Filed with the Securities and Exchange Commission on February 16, 1996.
File No. 2-96461
File No. 811-4257
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
-----
Post-Effective Amendment No. 17
-----
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 21
-----
Scudder Variable Life Investment Fund
-------------------------------------
(Exact Name of Registrant as Specified in Charter)
Two International Place, Boston, MA 02110-4103
----------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (617) 295-2567
---------------
Thomas F. McDonough
Scudder, Stevens & Clark, Inc.
Two International Place, Boston, MA 02110-4103
----------------------------------------------
(Name Address of Agent for Service)
It is proposed that this filing will become effective
----- immediately upon filing pursuant to paragraph (b)
----- on May 1, 1995 pursuant to paragraph (b)
----- 60 days after filing pursuant to paragraph (a)(i)
----- on __________________ pursuant to paragraph (a)(i)
X 75 days after filing pursuant to paragraph (a)(ii)
-----
----- on ________________ pursuant to paragraph (a)(ii) of Rule 485.
If appropriate, check the following box:
This post-effective amendment designates a new effective date
------- for a previously filed post-effective amendment.
The Registrant has filed a declaration registering an indefinite amount of
securities pursuant to Rule 24f-2 under the Investment Company Act of 1940, as
amended. The Registrant intends to file the notice required by Rule 24f-2 for
its most recent fiscal year on or about February 28, 1996.
<PAGE>
<TABLE>
<CAPTION>
SCUDDER VARIABLE LIFE INVESTMENT FUND
GLOBAL DISCOVERY PORTFOLIO
CROSS-REFERENCE SHEET
Items Required By Form N-1A
---------------------------
PART A
- ------
Item No. Item Caption Prospectus Caption
-------- ------------ ------------------
<S> <C> <C>
1. Cover Page COVER PAGE
2. Synopsis NOT APPLICABLE
3. Condensed Financial NOT APPLICABLE
Information
4. General Description of INVESTMENT CONCEPT OF THE FUND;
Registrant INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIO; SPECIAL RISK
CONSIDERATIONS; POLICIES AND TECHNIQUES APPLICABLE TO THE
PORTFOLIO;
INVESTMENT RESTRICTIONS
5. Management of the Fund INVESTMENT ADVISER; PORTFOLIO MANAGEMENT;
ADDITIONAL INFORMATION
5A. Management's Discussion of NOT APPLICABLE
Fund Performance
6. Capital Stock and Other TAX STATUS, DIVIDENDS AND DISTRIBUTIONS;
Securities SHAREHOLDER COMMUNICATIONS; ADDITIONAL INFORMATION
7. Purchase of Securities DISTRIBUTOR; PURCHASES AND REDEMPTIONS;
Being Offered NET ASSET VALUE
8. Redemption or Repurchase PURCHASES AND REDEMPTIONS;
NET ASSET VALUE
9. Pending Legal Proceedings NOT APPLICABLE
Cross Reference - Page 1
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
CROSS-REFERENCE SHEET
Items Required By Form N-1A
---------------------------
PART B
- ------
Caption in Statement of
Item No. Item Caption Additional Information
-------- ------------ -----------------------
10. Cover Page COVER PAGE
11. Table of Contents TABLE OF CONTENTS
12. General Information and History ORGANIZATION AND CAPITALIZATION
13. Investment Objectives and INVESTMENT OBJECTIVE AND POLICIES;
Policies POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIO; INVESTMENT
RESTRICTIONS; PORTFOLIO TURNOVER
14. Management of the Fund MANAGEMENT
15. Control Persons and Principal TRUSTEES AND OFFICERS
Holders of Securities
16. Investment Advisory and Other INVESTMENT ADVISER AND DISTRIBUTOR; EXPERTS
Services
17. Brokerage Allocation ALLOCATION OF PORTFOLIO BROKERAGE
18. Capital Stock and Other ORGANIZATION AND CAPITALIZATION;
Securities ADDITIONAL INFORMATION
19. Purchase, Redemption and PURCHASES AND REDEMPTIONS;
Pricing of Securities Being NET ASSET VALUE;
Offered DIVIDENDS AND DISTRIBUTIONS
20. Tax Status TAX STATUS; DIVIDENDS AND DISTRIBUTIONS
21. Underwriters INVESTMENT ADVISER AND DISTRIBUTOR
22. Calculations of PERFORMANCE INFORMATION
Performance Data
23. Financial Statements FINANCIAL STATEMENTS
Cross Reference - Page 2
</TABLE>
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
GLOBAL DISCOVERY PORTFOLIO
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 seven
diversified Portfolios, one of which is offered herein. The Global Discovery
Portfolio (the "Portfolio") seeks above-average capital appreciation over the
long term by investing primarily in the equity securities of small companies
located throughout the world.
This prospectus sets forth concisely the information about the Fund as well as
the Portfolio 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, 1996, 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, 1996
CLASS A SHARES OF BENEFICIAL INTEREST
CLASS B SHARES OF BENEFICIAL INTEREST
<PAGE>
Scudder
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
Page
INVESTMENT CONCEPT OF THE FUND 1
INVESTMENT OBJECTIVE AND POLICIES OF THE PORTFOLIO 1
SPECIAL RISK CONSIDERATIONS 2
POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIO 3
Repurchase Agreements 3
Special Situation Securities 3
Convertible Securities 3
Loans of Portfolio Securities 3
Strategic Transactions and Derivatives 4
INVESTMENT RESTRICTIONS 5
INVESTMENT ADVISER 6
Portfolio Management 6
DISTRIBUTOR 6
Class A Shares 7
Class B Shares 8
Class A Shares and Class B Shares 8
PURCHASES AND REDEMPTIONS 8
NET ASSET VALUE 8
PERFORMANCE INFORMATION 9
VALUATION OF PORTFOLIO SECURITIES 9
TAX STATUS, DIVIDENDS AND DISTRIBUTIONS 9
SHAREHOLDER COMMUNICATIONS 10
ADDITIONAL INFORMATION 10
Fund Organization and Shareholder Indemnification 10
Other Information 11
TRUSTEES AND OFFICERS 12
<PAGE>
Scudder
- -------------------------------------------------------------------------------
INVESTMENT CONCEPT OF THE FUND
- -------------------------------------------------------------------------------
Scudder Variable Life Investment Fund (the "Fund") is an open-end, registered
management investment company comprised of seven diversified series. Additional
Portfolios and classes of shares 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"). Two classes of shares of the Fund currently are offered
by Participating Insurance Companies. Class A shares are offered at net asset
value and are not subject to a Distribution Plan. Class B shares are offered at
net asset value and are subject to fees imposed pursuant to a Distribution Plan.
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.
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND
POLICIES OF THE PORTFOLIO
- -------------------------------------------------------------------------------
The Global Discovery Portfolio (the "Portfolio") seeks above-average capital
appreciation over the long term by investing primarily in the equity securities
of small companies located throughout the world. The Portfolio is designed for
investors looking for above-average appreciation potential (when compared with
the overall domestic stock market as reflected by Standard & Poor's 500
Composite Price Index) and the benefits of investing globally, but who are
willing to accept above-average stock market risk, the impact of currency
fluctuation and little or no current income.
In pursuit of its objective, the Portfolio generally invests in small, rapidly
growing companies that offer the potential for above-average returns relative to
larger companies, yet are frequently overlooked and thus undervalued by the
market. The Portfolio has the flexibility to invest in any region of the world.
It can invest in companies based in emerging markets, typically in the Far East,
Latin America and lesser developed countries in Europe, as well as in firms
operating in developed economies, such as those of the United States, Japan and
in Western Europe.
Scudder, Stevens & Clark, Inc. (the "Adviser") invests the Portfolio's assets in
companies it believes offer above-average earnings, cash flow or asset growth
potential. It also invests in companies that may receive greater market
recognition over time. The Adviser believes these factors offer significant
opportunity for long-term capital appreciation. The Adviser evaluates
investments for the Portfolio from both a macroeconomic and microeconomic
perspective, using fundamental analysis, including field research. The Adviser
analyzes the growth potential and relative value of possible investments. When
evaluating an individual company, the Adviser takes into consideration numerous
factors, including the depth and quality of management; a company's product
line, business strategy and competitive position; research and development
efforts; financial strength, including degree of leverage; cost structure;
revenue and earnings growth potential; price-earnings ratios and other stock
valuation measures. Secondarily, the Adviser weighs the attractiveness of the
country and region in which a company is located.
Under normal circumstances the Portfolio invests at least 65% of its total
assets in the equity securities of small issuers. While the Adviser believes
that smaller, lesser-known companies can offer greater growth potential than
larger, more established firms, the former also involve greater risk and price
volatility. To help reduce risk, the Portfolio expects, under usual market
conditions, to diversify its portfolio widely by company, industry and country.
The Portfolio intends to allocate investments among at least three countries at
all times, including the United States.
1
<PAGE>
The Portfolio may invest up to 35% of its total assets in equity securities of
larger companies throughout the world and in debt securities if the Adviser
determines that the capital appreciation of debt securities is likely to exceed
the capital appreciation of equity securities. The Portfolio may purchase
investment-grade bonds, 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. The Portfolio may also invest up to 5% of its net assets in debt
securities rated below investment-grade. Securities rated below Baa/BBB are
commonly referred to as "junk bonds." The lower the ratings of such debt
securities, the greater their risks render them like equity securities. The
Portfolio may invest in securities rated D by S&P at the time of purchase, which
may be in default with respect to payment of principal or interest.
The Portfolio invests primarily in companies whose individual equity market
capitalizations would place them in the same size range as companies in
approximately the lowest 20% of world market capitalization as represented by
the Salomon Brothers Broad Market Index, an index comprised of equity securities
of more than 6,500 small, medium and large-sized companies based in 22 markets
around the globe. Based on this policy, the companies held by the Portfolio
typically will have individual equity market capitalizations of between
approximately $50 million and $2 billion (although the Portfolio will be free to
invest in smaller capitalization issues that satisfy the Portfolio's size
standard). Furthermore, the median market capitalization of the Portfolio will
not exceed $750 million.
The equity securities in which the Portfolio may invest consist of common
stocks, preferred stocks (either convertible or nonconvertible), rights and
warrants. These securities may be listed on the U.S. or foreign securities
exchanges or traded over-the-counter. For capital appreciation purposes, the
Portfolio may purchase notes, bonds, debentures, government securities and zero
coupon bonds (any of which may be convertible or nonconvertible). The Portfolio
may invest in foreign securities and American Depositary Receipts which may be
sponsored or unsponsored. The Portfolio may also invest in closed-end investment
companies holding foreign securities, and engage in strategic transactions. In
addition, the Portfolio may invest in illiquid or restricted securities. For
temporary defensive purposes, the Portfolio may, during periods in which
conditions in securities markets warrant, invest without limit in cash and cash
equivalents.
The Global Discovery 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
changes in foreign currency exchange rates. The investment objective and
policies of the 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 objective of the Portfolio will be achieved.
- -------------------------------------------------------------------------------
SPECIAL RISK CONSIDERATIONS
- -------------------------------------------------------------------------------
The Portfolio is designed for long-term investors who can accept international
investment risk. Since the Portfolio normally will invest in both U.S. and
foreign securities markets, changes in the Portfolio's share price may have a
low correlation with movements in the U.S. markets, which enhances the
Portfolio's appeal as a diversification tool. The Portfolio's share price will
reflect the movements of the different stock markets in which it is invested and
the different currencies in which the investments are denominated. The strength
or weakness of the U.S. dollar against foreign currencies is likely to account
for part of the Portfolio's investment performance, although the Adviser
believes that, over the long term, the impact of currency changes on Portfolio
performance will not be as significant as changes in the underlying investments.
As with any long-term investment, the value of shares when sold may be higher or
lower than when purchased.
Global investing involves economic and political considerations not typically
found in U.S. markets. These considerations, which may favorably or unfavorably
affect the 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, nonnegotiable brokerage commissions, 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 interest and dividends paid to the
Portfolio), war, expropriation, political and social instability, and diplomatic
developments.
Further, the settlement period of securities transactions in foreign markets may
be longer than in domestic markets. These considerations generally are more of a
concern in developing countries. For example, the possibility of political
2
<PAGE>
upheaval 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. The Portfolio will limit investments in securities of
issuers located in Eastern Europe to 5% of its total assets.
There is typically less publicly available information concerning foreign and
smaller companies than for domestic and larger, more established companies. Some
small companies have limited product lines, distribution channels and financial
and managerial resources. Also, because smaller companies normally have fewer
shares outstanding than larger companies and trade less frequently, it may be
more difficult for the Portfolio to buy and sell significant amounts of such
shares without an unfavorable impact on prevailing market prices. Some of the
companies in which the Portfolio may invest may distribute, sell or produce
products which have recently been brought to market and may be dependent on key
personnel with varying degrees of experience.
- -------------------------------------------------------------------------------
POLICIES AND TECHNIQUES
APPLICABLE TO THE PORTFOLIO
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
As a means of earning income for periods as short as overnight, the Fund, on
behalf of the 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, the 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.
SPECIAL SITUATION SECURITIES
From time to time, the Portfolio may invest in equity or debt securities issued
by companies that are determined by the Adviser to possess "special situation"
characteristics. In general, a special situation company is a company whose
securities are expected to increase in value solely by reason of a development
particularly or uniquely applicable to the company. Developments that may create
special situations include, among others, a liquidation, reorganization,
recapitalization or merger, material litigation, technological breakthrough and
new management or management policies. The principal risk associated with
investments in special situation companies is that the anticipated development
thought to create the special situation may not occur and the investments
therefore may not appreciate in value or may decline in value.
CONVERTIBLE SECURITIES
The Portfolio may invest in convertible securities which may offer higher income
than the common stocks into which they are convertible. The convertible
securities in which the Portfolio may invest consist of bonds, notes, debentures
and preferred stocks 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
nonconvertible securities. While convertible securities generally offer lower
yields than nonconvertible debt securities of similar quality, their prices may
reflect changes in the value of the underlying common stock. Convertible
securities entail less credit risk than the issuer's common stock.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend the portfolio securities of the 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
3
<PAGE>
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.
STRATEGIC TRANSACTIONS AND DERIVATIVES
The Portfolio may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates, currency exchange rates, and broad or specific equity or fixed-income
market movements), to manage the effective maturity or duration of fixed-income
securities in the Portfolio or to enhance potential gain. These strategies may
be executed through the use of derivative contracts. Such strategies are
generally accepted as a part of modern portfolio management and are regularly
utilized by many mutual funds and other institutional investors. Techniques and
instruments may change over time as new instruments and strategies are developed
or regulatory changes occur.
In the course of pursuing these investment strategies, the Portfolio may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various interest rate transactions such as swaps, caps, floors or collars, and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used without limit to attempt to protect against
possible changes in the market value of securities held in or to be purchased by
the Portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect the Portfolio's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of fixed-income
securities in the portfolio, or to establish a position in the derivatives
markets as a temporary substitute for purchasing or selling particular
securities. Some Strategic Transactions may also be used to enhance potential
gain although no more than 5% of the Portfolio's assets will be committed to
Strategic Transactions entered into for non-hedging purposes. Any or all of
these investment techniques may be used at any time and in any combination, and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Portfolio to utilize
these Strategic Transactions successfully will depend on the Adviser's ability
to predict pertinent market movements, which cannot be assured. The Portfolio
will comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions involving
financial futures and options thereon will be purchased, sold or entered into
only for bona fide hedging, risk management or portfolio management purposes and
not for speculative purposes.
Strategic Transactions, including derivative contracts, have risks associated
with them including possible default by the other party to the transaction,
illiquidity and, to the extent the Adviser's view as to certain market movements
is incorrect, the risk that the use of such Strategic Transactions could result
in losses greater than if they had not been used. Use of put and call options
may result in losses to the Portfolio, force the sale or purchase of portfolio
securities at inopportune times or for prices higher than (in the case of put
options) or lower than (in the case of call options) current market values,
limit the amount of appreciation the Portfolio can realize on its investments or
cause the Portfolio to hold a security it might otherwise sell. The use of
currency transactions can result in the Portfolio incurring losses as a result
of a number of factors including the imposition of exchange controls, suspension
of settlements or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Portfolio creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Portfolio's position. In addition,
futures and options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Portfolio might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures contracts and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized. The Strategic Transactions that the
4
<PAGE>
Portfolio may use and some of their risks are described more fully in the Fund's
Statement of Additional Information.
- -------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
- -------------------------------------------------------------------------------
Unless specified to the contrary, the following restrictions may not be changed
with respect to the Portfolio without the approval of the majority of
outstanding voting securities of the 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 the
Portfolio present at a meeting if the holders of more than 50% of the
outstanding shares of the Portfolio are present in person or by proxy, or (2)
more than 50% of the outstanding shares of the 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, the Portfolio.
The Fund may not, on behalf of the Portfolio:
(1) borrow money except as a temporary measure for extraordinary or
emergency purposes or except in connection with reverse repurchase
agreements provided that the Portfolio maintains asset coverage of 300%
for all borrowings;
(2) purchase or sell real estate (except that the Portfolio may invest in
(i) securities of companies which deal in real estate or mortgages, and
(ii) securities secured by real estate or interests therein, and that
the Portfolio reserves freedom of action to hold and to sell real estate
acquired as a result of the Portfolio's ownership of securities); or
purchase or sell physical commodities or contracts relating to physical
commodities;
(3) act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of portfolio securities of the Portfolio;
(4) issue senior securities, except as appropriate to evidence indebtedness
which it is permitted to incur, and except for shares of the separate
classes or series of the Fund; provided that collateral arrangements
with respect to currency-related contracts, futures contracts, options
or other permitted investments, including deposits of initial and
variation margin, are not considered to be the issuance of senior
securities for purposes of this restriction;
(5) purchase any securities which would cause more than 25% of the market
value of its total assets 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
with respect to investments in obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities (for the purposes of
this restriction, telephone companies are considered to be in a separate
industry from gas and electric public utilities, wholly-owned finance
companies are considered to be in the same industry of their parents if
their activities are primarily related to financing the activities of
their parents and each foreign government, its agencies or
instrumentalities as well as supranational organizations as a group, are
each considered to be a separate industry);
(6) with respect to 75% of its total assets taken at market value purchase
more than 10% of the voting securities of any one issuer, or invest more
than 5% of the value of its total assets in the securities of any one
issuer, except obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities and except securities of closed end
investment companies;
(7) make loans to other persons, except (a) loans of portfolio securities,
provided collateral is maintained at not less than 100% by marking to
market daily, and (b) to the extent the entry into repurchase agreements
and the purchase of debt securities in accordance with its investment
objective and investment policies may be deemed to be loans;
"Value" for the purposes of all investment restrictions shall mean the value
used in determining the Portfolio's net asset value (see "NET ASSET VALUE").
5
<PAGE>
-------------------------------------------------------------------------------
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 the 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 Portfolio, the Adviser receives an investment
advisory fee at an annual rate of 0.975% of the average daily net assets of the
Portfolio.
The investment advisory fee for the Portfolio is higher than those charged many
funds which invest primarily in U.S. securities, but is not necessarily higher
than those charged to funds with investment objectives similar to the investment
objective of this Portfolio.
Under the investment advisory agreement between the Fund, on behalf of the
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 subsidiary of
the Adviser, places portfolio transactions on behalf of the Portfolio. 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 agreement
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.
Until April 30, 1998, the Adviser has agreed to waive part or all of its fee for
the Portfolio to the extent that the Portfolio's expenses will be maintained at
1.50% of the average daily net assets of the Portfolio.
PORTFOLIO MANAGEMENT
The 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
Portfolio. 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.
- -------------------------------------------------------------------------------
DISTRIBUTOR
- -------------------------------------------------------------------------------
The Fund has underwriting agreements with Scudder Investor Services, Inc. (the
"Distributor"), a subsidiary of Scudder, Stevens & Clark, Inc. Located at Two
International Place, Boston, Massachusetts 02110-4103, the Distributor is a
Massachusetts corporation formed in 1947.
6
<PAGE>
CLASS A SHARES
Under the principal underwriting agreement for Class A shares of the Fund
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 Class A
shares, and the registration and qualification of Class A 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
Class A shareholders and any notice, proxy statement, report, prospectus or
other communication to Class A shareholders of the Fund, printing and mailing
confirmations of purchases of Class A shares, any issue taxes or any initial
transfer taxes, a portion of toll-free telephone service for Class A
shareholders, wiring funds for Class A 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 Class A shares, and
preparing, printing and mailing any other literature or advertising in
connection with the offering of the Class A 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 Class A 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.
