation policy, which included
rising interest rates, to a more neutral wait-and-see stance. Additions during
the period include Compagnie Bancaire SA and Societe Generale in France, and
AEGON Insurance Group NV in the Netherlands.
In the coming months, we intend to remain focused on what we consider
the key global growth themes, identifying those companies that have established
successful market niches in a world economy characterized by slow overall growth
and low inflation.
Sincerely,
Your Portfolio Management Team
/s/Carol L. Franklin /s/Nicholas Bratt
Carol L. Franklin Nicholas Bratt
Lead Portfolio Manager
/s/Joan R. Gregory
Joan R. Gregory
12
<PAGE>
International Portfolio
Portfolio Summary as of June 30, 1995
- -----------------------------------------------------------------
Growth of a $10,000 Investment
- -----------------------------------------------------------------
International Portfolio
- ----------------------------------------
Total Return
Period Growth -------------
Ended of Average
6/30/95 $10,000 Cumulative Annual
- --------- ------- ---------- -------
1 Year $10,262 2.62% 2.62%
5 Year $13,275 32.75% 5.83%
Life of
Fund* $20,428 104.28% 9.15%
MSCI EAFE & Canada Index
- --------------------------------------
Total Return
Period Growth -------------
Ended of Average
6/30/95 $10,000 Cumulative Annual
- --------- ------- ---------- -------
1 Year $10,227 2.27% 2.27%
5 Year $12,552 25.52% 4.65%
Life of
Fund* $14,325 43.25% 4.55%
*The Fund commenced operations on May 1, 1987.
Index comparisons begin May 31, 1987.
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
Yearly Periods Ended June 30
International Portfolio
Year Amount
- ---------------------
5/31/87* 10000
87 10688
88 9972
89 11921
90 15492
91 13925
92 15162
93 16540
94 20041
95 20566
MSCI EAFE & Canada Index
Year Amount
- ---------------------
5/31/87* 10000
87 9706
88 10092
89 11065
90 11413
91 10167
92 10088
93 12057
94 14007
95 14325
The Morgan Stanley Capital International (MSCI) Europe, Australia,
the Far East (EAFE) & Canada Index is an unmanaged capitalization-
weighted measure of stock markets in Europe, Australia, the Far East
and Canada. Index returns assume dividends reinvested net of
withholding tax and, unlike Fund returns, do not reflect any fees or
expenses.
All performance is historical, assumes reinvestment of all dividends
and capital gains, and is not indicative of future results. Investment
return and principal value will fluctuate, so an investor's shares,
when redeemed, may be worth more or less than when purchased. Total
returns in some periods were higher due to maintenance of the Fund's
expenses. See Financial Highlights for the International Portfolio.
- -------------------------------------------------------------------
DIVERSIFICATION
- -------------------------------------------------------------------
By Region (Excluding Cash Equivalents)
- --------------------------------------
Europe 63%
Japan 18%
Pacific Basin 11%
Latin America 5%
Canada 3%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
By Sector (Equity Holdings)
- -------------------------------------
Manufacturing 18%
Financial 12%
Metals and Minerals 10%
Durables 10%
Energy 9%
Utilities 6%
Technology 6%
Service Industries 6%
Consumer Staples 5%
Other 18%
----
100%
====
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- --------------------------------------------------------------------------
TEN LARGEST EQUITY HOLDINGS
- --------------------------------------------------------------------------
1. SAP AG
German computer software manufacturer
2. Autoliv AB
Swedish manufacturer of safety airbags for automobiles
3. Nokia AB Oy
Leading manufacturer of cellular telephones in Finland
4. L.M. Ericsson Telephone Co.
Leading manufacturer of cellular telephone equipment in Sweden
5. SMC Corp.
Leading maker of pneumatic equipment in Japan
6. Heineken Holdings N.V.
Brewery in the Netherlands
7. Philips Electronics N.V.
Leading manufacturer of electrical equipment in the Netherlands
8. Hutchison Whampoa, Ltd.
Container terminal and real estate company in Hong Kong
9. Reuters Holdings PLC
International news agency in the United Kingdom
10. Brown, Boveri & Cie. AG
Swiss manufacturer of electrical equipment
13
<PAGE>
<TABLE>
MONEY MARKET PORTFOLIO
INVESTMENT PORTFOLIO as of June 30, 1995 (Unaudited)
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Value ($)
Portfolio Amount ($) (Note A)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
--------------------------------------------------------------------------------------
13.7% REPURCHASE AGREEMENT
--------------------------------------------------------------------------------------
11,293,000 Repurchase Agreement with Nesbitt Burns Securities
Inc. dated 6/30/95 at 6.125%, to be repurchased at
$11,298,764 on 7/3/95, collateralized by a $11,140,000
U.S. Treasury Note, 6.25%, 8/31/96 (Cost $11,293,000)...... 11,293,000
----------
--------------------------------------------------------------------------------------
59.8% COMMERCIAL PAPER
--------------------------------------------------------------------------------------
HEALTH 7.2%
Pharmaceuticals 3,000,000 Eli Lilly & Co., 5.82%, 9/20/95............................. 2,960,715
3,000,000 Warner Lambert Co., 5.55%, 12/18/95......................... 2,921,375
----------
5,882,090
----------
COMMUNICATIONS 7.2%
Telephone/
Communications 3,000,000 AT&T Corp., 5.97%, 7/26/95.................................. 2,987,562
3,000,000 BellSouth Telecommunications Inc., 6.02%, 9/22/95........... 2,958,362
----------
5,945,924
----------
FINANCIAL 36.4%
Banks 7.3% 3,000,000 Deutsche Bank Financial Inc., 5.85%, 7/6/95................. 2,997,562
3,000,000 Prudential Funding Corp., 6%, 7/14/95....................... 3,000,000
----------
5,997,562
----------
Consumer Finance 10.9% 3,000,000 American Express Credit Corp., 5.99%, 8/8/95................ 3,000,000
3,000,000 Ford Motor Credit Corp., 5.97%, 7/7/95...................... 2,997,015
3,000,000 General Electric Capital Corp., 5.99%, 7/24/95.............. 3,000,000
----------
8,997,015
----------
Other Financial
Companies 18.2% 3,000,000 Associated Corp. of North America, 5.96%, 7/10/95........... 3,000,000
3,000,000 Ciesco L.P., 5.85%, 9/12/95................................. 2,964,412
3,000,000 Corporate Asset Funding Corp., 5.9%, 8/23/95................ 2,973,942
3,000,000 New Center Asset Trust, 5.94%, 7/5/95....................... 2,998,020
3,075,000 Rincon Securities Inc., 5.97%, 7/26/95...................... 3,062,252
----------
14,998,626
----------
MANUFACTURING 3.6%
Machinery/
Components/Controls 3,000,000 Pitney Bowes Credit Corp., 6.17%, 9/6/95.................... 2,965,551
-----------
ENERGY 5.4%
Oil Companies 1,500,000 Chevron Oil Finance Co., 5.93%, 7/12/95..................... 1,497,282
3,000,000 Shell Oil Credit Co., 5.95%, 8/1/95......................... 2,984,629
-----------
4,481,911
-----------
TOTAL COMMERCIAL PAPER (Cost $49,268,679)................... 49,268,679
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Value ($)
Portfolio Amount ($) (Note A)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
13.2% ---------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS
---------------------------------------------------------------------------------------
5,000,000 U.S. Treasury Bill, 6.32%, 7/6/95............................. 4,995,615
3,000,000 U.S. Treasury Bill, 6.19%, 7/13/95............................ 2,993,815
3,000,000 U.S. Treasury Bill, 6.75%, 12/14/95........................... 2,906,694
----------
TOTAL U.S. TREASURY OBLIGATIONS (Cost $10,896,124)........................ 10,896,124
----------
---------------------------------------------------------------------------------------
3.6% U.S. GOVERNMENT AGENCY OBLIGATIONS
---------------------------------------------------------------------------------------
3,000,000 Federal National Mortgage Association, Discount Note,
5.53%, 11/29/95 (Cost $2,930,414)............................ 2,930,414
----------
---------------------------------------------------------------------------------------
9.7% SHORT-TERM NOTES
---------------------------------------------------------------------------------------
3,000,000 Fifth Third Bank, 6.2%, 10/26/95.............................. 3,000,000
3,000,000 Harris Trust and Savings Bank, 6.1%, 7/18/95.................. 3,000,000
2,000,000 Morgan Bank Delaware, 6.5%, 5/6/96............................ 2,007,463
----------
TOTAL SHORT-TERM NOTES (Cost $8,007,463)...................... 8,007,463
----------
==========================================================================================================================
TOTAL INVESTMENT PORTFOLIO - 100.0 - (Cost $82,395,680)(a).... 82,395,680
==========
(a) Cost for federal income tax purposes is $82,395,680.
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
<TABLE>
MONEY MARKET PORTFOLIO
FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------------
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
- ------------------------------------------------------------------------------------
JUNE 30, 1995 (UNAUDITED)
- ------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Investments, at value (amortized cost $82,395,680)......
(Note A)............................................. $82,395,680
Cash 66
Receivables:
Portfolio shares sold................................ 1,400,985
Interest............................................. 186,535
-----------
Total assets................................ 83,983,266
LIABILITIES
Payables:
Portfolio shares redeemed............................ $ 1,893
Accrued management fee (Note B)...................... 23,513
Other accrued expenses (Note B)...................... 9,301
-------
Total liabilities............................ 34,707
-----------
Net assets, at value.................................... $83,948,559
===========
NET ASSETS
Net assets consist of:
Paid-in capital...................................... 83,948,559
-----------
Net assets, at value.................................... $83,948,559
===========
NET ASSET VALUE, offering and redemption price per
share ($83,948,559 divided by 83,948,559
outstanding shares of beneficial interest,
no par value, unlimited number of shares
authorized).......................................... $1.00
=====
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<CAPTION>
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED)
- --------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest.............................................. $2,563,701
Expenses (Note A):....................................
Management fee (Note B)............................... $154,582
Accounting fees (Note B).............................. 15,023
Trustees' fees (Note B)............................... 7,562
Legal................................................. 12,998
Custodian fees........................................ 9,268
Auditing.............................................. 7,382
Other................................................. 3,907 210,722
------- ----------
Net investment income................................. 2,352,979
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.. $2,352,979
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
<TABLE>
MONEY MARKET PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS
ENDED YEAR
JUNE 30, ENDED
1995 DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS (UNAUDITED) 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income and net increase in net
assets resulting from operations.............................................. $ 2,352,979 $ 2,768,491
------------ -------------
Distributions to shareholders from net investment income
($.028 and $.037 per share, respectively)..................................... (2,352,979) (2,768,491)
Portfolio share transactions at net asset value of $1.00 per share: ------------ -------------
Proceeds from shares sold..................................................... 64,134,282 186,827,297
Net asset value of shares issued to shareholders in
reinvestment of distributions from net investment income................... 2,352,979 2,768,491
Cost of shares redeemed....................................................... (73,036,614) (147,877,533)
------------ -------------
Net increase (decrease) in net assets from Portfolio share transactions....... (6,549,353) 41,718,255
------------ -------------
INCREASE (DECREASE) IN NET ASSETS............................................... (6,549,353) 41,718,255
Net assets at beginning of period............................................... 90,497,912 48,779,657
------------ -------------
NET ASSETS AT END OF PERIOD..................................................... $ 83,948,559 $ 90,497,912
============ =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
- ----------------------------------------------------------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED
FROM THE FINANCIAL STATEMENTS.
<CAPTION>
SIX SIX
MONTHS MONTHS
ENDED ENDED
JUNE 30, YEARS ENDED DECEMBER 31, DECEMBER
1995 --------------------------------------------------------------------- 31,
(UNAUDITED) 1994 1993 1992 1991 1990 1989 1988 1987 1986(E)
----------- --------------------------------------------------------------------- ----------
<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
Income from investment......... ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
operations:
Net investment
income (a)................... .028 .037 .025 .033 .057 .076 .088 .068 .060 .026
Less distributions from
net investment income......... (.028) (.037) (.025) (.033) (.057) (.076) (.088) (.068) (.060) (.026)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period................. $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN (%)............... 2.83(d) 3.72 2.54 3.33 5.81 7.83 8.84 7.08 5.95 2.59(d)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of
period ($ millions)........... 84 90 49 34 28 32 15 11 8 3
Ratio of operating
expenses, net to
average daily net
assets (%) (a)................ .50(c) .56 .66 .64 .67 .69 .72 .75 .75 .75(c)
Ratio of net investment
income to average
daily net assets (%).......... 5.63(c) 3.80 2.55 3.26 5.67 7.57 8.53 6.99 6.06 5.10(c)
<FN>
(a) Portion of expenses
reimbursed
(Note B).................. $ - $ - $ - $ - $ - $ - $ .001 $ .003 $ .006 $ .022
(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.
</FN>
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 16, 1985
(COMMENCEMENT
OF OPERATIONS)
TO JUNE 30,
1986
--------------
<S> <C>
Net asset value,
beginning of period $1.000(b)
Income from investment......... ------
operations:
Net investment
income (a)................... .064
Less distributions from
net investment income......... (.064)
------
Net asset value,
end of period................. $1.000
======
TOTAL RETURN (%)............... 6.59(d)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of
period ($ millions)........... -
Ratio of operating
expenses, net to
average daily net
assets (%) (a)................ .60(c)
Ratio of net investment
income to average
daily net assets (%).......... 6.75(c)
<FN>
(a) Portion of expenses
reimbursed
(Note B).................. $ .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.
