Filed with the Securities and Exchange Commission on April 29, 1997.
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. 22
--
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 26
--
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)
-
X on May 1, 1997 pursuant to paragraph (b)
-
60 days after filing pursuant to paragraph (a)(i)
-
on pursuant to paragraph (a)(i)
- --------------
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 has filed the notice required by Rule 24f-2 for its most
recent fiscal year on February 28, 1997.
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
MONEY MARKET PORTFOLIO
CROSS-REFERENCE SHEET
Items Required By Form N-1A
---------------------------
PART A
- ------
<TABLE>
<CAPTION>
Item No. Item Caption Prospectus Caption
-------- ------------ ------------------
<S> <C> <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
MONEY MARKET PORTFOLIO
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
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
BOND PORTFOLIO
CROSS-REFERENCE SHEET
Items Required By Form N-1A
---------------------------
PART A
- ------
Item No. Item Caption Prospectus Caption
-------- ------------ ------------------
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 3
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
BOND PORTFOLIO
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 4
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
BALANCED PORTFOLIO
CROSS-REFERENCE SHEET
Items Required By Form N-1A
---------------------------
PART A
- ------
Item No. Item Caption Prospectus Caption
-------- ------------ ------------------
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 5
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
BALANCED PORTFOLIO
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 6
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
GROWTH AND INCOME PORTFOLIO
CROSS-REFERENCE SHEET
Items Required By Form N-1A
---------------------------
PART A
- ------
Item No. Item Caption Prospectus Caption
-------- ------------ ------------------
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 7
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
GROWTH AND INCOME PORTFOLIO
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 8
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
CAPITAL GROWTH PORTFOLIO
CROSS-REFERENCE SHEET
Items Required By Form N-1A
---------------------------
PART A
- ------
Item No. Item Caption Prospectus Caption
-------- ------------ ------------------
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 9
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
CAPITAL GROWTH PORTFOLIO
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 10
<PAGE>
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
-------- ------------ ------------------
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 11
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
GLOBAL DISCOVERY PORTFOLIO
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 12
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
INTERNATIONAL PORTFOLIO
CROSS-REFERENCE SHEET
Items Required By Form N-1A
---------------------------
PART A
- ------
Item No. Item Caption Prospectus Caption
-------- ------------ ------------------
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 13
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
INTERNATIONAL PORTFOLIO
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
</TABLE>
Cross Reference-Page 14
<PAGE>
SCUDDER
SCUDDER VARIABLE LIFE INVESTMENT FUND
Two International Place
Boston, Massachusetts 02110-4103
(A Mutual Fund)
Scudder Variable Life Investment Fund (the "Fund") is an open-end management
investment company which offers shares of beneficial interest of seven
diversified Portfolios:
o Money Market Portfolio seeks stability and current income from a portfolio
of money market instruments. The Money Market Portfolio will maintain a
dollar-weighted average portfolio maturity of 90 days or less in an effort
to maintain a constant net asset value of $1.00 per share.
o Bond Portfolio seeks high income from a high quality portfolio of bonds.
o Balanced Portfolio seeks a balance of growth and income, as well as
long-term preservation of capital, from a diversified portfolio of equity
and fixed-income securities.
o Growth and Income Portfolio seeks long-term growth of capital, current
income and growth of income from a portfolio consisting primarily of common
stocks and securities convertible into common stocks.
o Capital Growth Portfolio seeks to maximize long-term capital growth from a
portfolio consisting primarily of equity securities.
o Global Discovery Portfolio seeks above-average capital appreciation over
the long term by investing primarily in the equity securities of small
companies located throughout the world.
o International Portfolio seeks long-term growth of capital principally from
a diversified portfolio of foreign equity securities.
This prospectus sets forth concisely the information about the Fund that a
prospective investor should know before applying for certain variable annuity
contracts ("VA contracts") and variable life insurance policies ("VLI policies")
offered in the separate accounts of certain insurance companies ("Participating
Insurance Companies"). Please read it carefully and retain it for future
reference. The prospectus should be read in conjunction with the VA contract or
VLI policy prospectus which accompanies it. Shares of the Money Market
Portfolio, and Class A shares of all other Portfolios, are offered herein. If
you require more detailed information, a Statement of Additional Information
dated May 1, 1997, 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 VA contracts and
VLI 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 and is available along with other related
materials on the Securities and Exchange Commission's Internet Web site
(http://www.sec.gov).
AN INVESTMENT IN THE MONEY MARKET PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY
THE UNITED STATES GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE PORTFOLIO
WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
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 VA CONTRACTS
AND VLI POLICIES.
PROSPECTUS
May 1, 1997
CLASS A SHARES OF BENEFICIAL INTEREST
<PAGE>
------------------------------------------------------------------------------
TABLE OF CONTENTS
------------------------------------------------------------------------------
Page
INVESTMENT CONCEPT OF THE FUND 1
FINANCIAL HIGHLIGHTS 2
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS 9
Money Market Portfolio 9
Bond Portfolio 9
Balanced Portfolio 10
Growth and Income Portfolio 11
Capital Growth Portfolio 12
Global Discovery Portfolio 13
International Portfolio 14
POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS 15
Repurchase Agreements 15
Debt Securities 15
Illiquid or Restricted Investments 15
Convertible Securities 16
Mortgage and Other Asset-Backed Securities 16
Foreign Securities 16
When-Issued Securities 17
Indexed Securities 17
Loans of Portfolio Securities 17
Zero Coupon Securities 18
Real Estate Investment Trusts 18
Derivatives 18
Options 18
Options on Securities Indexes 18
Futures Contracts 18
Forward Foreign Currency Exchange Contracts, Foreign Currency Futures
Contracts and Foreign Currency Options 19
Strategic Transactions and Derivatives Applicable to Global Discovery
Portfolio 19
Special Situation Securities 20
INVESTMENT RESTRICTIONS 21
INVESTMENT ADVISER 22
Portfolio Management 23
Money Market Portfolio 23
Bond Portfolio 24
Balanced Portfolio 24
Growth and Income Portfolio 24
Capital Growth Portfolio 24
Global Discovery Portfolio 24
International Portfolio 24
DISTRIBUTOR 25
PURCHASES AND REDEMPTIONS 25
NET ASSET VALUE 26
PERFORMANCE INFORMATION 26
Money Market Portfolio 26
Bond Portfolio 26
All Portfolios 26
VALUATION OF PORTFOLIO SECURITIES 27
Money Market Portfolio 27
Other Portfolios 27
TAX STATUS, DIVIDENDS AND DISTRIBUTIONS 27
SHAREHOLDER COMMUNICATIONS 28
ADDITIONAL INFORMATION 28
Fund Organization and Shareholder Indemnification 28
Other Information 29
TRUSTEES AND OFFICERS 30
APPENDIX 31
<PAGE>
------------------------------------------------------------------------------
INVESTMENT CONCEPT OF THE FUND
------------------------------------------------------------------------------
Scudder Variable Life Investment Fund (the "Fund") is an open-end, registered
management investment company comprised of the following diversified series: the
Money Market Portfolio, Bond Portfolio, Balanced Portfolio, Growth and Income
Portfolio, Capital Growth Portfolio, Global Discovery Portfolio, and
International Portfolio (individually or collectively hereinafter referred to as
a "Portfolio" or the "Portfolios"). Additional Portfolios may be created from
time to time. The Fund is intended to be the funding vehicle for VA contracts
and VLI policies to be offered by the separate accounts of certain Participating
Insurance Companies. The Fund currently does not foresee any disadvantages to
the holders of VA contracts and VLI policies arising from the fact that the
interests of the holders of such contracts and policies may differ.
Nevertheless, the Fund's Trustees intend to monitor events in order to identify
any material irreconcilable conflicts which may possibly arise and to determine
what action, if any, should be taken in response thereto. The VA contracts and
the VLI policies are described in the separate prospectuses issued by the
Participating Insurance Companies. The Fund assumes no responsibility for such
prospectuses.
Individual VA contract holders and VLI policyholders are not the "shareholders"
of the Fund. Rather, the Participating Insurance Companies and their separate
accounts are the shareholders or investors (the "Shareholders"), although such
companies may pass through voting rights to their VA contract and VLI
policyholders.
1
<PAGE>
------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
------------------------------------------------------------------------------
Money Market Portfolio
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements.
If you would like more detailed information concerning the Portfolio's
performance, a complete portfolio listing and audited financial statements are
available in the Fund's Annual Report dated December 31, 1996 and may be
obtained without charge by calling a Participating Insurance Company or by
writing to broker/dealers offering the previously mentioned VA contracts and VLI
policies, or Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ...... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income ................. .050 .055 .037 .025 .033 .057 .076 .088 .068 .060
Less distributions from
net investment income .... (.050) (.055) (.037) (.025) (.033) (.057) (.076) (.088) (.068) (.060)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period .............. $ 1.00 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return (%) ........... 5.09 5.65 3.72 2.54 3.33 5.81 7.83 8.84 7.08 5.95
Ratios and
Supplemental Data
Net assets, end of
period ($ millions) ...... 98 80 90 49 34 28 32 15 11 8
Ratio of operating
expenses, net to
average daily net
assets (%) ............... .46 .50 .56 .66 .64 .67 .69 .72 .75 .75
Ratio of operating expenses
before expense reductions,
to average daliy net
assets (%) ............... .46 .50 .56 .66 .64 .67 .69 .81 1.04 1.12
Ratio of net
investment income
to average daily
net assets (%) ........... 4.98 5.51 3.80 2.55 3.26 5.67 7.57 8.53 6.99 6.06
</TABLE>
2
<PAGE>
------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
------------------------------------------------------------------------------
Bond Portfolio
The following table includes selected data for a Class A share outstanding
throughout each period and other performance information derived from the
audited financial statements.
If you would like more detailed information concerning the Portfolio's
performance, a complete portfolio listing and audited financial statements are
available in the Fund's Annual Report dated December 31, 1996 and may be
obtained without charge by calling a Participating Insurance Company or by
writing to broker/dealers offering the previously mentioned VA contracts and VLI
policies, or Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
Years Ended December 31, (a)
------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ..... $ 7.16 $ 6.48 $ 7.42 $ 7.19 $ 7.37 $ 6.73 $ 6.72 $ 6.39 $ 6.47 $ 6.67
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from
investment operations:
Net investment
income ............... .41 .44 .43 .48 .49 .52 .53 .54 .54 .49
Net realized and
unrealized gain
(loss) on
investment
transactions ........... (.22) .69 (.77) .38 (.02) .61 (.02) .18 (.19) (.40)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ................. .19 1.13 (.34) .86 .47 1.13 .51 .72 .35 .09
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions from:
Net investment
income ................. (.62) (.45) (.43) (.48) (.46) (.47) (.50) (.39) (.43) (.29)
Net realized gains
on investment
transactions ........... -- -- (.17) (.15) (.19) (.02) -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions ........ (.62) (.45) (.60) (.63) (.65) (.49) (.50) (.39) (.43) (.29)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period .............. $ 6.73 $ 7.16 $ 6.48 $ 7.42 $ 7.19 $ 7.37 $ 6.73 $ 6.72 $ 6.39 $ 6.47
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return (%) ........... 2.82 18.17 (4.79) 12.38 7.01 17.61 8.06 11.65 5.46 1.22
Ratios and
Supplemental Data
Net assets, end of
period ($ millions) ...... 66 73 142 129 113 74 42 22 3 3
Ratio of operating
expenses, net to
average net
assets (%) ............... .61 .56 .58 .61 .63 .69 .73 .75 .75 .75
Ratio of operating expenses
before expense reductions,
to average daliy net
assets (%) ............... .61 .56 .58 .61 .63 .69 .73 .84 1.40 2.01
Ratio of net investment
income to average
net assets (%) ........... 6.2 6.29 6.43 6.59 6.89 7.51 8.05 8.04 7.86 7.53
Portfolio turnover
rate (%) ................. 85.11 177.21 96.55 125.15 87.00 115.86 71.02 103.41 245.23 186.05
(a) Based on monthly average shares outstanding during the period.
</TABLE>
3
<PAGE>
------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
------------------------------------------------------------------------------
Balanced Portfolio
The following table includes selected data for a Class A share outstanding
throughout each period and other performance information derived from the
audited financial statements.
If you would like more detailed information concerning the Portfolio's
performance, a complete portfolio listing and audited financial statements are
available in the Fund's Annual Report dated December 31, 1996 and may be
obtained without charge by calling a Participating Insurance Company or by
writing to broker/dealers offering the previously mentioned VA contracts and VLI
policies, or Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
Years Ended December 31, (a)
---------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ........ $10.95 $ 8.97 $10.23 $10.02 $ 9.85 $ 8.10 $ 8.75 $ 7.62 $ 6.88 $ 7.35
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from
investment operations:
Net investment income ...... .31 .30 .29 .30 .29 .35 .42 .40 .33 .34
Net realized and unrealized
gain (loss) on investment
transactions ............. .95 2.04 (.48) .42 .36 1.77 (.59) 1.06 .64 (.45)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ................. 1.26 2.34 (.19) .72 .65 2.12 (.17) 1.46 .97 (.11)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions from:
Net investment income ...... (.30) (.30) (.30) (.28) (.29) (.37) (.43) (.33) (.23) (.23)
Net realized gains on
investment transactions .. (.30) (.06) (.77) (.23) (.19) -- (.05) -- -- (.13)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions .......... (.60) (.36) (1.07) (.51) (.48) (.37) (.48) (.33) (.23) (.36)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period .............. $11.61 $10.95 $ 8.97 $10.23 $10.02 $ 9.85 $ 8.10 $ 8.75 $ 7.62 $ 6.88
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return (%) ............. 11.89 26.67 (2.05) 7.45 6.96 26.93 (1.91) 19.50 14.21 (1.68)
Ratios and
Supplemental Data
Net assets, end of
period ($ millions) ........ 88 68 46 45 37 25 16 18 11 12
Ratio of operating expenses,
net to average net
assets (%) ................. .60 .65 .75 .75 .75 .75 .75 .75 .75 .75
Ratio of operating expense
before expense reductions,
to average daily net assets .60 .65 .75 .75 .75 .81 .75 .89 1.14 1.20
Ratio of net investment income
to average net assets (%) .. 2.82 3.01 3.19 3.01 3.01 4.00 5.15 4.74 4.48 4.42
Portfolio turnover rate (%) .. 67.56 87.98 101.64 133.95* 51.66 62.03 49.03 77.98 109.95 111.00
Average commission
rate paid (b) .............. $.0535 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred securities is calculated for fiscal years beginning on or after
September 1, 1995.
* On May 1, 1993, the Portfolio adopted its present name and investment objective which is a balance of growth and income, as
well as long-term preservation of capital, from a diversified portfolio of equity and fixed income securities. Prior to that
date, the Portfolio was known as the Managed Diversified Portfolio and its investment objective was to realize a high level of
long-term total rate of return consistent with prudent investment risk. The portfolio turnover rate increased due to
implementing the present investment objective. Financial highlights for the seven periods ended December 31, 1993 should not be
considered representative of the present Portfolio.
</TABLE>
4
<PAGE>
------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
------------------------------------------------------------------------------
Growth and Income Portfolio
The following table includes selected data for a Class A share outstanding
throughout the period and other performance information derived from the audited
financial statements.
If you would like more detailed information concerning the Portfolio's
performance, a complete portfolio listing and audited financial statements are
available in the Fund's Annual Report dated December 31, 1996 and may be
obtained without charge by calling a Participating Insurance Company or by
writing to broker/dealers offering the previously mentioned VA contracts and VLI
policies, or Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
For the Period
May 2, 1994
(commencement
Years Ended December 31, of operations)
------------------------- to December 31,
1996 1995 1994
------------------------- ----------------
<S> <C> <C> <C>
Net asset value, beginning of period ............................................ $ 7.98 $ 6.26 $ 6.00(b)
-------- -------- --------
Income from investment operations:
Net investment income ......................................................... .27 .23 .13
Net realized and unrealized gain on investment transactions ................... 1.46 1.72 .17(d)
-------- -------- --------
Total from investment operations ................................................ 1.73 1.95 .30
-------- -------- --------
Less distributions from:
Net investment income ......................................................... (.23) (.19) (.04)
Net realized gains on investment transactions ................................. (.11) (.04) --
-------- --------
Total distributions ............................................................. (.34) (.23) (.04)
-------- -------- --------
Net asset value, end of period .................................................. $ 9.37 $ 7.98 $ 6.26
======== ======== ========
Total Return (%) ................................................................ 22.17 31.74 4.91**
Ratios and Supplemental Data
Net assets, end of period ($ millions) .......................................... 91 52 20
Ratio of operating expenses, net to average net assets (%) ...................... .66 .75 .75*
Ratio of operating expenses, before reductions, to average daily net assets (%) . .66 .75 1.62*
Ratio of net investment income to average net assets (%) ........................ 3.14 3.18 3.63*
Portfolio turnover rate (%) ..................................................... 32.18 24.33 28.41*
Average commission rate paid (c) ................................................ $ .0502 $ -- $ --
(a) Based on monthly average shares outstanding during the period.
(b) Original capital
(c) Average commission rate paid per share of common and preferred securities is calculated for fiscal years beginning on or after
September 1, 1995.
(d) The amount shown for a share outstanding throughout the period does not accord with the change in the aggregate gains and
losses in the portfolio securities during the period because of the timing of sales and purchases of Portfolio shares in
relation to fluctuating market values during the period.
* Annualized
** Not annualized
</TABLE>
5
<PAGE>
------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
------------------------------------------------------------------------------
Capital Growth Portfolio
The following table includes selected data for a Class A share outstanding
throughout each period and other performance information derived from the
audited financial statements.
If you would like more detailed information concerning the Portfolio's
performance, a complete portfolio listing and audited financial statements are
available in the Fund's Annual Report dated December 31, 1996 and may be
obtained without charge by calling a Participating Insurance Company or by
writing to broker/dealers offering the previously mentioned VA contracts and VLI
policies, or Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
Years Ended December 31, (a)
---------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ......... $15.08 $12.23 $14.95 $12.71 $12.28 $ 8.99 $10.21 $ 8.53 $ 7.06 $ 7.67
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from
investment operations:
Net investment income ....... .19 .14 .06 .06 .11 .16 .25 .35 .16 .15
Net realized and unrealized
gain (loss) on investment
transactions .............. 2.68 3.25 (1.42) 2.52 .66 3.35 (1.00) 1.58 1.40 (.28)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations .................. 2.87 3.39 (1.36) 2.58 .77 3.51 (.75) 1.93 1.56 (.13)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions from:
Net investment income ....... (.19) (.11) (.05) (.07) (.11) (.22) (.24) (.25) (.09) (.09)
Net realized gains on
investment transactions ... (1.26) (.43) (1.31) (.27) (.23) -- (.23) -- -- (.39)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions ........... (1.45) (.54) (1.36) (.34) (.34) (.22) (.47) (.25) (.09) (.48)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period ............... $16.50 $15.08 $12.23 $14.95 $12.71 $12.28 $ 8.99 $10.21 $ 8.53 $ 7.06
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return (%) .............. 20.13 28.65 (9.67) 20.88 6.42 39.56 (7.45) 22.75 22.07 (1.88)
Ratios and
Supplemental Data
Net assets, end of
period ($ millions) ......... 440 338 257 257 167 108 45 45 17 10
Ratio of operating expenses,
net to average net
assets (%) .................. .53 .57 .58 .60 .63 .71 .72 .75 .75 .75
Ratio of operating expenses
before expense reductions, to
average daily net assets (%) .53 .57 .58 .60 .63 .71 .72 .85 1.11 1.24
Ratio of net investment income
to average net assets (%) ... 1.27 1.06 .47 .46 .95 1.49 2.71 3.51 2.17 1.68
Portfolio turnover rate (%) ... 65.56 119.41 66.44 95.31 56.29 58.88 61.39 63.96 129.75 113.34
Average commission
rate paid (b) ............... $.0585 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred securities is calculated for fiscal years beginning on or after
September 1, 1995.
</TABLE>
6
<PAGE>
------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
------------------------------------------------------------------------------
Global Discovery Portfolio
The following table includes selected data for a Class A share outstanding
throughout the period (a) and other performance information derived from the
audited financial statements.
If you would like more detailed information concerning the Portfolio's
performance, a complete portfolio listing and audited financial statements are
available in the Fund's Annual Report dated December 31, 1996 and may be
obtained without charge by calling a Participating Insurance Company or by
writing to broker/dealers offering the previously mentioned VA contracts and VLI
policies, or Scudder Investor Services, Inc.
For the Period
May 1, 1996
(commencement
of operations)
to December 31,
1996
---------------
Net asset value, beginning of period ............................ $ 6.00(c)
--------
Income from investment operations:
Net investment loss ........................................... (.01)
Net realized and unrealized gain on investment transactions ... .34
--------
Total from investment operations ................................ .33
--------
Net asset value, end of period .................................. $ 6.33
========
Total Return (%) ................................................ 5.50**
Ratios and Supplemental Data
Net assets, end of period ($ millions) .......................... 17
Ratio of operating expenses, net to average net assets (%) ...... 1.50*
Ratio of operating expenses before expense reductions, to
average daily net assets (%) .................................. 2.32*
Ratio of net investment loss to average net assets (%) .......... (.13)*
Portfolio turnover rate (%) ..................................... 50.31*
Average commission rate paid (b) ................................ $ .0029
(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred stocks.
(c) Original capital
* Annualized
**Not annualized
7
<PAGE>
------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
------------------------------------------------------------------------------
International Portfolio
The following table includes selected data for a Class A share outstanding
throughout each period and other performance information derived from the
audited financial statements. If you would like more detailed information
concerning the Portfolio's performance, a complete portfolio listing and audited
financial statements are available in the Fund's Annual Report dated December
31, 1996 and may be obtained without charge by calling a Participating Insurance
Company or by writing to broker/dealers offering the previously mentioned VA
contracts and VLI policies, or Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
For the Period
May 1, 1987
(commencement
Years Ended December 31, of operations) to
---------------------------------------------------------------------------------------- December 31,
1996(a) 1995(a) 1994(a) 1993(a) 1992(a) 1991(a) 1990(a) 1989(a) 1988 1987
---------------------------------------------------------------------------------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period ............... $11.82 $10.69 $10.85 $ 8.12 $ 8.47 $ 7.78 $ 8.46 $ 6.14 $ 5.26 $ 6.00(c)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income ............. .12 .11 .06 .09 .10 .12 .25 .10 .09 --
Net realized and
unrealized gain
(loss) on investment
transactions ....... 1.60 1.07 (.15) 2.90 (.36) .77 (.89) 2.22(d) .79 (.64)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ........... 1.72 1.18 (.09) 2.99 (.26) .89 (.64) 2.32 .88 (.64)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
From net investment
income ............. (.29) (.01) (.07) (.14) (.09) (.20) (.04) -- -- --
In excess of net
investment income .. -- -- -- (.12) -- -- -- -- -- --
From net realized
gains on investment
transactions ....... -- (.04) -- -- -- -- -- -- -- (.10)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions .. (.29) (.05) (.07) (.26) (.09) (.20) (.04) -- -- (.10)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end
of period ............ $13.25 $11.82 $10.69 $10.85 $ 8.12 $ 8.47 $ 7.78 $ 8.46 $ 6.14 $ 5.26
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return (%) ....... 14.78 11.11 (.85) 37.82 (3.08) 11.45 (7.65) 37.79 16.73 (10.64)**
Ratios and
Supplemental Data
Net assets, end of
period ($ millions) .. 726 548 472 238 65 41 35 17 3 2
Ratio of operating
expenses, net to
average net assets
(%) .................. 1.05 1.08 1.08 1.20 1.31 1.39 1.38 1.50 1.50 1.50*
Ratio of operating
expenses before
expense reductions,
to average daily net
assets (%) ........... 1.05 1.08 1.08 1.20 1.31 1.39 1.38 1.80 4.15 4.06*
Ratio of net investment
income to average
net assets (%) ....... .95 .95 .57 .91 1.23 1.43 2.89 1.30 1.59 .02*
Portfolio turnover
rate (%) ............. 32.63 45.76 33.52 20.36 34.42 45.01 26.67 57.69 110.42 146.08*
Average commission
rate paid (b) ........ $.0002 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred securities is
calculated for fiscal years beginning on or after September 1, 1995.
(c) Original capital
(d) Includes provision for federal income tax of $.03 per share.
* Annualized
**Not annualized
8
<PAGE>
------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND
POLICIES OF THE PORTFOLIOS
------------------------------------------------------------------------------
Each Portfolio has a different investment objective which it pursues through
separate investment policies, as described below. The differences in objectives
and policies among the Portfolios can be expected to affect the degree of market
and financial risk to which each Portfolio is subject and the return of each
Portfolio. The investment objectives and policies of each Portfolio may, unless
otherwise specifically stated, be changed by the Trustees of the Fund without a
vote of the Shareholders. There is no assurance that the objectives of any
Portfolio will be achieved.
MONEY MARKET PORTFOLIO
The Money Market Portfolio seeks to maintain the stability of capital and,
consistent therewith, to maintain the liquidity of capital and to provide
current income. The Portfolio seeks to maintain a constant net asset value of
$1.00 per share, although there can be no assurance that this will be achieved.
The Portfolio uses the amortized cost method of securities valuation.
The Money Market Portfolio purchases money market securities such as U.S.
Treasury, agency and instrumentality obligations, finance company and corporate
commercial paper, bankers' acceptances and certificates of deposit of domestic
and foreign banks (i.e., banks which at the time of their most recent annual
financial statements show total assets in excess of $1 billion), including
foreign branches of domestic banks, which involve different risks than those
associated with investments in certificates of deposit of domestic banks, and
corporate obligations. The Money Market Portfolio may also enter into repurchase
agreements. The Money Market Portfolio may also invest in certificates of
deposit issued by banks and savings and loan institutions which had at the time
of their most recent annual financial statements total assets of less than $1
billion, provided that (i) the principal amounts of such certificates of deposit
are insured by an agency of the U.S. Government, (ii) at no time will the
Portfolio hold more than $100,000 principal amount of certificates of deposit of
any one such bank, and (iii) at the time of acquisition, no more than 10% of the
Portfolio's assets (taken at current value) are invested in certificates of
deposit of such banks having total assets not in excess of $1 billion.
Investments are limited to those that are dollar-denominated and at the time of
purchase are rated, or judged by the Fund's investment adviser, Scudder, Stevens
& Clark, Inc. (the "Adviser"), subject to the supervision of the Trustees, to be
equivalent to those rated high quality (i.e., rated in the two highest quality
rating categories) by any two nationally-recognized rating services such as
Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's ("S&P"). In
addition, the Adviser seeks through its own credit analysis to limit investments
to high quality instruments presenting minimal credit risks. The portfolio is
subject to certain additional quality and diversification restrictions which are
set forth in the Fund's Statement of Additional Information.
The remaining maturity of each investment in the Money Market Portfolio is 397
calendar days or less. The dollar-weighted average maturity of the Portfolio's
investments varies with money market conditions, but is always 90 days or less.
As a money market fund with a short-term maturity, the Portfolio's income
fluctuates with changes in interest rates, but its price to the public or
"offering price," is expected to remain fixed at $1.00 per share.
BOND PORTFOLIO
The Bond Portfolio pursues a policy of investing for a high level of income
consistent with a high quality portfolio of debt securities. Under normal
circumstances, the Portfolio invests at least 65% of its assets in bonds,
including those of the U.S. Government and its agencies, and those of
corporations and other notes and bonds paying high current income. It will
attempt to moderate the effect of market price fluctuation relative to that of a
long-term bond by investing in securities with varying maturities and by
entering into futures contracts on debt securities and related options for
hedging purposes.
The Portfolio is actively managed. The Portfolio may invest in a broad range of
short-, intermediate-, and long-term securities. Proportions among maturities
and types of securities may vary depending upon the prospects for income
relative to the outlook for the economy and the securities markets, the quality
of available investments, the level of interest rates, and other factors. The
Portfolio may also invest in preferred stocks consistent with the Portfolio's
objectives.
9
<PAGE>
The Bond Portfolio may purchase corporate notes and bonds including issues
convertible into common stock and obligations of municipalities. It may purchase
U.S. Government securities and obligations of federal agencies that are not
backed by the full faith and credit of the U.S. Government, such as obligations
of Federal Home Loan Banks, Farm Credit Banks and the Federal Home Loan Mortgage
Corporation. In addition, it may purchase obligations of international agencies
such as the International Bank for Reconstruction and Development, and the
Inter-American Development Bank. Other eligible investments include foreign
securities, such as non-U.S. dollar-denominated foreign debt securities and U.S.
dollar-denominated foreign debt securities (such as those issued by the Dominion
of Canada and its provinces) including, without limitation, Eurodollar Bonds and
Yankee Bonds, mortgage and other asset-backed securities, and money market
instruments such as commercial paper, and bankers' acceptances and certificates
of deposit issued by domestic and foreign branches of U.S. banks. The Portfolio
may also enter into repurchase agreements and may invest in trust preferred
securities and zero coupon securities.
The Bond Portfolio invests primarily in high quality securities. Under normal
market conditions, the Portfolio will invest at least 65% of its assets in
securities rated within the three highest quality rating categories of Moody's
(Aaa, Aa and A) or S&P (AAA, AA and A), or if unrated, in bonds judged by the
Fund's Adviser, to be of comparable quality at the time of purchase. The
Portfolio may invest up to 20% of its assets in debt securities rated lower than
Baa or BBB or, if unrated, of equivalent quality as determined by the Adviser,
but will not purchase bonds rated below B3 by Moody's or B- by S&P or their
equivalent.
The Portfolio may, for hedging purposes, enter into forward foreign currency
exchange contracts and foreign currencies in the form of bank deposits. The
Portfolio may also purchase other foreign money market instruments, including,
but not limited to, bankers' acceptances, certificates of deposit, commercial
paper, short-term government obligations and repurchase agreements.
Except for limitations imposed by the Bond Portfolio's investment restrictions
(see "INVESTMENT RESTRICTIONS"), there is no limit as to the proportions of the
Portfolio which may be invested in any of the eligible investments; however, it
is a policy of the Portfolio that its non-governmental investments will be
spread among a variety of companies and will not be concentrated in any
industry.
The Bond Portfolio cannot guarantee a gain or eliminate the risk of loss. The
net asset value of the Portfolio's shares will fluctuate with changes in the
market price of the Portfolio's investments, which tend to vary inversely with
changes in prevailing interest rates and, to a lesser extent, changes in foreign
currency exchange rates.
BALANCED PORTFOLIO
The Balanced Portfolio seeks a balance of growth and income from a diversified
portfolio of equity and fixed income securities. The Portfolio also seeks
long-term preservation of capital through a quality-oriented investment approach
that is designed to reduce risk.
In seeking its objectives of a balance of growth and income, as well as
long-term preservation of capital, the Portfolio invests in a diversified
portfolio of equity and fixed income securities. The Portfolio invests, under
normal circumstances, at least 50%, but no more than 75%, of its net assets in
common stocks and other equity investments. The Portfolio's equity investments
consist of common stocks, preferred stocks, warrants and securities convertible
into common stocks, of companies that, in the Adviser's judgment, are of
above-average financial quality and offer the prospect for above-average growth
in earnings, cash flow, or assets relative to the overall market as defined by
the Standard and Poor's 500 Composite Price Index ("S&P 500"). The Portfolio
will invest primarily in securities issued by medium- to large-sized domestic
companies with annual revenues or market capitalization of at least $600
million, and which, in the opinion of the Adviser, offer above-average potential
for price appreciation. The Portfolio seeks to invest in companies that have
relatively consistent and above-average rates of growth; companies that are in a
strong financial position with high credit standings and profitability; firms
with important business franchises, leading products, or dominant marketing and
distribution systems; companies guided by experienced and motivated managements;
and companies selling at attractive market valuations. The Adviser believes that
companies with these characteristics will be rewarded by the market with higher
stock prices over time and provide investment returns, on average, in excess of
the S&P 500.
At least 65% of the value of the Portfolio's common stocks will be of issuers
which qualify, at the time of purchase, for one of the three highest equity
earnings and dividends ranking categories (A+, A, or A-) of S&P, or if not
ranked by S&P, are judged to be of comparable quality by the Adviser. S&P
assigns earnings and dividends rankings to corporations based on a number of
10
<PAGE>
factors, including stability and growth of earnings and dividends. Rankings by
S&P are not an appraisal of a company's creditworthiness, as is true for S&P's
debt security ratings, nor are these rankings intended as a forecast of future
stock market performance. In addition to using S&P rankings of earnings and
dividends of common stocks, the Adviser conducts its own analysis of a company's
history, current financial position, and earnings prospects.
To enhance income and stability, the Portfolio's remaining assets are allocated
to bonds and other fixed income securities, including cash reserves. The
Portfolio will normally invest 25% to 50% of its net assets in fixed income
securities. However, at least 25% of the Portfolio's net assets will always be
invested in fixed income securities. The Portfolio can invest in a broad range
of corporate bonds and notes, convertible bonds, and preferred and convertible
preferred securities. It may also purchase U.S. Government securities and
obligations of federal agencies and instrumentalities that are not backed by the
full faith and credit of the U.S. Government, such as obligations of the Federal
Home Loan Banks, Farm Credit Banks, and the Federal Home Loan Mortgage
Corporation. The Portfolio may also invest in obligations of international
agencies, foreign debt securities (both U.S. and non-U.S. dollar-denominated),
mortgage-backed and other asset-backed securities, municipal obligations, trust
preferred securities, restricted securities issued in private placements and
zero coupon securities.