CLASS B SHARES
Under the principal underwriting agreement for Class B shares of the Fund
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 Class B
shares, and the registration and qualification of Class B 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
Class B shareholders and any notice, proxy statement, report, prospectus or
other communication to Class B shareholders of the Fund, printing and mailing
confirmations of purchases of Class B shares, any issue taxes or any initial
transfer taxes, a portion of toll-free telephone service for Class B
shareholder, writing funds for Class B 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.
Subject to the Fund's reimbursing the Distributor for such fees and expenses as
may be permitted by the Fund pursuant to the Rule 12b-1 plan in effect for Class
B shares of the Fund (as discussed below), the Distributor will pay for printing
and distributing prospectuses or reports prepared for its use in connection with
the offering of the Class B shares, and preparing, printing and mailing any
other literature or advertising in connection with the offering of the Class B
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 Class B shares issued by the Fund.
The Fund has adopted a plan pursuant to Rule 12b-1 under the 1940 Act for Class
B shares of the Fund (the "Plan"). Pursuant to the Plan, each Portfolio
participating in the Plan may pay the Distributor (for remittance to a
Participating Insurance Company) for various costs incurred or paid by such
company in connection with the distribution of Class B shares of that Portfolio.
Depending on the Participating Insurance Company's corporate structure and
applicable state law, the Distributor may remit payments to the Participating
Insurance Company's affiliated broker-dealer or other affiliated company rather
than the Participating Insurance Company itself.
The Plan provides that the Fund, on behalf of Class B shares of each Portfolio,
shall pay the Distributor in its capacity as principal underwriter of Fund
shares, a fee of up to 0.25% of the average daily net assets of a Portfolio
attributable to its Class B shares. Under the terms of the Plan, the Fund is
authorized to make payments quarterly to the Distributor for remittance to a
Participating Insurance Company, in order to pay or reimburse such Participating
Insurance Company for distribution and shareholder servicing-related expenses
incurred or paid by such Participating Insurance Company. The Plan also
provides, however, that no such payment shall be made with respect to any
7
<PAGE>
quarterly period in excess of an amount determined for such a period at the
annual rate of 0.25% of the average daily net assets of Class B shares of the
Portfolios attributable to that Participating Insurance Company's VA contracts
and VLI policies during that quarterly period.
Expenses payable pursuant to this Plan may include, but are not necessarily
limited to: (a) the printing and mailing of Fund prospectuses, statements of
additional information, any supplements thereto and shareholder reports for
existing and prospective VA contract and VLI policy owners; (b) those relating
to the development, preparation, printing and mailing of Fund advertisements,
sales literature and other promotional materials describing and/or relating to
the Fund and including materials intended for use within the Participating
Insurance Company, or for broker-dealer only use or retail use; (c) holding
seminars and sales meetings designed to promote the distribution of Fund shares;
(d) obtaining information and providing explanations to VA contract and VLI
policy owners regarding Fund investment objectives and policies and other
information about the Fund and its Portfolios, including the performance of the
Portfolios; (e) training sales personnel regarding the Fund; (f) compensating
sales personnel in connection with the allocation of cash values and premiums of
the VA contracts and VLI policies to the Fund; (g) personal service and/or
maintenance of VA contract and VLI policy owner accounts with respect to Fund
shares attributable to such accounts; and (h) financing any other activity that
the Fund's Board of Trustees determines is primarily intended to result in the
sale of Class B shares.
CLASS A SHARES AND CLASS B SHARES
As agent, the Distributor currently offers shares of the Portfolio 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
agreements provide that the Distributor accepts orders for shares at net asset
value. The Distributor has made no firm commitment to acquire shares of the
Fund.
- -------------------------------------------------------------------------------
PURCHASES AND REDEMPTIONS
- -------------------------------------------------------------------------------
The Fund offers two classes of shares: Class A shares are offered at net asset
value and are not subject to a Distribution Plan. Class B shares are offered at
net asset value and are subject to fees imposed pursuant to a Distribution Plan.
The separate accounts of the Participating Insurance Companies place orders to
purchase and redeem shares of the 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 the Portfolio are effected at
the net asset value per share determined as of the close of regular trading on
the Exchange on that same day (see "NET ASSET VALUE"). Payment for redemptions
will be made by Brown Brothers Harriman & Co. on behalf of the Fund and the
Portfolio 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 the Portfolio and may
postpone payment for any period: (i) during which the Exchange is closed, other
than customary weekend and holiday closings or during which trading on the
Exchange is restricted; (ii) when the Securities and Exchange Commission
determines that a state of emergency exists which may make payment or transfer
not reasonably practicable; (iii) as the Securities and Exchange Commission may
by order permit for the protection of the security holders of the Fund; or (iv)
at any time when the Fund may, under applicable laws and regulations, suspend
payment on the redemption of its shares.
Should any conflict between VA contract and VLI policy holders arise which would
require that a substantial amount of net assets be withdrawn from the Fund,
orderly portfolio management could be disrupted to the potential detriment of
such contract and policy holders.
- -------------------------------------------------------------------------------
NET ASSET VALUE
- -------------------------------------------------------------------------------
Scudder Fund Accounting Corporation, a 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 trading. Net
8
<PAGE>
asset value per share is calculated for purchases and redemptions for the
Portfolio by dividing the current market value of total Portfolio assets, plus
other assets, less all liabilities, by the total number of shares outstanding.
- -------------------------------------------------------------------------------
PERFORMANCE INFORMATION
- -------------------------------------------------------------------------------
From time to time, quotations of the 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 the Portfolio
refers to return assuming an investment has been held in the Portfolio for the
life of the Portfolio (the ending date of the period 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 the Portfolio.
Cumulative total return represents the cumulative change in value of an
investment in the Portfolio. Both will assume that all dividends and capital
gains distributions were reinvested.
Total return for the Portfolio will vary based on, among other things, changes
in market conditions and the level of the Portfolio's expenses.
- -------------------------------------------------------------------------------
VALUATION OF PORTFOLIO SECURITIES
- -------------------------------------------------------------------------------
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, the Portfolio
intends to qualify as a separate regulated investment company under Subchapter M
of the Code.
The Portfolio 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, the 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
9
<PAGE>
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 Portfolio intends to distribute its net investment income annually within
three months of December 31, its fiscal year-end. The Portfolio will distribute
its capital gains, if any, within three months of the end of each year. All
distributions will be reinvested in shares of the Portfolio unless an election
is made on behalf of a separate account to receive distributions in cash.
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. Participating Insurance Companies
will be informed about the amount and character of distributions from the
Portfolio for federal income tax purposes. Distributions paid by the Fund with
respect to Class A shares will generally be greater than those paid with respect
to Class B shares because expenses attributable to Class B shares will generally
be higher.
- -------------------------------------------------------------------------------
SHAREHOLDER COMMUNICATIONS
- -------------------------------------------------------------------------------
Owners of policies and contracts issued by Participating Insurance Companies for
which shares of the Portfolio 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 seven separate series. Additional series and classes of
shares may be created from time to time. The Fund has adopted a plan pursuant to
Rule 18f-3 under the 1940 Act to permit the Fund to establish a multiple class
distribution system for all of its Portfolios, except Money Market Portfolio.
The plan was approved by the Fund's Board of Trustees at a special meeting on
October 5, 1995.
Under the Fund's multi-class system, shares of each class of a multi-class
Portfolio represent an equal pro rata interest in that Portfolio and, generally,
shall have identical voting, dividend, liquidation, and other rights,
preferences, powers, restrictions, limitations, qualifications and terms and
conditions, except that: (1) each class shall have a different designation; (2)
each class of shares shall bear its "class expenses;" (3) each class shall have
exclusive voting rights on any matter submitted to shareholders that relates
solely to its distribution arrangement; (4) each class shall have separate
voting rights on any matter submitted to shareholders in which the interests of
one class differ from the interests of any other class; (5) each class may have
separate exchange privileges; and (6) each class may have different conversion
features, although a conversion feature is not currently contemplated. Expenses
currently designated as "Class Expenses" by the Fund's Board of Trustees under
the plan pursuant to Rule 18f-3 include, for example, payments to the
Distributor pursuant to the distribution plan for that class, Fund transfer
agent fees attributable to a specific class, and certain securities registration
fees.
The Portfolio has two classes of shares, designated as "Class A" shares and
"Class B" shares, each of which is offered at net asset value. Class A shares
will not be sold subject to a Rule 12b-1 fee and are available to certain
Participating Insurance Companies. Class B shares will be offered to certain
Participating Insurance Companies in the future and such shares would be subject
to Rule 12b-1 fees.
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
10
<PAGE>
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 (SECTION TO BE UPDATED)
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.
The Portfolio has a December 31 fiscal year end.
Portfolio securities of the Fund are held separately, pursuant to a custodian
agreement, by Brown Brothers Harriman & Co., 40 Water Street, Boston,
Massachusetts 02109, as custodian.
Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts 02107-2291, is
the transfer and dividend paying agent for the Fund.
Scudder Fund Accounting Corporation, a subsidiary of the Adviser, is responsible
for determining the daily net asset value per share and maintaining the general
accounting records of the Portfolio.
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,
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.
11
<PAGE>
- -------------------------------------------------------------------------------
TRUSTEES AND OFFICERS
- -------------------------------------------------------------------------------
David B. Watts*
President and Trustee
Daniel Pierce*
Vice President and Trustee
Dr. Kenneth Black, Jr.
Trustee; Regents' Professor Emeritus of Insurance, Georgia State University
Rosita P. Chang
Trustee; Professor of Finance, University of Rhode Island
Peter B. Freeman
Trustee; Corporate Director and Trustee
Dr. J. D. Hammond
Trustee; Dean, Smeal College of Business Administration, Pennsylvania State
University
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
Randall K. Zeller*
Vice President
Thomas F. McDonough*
Vice President and Secretary
Pamela A. McGrath*
Vice President and Treasurer
Edward J. O'Connell*
Vice President and Assistant Treasurer
Kathryn L. Quirk*
Vice President and Assistant Secretary
Coleen Downs Dinneen*
Assistant Secretary
*Scudder, Stevens & Clark, Inc.
12
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
GLOBAL DISCOVERY PORTFOLIO
Two International Place
Boston, Massachusetts 02110-4103
An open-end management investment company which currently offers shares
of beneficial interest of seven diversified Portfolios, one of which is
offered herein,
which seeks above-average capital appreciation over the long term
by investing primarily in the equity securities of
small companies located throughout the world
(A Mutual Fund)
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1996
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the prospectus of the Global Discovery Portfolio of
Scudder Variable Life Investment Fund dated May 1, 1996, 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 OBJECTIVE AND POLICIES.....................................................................................1
Risk Factors.................................................................................................2
POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIO...................................................................8
Debt Securities..............................................................................................8
High Yield, High Risk Securities.............................................................................8
Convertible Securities.......................................................................................9
Illiquid Securities..........................................................................................9
Repurchase Agreements.......................................................................................10
When-Issued Securities......................................................................................11
Strategic Transactions and Derivatives......................................................................11
INVESTMENT RESTRICTIONS..............................................................................................18
PURCHASES AND REDEMPTIONS............................................................................................19
INVESTMENT ADVISER AND DISTRIBUTOR...................................................................................20
Investment Adviser..........................................................................................20
Personal Investments by Employees of the Adviser............................................................22
Distributor.................................................................................................22
MANAGEMENT OF THE FUND...............................................................................................24
Trustees and Officers.......................................................................................24
Remuneration................................................................................................26
NET ASSET VALUE......................................................................................................27
TAX STATUS...........................................................................................................28
DIVIDENDS AND DISTRIBUTIONS..........................................................................................32
PERFORMANCE INFORMATION..............................................................................................32
Comparison of Portfolio Performance.........................................................................33
SHAREHOLDER COMMUNICATIONS...........................................................................................36
ORGANIZATION AND CAPITALIZATION......................................................................................36
General.....................................................................................................36
Shareholder and Trustee Liability...........................................................................38
ALLOCATION OF PORTFOLIO BROKERAGE....................................................................................38
PORTFOLIO TURNOVER...................................................................................................39
EXPERTS..............................................................................................................39
COUNSEL..............................................................................................................39
ADDITIONAL INFORMATION...............................................................................................39
FINANCIAL STATEMENTS.................................................................................................40
APPENDIX
</TABLE>
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
(See "INVESTMENT CONCEPT OF THE FUND" and
"INVESTMENT OBJECTIVE AND POLICIES OF THE PORTFOLIO"
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 seven
diversified series, one of which, the Global Discovery Portfolio (the
"Portfolio"), is included 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").
The Portfolio seeks above-average capital appreciation over the long
term by investing primarily in the equity securities of small companies located
throughout the world. The Portfolio is designed for investors looking for
above-average appreciation potential (when compared with the overall domestic
stock market as reflected by Standard & Poor's 500 Composite Price Index) and
the benefits of investing globally, but who are willing to accept above-average
stock market risk, the impact of currency fluctuation and little or no current
income.
In pursuit of its objective, the Portfolio generally invests in small,
rapidly growing companies that offer the potential for above-average returns
relative to larger companies, yet are frequently overlooked and thus undervalued
by the market. The Portfolio has the flexibility to invest in any region of the
world. It can invest in companies based in emerging markets, typically in the
Far East, Latin America and lesser developed countries in Europe, as well as in
firms operating in developed economies, such as those of the United States,
Japan and Western Europe.
Scudder, Stevens & Clark, Inc. (the "Adviser") invests the Portfolio's
assets in companies it believes offer above-average earnings, cash flow or asset
growth potential. It also invests in companies that may receive greater market
recognition over time. The Adviser believes these factors offer significant
opportunity for long-term capital appreciation. The Adviser evaluates
investments for the Portfolio from both a macroeconomic and microeconomic
perspective, using fundamental analysis, including field research. The Adviser
analyzes the growth potential and relative value of possible investments. When
evaluating an individual company, the Adviser takes into consideration numerous
factors, including the depth and quality of management; a company's product
line, business strategy and competitive position; research and development
efforts; financial strength, including degree of leverage; cost structure;
revenue and earnings growth potential; price-earnings ratios and other stock
valuation measures. Secondarily, the Adviser weighs the attractiveness of the
country and region in which a company is located.
Under normal circumstances the Portfolio invests at least 65% of its
total assets in the equity securities of small issuers. While the Adviser
believes that smaller, lesser-known companies can offer greater growth potential
than larger, more established firms, the former also involve greater risk and
price volatility. To help reduce risk, the Portfolio expects, under usual market
conditions, to diversify its portfolio widely by company, industry and country.
The Portfolio intends to allocate investments among at least three countries at
all times, including the United States.
The Portfolio may invest up to 35% of its total assets in equity
securities of larger companies throughout the world and in debt securities if
the Adviser determines that the capital appreciation of debt securities is
likely to exceed the capital appreciation of equity securities. The Portfolio
may purchase investment-grade bonds, 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. The Portfolio may also invest up to 5% of its net assets in debt
securities rated below investment-grade. Securities rated below Baa/BBB are
commonly referred to as "junk bonds." The lower the ratings of such debt
securities, the greater their risks render them like equity securities. The
Portfolio may invest in securities rated D by S&P at the time of purchase, which
may be in default with respect to payment of principal or interest.
The Portfolio selects its portfolio investments primarily from
companies whose individual equity market capitalizations would place them in the
same size range as companies in approximately the lowest 20% of market
capitalization as represented by the Salomon Brothers Broad Market Index, an
index comprised of global equity securities of companies with total available
market capitalization greater than $100 million. Based on this policy, the
<PAGE>
companies held by the Portfolio typically will have individual equity market
capitalizations of between approximately $50 million and $2 billion (although
the Portfolio will be free to invest in smaller capitalization issues that
satisfy the Portfolio's size standard). Furthermore, the median market
capitalization of the Portfolio will not exceed $750 million.
Because the Portfolio applies a U.S. size standard on a global basis, a
small company investment outside the U.S. might rank above the lowest 20% by
market capitalization in local markets and, in fact, might in some countries
rank among the largest companies in terms of capitalization.
The equity securities in which the Portfolio may invest consist of
common stocks, preferred stocks (either convertible or nonconvertible), rights
and warrants. These securities may be listed on the U.S. or foreign securities
exchanges or traded over-the-counter. For capital appreciation purposes, the
Portfolio may purchase notes, bonds, debentures, government securities and zero
coupon bonds (any of which may be convertible or nonconvertible). The Portfolio
may invest in foreign securities and American Depositary Receipts which may be
sponsored or unsponsored. The Portfolio may also invest in closed-end investment
companies holding foreign securities, and engage in strategic transactions. In
addition, the Portfolio may invest in illiquid or restricted securities. For
temporary defensive purposes, the Portfolio may, during periods in which
conditions in securities markets warrant, invest without limit in cash and cash
equivalents.
The Global Discovery 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
changes in foreign currency exchange rates. The investment objective and
policies of the 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 objective of the Portfolio will be achieved.
Risk Factors
Small Company Risk. The Adviser believes that small companies often have sales
and earnings growth rates which exceed those of larger companies, and that such
growth rates may in turn be reflected in more rapid share price appreciation
over time. However, investing in smaller company stocks involves greater risk
than is customarily associated with investing in larger, more established
companies. For example, smaller companies can have limited product lines,
markets, or financial and managerial resources. Smaller companies may also be
dependent on one or a few key persons, and may be more susceptible to losses and
risks of bankruptcy. Also, the securities of smaller companies may be thinly
traded (and therefore have to be sold at a discount from current market prices
or sold in small lots over an extended period of time). Transaction costs in
smaller company stocks may be higher than those of larger companies.
Foreign Securities. The Portfolio is intended to provide investors with an
opportunity to invest a portion of their assets in a diversified portfolio of
securities of U.S. and foreign companies located worldwide and is designed for
long-term investors who can accept international investment risk. The Portfolio
is designed for investors who can accept currency and other forms of
international investment risk. The Adviser believes that allocation of the
Portfolio's assets on a global basis decreases the degree to which events in any
one country, including the U.S., will affect an investor's entire investment
holdings. In the period since World War II, many leading foreign economies have
grown more rapidly than the U.S. economy and from time to time have had interest
rate levels that had a higher real return than the U.S. bond market.
Consequently, the securities of foreign issuers have provided attractive returns
relative to the returns provided by the securities of U.S. issuers, although
there can be no assurance that this will be true in the future.
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
affect the Portfolio's performance favorably or unfavorably. As foreign
companies are not generally subject to uniform accounting, 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
less volume than that of the New York Stock Exchange, and securities of some
foreign issuers are less liquid and more volatile than securities of domestic
issuers. Similarly, volume and liquidity in most foreign bond markets is less
than that in the U.S. market and at times, volatility of price can be greater
than in the U.S. Further, foreign markets have different clearance and
2
<PAGE>
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 Portfolio are
uninvested and no return is earned thereon. The inability of the Portfolio to
make intended security purchases due to settlement problems could cause the
Portfolio to miss attractive investment opportunities. Inability to dispose of
portfolio securities due to settlement problems either could result in losses to
the Portfolio due to subsequent declines in value of the portfolio security or,
if the Portfolio has entered into a contract to sell the security, could result
in possible liability to the purchaser. Fixed commissions on some foreign
securities exchanges are generally higher than negotiated commissions on U.S.
exchanges, although the Adviser will endeavor to achieve the most favorable net
results on the Portfolio's portfolio transactions. Further, the Portfolio may
encounter difficulties or be unable to pursue legal remedies and obtain judgment
in foreign courts. There is generally less government supervision and regulation
of business and industry practices, securities exchanges, brokers and listed
companies than in the U.S. It may be more difficult for the Portfolio's 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 confiscatory or withholding
taxation, political, social or economic instability, 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. The Adviser seeks to mitigate the risks to the
Portfolio associated with the foregoing considerations through investment
variation and continuous professional management.
Limitations on Holdings of Foreign Securities. The Portfolio 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.
The 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 the 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 the Portfolio's assets may be invested in securities of issuers located
in the United States.
Eastern Europe. Investments in companies domiciled in Eastern European countries
may be subject to potentially greater risks than those of other foreign issuers.