</FN>
</TABLE>
19
<PAGE>
<TABLE>
BOND PORTFOLIO
INVESTMENT PORTFOLIO as of June 30, 1995 (Unaudited)
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
--------------------------------------------------------------------------------------
51.8% U.S. TREASURY OBLIGATIONS
--------------------------------------------------------------------------------------
2,735,000 U.S. Treasury Bill, 5.5%, 8/3/95............................ 2,722,638
13,210,000 U.S. Treasury Bond, 7.25%, 5/15/16.......................... 14,000,486
1,520,000 U.S. Treasury Bond, 7.875%, 2/15/21......................... 1,728,529
12,655,000 U.S. Treasury Note, 4%, 1/31/96............................. 12,532,373
11,875,000 U.S. Treasury Note, 6%, 6/30/96............................. 11,904,687
6,400,000 U.S. Treasury Note, 5.5%, 7/31/97........................... 6,356,992
1,190,000 U.S. Treasury Note, 6.375%, 7/15/99......................... 1,205,803
7,190,000 U.S. Treasury Note, 6%, 10/15/99............................ 7,195,608
6,910,000 U.S. Treasury Note, 6.375%, 8/15/02......................... 6,992,022
3,670,000 U.S. Treasury Note, 5.875%, 2/15/04......................... 3,579,975
12,700,000 U.S. Treasury Separate Trading Registered Interest
and Principal Securities, 11/15/10 (6.78**)............... 4,555,109
5,340,000 U.S. Treasury Separate Trading Registered Interest
and Principal Securities, 2/15/12 (6.84**)................ 1,744,898
----------
TOTAL U.S. TREASURY OBLIGATIONS (Cost $72,297,430).......... 74,519,120
----------
--------------------------------------------------------------------------------------
7.3% U.S. GOV'T GUARANTEED MORTGAGES
--------------------------------------------------------------------------------------
3,183,519 Government National Mortgage Association,
6.5%, 8/15/08*............................................. 3,147,704
6,806,378 Government National Mortgage Association,
10%, 8/15/20*.............................................. 7,408,267
----------
TOTAL U.S. GOV'T GUARANTEED MORTGAGES
(Cost $10,609,861)......................................... 10,555,971
----------
--------------------------------------------------------------------------------------
4.2% U.S. GOVERNMENT AGENCY PASS-THRUS
--------------------------------------------------------------------------------------
5,729,457 Federal Home Loan Mortgage Corp., 9.5%, 3/1/25*
(Cost $ 6,003,397)......................................... 6,012,321
----------
--------------------------------------------------------------------------------------
1.6% COLLATERALIZED MORTGAGE OBLIGATIONS
--------------------------------------------------------------------------------------
2,000,000 Federal Home Loan Mortgage Corp., REMIC, 7%, 7/15/06........ 2,002,500
231,929 Federal National Mortgage Association, REMIC, 8.5%,
4/25/18.................................................... 235,842
----------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $2,054,250).......................................... 2,238,342
----------
--------------------------------------------------------------------------------------
3.0% FOREIGN BONDS - U.S. $ DENOMINATED
--------------------------------------------------------------------------------------
1,000,000 ABN-AMRO Bank NV, 7.75%, 5/15/23............................ 1,018,730
2,000,000 Korea Development Bank, 9.6%, 12/1/00....................... 2,256,520
1,000,000 Nippon Telegraph & Telephone Corp., 9.5%, 7/27/98........... 1,092,770
----------
TOTAL FOREIGN BONDS - U.S. $ DENOMINATED
(Cost $4,177,789).......................................... 4,368,020
----------
--------------------------------------------------------------------------------------
5.4% FOREIGN BONDS - NON U.S. $ DENOMINATED
--------------------------------------------------------------------------------------
DM 5,300,000 Federal Republic of Germany, 6.5%, 7/15/03.................. 3,713,469
FFr 19,500,000 Government of France OAT, 7.5%, 4/25/05..................... 3,982,200
----------
TOTAL FOREIGN BONDS - NON U.S. $ DENOMINATED
(Cost $7,703,350).......................................... 7,695,669
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
--------------------------------------------------------------------------------------
7.6% ASSET-BACKED SECURITIES
--------------------------------------------------------------------------------------
Automobile Receivables 0.6% 898,739 Premier Auto Trust Asset Backed Certificate
Series 1994-3, 6.8%, 12/2/99*............................. 903,512
----------
Credit Card Receivables 4.5% 1,125,000 Chase Manhattan Credit Card Trust, 1991 "A",
7.65%, 11/15/98........................................... 1,128,859
1,000,000 First Chicago Master Trust, Series 1991-D, 8.4%, 6/15/98... 1,018,750
2,500,000 Standard Credit Card Trust, Series 1990-3B, 9.85%,
7/10/97................................................... 2,651,550
1,500,000 Standard Credit Card Trust, Series 1990-6B, 9.625%,
9/10/97................................................... 1,587,180
----------
6,386,339
----------
Home Equity Loans 1.5% 1,578,067 Contimortgage Home Equity Loan Trust, Series 1994-5 A1,
9.07%, 5/15/06*........................................... 1,592,614
569,384 United Companies Financial Corp., Home Loan Trust,
Series 1993 B1, 6.075%, 7/25/14*.......................... 552,124
----------
2,144,738
----------
Manufactured Housing
Receivables 1.0% 1,493,629 Green Tree Financial Corp., Securitized NIM
Series 1994B, 7.85%, 7/15/04*............................. 1,497,363
----------
TOTAL ASSET-BACKED SECURITIES (Cost $11,245,316)........... 10,931,952
----------
--------------------------------------------------------------------------------------
19.1% CORPORATE BONDS
--------------------------------------------------------------------------------------
Consumer Discretionary 3.6% 2,000,000 Dayton Hudson Corp., 8.6%, 1/15/12......................... 2,195,540
3,000,000 Price/Costco Inc., 7.125%, 6/15/05......................... 3,013,980
----------
5,209,520
----------
Consumer Staples 0.8% 1,000,000 Seagram & Sons Inc., 9%, 8/15/21........................... 1,130,570
----------
Financial 2.2% 1,000,000 Banc One Corp., 8.74%, 9/15/03............................. 1,109,300
1,000,000 Golden West Financial Corp., 6%, 10/1/03................... 941,670
1,000,000 Grand Metropolitan Investment Corp., 8.625%, 8/15/01....... 1,093,510
----------
3,144,480
----------
Media 2.9% 4,000,000 Time Warner Inc., 9.125%, 1/15/13.......................... 4,157,160
----------
Durables 1.8% 5,000,000 General Motors Acceptance Corp., Zero Coupon, 12/1/12...... 1,353,850
1,000,000 Lockheed Corp., 9%, 1/15/22................................ 1,181,220
----------
2,535,070
----------
Manufacturing 1.6% 1,000,000 ARCO Chemical Co., 9.375%, 12/15/05........................ 1,164,580
1,000,000 Monsanto Co., 8.7%, 10/15/21............................... 1,149,640
----------
2,314,220
----------
Technology 1.5% 2,000,000 Loral Corp., 8.375%, 6/15/24............................... 2,127,800
----------
Energy 3.9% 2,000,000 Atlantic Richfield Co., 8.25%, 2/1/22...................... 2,174,900
2,000,000 Atlantic Richfield Co., 9.125%, 8/1/31..................... 2,406,040
1,000,000 Enron Corp., 10%, 6/1/98................................... 1,082,350
----------
5,663,290
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
<TABLE>
BOND PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Transportation 0.8% 575,000 American Airlines, 8.39%, 7/2/17 575,575
600,000 American Airlines, 8.8%, 9/16/15 623,970
----------
1,199,545
----------
TOTAL CORPORATE BONDS (Cost $25,582,170) 27,481,655
----------
=========================================================================================================================
TOTAL INVESTMENT PORTFOLIO - 100.0%
(Cost $139,673,563)(a) 143,803,050
===========
<FN>
* Effective maturities will be shorter due to amortization and prepayments.
** Yield; bond equivalent yield to maturity; not a coupon rate (unaudited).
(a) At June 30, 1995, the net unrealized appreciation on investments based on cost for
federal income tax purposes of $139,766,334 was as follows:
Aggregate gross unrealized appreciation for all investments in which there is an
excess of market value over tax cost........................................................... $4,707,448
Aggregate gross unrealized depreciation for all investments in which there is an
excess of tax cost over market value........................................................... (670,732)
----------
Net unrealized appreciation...................................................................... $4,036,716
==========
- --------------------------------------------------------------------------------------------------------------------------
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 realized net taxable capital gains of each succeeding year until fully utilized or until December
31, 2002, whichever occurs first.
- --------------------------------------------------------------------------------------------------------------------------
From November 1, 1994 through December 31, 1994, the Bond Portfolio incurred approximately $934,894 of net realized capital
losses which the Portfolio intends to elect to defer and treat as arising in the fiscal year ended December 31, 1995.
- --------------------------------------------------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term investments and U.S. Government securities), for the six
months ended June 30, 1995, aggregated $40,857,557 and $48,304,344, respectively. Purchases and sales of U.S. Government
securities for the six months ended June 30, 1995, aggregated $69,417,915 and $67,599,030, respectively.
- --------------------------------------------------------------------------------------------------------------------------
COMMITMENTS:
As of June 30, 1995, the Bond Portfolio entered into the following forward foreign currency exchange contracts resulting in
net unrealized appreciation of $119,533.
</FN>
</TABLE>
<TABLE>
<CAPTION>
NET UNREALIZED
APPRECIATION/
SETTLEMENT DEPRECIATION
CONTRACTS TO DELIVER IN EXCHANGE FOR DATE (U.S.$)
- ---------------------------- ------------------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Deutschemarks 5,380,751 U.S. Dollars 4,010,219 10/23/95 102,109
French Francs 18,975,450 U.S. Dollars 3,917,714 10/23/95 17,424
-------
119,533
=======
The accompanying notes are an integral part of the financial statements.
</TABLE>
22
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
- ----------------------------------------------------------------------------------------------------------------
JUNE 30, 1995 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost $139,673,563) (Note A)................ $143,803,050
Cash.......................................................................... 664
Unrealized appreciation on forward currency exchange contracts (Note A)....... 119,533
Receivables:
Interest.................................................................... 2,147,165
Portfolio shares sold....................................................... 116,483
------------
Total assets.............................................................. 146,186,895
LIABILITIES
Payables:
Portfolio shares redeemed................................................... $ 491,227
Accrued management fee (Note B)............................................. 59,844
Other accrued expenses (Note B)............................................. 16,157
----------
Total liabilities......................................................... 567,228
------------
Net assets, at market value................................................... $145,619,667
============
NET ASSETS
Net assets consist of:
Undistributed net investment income......................................... $ 2,403,397
Net unrealized appreciation on:
Investments............................................................... 4,129,487
Foreign currency related transactions..................................... 117,367
Accumulated net realized loss............................................... (5,037,416)
Paid-in capital............................................................. 144,006,832
------------
Net assets, at market value................................................... $145,619,667
============
NET ASSET VALUE, offering and redemption price per share
($145,619,667 divided by 21,008,272 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized)........ $6.93
=====
</TABLE>
The accompanying notes are an integral part of the financial statements.
23
<PAGE>
<TABLE>
BOND PORTFOLIO
- ------------------------------------------------------------------------------------------------------
<CAPTION>
STATEMENT OF OPERATIONS
- ------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest............................................................... $ 4,927,305
Expenses (Note A):
Management fee (Note B).............................................. $ 336,348
Accounting fees (Note B)............................................. 21,673
Trustees' fees (Note B).............................................. 8,414
Custodian fees....................................................... 9,437
Auditing............................................................. 8,876
Legal................................................................ 3,852
Other................................................................ 3,475 392,075
---------- -----------
Net investment income.................................................. 4,535,230
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments.......................................................... 343,683
Foreign currency related transactions................................ (25,038) 318,645
----------
Net unrealized appreciation during the period on:
Investments.......................................................... 8,897,348
Foreign currency related transactions................................ 117,367 9,014,715
---------- -----------
Net gain on investment transactions.................................... 9,333,360
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..................... $13,868,590
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
24
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR
JUNE 30, ENDED
1995 DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS (UNAUDITED) 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income..................................................... $ 4,535,230 $ 8,806,288
Net realized gain (loss) from investment transactions..................... 318,645 (5,607,148)
Net unrealized appreciation (depreciation) on investment
transactions during the period.......................................... 9,014,715 (9,672,581)
------------ ------------
Net increase (decrease) in net assets resulting from operations............. 13,868,590 (6,473,441)
------------ ------------
Distributions to shareholders from:
Net investment income ($.21 and $.43 per share, respectively)............. (4,319,990) (8,525,294)
------------ ------------
Net realized gain from investment transactions ($.17 per share)........... - (3,161,229)
------------ ------------
Portfolio share transactions:
Proceeds from shares sold................................................. 30,873,203 86,578,280
Net asset value of shares issued to shareholders in
reinvestment of distributions........................................... 4,319,990 11,686,523
Cost of shares redeemed................................................... (41,526,738) (66,398,542)
------------ ------------
Net increase (decrease) in net assets from Portfolio share transactions..... (6,333,545) 31,866,261
------------ ------------
INCREASE IN NET ASSETS...................................................... 3,215,055 13,706,297
Net assets at beginning of period........................................... 142,404,612 128,698,315
------------ ------------
NET ASSETS AT END OF PERIOD (including undistributed net investment
income of $2,403,397 and $2,188,157, respectively).................. $145,619,667 $142,404,612
============ ============
OTHER INFORMATION
INCREASE (DECREASE) IN PORTFOLIO SHARES
Shares outstanding at beginning of period................................... 21,973,579 17,350,092
------------ ------------
Shares sold............................................................... 4,615,281 12,843,292
Shares issued to shareholders in reinvestment of distributions............ 659,112 1,713,654
Shares redeemed........................................................... (6,239,700) (9,933,459)
------------ ------------
Net increase (decrease) in Portfolio shares............................... (965,307) 4,623,487
------------ ------------
Shares outstanding at end of period......................................... 21,008,272 21,973,579
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
25
<PAGE>
<TABLE>
BOND PORTFOLIO
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout each period and other performance information derived
from the financial statements.
<CAPTION>
SIX
SIX MONTHS MONTHS
ENDED ENDED
JUNE 30, YEARS ENDED DECEMBER 31, (E) DECEMBER
1995(E) -------------------------------------------------------------------------- 31,
(UNAUDITED) 1994 1993 1992 1991 1990 1989 1988 1987 1986(E)(F)
----------- -------------------------------------------------------------------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period..... $ 6.48 $ 7.42 $ 7.19 $ 7.37 $ 6.73 $ 6.72 $ 6.39 $ 6.47 $ 6.67 $ 6.56
------- ------ ------- ------ ------- ------ ------- ------- ------- ------
Income from investment
operations:
Net investment
income (a).......... .21 .43 .48 .49 .52 .53 .54 .54 .49 .23
Net realized and
unrealized gain
(loss) on
investment
transactions........ .45 (.77) .38 (.02) .61 (.02) .18 (.19) (.40) .08
------- ------ ------- ------ ------- ------ ------- ------- ------- ------
Total from investment
operations.............. .66 (.34) .86 .47 1.13 .51 .72 .35 .09 .31
------- ------ ------- ------ ------- ------ ------- ------- ------- ------
Less distributions from:
Net investment income... (.21) (.43) (.48) (.46) (.47) (.50) (.39) (.43) (.29) (.17)
Net realized gains on
on investment
transactions.......... - (.17) (.15) (.19) (.02) - - - - (.03)
------- ------ ------- ------ ------- ------ ------- ------- ------- ------
Total distributions....... (.21) (.60) (.63) (.65) (.49) (.50) (.39) (.43) (.29) (.20)
------- ------ ------- ------ ------- ------ ------- ------- ------- ------
Net asset value,
end of period........... $ 6.93 $ 6.48 $ 7.42 $ 7.19 $ 7.37 $ 6.73 $ 6.72 $ 6.39 $ 6.47 $ 6.67
======= ====== ======= ====== ======= ====== ======= ======= ======= ======
TOTAL RETURN (%).......... 10.40(d) (4.79) 12.38 7.01 17.61 8.06 11.65 5.46 1.22 4.90(d)
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
period ($ millions)..... 146 142 129 113 74 42 22 3 3 1
Ratio of operating
expenses, net to
average net
assets (%) (a).......... .56(c) .58 .61 .63 .69 .73 .75 .75 .75 .75(c)
Ratio of net investment
income to average
net assets (%).......... 6.45(c) 6.43 6.59 6.89 7.51 8.05 8.04 7.86 7.53 6.88(c)
Portfolio turnover
rate (%)................ 157.99(c) 96.55 125.15 87.00 115.86 71.02 103.41 245.23 186.05 23.82(c)
<FN>
(a) Portion of expenses
reimbursed (Note B)... $ - $ - $ - $ - $ - $ - $ .01 $ .04 $ .08 $ .21
(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.
</FN>
</TABLE>
<TABLE>
BOND PORTFOLIO
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout each period and other performance information derived
from the financial statements.
<CAPTION>
FOR THE PERIOD
JULY 16, 1985
(COMMENCEMENT
OF OPERATIONS)
TO JUNE 30,
1986
--------------
<S> <C>
Net asset value,
beginning of period..... $ 6.00(b)
------
Income from investment
operations:
Net investment
income (a).......... .45
Net realized and
unrealized gain
(loss) on
investment
transactions........ .44
------
Total from investment
operations.............. .89
------
Less distributions from:
Net investment income... (.33)
Net realized gains on
on investment
transactions.......... -
------
Total distributions....... (.33)
------
Net asset value,
end of period........... $ 6.56
======
TOTAL RETURN (%).......... 15.11(d)
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
period ($ millions)..... -
Ratio of operating
expenses, net to
average net
assets (%) (a).......... .60(c)
Ratio of net investment
income to average
net assets (%).......... 7.48(c)
Portfolio turnover
rate (%)................ 6.27(c)
<FN>
(a) Portion of expenses
reimbursed (Note B)... $ .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.