For liquidity and defensive purposes, the Portfolio may invest without limit in
cash and in money market securities such as commercial paper, bankers'
acceptances, and certificates of deposit issued by domestic and foreign branches
of U.S. banks. The Portfolio may also enter into repurchase agreements with
respect to U.S.
Government securities.
Not less than 50% of the Portfolio's debt securities will be invested in debt
obligations, including money market instruments, that (a) are issued or
guaranteed by the U.S. Government, (b) are rated at the time of purchase within
the two highest ratings categories by any nationally-recognized rating service
or (c) if not rated, are judged by the Adviser to be of a quality comparable to
obligations rated as described in (b) above. Not less than 80% of the debt
obligations in which the Portfolio invests will, at the time of purchase, be
rated within the three highest ratings categories of any such service or, if not
rated, will be judged to be of comparable quality by the Adviser. Up to 20% of
the Portfolio's debt securities may be invested in bonds rated below A but no
lower than B by Moody's or S&P, or unrated securities judged by the Adviser to
be of comparable quality.
The Portfolio will, on occasion, adjust its mix of investments among equity
securities, bonds, and cash reserves. In reallocating investments, the Adviser
weighs the relative values of different asset classes and expectations for
future returns. In doing so, the Adviser analyzes, on a global basis, the level
and direction of interest rates, capital flows, inflation expectations,
anticipated growth of corporate profits, monetary and fiscal policies around the
world, and other related factors. The Portfolio does not take extreme investment
positions as part of an effort to "time the market." Shifts between stocks and
fixed income investments are expected to occur in generally small increments
within the guidelines adopted in this prospectus. The Portfolio is designed as a
conservative long-term investment program.
While the Portfolio emphasizes U.S. equity and debt securities, it may invest a
portion of its assets in foreign securities, including depositary receipts. The
Portfolio's foreign holdings will meet the criteria applicable to its domestic
investments. The international component of the Portfolio's investment program
is intended to increase diversification, thus reducing risk, while providing the
opportunity for higher returns.
In addition, the Portfolio may invest in securities on a when-issued or forward
delivery basis. The Portfolio may, for hedging purposes, purchase forward
foreign currency exchange contracts and foreign currencies in the form of bank
deposits. The Portfolio may also purchase other foreign money market
instruments, including, but not limited to, bankers' acceptances, certificates
of deposit, commercial paper, short-term government obligations and repurchase
agreements.
The Balanced Portfolio cannot guarantee a gain or eliminate the risk of loss.
The net asset value of the shares of the Portfolio will increase or decrease
with changes in the market price of the Portfolio's investments and, to a lesser
extent, changes in foreign currency exchange rates.
GROWTH AND INCOME PORTFOLIO
The Growth and Income Portfolio seeks long-term growth of capital, current
income and growth of income. In pursuing these three objectives, the Portfolio
invests primarily in common stocks, preferred stocks, and securities convertible
into common stocks of companies which offer the prospect for growth of earnings
while paying higher than average current dividends. Over time, continued growth
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of earnings tends to lead to higher dividends and enhancement of capital value.
The Portfolio allocates its investments among different industries and
companies, and changes its portfolio securities for investment considerations
and not for trading purposes.
The Portfolio attempts to achieve its investment objectives by investing
primarily in dividend paying common stocks, preferred stocks and securities
convertible into common stocks. The Portfolio may also purchase such securities
which do not pay current dividends but which offer prospects for growth of
capital and future income. Convertible securities (which may be current coupon
or zero coupon securities) are bonds, notes, debentures, preferred stocks and
other securities which may be converted or exchanged at a stated or determinable
exchange ratio into underlying shares of common stock. The Portfolio may also
invest in nonconvertible preferred stocks consistent with the Portfolio's
objectives. From time to time, when the Adviser feels such a position is
advisable in light of economic or market conditions, the Portfolio may invest
without limit in cash and cash equivalents. The Portfolio may invest in foreign
securities and in repurchase agreements.
The Portfolio may, for hedging purposes, purchase forward foreign currency
exchange contracts and foreign currencies in the form of bank deposits. The
Portfolio may also purchase other foreign money market instruments, including,
but not limited to, bankers' acceptances, certificates of deposit, commercial
paper, short-term government obligations and repurchase agreements.
The Growth and Income Portfolio cannot guarantee a gain or eliminate the risk of
loss. The net asset value of the Portfolio's shares will increase or decrease
with changes in the market prices of the Portfolio's investments and, to a
lesser extent, changes in foreign currency exchange rates.
CAPITAL GROWTH PORTFOLIO
The Capital Growth Portfolio seeks to maximize long-term capital growth through
a broad and flexible investment program. The Portfolio invests in marketable
securities, principally common stocks and, consistent with its objective of
long-term capital growth, preferred stocks. However, in order to reduce risk, as
market or economic conditions periodically warrant, the Portfolio may also
invest up to 25% of its assets in short-term debt instruments.
In its examination of potential investments, the Adviser considers, among other
things, the issuer's financial strength, management reputation, absolute size
and overall industry position.
Equity investments can have diverse financial characteristics, and the Trustees
believe that the opportunity for capital growth may be found in many different
sectors of the market at any particular time. In contrast to the specialized
investment policies of some capital appreciation funds, the Portfolio is
therefore free to invest in a wide range of marketable securities offering the
potential for growth. This enables the Portfolio to pursue investment values in
various sectors of the stock market including:
1. Companies that generate or apply new technologies, new and improved
distribution techniques, or new services, such as those in the
business equipment, electronics, specialty merchandising, and health
service industries.
2. Companies that own or develop natural resources, such as energy
exploration or precious metals companies.
3. Companies that may benefit from changing consumer demands and
lifestyles, such as financial service organizations and
telecommunications companies.
4. Foreign companies.
While emphasizing investments in companies with above-average growth prospects,
the Portfolio may also purchase and hold equity securities of companies that may
have only average growth prospects, but seem undervalued due to factors thought
to be of a temporary nature which may cause their securities to be out of favor
and to trade at a price below their potential value.
The Portfolio, as a matter of nonfundamental policy, may invest up to 20% of its
net assets in intermediate to longer term debt securities when management
anticipates that the total return on debt securities is likely to equal or
exceed the total return on common stocks over a selected period of time. The
Portfolio may purchase investment-grade debt securities, which are those rated
Aaa, Aa, A or Baa by Moody's, or AAA, AA, A or BBB by S&P, or, if unrated, of
equivalent quality as determined by the Adviser. The Portfolio's intermediate to
longer term debt securities may also include those which are rated below
investment grade, as long as no more than 5% of its net assets are invested in
such securities.
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The Portfolio may, for hedging purposes, purchase forward foreign currency
exchange contracts and foreign currencies in the form of bank deposits. The
Portfolio may also purchase other foreign money market instruments, including,
but not limited to, bankers' acceptances, certificates of deposit, commercial
paper, short-term government obligations and repurchase agreements.
The Capital Growth Portfolio cannot guarantee a gain or eliminate the risk of
loss. The net asset value of the shares of the Portfolio will increase or
decrease with changes in the market price of the Portfolio's investments and, to
a lesser extent, changes in foreign currency exchange rates.
GLOBAL DISCOVERY PORTFOLIO
The Global Discovery 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. The Portfolio will limit investments in securities of issuers
located in Eastern Europe to 5% of its total assets.
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 companies. 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. 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.
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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.
SPECIAL RISK CONSIDERATIONS FOR GLOBAL DISCOVERY PORTFOLIO
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
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.
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.
INTERNATIONAL PORTFOLIO
The International Portfolio seeks long-term growth of capital primarily through
diversified holdings of marketable foreign equity investments. The Portfolio
invests in companies, wherever organized, which do business primarily outside
the United States. The Portfolio intends to diversify investments among several
countries and to have represented in its holdings business activities in not
less than three different countries, excluding the United States.
The Portfolio invests primarily in equity securities of established companies,
listed on foreign exchanges, which the Adviser believes have favorable
characteristics. It may also invest in fixed income securities of foreign
governments and companies. However, management intends to maintain a portfolio
consisting primarily of equity securities. Investing in foreign securities may
involve a greater degree of risk than investing in domestic securities due to
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the possibility of exchange rate fluctuations and exchange controls, less
publicly available information, more volatile markets, less securities
regulation, less favorable tax provisions, war and expropriation (see "POLICIES
AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS--Foreign Securities").
The Portfolio has no present intention of altering its general policy of being
primarily invested under normal conditions in foreign securities. However, in
the event of exceptional conditions abroad, the Portfolio may temporarily invest
all or a portion of its assets in Canadian or U.S. Government obligations or
currencies, or securities of companies incorporated in and having their
principal activities in Canada or the United States.
The Portfolio may, for hedging purposes, purchase forward foreign currency
exchange contracts, foreign currency options and futures contracts and foreign
currencies in the form of bank deposits. The Portfolio may also purchase other
foreign money market instruments, including, but not limited to, bankers'
acceptances, certificates of deposit, commercial paper, short-term government
and corporate obligations and repurchase agreements.
The International 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.
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POLICIES AND TECHNIQUES
APPLICABLE TO THE PORTFOLIOS
------------------------------------------------------------------------------
Except as otherwise noted below, the following description of additional
investment policies and techniques is applicable to all of the Portfolios.
REPURCHASE AGREEMENTS
As a means of earning income for periods as short as overnight, the Fund, on
behalf of a Portfolio, may enter into repurchase agreements with U.S. and
foreign banks, and any broker-dealer which is recognized as a reporting
government securities dealer, if the creditworthiness of the bank or
broker-dealer has been determined by the Adviser to be of a sufficiently high
quality. Under a repurchase agreement, a Portfolio acquires securities, subject
to the seller's agreement to repurchase those securities at a specified time and
price. Securities subject to a repurchase agreement are held in a segregated
account and the seller agrees to maintain the market value of such securities at
least equal to 100.5% of the repurchase price on a daily basis. If the seller
under a repurchase agreement becomes insolvent, the Fund's right to dispose of
the securities may be restricted. In the event of the commencement of bankruptcy
or insolvency proceedings of the seller of the securities before repurchase of
the securities under a repurchase agreement, the Fund may encounter delay and
incur costs, including a decline in value of the securities, before being able
to sell the securities.
DEBT SECURITIES
The Bond, Balanced, Capital Growth and Global Discovery Portfolios may each
invest in debt securities rated below investment-grade (those rated below Baa or
BBB). These securities are commonly referred to as "junk bonds" and can entail
greater price volatility and involve a higher degree of speculation with respect
to the payment of principal and interest than higher quality fixed-income
securities. The market prices of such lower rated debt securities may decline
significantly in periods of general economic difficulty. The trading market for
these securities is generally less liquid than for higher rated securities, and
a Portfolio may have difficulty disposing of these securities at the time it
wishes to do so. The lack of a liquid secondary market for certain securities
may also make it more difficult for a Portfolio to obtain accurate market
quotations for purposes of valuing its portfolio and calculating its net asset
value. The lower the ratings of such debt securities, the greater their risks
render them like equity securities. In addition, as interest rates fall, the
prices of debt securities tend to rise and vice versa. Should the rating of any
security held by a Portfolio be downgraded after the time of purchase, the
Adviser will determine whether it is in the best interest of the Portfolio to
retain or dispose of the security.
ILLIQUID OR RESTRICTED INVESTMENTS
The Portfolios may each invest in illiquid or restricted securities. The absence
of a trading market can make it difficult to ascertain a market value for
illiquid or restricted investments. Disposing of illiquid or restricted
investments may involve time-consuming negotiation and legal expenses, and it
may be difficult or impossible for a Portfolio to sell them promptly at an
acceptable price.
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CONVERTIBLE SECURITIES
The Bond, Balanced, Growth and Income, Capital Growth, Global Discovery and
International Portfolios may each invest in convertible securities (bonds,
notes, debentures, preferred stocks and other securities convertible into common
stocks) which may offer higher income than the common stocks into which they are
convertible. The convertible securities in which each Portfolio may invest
include fixed income or zero coupon debt securities, which may be converted or
exchanged at a stated or determinable exchange ratio into underlying shares of
common stock. Prior to their conversion, convertible securities may have
characteristics similar to non-convertible securities.
While convertible securities generally offer lower yields than non-convertible
debt securities of similar quality, their prices may reflect changes in the
value of the underlying common stock. Although to a lesser extent than with debt
securities generally, the market value of convertible securities tends to
decline as interest rates increase and, conversely, tends to increase as
interest rates decline. Convertible securities entail less credit risk than the
issuer's common stock. The ratings of the convertible securities in which the
Portfolios invest will be comparable to the ratings of the Portfolios' fixed
income securities.
MORTGAGE AND OTHER ASSET-BACKED SECURITIES
The Bond Portfolio and the Balanced Portfolio may each invest in mortgage-backed
securities, which are securities representing interests in pools of mortgage
loans. These securities provide shareholders with payments consisting of both
interest and principal as the mortgages in the underlying mortgage pools are
paid off.
The timely payment of principal and interest on mortgage-backed securities
issued or guaranteed by the Government National Mortgage Association ("GNMA") is
backed by GNMA and the full faith and credit of the U.S. Government. These
guarantees, however, do not apply to the market value or yield of
mortgage-backed securities or to the value of Portfolio shares. Also, GNMA and
other mortgage-backed securities may be purchased at a premium over the maturity
value of the underlying mortgages. This premium is not guaranteed and will be
lost if prepayment occurs. In addition, either Portfolio may invest in
mortgage-backed securities issued by other issuers, such as the Federal National
Mortgage Association, ("FNMA"), which are not guaranteed by the U.S. Government.
Moreover, the Portfolios may invest in debt securities which are secured with
collateral consisting of mortgage-backed securities, such as collateralized
mortgage obligations ("CMOs"), and in other types of mortgage-related
securities.
Unscheduled or early payments on the underlying mortgages may shorten the
securities' effective maturities and lessen their growth potential. Either
Portfolio may agree to purchase or sell these securities with payment and
delivery taking place at a future date. A decline in interest rates may lead to
a faster rate of repayment of the underlying mortgages, and expose the Portfolio
to a lower rate of return upon reinvestment. To the extent that such
mortgage-backed securities are held by the Portfolio, the prepayment right of
mortgagors may limit the increase in net asset value of the Portfolio because
the value of the mortgage-backed securities held by the Portfolio may not
appreciate as rapidly as the price of non-callable debt securities.
The Portfolios may also invest in securities representing interests in pools of
certain other consumer loans, such as automobile loans or credit card
receivables. In some cases, principal and interest payments are partially
guaranteed by a letter of credit from a financial institution. Asset-backed
securities are subject to the risk of prepayment and the risk that the
underlying loans will not be repaid.
FOREIGN SECURITIES
The Bond, Balanced, Growth and Income, Capital Growth, Global Discovery and
International Portfolios may each invest without limit, except as may be
applicable to debt securities generally, in U.S. dollar-denominated foreign debt
securities (including those issued by the Dominion of Canada and its provinces
and other debt securities which meet the criteria applicable to a Portfolio's
domestic investments), and in certificates of deposit issued by foreign banks
and foreign branches of United States banks, to any extent deemed appropriate by
the Adviser. The Bond Portfolio may invest up to 20% of its assets in non-U.S.
dollar-denominated foreign debt securities. The Balanced Portfolio may invest up
to 20% of its debt securities in non-U.S. dollar-denominated foreign debt
securities, and may invest up to 25% of its equity securities in non-U.S.
dollar-denominated foreign equity securities. The Growth and Income Portfolio
may invest up to 25% of its assets in non-U.S. dollar-denominated securities of
foreign issuers. The Capital Growth Portfolio may invest up to 25% of its
assets, and the Global Discovery and International Portfolios may each invest
without limit, in non-U.S. dollar-denominated equity securities of foreign
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issuers. Global investing involves economic and political considerations not
typically found in U.S. markets. These considerations, which may favorably or
unfavorably affect the Fund'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 Fund),
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 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.
WHEN-ISSUED SECURITIES
A Portfolio may from time to time purchase securities on a "when-issued" or
"forward delivery" basis. Debt securities are often issued on this basis. The
price of such securities, which may be expressed in yield terms, is fixed at the
time a commitment to purchase is made, but delivery and payment for such
securities take place at a later date. During the period between purchase and
settlement, no payment is made by a Portfolio and no interest accrues to the
Portfolio. To the extent that assets of a Portfolio are held in cash pending the
settlement of a purchase of securities, that Portfolio would earn no income;
however, it is the Fund's intention that each Portfolio will be fully invested
to the extent practicable and subject to the policies stated above. While
when-issued or forward delivery securities may be sold prior to the settlement
date, the Portfolio intends to purchase such securities with the purpose of
actually acquiring them unless a sale appears desirable for investment reasons.
At the time a Portfolio makes the commitment to purchase a security on a
when-issued or forward delivery basis, it will record the transaction and
reflect the amount due and the value of the security in determining the net
asset value of a Portfolio. The market value of the when-issued or forward
delivery securities may be more or less than the purchase price payable at the
settlement date. The Fund does not believe that a Portfolio's net asset value or
income will be adversely affected by the purchase of securities on a when-issued
or forward delivery basis. Each Portfolio will establish a segregated account
with its custodian in which it will maintain cash, U.S. Government securities
and other liquid assets at least equal in value to commitments for when-issued
or forward delivery securities. Such segregated securities either will mature
or, if necessary, be sold on or before the settlement date.
INDEXED SECURITIES
The Bond Portfolio and the Balanced Portfolio may each invest in indexed
securities, the value of which is linked to currencies, interest rates,
commodities, indices or other financial indicators ("reference instruments").
The interest rate or (unlike most fixed-income securities) the principal amount
payable at maturity of an indexed security may be increased or decreased,
depending on changes in the value of the reference instrument. Indexed
securities may be positively or negatively indexed, so that appreciation of the
reference instrument may produce an increase or a decrease in the interest rate
or value at maturity of the security. In addition, the change in the interest
rate or value at maturity of the security may be some multiple of the change in
the value of the reference instrument. Thus, in addition to the credit risk of
the security's issuer, the Fund will bear the market risk of the reference
instrument.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend the portfolio securities of any Portfolio (other than the
Money Market Portfolio) provided: (1) the loan is secured continuously by
collateral consisting of U.S. Government securities, or cash or cash equivalents
adjusted daily to have a market value at least equal to the current market value
of the securities loaned; (2) the Fund may at any time call the loan and regain
the securities loaned; (3) the Portfolio will receive any interest or dividends
paid on the loaned securities; and (4) the value of such securities loaned will
not at any time exceed 10% of the value of the Portfolio's total assets. In
addition, it is anticipated that the Portfolio may share with the borrower some
of the income received on the collateral for the loan or that it will be paid a
premium for the loan. Before a Portfolio enters into a loan, the Adviser
considers all relevant facts and circumstances including the creditworthiness of
the borrower.
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ZERO COUPON SECURITIES
The Bond, Balanced, Growth and Income, Capital Growth, Global Discovery and
International Portfolios may each invest in zero coupon securities, including
U.S. Government securities and privately stripped coupons on and receipts for
U.S. Government securities. These securities pay no cash income but are issued
at substantial discounts from their value at maturity. When held to maturity,
their entire return, which consists of the accretion of discount, comes from the
difference between their issue price and their maturity value. Because they do
not pay interest until maturity, zero coupon securities tend to be subject to
greater interim fluctuation of market value in response to changes in interest
rates than interest-paying securities of similar maturities.
REAL ESTATE INVESTMENT TRUSTS
The Bond Portfolio and the Growth and Income Portfolio each may purchase
instruments such as real estate investment trusts, commercial and residential
mortgage-backed securities, and real estate financings. Real estate-related
instruments are sensitive to factors such as changes in real estate values and
property taxes, interest rates, cash flow of underlying real estate assets,
supply and demand, and the management skill and creditworthiness of the issuer.
Real estate-related instruments may also be affected by tax and regulatory
requirements.
DERIVATIVES
The following descriptions of Options, Options on Securities Indexes, Futures
Contracts, and Forward Foreign Currency Exchange Contracts, Foreign Currency
Futures Contracts and Foreign Currency Options discuss types of derivatives in
which certain of the Portfolios may invest.
OPTIONS
The Fund may write covered call options on securities of any Portfolio (other
than the Money Market Portfolio) in an attempt to earn income. The Balanced,
Growth and Income, Capital Growth and International Portfolios may each also
write put options to a limited extent in an attempt to earn additional income on
their portfolios, consistent with their investment objectives, and they may
purchase call and put options for hedging purposes. Risks associated with
writing put options include the possible inability to effect closing
transactions at favorable prices. In addition, the Fund may engage in
over-the-counter options transactions with broker-dealers who make markets in
these options. Over-the-counter options purchased by the Fund and portfolio
securities "covering" the Fund's obligation pursuant to an over-the-counter
option may be deemed to be illiquid and may not be readily marketable. The
Adviser will monitor the creditworthiness of dealers with whom the Fund enters
into such options transactions under the general supervision of the Fund's
Trustees. The Fund may forego the benefit of appreciation in its Portfolios on
securities sold pursuant to call options.
OPTIONS ON SECURITIES INDEXES
The Bond, Balanced, Growth and Income, Capital Growth and International
Portfolios may each purchase put and call options on securities indexes to hedge
against the risk of unfavorable price movements adversely affecting the value of
a Portfolio's securities. Options on securities indexes are similar to options
on securities except that settlement is made in cash.
Unlike a securities option, which gives the holder the right to purchase or sell
a specified security at a specified price, an option on a securities index gives
the holder the right to receive a cash "exercise settlement amount" equal to (i)
the difference between the exercise price of the option and the value of the
underlying stock index on the exercise date, multiplied by (ii) a fixed "index
multiplier." In exchange for undertaking the obligation to make such cash
payment, the writer of the securities index option receives a premium.
Gains or losses on a Portfolio's transactions in securities index options depend
on price movements in the stock market generally (or, for narrow market indexes,
in a particular industry or segment of the market) rather than the price
movements of individual securities held by a Portfolio of the Fund. In this
respect, purchasing a stock index put option is analogous to the purchase of a
put on a securities index futures contract.
A Portfolio may sell securities index options prior to expiration in order to
close out its positions in securities index options which it has purchased. A
Portfolio may also allow options to expire unexercised.
FUTURES CONTRACTS
To protect against the effects of adverse changes in interest rates (sometimes
known as "hedging"), the Bond, Balanced, and International Portfolios may each,
to a limited extent, enter into futures contracts on debt securities. Such
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futures contracts obligate the Fund, at maturity, to purchase or sell certain
debt securities. The Bond, Balanced, Growth and Income, Capital Growth and
International Portfolios may each enter into securities index futures contracts
to protect against changes in securities market prices. Each of these five
Portfolios may purchase and write put and call options on futures contracts of
the type which such Portfolio is authorized to enter into and may engage in
related closing transactions. This type of option must be traded on a U.S. or
foreign exchange or board of trade.
When interest rates are rising or stock or security prices are falling, futures
contracts can offset a decline in the value of a Portfolio's current portfolio
securities. When rates are falling or stock or security prices are rising, these
contracts can secure better rates or prices for a Portfolio than might later be
available in the market when it makes anticipated purchases.
The Fund will engage in transactions in futures contracts and options thereon
only in an effort to protect a Portfolio against a decline in the value of the
Portfolio's securities or an increase in the price of securities that the
Portfolio intends to acquire. Also, the initial margin deposits for futures
contracts and premiums paid for related options may not be more than 5% of a
Portfolio's total assets. These transactions involve brokerage costs and require
the Fund to segregate assets, such as cash, U.S. Government securities and other
liquid assets, of a Portfolio to cover contracts which would require it to
purchase securities. A Portfolio may lose the expected benefit of the
transactions if interest rates or stock prices move in an unanticipated manner.
Such unanticipated changes in interest rates or stock prices may also result in
poorer overall performance in a Portfolio than if the Fund had not entered into
any futures transactions for that Portfolio. A Portfolio would be required to
make and maintain "margin" deposits in connection with transactions in futures
contracts.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS, FOREIGN CURRENCY FUTURES
CONTRACTS AND FOREIGN CURRENCY OPTIONS
The Bond, Balanced, Growth and Income, Capital Growth and International
Portfolios may each enter into forward foreign currency exchange contracts
("forward contracts") to the extent of 15% of the value of their respective
total assets, for hedging purposes. A forward contract is a contract
individually negotiated and privately traded by currency traders and their
customers. A forward contract involves an obligation to purchase or sell a
specific currency for an agreed price at a future date, which may be any fixed
number of days from the date of the contract. The agreed price may be fixed or
with a specified range of prices.
The International Portfolio may also enter into foreign currency futures
contracts and foreign currency options to the extent of 15% of the value of its
total assets, for hedging purposes. Foreign currency futures contracts are
standardized contracts traded on commodities exchanges which involve an
obligation to purchase or sell a predetermined amount of currency at a
predetermined date at a specified price. The purpose of entering into these
contracts is to minimize the risk to the Portfolio from adverse changes in the
relationship between the U.S. dollar and foreign currencies. At the same time,
such contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies. The Portfolio may
purchase and sell options on foreign currencies for hedging purposes in a manner
similar to that of transactions in forward contracts. Unanticipated changes in
currency prices may result in poorer overall performance for the Portfolio than
if it had not engaged in forward contracts, foreign currency futures contracts
and foreign currency options.
STRATEGIC TRANSACTIONS AND DERIVATIVES APPLICABLE TO GLOBAL
DISCOVERY PORTFOLIO
The Global Discovery 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").
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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
Portfolio may use and some of their risks are described more fully in the Fund's
Statement of Additional Information.
SPECIAL SITUATION SECURITIES
From time to time, the Global Discovery 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.
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INVESTMENT RESTRICTIONS
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Unless specified to the contrary, the following restrictions may not be changed
with respect to any Portfolio without the approval of the majority of
outstanding voting securities of that Portfolio (which, under the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules thereunder and
as used in this prospectus, means the lesser of (1) 67% of the shares of that
Portfolio present at a meeting if the holders of more than 50% of the
outstanding shares of that Portfolio are present in person or by proxy, or (2)
more than 50% of the outstanding shares of that Portfolio). Any investment
restrictions which involve a maximum percentage of securities or assets shall
not be considered to be violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition or encumbrance of securities
or assets of, or borrowings by or on behalf of, a Portfolio.
The Fund may not, on behalf of any Portfolio, except the Global Discovery
Portfolio:
(1)with respect to 75% of the value of the total assets of a Portfolio,
invest more than 5% of the value of the Portfolio's total assets in the
securities of any one issuer, except U.S. Government securities and,
with respect to 100% of the value of the total assets of a Portfolio,
the Fund may not invest more than 25% of the value of the Portfolio's
total assets in the securities of any one issuer, except U.S.
Government securities;
(2)pledge, mortgage or hypothecate its assets, except that, to secure
borrowings permitted by the investment restriction (8) below, it may
pledge securities having a market value at the time of pledge not
exceeding 15% of the value of a Portfolio's total assets and except in
connection with the writing of covered call options and the purchase
and sale of futures contracts and options on futures contracts;
(3)make loans to other persons, except loans of portfolio securities and
except to the extent that the purchase of debt obligations in
accordance with its investment objectives and policies and the entry
into repurchase agreements may be deemed to be loans;
(4)enter into repurchase agreements or purchase any securities if, as a
result thereof, more than 10% of the total assets of a Portfolio (taken
at market value) would be, in the aggregate, subject to repurchase
agreements maturing in more than seven days and invested in restricted
securities or securities which are not readily marketable;
(5)purchase the securities of any issuer if such purchase would cause more
than 10% of the voting securities of such issuer to be held by a
Portfolio;
(6)purchase securities if such purchase would cause more than 25% in the
aggregate of the market value of the total assets of a Portfolio at the
time of such purchase to be invested in the securities of one or more
issuers having their principal business activities in the same
industry, provided that there is no limitation in respect to
investments in obligations issued or guaranteed by the U.S. Government
or its agencies or instrumentalities (for the purposes of this
restriction, telephone companies are considered to be a separate
industry from gas and electric public utilities, and wholly-owned
finance companies are considered to be in the industry of their parents
if their activities are primarily related to financing the activities
of the parents).
(7)purchase or sell any put or call options or any combination thereof,
except that the Fund may purchase and sell options on futures contracts
on debt securities, options on securities indexes and securities index
futures contracts and write covered call option contracts on securities
owned by a Portfolio, and may also purchase call options for the
purpose of terminating its outstanding obligations with respect to
securities upon which covered call option contracts have been written
(i.e., "closing purchase transactions"), and except that the
International Portfolio may also purchase and sell options on foreign
currency and on foreign currency futures contracts.
(8)borrow money except from banks as a temporary measure for extraordinary
or emergency purposes (each Portfolio is required to maintain asset
coverage (including borrowings) of 300% for all borrowings) and no
purchases of securities for a Portfolio will be made while borrowings
of that Portfolio exceed 5% of the Portfolio's assets (the payment of
interest on borrowings by a Portfolio will reduce that Portfolio's
income). In addition, the Board of Trustees has adopted a policy
whereby each Portfolio of the Fund may borrow up to 10% of its total
assets; provided, however, that each Portfolio may borrow up to 25% of
its total assets for extraordinary or emergency purposes, including the
facilitation of redemptions.
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In addition, the Fund may not, on behalf of the Global Discovery 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 a Portfolio's net asset value (see "NET ASSET VALUE").
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INVESTMENT ADVISER
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The Fund retains the investment advisory firm of Scudder, Stevens & Clark, Inc.,
a Delaware corporation, Two International Place, Boston, Massachusetts
02110-4103, to manage each Portfolio's daily investment and business affairs
subject to the policies established by the Trustees. The Trustees have overall
responsibility for the management of the Fund under Massachusetts law. The
Adviser is one of the most experienced investment counsel firms in the United
States. It was established in 1919 and pioneered the practice of providing
investment counsel to individual clients on a fee basis. The principal source of
the Adviser's income is professional fees received from providing continuing
investment advice, and the firm derives no income from brokerage, insurance or
underwriting of securities. Today, it provides investment counsel for many
individuals and institutions, including insurance companies, colleges,
industrial corporations, and financial and banking organizations. Directly or
through affiliates, the Adviser provides investment advice to over 50 mutual
fund portfolios.
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For its advisory services to the Portfolios, the Adviser receives compensation
monthly at the following annual rates for each Portfolio:
Percent of the average
daily net asset values
Portfolio of each Portfolio
- --------- -----------------
Money Market Portfolio .370%
Bond Portfolio .475%
Balanced Portfolio .475%
Growth and Income Portfolio .475%
Capital Growth Portfolio .475%
Global Discovery Portfolio .975%
International Portfolio .875%*
* For any calendar month during which the average daily net assets of
International Portfolio exceed $500,000,000, the fee payable for that month,
with respect to the excess over $500,000,000, is calculated at an annual rate
of .775%. As a result, the Adviser received compensation at an annual rate of
.863% for the fiscal year ended December 31, 1996.
The investment advisory fees for the Global Discovery and International
Portfolios are higher than those charged many funds which invest primarily in
U.S. securities, but are not necessarily higher than those charged to funds with
investment objectives similar to the investment objectives of these Portfolios.
Under the investment advisory agreements between the Fund, on behalf of each
Portfolio, and the Adviser, the Fund is responsible for all its other expenses,
including clerical salaries; fees and expenses incurred in connection with
membership in investment company organizations; brokers' commissions; legal,
auditing and accounting expenses; taxes and governmental fees; the charges of
custodians, transfer agents and other agents; any other expenses, including
clerical expenses, of issue, sale, underwriting, distribution, redemption or
repurchase of shares; the expenses of and fees for registering or qualifying
securities for sale; the fees and expenses of the Trustees of the Fund who are
not affiliated with the Adviser; the cost of preparing and distributing reports
and notices to shareholders. The Fund is also responsible for its expenses
incurred in connection with litigation, proceedings and claims and the legal
obligation it may have to indemnify its officers and Trustees with respect
thereto. The Adviser, through Scudder Investor Services, Inc., a subsidiary of
the Adviser, places portfolio transactions on behalf of the Fund's Portfolios.
In so doing, the Adviser seeks to obtain the most favorable net results. Subject
to the foregoing, the Adviser may consider sales of VA contracts and VLI
policies for which the Fund is an investment option, as a factor in the
selection of firms to execute portfolio transactions.
In addition to payments for investment advisory services provided by the
Adviser, the Trustees, consistent with the Fund's investment advisory agreements
and underwriting agreement, have approved payments to the Adviser 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 fees
for the Global Discovery Portfolio to the extent that the Portfolio's expenses
will be maintained at 1.50% of average net assets.
PORTFOLIO MANAGEMENT
Each Portfolio is managed by a team of Scudder investment professionals who each
play an important role in the Portfolio's management process. Team members work
together to develop investment strategies and select securities for the
Portfolios. They are supported by Scudder's large staff of economists, research
analysts, traders, and other investment specialists who work in Scudder's
offices across the United States and abroad. Scudder believes its team approach
benefits Fund investors by bringing together many disciplines and leveraging
Scudder's extensive resources.
MONEY MARKET PORTFOLIO
Lead Portfolio Manager Stephen L. Akers has led Money Market Portfolio's
day-to-day management since 1995. Mr. Akers joined the team in 1995 and has
managed several fixed-income portfolios since joining Scudder in 1984. David
Wines, Portfolio Manager, joined Scudder and the team in 1996. Mr. Wines helps
set the Portfolio's overall strategy and has eight years of investment industry
experience. Nicca Alcantara, Portfolio Manager, has responsibility for the
Portfolio's day-to-day investments. Ms. Alcantara, who came to Scudder in 1984,
has worked as a portfolio manager since 1989 and joined the team in 1990. Debra
A. Hanson, Portfolio Manager, joined the team in 1996. Ms. Hanson assists with
the development and execution of investment strategy and has been with Scudder
since 1983.