These risks include (i) potentially less social, political and economic
stability; (ii) the small current size of the markets for such securities and
the low volume of trading, which result in less liquidity and in greater price
volatility; (iii) certain national policies which may restrict the Portfolio's
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in certain Eastern European countries, of a capital
market structure or market-oriented economy; and (vii) the possibility that
recent favorable economic developments in Eastern Europe may be slowed or
reversed by unanticipated political or social events in such countries, or in
the countries of the former Soviet Union. The Portfolio may invest up to 5% of
its total assets in the securities of issuers domiciled in Eastern European
countries.
Investments in such countries involve risks of nationalization,
expropriation and confiscatory taxation. The Communist governments of a number
of East European countries expropriated large amounts of private property in the
past, in many cases without adequate compensation, and there may be no assurance
that such expropriation will not occur in the future. In the event of such
expropriation, the Fund could lose a substantial portion of any investments it
has made in the affected countries. Further, no accounting standards exist in
3
<PAGE>
East European countries. Finally, even though certain East European currencies
may be convertible into U.S. dollars, the conversion rates may be artificial to
the actual market values and may be adverse to the Portfolio's shareholders.
Foreign Currencies. Investments in foreign securities usually will involve
currencies of foreign countries. Moreover, the Portfolio temporarily may hold
funds in bank deposits in foreign currencies during the completion of investment
programs and may purchase forward foreign currency contracts, foreign currency
futures contracts and options on such contracts. Because of these factors, the
value of the assets of the Portfolio as measured in U.S. dollars may be affected
favorably or unfavorably by changes in foreign currency exchange rates and
exchange control regulations, and the Portfolio may incur costs in connection
with conversions between various currencies. Although the Portfolio's custodian
values each Fund's assets daily in terms of U.S. dollars, none of the Funds
intends to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. The Portfolio 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 Portfolio at one rate, while offering a lesser rate of exchange should
the Portfolio desire to resell that currency to the dealer. The Portfolio will
conduct its 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 or futures contracts to purchase or sell foreign
currencies.
Because the Portfolio normally will be invested in both U.S. and
foreign securities markets, changes in the Portfolio's share price may have a
low correlation with movements in the U.S. markets. The Portfolio's share price
will reflect the movements of both the different stock and bond markets in which
it is invested and of the currencies in which the investments are denominated;
the strength or weakness of the U.S. dollar against foreign currencies may
account for part of the Portfolio's investment performance. U.S. and foreign
securities markets do not always move in step with each other, and the total
returns from different markets may vary significantly. The Portfolio invests in
many securities markets around the world in an attempt to take advantage of
opportunities wherever they may arise.
Investing in Emerging Markets. Most emerging securities markets may have
substantially less volume and are subject to less government supervision than
U.S. securities markets. Securities of many issuers in emerging markets may be
less liquid and more volatile than securities of comparable domestic issuers. In
addition, there is less regulation of securities exchanges, securities dealers,
and listed and unlisted companies in emerging markets than in the United States.
Emerging markets also 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. Delays in
settlement could result in temporary periods when a portion of the assets of the
Portfolio is uninvested and no cash is earned thereon. The inability of the
Portfolio to make intended security purchases due to settlement problems could
cause the Portfolio to miss attractive investment opportunities. Inability to
dispose of portfolio securities due to settlement problems could result either
in losses to the Portfolio due to subsequent declines in value of the portfolio
security or, if the Fund has entered into a contract to sell the security, could
result in possible liability to the purchaser. Costs associated with
transactions in foreign securities are generally higher than costs associated
with transactions in U.S. securities. Such transactions also involve additional
costs for the purchase or sale of foreign currency.
Foreign investment in certain emerging market debt obligations is
restricted or controlled to varying degrees. These restrictions or controls may
at times limit or preclude foreign investment in certain emerging markets debt
obligations and increase the costs and expenses of the Portfolio. Certain
emerging markets require prior governmental approval of investments by foreign
persons, limit the amount of investment by foreign persons in a particular
company, limit the investment by foreign persons only to a specific class of
securities of a company that may have less advantageous rights than the classes
available for purchase by domiciliaries of the countries and/or impose
additional taxes on foreign investors. Certain emerging markets may also
restrict investment opportunities in issuers in industries deemed important to
national interest.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. The Portfolio
4
<PAGE>
could be adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
to the Portfolio of any restrictions on investments.
Many emerging markets have experienced substantial, and in some periods
extremely high rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price controls have been
imposed in certain countries. Of these countries, some, in recent years, have
begun to control inflation through prudent economic policies.
Investing in Latin America. Investing in securities of Latin American issuers
may entail risks relating to the potential political and economic instability of
certain Latin American countries and the risks of expropriation,
nationalization, confiscation or the imposition of restrictions on foreign
investment and on repatriation of capital invested. In the event of
expropriation, nationalization or other confiscation by any country, the
Portfolio could lose its entire investment in any such country.
The securities markets of Latin American countries are substantially
smaller, less developed, less liquid and more volatile than the major securities
markets in the U.S. Disclosure and regulatory standards are in many respects
less stringent than U.S. standards. Furthermore, there is a lower level of
monitoring and regulation of the markets and the activities of investors in such
markets.
The limited size of many Latin American securities markets and limited
trading volume in the securities of Latin American issuers compared to volume of
trading in the securities of U.S. issuers could cause prices to be erratic for
reasons apart from factors that affect the soundness and competitiveness of the
securities issuers. For example, limited market size may cause prices to be
unduly influenced by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on in-depth fundamental analysis,
may decrease the value and liquidity of portfolio securities.
The Portfolio may invest a portion of its assets in securities
denominated in currencies of Latin American countries. Accordingly, changes in
the value of these currencies against the U.S. dollar may result in
corresponding changes in the U.S. dollar value of the Portfolio's assets
denominated in those currencies.
Some Latin American countries also may have managed currencies, which
are not free floating against the U.S. dollar. In addition, there is risk that
certain Latin American countries may restrict the free conversion of their
currencies into other currencies. Further, certain Latin American currencies may
not be internationally traded. Certain of these currencies have experienced a
steep devaluation relative to the U.S. dollar. Any devaluations in the
currencies in which the Portfolio securities are denominated may have a
detrimental impact on the Portfolio's net asset value.
The economies of individual Latin American countries may differ
favorably or unfavorably from the U.S. economy in such respects as the rate of
growth of gross domestic product, the rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. Certain Latin
American countries have experienced high levels of inflation which can have a
debilitating effect on an economy, although some have begun to control inflation
in recent years through prudent economic policies. Furthermore, certain Latin
American countries may impose withholding taxes on dividends payable to the
Portfolio at a higher rate than those imposed by other foreign countries. This
may reduce the Portfolio's investment income available for distribution to
shareholders.
Certain Latin American countries such as Argentina, Brazil and Mexico
are among the world's largest debtors to commercial banks and foreign
governments. At times, certain Latin American countries have declared moratoria
on the payment of principal and/or interest on outstanding debt.
Latin America is a region rich in natural resources such as oil,
copper, tin, silver, iron ore, forestry, fishing, livestock and agriculture. The
region has a large population (roughly 300 million) representing a large
domestic market. Economic growth was strong in the 1960s and 1970s, but slowed
dramatically (and in some instances was negative) in the 1980s as a result of
poor economic policies, higher international interest rates, and the denial of
access to new foreign capital. Although a number of Latin American countries are
currently experiencing lower rates of inflation and higher rates of real growth
5
<PAGE>
in gross domestic product than they have in the past, other Latin American
countries continue to experience significant problems, including high inflation
rates and high interest rates. Capital flight has proven a persistent problem
and external debt has been forcibly restructured. Political turmoil, high
inflation, capital repatriation restrictions, and nationalization have further
exacerbated conditions.
Governments of many Latin American countries have exercised and
continue to exercise substantial influence over many aspects of the private
sector through the ownership or control of many companies, including some of the
largest in those countries. As a result, government actions in the future could
have a significant effect on economic conditions which may adversely affect
prices of certain portfolio securities. Expropriation, confiscatory taxation,
nationalization, political, economic or social instability or other similar
developments, such as military coups, have occurred in the past and could also
adversely affect the Fund's investments in this region.
Changes in political leadership, the implementation of market oriented
economic policies, such as privatization, trade reform and fiscal and monetary
reform are among the recent steps taken to renew economic growth. External debt
is being restructured and flight capital (domestic capital that has left home
country) has begun to return. Inflation control efforts have also been
implemented. Free Trade Zones are being discussed in various areas around the
region, the most notable being a free zone among Mexico, the U.S. and Canada and
another zone among four countries in the southernmost point of Latin America.
Currencies are typically weak, but most are now relatively free floating, and it
is not unusual for the currencies to undergo wide fluctuations in value over
short periods of time due to changes in the market.
Investing in the Pacific Basin. Economies of individual Pacific Basin countries
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, interest rate levels, and balance of payments
position. Of particular importance, most of the economies in this region of the
world are heavily dependent upon exports, particularly to developed countries,
and, accordingly, have been and may continue to be adversely affected by trade
barriers, managed adjustments in relative currency values, and other
protectionist measures imposed or negotiated by the U.S. and other countries
with which they trade. These economies also have been and may continue to be
negatively impacted by economic conditions in the U.S. and other trading
partners, which can lower the demand for goods produced in the Pacific Basin.
With respect to the Peoples Republic of China and other markets in
which the Fund may participate, there is the possibility of nationalization,
expropriation or confiscatory taxation, political changes, government
regulation, social instability or diplomatic developments that could adversely
impact a Pacific Basin country or the Portfolio's investment in the debt of that
country.
Foreign companies, including Pacific Basin companies, are not generally
subject to uniform accounting, auditing and financial reporting standards,
practices and disclosure requirements comparable to those applicable to U.S.
companies. Consequently, there may be less publicly available information about
such companies than about U.S. companies. Moreover, there is generally less
government supervision and regulation in the Pacific Basin than in the U.S.
Investing in Europe. Most Eastern European nations, including Hungary, Poland,
Czechoslovakia, and Romania have had centrally planned, socialist economies
since shortly after World War II. A number of their governments, including those
of Hungary, the Czech Republic, and Poland are currently implementing or
considering reforms directed at political and economic liberalization, including
efforts to foster multi-party political systems, decentralize economic planning,
and move toward free market economies. At present, no Eastern European country
has a developed stock market, but Poland, Hungary, and the Czech Republic have
small securities markets in operation. Ethnic and civil conflict currently rage
through the former Yugoslavia. The outcome is uncertain.
Both the European Community (the "EC") and Japan, among others, have
made overtures to establish trading arrangements and assist in the economic
development of the Eastern European nations. A great deal of interest also
surrounds opportunities created by the reunification of East and West Germany.
Following reunification, the Federal Republic of Germany has remained a firm and
reliable member of the EC and numerous other international alliances and
organizations. To reduce inflation caused by the unification of East and West
Germany, Germany has adopted a tight monetary policy which has led to weakened
exports and a reduced domestic demand for goods and services. However, in the
long-term, reunification could prove to be an engine for domestic and
international growth.
6
<PAGE>
The conditions that have given rise to these developments are
changeable, and there is no assurance that reforms will continue or that their
goals will be achieved.
Portugal is a genuinely emerging market which has experienced rapid
growth since the mid-1980s, except for a brief period of stagnation over
1990-91. Portugal's government remains committed to privatization of the
financial system away from one dependent upon the banking system to a more
balanced structure appropriate for the requirements of a modern economy.
Inflation continues to be about three times the EC average.
Economic reforms launched in the 1980s continue to benefit Turkey in
the 1990s. Turkey's economy has grown steadily since the early 1980s, with real
growth in per capita Gross Domestic Product (the "GDP") increasing more than 6%
annually. Agriculture remains the most important economic sector, employing
approximately 55% of the labor force, and accounting for nearly 20% of GDP and
20% of exports. Inflation and interest rates remain high, and a large budget
deficit will continue to cause difficulties in Turkey's substantial
transformation to a dynamic free market economy.
Like many other Western economies, Greece suffered severely from the
global oil price hikes of the 1970s, with annual GDP growth plunging from 8% to
2% in the 1980s, and inflation, unemployment, and budget deficits rising
sharply. The fall of the socialist government in 1989 and the inability of the
conservative opposition to obtain a clear majority have led to business
uncertainty and the continued prospects for flat economic performance. Once
Greece has sorted out its political situation, it will have to face the
challenges posed by the steadily increasing integration of the EC, including the
progressive lowering of trade and investment barriers. Tourism continues as a
major industry, providing a vital offset to a sizable commodity trade deficit.
Securities traded in certain emerging European securities markets may
be subject to risks due to the inexperience of financial intermediaries, the
lack of modern technology and the lack of a sufficient capital base to expand
business operations. Additionally, former Communist regimes of a number of
Eastern European countries had expropriated a large amount of property, the
claims of which have not been entirely settled. There can be no assurance that
the Portfolio's investments in Eastern Europe would not also be expropriated,
nationalized or otherwise confiscated. Finally, any change in leadership or
policies of Eastern European countries, or countries that exercise a significant
influence over those countries, may halt the expansion of or reverse the
liberalization of foreign investment policies now occurring and adversely affect
existing investment opportunities.
Investing in Africa. Africa is a continent of roughly 50 countries with a total
population of approximately 840 million people. Literacy rates (the percentage
of people who are over 15 years of age and who can read and write) are
relatively low, ranging from 20% to 60%. The primary industries include crude
oil, natural gas, manganese ore, phosphate, bauxite, copper, iron, diamond,
cotton, coffee, cocoa, timber, tobacco, sugar, tourism, and cattle.
Many of the countries are fraught with political instability. However,
there has been a trend over the past five years toward democratization. Many
countries are moving from a military style, Marxist, or single party government
to a multi-party system. Still, there remain many countries that do not have a
stable political process. Other countries have been enmeshed in civil wars and
border clashes.
Economically, the Northern Rim countries (including Morocco, Egypt, and
Algeria) and Nigeria, Zimbabwe and South Africa are the wealthier countries on
the continent. The market capitalization of these countries has been growing
recently as more international companies invest in Africa and as local companies
start to list on the exchanges. However, religious and ethnic strife has been a
significant source of instability.
On the other end of the economic spectrum are countries, such as
Burkinafaso, Madagascar, and Malawi, that are considered to be among the poorest
or least developed in the world. These countries are generally landlocked or
have poor natural resources. The economies of many African countries are heavily
dependent on international oil prices. Of all the African industries, oil has
been the most lucrative, accounting for 40% to 60% of many countries' GDP.
However, general decline in oil prices has had an adverse impact on many
economies.
7
<PAGE>
Foreign securities such as those purchased by the Portfolio may be
subject to foreign government taxes which could reduce the yield on such
securities, although a shareholder of the Portfolio may, subject to certain
limitations, be entitled to claim a credit or deduction for U.S. federal income
tax purposes for his or her proportionate share of such foreign taxes paid by
the Portfolio. (See "TAX STATUS.")
POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIO
(See "POLICIES AND TECHNIQUES APPLICABLE TO THE
PORTFOLIO" in the Fund's prospectus.)
Debt Securities
If the Adviser determines that the capital appreciation on debt
securities is likely to exceed that of common stocks, the Portfolio may invest
in debt securities of foreign and U.S. issuers. Portfolio debt investments will
be selected on the basis of capital appreciation potential, by evaluating, among
other things, potential yield, if any, credit quality, and the fundamental
outlooks for currency and interest rate trends in different parts of the world,
taking into account the ability to hedge a degree of currency or local bond
price risk. The Portfolio may purchase "investment-grade" bonds, which are those
rated Aaa, Aa, A or Baa by Moody's or AAA, AA, A or BBB by S&P or, if unrated,
judged to be of equivalent quality as determined by the Adviser. Bonds rated Baa
or BBB may have speculative elements as well as investment-grade
characteristics. The Portfolio may also invest up to 5% of its net assets in
debt securities which are rated below investment-grade, that is, rated below Baa
by Moody's or below BBB by S&P and in unrated securities of equivalent quality.
High Yield, High Risk Securities
Below investment-grade securities (rated Ba and lower by Moody's and BB
and lower by S&P) or unrated securities of equivalent quality, in which the
Portfolio may invest up to 5% of its net assets, carry a high degree of risk
(including the possibility of default or bankruptcy of the issuers of such
securities), generally involve greater volatility of price and risk of principal
and income, and may be less liquid, than securities in the higher rating
categories 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.
Economic downturns may disrupt the high yield market and impair the
ability of issuers to repay principal and interest. Also, an increase in
interest rates would likely have a greater adverse impact on the value of such
obligations than on comparable higher quality debt securities. During an
economic downturn or period of rising interest rates, highly leveraged issues
may experience financial stress which could adversely affect their ability to
service their principal and interest payment obligations. Prices and yields of
high yield securities will fluctuate over time and, during periods of economic
uncertainty, volatility of high yield securities may adversely affect the
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
Portfolio to accurately value high yield securities held by the 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, and
liquidity and valuation difficulties.
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
Portfolio's investment objective by investment in such securities 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 the Portfolio to retain or
dispose of such security.
8
<PAGE>
Prices for below investment-grade securities may be affected by
legislative and regulatory developments. For example, new federal rules require
savings and loan institutions to gradually 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. For
more information regarding tax issues related to high yield securities, see "TAX
STATUS."
Convertible Securities
The Portfolio may 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 Portfolio may invest are either
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
debt 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 debt 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,
like all debt 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 generally are 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"(TM)).
Illiquid Securities
The Portfolio may occasionally purchase securities other than in the
open market. While such purchases may often offer attractive opportunities for
investment not otherwise available on the open market, the securities so
purchased are often "restricted securities" or "not readily marketable," i.e.,
securities which cannot be sold to the public without registration under the
Securities Act of 1933 (the "1933 Act") or the availability of an exemption from
registration (such as Rules 144 or 144A) or because they are subject to other
legal or contractual delays in or restrictions on resale.
9
<PAGE>
Generally speaking, restricted securities may be sold only to qualified
institutional buyers, or in a privately negotiated transaction to a limited
number of purchasers, or in limited quantities after they have been held for a
specified period of time and other conditions are met pursuant to an exemption
from registration, or in a public offering for which a registration statement is
in effect under the 1933 Act. The Portfolio may be deemed to be an "underwriter"
for purposes of the 1933 Act when selling restricted securities to the public,
and in such event the Portfolio may be liable to purchasers of such securities
if the registration statement prepared by the issuer, or the prospectus forming
a part of it, is materially inaccurate or misleading.
Repurchase Agreements
The Portfolio may enter into repurchase agreements with member banks of
the Federal Reserve System, with any domestic or foreign broker/dealer which is
recognized as a reporting government securities dealer, any foreign bank, if the
repurchase agreement is fully secured by government securities of the particular
foreign jurisdiction, if the creditworthiness of the bank or broker/dealer has
been determined by the Adviser to be at least as high as that of other
obligations the Portfolio may purchase, or to be at least equal to that of
issuers of commercial paper rated within the two highest grades assigned by
Moody's or S&P. In addition, the Portfolio may enter into repurchase agreements
with any foreign bank or with any domestic or foreign 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
as high as that of other obligations the Portfolio may purchase.
A repurchase agreement provides a means for the Portfolio to earn
income on assets for periods as short as overnight. It is an arrangement under
which the Portfolio acquires a security ("Obligation") and the seller agrees, at
the time of sale, to repurchase the Obligation at a specified time and price.
Obligations subject to a repurchase agreement are held in a segregated account
and the value of such securities kept at least equal to the repurchase price on
a daily basis. 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 upon repurchase. In either case, the income to the
Portfolio is unrelated to the interest rate on the Obligation itself.
Obligations will be held by the custodian or in the Federal Reserve Book Entry
system.
For purposes of 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 that Portfolio's investment
restriction applicable to loans. It is not clear whether 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 with respect to 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 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 Adviser 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 Obligation, in which case the
Portfolio may incur a loss if the proceeds to the Portfolio of the sale to a
third party are less than the repurchase price. 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. A repurchase agreement with foreign banks may be available with
respect to government securities of the particular foreign jurisdiction, and
such repurchase agreements involve risks similar to repurchase agreements with
U.S. entities.