</FN>
</TABLE>
26
<PAGE>
<TABLE>
BALANCED PORTFOLIO
INVESTMENT PORTFOLIO as of June 30, 1995 (Unaudited)
- --------------------------------------------------------------------------------------------
<CAPTION>
% OF PRINCIPAL MARKET
PORTFOLIO AMOUNT ($) VALUE ($)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
7.5% REPURCHASE AGREEMENT
---------------------------------------------------------------------------------
4,285,000 Repurchase Agreement with Donaldson, Lufkin &
Jenrette dated 6/30/95 at 6.07%, to be repurchased
at $4,287,167 on 7/3/95, collateralized by a $4,286,000
U.S. Treasury Note, 6.125%, 5/31/97 (Cost $4,285,000).... 4,285,000
----------
17.6% U.S. TREASURY OBLIGATIONS
---------------------------------------------------------------------------------
700,000 U.S. Treasury Bill, 5.56%, 8/3/95........................ 696,836
1,000,000 U.S. Treasury Bond, 7.25%, 5/15/16....................... 1,059,840
500,000 U.S. Treasury Bond, 7.5%, 11/15/16....................... 544,375
340,000 U.S. Treasury Bond, 7.875%, 2/15/21...................... 386,645
300,000 U.S. Treasury Bond, 8.125%, 5/15/21...................... 350,391
300,000 U.S. Treasury Note, 4.25%, 7/31/95....................... 299,673
1,170,000 U.S. Treasury Note, 5.125%, 3/31/96...................... 1,164,875
2,000,000 U.S. Treasury Note, 6%, 6/30/96.......................... 2,005,000
500,000 U.S. Treasury Note, 5.5%, 7/31/97........................ 496,640
900,000 U.S. Treasury Note, 5.25%, 7/31/98....................... 882,981
200,000 U.S. Treasury Note, 5.875%, 3/31/99...................... 199,344
550,000 U.S. Treasury Note, 6%, 10/15/99......................... 550,429
250,000 U.S. Treasury Note, 6.375%, 8/15/02...................... 252,967
500,000 U.S. Treasury Note, 5.875%, 2/15/04...................... 487,735
800,000 U.S. Treasury Separate Trading Registered Interest
and Principal Securities, 11/15/10 (6.78**)............ 286,936
1,460,000 U.S. Treasury Separate Trading Registered Interest
and Principal Securities, 2/15/12 (6.84**)............. 477,070
----------
TOTAL U.S. TREASURY OBLIGATIONS (Cost $9,890,948)........ 10,141,737
----------
2.4% U.S. GOV'T GUARANTEED MORTGAGES
---------------------------------------------------------------------------------
777,872 Government National Mortgage Association, 10%,
8/15/20 (a)............................................ 846,659
534,109 Government National Mortgage Association, 8.75%,
12/15/24 (a)........................................... 551,799
----------
TOTAL U.S. GOV'T GUARANTEED MORTGAGES (Cost $1,343,920).. 1,398,458
----------
0.9% U.S. GOVERNMENT AGENCY PASS-THRUS
---------------------------------------------------------------------------------
481,964 Federal Home Loan Mortgage Corp., 9.5%, 3/1/25 (a)
(Cost $505,008)........................................ 505,758
----------
0.4% COLLATERALIZED MORTGAGE OBLIGATIONS
---------------------------------------------------------------------------------
231,929 Federal National Mortgage Association, REMIC, 8.5%,
4/25/18 (Cost $222,797)................................ 235,842
----------
0.5% FOREIGN BONDS - U.S. $ DENOMINATED
---------------------------------------------------------------------------------
250,000 ABN-AMRO Bank NV, 7.75%, 5/15/23 (Cost $247,031)......... 254,682
----------
1.6% FOREIGN BONDS - NON U.S. $ DENOMINATED
---------------------------------------------------------------------------------
DM 650,000 Federal Republic of Germany, 6.5%, 7/15/03............... 455,425
FFr 2,400,000 Government of France OAT, 7.5%, 4/25/05.................. 490,117
----------
TOTAL FOREIGN BONDS - NON U.S. $ DENOMINATED
(Cost $946,463)........................................ 945,542
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
27
<PAGE>
<TABLE>
BALANCED PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% OF PRINCIPAL MARKET
PORTFOLIO AMOUNT ($) VALUE ($)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
---------------------------------------------------------------------------------------
2.2% ASSET-BACKED SECURITIES
---------------------------------------------------------------------------------------
AUTOMOBILE RECEIVABLES 0.4%
224,685 Premier Auto Trust Asset Backed Certificate
Series 1994-3, 6.8%, 12/2/99 (a).............................. 225,878
---------
CREDIT CARD RECEIVABLES 1.2%
187,500 Chase Manhattan Credit Card Trust, 1991 "A", 7.65%,
11/15/98 (a) 188,143
250,000 First Chicago Master Trust, Series 1991-D, 8.4%, 6/15/98........ 254,687
250,000 Standard Credit Card Trust, Series 1990-6B, 9.625%, 9/10/97..... 264,530
---------
707,360
---------
HOME EQUITY LOANS 0.6%
197,258 Contimortgage Home Equity Loan Trust, Series 1994-5 A1,
9.07%, 5/15/06 (a)............................................ 199,077
142,346 United Companies Financial Corp., Home Loan Trust,
Series 1993 B1, 6.075%, 7/25/14 (a)........................... 138,031
---------
337,108
---------
TOTAL ASSET-BACKED SECURITIES (Cost $1,285,115)................. 1,270,346
---------
---------------------------------------------------------------------------------------
6.8% CORPORATE BONDS
---------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY 0.4%
250,000 Price/Costco Inc., 7.125%, 6/15/05.............................. 251,165
---------
CONSUMER STAPLES 0.4%
250,000 Seagram Ltd., 6.875%, 9/1/23.................................... 225,037
---------
MEDIA 1.8%
1,000,000 Time Warner Inc., 9.125%, 1/15/13............................... 1,039,290
---------
DURABLES 0.5%
250,000 Lockheed Corp., 9%, 1/15/22..................................... 295,305
---------
MANUFACTURING 0.5%
250,000 Corning Inc., 8.75%, 7/15/99.................................... 266,842
---------
TECHNOLOGY 0.9%
500,000 Loral Corp., 8.375%, 6/15/24.................................... 531,950
---------
ENERGY 1.4%
500,000 Atlantic Richfield Co., 8.25%, 2/1/22........................... 543,725
250,000 Enron Corp., 10%, 6/1/98........................................ 270,587
---------
814,312
---------
TRANSPORTATION 0.4%
100,000 American Airlines, 8.39%, 7/2/17................................ 100,100
100,000 American Airlines, 8.8%, 9/16/15................................ 103,995
---------
204,095
---------
UTILITIES 0.5%
250,000 Commonwealth Edison Co., 9.05%, 10/15/99........................ 262,007
---------
TOTAL CORPORATE BONDS (Cost $3,699,546)......................... 3,890,003
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
28
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------
60.1% COMMON STOCKS
------------------------------------------------------------------------------
CONSUMER DISCRETIONARY 4.7%
Department &
Chain Stores 3.1% 14,966 Home Depot, Inc................................. 607,994
2,400 J.C. Penney Inc................................. 115,200
7,600 May Department Stores........................... 316,350
16,000 Wal-Mart Stores Inc............................. 428,000
6,500 Walgreen Co..................................... 325,813
-----------
1,793,357
-----------
Hotels & Casinos 0.7% 16,500 Carnival Corp., Class A......................... 385,687
-----------
Restaurants 0.4% 4,900 McDonald's Corp................................. 191,713
-----------
Specialty Retail 0.5% 11,200 Pep Boys - Manny, Moe & Jack.................... 299,600
-----------
CONSUMER STAPLES 8.3%
Alcohol & Tobacco 0.6% 4,900 Philip Morris Companies Inc..................... 364,438
-----------
Consumer Electronic &
Photographic Products 0.3% 4,200 Duracell International Inc...................... 181,650
-----------
Food & Beverage 5.1% 22,000 Albertson's Inc................................. 654,500
2,600 CPC International Inc........................... 160,550
14,000 ConAgra Inc..................................... 488,250
3,500 General Mills, Inc.............................. 179,813
17,500 PepsiCo Inc..................................... 798,438
22,100 Sara Lee Corp................................... 629,850
-----------
2,911,401
-----------
Package Goods/
Cosmetics 2.3% 2,700 Clorox Co....................................... 176,175
4,800 Colgate-Palmolive Co............................ 351,000
6,800 Gillette Co..................................... 303,450
6,500 Procter & Gamble Co............................. 467,188
-----------
1,297,813
-----------
HEALTH 7.2%
Biotechnology 0.1% 1,900 Biogen Inc.*.................................... 84,550
-----------
Hospital Management 1.8% 23,500 Columbia/HCA Healthcare Corp.................... 1,016,375
-----------
Pharmaceuticals 5.3% 6,600 Abbott Laboratories............................. 267,300
4,500 American Home Products Corp..................... 348,187
11,200 Eli Lilly Co.................................... 879,200
4,900 Johnson & Johnson............................... 331,363
11,400 Merck & Co. Inc................................. 558,600
5,300 Sandoz Ltd. AG (ADR)............................ 182,850
11,000 Schering-Plough Corp............................ 485,375
-----------
3,052,875
-----------
COMMUNICATIONS 1.6%
Cellular Telephone 0.5% 3,700 AirTouch Communications, Inc.*.................. 105,450
4,800 Vodafone Group PLC (ADR)........................ 181,800
-----------
287,250
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
29
<PAGE>
<TABLE>
BALANCED PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Telephone/
Communications 1.1% 11,300 American Telephone & Telegraph Co............... 600,312
-----------
FINANCIAL 8.5%
Banks 2.9% 10,330 Banc One Corp................................... 333,142
13,850 Mellon Bank Corp................................ 576,506
7,300 Norwest Corp.................................... 209,875
15,300 State Street Boston Corp........................ 564,188
-----------
1,683,711
-----------
Insurance 3.8% 8,700 American International Group, Inc............... 991,800
6,000 EXEL, Ltd....................................... 312,000
1,700 General Re Corp................................. 227,588
7,700 MBIA Inc........................................ 512,050
3,000 PMI Group, Inc.................................. 130,125
-----------
2,173,563
-----------
Other Financial
Companies 1.8% 10,800 Federal National Mortgage Association........... 1,019,250
-----------
MEDIA 4.4%
Advertising 0.6% 9,500 Interpublic Group of Companies Inc.............. 356,250
-----------
Broadcasting &
Entertainment 3.1% 6,500 Capital Cities/ABC Inc.......................... 702,000
9,000 Time Warner Inc................................. 370,125
4,600 Viacom Inc. "B"*................................ 213,325
9,100 Walt Disney Co.................................. 506,187
-----------
1,791,637
-----------
Cable Television 0.7% 17,200 Tele-Communications Inc. "A"*................... 403,125
-----------
SERVICE INDUSTRIES 2.6%
EDP Services 1.2% 2,800 Automatic Data Processing, Inc.................. 176,050
3,500 First Data Corp................................. 199,063
7,100 General Motors Corp. "E"........................ 308,850
-----------
683,963
-----------
Miscellaneous
Commercial Services 0.5% 1,700 Flightsafety International Inc.................. 82,875
6,800 Sysco Corp...................................... 200,600
-----------
283,475
-----------
Miscellaneous
Consumer Services 0.2% 2,300 H & R Block Inc................................. 94,587
-----------
Printing/Publishing 0.7% 8,600 Reuters Holdings PLC "B" (ADR).................. 431,075
-----------
DURABLES 4.5%
Automobiles 0.1% 2,700 Echlin, Inc..................................... 93,825
-----------
Telecommunications
Equipment 3.6% 9,200 DSC Communications Corp.*....................... 427,800
15,700 General Instrument Corp.*....................... 602,488
26,400 L.M. Ericsson Telephone Co. "B" (ADR)........... 528,000
5,800 Nokia AB Oy (ADR)............................... 345,825
1,300 U.S. Robotics Corp.............................. 141,700
-----------
2,045,813
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
30
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tires 0.8% 19,400 Cooper Tire & Rubber Co......................... 472,875
-----------
MANUFACTURING 4.0%
Diversified
Manufacturing 2.7% 5,100 Dover Corp...................................... 371,025
6,500 General Electric Co............................. 366,438
7,900 Minnesota Mining & Manufacturing Co............. 452,275
3,400 TRW Inc......................................... 271,575
2,250 Thermo Electron Corp.*.......................... 90,563
-----------
1,551,876
-----------
Electrical Products 1.3% 4,200 ASEA AB (ADR)................................... 359,100
5,700 Emerson Electric Co............................. 407,550
-----------
766,650
-----------
TECHNOLOGY 9.2%
Computer Software 1.1% 3,600 Microsoft Corp.*................................ 325,350
7,450 Oracle Systems Corp.*........................... 287,756
-----------
613,106
-----------
Diverse Electronic
Products 2.3% 1,200 Applied Materials, Inc.*........................ 103,950
9,700 General Motors Corp. "H"........................ 383,150
12,900 Motorola Inc.................................... 865,913
-----------
1,353,013
-----------
Electronic Data
Processing 1.7% 7,600 Ceridian Corp.*................................. 280,250
8,000 Hewlett-Packard Co.............................. 596,000
2,200 Silicon Graphics Inc.*.......................... 87,725
-----------
963,975
-----------
Military Electronics 1.0% 10,600 Loral Corp...................................... 548,550
-----------
Office/Plant
Automation 1.4% 2,600 3Com Corp.*..................................... 174,200
6,500 Cabletron Systems Inc.*......................... 346,125
6,000 Cisco Systems, Inc.*............................ 303,375
-----------
823,700
-----------
Semiconductors 1.7% 10,600 Intel Corp...................................... 671,113
2,500 Texas Instruments Inc........................... 334,688
-----------
1,005,801
-----------
ENERGY 4.5%
Engineering 0.8% 8,800 Fluor Corp...................................... 457,600
-----------
Oil Companies 2.6% 5,900 Amoco Corp...................................... 393,087
8,500 Chevron Corp.................................... 396,312
2,700 Exxon Corp...................................... 190,687
2,900 Mobil Corp...................................... 278,400
2,200 Royal Dutch Petroleum Co. (New York shares)..... 268,125
-----------
1,526,611
-----------
Oil/Gas Transmission 1.1% 17,900 Enron Corp...................................... 628,737
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
31
<PAGE>
<TABLE>
BALANCED PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
METALS AND MINERALS 0.6%
Steel & Metals 6,500 Nucor Corp...................................... 347,750
-----------
TOTAL COMMON STOCKS (Cost $29,222,949).......... 34,587,539
-----------
TOTAL INVESTMENT PORTFOLIO - 100.0%
(Cost $51,648,777)(b).......................... 57,514,907
===========
<FN>
* Non-income producing security.
** Yield; bond equivalent yield to maturity; not a coupon rate (unaudited).
(a) Effective maturities will be shorter due to amortization and prepayments.
(b) At June 30, 1995, the net unrealized appreciation on investments based on cost for federal income tax purposes
of $51,733,807 was as follows:
Aggregate gross unrealized appreciation for all investments in which there
is an excess of market value over tax cost..................................................... $ 6,085,600
Aggregate gross unrealized depreciation for all investments in which there
is an excess of tax cost over market value..................................................... (304,500)
-----------
Net unrealized appreciation.................................................................... $ 5,781,100
===========
</FN>
</TABLE>
- --------------------------------------------------------------------------------
From November 1, 1994 through December 31, 1994, the Balanced Portfolio
incurred approximately $275,417 of net realized capital losses which the
Portfolio intends to elect to defer and treat as arising in the fiscal year
ended December 31, 1995.
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short#term
investments and U.S. Government securities), for the six months ended June
30, 1995, aggregated $18,831,651 and $18,977,054, respectively. Purchases
and sales of U.S. Government securities for the six months ended June 30,
1995, aggregated $6,963,426 and $2,745,576, respectively.
- --------------------------------------------------------------------------------
COMMITMENTS:
As of June 30, 1995, the Balanced Portfolio entered into the following
forward foreign currency exchange contracts resulting in net unrealized
appreciation of $14,667.
<TABLE>
<CAPTION>
NET UNREALIZED
APPRECIATION/
SETTLEMENT DEPRECIATION
CONTRACTS TO DELIVER IN EXCHANGE FOR DATE (U.S.$)
- --------------------------- -------------------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Deutschemarks 659,903 U.S. Dollars 491,819 10/23/95 12,523
French Francs 2,335,440 U.S. Dollars 482,180 10/23/95 2,144
--------
14,667
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
32
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- ----------------------------------------------------------------------------------------------------------------
June 30, 1995 (Unaudited)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost $51,648,777) (Note A) .............. $ 57,514,907
Cash ....................................................................... 460
Unrealized appreciation on forward currency exchange contacts (Note A) ..... 14,667
Receivables:
Dividends and interest .................................................. 318,166
Portfolio shares sold ................................................... 43,445
Total assets .......................................................... 57,891,645
------------
LIABILITIES
Payables:
Investments purchased .................................................... $111,714
Portfolio shares redeemed ................................................ 13,033
Accrued management fee (Note B) .......................................... 22,491
Other accrued expenses (Note B) .......................................... 15,657
--------
Total liabilities ..................................................... 162,895
------------
Net assets, at market value ................................................ $ 57,728,750
============
NET ASSETS
Net assets consist of:
Undistributed net investment income ...................................... $ 457,532
Net unrealized appreciation on:
Investments ........................................................... 5,866,130
Foreign currency related transactions ................................. 14,405
Accumulated net realized loss ............................................ (13,583)
Paid-in capital .......................................................... 51,404,266
------------
Net assets, at market value ................................................ $ 57,728,750
============
NET ASSET VALUE, offering and redemption price per share
($57,728,750 divided by 5,708,319 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) .......... $10.11
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
33
<PAGE>
<TABLE>
BALANCED PORTFOLIO
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
STATEMENT OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Income:
Interest ............................................................. $ 721,498
Dividends (net of foreign taxes withheld of $182) .................... 290,725
----------
1,012,223
Expenses (Note A):
Management fee (Note B) ................................................. $ 122,045
Accounting fees (Note B) ................................................ 18,595
Trustees' fees (Note B) ................................................. 8,005
Custodian fees .......................................................... 13,189
Auditing ................................................................ 2,519
Legal ................................................................... 1,375
Other ................................................................... 5,710 171,438
---------- ----------
Net investment income ...................................................... $ 840,785
----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments .......................................................... 409,897
Foreign currency related transactions ................................ (3,069) 406,828
----------
Net unrealized appreciation during the period on:
Investments .......................................................... 6,104,049
Foreign currency related transactions ................................ 14,405 6,118,454
---------- ----------
Net gain on investment transactions ..................................... 6,525,282
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ....................... $7,366,067
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
34
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS
ENDED YEAR
JUNE 30, ENDED
1995 DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS (UNAUDITED) 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ........................................ $ 840,785 $ 1,464,324
Net realized gain (loss) from investment transactions ........ 406,828 (70,680)
Net unrealized appreciation (depreciation) on investment
transactions during the period ............................ 6,118,454 (2,374,110)
------------ ------------
Net increase (decrease) in net assets resulting from operations . 7,366,067 (980,466)
------------ ------------
Distributions to shareholders from:
Net investment income ($.15 and $.30 per share, respectively) (775,538) (1,442,472)
------------ ------------
Net realized gains from investment transactions
($.06 and $.77 per share, respectively) ................... (316,977) (3,525,834)
------------ ------------
Portfolio share transactions:
Proceeds from shares sold .................................... 8,209,973 14,384,876
Net asset value of shares issued to shareholders in
reinvestment of distributions ............................. 1,092,515 4,968,306
Cost of shares redeemed ...................................... (3,371,865) (12,950,121)
------------ ------------
Net increase in net assets from Portfolio share transactions .... 5,930,623 6,403,061
------------ ------------
INCREASE IN NET ASSETS .......................................... 12,204,175 454,289
Net assets at beginning of period ............................... 45,524,575 45,070,286
------------ ------------
NET ASSETS AT END OF PERIOD (including undistributed net
investment income of $457,532 and $392,285, respectively) .... $ 57,728,750 $ 45,524,575
============ ============
OTHER INFORMATION
INCREASE (DECREASE) IN PORTFOLIO SHARES
Shares outstanding at beginning of period ....................... 5,076,236 4,407,727
------------ ------------
Shares sold .................................................. 868,030 1,539,383
Shares issued to shareholders in reinvestment
of distributions......................................... 117,990 532,133
Shares redeemed .............................................. (353,937) (1,403,007)
------------ ------------
Net increase in Portfolio shares ............................. 632,083 668,509
------------ ------------
Shares outstanding at end of period ............................. 5,708,319 5,076,236
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
35
<PAGE>
<TABLE>
BALANCED PORTFOLIO
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED
FROM THE FINANCIAL STATEMENTS.