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<PAGE>
BOND PORTFOLIO
Lead Portfolio Manager William M. Hutchinson has had responsibility for
overseeing the Portfolio's day-to-day operations and has guided the Portfolio's
investment strategy since 1996. Mr. Hutchinson, who has 23 years of investment
experience, came to Scudder in 1986 as a portfolio manager and joined the team
in 1987. Ruth Heisler, Portfolio Manager, helps set the Portfolio's investment
strategy. Ms. Heisler, who has over 40 years of fixed-income investing
experience, joined the team in 1986.
BALANCED PORTFOLIO
Lead Portfolio Manager Valerie F. Malter joined Scudder in 1995 and is
responsible for the Portfolio's investment strategy and daily operation. Ms.
Malter has 11 years of experience as an analyst covering a wide range of
industries, and three years of portfolio management experience focusing on the
stocks of companies with medium- to large-sized market capitalizations. William
M. Hutchinson, Portfolio Manager, helps set Scudder's overall fixed-income
investment strategy. Mr. Hutchinson, who has 23 years of investment experience,
came to Scudder in 1986 as a portfolio manager. Ruth Heisler, Portfolio Manager,
has had responsibility for the Portfolio's fixed-income investments since she
joined the team in 1986. Ms. Heisler has been involved with bond research and
investing at Scudder since 1953.
GROWTH AND INCOME PORTFOLIO
Lead Portfolio Manager Robert T. Hoffman has responsibility for setting Growth
and Income Portfolio's stock investing strategy and oversees the Portfolio's
day-to-day operations. Mr. Hoffman, who joined Scudder in 1990 as a portfolio
manager, has 13 years of experience in the investment industry, including
several years of pension fund management experience. Kathleen T. Millard,
Portfolio Manager, has worked in the investment industry since 1983 and as a
portfolio manager since 1986. Ms. Millard, who joined Scudder in 1991, also
focuses on stock investing strategy and stock selection. Benjamin W. Thorndike,
Portfolio Manager, is the Portfolio's chief analyst and strategist for
convertible securities. Mr. Thorndike, who has 18 years of investment
experience, joined Scudder in 1983 as a portfolio manager. Lori J. Ensinger,
Portfolio Manager, joined the team in 1996. Ms. Ensinger, who has 14 years of
investment industry experience, focuses on stock selection and investment
strategy, a role she has played since joining Scudder in 1993. Deborah Chaplin,
Portfolio Manager, joined Scudder and the team in 1996. Ms. Chaplin has five
years of investment experience as a securities analyst and institutional
portfolio manager.
CAPITAL GROWTH PORTFOLIO
Lead Portfolio Manager William F. Gadsden assumed responsibility for setting
Capital Growth Portfolio's stock investing strategy and overseeing the
Portfolio's day-to-day operations in 1995. Mr. Gadsden joined the team in 1989
and Scudder in 1983 and has 15 years of investment experience. Bruce F. Beaty,
Portfolio Manager, joined the team in 1995 and has been a portfolio manager
since joining Scudder in 1991.
GLOBAL DISCOVERY PORTFOLIO
Lead Portfolio Manager Gerald J. Moran sets the Portfolio's investment strategy
and oversees its daily operation. Mr. Moran joined Scudder's equity research and
management area in 1968 as an analyst and has focused on small company stocks
since 1982 and has been a portfolio manager since 1985. Sewall Hodges, Portfolio
Manager, joined Scudder in 1995. Mr. Hodges, who has 11 years of experience in
global analysis and portfolio management, focuses on the Portfolio's stock
selection and research.
INTERNATIONAL PORTFOLIO
Lead Portfolio Manager Carol L. Franklin sets International Portfolio's
investment strategy and has responsibility for the Portfolio's daily operation.
Ms. Franklin, who joined the team in 1989, has worked on equity investing at
Scudder as a portfolio manager since 1981. Nicholas Bratt, Portfolio Manager,
has been a member of the Portfolio team since 1987 and has 23 years of
experience in worldwide investing, including 21 years of experience as a
portfolio manager. Mr. Bratt, who has worked at Scudder since 1976, is the head
of Scudder's Global Equity Department. Joan Gregory, Portfolio Manager, focuses
on stock selection, a role she has played since joining Scudder in 1992.
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DISTRIBUTOR
------------------------------------------------------------------------------
The Fund has an underwriting agreement 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. Under the principal underwriting
agreement between the Fund and the Distributor, the Fund is responsible for the
payment of all fees and expenses in connection with the preparation and filing
of any registration statement and prospectus covering the issue and sale of
shares, and the registration and qualification of shares for sale with the
Securities and Exchange Commission and in the various states, including
registering the Fund as a broker or dealer. The Fund will also pay the fees and
expenses of preparing, printing and mailing prospectuses annually to existing
shareholders and any notice, proxy statement, report, prospectus or other
communication to shareholders of the Fund, printing and mailing confirmations of
purchases of shares, any issue taxes or any initial transfer taxes, a portion of
toll-free telephone service for shareholders, wiring funds for share purchases
and redemptions (unless paid by the shareholder who initiates the transaction),
printing and postage of business reply envelopes and a portion of the computer
terminals used by both the Fund and the Distributor.
The Distributor will pay for printing and distributing prospectuses or reports
prepared for its use in connection with the offering of the shares, and
preparing, printing and mailing any other literature or advertising in
connection with the offering of the shares to the Participating Insurance
Companies. The Distributor will pay all fees and expenses in connection with its
qualification and registration as a broker or dealer under Federal and state
laws, a portion of the toll-free telephone service and of computer terminals,
and of any activity which is primarily intended to result in the sale of shares
issued by the Fund, unless a Plan pursuant to Rule 12b-1 under the 1940 Act, as
amended, is in effect which provides that the Fund shall bear some or all of
such expenses.
As agent, the Distributor currently offers shares of each Portfolio of the Fund
continuously to the separate accounts of Participating Insurance Companies in
all states in which it is registered or where permitted by applicable law. The
underwriting agreement provides that the Distributor accepts orders for shares
at net asset value, as no sales commission or load is charged. The Distributor
has made no firm commitment to acquire shares of the Fund.
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PURCHASES AND REDEMPTIONS
------------------------------------------------------------------------------
Except for the Money Market Portfolio, which does not offer separate classes of
shares, the Fund offers two classes of shares on behalf of each Portfolio: Class
A shares are offered at net asset value and are not subject to fees imposed
pursuant 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 each Portfolio based on, among other things, the
amount of premium payments to be invested and surrender and transfer requests to
be effected on that day pursuant to VA contracts and VLI policies. Orders
received by the Fund or its agent are effected on days on which the New York
Stock Exchange (the "Exchange") is open for trading. For orders received before
the close of regular trading on the Exchange (normally 4 p.m., eastern time),
such purchases and redemptions of the shares of each Portfolio are effected at
the respective net asset values per share determined as of the close of regular
trading on the Exchange on that same day except that, in the case of the Money
Market Portfolio, purchases will not be effected until the next determination of
net asset value after federal funds have been made available to the Fund (see
"NET ASSET VALUE"). Payment for redemptions will be made by State Street Bank
and Trust Company or Brown Brothers Harriman & Co. on behalf of the Fund and the
relevant Portfolios within seven days thereafter. No fee is charged the
shareholders when they redeem Portfolio shares.
The Fund may suspend the right of redemption of shares of any Portfolio and may
postpone payment for any period: (i) during which the Exchange is closed, other
than customary weekend and holiday closings or during which trading on the
Exchange is restricted; (ii) when the Securities and Exchange Commission
determines that a state of emergency exists which may make payment or transfer
not reasonably practicable; (iii) as the Securities and Exchange Commission may
by order permit for the protection of the security holders of the Fund; or (iv)
25
<PAGE>
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
asset value per share is calculated for purchases and redemptions for each
Portfolio by dividing the current market value (amortized cost value in the case
of the Money Market Portfolio) of total Portfolio assets, plus other assets,
less all liabilities, by the total number of shares outstanding.
------------------------------------------------------------------------------
PERFORMANCE INFORMATION
------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
From time to time, quotations of the Money Market Portfolio's "yield" and
"effective yield" may be included in advertisements, sales literature or reports
to shareholders or prospective investors. Both yield figures are based on the
historical performance of the Portfolio and show the performance of a
hypothetical investment and are not intended to indicate future performance. The
yield of the Money Market Portfolio refers to the net investment income
generated by the Portfolio over a specified seven-day period (the ending date of
which will be stated). Included in "net investment income" is the amortization
of market premium or accretion of market and original issue discount. This
income is then "annualized." That is, the amount of income generated by the
Portfolio during that week is assumed to be generated during each week over a
52-week period and is shown as a percentage. The effective yield is expressed
similarly but, when annualized, the income earned by an investment in the
Portfolio is assumed to be reinvested. The effective yield will be slightly
higher than the yield because of the compounding effect of this assumed
reinvestment. Yield and effective yield for the Portfolio will vary based on,
among other things, changes in market conditions, the level of interest rates
and the level of the Portfolio's expenses.
BOND PORTFOLIO
From time to time, quotations of the Bond Portfolio's yield may be included in
advertisements, sales literature or reports to shareholders or prospective
investors. Yield figures are based on historical performance of the Bond
Portfolio and show the performance of a hypothetical investment and are not
intended to indicate future performance. The yield of the Bond Portfolio refers
to net investment income generated by the Bond Portfolio over a specified
thirty-day (or one month) period. This income is then "annualized." That is, the
amount of income generated by the Bond Portfolio during that thirty-day (or one
month) period is assumed to be generated over a 12-month period and is shown as
a percentage of net asset value.
ALL PORTFOLIOS
From time to time, quotations of a Portfolio's total return may be included in
advertisements, sales literature or reports to shareholders or prospective
investors. Total return figures are based on historical performance of the
Portfolio and show the performance of a hypothetical investment and are not
intended to indicate future performance. The total return of a Portfolio refers
to return assuming an investment has been held in the Portfolio for one year,
five years and ten years or for the life of the Portfolio (the ending date of
which will be stated). The total return quotations may be expressed in terms of
average annual or cumulative rates of return for all periods quoted. Average
annual total return refers to the average annual compound rate of return of an
investment in a Portfolio. Cumulative total return represents the cumulative
change in value of an investment in a Portfolio. Both will assume that all
dividends and capital gains distributions were reinvested.
Yield and total return for a Portfolio will vary based on, among other things,
changes in market conditions and the level of the Portfolio's expenses.
26
<PAGE>
------------------------------------------------------------------------------
VALUATION OF PORTFOLIO SECURITIES
------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
Pursuant to a Rule of the Securities and Exchange Commission, the Money Market
Portfolio will be valued at amortized cost. Under the amortized cost method of
valuation, securities are valued at cost plus constant accretion/amortization to
maturity of any discount/premium every day.
By using amortized cost valuation, the Fund seeks to maintain a constant net
asset value of $1.00 per share for the Money Market Portfolio, despite minor
shifts in the market value of its portfolio securities. The yield on a
shareholder's investment may be more or less than that which would be recognized
if the net asset value per share of the Money Market Portfolio were not constant
and were permitted to fluctuate with the market value of the portfolio
securities of the Money Market Portfolio. However, as a result of certain
procedures adopted by the Fund, the Adviser believes any difference will
normally be minimal.
OTHER PORTFOLIOS
An exchange-traded equity security (not subject to resale restrictions) is
valued at its most recent sale price as of the close of regular trading on the
Exchange on each day the Exchange is open for trading. Lacking any sales, the
security is valued at the calculated mean between the most recent bid quotation
and the most recent asked quotation. An unlisted equity security which is traded
on the NASDAQ system is valued at the most recent sale price or, if there are no
such sales, the security is valued at the high or "inside" bid quotation
supplied through such system. Debt securities, other than short-term securities,
are valued at prices supplied by the Fund's pricing agent. Short-term securities
with remaining maturities of sixty days or less are valued by the amortized cost
method, which the Trustees believe approximates market value. Foreign currency
forward contracts are valued at the value of the underlying currency at the
prevailing currency exchange rate. Securities for which current market
quotations are not readily available are valued at fair value as determined in
good faith by the Trustees, although the actual calculations may be made by
persons acting pursuant to the direction of the Trustees. Please refer to the
section entitled "NET ASSET VALUE" in the Fund's Statement of Additional
Information for more information concerning valuation of portfolio securities.
------------------------------------------------------------------------------
TAX STATUS, DIVIDENDS AND DISTRIBUTIONS
------------------------------------------------------------------------------
The Internal Revenue Code of 1986 (the "Code") provides that each portfolio of a
series fund is to be treated as a separate taxpayer. Accordingly, each Portfolio
of the Fund intends to qualify as a separate regulated investment company under
Subchapter M of the Code.
Each Portfolio of the Fund intends to comply with the diversification
requirements of Code Section 817(h). By meeting this and other requirements, the
Participating Insurance Companies, rather than the holders of VA contracts and
VLI policies, should be subject to tax on distributions received with respect to
Portfolio shares. For further information concerning federal income tax
consequences for the holders of the VA contracts and VLI policies, such holders
should consult the prospectus used in connection with the issuance of their
particular contracts or policies.
As a regulated investment company, each Portfolio generally will not be subject
to tax on its ordinary income and net realized capital gains to the extent such
income and gains are distributed in conformity with applicable distribution
requirements under the Code to the separate accounts of the Participating
Insurance Companies which hold its shares. Distributions of income and the
excess of net short-term capital gain over net long-term capital loss will be
treated as ordinary income and distributions of the excess of net long-term
capital gain over net short-term capital loss will be treated as long-term
capital gain by the Participating Insurance Companies. Participating Insurance
Companies should consult their own tax advisers as to whether such distributions
are subject to federal income tax if they are retained as part of policy
reserves.
The Money Market Portfolio will declare a dividend of its net investment income
daily and distribute such dividend monthly. Distributions will be made shortly
after the first business day of each month following declaration of the
dividend. The Bond, Balanced, Growth and Income and Capital Growth Portfolios
will declare and distribute dividends from their net investment income, if any,
27
<PAGE>
quarterly, in January, April, July and October. The Global Discovery and
International Portfolios each intend to distribute their net investment income
annually within three months of the Fund's fiscal year-end of December 31,
although an additional distribution may be made if necessary. For all
portfolios, distributions of capital gains, if any, will generally be made
within three months of December 31, although an additional distribution may be
made if necessary. Dividends declared in October, November or December with a
record date in such a month will be deemed to have been received by shareholders
on December 31 if paid during January of the following year. All distributions
will be reinvested in shares of such Portfolios unless an election is made on
behalf of a separate account to receive distributions in cash. Participating
Insurance Companies will be informed about the amount and character of
distributions from the relevant Portfolio for federal income tax purposes.
------------------------------------------------------------------------------
SHAREHOLDER COMMUNICATIONS
------------------------------------------------------------------------------
Owners of policies and contracts issued by Participating Insurance Companies for
which shares of one or more Portfolios are the investment vehicle will receive
from the Participating Insurance Companies unaudited semi-annual financial
statements and audited year-end financial statements certified by the Fund's
independent public accountants. Each report will show the investments owned by
the Fund and the market values thereof as determined by the Trustees and will
provide other information about the Fund and its operations.
Participating Insurance Companies with inquiries regarding the Fund may call the
Fund's underwriter, Scudder Investor Services, Inc. at 1-617-295-1000 or write
Scudder Investor Services, Inc., Two International Place, Boston, Massachusetts
02110-4103.
------------------------------------------------------------------------------
ADDITIONAL INFORMATION
------------------------------------------------------------------------------
FUND ORGANIZATION AND SHAREHOLDER INDEMNIFICATION
The Fund was organized in the Commonwealth of Massachusetts as a "Massachusetts
business trust" on March 15, 1985. The Fund's shares of beneficial interest are
presently divided into 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.
Each Portfolio (except Money Market 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, which are not sold subject to a Rule 12b-1 fee, are
offered pursuant to this prospectus. Class B shares, which are sold subject to a
Rule 12b-1 fee, are offered to certain Participating Insurance Companies
pursuant to a separate prospectus. Participating Insurance Companies with
inquiries regarding Class B shares may call or write to the Fund's underwriter,
Scudder Investor Services, Inc., at the number and address listed above.
Under Massachusetts law, shareholders of a Massachusetts business trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the trust. The Declaration of Trust contains an express
28
<PAGE>
disclaimer of shareholder liability in connection with the Fund property or the
acts, obligations or affairs of the Fund. The Declaration of Trust also provides
for indemnification out of the Fund property of any shareholder held personally
liable for the claims and liabilities to which a shareholder may become subject
by reason of being or having been a shareholder. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund itself would be unable to meet its obligations.
The Trustees believe that, in view of the above, the risk of personal liability
of shareholders is remote.
OTHER INFORMATION
The activities of the Fund are supervised by the Trustees.
Although the Fund does not intend to hold annual meetings, shareholders of the
Fund have certain rights, as set forth in the Declaration of Trust of the Fund,
including the right to call a meeting of shareholders for the purpose of voting
on the removal of one or more Trustees. Shareholders have one vote for each
share held. Fractional shares have fractional votes.
As of December 31, 1996, Aetna Life Insurance and Annuity Company owned 22.31%,
Banner Life Insurance Company owned 1.87%, Charter National Life Insurance
Company owned 26.09%, Companion Life Insurance Company of New York owned 0.01%,
Fortis Benefits Life Insurance Company owned 0.19%, Intramerica Life Insurance
Company owned 3.24%, Lincoln Benefit Life Insurance Company owned 0.57%, Mutual
of America Life Insurance Company owned 29.05%, Paragon Life Insurance Company
owned 0.14%, Providentmutual Life and Annuity Company of America owned 1.12%,
Safeco Life Insurance Companies owned 3.11%, Security First Life Insurance
Company owned 0.14%, Southwestern Life Insurance Company owned 0.43%, The Union
Central Life Insurance Company owned 8.23%, United Companies Life Insurance
Company owned 0.25%, United of Omaha owned 1.02%, USAA Life Insurance Company
owned 0.66% and Washington National Life Insurance Company owned 2.24% of the
Fund's outstanding shares.
Each Portfolio of the Fund has a December 31 fiscal year end.
Portfolio securities of the Money Market, Bond, Balanced, Growth and Income, and
Capital Growth Portfolios are held separately, pursuant to a custodian
agreement, by State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, as custodian. Portfolio securities of the Global Discovery
and International Portfolios 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 each 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.
29
<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
Dr. 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
Stephen L. Akers*
Vice President
Thomas S. Crain*
Vice President
Carol Franklin*
Vice President
William F. Gadsden*
Vice President
Jerard K. Hartman*
Vice President
Robert T. Hoffman*
Vice President
William M. Hutchinson*
Vice President
Richard A. Holt*
Vice President
Thomas W. Joseph*
Vice President
David S. Lee*
Vice President
Valerie F. Malter*
Vice President
Steven M. Meltzer*
Vice President
Gerald J. Moran*
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
*Scudder, Stevens & Clark, Inc.
30
<PAGE>
APPENDIX
The following is a description of the ratings given by S&P and Moody's to
corporate and municipal bonds.
S&P:
Debt rated AAA has the highest rating assigned by S&P. Capacity to pay interest
and repay principal is extremely strong. Debt rated AA has a very strong
capacity to pay interest and repay principal and differs from the highest rated
issues only in small degree. Debt rated A has a strong capacity to pay interest
and repay principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in higher
rated categories. Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits 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.
Debt rated BB, B, CCC, CC and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighted by large uncertainties or major exposures to adverse conditions.
Debt rated BB has less near-term vulnerability to default than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to inadequate
capacity to meet timely interest and principal payments. The BB rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating. Debt rated B has a greater vulnerability to default but
currently has 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.
Debt rated CCC has a currently identifiable vulnerability to default, and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating. The rating CC typically is applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating. The rating C
typically is applied to debt subordinated to senior debt which is assigned an
actual or implied CCC- debt rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued. The rating C1 is reserved for income bonds on which no interest
is being paid. Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period had not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Moody's:
Bonds which are rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues. Bonds which are rated Aa are
judged to be of high quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks appear
somewhat larger than in Aaa securities. Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
31
<PAGE>
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. Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered as well assured. Often
the protection of interest and principal payments may be very moderate and
thereby not well safeguarded during other good and bad times over the future.
Uncertainty of position characterizes bonds in this class. Bonds which are rated
B generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
32
<PAGE>
SCUDDER
SCUDDER VARIABLE LIFE INVESTMENT FUND
Two International Place
Boston, Massachusetts 02110-4103
(A Mutual Fund)
Scudder Variable Life Investment Fund (the "Fund") is an open-end management
investment company which offers shares of beneficial interest of seven
diversified Portfolios:
o Money Market Portfolio seeks stability and current income from a portfolio
of money market instruments. The Money Market Portfolio will maintain a
dollar-weighted average of 90 days or less in an effort to maintain a
constant net asset value of $1.00 per share.
o Bond Portfolio seeks high income from a high quality portfolio of bonds.
o Balanced Portfolio seeks a balance of growth and income, as well as
long-term preservation of capital, from a diversified portfolio of equity
and fixed-income securities.
o Growth and Income Portfolio seeks long-term growth of capital, current
income and growth of income from a portfolio consisting primarily of common
stocks and securities convertible into common stocks.
o Capital Growth Portfolio seeks to maximize long-term capital growth from a
portfolio consisting primarily of equity securities.
o Global Discovery Portfolio seeks above-average capital appreciation over the
long term by investing primarily in the equity securities of small companies
located throughout the world.
o International Portfolio seeks long-term growth of capital principally from a
diversified portfolio of foreign equity securities.
This prospectus sets forth concisely the information about the Fund that a
prospective investor should know before applying for certain variable annuity
contracts ("VA contracts") and variable life insurance policies ("VLI policies")
offered in the separate accounts of certain insurance companies ("Participating
Insurance Companies"). Please read it carefully and retain it for future
reference. The prospectus should be read in conjunction with the VA contract or
VLI policy prospectus which accompanies it. Shares of the Money Market
Portfolio, and Class B shares of all other Portfolios, are offered herein. If
you require more detailed information, a Statement of Additional Information
dated May 1, 1997, 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 VA contracts and VLI 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 and is available along with other related materials on the Securities
and Exchange Commission's Internet Web site (http://www.sec.gov).
AN INVESTMENT IN THE MONEY MARKET PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY
THE UNITED STATES GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE PORTFOLIO
WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
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, 1997
CLASS B SHARES OF BENEFICIAL INTEREST
<PAGE>
-------------------------------------------------------------------------------
TABLE OF CONTENTS
-------------------------------------------------------------------------------
Page
INVESTMENT CONCEPT OF THE FUND 1
FINANCIAL HIGHLIGHTS 2
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS 3
Money Market Portfolio 3
Bond Portfolio 3
Balanced Portfolio 4
Growth and Income Portfolio 5
Capital Growth Portfolio 6
Global Discovery Portfolio 7
International Portfolio 8
POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS 9
Repurchase Agreements 9
Debt Securities 9
Illiquid or Restricted Investments 9
Convertible Securities 9
Mortgage and Other Asset-Backed Securities 10
Foreign Securities 10
When-Issued Securities 11
Indexed Securities 11
Loans of Portfolio Securities 11
Zero Coupon Securities 11
Real Estate Investment Trusts 11
Derivatives 12
Options 12
Options on Securities Indexes 12
Futures Contracts 12
Forward Foreign Currency Exchange Contracts, Foreign Currency Futures
Contracts and Foreign Currency Options 13
Strategic Transactions and Derivatives Applicable to Global Discovery
Portfolio 13
Special Situation Securities 14
INVESTMENT RESTRICTIONS 14
INVESTMENT ADVISER 16
Portfolio Management 17
Money Market Portfolio 17
Bond Portfolio 17
Balanced Portfolio 17
Growth and Income Portfolio 18
Capital Growth Portfolio 18
Global Discovery Portfolio 18
International Portfolio 18
DISTRIBUTOR 18
PURCHASES AND REDEMPTIONS 19
NET ASSET VALUE 20
PERFORMANCE INFORMATION 20
Money Market Portfolio 20
Bond Portfolio 20
All Portfolios 21
VALUATION OF PORTFOLIO SECURITIES 21
Money Market Portfolio 21
Other Portfolios 21
TAX STATUS, DIVIDENDS AND DISTRIBUTIONS 21
SHAREHOLDER COMMUNICATIONS 22
ADDITIONAL INFORMATION 22
Fund Organization and Shareholder Indemnification 22
Other Information 23
TRUSTEES AND OFFICERS 24
APPENDIX 25
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT CONCEPT OF THE FUND
- --------------------------------------------------------------------------------
Scudder Variable Life Investment Fund (the "Fund") is an open-end, registered
management investment company comprised of the following diversified series: the
Money Market Portfolio, Bond Portfolio, Balanced Portfolio, Growth and Income
Portfolio, Capital Growth Portfolio, Global Discovery Portfolio, and
International Portfolio (individually or collectively hereinafter referred to as
a "Portfolio" or the "Portfolios"). Additional Portfolios may be created from
time to time. The Fund is intended to be the funding vehicle for VA contracts
and VLI policies to be offered by the separate accounts of certain Participating
Insurance Companies.
Class B shares are offered at net asset value and are subject to a Distribution
Plan. Except for the Money Market Portfolio, which does not offer separate
classes of shares, this prospectus pertains to Class B shares ("Shares") only.
Class A shares are offered by a separate prospectus. Participating Insurance
Companies with inquiries regarding Class A shares may call the Fund's
underwriter, Scudder Investor Services, Inc., at 1-617-295-2000 or write to
Scudder Investor Services, Inc., Two International Place, Boston, Massachusetts
02110-4103.
The Fund currently does not foresee any disadvantages to the holders of VA
contracts and VLI policies arising from the fact that the interests of the
holders of such contracts and policies may differ. Nevertheless, the Fund's
Trustees intend to monitor events in order to identify any material
irreconcilable conflicts which may possibly arise and to determine what action,
if any, should be taken in response thereto. The VA contracts and the VLI
policies are described in the separate prospectuses issued by the Participating
Insurance Companies. The Fund assumes no responsibility for such prospectuses.
Individual VA contract holders and VLI policyholders are not the "shareholders"
of the Fund. Rather, the Participating Insurance Companies and their separate
accounts are the shareholders or investors (the "Shareholders"), although such
companies may pass through voting rights to their VA contract and VLI
policyholders.
1
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
As of December 31, 1996, each of the Portfolios (except the Money Market
Portfolio which does not offer separate classes of shares) had not begun issuing
Class B shares.
Money Market Portfolio
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the audited financial
statements.
If you would like more detailed information concerning the Portfolio's
performance, a complete portfolio listing and audited financial statements are
available in the Fund's Annual Report dated December 31, 1996 and may be
obtained without charge by calling a Participating Insurance Company or by
writing to broker/dealers offering the previously mentioned variable annuity
contracts and variable life insurance policies, or Scudder Investor Services,
Inc.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ...... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income ................. .050 .055 .037 .025 .033 .057 .076 .088 .068 .060
Less distributions from
net investment income .... (.050) (.055) (.037) (.025) (.033) (.057) (.076) (.088) (.068) (.060)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period .............. $ 1.00 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return (%) ........... 5.09 5.65 3.72 2.54 3.33 5.81 7.83 8.84 7.08 5.95
Ratios and
Supplemental Data
Net assets, end of
period ($ millions) ...... 98 80 90 49 34 28 32 15 11 8
Ratio of operating
expenses, net to
average daily net
assets (%) ............... .46 .50 .56 .66 .64 .67 .69 .72 .75 .75
Ratio of operating expenses
before expense reductions,
to average daliy net
assets (%) ............... .46 .50 .56 .66 .64 .67 .69 .81 1.04 1.12
Ratio of net
investment income
to average daily
net assets (%) ........... 4.98 5.51 3.80 2.55 3.26 5.67 7.57 8.53 6.99 6.06
</TABLE>
2
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND
POLICIES OF THE PORTFOLIOS
- --------------------------------------------------------------------------------
Each Portfolio has a different investment objective which it pursues through
separate investment policies, as described below. The differences in objectives
and policies among the Portfolios can be expected to affect the degree of market
and financial risk to which each Portfolio is subject and the return of each
Portfolio. The investment objectives and policies of each Portfolio may, unless
otherwise specifically stated, be changed by the Trustees of the Fund without a
vote of the Shareholders. There is no assurance that the objectives of any
Portfolio will be achieved.
MONEY MARKET PORTFOLIO
The Money Market Portfolio seeks to maintain the stability of capital and,
consistent therewith, to maintain the liquidity of capital and to provide
current income. The Portfolio seeks to maintain a constant net asset value of
$1.00 per share, although there can be no assurance that this will be achieved.
The Portfolio uses the amortized cost method of securities valuation.
The Money Market Portfolio purchases money market securities such as U.S.
Treasury, agency and instrumentality obligations, finance company and corporate
commercial paper, bankers' acceptances and certificates of deposit of domestic
and foreign banks (i.e., banks which at the time of their most recent annual
financial statements show total assets in excess of $1 billion), including
foreign branches of domestic banks, which involve different risks than those
associated with investments in certificates of deposit of domestic banks, and
corporate obligations. The Money Market Portfolio may also enter into repurchase
agreements. The Money Market Portfolio may also invest in certificates of
deposit issued by banks and savings and loan institutions which had at the time
of their most recent annual financial statements total assets of less than $1
billion, provided that (i) the principal amounts of such certificates of deposit
are insured by an agency of the U.S. Government, (ii) at no time will the
Portfolio hold more than $100,000 principal amount of certificates of deposit of
any one such bank, and (iii) at the time of acquisition, no more than 10% of the
Portfolio's assets (taken at current value) are invested in certificates of
deposit of such banks having total assets not in excess of $1 billion.
Investments are limited to those that are dollar-denominated and at the time of
purchase are rated, or judged by the Fund's investment adviser, Scudder, Stevens
& Clark, Inc. (the "Adviser"), subject to the supervision of the Trustees, to be
equivalent to those rated high quality (i.e., rated in the two highest quality
rating categories) by any two nationally-recognized rating services such as
Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's ("S&P"). In
addition, the Adviser seeks through its own credit analysis to limit investments
to high quality instruments presenting minimal credit risks. The portfolio is
subject to certain additional quality and diversification restrictions which are
set forth in the Fund's Statement of Additional Information.
The remaining maturity of each investment in the Money Market Portfolio is 397
calendar days or less. The dollar-weighted average maturity of the Portfolio's
investments varies with money market conditions, but is always 90 days or less.
As a money market fund with a short-term maturity, the Portfolio's income
fluctuates with changes in interest rates, but its price to the public or
"offering price," is expected to remain fixed at $1.00 per share.
BOND PORTFOLIO
The Bond Portfolio pursues a policy of investing for a high level of income
consistent with a high quality portfolio of debt securities. Under normal
circumstances, the Portfolio invests at least 65% of its assets in bonds,
including those of the U.S. Government and its agencies, and those of
corporations and other notes and bonds paying high current income. It will
attempt to moderate the effect of market price fluctuation relative to that of a
long-term bond by investing in securities with varying maturities and by
entering into futures contracts on debt securities and related options for
hedging purposes.
The Portfolio is actively managed. The Portfolio may invest in a broad range of
short-, intermediate-, and long-term securities. Proportions among maturities
and types of securities may vary depending upon the prospects for income
relative to the outlook for the economy and the securities markets, the quality
of available investments, the level of interest rates, and other factors. The
Portfolio may also invest in preferred stocks consistent with the Portfolio's
objectives.
The Bond Portfolio may purchase corporate notes and bonds including issues
convertible into common stock and obligations of municipalities. It may purchase
U.S. Government securities and obligations of federal agencies that are not
3
<PAGE>
backed by the full faith and credit of the U.S. Government, such as obligations
of Federal Home Loan Banks, Farm Credit Banks and the Federal Home Loan Mortgage
Corporation. In addition, it may purchase obligations of international agencies
such as the International Bank for Reconstruction and Development, and the
Inter-American Development Bank. Other eligible investments include foreign
securities, such as non-U.S. dollar-denominated foreign debt securities and U.S.
dollar-denominated foreign debt securities (such as those issued by the Dominion
of Canada and its provinces) including, without limitation, Eurodollar Bonds and
Yankee Bonds, mortgage and other asset-backed securities, and money market
instruments such as commercial paper, and bankers' acceptances and certificates
of deposit issued by domestic and foreign branches of U.S. banks. The Portfolio
may also enter into repurchase agreements and may invest in trust preferred
securities and zero coupon securities.
The Bond Portfolio invests primarily in high quality securities. Under normal
market conditions, the Portfolio will invest at least 65% of its assets in
securities rated within the three highest quality rating categories of Moody's
(Aaa, Aa and A) or S&P (AAA, AA and A), or if unrated, in bonds judged by the
Fund's Adviser, to be of comparable quality at the time of purchase. The
Portfolio may invest up to 20% of its assets in debt securities rated lower than
Baa or BBB or, if unrated, of equivalent quality as determined by the Adviser,
but will not purchase bonds rated below B3 by Moody's or B- by S&P or their
equivalent.
The Portfolio may, for hedging purposes, enter into forward foreign currency
exchange contracts and foreign currencies in the form of bank deposits. The
Portfolio may also purchase other foreign money market instruments, including,
but not limited to, bankers' acceptances, certificates of deposit, commercial
paper, short-term government obligations and repurchase agreements.