10
<PAGE>
When-Issued Securities
The Portfolio may from time to time purchase securities on a
"when-issued" or "forward delivery" basis. The price of such securities, which
may be expressed in yield terms, is fixed at the time the commitment to purchase
is made, but delivery and payment for the when-issued or forward delivery
securities takes place at a later date. During the period between purchase and
settlement, no payment is made by the Portfolio to the issuer and no interest
accrues to the Portfolio. To the extent that assets of the Portfolio are held in
cash pending the settlement of a purchase of securities, the Portfolio would
earn no income; however, it is the Portfolio's intention to 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 Portfolio makes the commitment to purchase a security on a
when-issued or forward delivery basis, it will record the transaction and
reflect the value of the security in determining its net asset value. The market
value of the when-issued or forward delivery securities may be more or less than
the purchase price. The Portfolio does not believe that its net asset value or
income will be adversely affected by its purchase of securities on a when-issued
or forward delivery basis.
Loans of Portfolio Securities
The Fund may lend the portfolio securities of the 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.
Depositary Receipts
The 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 Portfolio's investment policies, the Portfolios' 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.
Strategic Transactions and Derivatives
The Portfolio may, but is not required to, utilize various other
investment strategies as described below to hedge various market risks (such as
interest rates, currency exchange rates, and broad or specific equity or
fixed-income market movements), to manage the effective maturity or duration of
fixed-income securities in the Portfolio's portfolio, or to enhance potential
gain. These strategies may be executed through the use of derivative contracts.
Such strategies are generally accepted as a part of modern portfolio management
and are regularly utilized by many mutual funds and other institutional
investors. Techniques and instruments may change over time as new instruments
and strategies are developed or regulatory changes occur.
11
<PAGE>
In the course of pursuing these investment strategies, the Portfolio
may purchase and sell exchange-listed and over-the-counter put and call options
on securities, equity and fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various interest rate transactions such as swaps, caps, floors or collars, and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used without limit to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect the Portfolio's unrealized gains in the value of its
portfolio securities in the Portfolio, to facilitate the sale of such securities
for investment purposes, to manage the effective maturity or duration of
fixed-income securities in the Portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. Some Strategic Transactions may also be used to enhance
potential gain although no more than 5% of the Portfolio's assets will be
committed to Strategic Transactions entered into for non-hedging purposes. Any
or all of these investment techniques may be used at any time and in any
combination and there is no particular strategy that dictates the use of one
technique rather than another, as use of any Strategic Transaction is a function
of numerous variables including market conditions. The ability of the Portfolio
to utilize these Strategic Transactions successfully will depend on the
Adviser's ability to predict pertinent market movements, which cannot be
assured. The Portfolio will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. Strategic
Transactions involving financial futures and options thereon will be purchased,
sold or entered into only for bona fide hedging, risk management or portfolio
management purposes and not for speculative purposes.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the Portfolio, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation the Portfolio can realize on its
investments or cause the Portfolio to hold a security it might otherwise sell.
The use of currency transactions can result in the Portfolio incurring losses as
a result of a number of factors including the imposition of exchange controls,
suspension of settlements, or the inability to deliver or receive a specified
currency. The use of options and futures transactions entails certain other
risks. In particular, the variable degree of correlation between price movements
of futures contracts and price movements in the related portfolio position of
the Portfolio creates the possibility that losses on the hedging instrument may
be greater than gains in the value of the Portfolio's position. In addition,
futures and options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Portfolio might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Portfolio assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, the Portfolio's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the Portfolio the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
12
<PAGE>
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Portfolio's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect the Portfolio against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase such instrument. An American style put or call
option may be exercised at any time during the option period while a European
style put or call option may be exercised only upon expiration or during a fixed
period prior thereto. The Portfolio is authorized to purchase and sell exchange
listed options and over-the-counter options ("OTC options"). Exchange listed
options are issued by a regulated intermediary such as the Options Clearing
Corporation ("OCC"), which guarantees the performance of the obligations of the
parties to such options. The discussion below uses the OCC as an example, but is
also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which the
option is "in-the-money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.
The Portfolio's ability to close out its position as a purchaser or
seller of an OCC or exchange listed put or call option is dependent, in part,
upon the liquidity of the option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (i) insufficient trading
interest in certain options; (ii) restrictions on transactions imposed by an
exchange; (iii) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities
including reaching daily price limits; (iv) interruption of the normal
operations of the OCC or an exchange; (v) inadequacy of the facilities of an
exchange or OCC to handle current trading volume; or (vi) a decision by one or
more exchanges to discontinue the trading of options (or a particular class or
series of options), in which event the relevant market for that option on that
exchange would cease to exist, although outstanding options on that exchange
would generally continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Portfolio will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Portfolio to require the
Counterparty to sell the option back to the Portfolio at a formula price within
seven days. The Portfolio expects generally to enter into OTC options that have
cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with the Portfolio or fails to make a cash
settlement payment due in accordance with the terms of that option, the
Portfolio will lose any premium it paid for the option as well as any
anticipated benefit of the transaction. Accordingly, the Adviser must assess the
creditworthiness of each such Counterparty or any guarantor or credit
enhancement of the Counterparty's credit to determine the likelihood that the
terms of the OTC option will be satisfied. The Portfolio will engage in OTC
option transactions only with U.S. government securities dealers recognized by
the Federal Reserve Bank of New York as "primary dealers", or broker dealers,
domestic or foreign banks or other financial institutions which have received
(or the guarantors of the obligation of which have received) a short-term credit
rating of A-1 from S&P or P-1 from Moody's or an equivalent rating from any
other nationally recognized statistical rating organization ("NRSRO") or, in the
case of OTC currency transactions, are determined to be of equivalent credit
quality by the Adviser. The staff of the SEC currently takes the position that
13
<PAGE>
OTC options purchased by the Portfolio, and portfolio securities "covering" the
amount of the Portfolio's obligation pursuant to an OTC option sold by it (the
cost of the sell-back plus the in-the-money amount, if any) are illiquid, and
are subject to the Portfolio's limitation on investing no more than 10% of its
assets in illiquid securities.
If the Portfolio sells a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Portfolio's income. The sale of put options can
also provide income.
The Portfolio may purchase and sell call options on securities
including U.S. Treasury and agency securities, mortgage-backed securities,
corporate debt securities, equity securities (including convertible securities)
and Eurodollar instruments that are traded on U.S. and foreign securities
exchanges and in the over-the-counter markets, and on securities indices,
currencies and futures contracts. All calls sold by the Portfolio must be
"covered" (i.e., the Portfolio must own the securities or futures contract
subject to the call) or must meet the asset segregation requirements described
below as long as the call is outstanding. Even though the Portfolio will receive
the option premium to help protect it against loss, a call sold by the Portfolio
exposes the Portfolio during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Portfolio to hold a security or
instrument which it might otherwise have sold.
The Portfolio may purchase and sell put options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, foreign
sovereign debt, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments (whether or not it holds the
above securities in its portfolio), and on securities indices, currencies and
futures contracts other than futures on individual corporate debt and individual
equity securities. The Portfolio will not sell put options if, as a result, more
than 50% of the Portfolio's assets would be required to be segregated to cover
its potential obligations under such put options other than those with respect
to futures and options thereon. In selling put options, there is a risk that the
Portfolio may be required to buy the underlying security at a disadvantageous
price above the market price.
General Characteristics of Futures. The Portfolio may enter into financial
futures contracts or purchase or sell put and call options on such futures as a
hedge against anticipated interest rate, currency or equity market changes, for
duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below. The sale of a futures
contract creates a firm obligation by the Portfolio, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to index
futures and Eurodollar instruments, the net cash amount). Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
position.
The Portfolio's use of financial futures and options thereon will in
all cases be consistent with applicable regulatory requirements and in
particular the rules and regulations of the Commodity Futures Trading Commission
and will be entered into only for bona fide hedging, risk management (including
duration management) or other portfolio management purposes. Typically,
maintaining a futures contract or selling an option thereon requires the
Portfolio to deposit with a financial intermediary as security for its
obligations an amount of cash or other specified assets (initial margin) which
initially is typically 1% to 10% of the face amount of the contract (but may be
higher in some circumstances). Additional cash or assets (variation margin) may
be required to be deposited thereafter on a daily basis as the mark to market
value of the contract fluctuates. The purchase of an option on financial futures
involves payment of a premium for the option without any further obligation on
the part of the Portfolio. If the Portfolio exercises an option on a futures
contract it will be obligated to post initial margin (and potential subsequent
variation margin) for the resulting futures position just as it would for any
position. Futures contracts and options thereon are generally settled by
entering into an offsetting transaction but there can be no assurance that the
position can be offset prior to settlement at an advantageous price, nor that
delivery will occur.
The Portfolio will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of the Portfolio's total assets (taken at current
value); however, in the case of an option that is in-the-money at the time of
14
<PAGE>
the purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to futures contracts and
options thereon are described below.
Options on Securities Indices and Other Financial Indices. The Portfolio also
may purchase and sell call and put options on securities indices and other
financial indices and in so doing can achieve many of the same objectives it
would achieve through the sale or purchase of options on individual securities
or other instruments. Options on securities indices and other financial indices
are similar to options on a security or other instrument except that, rather
than settling by physical delivery of the underlying instrument, they settle by
cash settlement, i.e., an option on an index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is specified). This amount of cash
is equal to the excess of the closing price of the index over the exercise price
of the option, which also may be multiplied by a formula value. The seller of
the option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Currency Transactions. The Portfolio may engage in currency transactions with
Counterparties in order to hedge the value of portfolio holdings denominated in
particular currencies against fluctuations in relative value. Currency
transactions include forward currency contracts, exchange listed currency
futures, exchange listed and OTC options on currencies, and currency swaps. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) 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. A currency swap is
an agreement to exchange cash flows based on the notional difference among two
or more currencies and operates similarly to an interest rate swap, which is
described below. The Portfolio may enter into currency transactions with
Counterparties which have received (or the guarantors of the obligations of
which have received) a credit rating of A-1 or P-1 by S&P or Moody's,
respectively, or that have an equivalent rating from a NRSRO or are determined
to be of equivalent credit quality by the Adviser.
The Portfolio's dealings in forward currency contracts and other
currency transactions such as futures, options, options on futures and swaps
will be limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Portfolio, which will generally
arise in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
The Portfolio will not enter into a transaction to hedge currency
exposure to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.
The Portfolio may also cross-hedge currencies by entering into
transactions to purchase or sell one or more currencies that are expected to
decline in value relative to other currencies to which the Portfolio has or in
which the Portfolio expects to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, the Portfolio may also engage
in proxy hedging. Proxy hedging is often used when the currency to which the
Portfolio's portfolio is exposed is difficult to hedge or to hedge against the
dollar. Proxy hedging entails entering into a commitment or option to sell a
currency whose changes in value are generally considered to be correlated to a
currency or currencies in which some or all of the Portfolio's portfolio
securities are or are expected to be denominated, in exchange for U.S. dollars.
The amount of the commitment or option would not exceed the value of the
Portfolio's securities denominated in correlated currencies. For example, if the
Adviser considers that the Austrian schilling is correlated to the German
deutschemark (the "D-mark"), the Portfolio holds securities denominated in
schillings and the Adviser believes that the value of schillings will decline
against the U.S. dollar, the Adviser may enter into a commitment or option to
sell D-marks and buy dollars. Currency hedging involves some of the same risks
15
<PAGE>
and considerations as other transactions with similar instruments. Currency
transactions can result in losses to the Portfolio if the currency being hedged
fluctuates in value to a degree or in a direction that is not anticipated.
Further, there is the risk that the perceived correlation between various
currencies may not be present or may not be present during the particular time
that the Portfolio is engaging in proxy hedging. If the Portfolio enters into a
currency hedging transaction, the Portfolio will comply with the asset
segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Portfolio if it is unable to deliver or receive currency or
funds in settlement of obligations and could also cause hedges it has entered
into to be rendered useless, resulting in full currency exposure as well as
incurring transaction costs. Buyers and sellers of currency futures are subject
to the same risks that apply to the use of futures generally. Further,
settlement of a currency futures contract for the purchase of most currencies
must occur at a bank based in the issuing nation. Trading options on currency
futures is relatively new, and the ability to establish and close out positions
on such options is subject to the maintenance of a liquid market which may not
always be available. Currency exchange rates may fluctuate based on factors
extrinsic to that country's economy.
Combined Transactions. The Portfolio may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
currency transactions (including forward currency contracts) and multiple
interest rate transactions and any combination of futures, options, currency and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Portfolio to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Portfolio may enter are interest rate, currency and index swaps and the purchase
or sale of related caps, floors and collars. The Portfolio expects to enter into
these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Portfolio anticipates purchasing at a
later date. The Portfolio intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Portfolio may be obligated to pay. Interest rate swaps involve the exchange by
the Portfolio with another party of their respective commitments to pay or
receive interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. A currency swap is an
agreement to exchange cash flows on a notional amount of two or more currencies
based on the relative value differential among them and an index swap is an
agreement to swap cash flows on a notional amount based on changes in the values
of the reference indices. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling such cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Portfolio will usually enter into swaps on a net basis, i.e., the
two payment streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the Portfolio receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
swaps, caps, floors and collars are entered into for good faith hedging
purposes, the Adviser and the Portfolio believe such obligations do not
constitute senior securities under the 1940 Act and, accordingly, will not treat
them as being subject to its borrowing restrictions. The Portfolio will not
enter into any swap, cap, floor or collar transaction unless, at the time of
entering into such transaction, the unsecured long-term debt of the
Counterparty, combined with any credit enhancements, is rated at least A by S&P
or Moody's or has an equivalent rating from an NRSRO or is determined to be of
equivalent credit quality by the Adviser. If there is a default by the
Counterparty, the Portfolio may have contractual remedies pursuant to the
16
<PAGE>
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid. Caps, floors and collars
are more recent innovations for which standardized documentation has not yet
been fully developed and, accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Portfolio may make investments in Eurodollar
instruments. Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon which are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency-denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. The Portfolio might use Eurodollar futures contracts and options
thereon to hedge against changes in LIBOR, to which many interest rate swaps and
fixed income instruments are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
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, currencies and other instruments. 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 U.S. of data on which to
make trading decisions, (iii) delays in the Portfolio's ability to act upon
economic events occurring in foreign markets during non-business hours in the
U.S., (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the U.S., and (v) lower trading
volume and liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Portfolio segregate liquid high
grade assets with its custodian to the extent Portfolio obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
the Portfolio to pay or deliver securities or assets must be covered at all
times by the securities, instruments or currency required to be delivered, or,
subject to any regulatory restrictions, an amount of cash or liquid high grade
securities at least equal to the current amount of the obligation must be
segregated with the custodian. The segregated assets cannot be sold or
transferred unless equivalent assets are substituted in their place or it is no
longer necessary to segregate them. For example, a call option written by the
Portfolio will require the Portfolio to hold the securities subject to the call
(or securities convertible into the needed securities without additional
consideration) or to segregate liquid high-grade securities sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by the Portfolio on an index will require the Portfolio to own portfolio
securities which correlate with the index or to segregate liquid high grade
assets equal to the excess of the index value over the exercise price on a
current basis. A put option written by the Portfolio requires the Portfolio to
segregate liquid, high grade assets equal to the exercise price.
Except when the Portfolio enters into a forward contract for the
purchase or sale of a security denominated in a particular currency, which
requires no segregation, a currency contract which obligates the Portfolio to
buy or sell currency will generally require the Portfolio to hold an amount of
that currency or liquid securities denominated in that currency equal to the
Portfolio's obligations or to segregate liquid high grade assets equal to the
amount of the Portfolio's obligation.
OTC options entered into by the Portfolio, including those on
securities, currency, financial instruments or indices and OCC issued and
exchange listed index options, will generally provide for cash settlement. As a
result, when the Portfolio sells these instruments it will only segregate an
amount of assets equal to its accrued net obligations, as there is no
requirement for payment or delivery of amounts in excess of the net amount.
These amounts will equal 100% of the exercise price in the case of a non
cash-settled put, the same as an OCC guaranteed listed option sold by the
Portfolio, or the in-the-money amount plus any sell-back formula amount in the
case of a cash-settled put or call. In addition, when the Portfolio sells a call
option on an index at a time when the in-the-money amount exceeds the exercise
price, the Portfolio will segregate, until the option expires or is closed out,
cash or cash equivalents equal in value to such excess. OCC issued and exchange
listed options sold by the Portfolio other than those above generally settle
with physical delivery, or with an election of either physical delivery or cash
settlement and the Portfolio will segregate an amount of assets equal to the
full value of the option. OTC options settling with physical delivery, or with
17
<PAGE>
an election of either physical delivery or cash settlement will be treated the
same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Portfolio
must deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash, cash equivalents,
liquid debt or equity securities or other acceptable assets.
With respect to swaps, the Portfolio will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid high grade
securities having a value equal to the accrued excess. Caps, floors and collars
require segregation of assets with a value equal to the Portfolio's net
obligation, if any.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. The Portfolio may also enter into
offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related options and
Strategic Transactions. For example, the Portfolio could purchase a put option
if the strike price of that option is the same or higher than the strike price
of a put option sold by the Portfolio. Moreover, instead of segregating assets
if the Portfolio held a futures or forward contract, it could purchase a put
option on the same futures or forward contract with a strike price as high or
higher than the price of the contract held. Other Strategic Transactions may
also be offset in combinations. If the offsetting transaction terminates at the
time of or after the primary transaction no segregation is required, but if it
terminates prior to such time, assets equal to any remaining obligation would
need to be segregated.
The Portfolio's activities involving Strategic Transactions may be
limited by the requirements of Subchapter M of the Internal Revenue Code for
qualification as a regulated investment company. (See "TAX STATUS.")
INVESTMENT RESTRICTIONS
(See "INVESTMENT RESTRICTIONS" in the Fund's prospectus.)
Any investment restrictions herein 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, the Portfolios.
In addition to the investment restrictions set forth in the Fund's
prospectus, as a matter of nonfundamental policy, the Fund may not, on behalf of
the Portfolio:
(1) purchase or retain securities of any open-end investment
company, or securities of closed-end investment companies
except by purchase in the open market where no commission or
profit to a sponsor or dealer results from such purchases, or
except when such purchase, though not made in the open market,
is part of a plan of merger, consolidation, reorganization or
acquisition of assets; in any event the Portfolio may not
purchase more than 3% of the outstanding voting securities of
another investment company, may not invest more than 5% of its
total assets in another investment company, and may not invest
more than 10% of its total assets in other investment
companies;
(2) invest more than 10% of its net assets in securities which are
not readily marketable, the disposition of which is restricted
under Federal securities laws, or in repurchase agreements not
terminable within 7 days, and the Portfolio will not invest
more than 5% of its total assets in restricted securities;
(3) buy options on securities or financial instruments, unless the
aggregate premiums paid on all such options held by the
Portfolio at any time do not exceed 20% of its net assets; or
sell put options on securities if, as a result, the aggregate
value of the obligations underlying such put options would
exceed 50% of the Portfolio's net assets;
18
<PAGE>
(4) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to all futures contracts
entered into on behalf of the Portfolio and the premiums paid
for options on futures contracts does not exceed 5% of the
Portfolio's total assets provided that in the case of an
option that is in-the-money at the time of purchase, the
in-the-money amount may be excluded in computing the 5% limit;
(5) borrow other than from banks, or borrow money (including
reverse repurchase agreements) in excess of 10% of its total
assets (taken at market value) except that for temporary or
emergency purposes the Portfolio may borrow up to 25% of its
total assets;
(6) 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 at no added cost and, if the right is
conditional, the sale is made upon the same conditions, except
in connection with arbitrage transactions and except that the
Fund may obtain such short-term credits as may be necessary
for the clearance of purchases and sales of securities;
(7) purchase warrants if as a result warrants taken at the lower
of cost or market value would represent more than 10% of the
value of the Portfolio's net assets or more than 2% of its net
assets in warrants that are not listed on the New York or
American Stock Exchanges or on an exchange with comparable
listing requirements (for this purpose, warrants attached to
securities will be deemed to have no value).
If a percentage restriction on investment or utilization of assets as
set forth under "Investment Restrictions" and "Other Investment Policies" above
is adhered to at the time an investment is made, a later change in percentage
resulting from changes in the value or the total cost of the Portfolio's assets
will not be considered a violation of the restriction.
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 the 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
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
the Portfolio are effected at the 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. (See "NET ASSET VALUE.") Payment for redemptions will be made by
Brown Brothers Harriman & Co. on behalf of the Fund and the Portfolio 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 the 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.