<CAPTION>
Six Months
Ended
June 30, Years Ended December 31, (e)
1995(e) ----------------------------------------------------------------------------------
(Unaudited) 1994 1993 1992 1991 1990 1989 1988 1987
- --------------------------- ------------- -------- ------- ------- ------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ....... $ 8.97 $ 10.23 $ 10.02 $ 9.85 $ 8.10 $ 8.75 $ 7.62 $ 6.88 $ 7.35
------ ------- ------- ------ ------ ------ ------ ------- -------
Income from investment
operations:
Net investment
income (a) ............... .15 .29 .30 .29 .35 .42 .40 .33 .34
Net realized and
unrealized gain (loss)
on investment
transactions ............. 1.20 (.48) .42 .36 1.77 (.59) 1.06 .64 (.45)
------ ------- ------- ------ ------ ------ ------ ------- -------
Total from investment
operations ................ 1.35 (.19) .72 .65 2.12 (.17) 1.46 .97 (.11)
------ ------- ------- ------ ------ ------ ------ ------- -------
Less distributions from:
Net investment
income ................... (.15) (.30) (.28) (.29) (.37) (.43) (.33) (.23) (.23)
Net realized gains
on investment
transactions ............. (.06) (.77) (.23) (.19) -- (.05) -- -- (.13)
------ ------- ------- ------ ------ ------ ------ ------- -------
Total distributions ........ (.21) (1.07) (.51) (.48) (.37) (.48) (.33) (.23) (.36)
------ ------- ------- ------ ------ ------ ------ ------- -------
Net asset value,
end of period ............. $10.11 $ 8.97 $ 10.23 $10.02 $ 9.85 $ 8.10 $ 8.75 $ 7.62 $ 6.88
====== ======= ======= ====== ====== ====== ====== ======= =======
TOTAL RETURN (%) ........... 15.22(D) (2.05) 7.45 6.96 26.93 (1.91) 19.50 14.21 (1.68)
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
period ($ millions) ....... 58 46 45 37 25 16 18 11 12
Ratio of operating
expenses, net to
average net
assets (%) (a) ............ .67(c) .75 .75 .75 .75 .75 .75 .75 .75
Ratio of net investment
income to average
net assets (%) ............ 3.30(c) 3.19 3.01 3.01 4.00 5.15 4.74 4.48 4.42
Portfolio turnover
rate (%) .................. 91.96(c) 101.64 133.95* 51.66 62.03 49.03 77.98 109.95 111.00
<FN>
(a) Portion of expenses
reimbursed (Note B)..... $ - $ - $ - $ - $ .01 $ - $ .01 $ .03 $ .03
</FN>
</TABLE>
<TABLE>
<CAPTION>
Six For the Period
Months July 16, 1985
Ended (commencement
December of operations)
31, to June 30,
1986(e)(f) 1986
- -----------------------------------------------------------------
<S> <C> <C>
Net asset value,
beginning of period ....... $ 7.58 $ 6.00(b)
------ ------
Income from investment
operations:
Net investment
income (a) ............... .15 .31
Net realized and
unrealized gain (loss)
on investment
transactions ............. (.11) 1.50
------ ------
Total from investment
operations ................ .04 1.81
------ ------
Less distributions from:
Net investment
income ................... (.18) (.23)
Net realized gains
on investment
transactions ............. (.09) --
------ ------
Total distributions ........ (.27) (.23)
------ ------
Net asset value,
end of period ............. $ 7.35 $ 7.58
====== ======
TOTAL RETURN (%) ........... .46(D) 30.60(D)
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
period ($ millions) ....... 1 --
Ratio of operating
expenses, net to
average net
assets (%) (a) ............ .75(c) .60(c)
Ratio of net investment
income to average
net assets (%) ............ 4.20(c) 4.87(c)
Portfolio turnover
rate (%) .................. 28.86(c) 64.12(c)
<FN>
(a) Portion of expenses
reimbursed (Note B)..... $ .17 $ .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.
* On May 1, 1993, the Portfolio adopted its present name and investment
objective which is a balance of growth and income from a diversified
portfolio of equity and fixed income securities. Prior to that date, the
Portfolio was known as the Managed Diversified Portfolio and its investment
objective was to realize a high level of long#term total rate of return
consistent with prudent investment risk. The portfolio turnover rate
increased due to implementing the present investment objective. Financial
highlights for the nine periods ended December 31, 1993 should not be
considered representative of the present Portfolio.
</FN>
</TABLE>
36
<PAGE>
<TABLE>
GROWTH AND INCOME PORTFOLIO
INVESTMENT PORTFOLIO as of June 30, 1995 (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------------
1.8% REPURCHASE AGREEMENT
----------------------------------------------------------------------------------
664,000 Repurchase Agreement with State Street Bank and
Trust Company dated 6/30/95 at 6%, to be repurchased
at $664,332 on 7/3/95, collateralized by a $760,000
U.S. Treasury Bond, 9.25%, 2/15/16 (Cost $664,000).... 664,000
-----------
----------------------------------------------------------------------------------
0.1% CONVERTIBLE BONDS
----------------------------------------------------------------------------------
FINANCIAL
Other Financial
Companies 40,000 First Financial Management Corp., 5%, 12/15/99
(Cost $40,000)........................................ 54,000
-----------
----------------------------------------------------------------------------------
3.1% CONVERTIBLE PREFERRED STOCKS
----------------------------------------------------------------------------------
Shares
----------------------------------------------------------------------------------
HEALTH 1.2%
Health Industry Services 18,200 FHP International Corp., Series A, 5%................... 432,250
-----------
SERVICE INDUSTRIES 1.6%
EDP Services 9,800 General Motors Corp., Series C, Cum. $3.25
(convertible into GM "E")............................. 617,400
-----------
MANUFACTURING 0.3%
Containers & Paper 0.1% 700 Boise Cascade Corp. "G", Cum $1.58...................... 23,362
-----------
Industrial Specialty 0.2% 1,800 Corning Inc., 6%........................................ 92,025
-----------
Total Convertible Preferred Stocks (Cost $1,142,518).... 1,165,037
-----------
----------------------------------------------------------------------------------
95.0% COMMON STOCKS
----------------------------------------------------------------------------------
CONSUMER DISCRETIONARY 3.5%
Department &
Chain Stores 3.3% 9,000 J.C. Penney Inc......................................... 432,000
2,400 Melville Corp........................................... 82,200
11,000 Rite Aid Corp........................................... 281,875
7,500 Sears, Roebuck & Co..................................... 449,063
-----------
1,245,138
-----------
Restaurants 0.2% 7,800 Darden Restaurants Inc.................................. 84,825
-----------
CONSUMER STAPLES 10.7%
Alcohol & Tobacco 3.7% 7,700 Anheuser Busch Companies, Inc........................... 437,937
6,800 Philip Morris Companies Inc............................. 505,750
15,980 RJR Nabisco Holdings Corp............................... 445,443
-----------
1,389,130
-----------
Food & Beverage 3.5% 8,300 General Mills, Inc...................................... 426,412
12,700 H.J. Heinz Co........................................... 563,562
9,400 Quaker Oats Co.......................................... 309,025
-----------
1,298,999
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
37
<PAGE>
<TABLE>
GROWTH AND INCOME PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Package Goods/
Cosmetics 3.5% 7,500 Avon Products........................................... 502,500
5,500 Clorox Co............................................... 358,875
10,700 Tambrands Inc........................................... 457,425
-----------
1,318,800
-----------
HEALTH 13.9%
Health Industry
Services 0.6% 2,500 McKesson Corp........................................... 116,875
2,900 U.S. HealthCare, Inc.................................... 88,813
-----------
205,688
-----------
Pharmaceuticals 13.3% 7,400 American Home Products Corp............................. 572,575
24,500 Baxter International Inc................................ 891,187
6,200 Bristol-Myers Squibb Co................................. 422,375
16,000 Carter-Wallace Inc...................................... 182,000
12,200 Eli Lilly Co............................................ 957,700
13,500 Schering-Plough Corp.................................... 595,688
10,900 SmithKline Beecham PLC (ADR)............................ 493,225
7,800 Warner-Lambert Co....................................... 673,725
8,700 Zeneca Group PLC........................................ 146,868
1,300 Zeneca Group PLC (ADR).................................. 66,625
-----------
5,001,968
-----------
COMMUNICATIONS 4.3%
Telephone/
Communications 19,700 Alltel Corp............................................. 499,887
12,600 GTE Corp................................................ 429,975
16,100 Hong Kong Telecommunications Ltd. (ADR)................. 319,987
10,700 Sprint Corp............................................. 359,788
-----------
1,609,637
-----------
FINANCIAL 18.1%
Banks 6.4% 6,000 Bankers Trust New York Corp............................. 372,000
8,300 Chemical Banking Corp................................... 392,175
13,400 CoreStates Financial Corp............................... 467,325
17,200 First Bank System Inc................................... 705,200
6,800 J.P. Morgan & Co., Inc.................................. 476,850
-----------
2,413,550
-----------
Insurance 2.9% 7,000 EXEL, Ltd............................................... 364,000
2,800 Hartford Steam Boiler Inspection & Insurance Co......... 124,250
13,800 Lincoln National Corp................................... 603,750
-----------
1,092,000
-----------
Other Financial
Companies 4.0% 5,000 Federal National Mortgage Association................... 471,875
7,800 Great Western Financial Corp............................ 160,875
18,600 Student Loan Marketing Association...................... 871,875
-----------
1,504,625
-----------
Real Estate 4.8% 14,700 Health Care Property Investment Inc. (REIT)............. 470,400
13,100 McArthur/Glen Realty Corp. (REIT)....................... 191,587
15,900 Meditrust SBI (REIT).................................... 542,587
14,700 Nationwide Health Properties Inc. (REIT)................ 573,300
-----------
1,777,874
-----------
MEDIA 0.3%
Print Media 2,600 Reader's Digest Association Inc. "A".................... 114,725
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
38
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SERVICE INDUSTRIES 3.0%
Miscellaneous
Commercial Services 0.1% 54,000 Jardine Strategic Holdings Ltd.......................... 58,590
-----------
Miscellaneous
Consumer Services 1.6% 14,400 H & R Block Inc......................................... 592,200
-----------
Printing/Publishing 1.3% 14,500 Deluxe Corp............................................. 480,312
-----------
DURABLES 8.1%
Aerospace 7.5% 9,100 AAR Corp................................................ 162,662
10,142 Lockheed Martin Corp.................................... 640,214
11,700 Rockwell International Corp............................. 535,275
14,400 Thiokol Corp............................................ 435,600
13,100 United Technologies Corp................................ 1,023,438
-----------
2,797,189
-----------
Automobiles 0.6% 8,200 Dana Corp............................................... 234,725
-----------
MANUFACTURING 15.4%
Chemicals 3.8% 4,600 Dow Chemical Co......................................... 330,625
9,700 E.I. du Pont de Nemours & Co............................ 666,875
16,100 Lyondell Petrochemical Co............................... 412,562
-----------
1,410,062
-----------
Containers & Paper 1.6% 10,300 Kimberly-Clark Corp..................................... 616,713
-----------
Diversified
Manufacturing 3.7% 22,000 Dresser Industries Inc.................................. 489,500
1,300 Olin Corp............................................... 66,950
10,300 TRW Inc................................................. 822,713
-----------
1,379,163
-----------
Electrical Products 1.0% 5,700 Thomas & Betts Corp..................................... 389,738
-----------
Machinery/
Components/Controls 0.7% 6,100 Timken Co............................................... 281,363
-----------
Office Equipment/
Supplies 2.0% 6,300 Xerox Corp.............................................. 738,675
-----------
Specialty Chemicals 2.6% 10,200 Betz Laboratories Inc................................... 461,550
15,700 Witco Corp.............................................. 506,325
-----------
967,875
-----------
ENERGY 11.0%
Engineering 1.2% 18,700 McDermott International Inc............................. 451,137
-----------
Oil Companies 8.6% 6,200 Exxon Corp.............................................. 437,875
10,800 Murphy Oil Corp......................................... 442,800
7,200 Pennzoil Co............................................. 339,300
7,800 Repsol SA (ADR)......................................... 246,675
3,400 Royal Dutch Petroleum Co. (New York shares)............. 414,375
9,248 Societe Nationale Elf Aquitaine (ADR)................... 344,488
5,000 Texaco Inc.............................................. 328,125
8,100 Total SA (ADR).......................................... 245,025
22,800 YPF SA "D" (ADR)........................................ 430,350
-----------
3,229,013
-----------
Oil/Gas Transmission 0.1% 1,800 El Paso Natural Gas Co.................................. 51,300
-----------
Oilfield Services/
Equipment 1.1% 11,100 Halliburton Co.......................................... 396,825
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
39
<PAGE>
<TABLE>
GROWTH AND INCOME PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
METALS AND MINERALS 1.7%
Steel & Metals 19,200 Freeport McMoRan Copper & Gold, Inc. "A"................ 396,000
13,500 Oregon Steel Mills Inc.................................. 231,188
-----------
627,188
-----------
UTILITIES 5.0%
Electric Utilities 10,800 CINergy Corp............................................ 283,500
6,000 CMS Energy Corp......................................... 147,750
3,500 Empresa Nacional de Electricidad SA (ADR)............... 172,375
12,300 National Power PLC (ADR)................................ 152,213
1,800 PacifiCorp.............................................. 33,750
9,700 Pacific Gas & Electric Co............................... 281,300
11,100 PowerGen PLC (ADR) (a).................................. 135,975
14,600 Southern Company........................................ 326,675
13,500 Unicom Corp............................................. 359,438
-----------
1,892,976
-----------
TOTAL COMMON STOCKS (Cost $32,330,465).................. 35,652,003
-----------
============================================================================================================================
TOTAL INVESTMENT PORTFOLIO - 100.0%
(Cost $34,176,983) (b)................................. 37,535,040
===========
<FN>
(a) Security valued in good faith by the Valuation Committee of the Trustees.
The cost and market value of this security at June 30, 1995 aggregated
$139,172 and $135,975 (.36% of net assets), respectively.
(b) At June 30, 1995, the net unrealized appreciation on investments based on
cost for federal income tax purposes of $34,187,761 was as follows:
Aggregate gross unrealized appreciation for all investments in which there
is an excess of market value over tax cost................................................................. $ 3,632,109
Aggregate gross unrealized depreciation for all investments in which there
is an excess of tax cost over market value................................................................. (284,830)
-----------
Net unrealized appreciation................................................................................ $ 3,347,279
===========
</FN>
</TABLE>
Purchases and sales of investment securities (excluding short#term investments),
for the six months ended June 30, 1995, aggregated $18,439,062 and $3,747,551,
respectively.
The accompanying notes are an integral part of the financial statements.