Except for limitations imposed by the Bond Portfolio's investment restrictions
(see "INVESTMENT RESTRICTIONS"), there is no limit as to the proportions of the
Portfolio which may be invested in any of the eligible investments; however, it
is a policy of the Portfolio that its non-governmental investments will be
spread among a variety of companies and will not be concentrated in any
industry.
The Bond Portfolio cannot guarantee a gain or eliminate the risk of loss. The
net asset value of the Portfolio's shares will fluctuate with changes in the
market price of the Portfolio's investments, which tend to vary inversely with
changes in prevailing interest rates and, to a lesser extent, changes in foreign
currency exchange rates.
BALANCED PORTFOLIO
The Balanced Portfolio seeks a balance of growth and income from a diversified
portfolio of equity and fixed income securities. The Portfolio also seeks
long-term preservation of capital through a quality-oriented investment approach
that is designed to reduce risk.
In seeking its objectives of a balance of growth and income, as well as
long-term preservation of capital, the Portfolio invests in a diversified
portfolio of equity and fixed income securities. The Portfolio invests, under
normal circumstances, at least 50%, but no more than 75%, of its net assets in
common stocks and other equity investments. The Portfolio's equity investments
consist of common stocks, preferred stocks, warrants and securities convertible
into common stocks, of companies that, in the Adviser's judgment, are of
above-average financial quality and offer the prospect for above-average growth
in earnings, cash flow, or assets relative to the overall market as defined by
the Standard and Poor's 500 Composite Stock Price Index ("S&P 500"). The
Portfolio will invest primarily in securities issued by medium- to large-sized
domestic companies with annual revenues or market capitalization of at least
$600 million, and which, in the opinion of the Adviser, offer above-average
potential for price appreciation. The Portfolio seeks to invest in companies
that have relatively consistent and above-average rates of growth; companies
that are in a strong financial position with high credit standings and
profitability; firms with important business franchises, leading products, or
dominant marketing and distribution systems; companies guided by experienced and
motivated managements; and companies selling at attractive market valuations.
The Adviser believes that companies with these characteristics will be rewarded
by the market with higher stock prices over time and provide investment returns,
on average, in excess of the S&P 500.
At least 65% of the value of the Portfolio's common stocks will be of issuers
which qualify, at the time of purchase, for one of the three highest equity
earnings and dividends ranking categories (A+, A, or A-) of S&P, or if not
ranked by S&P, are judged to be of comparable quality by the Adviser. S&P
assigns earnings and dividends rankings to corporations based on a number of
factors, including stability and growth of earnings and dividends. Rankings by
S&P are not an appraisal of a company's creditworthiness, as is true for S&P's
debt security ratings, nor are these rankings intended as a forecast of future
stock market performance. In addition to using S&P rankings of earnings and
4
<PAGE>
dividends of common stocks, the Adviser conducts its own analysis of a company's
history, current financial position, and earnings prospects.
To enhance income and stability, the Portfolio's remaining assets are allocated
to bonds and other fixed income securities, including cash reserves. The
Portfolio will normally invest 25% to 50% of its net assets in fixed income
securities. However, at least 25% of the Portfolio's net assets will always be
invested in fixed income securities. The Portfolio can invest in a broad range
of corporate bonds and notes, convertible bonds, and preferred and convertible
preferred securities. It may also purchase U.S. Government securities and
obligations of federal agencies and instrumentalities that are not backed by the
full faith and credit of the U.S. Government, such as obligations of the Federal
Home Loan Banks, Farm Credit Banks, and the Federal Home Loan Mortgage
Corporation. The Portfolio may also invest in obligations of international
agencies, foreign debt securities (both U.S. and non-U.S. dollar-denominated),
mortgage-backed and other asset-backed securities, municipal obligations, trust
preferred securities, restricted securities issued in private placements and
zero coupon securities.
For liquidity and defensive purposes, the Portfolio may invest without limit in
cash and in money market securities such as commercial paper, bankers'
acceptances, and certificates of deposit issued by domestic and foreign branches
of U.S. banks. The Portfolio may also enter into repurchase agreements with
respect to U.S. Government securities.
Not less than 50% of the Portfolio's debt securities will be invested in debt
obligations, including money market instruments, that (a) are issued or
guaranteed by the U.S. Government, (b) are rated at the time of purchase within
the two highest ratings categories by any nationally-recognized rating service
or (c) if not rated, are judged by the Adviser to be of a quality comparable to
obligations rated as described in (b) above. Not less than 80% of the debt
obligations in which the Portfolio invests will, at the time of purchase, be
rated within the three highest ratings categories of any such service or, if not
rated, will be judged to be of comparable quality by the Adviser. Up to 20% of
the Portfolio's debt securities may be invested in bonds rated below A but no
lower than B by Moody's or S&P, or unrated securities judged by the Adviser to
be of comparable quality.
The Portfolio will, on occasion, adjust its mix of investments among equity
securities, bonds, and cash reserves. In reallocating investments, the Adviser
weighs the relative values of different asset classes and expectations for
future returns. In doing so, the Adviser analyzes, on a global basis, the level
and direction of interest rates, capital flows, inflation expectations,
anticipated growth of corporate profits, monetary and fiscal policies around the
world, and other related factors. The Portfolio does not take extreme investment
positions as part of an effort to "time the market." Shifts between stocks and
fixed income investments are expected to occur in generally small increments
within the guidelines adopted in this prospectus. The Portfolio is designed as a
conservative long-term investment program.
While the Portfolio emphasizes U.S. equity and debt securities, it may invest a
portion of its assets in foreign securities, including depositary receipts. The
Portfolio's foreign holdings will meet the criteria applicable to its domestic
investments. The international component of the Portfolio's investment program
is intended to increase diversification, thus reducing risk, while providing the
opportunity for higher returns.
In addition, the Portfolio may invest in securities on a when-issued or forward
delivery basis. The Portfolio may, for hedging purposes, purchase forward
foreign currency exchange contracts and foreign currencies in the form of bank
deposits. The Portfolio may also purchase other foreign money market
instruments, including, but not limited to, bankers' acceptances, certificates
of deposit, commercial paper, short-term government obligations and repurchase
agreements.
The Balanced Portfolio cannot guarantee a gain or eliminate the risk of loss.
The net asset value of the shares of the Portfolio will increase or decrease
with changes in the market price of the Portfolio's investments and, to a lesser
extent, changes in foreign currency exchange rates.
GROWTH AND INCOME PORTFOLIO
The Growth and Income Portfolio seeks long-term growth of capital, current
income and growth of income. In pursuing these three objectives, the Portfolio
invests primarily in common stocks, preferred stocks, and securities convertible
into common stocks of companies which offer the prospect for growth of earnings
while paying higher than average current dividends. Over time, continued growth
of earnings tends to lead to higher dividends and enhancement of capital value.
The Portfolio allocates its investments among different industries and
companies, and changes its portfolio securities for investment considerations
and not for trading purposes.
The Portfolio attempts to achieve its investment objectives by investing
primarily in dividend paying common stocks, preferred stocks and securities
convertible into common stocks. The Portfolio may also purchase such securities
5
<PAGE>
which do not pay current dividends but which offer prospects for growth of
capital and future income. Convertible securities (which may be current coupon
or zero coupon securities) are bonds, notes, debentures, preferred stocks and
other securities which may be converted or exchanged at a stated or determinable
exchange ratio into underlying shares of common stock. The Portfolio may also
invest in nonconvertible preferred stocks consistent with the Portfolio's
objectives. From time to time, when the Adviser feels such a position is
advisable in light of economic or market conditions, the Portfolio may invest
without limitation in cash and cash equivalents. The Portfolio may invest in
foreign securities and in repurchase agreements.
The Portfolio may, for hedging purposes, purchase forward foreign currency
exchange contracts and foreign currencies in the form of bank deposits. The
Portfolio may also purchase other foreign money market instruments, including,
but not limited to, bankers' acceptances, certificates of deposit, commercial
paper, short-term government obligations and repurchase agreements.
The Growth and Income Portfolio cannot guarantee a gain or eliminate the risk of
loss. The net asset value of the Portfolio's shares will increase or decrease
with changes in the market prices of the Portfolio's investments and, to a
lesser extent, changes in foreign currency exchange rates.
CAPITAL GROWTH PORTFOLIO
The Capital Growth Portfolio seeks to maximize long-term capital growth through
a broad and flexible investment program. The Portfolio invests in marketable
securities, principally common stocks and, consistent with its objective of
long-term capital growth, preferred stocks. However, in order to reduce risk, as
market or economic conditions periodically warrant, the Portfolio may also
invest up to 25% of its assets in short-term debt instruments.
In its examination of potential investments, the Adviser considers, among other
things, the issuer's financial strength, management reputation, absolute size
and overall industry position.
Equity investments can have diverse financial characteristics, and the Trustees
believe that the opportunity for capital growth may be found in many different
sectors of the market at any particular time. In contrast to the specialized
investment policies of some capital appreciation funds, the Portfolio is
therefore free to invest in a wide range of marketable securities offering the
potential for growth. This enables the Portfolio to pursue investment values in
various sectors of the stock market including:
1. Companies that generate or apply new technologies, new and improved
distribution techniques, or new services, such as those in the
business equipment, electronics, specialty merchandising, and health
service industries.
2. Companies that own or develop natural resources, such as energy
exploration or precious metals companies.
3. Companies that may benefit from changing consumer demands and
lifestyles, such as financial service organizations and
telecommunications companies.
4. Foreign companies.
While emphasizing investments in companies with above-average growth prospects,
the Portfolio may also purchase and hold equity securities of companies that may
have only average growth prospects, but seem undervalued due to factors thought
to be of a temporary nature which may cause their securities to be out of favor
and to trade at a price below their potential value.
The Portfolio, as a matter of nonfundamental policy, may invest up to 20% of its
net assets in intermediate to longer term debt securities when management
anticipates that the total return on debt securities is likely to equal or
exceed the total return on common stocks over a selected period of time. The
Portfolio may purchase investment-grade debt securities, which are those rated
Aaa, Aa, A or Baa by Moody's, or AAA, AA, A or BBB by S&P, or, if unrated, of
equivalent quality as determined by the Adviser. The Portfolio's intermediate to
longer term debt securities may also include those which are rated below
investment grade, as long as no more than 5% of its net assets are invested in
such securities.
The Portfolio may, for hedging purposes, purchase forward foreign currency
exchange contracts and foreign currencies in the form of bank deposits. The
Portfolio may also purchase other foreign money market instruments, including,
but not limited to, bankers' acceptances, certificates of deposit, commercial
paper, short-term government obligations and repurchase agreements.
The Capital Growth Portfolio cannot guarantee a gain or eliminate the risk of
loss. The net asset value of the shares of the Portfolio will increase or
decrease with changes in the market price of the Portfolio's investments and, to
a lesser extent, changes in foreign currency exchange rates.
6
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
The Global Discovery 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. The Portfolio will limit investments in securities of issuers
located in Eastern Europe to 5% of its total assets.
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 companies. 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. 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.
7
<PAGE>
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.
SPECIAL RISK CONSIDERATIONS FOR GLOBAL DISCOVERY PORTFOLIO
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
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.
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.
INTERNATIONAL PORTFOLIO
The International Portfolio seeks long-term growth of capital primarily through
diversified holdings of marketable foreign equity investments. The Portfolio
invests in companies, wherever organized, which do business primarily outside
the United States. The Portfolio intends to diversify investments among several
countries and to have represented in its holdings business activities in not
less than three different countries, excluding the United States.
The Portfolio invests primarily in equity securities of established companies,
listed on foreign exchanges, which the Adviser believes have favorable
characteristics. It may also invest in fixed income securities of foreign
governments and companies. However, management intends to maintain a portfolio
consisting primarily of equity securities. Investing in foreign securities may
involve a greater degree of risk than investing in domestic securities due to
the possibility of exchange rate fluctuations and exchange controls, less
publicly available information, more volatile markets, less securities
regulation, less favorable tax provisions, war and expropriation (see "POLICIES
AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS--Foreign Securities").
The Portfolio has no present intention of altering its general policy of being
primarily invested under normal conditions in foreign securities. However, in
the event of exceptional conditions abroad, the Portfolio may temporarily invest
all or a portion of its assets in Canadian or U.S. Government obligations or
currencies, or securities of companies incorporated in and having their
principal activities in Canada or the United States.
The Portfolio may, for hedging purposes, purchase forward foreign currency
exchange contracts, foreign currency options and futures contracts and foreign
currencies in the form of bank deposits. The Portfolio may also purchase other
8
<PAGE>
foreign money market instruments, including, but not limited to, bankers'
acceptances, certificates of deposit, commercial paper, short-term government
and corporate obligations and repurchase agreements.
The International 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.
- --------------------------------------------------------------------------------
POLICIES AND TECHNIQUES
APPLICABLE TO THE PORTFOLIOS
- --------------------------------------------------------------------------------
Except as otherwise noted below, the following description of additional
investment policies and techniques is applicable to all of the Portfolios.
REPURCHASE AGREEMENTS
As a means of earning income for periods as short as overnight, the Fund, on
behalf of a Portfolio, may enter into repurchase agreements with U.S. and
foreign banks, and any broker-dealer which is recognized as a reporting
government securities dealer, if the creditworthiness of the bank or
broker-dealer has been determined by the Adviser to be of a sufficiently high
quality. Under a repurchase agreement, a Portfolio acquires securities, subject
to the seller's agreement to repurchase those securities at a specified time and
price. Securities subject to a repurchase agreement are held in a segregated
account and the seller agrees to maintain the market value of such securities at
least equal to 100.5% of the repurchase price on a daily basis. If the seller
under a repurchase agreement becomes insolvent, the Fund's right to dispose of
the securities may be restricted. In the event of the commencement of bankruptcy
or insolvency proceedings of the seller of the securities before repurchase of
the securities under a repurchase agreement, the Fund may encounter delay and
incur costs, including a decline in value of the securities, before being able
to sell the securities.
DEBT SECURITIES
The Bond, Balanced, Capital Growth and Global Discovery Portfolios may each
invest in debt securities rated below investment-grade (those rated below Baa or
BBB). These securities are commonly referred to as "junk bonds" and can entail
greater price volatility and involve a higher degree of speculation with respect
to the payment of principal and interest than higher quality fixed-income
securities. The market prices of such lower rated debt securities may decline
significantly in periods of general economic difficulty. The trading market for
these securities is generally less liquid than for higher rated securities, and
a Portfolio may have difficulty disposing of these securities at the time it
wishes to do so. The lack of a liquid secondary market for certain securities
may also make it more difficult for a Portfolio to obtain accurate market
quotations for purposes of valuing its portfolio and calculating its net asset
value. The lower the ratings of such debt securities, the greater their risks
render them like equity securities. In addition, as interest rates fall, the
prices of debt securities tend to rise and vice versa. Should the rating of any
security held by a Portfolio be downgraded after the time of purchase, the
Adviser will determine whether it is in the best interest of the Portfolio to
retain or dispose of the security.
ILLIQUID OR RESTRICTED INVESTMENTS
The Portfolios may each invest in illiquid or restricted securities. The absence
of a trading market can make it difficult to ascertain a market value for
illiquid or restricted investments. Disposing of illiquid or restricted
investments may involve time-consuming negotiation and legal expenses, and it
may be difficult or impossible for a Portfolio to sell them promptly at an
acceptable price.
CONVERTIBLE SECURITIES
The Bond, Balanced, Growth and Income, Capital Growth, Global Discovery and
International Portfolios may each invest in convertible securities (bonds,
notes, debentures, preferred stocks and other securities convertible into common
stocks) which may offer higher income than the common stocks into which they are
convertible. The convertible securities in which each Portfolio may invest
include fixed income or zero coupon debt securities, which may be converted or
exchanged at a stated or determinable exchange ratio into underlying shares of
common stock. Prior to their conversion, convertible securities may have
characteristics similar to non-convertible securities.
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While convertible securities generally offer lower yields than non-convertible
debt securities of similar quality, their prices may reflect changes in the
value of the underlying common stock. Although to a lesser extent than with debt
securities generally, the market value of convertible securities tends to
decline as interest rates increase and, conversely, tends to increase as
interest rates decline. Convertible securities entail less credit risk than the
issuer's common stock. The ratings of the convertible securities in which the
Portfolios invest will be comparable to the ratings of the Portfolios' fixed
income securities.
MORTGAGE AND OTHER ASSET-BACKED SECURITIES
The Bond Portfolio and the Balanced Portfolio may each invest in mortgage-backed
securities, which are securities representing interests in pools of mortgage
loans. These securities provide shareholders with payments consisting of both
interest and principal as the mortgages in the underlying mortgage pools are
paid off.
The timely payment of principal and interest on mortgage-backed securities
issued or guaranteed by the Government National Mortgage Association ("GNMA") is
backed by GNMA and the full faith and credit of the U.S. Government. These
guarantees, however, do not apply to the market value or yield of
mortgage-backed securities or to the value of Portfolio shares. Also, GNMA and
other mortgage-backed securities may be purchased at a premium over the maturity
value of the underlying mortgages. This premium is not guaranteed and will be
lost if prepayment occurs. In addition, either Portfolio may invest in
mortgage-backed securities issued by other issuers, such as the Federal National
Mortgage Association, ("FNMA"), which are not guaranteed by the U.S. Government.
Moreover, the Portfolios may invest in debt securities which are secured with
collateral consisting of mortgage-backed securities, such as collateralized
mortgage obligations ("CMOs"), and in other types of mortgage-related
securities.
Unscheduled or early payments on the underlying mortgages may shorten the
securities' effective maturities and lessen their growth potential. Either
Portfolio may agree to purchase or sell these securities with payment and
delivery taking place at a future date. A decline in interest rates may lead to
a faster rate of repayment of the underlying mortgages, and expose the Portfolio
to a lower rate of return upon reinvestment. To the extent that such
mortgage-backed securities are held by the Portfolio, the prepayment right of
mortgagors may limit the increase in net asset value of the Portfolio because
the value of the mortgage-backed securities held by the Portfolio may not
appreciate as rapidly as the price of non-callable debt securities.
The Portfolios may also invest in securities representing interests in pools of
certain other consumer loans, such as automobile loans or credit card
receivables. In some cases, principal and interest payments are partially
guaranteed by a letter of credit from a financial institution. Asset-backed
securities are subject to the risk of prepayment and the risk that the
underlying loans will not be repaid.
FOREIGN SECURITIES
The Bond, Balanced, Growth and Income, Capital Growth, Global Discovery and
International Portfolios may each invest without limit, except as may be
applicable to debt securities generally, in U.S. dollar-denominated foreign debt
securities (including those issued by the Dominion of Canada and its provinces
and other debt securities which meet the criteria applicable to a Portfolio's
domestic investments), and in certificates of deposit issued by foreign banks
and foreign branches of United States banks, to any extent deemed appropriate by
the Adviser. The Bond Portfolio may invest up to 20% of its assets in non-U.S.
dollar-denominated foreign debt securities. The Balanced Portfolio may invest up
to 20% of its debt securities in non-U.S. dollar-denominated foreign debt
securities, and may invest up to 25% of its equity securities in non-U.S.
dollar-denominated foreign equity securities. The Growth and Income Portfolio
may invest up to 25% of its assets in non-U.S. dollar-denominated securities of
foreign issuers. The Capital Growth Portfolio may invest up to 25% of its
assets, and the Global Discovery and International Portfolios may each invest
without limit, in non-U.S. dollar-denominated equity securities of foreign
issuers. Global investing involves economic and political considerations not
typically found in U.S. markets. These considerations, which may favorably or
unfavorably affect the Fund'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 Fund),
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 upheaval and the dependence on foreign economic
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assistance may be greater in these countries than in developed countries. The
Adviser seeks to mitigate the risks associated with these considerations through
diversification and active professional management.
WHEN-ISSUED SECURITIES
A Portfolio may from time to time purchase securities on a "when-issued" or
"forward delivery" basis. Debt securities are often issued on this basis. The
price of such securities, which may be expressed in yield terms, is fixed at the
time a commitment to purchase is made, but delivery and payment for such
securities take place at a later date. During the period between purchase and
settlement, no payment is made by a Portfolio and no interest accrues to the
Portfolio. To the extent that assets of a Portfolio are held in cash pending the
settlement of a purchase of securities, that Portfolio would earn no income;
however, it is the Fund's intention that each Portfolio will be fully invested
to the extent practicable and subject to the policies stated above. While
when-issued or forward delivery securities may be sold prior to the settlement
date, the Portfolio intends to purchase such securities with the purpose of
actually acquiring them unless a sale appears desirable for investment reasons.
At the time a Portfolio makes the commitment to purchase a security on a
when-issued or forward delivery basis, it will record the transaction and
reflect the amount due and the value of the security in determining the net
asset value of a Portfolio. The market value of the when-issued or forward
delivery securities may be more or less than the purchase price payable at the
settlement date. The Fund does not believe that a Portfolio's net asset value or
income will be adversely affected by the purchase of securities on a when-issued
or forward delivery basis. Each Portfolio will establish a segregated account
with its custodian in which it will maintain cash, U.S. Government securities
and other liquid assets at least equal in value to commitments for when-issued
or forward delivery securities. Such segregated securities either will mature
or, if necessary, be sold on or before the settlement date.
INDEXED SECURITIES
The Bond Portfolio and the Balanced Portfolio may each invest in indexed
securities, the value of which is linked to currencies, interest rates,
commodities, indices or other financial indicators ("reference instruments").
The interest rate or (unlike most fixed-income securities) the principal amount
payable at maturity of an indexed security may be increased or decreased,
depending on changes in the value of the reference instrument. Indexed
securities may be positively or negatively indexed, so that appreciation of the
reference instrument may produce an increase or a decrease in the interest rate
or value at maturity of the security. In addition, the change in the interest
rate or value at maturity of the security may be some multiple of the change in
the value of the reference instrument. Thus, in addition to the credit risk of
the security's issuer, the Fund will bear the market risk of the reference
instrument.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend the portfolio securities of any Portfolio (other than the
Money Market Portfolio) provided: (1) the loan is secured continuously by
collateral consisting of U.S. Government securities, or cash or cash equivalents
adjusted daily to have a market value at least equal to the current market value
of the securities loaned; (2) the Fund may at any time call the loan and regain
the securities loaned; (3) the Portfolio will receive any interest or dividends
paid on the loaned securities; and (4) the value of such securities loaned will
not at any time exceed 10% of the value of the Portfolio's total assets. In
addition, it is anticipated that the Portfolio may share with the borrower some
of the income received on the collateral for the loan or that it will be paid a
premium for the loan. Before a Portfolio enters into a loan, the Adviser
considers all relevant facts and circumstances including the creditworthiness of
the borrower.
ZERO COUPON SECURITIES
The Bond, Balanced, Growth and Income, Capital Growth, Global Discovery and
International Portfolios may each invest in zero coupon securities, including
U.S. Government securities and privately stripped coupons on and receipts for
U.S. Government securities. These securities pay no cash income but are issued
at substantial discounts from their value at maturity. When held to maturity,
their entire return, which consists of the accretion of discount, comes from the
difference between their issue price and their maturity value. Because they do
not pay interest until maturity, zero coupon securities tend to be subject to
greater interim fluctuation of market value in response to changes in interest
rates than interest-paying securities of similar maturities.
REAL ESTATE INVESTMENT TRUSTS
The Bond Portfolio and the Growth and Income Portfolio each may purchase
instruments such as real estate investment trusts, commercial and residential
mortgage-backed securities, and real estate financings. Real estate-related
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instruments are sensitive to factors such as changes in real estate values and
property taxes, interest rates, cash flow of underlying real estate assets,
supply and demand, and the management skill and creditworthiness of the issuer.
Real estate-related instruments may also be affected by tax and regulatory
requirements.
DERIVATIVES
The following descriptions of Options, Options on Securities Indexes, Futures
Contracts, and Forward Foreign Currency Exchange Contracts, Foreign Currency
Futures Contracts and Foreign Currency Options discuss types of derivatives in
which certain of the Portfolios may invest.
OPTIONS
The Fund may write covered call options on securities of any Portfolio (other
than the Money Market Portfolio) in an attempt to earn income. The Balanced,
Growth and Income, Capital Growth and International Portfolios may each also
write put options to a limited extent in an attempt to earn additional income on
their portfolios, consistent with their investment objectives, and they may
purchase call and put options for hedging purposes. Risks associated with
writing put options include the possible inability to effect closing
transactions at favorable prices. In addition, the Fund may engage in
over-the-counter options transactions with broker-dealers who make markets in
these options. Over-the-counter options purchased by the Fund and portfolio
securities "covering" the Fund's obligation pursuant to an over-the-counter
option may be deemed to be illiquid and may not be readily marketable. The
Adviser will monitor the creditworthiness of dealers with whom the Fund enters
into such options transactions under the general supervision of the Fund's
Trustees. The Fund may forego the benefit of appreciation in its Portfolios on
securities sold pursuant to call options.
OPTIONS ON SECURITIES INDEXES
The Bond, Balanced, Growth and Income, Capital Growth and International
Portfolios may each purchase put and call options on securities indexes to hedge
against the risk of unfavorable price movements adversely affecting the value of
a Portfolio's securities. Options on securities indexes are similar to options
on securities except that settlement is made in cash.
Unlike a securities option, which gives the holder the right to purchase or sell
a specified security at a specified price, an option on a securities index gives
the holder the right to receive a cash "exercise settlement amount" equal to (i)
the difference between the exercise price of the option and the value of the
underlying stock index on the exercise date, multiplied by (ii) a fixed "index
multiplier." In exchange for undertaking the obligation to make such cash
payment, the writer of the securities index option receives a premium.
Gains or losses on a Portfolio's transactions in securities index options depend
on price movements in the stock market generally (or, for narrow market indexes,
in a particular industry or segment of the market) rather than the price
movements of individual securities held by a Portfolio of the Fund. In this
respect, purchasing a stock index put option is analogous to the purchase of a
put on a securities index futures contract.
A Portfolio may sell securities index options prior to expiration in order to
close out its positions in securities index options which it has purchased. A
Portfolio may also allow options to expire unexercised.
FUTURES CONTRACTS
To protect against the effects of adverse changes in interest rates (sometimes
known as "hedging"), the Bond, Balanced and International Portfolios may each,
to a limited extent, enter into futures contracts on debt securities. Such
futures contracts obligate the Fund, at maturity, to purchase or sell certain
debt securities. The Bond, Balanced, Growth and Income, Capital Growth and
International Portfolios may each enter into securities index futures contracts
to protect against changes in securities market prices. Each of these five
Portfolios may purchase and write put and call options on futures contracts of
the type which such Portfolio is authorized to enter into and may engage in
related closing transactions. This type of option must be traded on a U.S. or
foreign exchange or board of trade.
When interest rates are rising or stock or security prices are falling, futures
contracts can offset a decline in the value of a Portfolio's current portfolio
securities. When rates are falling or stock or security prices are rising, these
contracts can secure better rates or prices for a Portfolio than might later be
available in the market when it makes anticipated purchases.
The Fund will engage in transactions in futures contracts and options thereon
only in an effort to protect a Portfolio against a decline in the value of the
Portfolio's securities or an increase in the price of securities that the
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Portfolio intends to acquire. Also, the initial margin deposits for futures
contracts and premiums paid for related options may not be more than 5% of a
Portfolio's total assets. These transactions involve brokerage costs and require
the Fund to segregate assets, such as cash, U.S. Government securities and other
liquid assets, of a Portfolio to cover contracts which would require it to
purchase securities. A Portfolio may lose the expected benefit of the
transactions if interest rates or stock prices move in an unanticipated manner.
Such unanticipated changes in interest rates or stock prices may also result in
poorer overall performance in a Portfolio than if the Fund had not entered into
any futures transactions for that Portfolio. A Portfolio would be required to
make and maintain "margin" deposits in connection with transactions in futures
contracts.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS, FOREIGN CURRENCY
FUTURES CONTRACTS AND FOREIGN CURRENCY OPTIONS
The Bond, Balanced, Growth and Income, Capital Growth and International
Portfolios may each enter into forward foreign currency exchange contracts
("forward contracts") to the extent of 15% of the value of their respective
total assets, for hedging purposes. A forward contract is a contract
individually negotiated and privately traded by currency traders and their
customers. A forward contract involves an obligation to purchase or sell a
specific currency for an agreed price at a future date, which may be any fixed
number of days from the date of the contract. The agreed price may be fixed or
with a specified range of prices.
The International Portfolio may also enter into foreign currency futures
contracts and foreign currency options to the extent of 15% of the value of its
total assets, for hedging purposes. Foreign currency futures contracts are
standardized contracts traded on commodities exchanges which involve an
obligation to purchase or sell a predetermined amount of currency at a
predetermined date at a specified price. The purpose of entering into these
contracts is to minimize the risk to the Portfolio from adverse changes in the
relationship between the U.S. dollar and foreign currencies. At the same time,
such contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies. The Portfolio may
purchase and sell options on foreign currencies for hedging purposes in a manner
similar to that of transactions in forward contracts. Unanticipated changes in
currency prices may result in poorer overall performance for the Portfolio than
if it had not engaged in forward contracts, foreign currency futures contracts
and foreign currency options.
STRATEGIC TRANSACTIONS AND DERIVATIVES APPLICABLE TO GLOBAL
DISCOVERY PORTFOLIO
The Global Discovery 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
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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
Portfolio may use and some of their risks are described more fully in the Fund's
Statement of Additional Information.
SPECIAL SITUATION SECURITIES
From time to time, the Global Discovery 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.
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INVESTMENT RESTRICTIONS
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Unless specified to the contrary, the following restrictions may not be changed
with respect to any Portfolio without the approval of the majority of
outstanding voting securities of that Portfolio (which, under the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules thereunder and
as used in this prospectus, means the lesser of (1) 67% of the shares of that
Portfolio present at a meeting if the holders of more than 50% of the
outstanding shares of that Portfolio are present in person or by proxy, or (2)
more than 50% of the outstanding shares of that Portfolio). Any investment
restrictions which involve a maximum percentage of securities or assets shall
not be considered to be violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition or encumbrance of securities
or assets of, or borrowings by or on behalf of, a Portfolio.
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The Fund may not, on behalf of any Portfolio, except the Global Discovery
Portfolio:
(1)with respect to 75% of the value of the total assets of a Portfolio,
invest more than 5% of the value of the Portfolio's total assets in the
securities of any one issuer, except U.S. Government securities and,
with respect to 100% of the value of the total assets of a Portfolio,
the Fund may not invest more than 25% of the value of the Portfolio's
total assets in the securities of any one issuer, except U.S.
Government securities;
(2)pledge, mortgage or hypothecate its assets, except that, to secure
borrowings permitted by the investment restriction (8) below, it may
pledge securities having a market value at the time of pledge not
exceeding 15% of the value of a Portfolio's total assets and except in
connection with the writing of covered call options and the purchase
and sale of futures contracts and options on futures contracts;
(3)make loans to other persons, except loans of portfolio securities and
except to the extent that the purchase of debt obligations in
accordance with its investment objectives and policies and the entry
into repurchase agreements may be deemed to be loans;
(4)enter into repurchase agreements or purchase any securities if, as a
result thereof, more than 10% of the total assets of a Portfolio (taken
at market value) would be, in the aggregate, subject to repurchase
agreements maturing in more than seven days and invested in restricted
securities or securities which are not readily marketable;
(5)purchase the securities of any issuer if such purchase would cause more
than 10% of the voting securities of such issuer to be held by a
Portfolio;
(6)purchase securities if such purchase would cause more than 25% in the
aggregate of the market value of the total assets of a Portfolio at the
time of such purchase to be invested in the securities of one or more
issuers having their principal business activities in the same
industry, provided that there is no limitation in respect to
investments in obligations issued or guaranteed by the U.S. Government
or its agencies or instrumentalities (for the purposes of this
restriction, telephone companies are considered to be a separate
industry from gas and electric public utilities, and wholly-owned
finance companies are considered to be in the industry of their parents
if their activities are primarily related to financing the activities
of the parents).
(7)purchase or sell any put or call options or any combination thereof,
except that the Fund may purchase and sell options on futures contracts
on debt securities, options on securities indexes and securities index
futures contracts and write covered call option contracts on securities
owned by a Portfolio, and may also purchase call options for the
purpose of terminating its outstanding obligations with respect to
securities upon which covered call option contracts have been written
(i.e., "closing purchase transactions"), and except that the
International Portfolio may also purchase and sell options on foreign
currency and on foreign currency futures contracts.
(8)borrow money except from banks as a temporary measure for extraordinary
or emergency purposes (each Portfolio is required to maintain asset
coverage (including borrowings) of 300% for all borrowings) and no
purchases of securities for a Portfolio will be made while borrowings
of that Portfolio exceed 5% of the Portfolio's assets (the payment of
interest on borrowings by a Portfolio will reduce that Portfolio's
income). In addition, the Board of Trustees has adopted a policy
whereby each Portfolio of the Fund may borrow up to 10% of its total
assets; provided, however, that each Portfolio may borrow up to 25% of
its total assets for extraordinary or emergency purposes, including the
facilitation of redemptions.
In addition, the Fund may not, on behalf of the Global Discovery 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
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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 a Portfolio's net asset value (see "NET ASSET VALUE").