19
<PAGE>
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 Portfolio (the
"Agreement") 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 $100 billion in assets for its
clients, including: more than $___ billion in U.S. and foreign bonds, and over
$___ billion in balanced portfolios for over 3,000 institutional and private
accounts. In addition, the assets of Scudder's international investment company
clients exceed $___ 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
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 Securities Trust, 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 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
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.
20
<PAGE>
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 objective and policies of the
Portfolio, and determines, for the Portfolio, what securities shall be
purchased, what securities shall be held or sold, and what portion of the
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 the
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 an annual rate of 0.975% of
the average daily net asset value of the Portfolio. Until April 30, 1998, the
Adviser has agreed to waive part or all of its fee for the Portfolio to the
extent that the Portfolio's expenses will be maintained at 1.50%.
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.
In addition to payments for investment advisory services provided by
the Adviser, the Trustees, consistent with the Funds' investment advisory
agreement 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
subsidiary of the Adviser, for determining the daily net asset value per share
and maintaining the portfolio and general accounting records of the Fund.
The Agreement dated _______ will remain in effect until _______. 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 the 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 the Portfolio. The Agreement for the Portfolio was
last approved by the Trustees (including a majority of the Trustees who are not
such "interested persons") on ___________. 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
21
<PAGE>
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 the Portfolio with respect to
the average daily net asset value of the shares of the Portfolio 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.
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 Portfolio. 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 underwriting agreements with Scudder Investor Services,
Inc. (the "Distributor"), a subsidiary of the Adviser, Two International Place,
Boston, Massachusetts 02110-4103. The Fund's underwriting agreements dated July
12, 1985, will remain in effect until September 30, 1996, and from year to year
thereafter only if their continuance is approved annually by a majority of the
Trustees who are not parties to such agreements 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
22
<PAGE>
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
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 the 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. The
Distributor has made no firm commitment to acquire shares of any Portfolio.
A description of the Rule 12b-1 plan for Class B shares of the
Portfolio (the "Plan") and related services and fees thereunder is provided in
the prospectus. On October 5, 1995, the Board of Trustees of the Fund
unanimously approved the Plan. In connection with its consideration of the Plan,
the Board of Trustees was furnished with drafts of the Plan and related
materials, including information related to the advantages and disadvantages of
Rule 12b-1 plans currently being used in the mutual fund industry. Legal counsel
for the Fund provided additional information, summarized the provisions of the
proposed Plan and discussed the legal and regulatory considerations in adopting
such Plan.
The Board considered various factors in connection with its decision as
to whether to approve the Plan, including (a) the nature and causes of the
circumstances which make implementation of the Plan necessary and appropriate;
(b) the way in which the Plan would address those circumstances, including the
nature and potential amount of expenditures; (c) the nature of the anticipated
benefits; (d) the possible benefits of the Plan to any other person relative to
those of the Fund; (e) the effect of the Plan on existing owners of VA contracts
and VLI policies; (f) the merits of possible alternative plans or pricing
structures; (g) competitive conditions in the variable products industry and (h)
the relationship of the Plan to other distribution efforts of the Fund.
Based upon its review of the foregoing factors and the materials
presented to it, and in light of its fiduciary duties under relevant state law
and the 1940 Act, the Board determined, in the exercise of its business
judgment, that the Fund's Plan is reasonably likely to benefit the Fund and the
VA contract and VLI policy owners in at least one of several ways. Specifically,
the Board concluded that the Participating Insurance Companies would have less
incentive to educate VA contract and VLI policy owners and sales people
concerning the Fund if expenses associated with such services were not paid for
by the Fund. In addition, the Board determined that the payment of distribution
fees to insurers should motivate them to maintain and enhance the level of
services relating to the Fund provided to VA contract and VLI policy owners,
which would, of course, benefit such VA contract and VLI policy owners. Further,
the adoption of the Plan would likely help to maintain and may lead to an
increase in net assets under management given the distribution financing
alternatives available through the multi-class structure. The Board also took
into account expense structures of other competing products and administrative
compensation arrangements between other funds, their advisers and insurance
companies that currently are in use in the variable products industry. Further,
it is anticipated that Plan fees may be used to educate potential and existing
owners of VA contracts and VLI policies concerning the Fund, the securities
markets and related risks. A better educated investor, in the Distributor's
view, is less likely to surrender his or her VA contract or VLI policy early,
thereby avoiding the costs associated with such an event. Accordingly, the Plan
may help the Fund and Participating Insurance Companies meet investor education
needs.
The Board realizes that there is no assurance that the expenditure of
Fund assets to finance distribution of Fund shares will have the anticipated
results. However, the Board believes there is a reasonable likelihood that one
or more of such benefits will result, and since the Board will be in a position
to monitor the distribution expenses of the Fund, it will be able to evaluate
the benefit of such expenditures in deciding whether to continue the Plan.
The Plan and any Rule 12b-1-related agreement that is entered into by
the Fund or the Distributor in connection with the Plan will continue in effect
for a period of more than one year only so long as continuance is specifically
approved at least annually by a vote of a majority of the Fund's Board of
Trustees, and of a majority of the Trustees who are not interested persons (as
defined in the 1940 Act) of the Fund or a Portfolio ("Independent Trustees"),
23
<PAGE>
cast in person at a meeting called for the purpose of voting on the Plan, or the
Rule 12b-1 related agreement, as applicable. In addition, the Plan and any Rule
12b-1 related agreement, may be terminated as to Class B shares of a Portfolio
at any time, without penalty, by vote of a majority of the outstanding Class B
shares of that Portfolio or by vote of a majority of the Independent Trustees.
The Plan also provides that it may not be amended to increase materially the
amount that may be spent for distribution of Class B shares of a Portfolio
without the approval of Class B shareholders of that Portfolio.
MANAGEMENT OF THE FUND
[TO BE UPDATED]
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 Assistant Treasurer
of Scudder, Stevens
& Clark, Inc.
Daniel Pierce*@+ Vice President and Chairman of the Vice President,
Trustee Board and Director and Assistant
Managing Director Treasurer
of Scudder, Stevens
& Clark, Inc.
Dr. Kenneth Black, Jr. Trustee Regents' Professor ----
Educational Foundation, Inc. Emeritus of Insurance, Georgia
35 Broad Street State University
11th Floor, Room 1144
Atlanta, GA 30303
Rosita P. Chang Trustee Professor of Finance, ----
Department of Finance and University of Rhode Island
Insurance, College of Business
Administration
University of Rhode Island
Kingston, RI 02881-0802
Peter B. Freeman@ Trustee Corporate Director ----
100 Alumni Avenue and Trustee
Providence, RI 02906
Dr. J. D. Hammond Trustee Dean, Smeal College ----
801 Business of Business
Administration Bldg. Administration, Pennsylvania
Pennsylvania State University State University
University Park, PA 16802
Thomas S. Crain++ Vice President Managing Director ----
of Scudder, Stevens
& Clark, Inc.
24
<PAGE>
Position with
Underwriter, Scudder
Investor Services,
Name and Address Position with Fund Principal Occupation** 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 President, Assistant
of Scudder, Stevens Treasurer and Director
& Clark, Inc.
Steven M. Meltzer+ Vice President Principal of Scudder, Stevens & ----
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.
Pamela A. McGrath+ Vice President and Managing Director of Scudder, ----
Treasurer Stevens & Clark, Inc.
Edward J. O'Connell# Vice President and Principal of Scudder, Stevens & Assistant Treasurer
Assistant Treasurer Clark, Inc.
Kathryn L. Quirk# Vice President and Managing Director Vice President
Assistant Secretary of Scudder, Stevens
& Clark, Inc.
Coleen Downs Dinneen+ Assistant Secretary Vice President of Assistant Clerk
Scudder, 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
25
<PAGE>
++ 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.
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, Ms. Chang and 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. Ms. Chang and 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 $_____ was
paid for Trustees' fees and expenses, including legal counsel to the Trustees,
in the year ended December 31, 1995.
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, which is comprised of Money Market Portfolio, Bond Portfolio, Balanced
Portfolio, Growth and Income Portfolio, Capital Growth Portfolio, Global Small
Company Portfolio and International Portfolio.
Columns (3) and (4) Pension or retirement benefits accrued or proposed to be
paid by the Fund. The 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, Global Small Company 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).
26
<PAGE>
<TABLE>
<CAPTION>
Compensation Table
for the year ended December 31, 1995 to be updated
=========================== ============================= =================== ================= ====================
(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., $ ______ N/A N/A $ ______
Trustee (__ funds)
Rosita P. Chang, Trustee $ ______ N/A N/A $ ______
(__ funds)
Peter B. Freeman, Trustee $ ______ N/A N/A $ ______
(__ funds)
Dr. J.D. Hammond, $ ______ N/A N/A $ ______
Trustee (__ funds)
* Scudder Variable Life Investment Fund consists of seven Portfolios: Money Market
Portfolio, Bond Portfolio, Balanced Portfolio, Growth and Income Portfolio,
Capital Growth Portfolio, Global Discovery Portfolio and International Portfolio.
</TABLE>
NET ASSET VALUE
(See "NET ASSET VALUE" and "VALUATION OF PORTFOLIO SECURITIES"
in the Fund's prospectus)
The net asset value of shares of the Portfolio is computed as of the
close of regular trading on the Exchange on each day the Exchange is open for
trading. 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.
An exchange-traded equity security is valued at its most recent sale
price. 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"). Lacking a Calculated Mean, the security is valued at the
most recent bid quotation. An equity security which is traded on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") system is
valued at its most recent sale price. Lacking any 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
its most recent sale price. Lacking any sales, the security is valued at the
Calculated Mean. Lacking a 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 Portfolio's pricing agent(s) 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 it is not possible to value a particular debt
security pursuant to the above methods, the Adviser may calculate the price of
that debt security, subject to limitations established by the Board.
27
<PAGE>
An exchange traded options contract on securities, currencies, futures
and other financial instruments is valued at its most recent sale price on such
exchange. Lacking any sales, the options contract is valued at the Calculated
Mean. Lacking any Calculated Mean, the options contract is valued at the most
recent bid quotation in the case of a purchased options contract, or the most
recent asked quotation in the case of a written options contract. An options
contract on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate.
If a security is traded on more than one exchange, or upon 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.
If, in the opinion of the Fund's Valuation Committee, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio 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 portfolio assets in terms of U.S. dollars is
calculated by converting the Local Currency into U.S. dollars at the prevailing
currency exchange rate on the valuation date.
TAX STATUS
(See "TAX STATUS, DIVIDENDS AND DISTRIBUTIONS" in the Fund's
prospectus.)
The Portfolio 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.
The 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, the 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.
The Portfolio will be subject to a 4% nondeductible excise tax on
amounts required to be but not distributed under a prescribed formula. The
formula requires payment to shareholders during a calendar year of distributions
representing at least 98% of the Portfolio's ordinary income for the calendar
year, at least 98% of the excess of its capital gains over capital losses
(adjusted for certain ordinary losses) realized during the one-year period
ending October 31 of such year, and all ordinary income and capital gains for
previous years that were not previously distributed. Investment companies with
taxable years ending on November 30 or December 31 may make an irrevocable
election to measure the required capital gain distribution using their actual
taxable year, and the Portfolio will consider making such an election. This 4%
excise tax will not apply to the Portfolio for any calendar year if throughout
such calendar year each shareholder of the Portfolio was a segregated asset
account of a life insurance company held in connection with variable life
insurance or annuity contracts (disregarding, for this purpose, shares of the
28
<PAGE>
Portfolio which are attributable to investments of up to $250,000 made in
connection with the organization of the Portfolio).
Investment company taxable income of the 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 the Portfolio for a fiscal year are computed by taking
into account any capital loss carryforward of the Portfolio.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by the Portfolio for reinvestment,
requiring federal income taxes to be paid thereon by the Portfolio, the
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. If the Fund makes such an election, it
may not be treated as having met the excise tax distribution requirement.
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 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.
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 the 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 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 any 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 the Portfolio's investment company taxable income and, accordingly,
would not be taxable to the Portfolio to the extent distributed by the Portfolio
as a dividend to its shareholders.
29
<PAGE>
Proposed regulations have been issued which will allow the Portfolio to
make an election to mark to market its shares of these foreign investment
companies in lieu of being taxed in the manner described above. At the end of
each taxable year to which the election applies, the Portfolio will include in
its income the amount by which the fair market value of the foreign company's
stock exceeds the Portfolio's adjusted basis in these shares. No mark to market
losses may be recognized. Distributions and gain on dispositions of such stock
will be treated as ordinary income distributable to shareholders rather than
being subject to a portfolio level tax when distributed to shareholders as a
dividend. The Portfolio intends to make this election if it is determined to be
appropriate and in the best interest of the shareholders.
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 the Portfolio will be subject to tax under Section 1234 of the
Code. In general, no loss is recognized by the 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 the 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 the Portfolio is not a taxable
transaction for the Portfolio.
Many futures contracts, certain foreign currency forward contracts
entered into by the 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
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 capital gain or loss, 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 capital gain or loss. 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 the 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 the 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 the Portfolio
may increase the amount of gains realized by the Portfolio that are subject to
the 30% limitation. Accordingly, the amount of such transactions that the
Portfolio may undertake may be limited.
Positions of the 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 the
Portfolio.
Positions of the 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. The
Portfolio will monitor its transactions in options and futures and may make
certain tax elections in connection with these investments.
30
<PAGE>
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time the 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 the
Portfolio's investment company taxable income to be distributed to its
shareholders as ordinary income.
If the 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 their 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 the 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 Portfolio 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.
The 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 the 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 Portfolio may be subject to state and local taxes
on distributions received from the Portfolio 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 Portfolio is liable for any income or franchise tax in the
Commonwealth of Massachusetts providing the 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.
31
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
(See "TAX STATUS, DIVIDENDS AND DISTRIBUTIONS" in the Fund's
prospectus.)
The Portfolio will follow the practice of distributing substantially
all of its investment company taxable income. The Portfolio intends to
distribute the excess of net realized long-term capital gains over net realized
short-term capital losses.
Distributions of investment company taxable income and any net capital
gain will be made within three months of the end of the Fund's fiscal taxable
year. Both distributions will be reinvested in additional shares of the
Portfolio unless a shareholder has elected to receive cash.
PERFORMANCE INFORMATION
(See "Performance Information" in the Fund's prospectus)
From time to time, quotations of the 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:
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 the 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
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.
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):
32
<PAGE>
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.
As described above, average annual total return and cumulative total
return are based on historical earnings and are not intended to indicate future
performance. Average annual total return and cumulative total return for the
Portfolio will vary based on changes in market conditions and the level of the
Portfolio's expenses.
In connection with communicating its total return to current or
prospective shareholders, the Fund also may compare these figures for the
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.
Comparison of Portfolio Performance
From time to time, in marketing and other fund literature, the
performance of the Portfolio 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, the 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. 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 Portfolio with performance quoted with respect to other
investment companies or types of investments.
From time to time, in marketing and other Fund literature, the
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 the Portfolio, including reprints of, or selections
from, editorials or articles about the Portfolio.
The Global Discovery 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, 1995;
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.
33
<PAGE>
(X-Y SCATTER CHART TITLE)
---------------------------------------------------------
EFFICIENT FRONTIER
S&P 500 vs. MSCI EAFE Index (12/31/85-12/31/95)
---------------------------------------------------------
(X-Y SCATTER CHART DATA)
Total Return Standard Deviation
(Reward) (Portfolio Volatility-Risk)
13.63 19.37 100% Int'l MSCI EAFE
13.92 18.14 10 US/90 Int'l
14.18 17.02 20/80
14.4 16.04 30 U.S./70 Int'l
14.58 15.23 40/60
14.73 14.61 50 U.S./50Int'l
14.83 14.2 60/40
14.9 14.03 70 U.S./30 Int'l
14.92 14.1 80/20
14.91 14.41 90 U.S./10 Int'l
14.86 14.95 100% U.S. S&P 500
Source: Lipper Analytical Services, Inc. (Data as of 12/31/95)
Evaluation of Portfolio performance or other relevant statistical
information made by independent sources may also be used in advertisements
concerning the Portfolio, including reprints of, or selections from, editorials
or articles about this Portfolio. Sources for Portfolio performance information
and articles about the Portfolio 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.
34
<PAGE>
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
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, ranks and
rates 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.
35
<PAGE>
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
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 the Portfolio 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.
36
<PAGE>
to be updated[ As of December 31, 1994, AEtna Life Insurance and Annuity Company
(151 Farmington Avenue PPH3, Hartford, CT 06156), owned of record and
beneficially 40.36% of the International Portfolio; they owned of record and
beneficially 9.58% of the Fund's total outstanding shares; and American Skandia
Life 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 Portfolio would be
voted upon only by shareholders of the Portfolio. Additionally, approval of the
investment advisory agreement covering the Portfolio is a matter to be
determined separately by each Portfolio. Approval by the shareholders of the
Portfolio is effective as to the 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. Each share of each of Class of that
37
<PAGE>
Portfolio shall be entitled to one vote (or fraction thereof in respect of a
fractional share) on matters which such shares (or Class of shares) shall be
entitled to vote. Shareholders of each Portfolio shall vote together on any
matter, except to the extent otherwise required by the Investment Company Act of
1940, as amended (the "1940 Act"), or when the Trustees have determined that the
matter affects only the interest of shareholders of one or more Classes, in
which case only the shareholders of such Class or Classes shall be entitled to
vote thereon. Any matter shall be deemed to have been effectively acted upon
with respect to each Portfolio if acted upon as provided in Rule 18f-2 under the
1940 Act or any successor rule and in the Declaration of Trust.
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.
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 debt securities acquired for the
Portfolio, 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 the 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.
38
<PAGE>
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
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.
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.
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 the Portfolio is the
ratio of the lesser of annual sales or purchases to the monthly average value of
the portfolio excluding all securities with maturities at the time of
acquisition of one year or less. A higher rate involves greater brokerage
transaction expenses to the Portfolio. Purchases and sales, for the Portfolio,
are made for the Portfolio whenever necessary, in management's opinion, to meet
the Portfolio's objective. Under normal investment conditions, it is anticipated
that the portfolio turnover rate for the Portfolio will not exceed __% for the
initial fiscal year.
EXPERTS
The Financial Highlights of the Portfolio will be included in the
prospectus and the Financial Statements incorporated by reference in this
Statement of Additional Information in reliance on the report of Coopers &
Lybrand L.L.P., One Post Office Square, Boston, Massachusetts 02109, independent
accountants, and given on the authority of that firm as experts in accounting
and auditing.
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.
39
<PAGE>
Portfolio securities of the Portfolio are held separately, pursuant to
a custodian agreement, by Brown Brothers Harriman & Co., 40 Water Street,
Boston, Massachusetts, 02109, as custodian.
Scudder Fund Accounting Corporation ("SFAC"), Two International Place,
Boston, Massachusetts 02110-4103, a subsidiary of the Adviser, computes net
asset value for the Portfolio. The Portfolio pays SFAC an annual fee equal to
0.065% of the first $150 million of average daily net assets, 0.040% of such
assets in excess of $150 million and 0.020% 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 Statement of Assets and Liabilities as of _____, 1996 and the
Report of Independent Accountants will be filed by amendment.
40
<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
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
A-1: Standard & Poor's Commercial Paper ratings are current
assessments of the likelihood of timely payment of debts
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>
<TABLE>
<CAPTION>
SCUDDER VARIABLE LIFE INVESTMENT FUND
PART C. OTHER INFORMATION
<S> <C>
Item 24. Financial Statements and Exhibits
- -------- ---------------------------------
a. Financial Statements
Included in Part A of this Registration Statement:
Financial Highlights for: the period July 16, 1985 (commencement of
operations) to June 30, 1986, the six months ended December 31, 1986 and
the nine years ended December 31, 1995 for the Money Market Portfolio, the
Bond Portfolio, the Capital Growth Portfolio and the Balanced Portfolio;
the period May 2, 1994 (commencement of operations) to December 31, 1994
and for the one year ended December 31, 1995 for the Growth and Income
Portfolio; the period May 1, 1987 (commencement of operations) to December
31, 1987 and the eight years ended December 31, 1995 for the International
Portfolio.
(To be filed by amendment).
For Global Discovery Portfolio:
Financial Highlights (to be filed by amendment).