40
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------------------
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
- -------------------------------------------------------------------------------------------
JUNE 30, 1995 (UNAUDITED)
- -------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Investments, at market (identified cost $34,176,983) (Note A)...... $37,535,040
Cash............................................................... 711
Receivables:
Investments sold................................................. 8,376
Dividends and interest........................................... 140,455
-----------
Total assets................................................. 37,684,582
LIABILITIES
Payables:
Investments purchased............................................ $102,404
Portfolio shares redeemed........................................ 86,035
Accrued management fee (Note B).................................. 55,931
Other accrued expenses (Note B).................................. 14,162
--------
Total liabilities............................................ 258,532
-----------
Net assets, at market value........................................ $37,426,050
===========
NET ASSETS
Net assets consist of:
Undistributed net investment income.............................. $ 315,067
Net unrealized appreciation on investments....................... 3,358,057
Accumulated net realized loss.................................... (94,632)
Paid-in capital.................................................. 33,847,558
-----------
Net assets, at market value........................................ $37,426,050
===========
NET ASSET VALUE, offering and redemption price per share
($37,426,050 / 5,281,521 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) $7.09
=====
</TABLE>
The accompanying notes are an integral part of the financial statements.
41
<PAGE>
<TABLE>
GROWTH AND INCOME PORTFOLIO
- ------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- ------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Income:
Dividends (net of foreign taxes withheld of $463)................. $ 533,764
Interest.......................................................... 63,800
----------
597,564
Expenses (Note A):
Management fee (net of $10,024 not imposed) (Note B).............. $ 56,747
Accounting fees (Note B).......................................... 19,199
Trustees' fees (Note B)........................................... 7,776
Custodian fees.................................................... 16,343
Federal registration.............................................. 2,144
Legal............................................................. 879
Auditing.......................................................... 570
Other............................................................. 1,771 105,429
-------- ----------
Net investment income............................................... 492,135
----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments....................................................... (69,966)
Foreign currency related transactions............................. 85 (69,881)
--------
Net unrealized appreciation on investments during the period........ 3,685,824
----------
Net gain on investment transactions................................. 3,615,943
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................. $4,108,078
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
42
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- ---------------------------------------------------------------------------------------------------------
FOR THE PERIOD
SIX MONTHS MAY 2, 1994
ENDED (COMMENCEMENT
JUNE 30, OF OPERATIONS) TO
1995 DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS (UNAUDITED) 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income............................................... $ 492,135 $ 251,018
Net realized gain (loss) from investment transactions............... (69,881) 124,765
Net unrealized appreciation (depreciation) on investment
transactions during the period.................................... 3,685,824 (327,767)
----------- -----------
Net increase in net assets resulting from operations.................. 4,108,078 48,016
----------- -----------
Distributions to shareholders from:
Net investment income ($.09 and $.04 per share, respectively)....... (341,200) (86,114)
----------- -----------
Net realized gains from investment transactions ($.04 per share).... (150,289) --
----------- -----------
Portfolio share transactions:
Proceeds from shares sold........................................... 15,424,241 22,441,709
Net asset value of shares issued to shareholders in reinvestment
of distributions.................................................. 491,489 86,114
Cost of shares redeemed............................................. (2,181,111) (2,415,483)
----------- -----------
Net increase in net assets from Portfolio share transactions.......... 13,734,619 20,112,340
----------- -----------
INCREASE IN NET ASSETS................................................ 17,351,208 20,074,242
Net assets at beginning of period..................................... 20,074,842 600
----------- -----------
NET ASSETS AT END OF PERIOD (including undistributed net
investment income of $315,067 and $164,132, respectively)........... $37,426,050 $20,074,842
=========== ===========
OTHER INFORMATION
INCREASE (DECREASE) IN PORTFOLIO SHARES
Shares outstanding at beginning of period............................. 3,204,882 100
----------- -----------
Shares sold......................................................... 2,327,536 3,576,097
Shares issued to shareholders in reinvestment of distributions...... 75,713 13,561
Shares redeemed..................................................... (326,610) (384,876)
----------- -----------
Net increase in Portfolio shares.................................... 2,076,639 3,204,782
----------- -----------
Shares outstanding at end of period................................... 5,281,521 3,204,882
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
43
<PAGE>
<TABLE>
GROWTH AND INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
- ----------------------------------------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD (E) AND OTHER
PERFORMANCE INFORMATION DERIVED FROM THE FINANCIAL STATEMENTS.
<CAPTION>
FOR THE PERIOD
SIX MONTHS MAY 2, 1994
ENDED (COMMENCEMENT
JUNE 30, OF OPERATIONS)
1995 TO DECEMBER 31,
(UNAUDITED) 1994
----------- ---------------
<S> <C> <C>
Net asset value, beginning of period.......................................... $ 6.26 $ 6.00(b)
------ ------
Income from investment operations:
Net investment income (a)................................................... .12 .13
Net realized and unrealized gain (loss) on investment transactions........ .84 .17(f)
------ ------
Total from investment operations.............................................. .96 .30
------ ------
Less distributions from:
Net investment income....................................................... (.09) (.04)
Net realized gains on investment transactions............................... (.04) --
------ ------
Total distributions........................................................... (.13) (.04)
------ ------
Net asset value, end of period................................................ $ 7.09 $ 6.26
====== ======
TOTAL RETURN (%).............................................................. 15.46(D) 4.91(D)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period ($ millions)........................................ 37 20
Ratio of operating expenses, net to average net assets (%) (a)................ .75(c) .75(c)
Ratio of net investment income to average net assets (%)...................... 3.50(c) 3.63(c)
Portfolio turnover rate (%)................................................... 27.36(c) 28.41(c)
<FN>
(a) Portion of expenses waived (Note B)..................................... $ -- $ .03
(b) Original capital
(c) Annualized
(d) Not annualized
(e) Per share amounts have been calculated using the monthly average shares
outstanding during the period method.
(f) The amount shown for a share outstanding throughout the period does not
accord with the change in the aggregate gains and losses in the portfolio
securities during the period because of the timing of sales and purchases
of Portfolio shares in relation to fluctuating market values during the
period.
</FN>
</TABLE>
44
<PAGE>
<TABLE>
CAPITAL GROWTH PORTFOLIO
INVESTMENT PORTFOLIO as of June 30, 1995 (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------
5.8% REPURCHASE AGREEMENT
--------------------------------------------------------------------------------
16,956,000 Repurchase Agreement with Nesbitt Burns Securities
Inc. dated 6/30/95 at 6.125%, to be repurchased
at $16,964,655 on 7/3/95, collateralized by a
$16,890,000 U.S. Treasury Note, 6.25%, 8/31/96
(Cost $16,956,000)................................. 16,956,000
----------
--------------------------------------------------------------------------------
0.2% CONVERTIBLE BONDS
--------------------------------------------------------------------------------
FINANCIAL
Banks 1,000,000 Banco Nacional de Mexico, 7%, 12/15/99
(Cost $1,226,250).................................. 725,000
----------
--------------------------------------------------------------------------------
0.8% PREFERRED STOCKS
--------------------------------------------------------------------------------
Shares
--------------------------------------------------------------------------------
FINANCIAL 0.3%
Banks 8,000 First Nationwide Bank, non-cum. 11.5%................ 864,000
----------
TECHNOLOGY 0.5%
Electronic Components/
Distributors 14,740 Samsung Electronics Co., Ltd......................... 1,360,606
1,927 Samsung Electronics Co., Ltd. (New (b)).............. 168,628
----------
1,529,234
----------
TOTAL PREFERRED STOCKS (Cost $1,949,332)............. 2,393,234
----------
--------------------------------------------------------------------------------
92.2% COMMON STOCKS
--------------------------------------------------------------------------------
CONSUMER DISCRETIONARY 6.2%
Department &
Chain Stores 3.5% 187,600 Filene's Basement Corp.*............................. 656,600
100,000 Lowe's Companies, Inc................................ 2,987,500
110,000 May Department Stores................................ 4,578,750
71,700 Wal-Mart Stores Inc.................................. 1,917,975
----------
10,140,825
----------
Hotels & Casinos 2.0% 168,000 Carnival Corp., Class A.............................. 3,927,000
88,200 Royal Caribbean Cruises Ltd.......................... 1,940,400
5,867,400
Specialty Retail 0.7% 21,800 Fingerhut Companies, Inc............................. 340,625
95,000 Home Shopping Network Inc.*.......................... 807,500
36,000 Toys "R" Us Inc.*.................................... 1,053,000
----------
2,201,125
----------
CONSUMER STAPLES 3.6%
Alcohol & Tobacco 0.8% 80,000 RJR Nabisco Holdings Corp............................ 2,230,000
----------
Package Goods/
Cosmetics 2.8% 65,000 Clorox Co............................................ 4,241,250
55,600 Colgate-Palmolive Co................................. 4,065,750
----------
8,307,000
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
45
<PAGE>
<TABLE>
CAPITAL GROWTH PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HEALTH 11.2%
Biotechnology 0.6% 40,000 Biogen Inc.*......................................... 1,780,000
----------
Hospital Management 3.2% 220,000 Columbia/HCA Healthcare Corp......................... 9,515,000
----------
Pharmaceuticals 7.4% 7,500 Astra AB "A" (Free).................................. 231,342
133,050 Astra AB "B" (Free).................................. 4,003,456
40,000 BioChem Pharma, Inc.*................................ 875,000
80,000 Carter-Wallace Inc................................... 910,000
40,000 Eli Lilly Co......................................... 3,140,000
45,000 Johnson & Johnson.................................... 3,043,125
113,000 Merck & Co. Inc...................................... 5,537,000
89,000 Schering-Plough Corp................................. 3,927,125
----------
21,667,048
----------
COMMUNICATIONS 4.4%
Cellular Telephone 0.7% 56,870 Associated Group, Inc. "A"*.......................... 981,007
45,270 Associated Group, Inc. "B"*.......................... 837,495
300 Korea Mobile Telecom (a)............................. 282,434
----------
2,100,936
----------
Telephone/
Communications 3.7% 165,000 Century Telephone Enterprises........................ 4,681,875
83 DDI Corp............................................. 665,919
75,132 SBC Communicatons, Inc............................... 3,578,162
2,660,000 Telecomunicacoes de Sao Paulo S.A. (pfd.)............ 329,401
60,000 WorldCom, Inc.*...................................... 1,620,000
----------
10,875,357
----------
FINANCIAL 13.7%
Banks 3.4% 80,000 Citicorp............................................ 4,630,000
163,000 MBNA Corp........................................... 5,501,250
----------
10,131,250
----------
Insurance 7.1% 59,000 American International Group, Inc................... 6,726,000
60,000 EXEL, Ltd........................................... 3,120,000
31,300 General Re Corp..................................... 4,190,287
9,900 Liberty Corp........................................ 269,775
70,000 MBIA Inc............................................ 4,655,000
41,200 PMI Group, Inc...................................... 1,787,050
----------
20,748,112
----------
Other Financial
Companies 3.2% 100,000 Federal National Mortgage Association............... 9,437,500
----------
MEDIA 10.8%
Broadcasting &
Entertainment 6.3% 60,000 Capital Cities/ABC Inc.............................. 6,480,000
50,000 King World Productions, Inc.*....................... 2,025,000
247,100 Time Warner Inc..................................... 10,161,988
----------
18,666,988
----------
Cable Television 4.5% 279,750 Comcast Corp. "A"................................... 5,192,859
338,307 Tele-Communications Inc. "A"*....................... 7,929,070
----------
13,121,929
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
46
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SERVICE INDUSTRIES 4.3%
EDP Services 0.4% 55,400 National Data Corp. 1,281,125
----------
Environmental Services 0.5% 40,000 Browning Ferris Industries 1,445,000
----------
Investment 1.3% 85,000 Franklin Resources Inc. 3,782,500
----------
Miscellaneous
Consumer Services 1.4% 100,000 H & R Block Inc. 4,112,500
----------
Printing/Publishing 0.7% 40,000 Reuters Holdings PLC "B" (ADR) 2,005,000
----------
DURABLES 4.5%
Aerospace 1.1% 40,000 United Technologies Corp. 3,125,000
----------
Automobiles 0.8% 44,000 Autoliv AB (Free)* 2,351,680
----------
Telecommunications
Equipment 2.6% 40,000 DSC Communications Corp.* 1,860,000
75,000 General Instrument Corp.* 2,878,125
50,400 Nokia AB Oy "A" 2,950,129
----------
7,688,254
----------
MANUFACTURING 3.8%
Chemicals 1.4% 45,000 E.I. du Pont de Nemours & Co. 3,093,750
13,000 Schering AG 908,125
----------
4,001,875
----------
Diversified
Manufacturing 0.6% 60,000 Canadian Pacific Ltd. 1,042,500
21,000 Thermo Electron Corp.* 845,250
----------
1,887,750
----------
Electrical Products 1.8% 40,000 American Power Conversion Corp.* 915,000
100,000 Philips NV (New York shares) 4,275,000
----------
5,190,000
----------
TECHNOLOGY 17.8%
Computer Software 1.2% 27,000 Intuit Inc.* 2,052,000
40,000 Oracle Systems Corp.* 1,545,000
----------
3,597,000
----------
Diverse Electronic
Products 1.9% 83,100 Motorola Inc. 5,578,087
----------
EDP Peripherals 0.4% 91,700 Intergraph Corp.* 1,020,162
----------
Electronic Components/
Distributors 0.3% 74 Samsung Electronics Co., Ltd. (GDS) (a) 5,322
374 Samsung Electronics Co., Ltd. (GDR) 26,928
4,461 Samsung Electronics Co., Ltd. (a) 760,977
882 Samsung Electronics Co., Ltd. (a) (New (b)) 148,606
----------
941,833
----------
Electronic Data
Processing 5.0% 125,000 Hewlett-Packard Co. 9,312,500
40,000 International Business Machines Corp. 3,840,000
40,000 Silicon Graphics Inc.* 1,595,000
----------
14,747,500
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
47
<PAGE>
<TABLE>
CAPITAL GROWTH PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Office/Plant
Automation 3.0% 22,000 3Com Corp.*............................................. 1,474,000
40,000 Cabletron Systems Inc.*................................. 2,130,000
100,000 Cisco Systems, Inc.*.................................... 5,056,250
-----------
8,660,250
-----------
Semiconductors 6.0% 150,000 Intel Corp.............................................. 9,496,875
60,000 Texas Instruments Inc................................... 8,032,500
-----------
17,529,375
-----------
ENERGY 7.9%
Oil & Gas Production 1.3% 78,800 Triton Energy Corp...................................... 3,654,350
-----------
Oil Companies 6.6% 90,000 Amoco Corp.............................................. 5,996,250
40,000 Chevron Corp............................................ 1,865,000
40,000 Mobil Corp.............................................. 3,840,000
125,000 Repsol SA (ADR)......................................... 3,953,125
200,000 YPF SA "D" (ADR)........................................ 3,775,000
-----------
19,429,375
-----------
METALS AND MINERALS 0.5%
Steel & Metals 123,000 Usinas Siderurgicas de Minas Gerais S/A(pfd.) (ADR)..... 1,383,750
-----------
UTILITIES 3.5%
Electric Utilities 20,000 CMS Energy Corp......................................... 492,500
30,000 Centerior Energy Corp................................... 288,750
43,700 Centrais Eletricas Brasileiras S/A (ADR)................ 589,950
6,800 Central Costanera SA (ADR).............................. 214,200
69,900 Destec Energy Inc.*..................................... 899,962
50,000 Houston Industries Inc.................................. 2,106,250
30,000 Illinova Corp........................................... 761,250
58,000 Midlands Electricity PLC................................ 581,107
50,000 National Power PLC*..................................... 354,246
79,000 Public Service Co. of New Mexico*....................... 1,125,750
50,000 Scottish Power PLC...................................... 257,236
50,000 Southern Electric PLC................................... 510,099
30,000 TNP Enterprises Inc..................................... 483,750
60,000 Unicom Corp............................................. 1,597,500
-----------
10,262,550
-----------
TOTAL COMMON STOCKS (Cost $244,804,027)................. 270,465,386
-----------
----------------------------------------------------------------------
1.0% WARRANTS
----------------------------------------------------------------------
TECHNOLOGY
Semiconductors 99,500 Intel Corp. Warrants (expire 3/14/98)*
(Cost $700,053)....................................... 3,009,875
-----------
==================================================================================================================================
TOTAL INVESTMENT PORTFOLIO - 100.0%
(Cost $265,635,662)(c)................................ 293,549,495
===========
==================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
48
<PAGE>
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
* Non-income producing security.
(a) Securities valued in good faith by the Valuation Committee of the Trustees.
The cost and market value of these securities at June 30, 1995 aggregated
$504,950 and $1,197,339 (.41% of net assets), respectively.
(b) New shares issued during 1995, eligible for a pro rata share of 1995
dividends.
(c) At June 30, 1995, the net unrealized appreciation on investments based on
cost for federal income tax purposes of $265,585,026 was as follows:
<TABLE>
<S> <C>
Aggregate gross unrealized appreciation for all investments in which there is an excess of market value
over tax cost $ 33,341,512
Aggregate gross unralized depreciation for all investments in which there is an excess of tax cost
over market value (5,377,043)
------------
Net unrealized appreciation
$ 27,964,469
============
</TABLE>
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term investments),
for the six months ended June 30, 1995, aggregated $203,816,308 and
$216,473,003, respectively.
The accompanying notes are an integral part of the financial statements.