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INVESTMENT ADVISER
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The Fund retains the investment advisory firm of Scudder, Stevens & Clark, Inc.,
a Delaware corporation, Two International Place, Boston, Massachusetts
02110-4103, to manage each Portfolio's daily investment and business affairs
subject to the policies established by the Trustees. The Trustees have overall
responsibility for the management of the Fund under Massachusetts law. The
Adviser is one of the most experienced investment counsel firms in the United
States. It was established in 1919 and pioneered the practice of providing
investment counsel to individual clients on a fee basis. The principal source of
the Adviser's income is professional fees received from providing continuing
investment advice, and the firm derives no income from brokerage, insurance or
underwriting of securities. Today, it provides investment counsel for many
individuals and institutions, including insurance companies, colleges,
industrial corporations, and financial and banking organizations. Directly or
through affiliates, the Adviser provides investment advice to over 50 mutual
fund portfolios.
For its advisory services to the Portfolios, the Adviser receives compensation
monthly at the following annual rates for each Portfolio:
Percent of the average
daily net asset values
Portfolio of each Portfolio
--------- -----------------
Money Market Portfolio .370%
Bond Portfolio .475%
Balanced Portfolio .475%
Growth and Income Portfolio .475%
Capital Growth Portfolio .475%
Global Discovery Portfolio .975%
International Portfolio .875%*
* For any calendar month during which the average daily net assets of
International Portfolio exceed $500,000,000, the fee payable for that month,
with respect to the excess over $500,000,000, is calculated at an annual rate
of .775%. As a result, the Adviser received compensation at an annual rate of
.863% for the fiscal year ended December 31, 1996.
16
<PAGE>
The investment advisory fees for the Global Discovery Portfolio and the
International Portfolio are higher than those charged many funds which invest
primarily in U.S. securities, but are not necessarily higher than those charged
to funds with investment objectives similar to the investment objectives of
these Portfolios.
Under the investment advisory agreements between the Fund, on behalf of each
Portfolio, and the Adviser, the Fund is responsible for all its other expenses,
including clerical salaries; fees and expenses incurred in connection with
membership in investment company organizations; brokers' commissions; legal,
auditing and accounting expenses; taxes and governmental fees; the charges of
custodians, transfer agents and other agents; any other expenses, including
clerical expenses, of issue, sale, underwriting, distribution, redemption or
repurchase of shares; the expenses of and fees for registering or qualifying
securities for sale; the fees and expenses of the Trustees of the Fund who are
not affiliated with the Adviser; the cost of preparing and distributing reports
and notices to shareholders. The Fund is also responsible for its expenses
incurred in connection with litigation, proceedings and claims and the legal
obligation it may have to indemnify its officers and Trustees with respect
thereto. The Adviser, through Scudder Investor Services, Inc., a subsidiary of
the Adviser, places portfolio transactions on behalf of the Fund's Portfolios.
In so doing, the Adviser seeks to obtain the most favorable net results. Subject
to the foregoing, the Adviser may consider sales of VA contracts and VLI
policies for which the Fund is an investment option, as a factor in the
selection of firms to execute portfolio transactions.
In addition to payments for investment advisory services provided by the
Adviser, the Trustees, consistent with the Fund's investment advisory agreements
and underwriting agreement, have approved payments to the Adviser 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 fees
for the Global Discovery Portfolio to the extent that the Portfolio's expenses,
excluding Rule 12b-1 fees, will be maintained at 1.50% of average net assets.
PORTFOLIO MANAGEMENT
Each Portfolio is managed by a team of Scudder investment professionals who each
play an important role in the Portfolio's management process. Team members work
together to develop investment strategies and select securities for the
Portfolios. They are supported by Scudder's large staff of economists, research
analysts, traders, and other investment specialists who work in Scudder's
offices across the United States and abroad. Scudder believes its team approach
benefits Fund investors by bringing together many disciplines and leveraging
Scudder's extensive resources.
MONEY MARKET PORTFOLIO
Lead Portfolio Manager Stephen L. Akers has led Money Market Portfolio's
day-to-day management since 1995. Mr. Akers joined the team in 1995 and has
managed several fixed-income portfolios since joining Scudder in 1984. David
Wines, Portfolio Manager, joined Scudder and the team in 1996. Mr. Wines helps
set the Portfolio's overall strategy and has eight years of investment industry
experience. Nicca Alcantara, Portfolio Manager, has responsibility for the
Portfolio's day-to-day investments. Ms. Alcantara, who came to Scudder in 1984,
has worked as a portfolio manager since 1989 and joined the team in 1990. Debra
A. Hanson, Portfolio Manager, joined the team in 1996. Ms. Hanson assists with
the development and execution of investment strategy and has been with Scudder
since 1983.
BOND PORTFOLIO
Lead Portfolio Manager William M. Hutchinson has had responsibility for
overseeing the Portfolio's day-to-day operations and has guided the Portfolio's
investment strategy since 1996. Mr. Hutchinson, who has 23 years of investment
experience, came to Scudder in 1986 as a portfolio manager and joined the team
in 1987. Ruth Heisler, Portfolio Manager, helps set the Portfolio's investment
strategy. Ms. Heisler, who has over 40 years of fixed-income investing
experience, joined the team in 1986.
BALANCED PORTFOLIO
Lead Portfolio Manager Valerie F. Malter joined Scudder in 1995 and is
responsible for the Portfolio's investment strategy and daily operation. Ms.
Malter has 11 years of experience as an analyst covering a wide range of
industries, and three years of portfolio management experience focusing on the
stocks of companies with medium- to large-sized market capitalizations. William
M. Hutchinson, Portfolio Manager, helps set Scudder's overall fixed-income
investment strategy. Mr. Hutchinson, who has 23 years of investment experience,
came to Scudder in 1986 as a portfolio manager. Ruth Heisler, Portfolio Manager,
17
<PAGE>
has had responsibility for the Portfolio's fixed-income investments since she
joined the team in 1986. Ms. Heisler has been involved with bond research and
investing at Scudder since 1953.
GROWTH AND INCOME PORTFOLIO
Lead Portfolio Manager Robert T. Hoffman has responsibility for setting Growth
and Income Portfolio's stock investing strategy and oversees the Portfolio's
day-to-day operations. Mr. Hoffman, who joined Scudder in 1990 as a portfolio
manager, has 13 years of experience in the investment industry, including
several years of pension fund management experience. Kathleen T. Millard,
Portfolio Manager, has worked in the investment industry since 1983 and as a
portfolio manager since 1986. Ms. Millard, who joined Scudder in 1991, also
focuses on stock investing strategy and stock selection. Benjamin W. Thorndike,
Portfolio Manager, is the Portfolio's chief analyst and strategist for
convertible securities. Mr. Thorndike, who has 18 years of investment
experience, joined Scudder in 1983 as a portfolio manager. Lori J. Ensinger,
Portfolio Manager, joined the team in 1996. Ms. Ensinger, who has 14 years of
investment industry experience, focuses on stock selection and investment
strategy, a role she has played since joining Scudder in 1993. Deborah Chaplin,
Portfolio Manager, joined Scudder and the team in 1996. Ms. Chaplin has five
years of investment experience as a securities analyst and institutional
portfolio manager.
CAPITAL GROWTH PORTFOLIO
Lead Portfolio Manager William F. Gadsden assumed responsibility for setting
Capital Growth Portfolio's stock investing strategy and overseeing the
Portfolio's day-to-day operations in 1995. Mr. Gadsden joined the team in 1989
and Scudder in 1983 and has 15 years of investment experience. Bruce F. Beaty,
Portfolio Manager, joined the team in 1995 and has been a portfolio manager
since joining Scudder in 1991.
GLOBAL DISCOVERY PORTFOLIO
Lead Portfolio Manager Gerald J. Moran sets the Portfolio's investment strategy
and oversees its daily operation. Mr. Moran joined Scudder's equity research and
management area in 1968 as an analyst and has focused on small company stocks
since 1982 and has been a portfolio manager since 1985. Sewall Hodges, Portfolio
Manager, joined Scudder in 1995. Mr. Hodges, who has 11 years of experience in
global analysis and portfolio management, focuses on the Portfolio's stock
selection and research.
INTERNATIONAL PORTFOLIO
Lead Portfolio Manager Carol L. Franklin sets International Portfolio's
investment strategy and has responsibility for the Portfolio's daily operation.
Ms. Franklin, who joined the team in 1989, has worked on equity investing at
Scudder as a portfolio manager since 1981. Nicholas Bratt, Portfolio Manager,
has been a member of the Portfolio team since 1987 and has 23 years of
experience in worldwide investing, including 21 years of experience as a
portfolio manager. Mr. Bratt, who has worked at Scudder since 1976, is the head
of Scudder's Global Equity Department. Joan Gregory, Portfolio Manager, focuses
on stock selection, a role she has played since joining Scudder in 1992.
- --------------------------------------------------------------------------------
DISTRIBUTOR
- --------------------------------------------------------------------------------
The Fund has an underwriting agreement 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.
Under the principal underwriting agreement between the Fund and the Distributor,
the Fund is responsible for the payment of all fees and expenses in connection
with the preparation and filing of any registration statement and prospectus
covering the issue and sale of Shares, and the registration and qualification of
Shares for sale with the Securities and Exchange Commission and in the various
states, including registering the Fund as a broker or dealer. The Fund will also
pay the fees and expenses of preparing, printing and mailing prospectuses
annually to existing 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 the Shares, any issue taxes
or any initial transfer taxes, a portion of toll-free telephone service for
Class B shareholders, wiring funds for Share purchases and redemptions (unless
paid by the shareholder who initiates the transaction), printing and postage of
18
<PAGE>
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 paid by the Fund pursuant to the Rule 12b-1 plan in effect for the 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 Shares, and preparing, printing and mailing any other literature
or advertising in connection with the offering of the Shares to the
Participating Insurance Companies. The Distributor will pay all fees and
expenses in connection with its qualification and registration as a broker or
dealer under Federal and state laws, a portion of the toll-free telephone
service and of computer terminals, and of any activity which is primarily
intended to result in the sale of Shares issued by the Fund.
The Fund has adopted a plan pursuant to Rule 12b-1 under the 1940 Act for the
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 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 each Portfolio, shall pay the
Distributor in its capacity as principal underwriter of the Shares, a fee of up
to 0.25% of the average daily net assets of a Portfolio attributable to its
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 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 Shares of the Portfolios attributable to that Participating
Insurance Company's VA contracts and VLI policies during that quarterly period.
Expenses payable pursuant to the 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 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
- --------------------------------------------------------------------------------
Except for the Money Market Portfolio, which does not offer separate classes of
shares, the Fund offers two classes of shares on behalf of each Portfolio: Class
A shares are offered at net asset value and are not subject to fees imposed
pursuant 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 each Portfolio based on, among other things, the
amount of premium payments to be invested and surrender and transfer requests to
be effected on that day pursuant to VA contracts and VLI policies. Orders
received by the Fund or its agent are effected on days on which the New York
Stock Exchange (the "Exchange") is open for trading. For orders received before
19
<PAGE>
the close of regular trading on the Exchange (normally 4 p.m., eastern time),
such purchases and redemptions of the shares of each Portfolio are effected at
the respective net asset values per share determined as of the close of regular
trading on the Exchange on that same day except that, in the case of the Money
Market Portfolio, purchases will not be effected until the next determination of
net asset value after federal funds have been made available to the Fund (see
"NET ASSET VALUE"). Payment for redemptions will be made by State Street Bank
and Trust Company or Brown Brothers Harriman & Co. on behalf of the Fund and the
relevant Portfolios within seven days thereafter. No fee is charged the
shareholders when they redeem Portfolio shares.
The Fund may suspend the right of redemption of shares of any Portfolio and may
postpone payment for any period: (i) during which the Exchange is closed, other
than customary weekend and holiday closings or during which trading on the
Exchange is restricted; (ii) when the Securities and Exchange Commission
determines that a state of emergency exists which may make payment or transfer
not reasonably practicable; (iii) as the Securities and Exchange Commission may
by order permit for the protection of the security holders of the Fund; or (iv)
at any time when the Fund may, under applicable laws and regulations, suspend
payment on the redemption of its shares.
Should any conflict between VA contract and VLI policy holders arise which would
require that a substantial amount of net assets be withdrawn from the Fund,
orderly portfolio management could be disrupted to the potential detriment of
such contract and policy holders.
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
Scudder Fund Accounting Corporation, a 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
asset value per share is calculated for purchases and redemptions for each
Portfolio by dividing the current market value (amortized cost value in the case
of the Money Market Portfolio) of total Portfolio assets, plus other assets,
less all liabilities, by the total number of shares outstanding.
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
From time to time, quotations of the Money Market Portfolio's "yield" and
"effective yield" may be included in advertisements, sales literature or reports
to shareholders or prospective investors. Both yield figures are based on the
historical performance of the Portfolio and show the performance of a
hypothetical investment and are not intended to indicate future performance. The
yield of the Money Market Portfolio refers to the net investment income
generated by the Portfolio over a specified seven-day period (the ending date of
which will be stated). Included in "net investment income" is the amortization
of market premium or accretion of market and original issue discount. This
income is then "annualized." That is, the amount of income generated by the
Portfolio during that week is assumed to be generated during each week over a
52-week period and is shown as a percentage. The effective yield is expressed
similarly but, when annualized, the income earned by an investment in the
Portfolio is assumed to be reinvested. The effective yield will be slightly
higher than the yield because of the compounding effect of this assumed
reinvestment. Yield and effective yield for the Portfolio will vary based on,
among other things, changes in market conditions, the level of interest rates
and the level of the Portfolio's expenses.
BOND PORTFOLIO
From time to time, quotations of the Bond Portfolio's yield may be included in
advertisements, sales literature or reports to shareholders or prospective
investors. Yield figures are based on historical performance of the Bond
Portfolio and show the performance of a hypothetical investment and are not
intended to indicate future performance. The yield of the Bond Portfolio refers
to net investment income generated by the Bond Portfolio over a specified
thirty-day (or one month) period. This income is then "annualized." That is, the
amount of income generated by the Bond Portfolio during that thirty-day (or one
month) period is assumed to be generated over a 12-month period and is shown as
a percentage of net asset value.
20
<PAGE>
ALL PORTFOLIOS
From time to time, quotations of a Portfolio's total return may be included in
advertisements, sales literature or reports to shareholders or prospective
investors. Total return figures are based on historical performance of the
Portfolio and show the performance of a hypothetical investment and are not
intended to indicate future performance. The total return of a Portfolio refers
to return assuming an investment has been held in the Portfolio for one year,
five years and ten years or for the life of the Portfolio (the ending date of
which will be stated). The total return quotations may be expressed in terms of
average annual or cumulative rates of return for all periods quoted. Average
annual total return refers to the average annual compound rate of return of an
investment in a Portfolio. Cumulative total return represents the cumulative
change in value of an investment in a Portfolio. Both will assume that all
dividends and capital gains distributions were reinvested.
Yield and total return for a Portfolio will vary based on, among other things,
changes in market conditions and the level of the Portfolio's expenses.
- --------------------------------------------------------------------------------
VALUATION OF PORTFOLIO SECURITIES
- --------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
Pursuant to a Rule of the Securities and Exchange Commission, the Money Market
Portfolio will be valued at amortized cost. Under the amortized cost method of
valuation, securities are valued at cost plus constant accretion/amortization to
maturity of any discount/premium every day.
By using amortized cost valuation, the Fund seeks to maintain a constant net
asset value of $1.00 per share for the Money Market Portfolio, despite minor
shifts in the market value of its portfolio securities. The yield on a
shareholder's investment may be more or less than that which would be recognized
if the net asset value per share of the Money Market Portfolio were not constant
and were permitted to fluctuate with the market value of the portfolio
securities of the Money Market Portfolio. However, as a result of certain
procedures adopted by the Fund, the Adviser believes any difference will
normally be minimal.
OTHER PORTFOLIOS
An exchange-traded equity security (not subject to resale restrictions) is
valued at its most recent sale price as of the close of regular trading on the
Exchange on each day the Exchange is open for trading. Lacking any sales, the
security is valued at the calculated mean between the most recent bid quotation
and the most recent asked quotation. An unlisted equity security which is traded
on the NASDAQ system is valued at the most recent sale price or, if there are no
such sales, the security is valued at the high or "inside" bid quotation
supplied through such system. Debt securities, other than short-term securities,
are valued at prices supplied by the Fund's pricing agent. Short-term securities
with remaining maturities of sixty days or less are valued by the amortized cost
method, which the Trustees believe approximates market value. Foreign currency
forward contracts are valued at the value of the underlying currency at the
prevailing currency exchange rate. Securities for which current market
quotations are not readily available are valued at fair value as determined in
good faith by the Trustees, although the actual calculations may be made by
persons acting pursuant to the direction of the Trustees. Please refer to the
section entitled "NET ASSET VALUE" in the Fund's Statement of Additional
Information for more information concerning valuation of portfolio securities.
- --------------------------------------------------------------------------------
TAX STATUS, DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
The Internal Revenue Code of 1986 (the "Code") provides that each portfolio of a
series fund is to be treated as a separate taxpayer. Accordingly, each Portfolio
of the Fund intends to qualify as a separate regulated investment company under
Subchapter M of the Code.
Each Portfolio of the Fund intends to comply with the diversification
requirements of Code Section 817(h). By meeting this and other requirements, the
Participating Insurance Companies, rather than the holders of VA contracts and
VLI policies, should be subject to tax on distributions received with respect to
Portfolio shares. For further information concerning federal income tax
consequences for the holders of the VA contracts and VLI policies, such holders
should consult the prospectus used in connection with the issuance of their
particular contracts or policies.
21
<PAGE>
As a regulated investment company, each Portfolio generally will not be subject
to tax on its ordinary income and net realized capital gains to the extent such
income and gains are distributed in conformity with applicable distribution
requirements under the Code to the separate accounts of the Participating
Insurance Companies which hold its shares. Distributions of income and the
excess of net short-term capital gain over net long-term capital loss will be
treated as ordinary income and distributions of the excess of net long-term
capital gain over net short-term capital loss will be treated as long-term
capital gain by the Participating Insurance Companies. Participating Insurance
Companies should consult their own tax advisers as to whether such distributions
are subject to federal income tax if they are retained as part of policy
reserves.
The Money Market Portfolio will declare a dividend of its net investment income
daily and distribute such dividend monthly. Distributions will be made shortly
after the first business day of each month following declaration of the
dividend. The Bond, Balanced, Growth and Income and Capital Growth Portfolios
will declare and distribute dividends from their net investment income, if any,
quarterly, in January, April, July and October. The Global Discovery and
International Portfolios each intend to distribute their net investment income
annually within three months of the Fund's fiscal year-end of December 31,
although an additional distribution may be made if necessary. Each of these
Portfolios will distribute its capital gains, if any, within three months of the
fiscal year-end. For all Portfolios, dividends declared in October, November or
December with a record date in such a month will be deemed to have been received
by shareholders on December 31 if paid during January of the following year. All
distributions will be reinvested in shares of such Portfolios unless an election
is made on behalf of a separate account to receive distributions in cash.
Participating Insurance Companies will be informed about the amount and
character of distributions from the relevant Portfolio for federal income tax
purposes. 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 one or more Portfolios are the investment vehicle will receive
from the Participating Insurance Companies unaudited semi-annual financial
statements and audited year-end financial statements certified by the Fund's
independent public accountants. Each report will show the investments owned by
the Fund and the market values thereof as determined by the Trustees and will
provide other information about the Fund and its operations.
Participating Insurance Companies with inquiries regarding the Fund may call the
Fund's underwriter, Scudder Investor Services, Inc. at 1-617-295-1000 or write
Scudder Investor Services, Inc., Two International Place, Boston, Massachusetts
02110-4103.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
FUND ORGANIZATION AND SHAREHOLDER INDEMNIFICATION
The Fund was organized in the Commonwealth of Massachusetts as a "Massachusetts
business trust" on March 15, 1985. The Fund's shares of beneficial interest are
presently divided into 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
22
<PAGE>
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.
Each Portfolio (except Money Market 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 B Shares, which are sold subject to a Rule 12b-1 fee, are
offered pursuant to this prospectus. Class A Shares, which are not sold subject
to a Rule 12b-1 fee, are offered to certain Participating Insurance Companies
pursuant to a separate prospectus. Participating Insurance Companies with
inquiries regarding Class A Shares may call or write to the Fund's underwriter,
Scudder, Stevens & Clark, Inc. at the number and address listed above.
Under Massachusetts law, shareholders of a Massachusetts business trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the trust. The Declaration of Trust contains an express
disclaimer of shareholder liability in connection with the Fund property or the
acts, obligations or affairs of the Fund. The Declaration of Trust also provides
for indemnification out of the Fund property of any shareholder held personally
liable for the claims and liabilities to which a shareholder may become subject
by reason of being or having been a shareholder. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund itself would be unable to meet its obligations.
The Trustees believe that, in view of the above, the risk of personal liability
of shareholders is remote.
OTHER INFORMATION
The activities of the Fund are supervised by the Trustees.
Although the Fund does not intend to hold annual meetings, shareholders of the
Fund have certain rights, as set forth in the Declaration of Trust of the Fund,
including the right to call a meeting of shareholders for the purpose of voting
on the removal of one or more Trustees. Shareholders have one vote for each
share held. Fractional shares have fractional votes.
As of December 31, 1996, Aetna Life Insurance and Annuity Company owned 22.31%,
Banner Life Insurance Company owned 1.87%, Charter National Life Insurance
Company owned 26.09%, Companion Life Insurance Company of New York owned 0.01%,
Fortis Benefits Life Insurance Company owned 0.19%, Intramerica Life Insurance
Company owned 3.24%, Lincoln Benefit Life Insurance Company owned 0.57%, Mutual
of America Life Insurance Company owned 29.05%, Paragon Life Insurance Company
owned 0.14%, Providentmutual Life and Annuity Company of America owned 1.12%,
Safeco Life Insurance Companies owned 3.11%, Security First Life Insurance
Company owned 0.14%, Southwestern Life Insurance Company owned 0.43%, The Union
Central Life Insurance Company owned 8.23%, United Companies Life Insurance
Company owned 0.25%, United of Omaha owned 1.02%, USAA Life Insurance Company
owned 0.66% and Washington National Life Insurance Company owned 2.24% of the
Fund's outstanding shares.
Each Portfolio of the Fund has a December 31 fiscal year end.
Portfolio securities of the Money Market, Bond, Balanced, Growth and Income, and
Capital Growth Portfolios are held separately, pursuant to a custodian
agreement, by State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, as custodian. Portfolio securities of Global Discovery and
International Portfolios 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 each 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.
23
<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
Dr. 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
Stephen L. Akers*
Vice President
Thomas S. Crain*
Vice President
Carol Franklin*
Vice President
William F. Gadsden*
Vice President
Jerard K. Hartman*
Vice President
Robert T. Hoffman*
Vice President
William M. Hutchinson*
Vice President
Richard A. Holt*
Vice President
Thomas W. Joseph*
Vice President
David S. Lee*
Vice President
Valerie F. Malter*
Vice President
Steven M. Meltzer*
Vice President
Gerald J. Moran*
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
*Scudder, Stevens & Clark, Inc.
24
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX
- --------------------------------------------------------------------------------
The following is a description of the ratings given by S&P and Moody's to
corporate and municipal bonds.
S&P:
Debt rated AAA has the highest rating assigned by S&P. Capacity to pay interest
and repay principal is extremely strong. Debt rated AA has a very strong
capacity to pay interest and repay principal and differs from the highest rated
issues only in small degree. Debt rated A has a strong capacity to pay interest
and repay principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in higher
rated categories. Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits 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.
Debt rated BB, B, CCC, CC and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighted by large uncertainties or major exposures to adverse conditions.
Debt rated BB has less near-term vulnerability to default than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to inadequate
capacity to meet timely interest and principal payments. The BB rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating. Debt rated B has a greater vulnerability to default but
currently has 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.
Debt rated CCC has a currently identifiable vulnerability to default, and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating. The rating CC typically is applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating. The rating C
typically is applied to debt subordinated to senior debt which is assigned an
actual or implied CCC- debt rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued. The rating C1 is reserved for income bonds on which no interest
is being paid. Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period had not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Moody's:
Bonds which are rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues. Bonds which are rated Aa are
judged to be of high quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks appear
somewhat larger than in Aaa securities. Bonds which are rated A possess many
favorable investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
25
<PAGE>
speculative characteristics as well. Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered as well assured. Often
the protection of interest and principal payments may be very moderate and
thereby not well safeguarded during other good and bad times over the future.
Uncertainty of position characterizes bonds in this class. Bonds which are rated
B generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small.
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
26
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
Two International Place
Boston, Massachusetts 02110-4103
An open-end management investment company which currently offers
shares of beneficial interest of seven diversified Portfolios which seek,
respectively, (i) stability and current income from a portfolio
of money market instruments, (ii) high income from a high
quality portfolio of bonds, (iii) a balance of growth and
income, as well as long-term preservation of capital,
from a diversified portfolio of equity and fixed
income securities, (iv) long-term growth of capital,
current income and growth of income from a portfolio
consisting primarily of common stocks and securities
convertible into common stocks, (v) long-term capital
growth from a a portfolio consisting primarily of equity
securities, (vi) above-average
capital appreciation over the long term by investing
primarily in the equity securities of small companies
located throughout the world, and
(vii) long-term growth of capital principally from a
diversified portfolio of foreign equity securities
(A Mutual Fund)
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1997
CLASS A SHARES OF BENEFICIAL INTEREST
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the prospectus of Scudder Variable Life Investment
Fund dated May 1, 1997, as may be amended from time to time, a copy of which may
be obtained without charge by calling a Participating Insurance Company or by
writing to broker/dealers offering certain variable annuity contracts and
variable life insurance policies, or Scudder Investor Services, Inc., Two
International Place, Boston, Massachusetts 02110-4103.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES....................................................................................1
Money Market Portfolio.......................................................................................1
Bond Portfolio...............................................................................................2
Balanced Portfolio...........................................................................................3
Growth and Income Portfolio..................................................................................5
Capital Growth Portfolio.....................................................................................5
Global Discovery Portfolio...................................................................................6
Risk Factors Regarding Global Discovery Portfolio............................................................7
International Portfolio.....................................................................................13
POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS.................................................................14
Repurchase Agreements.......................................................................................14
Debt Securities.............................................................................................15
Illiquid or Restricted Securities...........................................................................15
Trust Preferred Securities..................................................................................16
Zero Coupon Securities......................................................................................16
Real Estate Investment Trusts...............................................................................17
Mortgage-Backed Securities and Mortgage Pass-Through Securities.............................................17
Collateralized Mortgage Obligations ("CMOs")................................................................18
FHLMC Collateralized Mortgage Obligations...................................................................19
Other Mortgage-Backed Securities............................................................................19
Other Asset-Backed Securities...............................................................................19
Municipal Obligations.......................................................................................21
Convertible Securities......................................................................................21
Depositary Receipts.........................................................................................22
Foreign Securities..........................................................................................22
Limitations on Holdings of Foreign Securities for the Bond, Balanced, Growth and Income
and International Portfolios...........................................................................23
Indexed Securities..........................................................................................23
When-Issued Securities......................................................................................24
Loans of Portfolio Securities...............................................................................24
Borrowing...................................................................................................24
Options for the Bond, Balanced, Growth and Income and International Portfolios..............................25
Securities Index Options....................................................................................26
Futures Contracts...........................................................................................27
Futures on Debt Securities..................................................................................27
Limitations on the Use of Futures Contracts and Options on Futures..........................................29
Foreign Currency Transactions...............................................................................30
Strategic Transactions and Derivatives Applicable to the Global Discovery Portfolio.........................32
Debt Securities.............................................................................................39
High Yield, High Risk Securities............................................................................39
Combined Transactions.......................................................................................40
Risks of Specialized Investment Techniques Abroad...........................................................40
INVESTMENT RESTRICTIONS..............................................................................................40
PURCHASES AND REDEMPTIONS............................................................................................42
INVESTMENT ADVISER AND DISTRIBUTOR...................................................................................43
Investment Adviser..........................................................................................43
Personal Investments by Employees of the Adviser............................................................46
Distributor.................................................................................................46
MANAGEMENT OF THE FUND...............................................................................................48
Trustees and Officers.......................................................................................48
i
<PAGE>
TABLE OF CONTENTS (continued)
Page
REMUNERATION.........................................................................................................50
Responsibilities of the Board--Board and Committee Meetings.................................................50
Compensation of Officers and Trustees.......................................................................50
NET ASSET VALUE......................................................................................................51
TAX STATUS...........................................................................................................52
DIVIDENDS AND DISTRIBUTIONS..........................................................................................56
Money Market Portfolio......................................................................................56
Global Discovery Portfolio and International Portfolio......................................................57
Other Portfolios............................................................................................57
PERFORMANCE INFORMATION..............................................................................................57
Money Market Portfolio......................................................................................57
Bond Portfolio..............................................................................................58
All Portfolios..............................................................................................58
Comparison of Portfolio Performance.........................................................................60
SHAREHOLDER COMMUNICATIONS...........................................................................................64
ORGANIZATION AND CAPITALIZATION......................................................................................65
General.....................................................................................................65
Shareholder and Trustee Liability...........................................................................66
ALLOCATION OF PORTFOLIO BROKERAGE....................................................................................66
PORTFOLIO TURNOVER...................................................................................................68
EXPERTS..............................................................................................................68
COUNSEL..............................................................................................................68
ADDITIONAL INFORMATION...............................................................................................68
FINANCIAL STATEMENTS.................................................................................................69
APPENDIX
Description of Bond Ratings
Description of Commercial Paper Ratings
</TABLE>
ii
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
(See "INVESTMENT CONCEPT OF THE FUND" and
"INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS"
in the Fund's prospectus.)
Scudder Variable Life Investment Fund (the "Fund") is an open-end,
diversified registered management investment company established as a
Massachusetts business trust. The Fund is a series fund consisting of the Money
Market Portfolio, Bond Portfolio, Balanced Portfolio, Growth and Income
Portfolio, Capital Growth Portfolio, Global Discovery Portfolio, and
International Portfolio (individually or collectively hereinafter referred to as
a "Portfolio" or the "Portfolios"). Additional portfolios may be created from
time to time. The Fund is intended to be the funding vehicle for variable
annuity contracts ("VA contracts") and variable life insurance policies ("VLI
policies") to be offered to the separate accounts of certain life insurance
companies ("Participating Insurance Companies").
Each Portfolio has a different investment objective which it pursues
through separate investment policies, as described below. The differences in
objectives and policies among the Portfolios can be expected to affect the
degree of market and financial risk to which each Portfolio is subject and the
return of each Portfolio. The investment objectives and policies of each
Portfolio may, unless otherwise specifically stated, be changed by the Trustees
of the Fund without a vote of the shareholders. There is no assurance that the
objectives of any Portfolio will be achieved.
Money Market Portfolio
The Money Market Portfolio seeks to maintain the stability of capital
and, consistent therewith, to maintain the liquidity of capital and to provide
current income. The Portfolio seeks to maintain a constant net asset value of
$1.00 per share, although there can be no assurance that this will be achieved.
The Portfolio will use the amortized cost method of securities valuation.
The Money Market Portfolio purchases U.S. Treasury bills, notes and
bonds; obligations of agencies and instrumentalities of the U.S. Government;
domestic and foreign bank certificates of deposit; bankers' acceptances; finance
company and corporate commercial paper; and repurchase agreements and corporate
obligations. Investments are limited to those that are dollar-denominated and at
the time of purchase are rated, or judged by the Fund's investment adviser,
Scudder, Stevens & Clark, Inc. (the "Adviser"), subject to the supervision of
the Trustees, to be equivalent to those rated high quality (i.e., rated in the
two highest categories) by any two nationally-recognized rating services such as
Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's ("S&P"). In
addition, the Adviser seeks through its own credit analysis to limit investments
to high quality instruments presenting minimal credit risks. Securities eligible
for investment by the Money Market Portfolio which are rated in the highest
category by at least two rating services (or by one rating service, if no other
rating service has issued a rating with respect to that security) are known as
"first tier securities." Securities rated in the top two categories which are
not first tier securities are known as "second tier securities." Investments in
commercial paper and finance company paper will be limited to securities which,
at the time of purchase, will be rated A-1 or A-2 by S&P or Prime 1 or Prime 2
by Moody's or the equivalent by any nationally-recognized rating service or
judged to be equivalent by the Adviser. Obligations which are subject to
repurchase agreements will be limited to those of the type and quality described
above. The Money Market Portfolio may also hold cash. Shares of the Portfolio
are not insured by an agency of the U.S. Government. Securities and instruments
in which the Portfolio may invest may be issued by the U.S. Government, its
agencies and instrumentalities, corporations, trusts, banks, finance companies
and other business entities.
The Money Market Portfolio may invest in certificates of deposit and
bankers' acceptances of large domestic banks (i.e., banks which at the time of
their most recent annual financial statements show total assets in excess of $1
billion) including foreign branches of such domestic banks, which involve
different risks than those associated with investments in certificates of
deposit of domestic banks, and of smaller banks as described below. The
Portfolio will invest in U.S. dollar-denominated certificates of deposit and
bankers' acceptances of foreign banks if such banks meet the stated
qualifications. Although the Portfolio recognizes that the size of a bank is
important, this fact alone is not necessarily indicative of its
creditworthiness. Investment in certificates of deposit and bankers' acceptances
issued by foreign banks and foreign branches of domestic banks involves
investment risks that are different in some respects from those associated with
<PAGE>
investments in certificates of deposit and bankers' acceptances issued by
domestic banks. (See "Foreign Securities" in this Statement of Additional
Information for further risks of foreign investment.)