Included in Part B of this Registration Statement:
Investment Portfolios as of December 31, 1995
Statements of Assets and Liabilities as of December 31, 1995
Statements of Operations for the year ended December 31, 1995
Statements of Changes in Net Assets for the two years ended December 31,
1995
Financial Highlights for: the period July 16, 1985 (commencement of
operations) to June 30, 1986, the six months ended December 31, 1986 and
the nine years ended December 31, 1995 for the Money Market Portfolio, the
Bond Portfolio, the Capital Growth Portfolio and the Balanced Portfolio;
the period May 2, 1994 (commencement of operations) to December 31, 1995
for the Growth and Income Portfolio; the period May 1, 1987 (commencement
of operations) to December 31, 1987 and the eight years ended December 31,
1995 for the International Portfolio.
Notes to Financial Statements
Report of Independent Accountants
(To be filed by amendment).
For Global Discovery Portfolio:
Statement of Assets and Liabilities as of __________, 1996 and related
notes (to be filed by amendment).
Statements, schedules and historical information other than those listed above have
been omitted since they are either not applicable or are not required.
b. Exhibits:
1. (a) Declaration of Trust of the Registrant dated March 15, 1985.
(Previously filed as Exhibit (a) to Pre-Effective Amendment No. 4 to
this Registration Statement.)
Part C - Page 1
<PAGE>
(b) Amendment to the Declaration of Trust dated March 10, 1988.
(Previously filed as Exhibit 1(b) to Post-Effective Amendment No. 9 to
this Registration Statement.)
(c) Establishment and Designation of Series of Shares of Beneficial
Interest, without Par Value.
(Previously filed as Exhibit 1(b) to Pre-Effective Amendment No. 4 to
this Registration Statement.)
(d) Establishment and Designation of Series of Shares of Beneficial
Interest, without Par Value.
(Previously filed as Exhibit 1(c) to Post-Effective Amendment No. 2 to
this Registration Statement.)
(e) Establishment and Designation of Series of Shares of Beneficial
Interest, without Par Value, with respect to the Managed International
Portfolio.
(Previously filed as Exhibit 1(d) to Post-Effective Amendment No. 7 to
this Registration Statement.)
(f) Amended Establishment and Designation of Series of Shares of
Beneficial Interest, without Par Value dated April 15, 1988.
(Previously filed as Exhibit 1(f) to Post-Effective Amendment No. 9 to
this Registration Statement.)
(g) Amended Establishment and Designation of Series of Shares of
Beneficial Interest, without Par Value dated April 30, 1993.
(Previously filed as Exhibit 1(g) to Post-Effective Amendment No. 13
to this Registration Statement.)
(h) Abolition of Series.
(Previously filed as Exhibit 1(h) to Post-Effective Amendment No. 13
to this Registration Statement.)
(i) Amended Establishment and Designation of Series of Shares of
Beneficial Interest, without Par Value, with respect to the Growth and
Income Portfolio dated February 11, 1994.
(Previously filed as Exhibit 1(i) to Post-Effective Amendment No. 14
to this Registration Statement.)
2. (a) By-Laws of the Registrant dated March 15, 1985.
(Previously filed as Exhibit 2 to Pre-Effective Amendment No. 4 to
this Registration Statement.)
(b) Amendment to the By-Laws of the Registrant dated November 13, 1991.
(Previously filed as Exhibit 2(b) to Post-Effective Amendment No. 12
to this Registration Statement.)
3. Inapplicable.
4. Inapplicable.
Part C - Page 2
<PAGE>
5. (a) Investment Advisory Agreement between the Registrant and Scudder,
Stevens & Clark Ltd. dated November 14, 1986.
(Previously filed as Exhibit 5(a) to Post-Effective Amendment No. 5 to
this Registration Statement.)
(b) Investment Advisory Agreement between the Registrant and Scudder,
Stevens & Clark, Inc. with respect to the Managed International
Portfolio.
(Previously filed as Exhibit 5(b) to Post-Effective Amendment No. 8 to
this Registration Statement.)
(c) Investment Advisory Agreement between the Registrant and Scudder,
Stevens & Clark, Inc. with respect to the Growth and Income Portfolio
dated May 1, 1994.
(Previously filed as Exhibit 5(c) to Post-Effective Amendment No. 15
to this Registration Statement.)
(d) Form of an Investment Advisory Agreement between the Registrant and
Scudder, Stevens & Clark, Inc. with respect to the Global Discovery
Portfolio dated May 1,1996 is filed herein.
6. (a) Underwriting Agreement between the Registrant and Scudder Investor
Services, Inc., dated July 12, 1985.
(Previously filed as Exhibit 6(a) to Post-Effective Amendment No. 1 to
this Registration Statement.)
(b) Participating Contract and Policy Agreement between Scudder Investor
Services, Inc. and Participating Insurance Companies.
(Previously filed as Exhibit 6(b) to Post-Effective Amendment No. 1 to
this Registration Statement).
(c) Participating Contract and Policy Agreement between Scudder Investor
Services, Inc. and Carillon Investments, Inc. dated February 18, 1992.
(Previously filed as Exhibit 6(c) to Post-Effective Amendment No. 13
to this Registration Statement.)
(d) Participating Contract and Policy Agreement between Scudder Investor
Services, Inc. and AEtna Life Insurance and Annuity Company dated
April 27, 1992.
(Previously filed as Exhibit 6(d) to Post-Effective Amendment No. 13
to this Registration Statement.)
(e) Participating Contract and Policy Agreement between Scudder Investor
Services, Inc. and PNMR Securities, Inc. dated December 1, 1992.
(Previously filed as Exhibit 6(e) to Post-Effective Amendment No. 13
to this Registration Statement.)
(f) Prototype Participating Contract and Policy Agreement.
(Previously filed as Exhibit 6(f) to Post-Effective Amendment No. 14
to this Registration Statement.)
7. Inapplicable.
Part C - Page 3
<PAGE>
8. (a) Custodian Contract between the Registrant and State Street Bank and
Trust Company dated August 22, 1985.
(Previously filed as Exhibit 8(a) to Post-Effective Amendment No. 1 to
this Registration Statement.)
(b) Fee schedule for Exhibit 8(a).
(Previously filed as Exhibit 8(b) to Post-Effective Amendment No. 9 to
this Registration Statement.)
(c) Amendment to the Custodian Contract dated February 17, 1987
(Previously filed as Exhibit 8(c) to Post-Effective Amendment No. 9 to
this Registration Statement.)
(d) Amendment to the Custodian Contract dated February 17, 1987.
(Previously filed as Exhibit 8(d) to Post-Effective Amendment No. 9 to
this Registration Statement.)
(e) Amendment to the Custodian Contract dated August 13, 1987.
(Previously filed as Exhibit 8(e) to Post-Effective Amendment No. 9 to
this Registration Statement.)
(f) Amendment to the Custodian Contract dated August 12, 1988.
(Previously filed as Exhibit 8(f) to Post-Effective Amendment No. 9 to
this Registration Statement.)
(g) Amendment to the Custodian Contract dated August 9, 1991.
(Previously filed as Exhibit 8(g) to Post-Effective Amendment No. 12
to this Registration Statement.)
(h) Fee Schedule for Exhibit 8(a).
(Previously filed as Exhibit 8(h) to Post-Effective Amendment No. 15
to this Registration Statement.)
9. (a)(1) Transfer, Dividend Disbursing and Plan Agency Agreement between the
Registrant and State Street Bank and Trust Company dated July 12, 1985.
(Previously filed as Exhibit 9(a)(1) to Post-Effective Amendment No. 1
to this Registration Statement.)
(a)(2) Fee schedule for Exhibit 9(a)(1).
(Previously filed as Exhibit 9(a)(2) to Post-Effective Amendment No. 1
to this Registration Statement.)
(a)(3) Transfer Agency and Service Agreement between the Registrant and
Scudder Service Corporation dated April 6, 1992.
(Previously filed as Exhibit 9(a)(3) to Post-Effective Amendment No.
13 to this Registration Statement.)
(b)(1) Participation Agreement between the Registrant and Security Equity
Life Insurance Company dated September 10, 1985.
(Previously filed as Exhibit 9(b) to Post-Effective Amendment No. 1 to
this Registration Statement.)
(b)(2) Amendment to Participation Agreement between the Registrant and
Security Equity Life Insurance Company dated July 21, 1987.
(Previously filed as Exhibit 9(b)(2) to Post-Effective Amendment No. 8
to this Registration Statement.)
Part C - Page 4
<PAGE>
(c)(1) Participation Agreement between the Registrant and Charter National
Life Insurance Company dated June 9, 1986.
(Previously filed as Exhibit 9(c)(1) to Post- Effective Amendment No.
8 to this Registration Statement.)
(c)(2) Amendment to Participation Agreement between the Registrant and
Charter National Life Insurance Company dated July 20, 1987.
(Previously filed as Exhibit 9(c)(2) to Post- Effective Amendment No.
8 to this Registration Statement.)
(c)(3) Amendment to Participation Agreement between the Registrant and
Charter National Life Insurance Company dated May 2, 1988.
(Previously filed as Exhibit 9(c)(3) to Post-Effective Amendment No. 9
to this Registration Statement.)
(c)(4) Amendment to Participation Agreement between the Registrant and
Charter National Life Insurance Company dated June 30, 1991.
(Previously filed as Exhibit 9(c)(4) to Post-Effective Amendment No.
12 to this Registration Statement.)
(c)(5) Participation Agreement between the Registrant and The Union Central
Life Insurance Company dated February 18, 1992.
(Previously filed as Exhibit 9(c)(5) to Post-Effective Amendment No.
13 to this Registration Statement.)
(c)(6) Participation Agreement between the Registrant and AEtna Life
Insurance and Annuity Company dated April 27, 1992.
(Previously filed as Exhibit 9(c)(6) to Post-Effective Amendment No.
13 to this Registration Statement.)
(c)(7) Participation Agreement between the Registrant and Safeco Life
Insurance Companies dated December 31, 1992.
(Previously filed as Exhibit 9(c)(7) to Post-Effective Amendment No.
13 to this Registration Statement.)
(c)(8) Prototype Participation Agreement - Form A.
(Previously filed as Exhibit 9(c)(8) to Post-Effective Amendment No.
14 to this Registration Statement.)
(c)(9) Prototype Participation Agreement - Form B.
(Previously filed as Exhibit 9(c)(9) to Post-Effective Amendment No.
14 to this Registration Statement.)
(c)(10) First Amendment to the Fund Participation Agreement between AEtna Life
Insurance and Annuity Company and the Fund dated February 19, 1993.
(Previously filed as Exhibit 9(c)(10) to Post-Effective Amendment No.
14 to this Registration Statement.)
(c)(11) Second Amendment to the Fund Participation Agreement between AEtna
Life Insurance and Annuity Company and the Fund dated August 13, 1993.
(Previously filed as Exhibit 9(c)(11) to Post-Effective Amendment No.
14 to this Registration Statement.)
Part C - Page 5
<PAGE>
(c)(12) First Amendment to the Participation Agreement between Mutual of
America Life Insurance Company, The American Life Insurance Company of
New York and the Fund dated August 13, 1993.
(Previously filed as Exhibit 9(c)(12) to Post-Effective Amendment No.
14 to this Registration Statement.)
(c)(13) First Amendment to the Participation Agreement between The Union
Central Life Insurance Company and the Fund dated September 30, 1993.
(Previously filed as Exhibit 9(c)(13) to Post-Effective Amendment No.
14 to this Registration Statement.)
(c)(14) Participation Agreement between the Registrant and American Life
Assurance Corporation dated May 3, 1993.
(Previously filed as Exhibit 9(c)(14) to Post-Effective Amendment No.
16 to this Registration Statement).
(c)(15) Participation Agreement between the Registrant and AUSA Life Insurance
Company, Inc. dated October 21, 1993.
(Previously filed as Exhibit 9(c)(15) to Post-Effective Amendment No.
16 to this Registration Statement).
(c)(16) Participation Agreement between the Registrant and Banner Life
Insurance Company dated January 18, 1990.
(Previously filed as Exhibit 9(c)(16) to Post-Effective Amendment No.
16 to this Registration Statement).
(c)(17) Participation Agreement between the Registrant and Banner Life
Insurance Company dated January 18, 1995.
(Previously filed as Exhibit 9(c)(17) to Post-Effective Amendment No.
16 to this Registration Statement).
(c)(18) Participation Agreement between the Registrant and Fortis Benefits
Insurance Company dated June 1, 1994.
(Previously filed as Exhibit 9(c)(18) to Post-Effective Amendment No.
16 to this Registration Statement).
(c)(19) Participation Agreement between the Registrant and Lincoln Benefit
Life Company dated December 30, 1993.
(Previously filed as Exhibit 9(c)(19) to Post-Effective Amendment No.
16 to this Registration Statement).
(c)(20) Participation Agreement between the Registrant and Charter National
Life Insurance Company dated September 3, 1993.
(Previously filed as Exhibit 9(c)(20)to Post-Effective Amendment No.
16 to this Registration Statement).
(c)(21) Participation Agreement between the Registrant and Mutual of America
Life Insurance Company dated December 30, 1988.
(Previously filed as Exhibit 9(c)(21) to Post-Effective Amendment No.
16 to this Registration Statement).
(c)(22) First Amendment to Participation Agreement between the Registrant and
Mutual of America Life Insurance Company dated August 13, 1993.
(Previously filed as Exhibit 9(c)(22) to Post-Effective Amendment No.
16 to this Registration Statement).
Part C - Page 6
<PAGE>
(c)(23) Participation Agreement between the Registrant and Mutual of America
Life Insurance Company dated December 30, 1988.
(Previously filed as Exhibit 9(c)(23) to Post-Effective Amendment No.
16 to this Registration Statement).
(c)(24) First Amendment to Participation Agreement between the Registrant and
Mutual of America Life Insurance Company dated August 13, 1993.
(Previously filed as Exhibit 9(c)(24) to Post-Effective Amendment No.
16 to this Registration Statement).
(c)(25) Participation Agreement between the Registrant and Mutual of America
Life Insurance Company dated December 30, 1993.
(Previously filed as Exhibit 9(c)(25) to Post-Effective Amendment No.
16 to this Registration Statement).
(c)(26) Participation Agreement between the Registrant and Paragon Life
Insurance Company dated April 30, 1993.
(Previously filed as Exhibit 9(c)(26) to Post-Effective Amendment No.
16 to this Registration Statement).
(c)(27) Participation Agreement between the Registrant and Provident Mutual
Life Insurance Company of Philadelphia dated July 21, 1993.
(Previously filed as Exhibit 9(c)(27) to Post-Effective Amendment No.
16 to this Registration Statement).
(c)(28) Participation Agreement between the Registrant and United of Omaha
Life Insurance Company dated May 15, 1994.
(Previously filed as Exhibit 9(c)(28) to Post-Effective Amendment No.
16 to this Registration Statement).
(c)(29) First Amendment to the Participation Agreement between the Registrant
and United of Omaha Life Insurance Company dated January 23, 1995.
(Previously filed as Exhibit 9(c)(29) to Post-Effective Amendment No.
16 to this Registration Statement).
(c)(30) Participation Agreement between the Registrant and USAA Life Insurance
Company dated February 3, 1995.
(Previously filed as Exhibit 9(c)(30) to Post-Effective Amendment No.
16 to this Registration Statement).
(c)(31) Amendment to the Participation Agreement, the Reimbursement Agreement
and the Participating Contract and Policy Agreement dated February 3,
1995.
(Previously filed as Exhibit 9(c)(31) to Post-Effective Amendment No.
16 to this Registration Statement).
(d) Accounting Services Agreement between the Registrant and Scudder
Investor Services, Inc. dated August 1, 1989.
(Previously filed as Exhibit 9(d) to Post-Effective Amendment No. 15
to this Registration Statement.)
Part C - Page 7
<PAGE>
(e)(1) Fund Accounting Services Agreement between the Registrant, on behalf
of the Money Market Portfolio, and Scudder Fund Accounting Corporation
dated October 1, 1994.
(Previously filed as Exhibit 9(e)(1) to Post-Effective Amendment No.
15 to this Registration Statement.)
(e)(2) Fund Accounting Services Agreement between the Registrant, on behalf
of the Bond Portfolio, and Scudder Fund Accounting Corporation dated
October 1, 1994.
(Previously filed as Exhibit 9(e)(2) to Post-Effective Amendment No.
15 to this Registration Statement.)
(e)(3) Fund Accounting Services Agreement between the Registrant, on behalf
of the Balanced Portfolio, and Scudder Fund Accounting Corporation
dated October 1, 1994.
(Previously filed as Exhibit 9(e)(3) to Post-Effective Amendment No.
15 to this Registration Statement.)
(e)(4) Fund Accounting Services Agreement between the Registrant, on behalf
of the Growth and Income Portfolio, and Scudder Fund Accounting
Corporation dated October 1, 1994.
(Previously filed as Exhibit 9(e)(4) to Post-Effective Amendment No.
15 to this Registration Statement.)
(e)(5) Fund Accounting Services Agreement between the Registrant, on behalf
of the Capital Growth Portfolio, and Scudder Fund Accounting
Corporation dated October 1, 1994.
(Previously filed as Exhibit 9(e)(5) to Post-Effective Amendment No.
15 to this Registration Statement.)
(e)(6) Fund Accounting Services Agreement between the Registrant, on behalf
of the International Portfolio, and Scudder Fund Accounting
Corporation dated October 1, 1994.
(Previously filed as Exhibit 9(e)(6) to Post-Effective Amendment No.
15 to this Registration Statement.)
10. Inapplicable.
11. Inapplicable.
12. Inapplicable.
13. Inapplicable.
14. Inapplicable.
15. Inapplicable.
16. Schedule of Computation of Performance Calculation.
(Previously filed as Exhibit 16 to Post-Effective Amendment No. 9 to Registration
Statement.)
Part C - Page 8
<PAGE>
Item 25. Persons Controlled by or under Common Control with Registrant
- -------- -------------------------------------------------------------
[to be updated]
As of December 31, 1994, 45.29% of the outstanding shares of beneficial interest of the
Registrant are owned by Charter National Life Insurance Company of Missouri ("CNL"). CNL
is a wholly-owned subsidiary of Leucadia National Corporation. Leucadia National
Corporation is a New York corporation.
Item 26. Number of Holders of Securities (as of December 31, 1995)
- -------- ---------------------------------------------------------
(1) (2)
Title of Class Number of Shareholders
Shares of beneficial interest,
of no par value
Money Market Portfolio (6)
Shares of beneficial interest,
of no par value
Bond Portfolio (9)
Shares of beneficial interest,
of no par value
Balanced Portfolio (6)
Shares of beneficial interest,
of no par value
Growth and Income Portfolio (4)
Shares of beneficial interest,
of no par value
Capital Growth Portfolio (7)
Shares of beneficial interest,
of no par value
International Portfolio (13)
Item 27. Indemnification.
- -------- ----------------
A policy of insurance covering Scudder, Stevens & Clark, Inc., its subsidiaries including
Scudder Investor Services, Inc., and all of the registered investment companies advised by
Scudder, Stevens & Clark, Inc. insures the Registrant's Trustees and officers and others
against liability arising by reason of an alleged breach of duty caused by any negligent
act, error or accidental omission in the scope of their duties.
Article IV, Sections 4.1 - 4.3 of Registrant's Declaration of Trust provide as
follows:
Section 4.1. No Personal Liability of Shareholders, Trustees, etc. No Shareholder
shall be subject to any personal liability whatsoever to any Person in connection
with Fund Property or the acts, obligations or affairs of the Fund. No Trustee,
officer, employee or agent of the Fund shall be subject to any personal liability
whatsoever to any Person, other than to the Fund or its Shareholders, in connection
with Fund Property or the affairs of the Fund, save only that arising from bad
faith, willful misfeasance, gross negligence or reckless disregard of his duties
with respect to such Person; and all such Persons shall look solely to the Fund
Property for satisfaction of claims of any nature arising in connection with the
affairs of the Fund. If any Shareholder, Trustee, officer, employee, or agent, as
such, of the Fund, is made a party to any suit or proceeding to enforce any such
liability of the Fund, he shall not, on account thereof, be held to any personal
liability. The Fund shall indemnify and hold each Shareholder harmless from and
against all claims and liabilities, to which such Shareholder may become subject by
Part C - Page 9
<PAGE>
reason of his being or having been a Shareholder, and shall reimburse such
Shareholder for all legal and other expenses reasonably incurred by him in
connection with any such claim or liability. The rights accruing to a Shareholder
under this Section 4.l shall not exclude any other right to which such Shareholder
may be lawfully entitled, nor shall anything herein contained restrict the right of
the Fund to indemnify or reimburse a Shareholder in any appropriate situation even
though not specifically provided herein.