49
<PAGE>
<TABLE>
CAPITAL GROWTH PORTFOLIO
FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------------------------------
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
- ----------------------------------------------------------------------------------------------------
JUNE 30, 1995 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost $265,635,662) (Note A).... $293,549,495
Receivables:
Investments sold................................................ 17,099,700
Dividends and interest.......................................... 281,015
Portfolio shares sold........................................... 80,587
------------
Total assets................................................ 311,010,797
LIABILITIES
Payables:
Due to custodian bank........................................... $ 1,741
Investments purchased........................................... 20,835,429
Accrued management fee (Note B)................................. 113,129
Other accrued expenses (Note B)................................. 36,808
-----------
Total liabilities........................................... 20,987,107
------------
Net assets, at market value....................................... $290,023,690
============
NET ASSETS
Net assets consist of:
Undistributed net investment income............................. $ 982,885
Net unrealized appreciation on:
Investments................................................. 27,913,833
Foreign currency related transactions....................... 38,922
Accumulated net realized gain................................... 10,056,935
Paid-in capital................................................. 251,031,115
------------
Net assets, at market value....................................... $290,023,690
============
Net asset value, offering and redemption price per share
($290,023,690 divided by 21,145,291 outstanding
shares of beneficial interest, no par value,
unlimited number of shares authorized)...................... $ 13.72
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
50
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------------------------------
<CAPTION>
STATEMENT OF OPERATIONS
- ----------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Income:
Dividends (net of foreign taxes withheld of $32,942)................ $ 1,647,706
Interest............................................................ 313,898
-----------
1,961,604
Expenses (Note A):
Management fee (Note B)............................................. $ 629,333
Accounting fees (Note B)............................................ 39,163
Trustees' fees (Note B)............................................. 7,760
Custodian fees...................................................... 41,676
Auditing............................................................ 14,002
Legal............................................................... 7,471
Other............................................................... 12,074 751,479
----------- -----------
Net investment income.................................................. 1,210,125
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized gain (loss) from:
Investments......................................................... 10,180,538
Foreign currency related transactions............................... (25,996) 10,154,542
-----------
Net unrealized appreciation during the period on:
Investments......................................................... 29,942,413
Foreign currency related transactions............................... 43,322 29,985,735
----------- -----------
Net gain on investment transactions.................................... 40,140,277
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..................... $41,350,402
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
51
<PAGE>
<TABLE>
CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
Six Months
Ended Year
June 30, Ended
1995 December 31,
INCREASE (DECREASE) IN NET ASSETS (Unaudited) 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income........................................... $ 1,210,125 $ 1,195,374
Net realized gain from investment transactions.................. 10,154,542 8,741,905
Net unrealized appreciation (depreciation) on investment
transactions during the period.......................... 29,985,735 (35,951,788)
------------ -------------
Net increase (decrease) in net assets resulting from operations......... 41,350,402 (26,014,509)
------------ -------------
Distributions to shareholders from:
Net investment income ($.04 and $.05 per share, respectively)... (734,483) (889,382)
------------ -------------
Net realized gain from investment transactions
($.43 and $1.31 per share, respectively)................ (8,804,833) (23,981,060)
------------ -------------
Portfolio share transactions:
Proceeds from shares sold....................................... 53,172,113 157,574,508
Net asset value of shares issued to shareholders in
reinvestment of distributions........................... 9,539,316 24,870,442
Cost of shares redeemed......................................... (61,029,580) (131,982,527)
------------ -------------
Net increase in net assets from Portfolio share transactions............ 1,681,849 50,462,423
------------ -------------
INCREASE (DECREASE) IN NET ASSETS....................................... 33,492,935 (422,528)
Net assets at beginning of period....................................... 256,530,755 256,953,283
------------ -------------
NET ASSETS AT END OF PERIOD (including undistributed net
investment income of $982,885 and $507,243, respectively)....... $290,023,690 $ 256,530,755
============ =============
OTHER INFORMATION
INCREASE (DECREASE) IN PORTFOLIO SHARES
Shares outstanding at beginning of period............................... 20,979,934 17,184,932
------------ -------------
Shares sold..................................................... 4,256,654 12,319,350
Shares issued to shareholders in reinvestment of distributions.. 792,498 1,905,054
Shares redeemed................................................. (4,883,795) (10,429,402)
------------ -------------
Net increase in Portfolio shares................................ 165,357 3,795,002
------------ -------------
Shares outstanding at end of period..................................... 21,145,291 20,979,934
============ =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
52
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED
FROM THE FINANCIAL STATEMENTS.
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEARS ENDED DECEMBER 31, (e)
1995(e) -----------------------------------------------------------------------
(UNAUDITED) 1994 1993 1992 1991 1990 1989 1988 1987
----------- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period........ $ 12.23 $14.95 $12.71 $12.28 $ 8.99 $10.21 $ 8.53 $ 7.06 $ 7.67
------- ------ ------ ------ ------ ------ ------ ------- -------
Income from investment
operations:
Net investment
income (a)................ .06 .06 .06 .11 .16 .25 .35 .16 .15
Net realized and
unrealized gain
(loss) on investment
transactions.............. 1.90 (1.42) 2.52 .66 3.35 (1.00) 1.58 1.40 (.28)
------- ------ ------ ------ ------ ------ ------ ------- -------
Total from investment
operations................ 1.96 (1.36) 2.58 .77 3.51 (.75) 1.93 1.56 (.13)
------- ------ ------ ------ ------ ------ ------ ------- -------
Less distributions from:
Net investment
income.................... (.04) (.05) (.07) (.11) (.22) (.24) (.25) (.09) (.09)
Net realized gains
on investment
transactions.............. (.43) (1.31) (.27) (.23) - (.23) - - (.39)
------- ------ ------ ------ ------ ------ ------ ------- -------
Total distributions......... (.47) (1.36) (.34) (.34) (.22) (.47) (.25) (.09) (.48)
------- ------ ------ ------ ------ ------ ------ ------- -------
Net asset value,
end of period.............. $ 13.72 $12.23 $14.95 $12.71 $12.28 $ 8.99 $10.21 $ 8.53 $ 7.06
======= ====== ====== ====== ====== ====== ====== ======= =======
TOTAL RETURN (%)............ 16.48(d) (9.67) 20.88 6.42 39.56 (7.45) 22.75 22.07 (1.88)
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
period ($ millions)........ 290 257 257 167 108 45 45 17 10
Ratio of operating
expenses, net to
average net
assets (%) (a)............. .57(c) .58 .60 .63 .71 .72 .75 .75 .75
Ratio of net investment
income to average
net assets (%)............. .92(c) .47 .46 .95 1.49 2.71 3.51 2.17 1.68
Portfolio turnover
rate (%)................... 159.11(c) 66.44 95.31 56.29 58.88 61.39 63.96 129.75 113.34
<FN>
(a) Portion of expenses
reimbursed (Note B)... $ - $ - $ - $ - $ - $ - $ .01 $ .01 $ .04
(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.
</FN>
</TABLE>
<TABLE>
<CAPTION>
SIX FOR THE PERIOD
MONTHS JULY 16, 1985
ENDED (COMMENCEMENT
DECEMBER OF OPERATIONS)
31, TO JUNE 30,
1986(e)(f) 1986
---------- --------------
<S> <C> <C>
Net asset value,
beginning of period........ $ 7.93 $ 6.00(b)
------ ------
Income from investment
operations:
Net investment
income (a)................ .09 .19
Net realized and
unrealized gain
(loss) on investment
transactions.............. (.07) 1.87
------ ------
Total from investment
operations................ .02 2.06
------ ------
Less distributions from:
Net investment
income.................... (.07) (.13)
Net realized gains
on investment
transactions.............. (.21) -
------ ------
Total distributions......... (.28) (.13)
------ ------
Net asset value,
end of period.............. $ 7.67 $ 7.93
====== ======
TOTAL RETURN (%)............ .26(d) 34.66(d)
RATIOS AND
SUPPLEMENTAL DATA
Net assets, end of
period ($ millions)........ 1 -
Ratio of operating
expenses, net to
average net
assets (%) (a)............. .75(c) .60(c)
Ratio of net investment
income to average
net assets (%)............. 2.21(c) 2.95(c)
Portfolio turnover
rate (%)................... 38.78(c) 86.22(c)
<FN>
(a) Portion of expenses
reimbursed (Note B)... $ .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.
</FN>
</TABLE>
53
<PAGE>
<TABLE>
INTERNATIONAL PORTFOLIO
INVESTMENT PORTFOLIO as of June 30, 1995 (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% OF PRINCIPAL MARKET
PORTFOLIO AMOUNT VALUE ($)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------
8.3% REPURCHASE AGREEMENT
-----------------------------------------------------------------------------------------------
U.S.$ 41,252,000 Repurchase Agreement with Nesbitt Burns Securities
Inc., dated 6/30/95 at 6.125%, to be repurchased at
$41,273,056 on 7/3/95, collateralized by a $40,320,000
U.S. Treasury Note, 6.875%, 3/31/97 (Cost $41,252,000)............. 41,252,000
----------
-----------------------------------------------------------------------------------------------
2.0% COMMERCIAL PAPER
-----------------------------------------------------------------------------------------------
U.S.$ 10,000,000 Household Finance, 5.75, 7/5/95 (Cost $ 9,993,611).................. 9,993,611
----------
-----------------------------------------------------------------------------------------------
0.1% BONDS
-----------------------------------------------------------------------------------------------
DM 350,000 Deutsche Bank AG, 8%, 4/11/00....................................... 267,021
DM 23,000 Deutsche Bank AG (PC), 9%, 12/31/02................................. 18,046
DM 33,000 Deutsche Bank AG (PC), 8.750%, 12/31/03............................. 25,391
----------
Total Bonds (Cost $220,601)......................................... 310,458
----------
-----------------------------------------------------------------------------------------------
0.6% CONVERTIBLE BONDS
-----------------------------------------------------------------------------------------------
U.S.$ 1,900,000 Henderson Land Development Co., Ltd., 4%, 10/27/96
(Property developer)............................................... 1,890,500
U.S.$ 1,050,000 Ssangyong Oil Refining Co., Ltd., 3.75%, 12/31/08
(Major oil refiner)................................................ 1,118,250
----------
Total Convertible Bonds (Cost $2,955,694)........................... 3,008,750
----------
-----------------------------------------------------------------------------------------------
4.1% PREFERRED STOCKS
-----------------------------------------------------------------------------------------------
Shares
-----------------------------------------------------------------------------------------------
GERMANY 3.4% 15,000 Rheinisch-Westfaelisches Elektrizitaetswerk AG
(Electric utility)*................................................ 4,126,261
10,000 SAP AG (Computer software manufacturer)............................. 12,600,788
----------
16,727,049
----------
ITALY 0.7% 1,500,000 Fiat SpA (Multi-industry, automobiles)*............................. 3,263,560
----------
Total Preferred Stocks (Cost $9,846,935)............................ 19,990,609
----------
-----------------------------------------------------------------------------------------------
84.8% COMMON STOCKS
-----------------------------------------------------------------------------------------------
ARGENTINA 0.7%
170,000 YPF SA "D" (ADR) (Petroleum company)................................ 3,208,750
----------
AUSTRALIA 0.7%
1,556,504 Ampol Exploration Ltd. (Oil and gas exploration company)............ 3,519,900
7,525 Coca Cola Amatil Ltd. (Soft drink bottler and distributor) (c)...... 46,075
60 M.I.M. Holdings Ltd. (Nonferrous metals and coal)................... 75
----------
3,566,050
----------
BRAZIL 3.3%
8,578,870 Centrais Eletricas Brasileiras S/A "B" (pfd.) (Electric utility).... 2,283,349
5,000,000 Companhia Cervejaria Brahma (pfd.) (Leading beer producer and
distributor)....................................................... 1,640,359
86,206 Companhia Cervejaria Brahma (pfd.) (New (b))........................ 25,754
28,110,000 Companhia Vale do Rio Doce (pfd.) (Diverse mining and industrial
complex)........................................................... 4,244,747
</TABLE>
The accompanying notes are an integral part of the financial statements.
54
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% OF MARKET
PORTFOLIO SHARES VALUE ($)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
22,000,000 Petroleo Brasileiro S/A (pfd.) (Petroleum company).................. 1,864,204
65,040,000 Telecomunicacoes Brasileiras S.A. (pfd.)
(Telecommunication services)....................................... 2,140,915
3,574,800,000 Usinas Siderurgicas de Minas Gerais S/A (pfd.)
(Non-coated flat products and electrolytic galvanized
products)......................................................... 4,038,883
----------
16,238,211
----------
CANADA 2.7%
160,000 Barrick Gold Corp. (Gold exploration and production
in North and South America)........................................ 4,047,610
201,821 Canadian Pacific Ltd. (Transportation and natural
resource conglomerate)............................................. 3,471,061
200,000 Hemlo Gold Mines, Inc. (Large gold producer, with
single mine in Ontario; active exploration company)................ 2,147,563
100,000 Imperial Oil Ltd. (Producer and refiner of natural gas
and petroleum products in Canada).................................. 3,712,736
----------
13,378,970
----------
DENMARK 0.8%
85,000 Unidanmark A/S "A" (Bank holding company)........................... 4,170,910
----------
FINLAND 2.9%
78,000 Metsa-Serla Oy "B" (Tissue paper producer).......................... 3,469,913
116,000 Nokia AB Oy "A" (Leading manufacturer of cellular
telephones)........................................................ 6,789,979
247,000 Outokumpu Oy "A" (Metals and minerals).............................. 4,106,064
----------
14,365,956
----------
FRANCE 8.0%
9,300 Carrefour (Hypermarket and food retailing).......................... 4,763,824
14,138 Castorama-Dubois Investissements (Retailer, wholesaler
and distributor)................................................... 2,343,098
10,607 Compagnie Bancaire SA (Bank)........................................ 1,268,139
30,000 Compagnie de Saint-Gobain (Glass manufacturer)...................... 3,623,808
14,950 ECIA - Equipements et Composants pour l'Industrie
Automobile (Manufacturer of automobile parts and
accessories)....................................................... 2,049,317
12,000 LVMH Moet-Hennessy Louis Vuitton (Producer of wine,
spirits and luxury products)....................................... 2,159,443
88,000 Michelin "B" (Leading tire manufacturer)*........................... 3,898,212
20,000 Societe Generale (Bank)............................................. 2,337,542
48,952 Societe Nationale Elf Aquitaine (Petroleum company)................. 3,617,478
15,420 Societe Nationale Elf Aquitaine (ADR)............................... 574,395
44,000 Television Francaise (Television broadcasting)...................... 4,330,843
70,473 Total SA "B" (International oil and gas exploration,
development and production)........................................ 4,241,817
94,687 Valeo SA (Automobile and truck components
manufacturer)...................................................... 4,604,311
----------
39,812,227
----------
GERMANY 5.8%
16,000 Bayer AG (Leading chemical producer)................................ 3,980,186
86,980 Deutsche Bank AG (Bank)............................................. 4,226,819
14,860 Mannesmann AG (Bearer) (Diversified construction
and technology company)............................................ 4,540,153
69,000 Schering AG (Pharmaceutical and chemical producer).................. 4,820,046
3,027 Siemens AG (Bearer) (Manufacturer of electrical and
electronic equipment).............................................. 1,502,719
12,720 VEBA AG (Electric utility, distributor of oil and chemicals)........ 4,999,328
12,000 Viag AG (Provider of electrical power and natural gas
services, aluminum products, chemicals, ceramics and
glass)............................................................. 4,736,305
----------
28,805,556
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
55
<PAGE>
<TABLE>
INTERNATIONAL PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% OF MARKET
PORTFOLIO SHARES VALUE ($)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HONG KONG 3.3%
209,787 HSBC Holdings Ltd. (Bank)............................................ 2,690,863
2,665,600 Hong Kong & China Gas Co., Ltd. (Gas utility)........................ 4,254,460
24,000 Hong Kong & China Gas Co., Ltd. Warrants
(expire 12/31/95)*.................................................. 3,660
330,000 Hong Kong Electric Holdings, Ltd. (Electric utility and
real estate)........................................................ 1,121,637
1,182,000 Hutchison Whampoa, Ltd. (Container terminal and real
estate company)..................................................... 5,728,372
781,000 Television Broadcasts, Ltd. (Television broadcasting)*............... 2,745,380
----------
16,544,372
----------
INDONESIA 1.1%
200,000 Indocement Tunggal (Foreign registered)
(Cement producer)................................................... 785,811
75,400 Indonesia Satellite Corp. (ADR) (International
telecommunication services)......................................... 2,884,050
402,000 Kalbe Farma (Foreign registered) (Pharmaceutical
producer and distributor)........................................... 1,841,222
----------
5,511,083
----------
ITALY 2.3%
2,500,000 Istituto Nazionale delle Assicurazione (Insurance
company)*........................................................... 3,361,345
65,000 Luxottica Group SpA (ADR) (Manufacturer and marketer
of eyeglasses)...................................................... 2,413,125
964,000 Societa Finanziaria Telefonica Torino SpA (Telephone
utility and telecommunication equipment manufacturer)............... 2,665,913
1,130,000 Telecom Italia SpA (Telecommunication services)...................... 3,062,827
----------
11,503,210
----------
JAPAN 16.5%
1,000 Amano Corp. (Time-management systems)................................ 11,799
258,000 Canon Inc. (Leading producer of visual image and
information equipment).............................................. 4,200,814
65,000 Cox Co., Ltd. (Men's and women's wear chain store
operator)........................................................... 613,533
260 DDI Corp. (Long distance telephone and cellular operator)........... 2,086,013
255,000 Fujitsu Ltd. (Leading manufacturer of computers)..................... 2,542,328
190,000 Hitachi Construction Machinery Co., Ltd. (Leading
maker of hydraulic shovels)......................................... 1,629,756
377,000 Hitachi Ltd. (General electronics manufacturer)...................... 3,758,657
380,000 Hitachi Metals, Ltd. (Major producer of high-quality
specialty steels)................................................... 4,263,819
88,000 Horipro Inc. (Growing entertainment production company).............. 1,453,602
39,000 Ito-Yokado Co., Ltd. (Leading supermarket operator).................. 2,056,870
465,000 Itochu Corp. (Leading general trading company)...................... 2,715,769
550,000 Kawasaki Steel Corp. (Major integrated steelmaker)*................. 1,804,023
44,000 Keyence Corp. (Specialized manufacturer of sensors).................. 4,931,862
43,000 Kyocera Corp. (Leading ceramic package manufacturer)................. 3,541,266
30,000 Mabuchi Motor Co., Ltd. (Manufacturer of DC motors).................. 2,067,135
280,000 Matsushita Electrical Industrial Co., Ltd. (Consumer
electronic products manufacturer)................................... 4,360,805
295,000 NGK Spark Plug Co., Ltd. (Leading manufacturer of
automotive spark plugs)............................................. 3,271,783
540,000 NSK Ltd. (Leading manufacturer of bearings and other
machinery parts).................................................... 3,115,568
33,000 Nichiei Co., Ltd. (Finance company for small and
medium-sized firms)................................................. 2,036,340
165,000 Nippon Shokubai Corp., Ltd. (Specialty chemical producer)............ 1,458,144
945,000 Nisshin Steel Co., Ltd. (Blast furnace steelmaker)................... 3,467,583
90,000 Pioneer Electronics Corp. (Leading manufacturer of
audio equipment).................................................... 1,529,113
110,000 SMC Corp. (Leading maker of pneumatic equipment)..................... 6,320,571
</TABLE>
The accompanying notes are an integral part of the financial statements.