The Money Market Portfolio may also invest in certificates of deposit
issued by banks and savings and loan institutions which had at the time of their
most recent annual financial statements total assets of less than $1 billion,
provided that (i) the principal amounts of such certificates of deposit are
insured by an agency of the U.S. Government, (ii) at no time will the Portfolio
hold more than $100,000 principal amount of certificates of deposit of any one
such bank, and (iii) at the time of acquisition, no more than 10% of the
Portfolio's assets (taken at current value) are invested in certificates of
deposit of such banks having total assets not in excess of $1 billion.
The assets of the Money Market Portfolio consist entirely of cash items
and investments having a remaining maturity date of 397 calendar days or less
from date of purchase. The Portfolio will be managed so that the average
maturity of all instruments in the portfolio (on a dollar-weighted basis) will
be 90 days or less. The average maturity of the Portfolio's investments varies
according to the Adviser's appraisal of money market conditions.
To ensure diversity of the Portfolio's investments, as a matter of
non-fundamental policy the Portfolio will not invest more than 5% of its total
assets in the securities of a single issuer, other than the U.S. Government. The
Portfolio may, however, invest more than 5% of its total assets in the first
tier securities of a single issuer for a period of up to three business days
after purchase, although the Portfolio may not make more than one such
investment at any time. The Portfolio may not invest more than 5% of its total
assets in securities which were second tier securities when acquired by the
Portfolio. Further, the Portfolio may not invest more than the greater of (1) 1%
of its total assets, or (2) one million dollars, in the securities of a single
issuer which were second tier securities when acquired by the Portfolio.
The net investment income of the Portfolio is declared as a dividend to
shareholders daily and distributed monthly in cash or reinvested in additional
shares.
Bond Portfolio
The Bond Portfolio pursues a policy of investing for a high level of
income consistent with a high quality portfolio of debt securities. Under normal
circumstances the Portfolio invests at least 65% of its assets in bonds
including those of the U.S. Government and its agencies and those of
corporations and other notes and bonds paying high current income. The Portfolio
may also invest in preferred stocks consistent with the Portfolio's objectives.
It will attempt to moderate the effect of market price fluctuation relative to
that of a long-term bond by investing in securities with varying maturities and
making use of futures contracts on debt securities and related options for
hedging purposes.
The Bond Portfolio may purchase corporate notes and bonds including
issues convertible into common stock and obligations of municipalities. The
Portfolio may purchase securities of real estate investment trusts ("REITs") and
certain mortgage-backed securities. It may purchase U.S. Government securities
and obligations of federal agencies that are not backed by the full faith and
credit of the U.S. Government, such as obligations of Federal Home Loan Banks,
Farm Credit Banks and the Federal Home Loan Mortgage Corporation. The Portfolio
may also purchase obligations of international agencies such as the
International Bank for Reconstruction and Development and the Inter-American
Development Bank. Other eligible investments include foreign securities,
including non-U.S. dollar-denominated foreign debt securities and U.S.
dollar-denominated foreign debt securities (such as those issued by the Dominion
of Canada and its provinces), including without limitation, Eurodollar Bonds and
Yankee Bonds, mortgage and other asset-backed securities and money market
instruments such as commercial paper and bankers' acceptances and certificates
of deposit issued by domestic and foreign branches of U.S. banks. The Portfolio
may also enter into repurchase agreements and may invest in zero coupon
securities. The Portfolio invests in a broad range of short-, intermediate-, and
long-term securities. Proportions among maturities and types of securities may
vary depending upon the prospects for income relative to the outlook for the
economy and the securities markets, the quality of available investments, the
level of interest rates, and other factors.
The Bond Portfolio invests primarily in high quality securities. Under
normal market conditions, the Portfolio will invest at least 65% of its assets
in securities rated within the three highest quality rating categories of
Moody's (Aaa, Aa and A) or S&P (AAA, AA and A), or if unrated, in bonds judged
by the Fund's Adviser, to be of comparable quality at the time of purchase. The
Portfolio may invest up to 20% of its assets in debt securities rated lower than
2
<PAGE>
Baa or BBB or, if unrated, of equivalent quality as determined by the Adviser,
but will not purchase bonds rated below B3 by Moody's or B- by S&P or their
equivalent.
See the Appendix to this Statement of Additional Information for a more
complete description of the ratings assigned by ratings organizations and their
respective characteristics.
Except for limitations imposed by the Bond Portfolio's investment
restrictions, there is no limit as to the proportions of the Portfolio which may
be invested in any of the eligible investments; however, it is a policy of the
Portfolio that its non-governmental investments will be spread among a variety
of companies and will not be concentrated in any industry.
The Bond Portfolio may invest in securities of the Government National
Mortgage Agency, a Government corporation within the U.S. Department of Housing
and Urban Development ("GNMAs"). GNMAs are mortgaged-backed securities
representing part ownership of a pool of mortgage loans. These loans, which are
issued by lenders such as mortgage bankers, commercial banks and savings and
loan associations, are either insured by the Federal Housing Administration
(FHA) or guaranteed by the Veterans Administration (VA). Once approved by GNMA,
the timely payment of interest and principal is guaranteed by the full faith and
credit of the U.S. Government.
The Bond Portfolio cannot guarantee a gain or eliminate the risk of
loss. The net asset value of the Portfolio's shares will fluctuate with changes
in the market prices of the Portfolio's investments, which tend to vary
inversely with changes in prevailing interest rates and, to a lesser extent,
changes in foreign currency exchange rates.
Balanced Portfolio
The Balanced Portfolio seeks a balance of growth and income from a
diversified portfolio of equity and fixed income securities. The Portfolio also
seeks long-term preservation of capital through a quality-oriented investment
approach that is designed to reduce risk.
In seeking its objectives of a balance of growth and income, as well as
long-term preservation of capital, the Portfolio invests in a diversified
portfolio of equity and fixed income securities. The Portfolio invests, under
normal circumstances, at least 50%, but no more than 75%, of its net assets in
common stocks and other equity investments. The Portfolio's equity investments
consist of common stocks, preferred stocks, warrants and securities convertible
into common stocks, of companies that, in the Adviser's judgment, are of
above-average financial quality and offer the prospect for above-average growth
in earnings, cash flow, or assets relative to the overall market as defined by
the Standard and Poor's 500 Composite Stock Price Index ("S&P 500"). The
Portfolio will invest primarily in securities issued by medium-to-large sized
domestic companies with annual revenues or market capitalization of at least
$600 million, and which, in the opinion of the Adviser, offer above-average
potential for price appreciation. The Portfolio seeks to invest in companies
that have relatively consistent and above-average rates of growth; companies
that are in a strong financial position with high credit standings and
profitability; firms with important business franchises, leading products, or
dominant marketing and distribution systems; companies guided by experienced and
motivated managements; and companies selling at attractive market valuations.
The Adviser believes that companies with these characteristics will be rewarded
by the market with higher stock prices over time and provide investment returns,
on average, in excess of the S&P 500.
At least 65% of the value of the Portfolio's common stocks will be of
issuers which qualify, at the time of purchase, for one of the three highest
equity earnings and dividends ranking categories (A+, A, or A-) of S&P, or if
not ranked by S&P, are judged to be of comparable quality by the Adviser. S&P
assigns earnings and dividends rankings to corporations based on a number of
factors, including stability and growth of earnings and dividends. Rankings by
S&P are not an appraisal of a company's creditworthiness, as is true for S&P's
debt security ratings, nor are these rankings intended as a forecast of future
stock market performance. In addition to using S&P rankings of earnings and
dividends of common stocks, the Adviser conducts its own analysis of a company's
history, current financial position, and earnings prospects.
3
<PAGE>
To enhance income and stability, the Portfolio's remaining assets are
allocated to bonds and other fixed income securities, including cash reserves.
The Portfolio will normally invest 25% to 50% of its net assets in fixed income
securities. However, at least 25% of the Portfolio's net assets will always be
invested in fixed income securities. The Portfolio can invest in a broad range
of corporate bonds and notes, convertible bonds, and preferred and convertible
preferred securities. It may also purchase U.S. Government securities and
obligations of federal agencies and instrumentalities that are not backed by the
full faith and credit of the U.S. Government, such as obligations of the Federal
Home Loan Banks, Farm Credit Banks, and the Federal Home Loan Mortgage
Corporation. The Portfolio may also invest in obligations of international
agencies, foreign debt securities (both U.S. and non-U.S. dollar-denominated),
mortgage-backed and other asset-backed securities, municipal obligations,
restricted securities issued in private placements and zero coupon securities.
Zero coupon securities are subject to greater market value fluctuations from
changing interest rates than debt obligations of comparable maturities that make
current cash distributions of interest. The Portfolio may invest in special
purpose trust securities ("Trust Preferred Securities").
For liquidity and defensive purposes, the Portfolio may invest without
limit in cash and in money market securities such as commercial paper, bankers'
acceptances, and certificates of deposit issued by domestic and foreign branches
of U.S. banks. The Portfolio may also enter into repurchase agreements with
respect to U.S. Government securities.
Not less than 50% of the Portfolio's debt securities will be invested
in debt obligations, including money market instruments, that (a) are issued or
guaranteed by the U.S. Government, (b) are rated at the time of purchase within
the two highest ratings categories by any nationally-recognized rating service
or (c) if not rated, are judged at the time of purchase, by the Adviser to be of
a quality comparable to obligations rated as described in (b) above. Not less
than 80% of the debt obligations in which the Portfolio invests will, at the
time of purchase, be rated within the three highest ratings categories of any
such service or, if not rated, will be judged to be of comparable quality by the
Adviser. Up to 20% of the Portfolio's debt securities may be invested in bonds
rated below A but no lower than B by Moody's or S&P, or unrated securities
judged by the Adviser to be of comparable quality. Debt securities which are
rated below investment-grade (that is, rated below Baa by Moody's or below BBB
by S&P and commonly referred to as "junk bonds") and unrated securities of
comparable quality, which usually entail greater risk (including the possibility
of default or bankruptcy of the issuers of such securities), generally involve
greater volatility of price and risk of principal and income, and may be less
liquid than securities in the higher rating categories. Securities rated B
involve a high degree of speculation with respect to the payment of principal
and interest. Should the rating of any security held by the Portfolio be
downgraded after the time of purchase, the Adviser will determine whether it is
in the best interest of the Portfolio to retain or dispose of the security.
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.
The Portfolio will, on occasion, adjust its mix of investments among
equity securities, bonds, and cash reserves. In reallocating investments, the
Adviser weighs the relative values of different asset classes and expectations
for future returns. In doing so, the Adviser analyzes, on a global basis, the
level and direction of interest rates, capital flows, inflation expectations,
anticipated growth of corporate profits, monetary and fiscal policies around the
world, and other related factors. The Portfolio does not take extreme investment
positions as part of an effort to "time the market." Shifts between stocks and
fixed income investments are expected to occur in generally small increments
within the guidelines adopted in this Statement of Additional Information. The
Portfolio is designed as a conservative long-term investment program.
While the Portfolio emphasizes U.S. equity and debt securities, it may
invest a portion of its assets in foreign securities, including depositary
receipts. The Portfolio's foreign holdings will meet the criteria applicable to
its domestic investments. The international component of the Portfolio's
investment program is intended to increase diversification, thus reducing risk,
while providing the opportunity for higher returns.
In addition, the Portfolio may invest in securities on a when-issued or
forward delivery basis. The Portfolio may, for hedging purposes, purchase
forward foreign currency exchange contracts and foreign currencies in the form
of bank deposits. The Portfolio may also purchase other foreign money market
instruments including, but not limited to, bankers' acceptances, certificates of
4
<PAGE>
deposit, commercial paper, short-term government obligations and repurchase
agreements.
The Balanced Portfolio cannot guarantee a gain or eliminate the risk of
loss. The net asset value of the shares of the Portfolio will increase or
decrease with changes in the market price of the Portfolio's investments and, to
a lesser extent, changes in foreign currency exchange rates.
Growth and Income Portfolio
The Growth and Income Portfolio seeks long-term growth of capital,
current income and growth of income. In pursuing these three objectives, the
Portfolio invests primarily in common stocks, preferred stocks, and securities
convertible into common stocks of companies which offer the prospect for growth
of earnings while paying higher than average current dividends. Over time,
continued growth of earnings tends to lead to higher dividends and enhancement
of capital value. The Portfolio allocates its investments among different
industries and companies, and changes its portfolio securities for investment
considerations and not for trading purposes. The Adviser believes that a
portfolio investing in these kinds of securities can perform well whether a
growth or value investment style is in favor and that the Portfolio's dividend
strategy can improve its performance in down markets. The Adviser believes these
characteristics can help a shareholder feel comfortable holding onto the
Portfolio for the long run, despite short-term changes in the investment
climate.
The Portfolio attempts to achieve its investment objectives by
investing primarily in dividend paying common stocks, preferred stocks and
securities convertible into common stocks. The Portfolio may also purchase such
securities which do not pay current dividends but which offer prospects for
growth of capital and future income. Convertible securities (which may be
current coupon or zero coupon securities) are bonds, notes, debentures,
preferred stocks and other securities which may be converted or exchanged at a
stated or determinable exchange ratio into underlying shares of common stock.
The Portfolio may also invest in nonconvertible preferred stocks consistent with
the Portfolio's objectives. From time to time, for temporary defensive purposes,
when the Adviser feels such a position is advisable in light of economic or
market conditions, the Portfolio may invest a portion of its assets in cash and
cash equivalents. The Portfolio may invest in foreign securities and in
repurchase agreements. The Portfolio may purchase securities of REITs and
certain mortgage-backed securities.
When evaluating a security for purchase or sale, the Adviser may
consider a security's dividend yield relative to the average dividend yield of
the S&P 500.
The Portfolio may, for hedging purposes, purchase forward foreign
currency exchange contracts and foreign currencies in the form of bank deposits.
The Portfolio may also purchase other foreign money market instruments,
including, but not limited to, bankers' acceptances, certificates of deposit,
commercial paper, short-term government obligations and repurchase agreements.
The Growth and Income Portfolio cannot guarantee a gain or eliminate
the risk of loss. The net asset value of the Portfolio's shares will increase or
decrease with changes in the market prices of the Portfolio's investments and,
to a lesser extent, changes in foreign currency exchange rates.
Capital Growth Portfolio
The Capital Growth Portfolio seeks to maximize long-term capital growth
through a broad and flexible investment program. The Portfolio invests in
marketable securities, principally common stocks and, consistent with its
objective of long-term capital growth, preferred stocks. However, in order to
reduce risk, as market or economic conditions periodically warrant, the
Portfolio may also invest up to 25% of its assets in short-term debt
instruments.
Important considerations to the Adviser in its examination of potential
investments include certain qualitative considerations such as a company's
financial strength, management reputation, absolute size and overall industry
position.
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Equity investments can have diverse financial characteristics, and the
Trustees believe that the opportunity for capital growth may be found in many
different sectors of the market at any particular time. In contrast to the
specialized investment policies of some capital appreciation funds, the
Portfolio is therefore free to invest in a wide range of marketable securities
offering the potential for growth. This enables the Portfolio to pursue
investment values in various sectors of the stock market, including:
1. Companies that generate or apply new technologies, new and
improved distribution techniques, or new services, such as
those in the business equipment, electronics, specialty
merchandising, and health service industries.
2. Companies that own or develop natural resources, such as
energy exploration or precious metals companies.
3. Companies that may benefit from changing consumer demands and
lifestyles, such as financial service organizations and
telecommunications companies.
4. Foreign companies.
While emphasizing investments in companies with above-average growth
prospects, the Portfolio may also purchase and hold equity securities of
companies that may have only average growth prospects, but seem undervalued due
to factors thought to be of a temporary nature which may cause their securities
to be out of favor and to trade at a price below their potential value.
The Portfolio, as a matter of nonfundamental policy, may invest up to
20% of its net assets in intermediate to longer term debt securities when
management anticipates that the total return on debt securities is likely to
equal or exceed the total return on common stocks over a selected period of
time. The Portfolio may purchase investment-grade debt securities, which are
those rated Aaa, Aa, A or Baa by Moody's, or AAA, AA, A or BBB by S&P, or, if
unrated, of equivalent quality as determined by the Adviser. Bonds that are
rated Baa by Moody's or BBB by S&P have some speculative characteristics. The
Portfolio's intermediate to longer term debt securities may also include those
which are rated below investment grade as long as no more than 5% of its net
assets are invested in such securities. As interest rates fall the prices of
debt securities tend to rise and vice versa. Should the rating of any security
held by the Portfolio be downgraded after the time of purchase, the Adviser will
determine whether it is in the best interest of the Portfolio to retain or
dispose of the security. (See "High Yield, High Risk Securities.")
The Capital Growth Portfolio cannot guarantee a gain or eliminate the
risk of loss. The net asset value of the shares of the Portfolio will increase
or decrease with changes in the market price of the Portfolio's investments and,
to a lesser extent, changes in foreign currency exchange rates.
Global Discovery Portfolio
The Global Discovery 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.
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
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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
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 Regarding Global Discovery Portfolio
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
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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
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,
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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
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
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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
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.
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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
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
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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.
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
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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.
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.")
International Portfolio
The International Portfolio seeks long-term growth of capital primarily
through diversified holdings of marketable foreign equity investments. The
Portfolio invests in companies, wherever organized, which do business primarily
outside the United States. The Fund, on behalf of the Portfolio, intends to
diversify investments among several countries and to have represented in the
program business activities in not less than three different countries. The
management considers it consistent with this policy for the Portfolio to acquire
securities of companies incorporated in the United States and having their
principal activities and interests outside of the United States, and such
investments may be included in the program.
It is not the policy of the Portfolio to concentrate its investments in
any particular industry, and the Portfolio's management does not intend to make
acquisitions in particular industries which would increase the percentage of the
market value of the Portfolio's assets above 25% for any one industry. The
Portfolio does not invest for the purpose of controlling or managing other
companies.
The major portion of the Portfolio's assets consists of equity
securities of established companies listed on recognized exchanges; the Adviser
expects this condition to continue, although the Portfolio may invest in other
securities. Investments may also be made in fixed income securities of foreign
governments and companies with a view toward total investment return. In
determining the location of the principal activities and interests of a company,
the Adviser takes into account such factors as the location of the company's
assets, personnel, sales and earnings. In selecting securities for the
Portfolio, the Adviser seeks to identify companies whose securities prices do
not adequately reflect their established positions in their fields. In analyzing
companies for investment, the Adviser ordinarily looks for one or more of the
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following characteristics: above-average earnings growth per share, high return
on invested capital, healthy balance sheets and overall financial strength,
strong competitive advantages, strength of management and general operating
characteristics which will enable the companies to compete successfully in their
marketplace. Investment decisions are made without regard to arbitrary criteria
such as minimum asset size, debt-equity ratios or dividend history of Portfolio
companies.
The Portfolio may invest in any type of security including, but not
limited to shares, preferred or common, bonds and other evidences of
indebtedness, and other securities of issuers wherever organized, and not
excluding evidences of indebtedness of governments and their political
subdivisions. Although no particular proportion of stocks, bonds or other
securities is required to be maintained, the Fund, on behalf of the Portfolio,
in view of the Portfolio's investment objective, intends under normal conditions
to maintain holdings consisting primarily of a diversified list of equity
securities.
Under exceptional economic or market conditions abroad, the Portfolio
may temporarily, until normal conditions return, invest all or a major portion
of its assets in Canadian or U.S. Government obligations or currencies, or
securities of companies incorporated in and having their principal activities in
Canada or the United States.
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 "TAXES.")
The Portfolio is intended to provide investors with an opportunity to
invest a portion of their assets in a diversified group of securities of foreign
companies and governments. Management of the Portfolio believes that
diversification of assets on an international basis decreases the degree to
which events in any one country, including the United States, will affect an
investor's entire investment holdings. In the period since World War II, many
leading foreign economies and foreign stock market indexes have grown more
rapidly than the United States economy and leading U.S. stock market indexes,
although there can be no assurance that this will be true in the future. Because
of the Portfolio's investment policy, the Portfolio is not intended to provide a
complete investment program for an investor.
Because the Portfolio normally will be invested in 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 foreign securities
markets in an attempt to take advantage of opportunities wherever they may
arise.
POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS
(See "POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS"
in the Fund's prospectus.)
Except as otherwise noted below, the following description of
additional investment policies and techniques is applicable to all of the
Portfolios.
Repurchase Agreements
On behalf of a Portfolio, the Fund may enter into repurchase agreements
with member banks of the Federal Reserve System, any foreign bank and any
broker-dealer which is recognized as a reporting government securities dealer if
the creditworthiness of the bank or broker-dealer has been determined by the
Adviser to be at least equal to that of issuers of commercial paper rated within
the two highest categories assigned by Moody's or S&P. A repurchase agreement
with a member bank of the Federal Reserve System, which provides a means for the
Portfolio to earn income on funds for periods as short as overnight, is an
arrangement through which the Portfolio acquires a U.S. Government or other high
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quality short-term debt obligation (the "Obligation") and the seller agrees, at
the time of sale, to repurchase the Obligation at a specified time and price. A
repurchase agreement with foreign banks may be available with respect to
government securities of the particular foreign jurisdiction. The repurchase
price may be higher than the purchase price, the difference being income to the
Portfolio, or the purchase and repurchase prices may be the same, with interest
at a stated rate due to the Portfolio together with the repurchase price on
repurchase. In either case, the income to the Portfolio is unrelated to the
interest rate on the Obligation subject to the repurchase agreement. For
purposes of the Investment Company Act of 1940, as amended (the "1940 Act"), a
repurchase agreement is deemed to be a loan from the Portfolio to the seller of
the Obligation subject to the repurchase agreement and is therefore subject to
the Portfolio's investment restriction applicable to loans. It is not clear
whether a court would consider the Obligation purchased by the Portfolio subject
to a repurchase agreement as being owned by the Portfolio or as being collateral
for a loan by the Portfolio to the seller. In the event of the commencement of
bankruptcy or insolvency proceedings of the seller of the Obligation before
repurchase of the Obligation under a repurchase agreement, the Portfolio may
encounter delay and incur costs before being able to sell the security. Delays
may involve loss of interest or decline in price of the Obligation. If the court
characterizes the transaction as a loan and the Portfolio has not perfected a
security interest in the Obligation, the Portfolio may be required to return the
Obligation to the seller's estate and be treated as an unsecured creditor of the
seller. As an unsecured creditor, the Portfolio would be at the risk of losing
some or all of the principal and income involved in the transaction. As with any
unsecured debt instrument purchased for the Portfolio, the Fund seeks to
minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the obligor, in this case the seller of the Obligation.
Apart from the risk of bankruptcy or insolvency proceedings, there is also the
risk that the seller may fail to repurchase the security. However, if the market
value of the Obligation subject to the repurchase agreement becomes less than
the repurchase price (including interest), the Portfolio will direct the seller
of the Obligation to deliver additional securities so that the market value of
all securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that the Portfolio will be unsuccessful in
seeking to impose on the seller a contractual obligation to deliver additional
securities.
Debt Securities
The Bond, Balanced, Capital Growth and Global Discovery Portfolios may
each invest in debt securities rated below investment-grade (those rated below
Baa or BBB). These securities are commonly referred to as "junk bonds" and can
entail greater price volatility and involve a higher degree of speculation with
respect to the payment of principal and interest than higher quality
fixed-income securities. The market prices of such lower rated debt securities
may decline significantly in periods of general economic difficulty. The trading
market for these securities is generally less liquid than for higher rated
securities, and a Portfolio may have difficulty disposing of these securities at
the time it wishes to do so. The lack of a liquid secondary market for certain
securities may also make it more difficult for a Portfolio to obtain accurate
market quotations for purposes of valuing its portfolio and calculating its net
asset value. The lower the ratings of such debt securities, the greater their
risks render them like equity securities. In addition, as interest rates fall,
the prices of debt securities tend to rise and vice versa. Should the rating of
any security held by a Portfolio be downgraded after the time of purchase, the
Adviser will determine whether it is in the best interest of the Portfolio to
retain or dispose of the security.
Illiquid or Restricted Securities
The Portfolios may each 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.
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. A 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
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if the registration statement prepared by the issuer, or the prospectus forming
a part of it, is materially inaccurate or misleading.
Trust Preferred Securities
The Bond Portfolio and Balanced Portfolio may each invest in Trust
Preferred Securities, which are hybrid instruments issued by a special purpose
trust (the "Special Trust"), the entire equity interest of which is owned by a
single issuer. The proceeds of the issuance to the Portfolios of Trust Preferred
Securities are typically used to purchase a junior subordinated debenture, and
distributions from the Special Trust are funded by the payments of principal and
interest on the subordinated debenture.
If payments on the underlying junior subordinated debentures held by
the Special Trust are deferred by the debenture issuer, the debentures would be
treated as original issue discount ("OID") obligations for the remainder of
their term. As a result, holders of Trust Preferred Securities, such as the
Portfolios, would be required to accrue daily for Federal income tax purposes,
their share of the stated interest and the de minimis OID on the debentures
(regardless of whether a Portfolio receives any cash distributions from the
Special Trust), and the value of Trust Preferred Securities would likely be
negatively affected. Interest payments on the underlying junior subordinated
debentures typically may only be deferred if dividends are suspended on both
common and preferred stock of the issuer. The underlying junior subordinated
debentures generally rank slightly higher in terms of payment priority than both
common and preferred securities of the issuer, but rank below other subordinated
debentures and debt securities. Trust Preferred Securities may be subject to
mandatory prepayment under certain circumstances. The market values of Trust
Preferred Securities may be more volatile than those of conventional debt
securities. Trust Preferred Securities may be issued in reliance on Rule 144A
under the Securities Act of 1933, as amended, and, unless and until registered,
are restricted securities; there can be no assurance as to the liquidity of
Trust Preferred Securities and the ability of holders of Trust Preferred
Securities, such as the Portfolios, to sell their holdings.
Zero Coupon Securities
The Bond, Balanced, Growth and Income, Capital Growth, Global Discovery
and International Portfolios may each invest in zero coupon securities which pay
no cash income and are sold at substantial discounts from their value at
maturity. When held to maturity, their entire income, which consists of
accretion of discount, comes from the difference between the issue price and
their value at maturity. Zero coupon securities are subject to greater market
value fluctuations from changing interest rates than debt obligations of
comparable maturities which make current distributions of interest (cash). Zero
coupon convertible securities offer the opportunity for capital appreciation (or
depreciation) as increases (or decreases) in market value of such securities
closely follow the movements in the market value of the underlying common stock.
Zero coupon convertible securities generally are expected to be less volatile
than the underlying common stocks because zero coupon convertible securities are
usually issued with shorter maturities (15 years or less) and with options
and/or redemption features exercisable by the holder of the obligation entitling
the holder to redeem the obligation and receive a defined cash payment.
Zero coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of securities firms and
banks have stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" ("TIGRS") and Certificate of Accrual on Treasuries
("CATS"). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates or other evidences of ownership of the U.S.
Treasury securities has stated that for federal tax and securities purposes, in
their opinion purchasers of such certificates, such as the Portfolios, most
likely will be deemed the beneficial holders of the underlying U.S. government
securities.
The Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupons and corpus payments on Treasury securities through the Federal
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Reserve book-entry record-keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program,
the Portfolio will be able to have its beneficial ownership of zero coupon
securities recorded directly in the book-entry record-keeping system in lieu of
having to hold certificates or other evidences of ownership of the underlying
U.S. Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold in such bundled form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells
itself.
Real Estate Investment Trusts
The Bond Portfolio and the Growth and Income Portfolio may each invest
in REITs. REITs are sometimes informally characterized as equity REITs, mortgage
REITs and hybrid REITs. Investment in REITs may subject a Portfolio to risks
associated with the direct ownership of real estate, such as decreases in real
estate values, overbuilding, increased competition and other risks related to
local or general economic conditions, increases in operating costs and property
taxes, changes in zoning laws, casualty or condemnation losses, possible
environmental liabilities, regulatory limitations on rent and fluctuations in
rental income. Equity REITs generally experience these risks directly through
fee or leasehold interests, whereas mortgage REITs generally experience these
risks indirectly through mortgage interests, unless the mortgage REIT forecloses
on the underlying real estate. Changes in interest rates may also affect the
value of a Portfolio's investment in REITs. For instance, during periods of
declining interest rates, certain mortgage REITs may hold mortgages that the
mortgagors elect to prepay, which prepayment may diminish the yield on
securities issued by those REITs.
Certain REITs have relatively small market capitalization, which may
tend to increase the volatility of the market price of their securities.
Furthermore, REITs are dependent upon specialized management skills, have
limited diversification and are, therefore, subject to risks inherent in
operating and financing a limited number of projects. REITs are also subject to
heavy cash flow dependency, defaults by borrowers and the possibility of failing
to qualify for tax-free pass-through of income under the Internal Revenue Code
of 1986, as amended and to maintain exemption from the registration requirements
of the 1940 Act. By investing in REITs indirectly through a Portfolio, a
shareholder will bear not only his or her proportionate share of the expenses of
the Portfolio, but also, indirectly, similar expenses of the REITs. In addition,
REITs depend generally on their ability to generate cash flow to make
distributions to shareholders.
Mortgage-Backed Securities and Mortgage Pass-Through Securities
The Bond, Balanced, and Growth and Income Portfolios may also invest in
mortgage-backed securities, which are interests in pools of mortgage loans,
including mortgage loans made by savings and loan institutions, mortgage
bankers, commercial banks, and others. Pools of mortgage loans are assembled as
securities for sale to investors by various governmental, government-related,
and private organizations as further described below. The Portfolios may also
invest in debt securities which are secured with collateral consisting of
mortgage-backed securities (see "Collateralized Mortgage Obligations"), and in
other types of mortgage-related securities.
A decline in interest rates may lead to a faster rate of repayment of
the underlying mortgages, and expose the Portfolios to a lower rate of return
upon reinvestment. To the extent that such mortgage-backed securities are held
by the Portfolios, the prepayment right will tend to limit to some degree the
increase in net asset value of the Portfolios because the value of the
mortgage-backed securities held by the Portfolios may not appreciate as rapidly
as the price of non-callable debt securities.
Interests in pools of mortgage-backed securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
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"pass-through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by repayments of principal resulting
from the sale of the underlying property, refinancing, or foreclosure, net of
fees or costs which may be incurred. Some mortgage-related securities such as
securities issued by the Government National Mortgage Association ("GNMA") are
described as "modified pass-through." These securities entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
certain fees, at the scheduled payment dates regardless of whether or not the
mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
GNMA. GNMA is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks, and mortgage bankers) and backed by
pools of FHA-insured or VA-guaranteed mortgages. These guarantees, however, do
not apply to the market value or yield of mortgage-backed securities or to the
value of Portfolio shares. Also, GNMA securities often are purchased at a
premium over the maturity value of the underlying mortgages. This premium is not
guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) mortgages from a list of approved seller/servicers which include state
and federally-chartered savings and loan associations, mutual savings banks,
commercial banks, credit unions, and mortgage bankers. Pass-through securities
issued by FNMA are guaranteed as to timely payment of principal and interest by
FNMA but are not backed by the full faith and credit of the U.S. Government.
FHLMC is a corporate instrumentality of the U.S. Government and was
created by Congress in 1970 for the purpose of increasing the availability of
mortgage credit for residential housing. Its stock is owned by the twelve
Federal Home Loan Banks. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal, but PCs are not backed by the full faith and credit of the U.S.
Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers, and other secondary market issuers also
create pass-through pools of conventional mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance, and
letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers, and the mortgage poolers. Such insurance and
guarantees and the creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets the Portfolios' investment
quality standards. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. The Portfolios may buy mortgage-related securities without
insurance or guarantees, if through an examination of the loan experience and
practices of the originators/servicers and poolers, the Adviser determines that
the securities meet the Portfolios' quality standards. Although the market for
such securities is becoming increasingly liquid, securities issued by certain
private organizations may not be readily marketable.
Collateralized Mortgage Obligations ("CMOs")
A CMO is a hybrid between a mortgage-backed bond and a mortgage
pass-through security. Similar to a bond, interest and prepaid principal are
paid, in most cases, semiannually. CMOs may be collateralized by whole mortgage
loans but are more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, FHLMC, or FNMA, and their income
streams.
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CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
In a typical CMO transaction, a corporation issues multiple series,
(e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are
used to purchase mortgages or mortgage pass-through certificates ("Collateral").
The Collateral is pledged to a third party trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on
the Bonds in the order A, B, C, Z. The Series A, B, and C bonds all bear current
interest. Interest on the Series Z Bond is accrued and added to principal and a
like amount is paid as principal on the Series A, B, or C Bond currently being
paid off. When the Series A, B, and C Bonds are paid in full, interest and
principal on the Series Z Bond begins to be paid currently. With some CMOs, the
issuer serves as a conduit to allow loan originators (primarily builders or
savings and loan associations) to borrow against their loan portfolios.
FHLMC Collateralized Mortgage Obligations
FHLMC CMOs are debt obligations of FHLMC issued in multiple classes
having different maturity dates which are secured by the pledge of a pool of
conventional mortgage loans purchased by FHLMC. Unlike FHLMC PCs, payments of
principal and interest on the CMOs are made semiannually, as opposed to monthly.
The amount of principal payable on each semiannual payment date is determined in
accordance with FHLMC's mandatory sinking fund schedule, which, in turn, is
equal to approximately 100% of FHA prepayment experience applied to the mortgage
collateral pool. All sinking fund payments in the CMOs are allocated to the
retirement of the individual classes of bonds in the order of their stated
maturities. Payment of principal on the mortgage loans in the collateral pool in
excess of the amount of FHLMC's minimum sinking fund obligation for any payment
date are paid to the holders of the CMOs as additional sinking fund payments.