Section 4.2. Non-Liability of Trustees, etc. No Trustee, officer, employee or agent
of the Fund shall be liable to the Fund, its Shareholders, or to any Shareholder,
Trustee, officer, employee, or agent thereof for any action or failure to act
(including without limitation the failure to compel in any way any former or acting
Trustee to redress any breach of trust) except for his own bad faith, willful
misfeasance, gross negligence or reckless disregard of the duties involved in the
conduct of his office.
Section 4.3 Mandatory Indemnification. (a) Subject to the exceptions and
limitations contained in paragraph (b) below:
(i) every person who is, or has been, a Trustee or officer of the
Fund shall be indemnified by the Fund to the fullest extent
permitted by law against all liability and against all expenses
reasonably incurred or paid by him in connection with any claim,
action, suit or proceeding in which he becomes involved as a
party or otherwise by virtue of his being or having been a
Trustee or officer and against amounts paid or incurred by him in
the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall apply
to all claims, actions, suits or proceedings (civil, criminal, or
other, including appeals), actual or threatened; and the words
"liability" and "expenses" shall include, without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement,
fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Trustee or officer:
(i) against any liability to the Fund or the Shareholders by reason
of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office;
(ii) with respect to any matter as to which he shall have been finally
adjudicated not to have acted in good faith in the reasonable
belief that his action was in the best interest of the Fund;
(iii) in the event of a settlement or other disposition not involving a
final adjudication as provided in paragraph (b)(i) resulting in a
payment by a Trustee or officer, unless there has been a
determination that such Trustee or officer did not engage in
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office;
(A) by the court or other body approving the settlement or
other disposition; or
(B) based upon a review of readily available facts (as
opposed to a full trial-type inquiry) by (x) vote of a
majority of the Disinterested Trustees acting on the
matter (provided that a majority of the Disinterested
Trustees then in office act on the matter) or (y)
written opinion of independent legal counsel.
Part C - Page 10
<PAGE>
(c) The rights of indemnification herein provided may be insured against by
policies maintained by the Fund, shall be severable, shall not affect any
other rights to which any Trustee or officer may now or hereafter be
entitled, shall continue as to a person who has ceased to be such Trustee
or officer and shall inure to the benefit of the heirs, executors,
administrators and assigns of such a person. Nothing contained herein
shall affect any rights to indemnification to which personnel of the Fund
other than Trustees and officers may be entitled by contract or otherwise
under law.
(d) Expenses of preparation and presentation of a defense to any claim,
action, suit, or proceeding of the character described in paragraph (a) of
this Section 4.3 shall be advanced by the Fund prior to final disposition
thereof upon receipt of an undertaking by or on behalf of the recipient,
to repay such amount if it is ultimately determined that he is not
entitled to indemnification under this Section 4.3, provided that either:
(i) such undertaking is secured by a surety bond or some other
appropriate security provided by the recipient, or the Fund shall
be insured against losses arising out of any such advances; or
(ii) a majority of the Disinterested Trustees acting on the matter
(provided that a majority of the Disinterested Trustees act on
the matter) or an independent legal counsel in a written opinion
shall determine, based upon a review of readily available facts
(as opposed to a full trial-type inquiry), that there is reason
to believe that the recipient ultimately will be found entitled
to indemnification.
As used in this Section 4.3, a "Disinterested Trustee" is one who is not (i) an
"Interested Person" of the Trust (including anyone who has been exempted from being
an "Interested Person" by any rule, regulation or order of the Commission), or (ii)
involved in the claim, action, suit or proceeding.
Item 28. Business or Other Connections of Investment Adviser
- -------- ---------------------------------------------------
The Adviser has stockholders and employees who are denominated officers but do not as such
have corporation-wide responsibilities. Such persons are not considered officers for the
purpose of this Item 28.
Business and Other Connections of Board
Name of Directors of Registrant's Adviser
--------------------- --------------------------------------------
Stephen R. Beckwith Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
Lynn S. Birdsong Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
Supervisory Director, The Latin America Income and Appreciation Fund N.V. (investment
company) +
Supervisory Director, The Venezuela High Income Fund N.V. (investment company) xx
Supervisory Director, Scudder Mortgage Fund (investment company) +
Supervisory Director, Scudder Floating Rate Funds for Fannie Mae Mortgage Securities I
& II (investment company) +
Director, Scudder, Stevens & Clark (Luxembourg) S.A. (investment manager) #
Trustee, Scudder Funds Trust (investment company)*
President & Director, The Latin America Dollar Income Fund, Inc. (investment company)**
President & Director, Scudder World Income Opportunities Fund, Inc. (investment
company)**
Part C - Page 11
<PAGE>
Director, Inverlatin Dollar Income Fund, Inc. (investment company) Georgetown, Grand
Cayman, Cayman Islands
Director, ProMexico Fixed Income Dollar Fund, Inc. (investment company) Georgetown,
Grand Cayman, Cayman Islands
Director, Canadian High Income Fund (investment company)#
Director, Hot Growth Companies Fund (investment company)#
Partner, George Birdsong Co., Rye, NY
Nicholas Bratt Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
President & Director, Scudder New Europe Fund, Inc. (investment company)**
President & Director, The Brazil Fund, Inc. (investment company)**
President & Director, The First Iberian Fund, Inc. (investment company)**
President & Director, Scudder International Fund, Inc. (investment company)**
President & Director, Scudder Global Fund, Inc. (Director only on Scudder Global Fund,
a series of Scudder Global Fund, Inc.) (investment company)**
President & Director, The Korea Fund, Inc. (investment company)**
President & Director, Scudder New Asia Fund, Inc. (investment company)**
President, The Argentina Fund, Inc. (investment company)**
Vice President, Scudder, Stevens & Clark Corporation (Delaware) (investment adviser)**
Vice President, Scudder, Stevens & Clark Japan, Inc. (investment adviser)###
Vice President, Scudder, Stevens & Clark of Canada Ltd. (Canadian investment adviser)
Toronto, Ontario, Canada
Vice President, Scudder, Stevens & Clark Overseas Corporationoo
Linda C. Coughlin Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
Director, Scudder Investor Services, Inc. (broker/dealer)**
President & Trustee, AARP Cash Investment Funds (investment company)**
President & Trustee, AARP Growth Trust (investment company)**
President & Trustee, AARP Income Trust (investment company)**
President & Trustee, AARP Tax Free Income Trust (investment company)**
Director, SFA, Inc. (advertising agency)*
Margaret D. Hadzima Director, Scudder, Stevens & Clark, Inc. (investment adviser)*
Assistant Treasurer, Scudder Investor Services, Inc. (broker/dealer)*
Jerard K. Hartman Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
Vice President, Scudder California Tax Free Trust (investment company)*
Vice President, Scudder Equity Trust (investment company)*
Vice President, Scudder Cash Investment Trust (investment company)*
Vice President, Scudder Global Fund, Inc. (investment company)**
Vice President, Scudder GNMA Fund (investment company)*
Vice President, Scudder Portfolio Trust (investment company)*
Vice President, Scudder International Fund, Inc. (investment company)**
Vice President, Scudder Investment Trust (investment company)*
Vice President, Scudder Municipal Trust (investment company)*
Vice President, Scudder Mutual Funds, Inc. (investment company)**
Vice President, Scudder New Asia Fund, Inc. (investment company)**
Vice President, Scudder New Europe Fund, Inc. (investment company)**
Vice President, Scudder Securities Trust (investment company)*
Vice President, Scudder State Tax Free Trust (investment company)*
Vice President, Scudder Funds Trust (investment company)*
Vice President, Scudder Tax Free Money Fund (investment company)*
Vice President, Scudder Tax Free Trust (investment company)*
Vice President, Scudder U.S. Treasury Money Fund (investment company)*
Vice President, Scudder Variable Life Investment Fund (investment company)*
Vice President, The Brazil Fund, Inc. (investment company)**
Part C - Page 12
<PAGE>
Vice President, The Korea Fund, Inc. (investment company)**
Vice President, The Argentina Fund, Inc. (investment company)**
Vice President & Director, Scudder, Stevens & Clark of Canada, Ltd. (Canadian
investment adviser) Toronto, Ontario, Canada
Vice President, The First Iberian Fund, Inc. (investment company)**
Vice President, The Latin America Dollar Income Fund, Inc. (investment company)**
Vice President, Scudder World Income Opportunities Fund, Inc. (investment company)**
Richard A. Holt Director, Scudder, Stevens & Clark, Inc. (investment adviser)++
Vice President, Scudder Variable Life Investment Fund (investment company)*
Dudley H. Ladd Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
Senior Vice President & Director, Scudder Investor Services, Inc. (broker/dealer)*
President & Director, SFA, Inc. (advertising agency)*
Vice President & Trustee, Scudder Cash Investment Trust (investment company)*
Trustee, Scudder Investment Trust (investment company)*
Trustee, Scudder Portfolio Trust (investment company)*
Trustee, Scudder Municipal Trust (investment company)*
Trustee, Scudder State Tax Free Trust (investment company)*
Vice President, Scudder U.S. Treasury Money Fund (investment company)*
Douglas M. Loudon Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
Vice President & Trustee, Scudder Equity Trust (investment company)*
Vice President, Scudder Global Fund, Inc. (investment company)**
Vice President, Scudder Investment Trust (investment company)*
Vice President & Director, Scudder Mutual Funds, Inc. (investment company)**
Vice President & Trustee, Scudder Securities Trust (investment company)*
Vice President, AARP Cash Investment Funds (investment company)**
Vice President, AARP Growth Trust (investment company)**
Vice President, AARP Income Trust (investment company)**
Vice President, AARP Tax Free Income Trust (investment company)**
Vice President, Scudder, Stevens & Clark Corporation (Delaware) (investment adviser)**
Senior Vice President, Scudder Investor Services, Inc. (broker/dealer)*
Vice President, Scudder, Stevens & Clark of Canada Ltd. (Canadian investment adviser)
Toronto, Ontario, Canada
Chairman, World Capital Fund (investment company) Luxembourg ##
Managing Director, Kankaku - Scudder Capital Asset Management Corporation (investment
adviser)**
Chairman & Director, Scudder, Stevens & Clark Japan, Inc. (investment adviser)###
President, The Japan Fund, Inc. (investment company)**
Trustee, Scudder, Stevens & Clark Supplemental Retirement Income Plan
Trustee, Scudder, Stevens & Clark Profit Sharing Plan **
Chairman & Director, The World Capital Fund (investment company) Luxembourg
Chairman & Director, Scudder, Stevens & Clark (Luxembourg), S.A., Luxembourg#
Chairman, Canadian High Income Fund (investment company) #
Chairman, Hot Growth Companies Fund (investment company) #
Vice President & Director, Scudder Precious Metals, Inc. xxx
Director, Berkshire Farm & Services for Youth
Board of Governors & President, Investment Counsel Association of America
John T. Packard Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
President, Montgomery Street Income Securities, Inc. (investment company) o
Director, Scudder Realty Advisors, Inc. (realty investment adviser) x
Part C - Page 13
<PAGE>
Juris Padegs Secretary & Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
Chairman & Director, The Brazil Fund, Inc. (investment company)**
Vice President & Trustee, Scudder Equity Trust (investment company)*
Chairman & Director, The First Iberian Fund, Inc. (investment company)**
Trustee, Scudder Funds Trust (investment company)*
Vice President & Assistant Secretary, Scudder Global Fund, Inc. (investment company)**
Trustee, Scudder Investment Trust (investment company)*
Vice President, Assistant Secretary & Director, Scudder International Fund, Inc.
(investment company)**
Vice President, The Latin America Dollar Income Fund, Inc. (investment company)**
Trustee, Scudder Municipal Trust (investment company)*
Vice President & Assistant Secretary, Scudder Mutual Funds, Inc. (investment company)**
Vice President & Director, Scudder New Europe Fund, Inc. (investment company)**
Trustee, Scudder State Tax Free Trust (investment company)*
Vice President, Assistant Secretary & Director, Scudder New Asia Fund, Inc. (investment
company)**
Trustee, Scudder Securities Trust (investment company)*
Vice President & Trustee, Scudder Tax Free Money Fund (investment company)*
Trustee, Scudder Tax Free Trust (investment company)*
Chairman & Director, The Korea Fund, Inc. (investment company)**
Vice President & Director, The Argentina Fund, Inc. (investment company)**
Secretary, Scudder, Stevens & Clark of Canada Ltd. (Canadian investment adviser),
Toronto, Ontario, Canada
Vice President & Director, Scudder Realty Advisors, Inc. (realty investment adviser) x
Assistant Secretary, SFA, Inc. (advertising agency)*
Vice President & Director, Scudder Investor Services, Inc. (broker/dealer)**
Assistant Treasurer & Director, Kankaku - Scudder Capital Asset Management (investment
adviser)**
Chairman & Director, Scudder, Stevens & Clark Japan, Inc. (investment adviser)###
Chairman & Director, Scudder, Stevens & Clark Corporation (Delaware) (investment
adviser)**
Chairman & Supervisory Director, Sovereign High Yield Investment Company N.V.
(investment company) +
Director, President Investment Trust Corporation (Joint Venture)***
Vice President, Scudder World Income Opportunities Fund, Inc. (investment company)**
Director, Vice President & Assistant Secretary, Scudder Precious Metals, Inc. xxx
Vice President & Director, Scudder Service Corporation (in-house transfer agent)*
Chairman, Scudder, Stevens & Clark Overseas Corporationoo
Director, Scudder Trust (Cayman) Ltd. (trust services company)xxx
Director, ICI Mutual Insurance Company, Inc., Washington, D.C.
Director, Baltic International USA
Director, Baltic International Airlines (a limited liability company) Riga, Latvia
Daniel Pierce Chairman & Director, Scudder New Europe Fund, Inc. (investment company)**
Trustee, California Tax Free Trust (investment company)*
President & Trustee, Scudder Equity Trust (investment company)**
Director, The First Iberian Fund, Inc. (investment company)**
President & Trustee, Scudder GNMA Fund (investment company)*
President & Trustee, Scudder Portfolio Trust (investment company)*
President & Trustee, Scudder Funds Trust (investment company)*
President & Director, Scudder Institutional Fund, Inc. (investment company)**
President & Director, Scudder Fund, Inc. (investment company)**
Director, Scudder International Fund, Inc. (investment company)**
President & Trustee, Scudder Investment Trust (investment company)*
Part C - Page 14
<PAGE>
Vice President & Trustee, Scudder Municipal Trust (investment company)*
President & Director, Scudder Mutual Funds, Inc. (investment company)**
Director, Scudder New Asia Fund, Inc. (investment company)**
President & Trustee, Scudder Securities Trust (investment company)**
Trustee, Scudder State Tax Free Trust (investment company)*
Vice President & Trustee, Scudder Variable Life Investment Fund (investment company)*
Director, The Brazil Fund, Inc. (until 7/94) (investment company)**
Vice President & Assistant Treasurer, Montgomery Street Income Securities, Inc.
(investment company)o
Vice President & Director, Scudder Global Fund, Inc. (investment company)**
Vice President, Director & Assistant Treasurer, Scudder Investor Services, Inc.
(broker/dealer)*
President & Director, Scudder Service Corporation (in-house transfer agent)*
Chairman & President, Scudder, Stevens & Clark of Canada, Ltd. (Canadian investment
adviser), Toronto, Ontario, Canada
Chairman, Assistant Treasurer & Director, Scudder, Stevens & Clark, Inc. (investment
adviser)**
President & Director, Scudder Precious Metals, Inc. xxx
Chairman & Director, Scudder Global Opportunities Funds (investment company) Luxembourg
Chairman, Scudder, Stevens & Clark, Ltd. (investment adviser) London, England
Director, Scudder Fund Accounting Corporation (in-house fund accounting agent)*
Director, Scudder Realty Holdings Corporation (a real estate holding company)*
Director, Scudder Latin America Investment Trust PLC (investment company)@
Incorporator, Scudder Trust Company (a trust company)+++
Director, Fiduciary Trust Company (banking & trust company) Boston, MA
Director, Fiduciary Company Incorporated (banking & trust company) Boston, MA
Trustee, New England Aquarium, Boston, MA
Cornelia M. Small Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
Vice President, Scudder Global Fund, Inc. (investment company)**
Vice President, AARP Cash Investment Funds (investment company)*
Vice President, AARP Growth Trust (investment company)*
Vice President, AARP Income Trust (investment company)*
Vice President, AARP Tax Free Income Trust (investment company)*
Edmond D. Villani President & Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
Chairman & Director, Scudder Global Fund, Inc. (investment company)**
Chairman & Director, Scudder International Fund, Inc. (investment company)**
Chairman & Director, Scudder New Asia Fund, Inc. (investment company)**
Trustee, Scudder Securities Trust (investment company)*
Chairman & Director, The Argentina Fund, Inc. (investment company)**
Director, Scudder Realty Advisors, Inc. (realty investment adviser) x
Supervisory Director, Scudder Mortgage Fund (investment company) +
Chairman & Director, The Latin America Dollar Income Fund, Inc. (investment company)**
Director, Scudder, Stevens & Clark Japan, Inc. (investment adviser)###
Chairman & Director, Scudder World Income Opportunities Fund, Inc. (investment
company)**
Supervisory Director, Scudder Floating Rate Funds for Fannie Mae Mortgage Securities I
& II (investment company)+
Director, The Brazil Fund, Inc. (investment company)**
Director, Indosuez High Yield Bond Fund (investment company) Luxembourg
President & Director, Scudder, Stevens & Clark Overseas Corporationoo
President & Director, Scudder, Stevens & Clark Corporation (Delaware) (investment
adviser)**
Part C - Page 15
<PAGE>
Director, IBJ Global Investment Manager S.A., (Luxembourg investment management
company) Luxembourg, Grand-Duchy of Luxembourg
* Two International Place, Boston, MA
x 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
++ Two Prudential Plaza, 180 N. Stetson Avenue, Chicago, IL
+++ 5 Industrial Way, Salem, NH
o 101 California Street, San Francisco, CA
# 11, rue Aldringen, L-1118 Luxembourg, Grand-Duchy of Luxembourg
+ John B. Gorsiraweg 6, Willemstad Curacao, Netherlands Antilles
xx De Ruyterkade 62, P.O. Box 812, Willemstad Curacao, Netherlands Antilles
## 2 Boulevard Royal, Luxembourg
*** B1 2F3F 248 Section 3, Nan King East Road, Taipei, Taiwan
xxx Grand Cayman, Cayman Islands, British West Indies
oo 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
@ c/o Sinclair Hendersen Limited, 23 Cathedral Yard, Exeter, Devon
Item 29. Principal Underwriters.
- -------- -----------------------
(a) Scudder California Tax Free Trust
Scudder Cash Investment Trust
Scudder Equity Trust
Scudder Fund, Inc.
Scudder Funds Trust
Scudder Global Fund, Inc.
Scudder GNMA Fund
Scudder Institutional Fund, Inc.
Scudder International Fund, Inc.
Scudder Investment Trust
Scudder Municipal Trust
Scudder Mutual Funds, Inc.
Scudder Portfolio Trust
Scudder Securities Trust
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
AARP Cash Investment Funds
AARP Growth Trust
AARP Income Trust
AARP Tax Free Income Trust
The Japan Fund, Inc.