56
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% OF MARKET
PORTFOLIO SHARES VALUE ($)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
44,000 Seven-Eleven Japan Co., Ltd. (Leading convenience
store operator).................................................... 3,151,201
250,000 ShinMaywa Industries, Ltd. (Leading maker of dump
trucks and other specialty vehicles)............................... 2,097,221
44,000 Sony Corp. (Consumer electronic products manufacturer).............. 2,112,914
530,000 Sumitomo Corp. (Leading general trading company, with
offices, subsidiaries and affiliates throughout the
world)............................................................. 4,827,562
21,000 Sumitomo Electric Industries, Ltd. (ADR) (Leading maker
of electric wires and cables)...................................... 2,509,500
1,360,000 Sumitomo Metal Industries, Ltd. (Leading integrated
crude steel producer)*............................................. 3,546,221
----------
81,481,772
----------
KOREA 0.8%
2,000 Korea International Trust IDR (Investment company) (a)*............. 101,000
10,884 Samsung Electronics Co., Ltd. (Major electronics
manufacturer) (c).................................................. 586,735
648 Samsung Electronics Co., Ltd. (GDS) (c)............................. 46,600
55,000 Samsung Electronics Co., Ltd. (GDS)(New (b))........................ 2,970,000
3,278 Samsung Electronics Co., Ltd. (GDR)................................. 236,016
----------
3,940,351
----------
MALAYSIA 1.5%
445,000 Malayan Banking Bhd. (Leading banking and
financial services group).......................................... 3,522,765
1,100,000 Renong Berhad (Holding company involved in engineering
and construction, financial services, telecommunication
and information technology)*....................................... 2,048,400
662,000 Technology Resources Industries (Mobile telephone
operator)*......................................................... 1,900,738
----------
7,471,903
----------
NETHERLANDS 5.9%
105,000 AEGON Insurance Group NV (Insurance company)........................ 3,632,139
24,000 Akzo-Nobel N.V. (Chemical producer)................................. 2,868,538
204,870 Elsevier NV (International publisher of scientific,
professional, business, and consumer information books)............ 2,419,568
70,137 Getronics N.V. (Computer and software distributor).................. 3,435,559
43,750 Heineken Holdings N.V. "A" (Brewery)................................ 6,070,507
50,448 Internationale-Nederlanden Groep CVA (Banking and
insurance holding company)......................................... 2,790,186
137,000 Philips Electronics N.V. (Leading manufacturer of
electrical equipment).............................................. 5,800,065
26,935 Wolters Kluwer CVA (Publisher)...................................... 2,376,260
----------
29,392,822
----------
NORWAY 0.8%
271,889 Saga Petroleum AS "A" (Oil and gas exploration and
production)........................................................ 3,861,119
----------
PHILIPPINES 0.7%
10,115 Philippine Long Distance Telephone Co.
(Telecommunication services)....................................... 725,751
622,700 San Miguel Corp. "B" (Brewery)...................................... 2,582,907
----------
3,308,658
----------
PORTUGAL 0.3%
30,192 Jeronimo Martins (Food producer and retailer)....................... 1,537,460
----------
SPAIN 3.1%
37,400 Acerinox, S.A. (Stainless steel producer)........................... 4,591,439
22,000 Banco Popular Espanol, S.A. (Retail bank)........................... 3,269,350
29,066 Banco Santander, S.A. (Leading regional bank)....................... 1,145,842
160,000 Compania Telefonica Nacional de Espana S.A.
(Telecommunication services)....................................... 2,060,681
133,000 Repsol SA (Integrated oil company).................................. 4,183,529
----------
15,250,841
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
57
<PAGE>
<TABLE>
INTERNATIONAL PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% OF MARKET
PORTFOLIO SHARES VALUE ($)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SWEDEN 6.8%
99,000 Astra AB "A" (Free) (Pharmaceutical company)......................... 3,053,708
600 Astra AB "B" (Free).................................................. 18,054
155,000 Autoliv AB (Free) (Manufacturer of safety airbags for
automobiles)........................................................ 8,284,329
324,000 L.M. Ericsson Telephone Co. "B" (ADR) (Leading
manufacturer of cellular telephone equipment)....................... 6,480,000
75,000 Mo och Domsjo AB "B" (Free) (Manufacturer of newsprint,
paperboard, and various sawn timber products)....................... 4,322,841
144,000 S.K.F. AB "B" (Free) (Manufacturer of roller bearings)............... 2,908,411
270,000 Skandia Foersaekrings AB (Free) (Financial conglomerate)*............ 5,230,689
175,000 Volvo AB "B" (Free) (Automobile manufacturer)........................ 3,330,150
----------
33,628,182
----------
SWITZERLAND 5.0%
7,000 Alusuisse-Lonza Holdings AG (Registered)
(Manufacturer of aluminum, chemicals, and paper
packaging products)................................................. 4,389,058
5,180 Brown, Boveri & Cie. AG (Bearer) (Manufacturer of
electrical equipment)............................................... 5,362,188
5 Brown, Boveri & Cie. AG (Registered)................................. 1,003
3,623 Holderbank Financiere Glaris AG (Bearer) (Cement
company)............................................................ 2,973,283
18,115 Holderbank Financiere Glaris AG Warrants
(expire 12/20/95)*.................................................. 24,384
2,514 Nestle SA (Registered) (Food manufacturer)........................... 2,617,704
1,710 SGS Holdings SA (Bearer) (Trade inspection company).................. 2,970,039
5,000 Sandoz Ltd. AG (Registered) (Pharmaceutical company)................. 3,447,677
8,054 Swiss Bank Corp. (Bearer) (Switzerland's second
largest universal bank)............................................. 2,853,697
1 Swiss Bank Corp. (Bearer) Warrants (expire 6/30/95)*................. 24
----------
24,639,057
----------
THAILAND 1.1%
15,500 American Standard Sanitaryware (Foreign registered)
(Manufacturer of bathroom fixtures)................................. 260,583
525,220 Thai Farmers Bank (Foreign registered) (Commercial bank)............. 5,021,346
----------
5,281,929
----------
UNITED KINGDOM 10.7%
810,000 British Gas PLC (Integrated gas utility)............................. 3,729,246
588,829 British Petroleum PLC (Major integrated world oil
company)............................................................ 4,218,630
278,310 Cable and Wireless PLC (International
telecommunication services in the United Kingdom
and Hong Kong)...................................................... 1,903,201
236,000 Carlton Communications PLC (Television post
production products and services)................................... 3,574,905
140,000 De La Rue PLC (Printer of commercial banknotes and
securities)......................................................... 2,083,970
660,000 Enterprise Oil PLC (Oil and gas exploration and production).......... 4,156,489
710,218 Hanson PLC (Industrial management company)........................... 2,479,212
1,320,427 Lasmo PLC (Oil production and exploration)........................... 3,601,355
170,000 Midlands Electricity PLC (Electric companies)........................ 1,703,244
495,000 PowerGen PLC (Electric utility)...................................... 3,798,306
307,362 RTZ Corp. PLC (Mining and finance company)........................... 4,005,775
654,200 Reuters Holdings PLC (International news agency)..................... 5,446,465
588,634 SmithKline Beecham "A" (Manufacturer of ethical
drugs and healthcare products)...................................... 5,326,539
7,102 U.S. Industries, Inc. (Consumer group manufacturing
and distributing housewares, recreational and leisure
products, footwear and textiles)*................................... 96,765
389,000 Waste Management International PLC (Waste
collection and disposal services)*.................................. 1,793,186
</TABLE>
The accompanying notes are an integrl part of the financial statements.
58
<PAGE>
<TABLE>
INVESTMENT PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
% OF MARKET
PORTFOLIO SHARES VALUE ($)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
300,000 Zeneca Group PLC (Holding company: manufacturing
and marketing of pharmaceutical and agrochemical
products and specialty chemicals).............................. 5,064,408
-----------
52,981,696
-----------
TOTAL COMMON STOCKS (Cost $380,630,630)........................ 419,881,085
-----------
-----------------------------------------------------------------------------------------------
0.1% PURCHASED OPTIONS
-----------------------------------------------------------------------------------------------
Principal
Amount
-----------------------------------------------------------------------------------------------
JPY 2,352,000,000 Put on Japanese Yen, strike price JPY 84.8, expire 4/11/96
(Cost $ 777,336).............................................. 736,176
-----------
========================================================================================================================
TOTAL INVESTMENT PORTFOLIO - 100.0%
(Cost $445,676,807) (d)....................................... 495,172,689
===========
========================================================================================================================
<FN>
* Non-income producing security.
(a) 1000 shares = 1 IDR unit for Korea International Trust.
(b) New shares issued during 1995, eligible for a pro rata share of 1995 dividends.
(c) Securities valued in good faith by the Valuation Committee of the Trustees.
The cost and market value of these securities at June 30, 1995 aggregated $482,632
and $679,410 (.14% of net assets), respectively.
(d) At June 30, 1995, the net unrealized appreciation on investments based on cost
for federal income tax purposes of $446,129,053 was as follows:
Aggregate gross unrealized appreciation for all investments in which there
is an excess of market value over tax cost....................................................... $ 74,286,132
Aggregate gross unrealized depreciation for all investments in which there
is an excess of tax cost over market value....................................................... (25,242,496)
------------
Net unrealized appreciation....................................................................... $ 49,043,636
============
- ------------------------------------------------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term investments), for the six months ended
June 30, 1995, aggregated $114,451,194 and $116,034,064, respectively.
- ------------------------------------------------------------------------------------------------------------------------
Sector breakdown of the International Portfolio's equity securities is noted on page 13.
- ------------------------------------------------------------------------------------------------------------------------
</FN>
</TABLE>
At June 30, 1995, outstanding written call options were as follows (Note
A):
<TABLE>
<CAPTION>
PRINCIPAL EXPIRATION STRIKE MARKET
AMOUNT DATE PRICE VALUE ($)
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Japanese Yen....... JPY 2,352,000,000 Apr. 96 JPY 75 421,008
-------
Total outstanding written options (Premiums received $777,336).................. 421,008
=======
</TABLE>
Transactions in written call option contracts during the six months ended
June 30, 1995 were:
<TABLE>
<CAPTION>
PREMIUMS
PRINCIPAL AMOUNT RECEIVED ($)
-------------------------------------
<S> <C> <C>
Outstanding at December 31, 1994..... - -
Contracts written.................. JPY 2,352,000,000 777,336
------------------- -------
Outstanding at June 30, 1995......... JPY 2,352,000,000 777,336
============= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
59
<PAGE>
<TABLE>
INTERNATIONAL PORTFOLIO
FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
- ---------------------------------------------------------------------------------------------------------------
June 30, 1995 (Unaudited)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at market (identified cost $445,676,807) (Note A).................... $495,172,689
Cash.............................................................................. 26,901
Receivables:
Investments sold................................................................ 1,220,002
Dividends and interest.......................................................... 2,367,618
Portfolio shares sold........................................................... 351,985
------------
Total assets.................................................................. 499,139,195
============
LIABILITIES
Payables:
Investments purchased........................................................... $1,085,461
Portfolio shares redeemed....................................................... 39,474
Accrued management fee (Note B)................................................. 349,467
Other accrued expenses (Note B)................................................. 160,068
Payable on closed forward foreign currency exchange contracts
(Note A)...................................................................... 114,417
Written options, at market (premiums received $777,336) (Note A)................ 421,008
----------
Total liabilities............................................................. 2,169,895
------------
Net assets, at market value....................................................... $496,969,300
============
NET ASSETS
Net assets consist of:
Undistributed net investment income........................................... $ 4,382,505
Net unrealized appreciation on:
Investments................................................................. 49,495,882
Written options............................................................. 356,328
Foreign currency related transactions....................................... 44,092
Accumulated net realized loss................................................. (10,690,438)
Paid-in capital............................................................... 453,380,931
------------
Net assets, at market value....................................................... $496,969,300
============
NET ASSET VALUE, offering and redemption price per share
($496,969,300 divided by 44,825,333 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized)................ $ 11.09
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
60
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- ---------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Income:
Dividends (net of foreign taxes withheld of $544,316)............... $ 5,522,064
Interest............................................................ 1,240,509
------------
6,762,573
Expenses (Note A):
Management fee (Note B)............................................. $ 2,040,333
Accounting fees (Note B)............................................ 135,451
Trustees' fees (Note B)............................................. 9,103
Custodian fees...................................................... 276,923
Auditing............................................................ 34,345
Legal............................................................... 15,053
Other............................................................... 18,582 2,529,790
----------- ------------
Net investment income.................................................. 4,232,783
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT TRANSACTIONS
Net realized loss from:
Investments......................................................... (8,333,683)
Foreign currency related transactions............................... (2,276,669) (10,610,352)
-----------
Net unrealized appreciation during the period on:
Investments......................................................... 24,550,553
Written options..................................................... 356,328
Foreign currency related transactions............................... 1,549,923 26,456,804
----------- ------------
Net gain on investment transactions.................................... 15,846,452
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..................... $ 20,079,235
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
61
<PAGE>
<TABLE>
INTERNATIONAL PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS
ENDED YEAR
JUNE 30, ENDED
1995 DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS (UNAUDITED) 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income........................................................... $ 4,232,783 $ 2,210,527
Net realized gain (loss) from investment transactions........................... (10,610,352) 3,671,002
Net unrealized appreciation (depreciation) on investment
transactions during the period................................................ 26,456,804 (14,866,907)
------------ ------------
Net increase (decrease) in net assets resulting from operations................... 20,079,235 (8,985,378)
------------ ------------
Distributions to shareholders from:
Net investment income ($.01 and $.07 per share, respectively)................... (572,293) (1,958,854)
------------ ------------
Net realized gain from investment transactions ($.04 per share)................. (1,628,833) -
------------ ------------
Portfolio share transactions:
Proceeds from shares sold....................................................... 299,749,345 313,276,872
Net asset value of shares issued to shareholders in
reinvestment of distributions................................................. 2,201,126 1,958,854
Cost of shares redeemed......................................................... (294,895,879) (70,378,561)
------------ ------------
Net increase in net assets from Portfolio share transactions...................... 7,054,592 244,857,165
------------ ------------
INCREASE IN NET ASSETS............................................................ 24,932,701 233,912,933
Net assets at beginning of period................................................. 472,036,599 238,123,666
------------ ------------
NET ASSETS AT END OF PERIOD (including undistributed net investment
income of $4,382,505 and $722,015, respectively)................................ $ 496,969,300 $472,036,599
============ ============
OTHER INFORMATION
INCREASE (DECREASE) IN PORTFOLIO SHARES
Shares outstanding at beginning of period......................................... 44,139,826 21,943,195
------------ ------------
Shares sold..................................................................... 27,671,154 28,463,330
Shares issued to shareholders in reinvestment of distributions 216,220 177,916
Shares redeemed................................................................. (27,201,867) (6,444,615)
------------ ------------
Net increase in Portfolio shares................................................ 685,507 22,196,631
------------ ------------
Shares outstanding at end of period............................................... 44,825,333 44,139,826
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
62
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------------------
THE FOLLOWING TABLE INCLUDES SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD AND OTHER PERFORMANCE INFORMATION DERIVED
FROM THE FINANCIAL STATEMENTS.