Because of the "pass-through" nature of all principal payments received on the
collateral pool in excess of FHLMC's minimum sinking fund requirement, the rate
at which principal of the CMOs is actually repaid is likely to be such that each
class of bonds will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage
loans during any semiannual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.
Other Mortgage-Backed Securities
The Adviser expects that governmental, government-related, or private
entities may create mortgage loan pools and other mortgage-related securities
offering mortgage pass-through and mortgage-collateralized investments in
addition to those described above. The mortgages underlying these securities may
include alternative mortgage instruments, that is, mortgage instruments whose
principal or interest payments may vary or whose terms to maturity may differ
from customary long-term fixed rate mortgages. The Bond Portfolio and the
Balanced Portfolio will not purchase mortgage-backed securities or any other
assets which, in the opinion of the Adviser, are illiquid if, as a result, more
than 10% of the value of the Portfolio's total assets will be illiquid. As new
types of mortgage-related securities are developed and offered to investors, the
Adviser will, consistent with the Portfolio's investment objectives, policies,
and quality standards, consider making investments in such new types of
mortgage-related securities.
Other Asset-Backed Securities
The securitization techniques used to develop mortgaged-backed
securities are now being applied to a broad range of assets. Through the use of
trusts and special purpose corporations, various types of assets, including
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automobile loans, computer leases and credit card receivables, are being
securitized in pass-through structures similar to the mortgage pass-through
structures described above or in a structure similar to the CMO structure.
Consistent with the Bond Portfolio's and the Balanced Portfolio's investment
objectives and policies, the Portfolios may invest in these and other types of
asset-backed securities that may be developed in the future. In general, the
collateral supporting these securities is of shorter maturity than mortgage
loans and is less likely to experience substantial prepayments with interest
rate fluctuations.
Several types of asset-backed securities have already been offered to
investors, including Certificates for Automobile ReceivablesSM ("CARSSM").
CARSSM represent undivided fractional interests in a trust ("Trust") whose
assets consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARSSM are passed through monthly to certificate holders, and
are guaranteed up to certain amounts and for a certain time period by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the Trust. An investor's return on CARSSM may be affected by early
prepayment of principal on the underlying vehicle sales contracts. If the letter
of credit is exhausted, the Trust may be prevented from realizing the full
amount due on a sales contract because of state law requirements and
restrictions relating to foreclosure sales of vehicles and the obtaining of
deficiency judgments following such sales or because of depreciation, damage to
or loss of a vehicle, the application of federal and state bankruptcy and
insolvency laws, or other factors. As a result, certificate holders may
experience delays in payments or losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security interest in the related assets. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. There is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection, and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
results from payment of the insurance obligations on at least a portion of the
assets in the pool. This protection may be provided through guarantees, policies
or letters of credit obtained by the issuer or sponsor from third parties,
through various means of structuring the transaction or through a combination of
such approaches. The Bond Portfolio and the Balanced Portfolio will not pay any
additional or separate fees for credit support. The degree of credit support
provided for each issue is generally based on historical information respecting
the level of credit risk associated with the underlying assets. Delinquency or
loss in excess of that anticipated, or failure of the credit support could
adversely affect the return on an investment in such a security.
The Bond Portfolio and the Balanced Portfolio may also invest in
residual interests in asset-backed securities. In the case of asset-backed
securities issued in a pass-through structure, the cash flow generated by the
underlying assets is applied to make required payments on the securities and to
pay related administrative expenses. The residual in an asset-backed security
pass-through structure represents the interest in any excess cash flow remaining
after making the foregoing payments. The amount of residual cash flow resulting
from a particular issue of asset-backed securities will depend on, among other
things, the characteristics of the underlying assets, the coupon rates on the
securities, prevailing interest rates, the amount of administrative expenses and
the actual prepayment experience on the underlying assets. Asset-backed security
residuals not registered under the Securities Act of 1933 may be subject to
certain restrictions on transferability. In addition, there may be no liquid
market for such securities.
The availability of asset-backed securities may be affected by
legislative or regulatory developments. It is possible that such developments
may require the Bond Portfolio and the Balanced Portfolio to dispose of any then
existing holdings of such securities.
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Municipal Obligations
The Bond Portfolio and the Balanced Portfolio may each invest in
municipal obligations, which are issued by or on behalf of states, territories,
and possessions of the U.S., and their political subdivisions, agencies, and
instrumentalities, and the District of Columbia to obtain funds for various
public purposes. The interest on these obligations is generally exempt from
federal income tax in the hands of most investors. The two principal
classifications of municipal obligations are "notes" and "bonds." The return on
municipal obligations is ordinarily lower than that of taxable obligations. The
Bond Portfolio and the Balanced Portfolio may each acquire municipal obligations
when, due to disparities in the debt securities markets, the anticipated total
return on such obligations is higher than that on taxable obligations. The Bond
Portfolio and the Balanced Portfolio have no current intention of purchasing
tax-exempt municipal obligations that would amount to greater than 5% of the
Portfolio's total assets.
Convertible Securities
The Bond, Balanced, Growth and Income, Capital Growth, Global Discovery
and International Portfolios may each invest in convertible securities; that is,
bonds, notes, debentures, preferred stocks and other securities which are
convertible into common stock. Investments in convertible securities can provide
an opportunity for capital appreciation and/or income through interest and
dividend payments by virtue of their conversion or exchange features.
The convertible securities in which the Portfolios may invest include
fixed-income or zero coupon debt securities which may be converted or exchanged
at a stated or determinable exchange ratio into underlying shares of common
stock. The exchange ratio for any particular convertible security may be
adjusted from time to time due to stock splits, dividends, spin-offs, other
corporate distributions or scheduled changes in the exchange ratio. Convertible
securities and convertible preferred stocks, until converted, have general
characteristics similar to both debt and equity securities. Although to a lesser
extent than with debt securities generally, the market value of convertible
securities tends to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. In addition, because of the conversion or
exchange feature, the market value of convertible securities typically changes
as the market value of the underlying common stocks changes, and, therefore,
also tends to follow movements in the general market for equity securities. A
unique feature of convertible securities is that as the market price of the
underlying common stock declines, convertible securities tend to trade
increasingly on a yield basis, and so may not experience market value declines
to the same extent as the underlying common stock. When the market price of the
underlying common stock increases, the prices of the convertible securities tend
to rise as a reflection of the value of the underlying common stock, although
typically not as much as the underlying common stock. While no securities
investments are without risk, investments in convertible securities generally
entail less risk than investments in common stock of the same issuer.
As fixed income securities, convertible securities are investments
which provide for a stream of income (or in the case of zero coupon securities,
accretion of income) with generally higher yields than common stocks. Of course,
like all fixed income securities, there can be no assurance of income or
principal payments because the issuers of the convertible securities may default
on their obligations. Convertible securities generally offer lower yields than
non-convertible securities of similar quality because of their conversion or
exchange features.
Convertible securities are generally subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar
non-convertible securities.
Convertible securities may be issued as fixed income obligations that
pay current income or as zero coupon notes and bonds, including Liquid Yield
Option Notes ("LYONs"). Zero coupon securities pay no cash income and are sold
at substantial discounts from their value at maturity. When held to maturity,
their entire income, which consists of accretion of discount, comes from the
difference between the purchase price and their value at maturity. Zero coupon
convertible securities offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follows the
movements in the market value of the underlying common stock. Zero coupon
convertible securities are generally expected to be less volatile than the
underlying common stocks as they are usually issued with short to medium length
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maturities (15 years or less) and are issued with options and/or redemption
features exercisable by the holder of the obligation entitling the holder to
redeem the obligation and receive a defined cash payment.
Depositary Receipts
The Balanced, Growth and Income, Capital Growth, Global Discovery and
International Portfolios may each 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 Balanced, Growth and Income, Capital Growth and International Portfolios'
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.
Foreign Securities
The Bond, Balanced, Growth and Income, Capital Growth, Global Discovery
and International Portfolios (collectively, the "Non-Money Market Portfolios")
may each invest, without limit, except as applicable to debt securities
generally, in U.S. dollar-denominated foreign debt securities (including those
issued by the Dominion of Canada and its provinces and other debt securities
which meet the criteria applicable to the Portfolio's domestic investments), and
in certificates of deposit issued by foreign banks and foreign branches of
United States banks, to any extent deemed appropriate by the Adviser. The Bond
Portfolio may invest up to 20% of its assets in non-U.S. dollar-denominated
foreign debt securities. The Balanced Portfolio may invest up to 20% of its debt
securities in non-U.S. dollar-denominated foreign debt securities, and may
invest up to 25% of its equity securities in non-U.S. dollar-denominated foreign
equity securities. The Growth and Income Portfolio may invest up to 25% of its
assets in non-U.S. dollar denominated equity securities of foreign issuers. The
Capital Growth Portfolio may invest up to 25% of its assets, and the
International Portfolio may invest without limit, in non-U.S. dollar-denominated
equity securities of foreign issuers.
Investors should recognize that investing in foreign securities
involves certain special considerations, including those set forth below, which
are not typically associated with investing in U.S. securities and which may
favorably or unfavorably affect the Non-Money Market Portfolios' performance. As
foreign companies are not generally subject to uniform accounting and auditing
and financial reporting standards, practices and requirements comparable to
those applicable to domestic companies, there may be less publicly available
information about a foreign company than about a domestic company. Many foreign
stock markets, while growing in volume of trading activity, have substantially
less volume than the New York Stock Exchange (the "Exchange"), and securities of
some foreign companies are less liquid and more volatile than securities of
domestic companies. Similarly, volume and liquidity in most foreign bond markets
are less than the volume and liquidity in the U.S. and at times, volatility of
price can be greater than in the U.S. Further, foreign markets have different
clearance and settlement procedures and in certain markets there have been times
when settlements have been unable to keep pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of the Portfolios are
uninvested and no return is earned thereon. The inability of the Portfolios to
make intended security purchases due to settlement problems could cause the
Portfolios to miss attractive investment opportunities. Inability to dispose of
portfolio securities due to settlement problems either could result in losses to
the Portfolios due to subsequent declines in value of the portfolio security or,
if the Portfolios have entered into a contract to sell the security, could
result in possible liability to the purchaser. Fixed commissions on some foreign
stock exchanges are generally higher than negotiated commissions on U.S.
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exchanges, although the Portfolios will endeavor to achieve the most favorable
net results on its portfolio transactions. Further, the Portfolios may encounter
difficulties or be unable to pursue legal remedies and obtain judgments in
foreign courts. There is generally less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the U.S. It may be more difficult for the Portfolios' agents to keep
currently informed about corporate actions such as stock dividends or other
matters which may affect the prices of portfolio securities. Communications
between the U.S. and foreign countries may be less reliable than within the
U.S., thus increasing the risk of delayed settlements of portfolio transactions
or loss of certificates for portfolio securities. In addition, with respect to
certain foreign countries, there is the possibility of nationalization,
expropriation, the imposition of withholding or confiscatory taxes, political,
social, or economic instability, devaluations in the currencies in which a
Portfolio's securities are denominated, or diplomatic developments which could
affect U.S. investments in those countries. Investments in foreign securities
may also entail certain risks, such as possible currency blockages or transfer
restrictions, and the difficulty of enforcing rights in other countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
These considerations generally are more of a concern in developing
countries. For example, the possibility of revolution and the dependence on
foreign economic assistance generally is greater in these countries than in
developed countries. The management of the Non-Money Market Portfolios seeks to
mitigate the risks associated with these considerations through diversification
and active professional management. Although investments in companies domiciled
in developing countries may be subject to potentially greater risks than
investments in developed countries, the Portfolios will not invest in any
securities of issuers located in developing countries if the securities, in the
judgment of the Adviser, are speculative.
To the extent that the Non-Money Market Portfolios invest in foreign
securities, the Portfolios' share price could reflect the movements of both the
different stock and bond markets in which it is invested and the currencies in
which the investments are denominated; the strength or weakness of the U.S.
dollar against foreign currencies could account for part of the Portfolios'
investment performance.
Limitations on Holdings of Foreign Securities for the Bond, Balanced, Growth and
Income and International Portfolios
Each Portfolio that invests in foreign securities shall invest in no
less than five foreign countries; provided that, (i) if foreign securities
comprise less than 80% of the value of the Portfolio's net assets, the Portfolio
shall invest in no less than four foreign countries; (ii) if foreign securities
comprise less than 60% of the value of the Portfolio's net assets, the Portfolio
shall invest in no less than three foreign countries; (iii) if foreign
securities comprise less than 40% of the value of the Portfolio's net assets,
the Portfolio shall invest in no less than two foreign countries; and (iv) if
foreign securities comprise less than 20% of the value of the Portfolio's net
assets the Portfolio may invest in a single foreign country.
Each Portfolio shall invest no more than 20% of the value of its net
assets in securities of issuers located in any one country; provided that an
additional 15% of the value of each Portfolio's net assets may be invested in
securities of issuers located in any one of the following countries: Australia,
Canada, France, Japan, the United Kingdom and Germany; and provided further that
100% of a Portfolio's assets may be invested in securities of issuers located in
the United States.
Indexed Securities
The Bond Portfolio and the Balanced Portfolio may each invest in
indexed securities, the value of which is linked to currencies, interest rates,
commodities, indices or other financial indicators ("reference instruments").
Most indexed securities have maturities of three years or less.
Indexed securities differ from other types of debt securities in which
the Fund may invest in several respects. First, the interest rate or, unlike
other debt securities, the principal amount payable at maturity of an indexed
security may vary based on changes in one or more specified reference
instruments, such as an interest rate compared with a fixed interest rate or the
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currency exchange rates between two currencies (neither of which need be the
currency in which the instrument is denominated). The reference instrument need
not be related to the terms of the indexed security. For example, the principal
amount of a U.S. dollar denominated indexed security may vary based on the
exchange rate of two foreign currencies. An indexed security may be positively
or negatively indexed; that is, its value may increase or decrease if the value
of the reference instrument increases. Further, the change in the principal
amount payable or the interest rate of an indexed security may be a multiple of
the percentage change (positive or negative) in the value of the underlying
reference instrument(s).
Investment in indexed securities involves certain risks. In addition to
the credit risk of the security's issuer and the normal risks of price changes
in response to changes in interest rates, the principal amount of indexed
securities may decrease as a result of changes in the value of reference
instruments. Further, in the case of certain indexed securities in which the
interest rate is linked to a reference instrument, the interest rate may be
reduced to zero, and any further declines in the value of the security may then
reduce the principal amount payable on maturity. Finally, indexed securities may
be more volatile than the reference instruments underlying indexed securities.
When-Issued Securities
A Portfolio may from time to time purchase securities on a
"when-issued" or "forward delivery" basis. Debt securities are often issued on
this basis. The price of such securities, which may be expressed in yield terms,
is fixed at the time a commitment to purchase is made, but delivery and payment
for the when-issued or forward delivery securities take place at a later date.
During the period between purchase and settlement, no payment is made by the
Portfolio and no interest accrues to the Portfolio. To the extent that assets of
a Portfolio are held in cash pending the settlement of a purchase of securities,
that Portfolio would earn no income; however, it is the Fund's intention that
each Portfolio will be fully invested to the extent practicable and subject to
the policies stated above. While when-issued or forward delivery securities may
be sold prior to the settlement date, the Portfolio intends to purchase such
securities with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time the Fund makes the commitment on
behalf of a Portfolio to purchase a security on a when-issued or forward
delivery basis, it will record the transaction and reflect the amount due and
the value of the security in determining the Portfolio's net asset value. The
market value of the when-issued or forward delivery securities may be more or
less than the purchase price payable at settlement date. The Fund does not
believe that a Portfolio's net asset value or income will be adversely affected
by the purchase of securities on a when-issued or forward delivery basis. Each
Portfolio will establish a segregated account in which it will maintain cash,
U.S. Government securities and other high-grade debt obligations at least equal
in value to commitments for when-issued or forward delivery securities. Such
segregated securities either will mature or, if necessary, be sold on or before
the settlement date.
Loans of Portfolio Securities
The Fund may lend the portfolio securities of any Portfolio (other than
the Money Market Portfolio) provided: (1) the loan is secured continuously by
collateral consisting of U.S. Government securities, cash or cash equivalents
adjusted daily to have market value at least equal to the current market value
of the securities loaned; (2) the Fund may at any time call the loan and regain
the securities loaned; (3) the Portfolio will receive any interest or dividends
paid on the loaned securities; and (4) the aggregate market value of securities
loaned will not at any time exceed one-third of the total assets of the
Portfolio. In addition, it is anticipated that the Portfolio may share with the
borrower some of the income received on the collateral for the loan or that it
will be paid a premium for the loan. Before the Portfolio enters into a loan,
the Adviser considers all relevant facts and circumstances including the
creditworthiness of the borrower.
Borrowing
The Board of Trustees has adopted a policy whereby each Portfolio of
the Fund may borrow up to 10% of its total assets; provided, however, that each
Portfolio may borrow up to 25% of its total assets for extraordinary or
emergency purposes, including the facilitation of redemptions. A Portfolio may
only borrow money from banks as a temporary measure for extraordinary or
emergency purposes (each Portfolio is required to maintain asset coverage
(including borrowings) of 300% for all borrowings) and no purchases of
securities for a Portfolio will be made while borrowings of that Portfolio
exceed 5% of the Portfolio's assets. Borrowings by the Fund increase exposure to
capital risk. In addition, borrowed funds are subject to interest costs that may
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offset or exceed the return earned on investment of such funds.
Options for the Bond, Balanced, Growth and Income and International Portfolios
The Fund may, on behalf of each of the Bond, Balanced, Growth and
Income, Capital Growth and International Portfolios, write covered call options
on the portfolio securities of such Portfolio in an attempt to enhance
investment performance. A call option is a contract generally having a duration
of nine months or less which gives the purchaser of the option, in return for a
premium paid, the right to buy, and the writer the obligation to sell, the
underlying security at the exercise price at any time upon the assignment of an
exercise notice prior to the expiration of the option, regardless of the market
price of the security during the option period. A covered call option is an
option written on a security which is owned by the writer throughout the option
period.
The Fund will write, on behalf of a Portfolio, covered call options
both to reduce the risks associated with certain of its investments and to
increase total investment return. In return for the premium income, the
Portfolio will give up the opportunity to profit from an increase in the market
price of the underlying security above the exercise price so long as its
obligations under the contract continue, except insofar as the premium
represents a profit. Moreover, in writing the option, the Portfolio will retain
the risk of loss should the price of the security decline, which loss the
premium is intended to offset in whole or in part. Unlike the situation in which
the Fund owns securities not subject to a call option, the Fund, in writing call
options, must assume that the call may be exercised at any time prior to the
expiration of its obligations as a writer, and that in such circumstances the
net proceeds realized from the sale of the underlying securities pursuant to the
call may be substantially below the prevailing market price. The Fund may forego
the benefit of appreciation in its Portfolios on securities sold pursuant to
call options.
When the Portfolio writes a covered call option, it gives the purchaser
of the option the right to buy the underlying security at the price specified in
the option (the "exercise price") by exercising the option at any time during
the option period, generally ranging up to nine months. Some of the options
which the Fund writes may be of the European type which means they may be
exercised only at a specified time. If the option expires unexercised, the
Portfolio will realize income in an amount equal to the premium received for the
written option. If the option is exercised, a decision over which the Portfolio
has no control, the Portfolio must sell the underlying security to the option
holder at the exercise price. By writing a covered call option, the Portfolio
forgoes, in exchange for the premium less the commission ("net premium"), the
opportunity to profit during the option period from an increase in the market
value of the underlying security above the exercise price.
The Balanced, Growth and Income, Capital Growth, Global Discovery and
International Portfolios may each write covered call and put options to a
limited extent in an attempt to earn additional income on their portfolios,
consistent with their investment objectives. The Portfolios may forego the
benefits of appreciation on securities sold or depreciation on securities
acquired pursuant to call and put options written by the Portfolios. Each
Portfolio has no current intention of writing options on more than 5% of its net
assets.
When the Fund, on behalf of the Balanced, Growth and Income, Capital
Growth, Global Discovery and International Portfolios, writes a put option, it
gives the purchaser of the option the right to sell the underlying security to
the Portfolio at the specified exercise price at any time during the option
period. Some of the European type options which the Fund writes may be exercised
only at a specified time. If the option expires unexercised, the Portfolio will
realize income in the amount of the premium received for writing the option. If
the put option is exercised, a decision over which the Portfolio has no control,
the Portfolio must purchase the underlying security from the option holder at
the exercise price. By writing a put option, the Portfolio, in exchange for the
net premium received, accepts the risk of a decline in the market value of the
underlying security below the exercise price. With respect to each put option it
writes, the Portfolio will have deposited in a separate account with its
custodian U.S. Treasury obligations, high-grade debt securities or cash equal in
value to the exercise price of the put option, will have purchased a put option
with a higher exercise price that will expire no earlier than the put option
written or will have used some combination of these two methods. The Fund on
behalf of each Portfolio, will only write put options involving securities for
which a determination is made that it wishes to acquire the securities at the
exercise price at the time the option is written.
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A Portfolio may terminate its obligation as a writer of a call or put
option by purchasing an option with the same exercise price and expiration date
as the option previously written. This transaction is called a "closing purchase
transaction."
When a Portfolio writes an option, an amount equal to the net premium
received by the Portfolio is included in the liability section of the Portfolio
Statement of Assets and Liabilities as a deferred credit. The amount of the
deferred credit will be subsequently marked to market to reflect the current
market value of the option written. The current market value of a traded option
is the last sale price or, in the absence of a sale, the mean between the
closing bid and asked price. If an option expires on its stipulated expiration
date or if the Portfolio enters into a closing purchase transaction, the
Portfolio will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the premium received when the option was sold), and the
deferred credit related to such option will be eliminated. If a call option is
exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security and the proceeds of the sale will be increased by the
premium originally received. The writing of covered call options may be deemed
to involve the pledge of the securities against which the option is being
written. Securities against which call options are written will be segregated on
the books of the custodian for the Portfolio.
The Portfolio may purchase call options on any securities in which it
may invest in anticipation of an increase in the market value of such
securities. The purchase of a call option would entitle the Portfolio, in
exchange for the premium paid, to purchase a security at a specified price
during the option period. The Portfolio would ordinarily have a gain if the
value of the securities increased above the exercise price sufficiently to cover
the premium and would have a loss if the value of the securities remained at or
below the exercise price during the option period.
The Balanced, Growth and Income, Capital Growth, Global Discovery and
International Portfolios will normally purchase put options in anticipation of a
decline in the market value of securities in their portfolios ("protective
puts") or securities of the type in which they are permitted to invest. The
purchase of a put option would entitle the Portfolio, in exchange for the
premium paid, to sell a security, which may or may not be held by the Portfolio,
at a specified price during the option period. The purchase of protective puts
is designed merely to offset or hedge against a decline in the market value of
the Portfolio's portfolio securities. Put options may also be purchased by the
Portfolio for the purpose of affirmatively benefiting from a decline in the
price of securities which the Portfolio does not own. The Portfolio would
ordinarily recognize a gain if the value of the securities decreased below the
exercise price sufficiently to cover the premium and would recognize a loss if
the value of the securities remained at or above the exercise price. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying portfolio securities.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying securities
markets that cannot be reflected in the option markets. Exchange markets in
securities options are a relatively new and untested concept. It is impossible
to predict the volume of trading that may exist in such options, and there can
be no assurance that viable exchange markets will develop or continue.
The Fund may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. At present, approximately
thirty broker-dealers make these markets and the Adviser will consider risk
factors such as their creditworthiness when determining a broker-dealer with
which to engage in options transactions. The ability to terminate
over-the-counter option positions is more limited than with exchange-traded
option positions because the predominant market is the issuing broker rather
than an exchange, and may involve the risk that broker-dealers participating in
such transactions will not fulfill their obligations. Written over-the-counter
options purchased by the Fund and portfolio securities "covering" the Fund's
obligation pursuant to an over-the-counter option may be deemed to be illiquid
and may not be readily marketable. The Adviser will monitor the creditworthiness
of dealers with whom the Fund enters into such options transactions under the
general supervision of the Fund's Trustees.
Securities Index Options
The Bond, Balanced, Growth and Income, Capital Growth, Global Discovery
and International Portfolios may each purchase call and put options on
securities indexes for the purpose of hedging against the risk of unfavorable
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price movements adversely affecting the value of a Portfolio's securities.
Options on securities indexes are similar to options on stock except that the
settlement is made in cash.
Unlike a securities option, which gives the holder the right to
purchase or sell a specified security at a specified price, an option on a
securities index gives the holder the right to receive a cash "exercise
settlement amount" equal to (i) the difference between the exercise price of the
option and the value of the underlying securities index on the exercise date,
multiplied by (ii) a fixed "index multiplier." In exchange for undertaking the
obligation to make such cash payment, the writer of the securities index option
receives a premium.
A securities index fluctuates with changes in the market values of the
securities so included. Some securities index options are based on a broad
market index such as the S&P 500 or the NYSE Composite Index, or a narrower
market index such as the S&P 100. Indices are also based on an industry or
market segment such as the AMEX Oil and Gas Index or the Computer and Business
Equipment Index. Options on securities indexes are currently traded on exchanges
including the Chicago Board Options Exchange, Philadelphia Exchange, New York
Stock Exchange, and American Stock Exchange.
The effectiveness of hedging through the purchase of securities index
options will depend upon the extent to which price movements in the portion of
the securities portfolio being hedged correlate with price movements in the
selected securities index. Perfect correlation is not possible because the
securities holdings of a Portfolio will not exactly match the composition of the
securities indexes on which options are written. In addition, the purchase of
securities index options involves essentially the same risks as the purchase of
options on futures contracts. The principal risk is that the premium and
transactions costs paid by a Portfolio in purchasing an option will be lost as a
result of unanticipated movements in prices of the securities comprising the
securities index on which the option is written. Options on securities indexes
also entail the risk that a liquid secondary market to close out the option will
not exist, although a Portfolio will generally only purchase or write such an
option if the Adviser believes the option can be closed out.
Futures Contracts
The Fund may, on behalf of the Bond, Balanced and International
Portfolios, purchase and sell futures contracts on debt securities to hedge
against anticipated changes in interest rates that might otherwise have an
adverse effect upon the value of the Portfolio's debt securities. In addition,
the Fund may, on behalf of the Non-Money Market Portfolios, purchase and sell
securities index futures to hedge the equity securities of a Portfolio with
regard to market (systematic) risk as distinguished from stock-specific risk.
Each of these five Portfolios may also purchase and write put and call options
on futures contracts of the type which such Portfolio is authorized to enter
into and may engage in related closing transactions. All of such futures on debt
securities, stock index futures and related options will be traded on exchanges
that are licensed and regulated by the Commodity Futures Trading Commission
("CFTC") or on appropriate foreign exchanges, to the extent permitted by law.
Even though at the present time no contracts based on global indices which meet
the International Portfolio's investment criteria are available, there are U.S.
stock indices which may be used to hedge U.S. securities held in that Portfolio.
Futures on Debt Securities
A futures contract on a debt security is a binding contractual
commitment which, if held to maturity, will result in an obligation to make or
accept delivery, during a particular future month, of securities having a
standardized face value and rate of return. By purchasing futures on debt
securities--assuming a "long" position--the Fund, on behalf of a Portfolio, will
legally obligate itself to accept the future delivery of the underlying security
and pay the agreed price. By selling futures on debt securities--assuming a
"short" position--it will legally obligate itself to make the future delivery of
the security against payment of the agreed price. Open futures positions on debt
securities will be valued at the most recent settlement price, unless such price
does not appear to the Trustees to reflect the fair value of the contract, in
which case the positions will be valued by or under the direction of the
Trustees.
Positions taken in the futures markets are normally not held to
maturity, but are instead liquidated through offsetting transactions which may
result in a profit or a loss. While futures positions taken by the Fund on
behalf of a Portfolio will usually be liquidated in this manner, the Fund may
instead make or take delivery of the underlying securities whenever it appears
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economically advantageous to the Portfolio to do so. A clearing corporation
associated with the exchange on which futures are traded assumes responsibility
for closing-out and guarantees that the sale and purchase obligations will be
performed with regard to all positions that remain open at the termination of
the contract.
Hedging by use of futures on debt securities seeks to establish more
certainly than would otherwise be possible the effective rate of return on
portfolio securities. A Portfolio may, for example, take a "short" position in
the futures market by selling contracts for the future delivery of debt
securities held by the Portfolio (or securities having characteristics similar
to those held by the Portfolio) in order to hedge against an anticipated rise in
interest rates that would adversely affect the value of the Portfolio's
portfolio securities. When hedging of this character is successful, any
depreciation in the value of portfolio securities will be substantially offset
by appreciation in the value of the futures position.
On other occasions, the Portfolio may take a "long" position by
purchasing futures on debt securities. This would be done, for example, when the
Fund intends to purchase for the Portfolio particular securities when it has the
necessary cash, but expects the rate of return available in the securities
markets at that time to be less favorable than rates currently available in the
futures markets. If the anticipated rise in the price of the securities should
occur (with its concomitant reduction in yield), the increased cost to the
Portfolio of purchasing the securities will be offset, at least to some extent,
by the rise in the value of the futures position taken in anticipation of the
subsequent securities purchase.
Stock Index Futures. A stock index futures contract does not require the
physical delivery of securities, but merely provides for profits and losses
resulting from changes in the market value of the contract to be credited or
debited at the close of each trading day to the respective accounts of the
parties to the contract. On the contract's expiration date a final cash
settlement occurs and the futures positions are simply closed out. Changes in
the market value of a particular stock index futures contract reflect changes in
the specified index of equity securities on which the future is based. That
index is designed to reflect overall price trends in the market for equity
securities.
Stock index futures may be used to hedge the equity securities of each
of the Balanced, Growth and Income, Capital Growth or International Portfolios
with regard to market (systematic) risk (involving the market's assessment of
over-all economic prospects), as distinguished from stock-specific risk
(involving the market's evaluation of the merits of the issuer of a particular
security). By establishing an appropriate "short" position in stock index
futures, the Fund may seek to protect the value of the equity of a Portfolio's
securities against an overall decline in the market for equity securities.
Alternatively, in anticipation of a generally rising market, the Fund can seek
on behalf of a Portfolio to avoid losing the benefit of apparently low current
prices by establishing a "long" position in stock index futures and later
liquidating that position as particular equity securities are in fact acquired.
To the extent that these hedging strategies are successful, the Portfolio will
be affected to a lesser degree by adverse overall market price movements,
unrelated to the merits of specific portfolio equity securities, than would
otherwise be the case.
Options on Futures. For bona fide hedging purposes, the Fund may also purchase
and write, on behalf of each of the Bond, Balanced, Growth and Income, Capital
Growth and International Portfolios, call and put options on futures contracts,
which are traded on exchanges that are licensed and regulated by the CFTC or on
any foreign exchange for the purpose of options trading, to the extent permitted
by law. A "call" option on a futures contract gives the purchaser the right, in
return for the premium paid, to purchase a futures contract (assume a "long"
position) at a specified exercise price at any time before the option expires. A
"put" option gives the purchaser the right, in return for the premium paid, to
sell a futures contract (assume a "short" position), for a specified exercise
price, at any time before the option expires.
Upon the exercise of a "call," the writer of the option is obligated to
sell the futures contract (to deliver a "long" position to the option holder) at
the option exercise price, which will presumably be lower than the current
market price of the contract in the futures market. Upon exercise of a "put,"
the writer of the option is obligated to purchase the futures contract (deliver
a "short" position to the option holder) at the option exercise price, which
will presumably be higher than the current market price of the contract in the
futures market. When a person exercises an option and assumes a long futures
position, in the case of a "call," or a short futures position, in the case of a
"put," his gain will be credited to his futures margin account, while the loss
suffered by the writer of the option will be debited to his account. However, as
with the trading of futures, most participants in the options markets do not
seek to realize their gains or losses by exercise of their option rights.
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Instead, the holder of an option will usually realize a gain or loss by buying
or selling an offsetting option at a market price that will reflect an increase
or a decrease from the premium originally paid.
Options on futures can be used by a Portfolio to hedge substantially
the same risks as might be addressed by the direct purchase or sale of the
underlying futures contracts. If the Portfolio purchases an option on a futures
contract, it may obtain benefits similar to those that would result if it held
the futures position itself. But in contrast to a futures transaction, in which
only transaction costs are involved, benefits received in an option transaction
will be reduced by the amount of the premium paid as well as by transaction
costs. In the event of an adverse market movement, however, the Portfolio will
not be subject to a risk of loss on the option transaction beyond the price of
the premium it paid plus its transaction costs, and may consequently benefit
from a favorable movement in the value of its portfolio securities that would
have been more completely offset if the hedge had been effected through the use
of futures.
If a Portfolio writes options on futures contracts, the Portfolio will
receive a premium but will assume a risk of adverse movement in the price of the
underlying futures contract comparable to that involved in holding a futures
position. If the option is not exercised, the Portfolio will gain the amount of
the premium, which may partially offset unfavorable changes in the value of
securities held in or to be acquired for the Portfolio. If the option is
exercised, the Portfolio will incur a loss in the option transaction, which will
be reduced by the amount of the premium it has received, but which may partially
offset favorable changes in the value of its portfolio securities.
While the holder or writer of an option on a futures contract may
normally terminate its position by selling or purchasing an offsetting option of
the same series, the Portfolio's ability to establish and close out options
positions at fairly established prices will be subject to the maintenance of a
liquid market. A Portfolio will not purchase or write options on futures
contracts unless, in the Adviser's opinion, the market for such options has
sufficient liquidity that the risks associated with such options transactions
are not at unacceptable levels.