(b)
(1) (2) (3)
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
E. Michael Brown Assistant Treasurer None
Two International Place
Boston, MA 02110
Part C - Page 16
<PAGE>
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
Mark S. Casady Vice President and Director None
Two International Place
Boston, MA 02110
Linda Coughlin Director None
345 Park Avenue
New York, NY 10154
Richard W. Desmond Vice President None
345 Park Avenue
New York, NY 10154
Coleen Downs Dinneen Assistant Clerk Assistant Secretary
Two International Place
Boston, MA 02110
Paul J. Elmlinger Vice President None
345 Park Avenue
New York, NY 10154
Cuyler W. Findlay Senior Vice President None
345 Park Avenue
New York, NY 10154
Margaret D. Hadzima Assistant Treasurer None
Two International Place
Boston, MA 02110
Thomas W. Joseph Vice President, Director, Vice President
Two International Place Treasurer and Assistant Clerk
Boston, MA 02110
Dudley H. Ladd Senior Vice President and None
Two International Place Director
Boston, MA 02110
David S. Lee President, Assistant Vice President
Two International Place Treasurer and Director
Boston, MA 02110
Douglas M. Loudon Senior Vice President None
345 Park Avenue
New York, NY 10154
Thomas F. McDonough Clerk Secretary
Two International Place
Boston, MA 02110
Thomas H. O'Brien Assistant Treasurer None
345 Park Avenue
New York, NY 10154
Part C - Page 17
<PAGE>
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
Edward J. O'Connell Assistant Treasurer Vice President and
345 Park Avenue Assistant Secretary
New York, NY 10154
Juris Padegs Vice President and Director None
345 Park Avenue
New York, NY 10154
Daniel Pierce Vice President, Director Vice President and Trustee
Two International Place and Assistant Treasurer
Boston, MA 02110
Kathryn L. Quirk Vice President Vice President and
345 Park Avenue Assistant Secretary
New York, NY 10154
Edmund J. Thimme Vice President and Director None
345 Park Avenue
New York, NY 10154
David B. Watts Assistant Treasurer President and Trustee
Two International Place
Boston, MA 02110
Linda J. Wondrack Vice President None
Two International Place
Boston, MA 02110
The Underwriter has employees who are denominated officers of an operational area. Such persons do
not have corporation-wide responsibilities and are not considered officers for the purpose of this
Item 29.
(c)
(1) (2) (3) (4) (5)
Net Underwriting Compensation on
Name of Principal Discounts and Redemptions Brokerage Other Compensation
Underwriter Commissions and Repurchases Commissions
Scudder Investor None None None None
Services, Inc.
Item 30. Location of Accounts and Records.
- -------- ---------------------------------
Certain accounts, books and other documents required to be maintained by Section 31(a) of
the 1940 Act and the Rules promulgated thereunder are maintained by Scudder, Stevens &
Clark, Inc., Two International Place, Boston, MA 02110-4103. Records relating to the
duties of the Registrant's custodian are maintained by State Street Bank and Trust Company,
Heritage Drive, North Quincy, Massachusetts. Records relating to the duties of the
Registrant's transfer agent are maintained by Scudder Service Corporation, Two
International Place, Boston, Massachusetts 02110-4103.
Item 31. Management Services.
- -------- --------------------
Inapplicable.
Part C - Page 18
<PAGE>
Item 32. Undertakings.
- -------- -------------
The Registrant hereby undertakes to file a post-effective amendment, using reasonably
current financial statements of Global Discovery Portfolio, within four to six months from
the effective date of the Registrant's Registration Statement under the 1933 Act.
The Registrant hereby undertakes to furnish each person to whom a prospectus is delivered
with a copy of such Fund's latest annual report to shareholders upon request and without
charge.
The Registrant hereby undertakes to call a meeting of shareholders for the purpose of
voting on the question of removal of a Trustee or Trustees when requested to do so by the
holders of at least 10% of the Registrant's outstanding shares and in connection with such
meeting to comply with the provisions of Section 16(c) of the Investment Company Act of
1940 relating to shareholder communications.
The Registrant hereby undertakes, insofar as indemnification for liability arising under
the Securities Act of 1933 may be permitted to Trustees, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a Trustee,
officer or controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such Trustee, officer or controlling person in
connection with the securities being registered, the registrant will unless in the opinion
of its counsel the matter has been settled by controlling precedent, submits to a court of
appropriate jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of such issue.
Part C - Page 19
</TABLE>
<PAGE>
File No. 2-96461
File No. 811-4257
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 17
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 21
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
SCUDDER VARIABLE LIFE INVESTMENT FUND
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
EXHIBIT INDEX
Exhibit 5(d)
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant certifies that
it meets all of the requirements for effectiveness of this
Registration Statement pursuant to Rule 485(a) under the Securities
Act of 1933 and has duly caused this amendment to its Registration
Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of Boston and the Commonwealth of
Massachusetts on the 14th day of February, 1996.
SCUDDER VARIABLE LIFE INVESTMENT FUND
By /s/ Thomas F. McDonough
------------------------------
Thomas F. McDonough, Secretary
Pursuant to the requirements of the Securities Act of 1933,
this amendment to its Registration Statement has been signed below
by the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ David B. Watts
- ------------------
David B. Watts* President (Principal February 14, 1996
Executive Officer)
and Trustee
/s/ Daniel Pierce
- -----------------
Daniel Pierce* Vice President and February 14, 1996
Trustee
/s/ Dr. Kenneth Black, Jr.
- -------------------------
Dr. Kenneth Black, Jr* Trustee February 14, 1996
- ------------------ Trustee February 14, 1996
Rosita P. Chang
/s/ Peter B. Freeman
- --------------------
Peter B. Freeman* Trustee February 14, 1996
<PAGE>
/s/ Dr. J. D. Hammond
- ---------------------
Dr. J. D. Hammond* Trustee February 14, 1996
- ----------------------
Pamela A. McGrath Treasurer (Principal February 14, 1996
Financial and
Accounting Officer)
and Vice President
*By: /s/ Thomas F. McDonough
----------------------------
Thomas F. McDonough**
** Attorney-in-fact pursuant to a
power of attorney contained in
the signature page of
Post-Effective Amendment No. 9 to
the Registration Statement filed
March 3, 1989.
2
Exhibit 5(d)
SCUDDER VARIABLE LIFE INVESTMENT FUND
Two International Place
Boston, Massachusetts 02110
May 1, 1996
Scudder, Stevens & Clark, Inc.
Two International Place
Boston, MA 02110
INVESTMENT ADVISORY AGREEMENT
Global Small Company Portfolio
Ladies and Gentlemen:
Scudder Variable Life Investment Fund (the "Fund") has been established
as a Massachusetts business trust to engage in the business of an investment
company. The shares of beneficial interest of the Fund, without par value
("Shares"), are divided into multiple series including the Global Small Company
Portfolio (the "Portfolio"), as established pursuant to a written instrument
executed by the Trustees of the Fund. Portfolios may be terminated, and
additional Portfolios established, from time to time by action of the Trustees.
The Fund on behalf of the Portfolio has selected you to act as the sole
investment adviser for the Portfolio and to provide certain other services, as
more fully set forth below, and you are willing to act as such investment
adviser and to perform such services under the terms and conditions hereinafter
set forth. Accordingly, the Fund agrees with you as follows:
1. Delivery of Fund Documents. The Fund has furnished you with copies properly
certified or authenticated of each of the following:
(a) Declaration of Trust of the Fund, dated March 15, 1985, as amended
from time to time.
(b) By-Laws of the Fund as in effect on the date hereof.
(c) Resolutions of the Trustees of the Fund selecting you as investment
adviser and approving the form of this Agreement.
(d) Written Instruments to Establish and Designate Separate Series of
Shares.
The Fund will furnish you from time to time with copies, properly certified or
authenticated, of all amendments of or supplements to the foregoing, if any.
<PAGE>
2. Sublicense to Use the Scudder Trademarks. As exclusive licensee of
the rights to use and sublicense the use of the "Scudder" and "Scudder, Stevens
& Clark," trademarks (together, the "Scudder Marks"), you hereby grant the Fund
a nonexclusive right and sublicense to use (1) the "Scudder" name and mark as
part of the Fund's name (the "Fund Name"), and (2) the Scudder Marks in
connection with the Fund's investment products and services, in each case only
for so long as this Agreement, any other investment management agreement between
you and the Fund, or any extension, renewal or amendment hereof or thereof
remains in effect, and only for so long as you are a licensee of the Scudder
Marks, provided, however, that you agree to use your best efforts to maintain
your license to use and sublicense the Scudder Marks. The Fund agrees that it
shall have no right to subscribe or assign rights to use the Scudder Marks,
shall acquire no interest in the Scudder Marks other than the rights granted
herein, that all of the Fund's uses of the Scudder Marks shall inure to the
benefit of Scudder Trust Company as owner and licensor of the Scudder Marks (the
"Trademark Owner"), and that the Fund shall not challenge the validity of the
Scudder Marks or the Trademark Owner's ownership thereof. The Fund further
agrees that all services and products it offers in connection with the Scudder
Marks shall meet commercially reasonable standards of quality, as may be
determined by you or the Trademark Owner from time to time, provided that you
acknowledge that the services and products the Fund rendered during the one-year
period preceding the date of this Agreement are acceptable. At your reasonable
request, the Fund shall cooperate with you and the Trademark Owner and shall
execute and deliver any and all documents necessary to maintain and protect
(including but not limited to in connection with any trademark infringement
action) the Scudder Marks and/or enter the Fund as a registered user thereof At
such time as this Agreement or any other investment management agreement shall
no longer be in effect between you (or your successor) and the Fund, or you no
longer are a licensee of the Scudder Marks, the Fund shall (to the extent that,
and as soon as, it lawfully can) cease to use the Fund Name or any other name
indicating that it is advised by, managed by or otherwise connected with you (or
any organization which shall have succeeded to your business as investment
manager) or the Trademark Owner. In no event shall the Fund use the Scudder
Marks or any other name or mark confusingly similar thereto (including, but not
limited to, any name or mark that includes the name "Scudder") if this Agreement
or any other investment advisory agreement between you (or your successor) and
the Fund is terminated.
3. Advisory Services. You will regularly provide the Portfolio with
investment research, advice and supervision and will furnish continuously an
investment program consistent with the investment objectives and policies of the
Portfolio and of the Fund. You will determine what securities shall be purchased
for the Portfolio, what securities shall be held or sold, and what portion of
the 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 Investment
Company Act of 1940, as amended (the "1940 Act"), and to the investment
objectives, policies and restrictions of the Portfolio and of the Fund, as each
of the same shall be from time to time in effect, and subject, further, to such
policies and instructions as the Trustees may from time to time establish. You
shall advise and assist the officers of the Fund in taking such steps as are
necessary or appropriate to carry out the decisions of the Trustees and the
appropriate committees of the Trustees regarding the conduct of the business of
the Fund.
2
<PAGE>
4. Administrative Services. In addition to the advisory services
specified above in section 3, you shall furnish at your expense for the use of
the Portfolio such office space and facilities as the Portfolio may require for
its reasonable needs, and you (or one or more of your affiliates designated by
you) shall render to the Fund administrative services on behalf of the Portfolio
necessary for operating as an investment company and not provided by persons not
parties to this Agreement including, but not limited to, preparing reports to
and meeting materials for the Fund's Board of Trustees and reports and notices
to Portfolio shareholders; supervising, negotiating contractual arrangements
with, to the extent appropriate, and monitoring the performance of, custodians,
depositories, transfer and pricing agents, accountants, attorneys, printers,
underwriters, brokers and dealers, insurers and other persons in any capacity
deemed to be necessary or desirable to Portfolio operations; preparing and
making filings with the Securities and Exchange Commission (the "SEC") and other
regulatory and self-regulatory organizations, including, but not limited to,
preliminary and definitive proxy materials, post-effective amendments to the
Registration Statement, semi-annual reports on Form N-SAR and notices pursuant
to Rule 24f-2 under the 1940 Act; overseeing the tabulation of proxies by the
Portfolio's transfer agent; assisting in the preparation and filing of the
Portfolio's federal, state and local tax returns; preparing and filing the
Portfolio's federal excise tax return pursuant to Section 4982 of the Code;
providing assistance with investor and public relations matters; monitoring the
valuation of portfolio securities, the calculation of net asset value and the
calculation and payment of distributions to Portfolio shareholders; monitoring
the registration of share of the Portfolio under applicable federal and state
securities laws; maintaining or causing to be maintained for the Portfolio all
books, records and reports and any other information required under the 1940
Act, to the extent that such books, records and reports and other information
are not maintained by the Portfolio's custodian or other agents of the
Portfolio; assisting in establishing the accounting policies of the Portfolio;
assisting in the resolution of accounting issues that may arise with respect to
the Portfolio's operations and consulting with the Portfolio's independent
accounts, legal counsel and the Portfolio's other agents as necessary in
connection therewith; establishing and monitoring the Portfolio's operating
expense budgets; reviewing the Portfolio's bills; processing the payment of
bills that have been approved by an authorized person; assisting the Portfolio
in determining the amount of dividends and distribution available to be paid by
the Portfolio to its shareholders, preparing and arranging for the printing of
dividend notices to shareholders, and providing the transfer and dividend paying
agent and the custodian with such information as is required for such parties to
effect the payment of dividends and distributions; and otherwise assisting the
Fund as it may reasonably request in the conduct of the Portfolio's business,
subject to the direction and control of the Fund's Board of Trustees. Nothing in
the Agreement shall be deemed to shift to you or to diminish the obligations of
any agent of the Portfolio or any other person not a party to this Agreement
which is obligated to provide services to the Portfolio.
5. Allocation of Charges and Expenses. You will pay the compensation
and expenses of all officers and executive employees of the Fund and will make
available, without expense to the Fund, the services of such of your managing
directors, principals, officers and employees as may duly be elected officers or
Trustees of the Fund, subject to their individual consent to serve and to any
limitations imposed by law. You will pay the Portfolio's office rent and will
provide investment advisory research and statistical facilities and all clerical
services relating to research, statistical and investment work. You will not be
3
<PAGE>
required to pay any expenses of the Fund other than those specifically allocated
to you in this paragraph 5. In particular, but without limiting the generality
of the foregoing, you will not be required to pay: organization expenses of the
Fund; clerical salaries; fees and expenses incurred by the Fund in connection
with membership in investment company organizations; brokers' commissions;
payment for portfolio pricing services to a pricing agent, if any; legal,
auditing or accounting expenses; taxes or governmental fees; the fees and
expenses of the transfer agent of the Fund; the cost of preparing share
certificates or any other expenses, including clerical expenses of issue,
redemption or repurchase of shares of the Fund; the expenses of and fees for
registering or qualifying securities for sale; the fees and expenses of Trustees
of the Fund who are not affiliated with you; the cost of preparing and
distributing reports and notices to shareholders; public and investor relations
expenses; or the fees or disbursements of custodians of the Fund's assets,
including expenses incurred in the performance of any obligations enumerated by
the Declaration of Trust or By-Laws of the Fund insofar as they govern
agreements with any such custodian. You shall not be required to pay expenses of
any activity which is primarily intended to result in the sale of shares,
including clerical expenses, of offer, sale, underwriting and distribution of
the Fund's shares if and to the extent that such expenses (i) are required to be
borne by a principal underwriter which acts as the distributor of the Fund's
shares pursuant to an underwriting agreement which provides that the underwriter
shall assume some or all of such expenses, or (ii) the Fund on behalf of the
Portfolio shall have adopted a plan in conformity with Rule 12b-1 under the 1940
Act providing that the Fund shall assume some or all of such expenses. You shall
be required to pay such of the foregoing expenses as are not required to be paid
by the principal underwriter pursuant to the underwriting agreement or are not
permitted to be paid by the Fund pursuant to such a plan.
6. Compensation of the Adviser. For all services to be rendered and
payments made as provided in paragraphs 3, 4 and 5 hereof, the Fund on behalf of
the Portfolio will pay you on the last day of each month a fee equal to 1/12 of
0.975% of the average daily net assets of the Portfolio for such month. The
"average daily net assets" of the Portfolio are defined as the average of the
values placed on the net assets of the Portfolio as of the close of the New York
Stock Exchange on each day on which the net asset value of the Portfolio is
determined consistent with the provisions of Rule 22c-1 under the 1940 Act or,
if the Fund lawfully determines the value of the net assets of the Portfolio as
of some other time on each business day, as of such time. The value of net
assets shall be determined pursuant to the applicable provisions of the
Declaration of Trust of the Fund. If, pursuant to such provisions, the
determination of net asset value is suspended for any particular business day,
then for the purposes of this paragraph 6, the value of the net assets of the
Portfolio as last determined shall be deemed to be the value of the net assets
as of the close of the New York Stock Exchange, or as of such other time as the
value of the net assets of the Portfolio may lawfully be determined, on that
day. If the determination of the net asset value of the shares of the Portfolio
has been suspended pursuant to the Declaration of Trust of the Fund for a period
including such month, your compensation payable at the end of such month shall
be computed on the basis of the value of the net assets of the Portfolio of the
Fund as last determined (whether during or prior to such month). If the Fund
determines the value of the net assets of the Portfolio more than once on any
day, the last such determination thereof on that day shall be deemed to be the
sole determination thereof on that day for the purposes of this paragraph 6. You
may waive all or a portion of your fees provided for hereunder. In the event
4
<PAGE>
that others than you agree to assume expenses of the Fund by way of
reimbursement or otherwise, you may as a matter of administrative convenience,
but shall not be obligated to, advance to the Fund an amount representing all or
a portion of the expenses so assumed. If you do advance such an amount to the
Fund and you are not repaid after a reasonable time by the party whose
obligation it is to assume such expense of the Fund, you shall be entitled to
have the amount of such advance returned to you upon request.
7. Avoidance of Inconsistent Position. In connection with purchases or
sales of portfolio securities for the account of the Portfolio, neither you nor
any of your managing directors, principals, directors, officers or employees
will act as a principal or agent or receive any commission. You or your agent
shall arrange for the placing of all orders for the purchase and sale of
portfolio securities for the Portfolio's account with brokers or dealers
selected by you. In the selection of such brokers or dealers and the placing of
such orders, you are directed at all times to seek for the Portfolio the most
favorable execution and net price available. If any occasion should arise in
which you give any advice to clients of yours concerning the shares of the
Portfolio, you will act solely as investment counsel for such clients and not in
any way on behalf of the Portfolio. Your services to the Portfolio pursuant to
this Agreement are not to be deemed to be exclusive and it is understood that
you may render investment advice, management and other services to others.
8. Limitation of Liability of Adviser. You shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Portfolio in
connection with the matters to which this Agreement relates except a loss
resulting from willful misfeasance, bad faith or gross negligence on your part
in the performance of your duties or from reckless disregard by you of your
obligations and duties under this Agreement. Any person, even though also
employed by you, who may be or become an employee of and paid by the Fund shall
be deemed, when acting within the scope of his employment by the Fund, to be
acting in such employment solely for the Fund and not as your employee or agent.
9. Duration and Termination of this Agreement. This Agreement shall
remain in force with respect to the Portfolio until September 30, 1997, and from
year to year thereafter, but only so long as such continuance is specifically
approved at least annually by the vote of a majority of the Trustees who are not
interested persons of you or of the Fund, cast in person at a meeting called for
the purpose of voting on such approval and by a vote of the Trustees or of a
majority of the outstanding voting securities of such Portfolios. This Agreement
may, on 60 days' written notice, be terminated at any time without the payment
of any penalty, by the Trustees, by vote of a majority of the outstanding voting
securities of the Portfolio, or by you. This Agreement shall automatically
terminate in the event of its assignment. In interpreting the provisions of this
Agreement, the definitions contained in Section 2(a) of the 1940 Act, as
modified by Rule 18f-2 under the 1940 Act, (particularly the definitions of
"interested person," "assignment" and "majority of the outstanding voting
securities"), as from time to time amended, shall be applied, subject, however,
to such exemptions as may be granted by the Securities and Exchange Commission
by any rule, regulation or order.
5
<PAGE>
10. Amendment of this Agreement. No provisions of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this Agreement shall be
effective with respect to the Portfolio until approved by vote of the holders of
a majority of the outstanding voting securities of such Portfolio and by the
Trustees, including a majority of the Trustees who are not interested persons of
you or of the Fund, cast in person at a meeting called for the purpose of voting
on such approval.
11. Miscellaneous. It is understood and expressly stipulated that
neither the holders of shares of the Fund nor the Trustees shall be personally
liable hereunder. The captions in this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
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 and all persons dealing with the Fund must look solely to the property of
the appropriate Portfolio or Portfolios 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. No Portfolio of the Fund shall be liable for any claims against any other
Portfolio of the Fund.
If you are in agreement with the foregoing, please sign the form of
acceptance on the accompanying counterpart of this letter and return such
counterpart to the Fund, whereupon this letter shall become a binding contract.
Yours very truly,
SCUDDER VARIABLE LIFE
INVESTMENT FUND
By: ----------------------------
President
The foregoing Agreement is hereby accepted as of the date thereof.
SCUDDER, STEVENS & CLARK, INC.
By: ----------------------------
Managing Director
6