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
1995(e) -----------------------------------------------------------------
(UNAUDITED) 1994(e) 1993(e) 1992(e) 1991(e) 1990(e) 1989(e) 1988
----------- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period................... $10.69 $10.85 $ 8.12 $ 8.47 $ 7.78 $ 8.46 $ 6.14 $ 5.26
------ ------ ------ ------ ------ ------ ------ -------
Income from investment
operations:
Net investment income (a)............. .10 .06 .09 .10 .12 .25 .10 .09
Net realized and unrealized
gain (loss) on investment
transactions......................... .35 (.15) 2.90 (.36) .77 (.89) 2.22(f) .79
------ ------ ------ ------ ------ ------ ------ -------
Total from investment
operations............................ .45 (.09) 2.99 (.26) .89 (.64) 2.32 .88
------ ------ ------ ------ ------ ------ ------ -------
Less distributions:
From net investment income............ (.01) (.07) (.14) (.09) (.20) (.04) - -
In excess of net investment
income............................... - - (.12) - - - - -
From net realized gains on
investment transactions.............. (.04) - - - - - - -
------ ------ ------ ------ ------ ------ ------ -------
Total distributions................... (.05) (.07) (.26) (.09) (.20) (.04) - -
------ ------ ------ ------ ------ ------ ------ -------
Net asset value, end of period......... $11.09 $10.69 $10.85 $ 8.12 $ 8.47 $ 7.78 $ 8.46 $ 6.14
====== ====== ====== ====== ====== ====== ====== =======
TOTAL RETURN (%)....................... 4.25(d) (.85) 37.82 (3.08) 11.45 (7.65) 37.79 16.73
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
($ millions).......................... 497 472 238 65 41 35 17 3
Ratio of operating expenses,
net to average net assets (%) (a)..... 1.09(c) 1.08 1.20 1.31 1.39 1.38 1.50 1.50
Ratio of net investment income
to average net assets (%)............. 1.82(c) .57 .91 1.23 1.43 2.89 1.30 1.59
Portfolio turnover rate (%)............ 53.06(c) 33.52 20.36 34.42 45.01 26.67 57.69 110.42
<FN>
(a) Portion of expenses reimbursed
(Note B) $ - $ - $ - $ - $ - $ - $ .02 $ .14
(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) Includes provision for federal income tax of $.03 per share.
</FN>
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD
MAY 1, 1987
(COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31,
1987
-----------------
<S> <C>
Net asset value,
beginning of period................... $ 6.00(b)
-------
Income from investment
operations:
Net investment income (a)............. -
Net realized and unrealized
gain (loss) on investment
transactions......................... (.64)
-------
Total from investment
operations............................ (.64)
-------
Less distributions:
From net investment income............ -
In excess of net investment
income............................... -
From net realized gains on
investment transactions.............. (.10)
-------
Total distributions................... (.10)
-------
Net asset value, end of period......... $ 5.26
=======
TOTAL RETURN (%)....................... (10.64)(d)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
($ millions).......................... 2
Ratio of operating expenses,
net to average net assets (%) (a)..... 1.50(c)
Ratio of net investment income
to average net assets (%)............. .02(c)
Portfolio turnover rate (%)............ 146.08(c)
<FN>
(a) Portion of expenses reimbursed
(Note B) $ .07
(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) Includes provision for federal income tax of $.03 per share.
</FN>
</TABLE>
63
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
NOTES TO FINANCIAL STATEMENTS (Unaudited)
- --------------------------------------------------------------------------------
A. SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Scudder Variable Life Investment Fund (the "Fund") is organized as a
Massachusetts business trust and is registered under the Investment Company Act
of 1940, as amended, as an open-end, diversified management investment company.
Its shares of beneficial interest are divided into six separate diversified
series, called "Portfolios." The Portfolios are comprised of the Money Market
Portfolio, Bond Portfolio, Balanced Portfolio, Growth and Income Portfolio,
Capital Growth Portfolio, and International Portfolio.
The Fund is intended to be the funding vehicle for variable annuity contracts
and variable life insurance policies to be offered by the separate accounts of
certain life insurance companies ("Participating Insurance Companies"). As of
June 30, 1995, ownership breakdown of the Portfolios by each Participating
Insurance Company is as follows:
<TABLE>
<CAPTION>
PORTFOLIOS
-------------------------------------------------------
PARTICIPATING GROWTH
MONEY AND CAPITAL INTERNA-
INSURANCE COMPANIES MARKET BOND BALANCED INCOME GROWTH TIONAL
- ------------------------------------ ------ ---- -------- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
Aetna Life Insurance & Annuity Co.............. -% -% -% -% -% 45.8%
American Skandia Life Assurance Co............. - 35.8 0.1 - - 0.5
AUSA Life Insurance Co......................... - - - - - 0.8
Banner Life Insurance Co....................... 0.3 0.4 6.8 0.6 1.4 0.5
Charter National Life Insurance Co............. 59.8 14.2 78.5 88.0 26.9 16.7
Fortis Benefits Insurance Co................... - - - - - 0.3
Intramerica Life Insurance Co.................. 5.1 1.6 5.7 11.1 2.4 1.5
Lincoln Benefit Life Co........................ - 0.5 1.7 - - -
Mutual of America Life Insurance Co............ - 45.3 - - 64.8 24.8
Paragon Life Insurance Co...................... - - 0.3 - 0.1 0.1
Providentmutual Life and Annuity Co.
of America.................................... - 2.0 - 0.3 - -
Safeco Life Insurance Co....................... - - 6.9 - - 2.3
Union Central Life Insurance Co................ 34.6 - - - 4.3 6.7
United of Omaha Life Insurance Co.............. 0.2 0.2 - - - -
USAA Life Insurance Co......................... - - - - 0.1 -
----- ----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
</TABLE>
The policies described below are followed consistently by the Fund in the
preparation of the financial statements for its Portfolios in conformity with
generally accepted accounting principles.
SECURITY VALUATION. The Money Market Portfolio values all securities utilizing
the amortized cost method permitted in accordance with Rule 2a-7 under the
Investment Company Act of 1940, as amended, and pursuant to which the Portfolio
must adhere to certain conditions. Under this method, which does not take into
account unrealized gains or losses on securities, an instrument is initially
valued at its cost and thereafter assumes a constant accretion/amortization to
maturity of any discount/premium.
Securities in each of the remaining Portfolios are valued in the following
manner:
Portfolio securities which are traded on U.S. or foreign stock exchanges are
valued at the most recent sale price reported on the exchange on which the
security is traded most extensively. If no sale occurred, the security is then
valued at the calculated mean between the most recent bid and asked quotations.
If there are no such bid and asked quotations, the most recent bid quotation is
used. Securities quoted on the National Association of Securities Dealers
Automatic Quotation ("NASDAQ") System, for which there have been sales, are
valued at the most recent sale price reported on such system. If there are no
such sales, the value is the high or "inside" bid quotation. Securities which
are not quoted on the NASDAQ System but are traded in another over-the-counter
market are valued at the most recent sale price on such market. If no sale
occurred, the security is then valued at the calculated mean between the most
recent bid and asked quotations. If there are no such bid and asked quotations,
the most recent bid quotation shall be used.
64
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Portfolio debt securities with remaining maturities greater than sixty days are
valued by pricing agents approved by the officers of the Fund, which quotations
reflect broker/dealer-supplied valuations and electronic data processing
techniques. If the pricing agents are unable to provide such quotations, the
most recent bid quotation supplied by a bona fide market maker shall be used.
Short-term investments having a maturity of sixty days or less are valued at
amortized cost.
All other securities are valued at their fair value as determined in good faith
by the Valuation Committee of the Trustees.
OPTIONS. An option contract is a contract in which the writer of the option
grants the buyer of the option the right to purchase from (call option), or sell
to (put option), the writer a designated instrument at a specified price within
a specified period of time. Certain options, including options on indices, will
require cash settlement by the Fund if the option is exercised. During the
period, the International Portfolio purchased put options on currencies and
wrote call options on currencies as a hedge against potential adverse price
movements in the value of portfolio assets.
The liability representing the Fund's obligation under an exchange traded
written option or investment in a purchased option is valued at the last sale
price or, in the absence of a sale, the mean between the closing bid and asked
price or at the most recent asked price (bid for purchased options) if no bid
and asked price are available. Over-the-counter written or purchased options are
valued using dealer supplied quotations.
FOREIGN CURRENCY TRANSLATIONS. The books and records of the Portfolios are
maintained in U.S. dollars. Foreign currency transactions are translated into
U.S. dollars on the following basis:
(i) market value of investment securities, other assets and liabilities
at the daily rates of exchange, and
(ii) purchases and sales of investment securities, dividend and interest
income and certain expenses at the rates of exchange prevailing on
the respective dates of such transactions.
The Portfolios do not isolate that portion of gains and losses on investments
which is due to changes in foreign exchange rates from that which is due to
changes in market prices of the investments. Such fluctuations are included with
the net realized and unrealized gains and losses from investments.
Net realized and unrealized gain (loss) from foreign currency related
transactions includes gains and losses between trade and settlement dates on
securities transactions, gains and losses arising from the sales of foreign
currency, and gains and losses between the ex and payment dates on dividends,
interest, and foreign withholding taxes.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency exchange
contract (forward contract) is a commitment to purchase or sell a foreign
currency at the settlement date at a negotiated rate. During the period, the
non-money market Portfolios utilized forward contracts as a hedge in connection
with portfolio purchases and sales of securities denominated in foreign
currencies and the Bond Portfolio, Balance Portfolio, and the International
Portfolio utilized forward contracts as a hedge against changes in exchange
rates relating to foreign currency denominated assets.
Forward contracts are valued at the prevailing forward exchange rate of the
underlying currencies and unrealized gain/loss is recorded daily. Forward
contracts having the same settlement date and broker are offset and any gain
(loss) is realized on the date of offset; otherwise, gain (loss) is realized on
settlement date. Realized and unrealized gains and losses which represent the
difference between the value of the forward contract to buy and the forward
contract to sell are included in net realized and unrealized gain (loss) from
foreign currency related transactions.
Certain risks may arise upon entering into forward contracts from the potential
inability of counterparties to meet the terms of their contracts. Additionally,
when utilizing forward contracts to hedge the Fund gives up the opportunity to
profit from favorable exchange rate movements during the term of the contract.
65
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS. The Fund on behalf of each Portfolio may enter into
repurchase agreements with U.S. and foreign banks and broker/dealers whereby the
Fund, through its custodian, receives delivery of the underlying securities, the
amount of which at the time of purchase and each subsequent business day is
required to be maintained at such a level that the market value, depending on
the maturity of the repurchase agreement and the underlying collateral, is equal
to at least 100.5% of the resale price.
FEDERAL INCOME TAXES. Each Portfolio is treated as a single corporate taxpayer
as provided for in the Internal Revenue Code of 1986, as amended. It is each
Portfolio's policy to comply with the requirements of the Internal Revenue Code
which are applicable to regulated investment companies and to distribute all of
its investment company taxable income to the separate accounts of the
Participating Insurance Companies which hold its shares. Accordingly, the
Portfolios paid no federal income taxes and no provision for federal income
taxes was required.
DISTRIBUTION OF INCOME AND GAINS. All of the net investment income of the Money
Market Portfolio is declared as a dividend to shareholders of record as of the
close of business each day and is paid to shareholders monthly. Dividends from
the Bond Portfolio, Balanced Portfolio, Growth and Income Portfolio, and the
Capital Growth Portfolio are declared and paid quarterly in April, July, October
and January. All of the net investment income of the International Portfolio
normally will be declared and distributed as a dividend annually. During any
particular year, net realized gains from investment transactions for each
Portfolio, in excess of available capital loss carryforwards, would be taxable
to the Portfolio if not distributed and, therefore, will be distributed to the
Participating Insurance Companies.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax regulations
which may differ from generally accepted accounting principles. The differences
primarily relate to investments in forward contracts, passive foreign investment
companies, post October loss deferral, non-taxable distributions, and certain
securities sold at a loss. As a result, net investment income (loss) and net
realized gain (loss) on investment transactions for a reporting period may
differ significantly from distributions during such period. Accordingly, the
Portfolios may periodically make reclassifications among certain of its capital
accounts without impacting the net asset value of each Portfolio.
The Portfolios use the specific identification method for determining realized
gain or loss on investments for both financial and federal income tax reporting
purposes.
EXPENSES. Each Portfolio is charged for those expenses which are directly
attributable to it, such as management fees and custodian fees, while other
expenses (reports to shareholders, legal and audit fees) are allocated based on
relative net asset value among the Portfolios.
OTHER. Investment security transactions are accounted for on a trade date basis.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income is recorded on the accrual basis. All original
issue discounts are accreted for both tax and financial reporting purposes.
B. RELATED PARTIES
- --------------------------------------------------------------------------------
Under the Fund's Investment Advisory Agreement (the "Agreement") with Scudder,
Stevens and Clark, Inc. (the "Adviser"), the Fund agrees to pay the Adviser a
fee, based on average daily net assets, equal to an annual rate of 0.37% for the
Money Market Portfolio, 0.475% for the Bond Portfolio, 0.475% for the Balanced
Portfolio, 0.475% for the Growth and Income Portfolio, 0.475% for the Capital
Growth Portfolio, and 0.875% for the International Portfolio.
The Trustees authorized the Fund on behalf of each Portfolio to pay Scudder Fund
Accounting Corp., 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.
Related fees for such services are detailed in each Portfolio's statement of
operations.
66
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 Companies, each of the Participating Insurance
Companies has agreed to reimburse the Fund to the extent that the annual
operating expenses of any Portfolio of the Fund, other than the International
Portfolio, exceed three-quarters of one percent (0.75 of 1%) of that Portfolio's
average annual net assets. The Participating Insurance Companies have agreed to
reimburse the Fund to the extent that such expenses of the International
Portfolio exceed one and one-half percent (1.50 of 1%) of the Portfolio's
average annual net assets. The Adviser may advance some or all of such
reimbursement to the Fund prior to receiving payment therefore from a
Participating Insurance Company, but it is under no obligation to do so. If the
Adviser does advance such reimbursement to the Fund and does not receive payment
therefore, it will be entitled to be repaid such amounts by the Fund. In
addition to the reimbursement by Participating Insurance Companies noted above,
until April 30, 1996, the Adviser has agreed to waive part or all of its fees
for the Growth and Income Portfolio to the extent that the Portfolio's expenses
will be maintained at 0.75%.
The Fund pays each Trustee not affiliated with the Adviser and not a Trustee of
other Scudder affiliated funds $12,000 annually plus specified amounts for
attended board and committee meetings. The Fund pays each Trustee not
affiliated with the Adviser and who is a Trustee of other Scudder affiliated
funds $7,500 annually plus specified amounts for attended board and committee
meetings. Allocated Trustees' fees for each Portfolio for the six months ended
June 30, 1995 are detailed in each Portfolio's statement of operations.
67
<PAGE>
Page 68 was intentionally left blank.
68
<PAGE>
Celebrating Over 75 Years of Serving Investors
- --------------------------------------------------------------------------------
Established in 1919 by Theodore Scudder,
Sidney Stevens, and F. Haven Clark, Scudder, Stevens
& Clark was the first independent investment counsel
firm in the United States. Since its birth, Scudder's
pioneering spirit and commitment to professional
long-term investment management have helped shape the
investment industry. In 1928, we introduced the
nation's first no-load mutual fund. Today we offer 36
pure no load(TM) funds, including the first
international mutual fund offered to U.S. investors.
Over the years, Scudder's global investment
perspective and dedication to research and
fundamental investment disciplines have helped
Scudder become one of the largest and most respected
investment managers in the world. Though times have
changed since our beginnings, we remain committed to
our long-standing principles: managing money with
integrity and distinction; keeping the interests of
our clients first; providing access to investments
and markets that may not be easily available to
individuals; and making investing as simple and
convenient as possible through friendly,
comprehensive service.
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.
This information must be preceded or
accompanied by a current prospectus.
Portfolio changes should not be considered
recommendations for action by individual
investors.