Limitations on the Use of Futures Contracts and Options on Futures
All of the futures contracts and options on futures transactions into
which the Fund will enter will be for bona fide hedging or other appropriate
risk management purposes as permitted by CFTC regulations and to the extent
consistent with requirements of the Securities and Exchange Commission (the
"SEC").
To ensure that its futures and options transactions meet this standard,
the Fund will enter into them only for the purposes or with the intent specified
in CFTC regulations, subject to the requirements of the SEC. The Fund will
further seek to assure that fluctuations in the price of the futures contracts
and options on futures that it uses for hedging purposes will be substantially
correlated to fluctuations in the price of the securities held by a Portfolio or
which it expects to purchase, though there can be no assurance that this result
will be achieved. The Fund will sell futures contracts or acquire puts to
protect against a decline in the price of securities that a Portfolio owns. The
Fund will purchase futures contracts or calls on futures contracts to protect a
Portfolio against an increase in the price of securities the Fund intends later
to purchase for the Portfolio before it is in a position to do so.
As evidence of this hedging intent, the Fund expects that on 75% or
more of the occasions on which it purchases a long futures contract or call
option on futures for a Portfolio the Fund will effect the purchase of
securities in the cash market or take delivery as it closes out a Portfolio's
futures position. In particular cases, however, when it is economically
advantageous to the Portfolio, a long futures position may be terminated (or an
option may expire) without the corresponding purchase of securities.
As an alternative to literal compliance with the bona fide hedging
definition, a CFTC definition now permits the Fund to elect to comply with a
different test, under which its long futures positions will not exceed the sum
of (a) cash or cash equivalents segregated for this purpose, (b) cash proceeds
on existing investments due within thirty days and (c) accrued profits on the
particular futures or options positions. However, the Fund will not utilize this
alternative unless it is advised by counsel that to do so is consistent with the
requirements of the SEC.
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Futures on debt securities and stock index futures are at present
actively traded on exchanges that are licensed and registered by the CFTC, or
consistent with the CFTC regulations on foreign exchanges. Portfolios will incur
brokerage fees in connection with their futures and options transactions, and
will be required to deposit and maintain funds with brokers as margin to
guarantee performance of futures obligations. In addition, while futures
contracts and options on futures will be purchased and sold to reduce certain
risks, those transactions themselves entail certain other risks. Thus, while a
Portfolio may benefit from the use of futures and options on futures,
unanticipated changes in interest rates or stock price movements may result in a
poorer overall performance for the Portfolio than if it had not entered into any
futures contracts or options transactions. Moreover, in the event of an
imperfect correlation between the futures position and the portfolio position
which is intended to be protected, the desired protection may not be obtained
and the Portfolio may be exposed to risk of loss.
Each Portfolio, in dealing in futures contracts and options on futures,
is subject to the 300% asset coverage requirement for borrowings set forth under
"Investment Restrictions" in the Fund's prospectus. The Trustees have also
adopted a policy (which is not fundamental and may be modified by the Trustees
without a shareholder vote) that, immediately after the purchase or sale of a
futures contract or option thereon, the value of the aggregate initial margin
with respect to all futures contracts and premiums on options on futures
contracts entered into by a Portfolio will not exceed 5% of the fair market
value of the Portfolio's total assets. Additionally, the value of the aggregate
premiums paid for all put and call options held by the Portfolio will not exceed
2% of its net assets. A futures contract for the receipt of a debt security and
long index futures will be offset by assets of the Portfolio held in a
segregated account in an amount equal to the total market value of the futures
contracts less the amount of the initial margin for the contracts.
Foreign Currency Transactions
The Non-Money Market Portfolios may enter into forward foreign currency
exchange contracts ("forward contracts") for hedging purposes. These Portfolios
may also, for hedging purposes, purchase foreign currencies in the form of bank
deposits as well as other foreign money market instruments, including but not
limited to, bankers' acceptances, certificates of deposit, commercial paper,
short-term government and corporate obligations and repurchase agreements. The
International Portfolio may also enter into foreign currency futures contracts
and foreign currency options.
Because investments in foreign companies usually will involve
currencies of foreign countries, and because the Non-Money Market Portfolios
temporarily may hold funds in bank deposits in foreign currencies during the
completion of investment programs, the value of their assets as measured in U.S.
dollars may be affected favorably or unfavorably by changes in foreign currency
exchange rates and exchange control regulations, and they may incur costs in
connection with conversions between various currencies. Although the Non-Money
Market Portfolios value their assets daily in terms of U.S. dollars, they do not
intend to convert their holdings of foreign currencies into U.S. dollars on a
daily basis. They will do so from time to time, and investors should be aware of
the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Non-Money
Market Portfolios at one rate, while offering a lesser rate of exchange should
the Non-Money Market Portfolios desire to resell that currency to the dealer.
The Non-Money Market Portfolios will conduct their foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market, or through entering into forward or, in
the case of the International Portfolio, futures contracts to purchase or sell
foreign currencies.
A forward contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades.
A foreign currency futures contract is a standardized contract for the
future delivery of a specified amount of a foreign currency at a future date at
a price set at the time of the contract. The agreed price may be fixed or within
a specified range of prices. Foreign currency futures contracts traded in the
United States are designed by and traded on exchanges regulated by the CFTC,
such as the Chicago Mercantile Exchange. Futures contracts involve brokerage
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costs, which may vary from less than 1% to 2.5% of the contract price, and
require parties to the contract to make "margin" deposits to secure performance
of the contract. The International Portfolio would also be required to segregate
assets to cover contracts that would require it to purchase foreign currencies.
The International Portfolio would enter into futures contracts solely for
hedging or other appropriate risk management purposes as defined in CFTC
regulations.
Forward contracts differ from foreign currency futures contracts in
certain respects. For example, the maturity date of a forward contract may be
any fixed number of days from the date of the contract agreed upon by the
parties, rather than a predetermined date in a given month, and they may be in
any amounts agreed upon by the parties rather than predetermined amounts. Also,
forward contracts are traded directly between currency traders so that no
intermediary is required. A forward contract generally requires no margin or
other deposit.
Upon the maturity of a forward or foreign currency futures contract a
Portfolio may either accept or make delivery of the currency specified in the
contract or, at or prior to maturity, enter into a closing purchase transaction
involving the purchase or sale of an offsetting contract. Closing purchase
transactions with respect to forward contracts are usually effected with the
currency trader who is a party to the original forward contract. Closing
purchase transactions with respect to futures contracts are effected on a
commodities exchange; a clearing corporation associated with the exchange
assumes responsibility for closing out such contracts.
A Portfolio may enter into forward contracts and foreign currency
futures contracts under certain circumstances. When a Portfolio enters into a
contract for the purchase or sale of a security denominated in a foreign
currency, or when a Portfolio anticipates the receipt in a foreign currency of
dividends or interest payments on such a security which it holds, the Portfolio
may desire to "lock in" the U.S. dollar price of the security or the U.S. dollar
equivalent of such dividend or interest payment, as the case may be. By entering
into a forward or futures contract for the purchase or sale, for a fixed amount
of dollars, of the amount of foreign currency involved in the underlying
transactions, the Portfolio will attempt to protect itself against a possible
loss resulting from an adverse change in the relationship between the U.S.
dollar and the foreign currency during the period between the date on which the
security is purchased or sold, or on which the dividend or interest payment is
declared, and the date on which such payments are made or received.
Additionally, when management of a Portfolio believes that the currency
of a particular foreign country may suffer a substantial decline against the
U.S. dollar, it may enter into a forward or futures contract to sell, for a
fixed amount of dollars, the amount of foreign currency approximating the value
of some or all of the Portfolio's securities denominated in such foreign
currency. The precise matching of the forward or futures contract amounts and
the value of the securities involved will not generally be possible because the
future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date on which the contract is entered into and the date it matures. The precise
projection of short-term currency market movements is not possible, and
short-term hedging provides a means of fixing the dollar value of a portion of
the Portfolio's foreign assets.
The Non-Money Market Portfolios do not intend to enter into such
forward or futures contracts to protect the value of their portfolio securities
on a regular continuous basis, and will not do so if, as a result, a Portfolio
will have more than 15% of the value of its total assets committed to the
consummation of such contracts. A Portfolio also will not enter into such
forward or foreign currency futures contracts or maintain a net exposure to such
contracts where the consummation of the contracts would obligate the Portfolio
to deliver an amount of foreign currency in excess of the value of the
Portfolio's securities or other assets denominated in that currency. Under
normal circumstances, consideration of the prospect for currency parities will
be incorporated into the long-term investment decisions made with regard to
overall diversification strategies. However, the Non-Money Market Portfolios
believe that it is important to have the flexibility to enter into such forward
or foreign currency futures contracts when each determines that the best
interests of the Portfolio will be served.
Except when a Portfolio enters into a forward contract for the purpose
of the purchase or sale of a security denominated in a foreign currency, State
Street Bank and Trust Company (the "Custodian"), will place cash or liquid
securities into a segregated account of the Portfolio in an amount equal to the
value of the Portfolio's total assets committed to the consummation of forward
contracts (or the Portfolio's forward contracts will be otherwise covered
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consistent with applicable regulatory policies) and foreign currency futures
contracts that require the Portfolio to purchase foreign currencies. If the
value of the securities placed in the segregated account declines, additional
cash or securities will be placed in the account on a daily basis so that the
value of the account will equal the amount of the Portfolio's commitments with
respect to such contracts.
The Non-Money Market Portfolios generally will not enter into a forward
or foreign currency futures contract with a term of greater than one year. It
also should be realized that this method of protecting the value of a
Portfolio's securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange which the Portfolio can achieve at some future
point in time.
While the Non-Money Market Portfolios will enter into forward and, in
the case of the International Portfolio, foreign currency futures contracts and
foreign currency options to reduce currency exchange rate risks, transactions in
such contracts involve certain other risks. Thus, while a Portfolio may benefit
from such transactions, unanticipated changes in currency prices may result in a
poorer overall performance for the Portfolio than if it had not engaged in any
such transaction. Moreover, there may be imperfect correlation between the value
of the Portfolio's holdings of securities denominated in a particular currency
and forward or futures contracts entered into by the Portfolio. Such imperfect
correlation may prevent the Portfolio from achieving a complete hedge or expose
the Portfolio to risk of foreign exchange loss.
The International Portfolio may purchase options on foreign currencies
for hedging purposes in a manner similar to that of transactions in forward
contracts. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such decreases in the value of portfolio securities,
the Portfolio may purchase put options on the foreign currency. If the value of
the currency declines, the Portfolio will have the right to sell such currency
for a fixed amount of dollars which exceeds the market value of such currency.
This would result in a gain that may offset, in whole or in part, the negative
effect of currency depreciation on the value of the Portfolio's securities
denominated in that currency.
Conversely, if a rise in the dollar value of a currency is projected
for those securities to be acquired, thereby increasing the cost of such
securities, the International Portfolio may purchase call options on such
currency. If the value of such currency increased, the purchase of such call
options would enable the Portfolio to purchase currency for a fixed amount of
dollars which is less than the market value of such currency. Such a purchase
would result in a gain that may offset, at least partially, the effect of any
currency related increase in the price of securities the Portfolio intends to
acquire. As in the case of other types of options transactions, however, the
benefit the Portfolio derives from purchasing foreign currency options will be
reduced by the amount of the premium and related transaction costs. In addition,
if currency exchange rates do not move in the direction or to the extent
anticipated, the Portfolio could sustain losses on transactions in foreign
currency options which would deprive it of a portion or all of the benefits of
advantageous changes in such rates.
The International Portfolio may close out its position in a currency
option by either selling the option it has purchased or entering into an
offsetting option.
Strategic Transactions and Derivatives Applicable to the Global Discovery
Portfolio
The Global Discovery 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.
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,
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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
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
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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
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.
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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
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
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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
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.
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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
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.
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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 cash or
liquid 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 cash or liquid 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 cash or liquid 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 cash or
liquid 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
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
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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.")
Debt Securities
If the Adviser determines that the capital appreciation of debt
securities is likely to exceed that of common stocks, the Global Discovery
Portfolio may invest in debt securities of foreign and U.S. issuers. Global
Discovery 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 Global Discovery 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 Global
Discovery 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
The Bond, Balanced, Capital Growth and Global Discovery Portfolios may
each invest in below investment grade securities (rated Ba and lower by Moody's
and BB and lower by S&P) or unrated securities. Such securities carry a high
degree of risk (including the possibility of default or bankruptcy of these
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 ratings categories and are considered speculative. The Global Discovery
Portfolio may invest up to 5% of its net assets in such securities. The lower
the ratings of such debt securities, the greater their risks render them like
equity securities. See the Appendix to this Statement of Additional Information
for a more complete description of the ratings assigned by ratings organizations
and their respective characteristics.
As economic downturn may disrupt the high yield market and impair the
ability of issuers to repay principal and interest. Also, an increase in
interest rates could adversely affect the value of such obligations held by a
Portfolio. Prices and yields of high yield securities will fluctuate over time
and may affect a Portfolio's net asset value. In addition, investments in high
yield zero coupon or pay-in-kind bonds, rather than income-bearing high yield
securities, may be more speculative and may be subject to greater fluctuations
in value due to changes in interest rates.
The trading market for high yield securities may be thin to the extent
that there is no established retail secondary market or because of a decline in
the value of such securities. A thin trading market may limit the ability of the
Trustees to value high yield securities accurately in a Portfolio and to dispose
of those securities. Adverse publicity and investor perceptions may decrease the
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values and liquidity of high yield securities. These securities may also involve
special registration responsibilities, liabilities and costs.
Credit quality in the high yield securities market can change suddenly
and unexpectedly, and even recently-issued credit ratings may not fully reflect
the actual risks posed by a particular high yield security. For these reasons,
it is the policy of the Adviser not to rely exclusively on ratings issued by
established credit rating agencies, but to supplement such ratings with its own
independent and on-going review of credit quality. The achievement of the
Portfolios' investment objectives may be more dependent on the Adviser's credit
analysis than is the case for higher quality bonds. Should the rating of a
portfolio security be downgraded the Adviser will determine whether it is in the
best interest of that Portfolio to retain or dispose of the security.
Prices for below investment grade securities may be affected by
legislative and regulatory developments. For example, federal rules require
savings and loan institutions gradually to reduce their holdings of this type of
security. Also, Congress has from time to time considered legislation which
would restrict or eliminate the corporate tax deduction for interest payments in
these securities and regulate corporate restructurings. Such legislation may
significantly depress the prices of outstanding securities of this type.
Combined Transactions
Each Portfolio may enter into multiple transactions, including multiple
options transactions, multiple futures transactions, multiple foreign currency
transactions (including forward contracts) and any combination of futures,
options and foreign currency transactions ("component" transactions), instead of
a single transaction, as part of a single hedging strategy when, in the opinion
of the Adviser, it is in the best interest of a Portfolio to do so. A combined
transaction, while part of a single hedging strategy, may not offset fully the
risks of each component transaction and, therefore, may contain elements of risk
that are present in each of its component transactions. (See above for the risk
characteristics of certain transactions.)
Risks of Specialized Investment Techniques Abroad
The above described specialized investment techniques when conducted
abroad may not be regulated as effectively as in the United States; may not
involve a clearing mechanism and related guarantees, and are subject to the risk
of governmental actions affecting trading in, or the prices of, foreign
securities. The value of such positions also could be adversely affected by: (i)
other complex foreign political, legal and economic factors; (ii) lesser
availability than in the United States of data on which to make trading
decisions; (iii) delays in the Fund's ability to act upon economic events
occurring in foreign markets during on-business hours in the United States; (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the United States; and (v) lesser trading volume.
INVESTMENT RESTRICTIONS
(See "INVESTMENT RESTRICTIONS" in the Fund's prospectus.)
Unless specified to the contrary, the following restrictions may not be
changed with respect to any Portfolio without the approval of the majority of
outstanding voting securities of that Portfolio (which, under the 1940 Act and
the rules thereunder and as used in this Statement of Additional Information,
means the lesser of (1) 67% of the shares of that Portfolio present at a meeting
if the holders of more than 50% of the outstanding shares of that Portfolio are
present in person or by proxy, or (2) more than 50% of the outstanding shares of
that Portfolio). Any investment restrictions which involve a maximum percentage
of securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, an acquisition
or encumbrance of securities or assets of, or borrowings by or on behalf of, a
Portfolio.
In addition to the investment restrictions set forth in the Fund's
prospectus, the Fund may not on behalf of any Portfolio:
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(1) purchase and sell real estate (though it may invest in
securities of companies which deal in real estate and in other
permitted investments secured by real estate) or commodities
or commodities contracts, except (a) debt securities futures
contracts and securities index futures contracts and options
thereon, and (b) in the case of the International Portfolio,
foreign currency futures contracts;
(2) participate on a joint or a joint and several basis in any
trading account in securities, but may for the purpose of
possibly achieving better net results on portfolio
transactions or lower brokerage commission rates join with
other investment company and client accounts managed by
Scudder, Stevens & Clark or its affiliates in the purchase or
sale of portfolio securities;
(3) purchase or retain securities of an issuer any of whose
officers, directors, trustees or security holders is an
officer or Trustee of the Fund or a member, officer, director
or trustee of the investment adviser of the Fund if one or
more of such individuals owns beneficially more than one-half
of one percent (1/2 of 1%) of the shares or securities or both
(taken at market value) of such issuer and such individuals
owning more than one-half of one percent (1/2 of 1%) of such
shares or securities together own beneficially more than 5% of
such shares or securities or both;
(4) purchase securities on margin or make short sales unless, by
virtue of its ownership of other securities, it has the right
to obtain securities equivalent in kind and amount to the
securities sold and, if the right is conditional, the sale is
made upon the same conditions;
(5) issue senior securities, except as appropriate to evidence
indebtedness which a Portfolio is permitted to incur pursuant
to the Investment Restrictions set forth in the Fund's
prospectus and except for shares of various additional series
which may be established by the Trustees; or
(6) act as underwriter of the securities issued by others, except
to the extent that the purchase of securities in accordance
with its investment objective and policies directly from the
issuer thereof and the later disposition thereof may be deemed
to be underwriting.
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 Global Discovery and International Portfolios:
(1) hedge by purchasing put and call options, futures contracts,
or other derivative instruments on securities in an aggregate
amount equivalent to more than 10% of the Portfolio's total
assets;
(2) make securities loans if the value of such securities loaned
exceeds 10% of the value of the Portfolio's total assets at
the time any loan is made.
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 Global Discovery 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
41
<PAGE>
value of the obligations underlying such put options would
exceed 50% of the Portfolio's net assets;
(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.
"Value" for the purposes of all investment restrictions shall mean the
value used in determining a Portfolio's net asset value. (See "NET ASSET
VALUE.")
PURCHASES AND REDEMPTIONS
(See "PURCHASES AND REDEMPTIONS" in the Fund's prospectus.)
The separate accounts of the Participating Insurance Companies purchase
and redeem shares of each Portfolio based on, among other things, the amount of
premium payments to be invested and surrender and transfer requests to be
effected on that day pursuant to variable annuity contracts and variable life
insurance policies but only on days on which the Exchange is open for trading.
Such purchases and redemptions of the shares of each Portfolio are effected at
their respective net asset values per share determined as of the close of
regular trading on the Exchange (normally 4 p.m. eastern time) on that same day
except that, in the case of the Money Market Portfolio, purchases will not be
effected until the next determination of net asset value after federal funds
have been made available to the Fund. (See "NET ASSET VALUE.") Payment for
redemptions will be made by State Street Bank and Trust Company or Brown
Brothers Harriman & Co. on behalf of the Fund and the applicable Portfolios
within seven days thereafter. No fee is charged the separate accounts of the
Participating Insurance Companies when they redeem Fund shares.
The Fund may suspend the right of redemption of shares of any Portfolio
and may postpone payment for any period: (i) during which the Exchange is closed
other than customary weekend and holiday closings or during which trading on the
Exchange is restricted; (ii) when the SEC determines that a state of emergency
exists which may make payment or transfer not reasonably practicable, (iii) as
the SEC may by order permit for the protection of the security holders of the
Fund or (iv) at any other time when the Fund may, under applicable laws and
regulations, suspend payment on the redemption of its shares.
42
<PAGE>
Should any conflict between VA contract and VLI policy holders arise
which would require that a substantial amount of net assets be withdrawn from
the Fund, orderly portfolio management could be disrupted to the potential
detriment of such contract and policy holders.
INVESTMENT ADVISER AND DISTRIBUTOR
(See "INVESTMENT ADVISER" and "DISTRIBUTOR" in the Fund's prospectus.)
Investment Adviser
The Fund has four investment advisory agreements, one for the Money
Market Portfolio, Bond Portfolio, Balanced Portfolio and Capital Growth
Portfolio, one for the International Portfolio, one for the Growth and Income
Portfolio and one for the Global Discovery Portfolio (the "Agreements"). These
Agreements are 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 $115 billion in assets
for its clients, including: more than $50 billion in U.S. and foreign bonds, and
over $10 billion in balanced portfolios for over 3,000 institutional and private
accounts. In addition, the assets of Scudder's international investment company
clients exceed $6 billion. Scudder, Stevens & Clark, Inc. was established in
1919 and pioneered the practice of providing investment counsel to individual
clients on a fee basis. In 1928, it introduced the first no-load mutual fund to
the public. The Adviser has been a leader in international investment management
and trading for over 40 years.
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice, and the firm derives no
income from brokerage or underwriting of securities. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations. In addition, it manages Montgomery Street Income Securities,
Inc., Scudder California Tax Free Trust, Scudder Cash Investment Trust, Scudder
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 Pathway Series, 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 $13 billion and includes the
AARP Growth Trust, AARP Income Trust, AARP Tax Free Income Trust, AARP Managed
Investment Portfolios 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
43
<PAGE>
Adviser's clients. However, the Adviser regards this information and material as
an adjunct to its own research activities. Scudder's international investment
management team travels the world, researching hundreds of companies. In
selecting the securities in which the Fund may invest, the conclusions and
investment decisions of the Adviser with respect to the Fund are based primarily
on the analyses of its own research department.
Under the Agreements, the Adviser regularly provides the Fund with
investment research, advice and supervision and furnishes continuously an
investment program consistent with the investment objectives and policies of
each Portfolio, and determines, for each Portfolio, what securities shall be
purchased, what securities shall be held or sold, and what portion of a
Portfolio's assets shall be held uninvested, subject always to the provisions of
the Fund's Declaration of Trust and By-Laws, and of the 1940 Act and to a
Portfolio's investment objectives, policies and restrictions, and subject
further to such policies and instructions as the Trustees may from time to time
establish. The Adviser also advises and assists the officers of the Fund in
taking such steps as are necessary or appropriate to carry out the decisions of
its Trustees and the appropriate committees of the Trustees regarding the
conduct of the business of the Fund.
The Adviser pays the compensation and expenses of all affiliated
Trustees and executive employees of the Fund and makes available, without
expense to the Fund, the services of such affiliated persons as may duly be
elected Trustees of the Fund, subject to their individual consent to serve and
to any limitations imposed by law, and pays the Fund's office rent and provides
investment advisory, research and statistical facilities and all clerical
services relating to research, statistical and investment work. For its advisory
services the Adviser receives compensation monthly at the following annual rates
for each Portfolio:
<TABLE>
<CAPTION>
% of the average
daily net asset
values of each Dollar Amount
Portfolio Portfolio 1994 1995 1996
<S> <C> <C> <C> <C>
Money Market Portfolio .370% $269,963 $306,996 $325,791
Bond Portfolio .475% 650,361 657,112 291,740
Balanced Portfolio .475% 218,621 269,230 372,176
Growth and Income Portfolio .475% 0 169,852 326,033
Capital Growth Portfolio .475% 1,199,585 1,383,919 1,870,361
Global Discovery Portfolio .975% -- -- 80,681
International Portfolio .875%* 3,363,597 4,357,541 5,590,601
</TABLE>
* For any calendar month during which the average daily net assets of
International Portfolio exceed $500,000,000, the fee payable for that
month, with respect to the excess over $500,000,000, is calculated at
an annual rate of .775%. As a result, the Adviser received compensation
at an annual rate of .863% for the fiscal year ended December 31, 1996.
Under the Agreements, 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 Fund's investment advisory
agreements and underwriting agreement, have approved payments to the Adviser and
Scudder Investor Services, Inc. for clerical, accounting and certain other
services they may provide the Fund. Effective October 1, 1994, the Trustees
44
<PAGE>
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.
For the year ended December 31, 1994, such compensation amounted to
$40,297 for the Money Market Portfolio, $40,238 for the Bond Portfolio, $38,204
for the Balanced Portfolio, $25,179 for the Growth and Income Portfolio, $45,253
for the Capital Growth Portfolio, $45,272 for the International Portfolio;
administrative expenses not imposed aggregated $7,119 for the Balanced
Portfolio.
For the year ended December 31, 1995, such compensation amounted to
$30,000 for the Money Market Portfolio, $43,187 for the Bond Portfolio, $37,353
for the Balanced Portfolio, $38,256 for the Growth and Income Portfolio, $73,583
for the Capital Growth Portfolio and $277,867 for the International Portfolio.
For the year ended December 31, 1996, such compensation amounted to
$___ for the Money Market Portfolio, $___ for the Bond Portfolio, $___ for the
Balanced Portfolio, $___ for the Growth and Income Portfolio, $___ for the
Capital Growth Portfolio, $___ for the Global Discovery Portfolio and $___ for
the International Portfolio.
The Agreements dated November 14, 1986 (for the Money Market Portfolio,
Bond Portfolio, Balanced Portfolio and Capital Growth Portfolio), April 30, 1987
(for the International Portfolio), May 1, 1994 (for the Growth and Income
Portfolio) will remain in effect until September 30, 1997. The Agreement dated
May 1, 1996 (for the Global Discovery Portfolio) will remain in effect until
September 30, 1997. The Agreements will continue in effect from year to year
thereafter only if their continuance is approved annually by the vote of a
majority of those Trustees who are not parties to such Agreements or "interested
persons" of the Adviser or the Fund cast in person at a meeting called for the
purpose of voting on such approval and either by vote of a majority of the
Trustees or a majority of the outstanding securities of such Portfolio. The
Agreement for the Money Market Portfolio, Bond Portfolio, Balanced Portfolio and
Capital Growth Portfolio, the Agreement for the International Portfolio and the
Agreement for the Growth and Income Portfolio were last approved by such
Trustees (including a majority of the Trustees who are not such "interested
persons") on August 9, 1996. The Agreement for the Global Discovery Portfolio
was last approved by such Trustees (including a majority of the Trustees who are
not such "interested persons") on October 5, 1995. Each 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.
Each 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 Agreements and in discussions with the
Adviser concerning the Agreements, Trustees who are not "interested persons" of
the Fund are represented by independent counsel at the Fund's expense.
The Agreements provide 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 Agreements relate, except a loss resulting
from willful misfeasance, bad faith or gross negligence on the part of the
Adviser in the performance of its duties or from reckless disregard by the
Adviser of its obligations and duties under the Agreements.
Each Participating Insurance Company has agreed with the Adviser to
reimburse the Adviser for a period of five years to the extent that the
aggregate annual advisory fee paid on behalf of all Portfolios with respect to
the average daily net asset value of the shares of all Portfolios held in that
Participating Insurance Company's general or separate account (or those of
affiliates) is less than $25,000 in any year. It is expected that insurance
companies which become Participating Insurance Companies in the future will be
required to enter into similar arrangements.
Until April 30, 1998, the Adviser has agreed to waive part or all of
both the management and administrative fees for the Global Discovery Portfolio
to the extent that the Portfolio's expenses will be maintained at 1.50%.
45
<PAGE>
Officers and employees of the Adviser from time to time may have
transactions with various banks, including the Fund's custodian bank. It is the
Adviser's opinion that the terms and conditions of those transactions were not
influenced by existing or potential custodial or other Fund relationships.
None of the Trustees or officers of the Fund may have dealings with the
Fund as principals in the purchase or sale of securities.
Personal Investments by Employees of the Adviser
Employees of the Adviser are permitted to make personal securities
transactions, subject to requirements and restrictions set forth in the
Adviser's Code of Ethics. The Code of Ethics contains provisions and
requirements designed to identify and address certain conflicts of interest
between personal investment activities and the interests of investment advisory
clients such as the Portfolios. Among other things, the Code of Ethics, which
generally complies with standards recommended by the Investment Company
Institute's Advisory Group on Personal Investing, prohibits certain types of
transactions absent prior approval, imposes time periods during which personal
transactions may not be made in certain securities, and requires the submission
of duplicate broker confirmations and monthly reporting of securities
transactions. Additional restrictions apply to portfolio managers, traders,
research analysts and others involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
Distributor
The Fund has an underwriting agreement with Scudder Investor Services,
Inc. (the "Distributor"), a subsidiary of the Adviser, Two International Place,
Boston, Massachusetts 02110-4103. The Fund's underwriting agreement dated July
12, 1985, will remain in effect until September 30, 1997, and from year to year
thereafter only if its continuance is approved annually by a majority of the
Trustees who are not parties to such agreement or "interested persons" of any
such party and either by vote of a majority of the Trustees or a majority of the
outstanding voting securities of the Fund.
Under the principal underwriting agreement between the Fund and the
Distributor, the Fund is responsible for the payment of all fees and expenses in
connection with the preparation and filing of any registration statement and
prospectus covering the issue and sale of shares, and the registration and
qualification of shares for sale with the SEC in the various states, including
registering the Fund as a broker or dealer. The Fund will also pay the fees and
expenses of preparing, printing and mailing prospectuses annually to existing
shareholders and any notice, proxy statement, report, prospectus or other
communication to shareholders of the Fund, printing and mailing confirmations of
purchases of shares, any issue taxes or any initial transfer taxes, a portion of
toll-free telephone service for shareholders, wiring funds for share purchases
and redemptions (unless paid by the shareholder who initiates the transaction),
printing and postage of business reply envelopes and a portion of the computer
terminals used by both the Fund and the Distributor.
The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of the shares to
the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of the shares to the public. The
Distributor will pay all fees and expenses in connection with its qualification
and registration as a broker or dealer under Federal and state laws, a portion
of the toll-free telephone service and of computer terminals, and of any
activity which is primarily intended to result in the sale of shares issued by
the Fund, unless a 12b-l Plan is in effect which provides that the Fund shall
bear some or all of such expenses. The Distributor has entered into agreements
with broker-dealers authorized to offer and sell VA contracts and VLI policies
on behalf of the Participating Insurance Companies under which agreements the
broker-dealers have agreed to be responsible for the fees and expenses of any
prospectus, statement of additional information and printed information
supplemental thereto of the Fund distributed in connection with their offer of
VA contracts and VLI policies.
As agent, the Distributor currently offers shares of each Portfolio on
a continuous basis to the separate accounts of Participating Insurance Companies
in all states in which the Portfolio or the Fund may from time to time be
registered or where permitted by applicable law. The underwriting agreement
provides that the Distributor accepts orders for shares at net asset value
46
<PAGE>
without sales commission or load being charged. 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"),
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.
47
<PAGE>
<TABLE>
<CAPTION>
MANAGEMENT OF THE FUND
Trustees and Officers
Position with
Underwriter, Scudder
Investor Services,
Name, Age and Address Position with Fund Principal Occupation** Inc.
- --------------------- ------------------ ---------------------- --------------------
<S> <C> <C> <C>
David B. Watts*@+ (62) President and Trustee Managing Director of Scudder, Assistant Treasurer
Stevens & Clark, Inc.
Daniel Pierce*@+ (63) Vice President and Chairman of the Board and Vice President,
Trustee Managing Director of Scudder, Director and Assistant
Stevens & Clark, Inc. Treasurer
Dr. Kenneth Black, Jr. (72) Trustee Regents' Professor Emeritus of ----
Educational Foundation, Inc. Insurance, Georgia State
35 Broad Street University
11th Floor, Room 1144
Atlanta, GA 30303
Dr. Rosita P. Chang (42) Trustee Professor of Finance, _____
PACAP Research Center University of Rhode Island
College of Business
Administration
University of Rhode Island
7 Lippitt Road
Kingston, RI 02881-0802
Peter B. Freeman@ (64) Trustee Corporate Director and Trustee ----
100 Alumni Avenue
Providence, RI 02906
Dr. J. D. Hammond (63) Trustee Dean, Smeal College of Business ----
801 Business Administration, Pennsylvania
Administration Bldg. State University
Pennsylvania State University
University Park, PA 16802
Thomas S. Crain++ (56) Vice President Managing Director of Scudder, ----
Stevens & Clark, Inc.
Carol Franklin*#(44) Vice President Managing Director of Scudder, ----
Stevens & Clark, Inc.
William F. Gadsden*#(42) Vice President Managing Director of Scudder, ----
Stevens & Clark, Inc.
Jerard K. Hartman#(64) Vice President Managing Director of Scudder, ----
Stevens & Clark, Inc.
Robert T. Hoffman*#(38) Vice President Managing Director of Scudder, ----
Stevens & Clark, Inc.
48
<PAGE>
Position with
Underwriter, Scudder
Investor Services,
Name, Age and Address Position with Fund Principal Occupation** Inc.
- --------------------- ------------------ ---------------------- --------------------
Richard A. Holt*** (55) Vice President Managing Director of Scudder, ----
Stevens & Clark, Inc.
William M. Hutchinson*+(49) Vice President Principal of Scudder, Stevens & ----
Clark, Inc.
Thomas W. Joseph+ (58) Vice President Principal of Scudder, Stevens & Vice President,
Clark, Inc. Director, Treasurer
and Assistant Clerk
David S. Lee+ (63) Vice President Managing Director of Scudder, President, Assistant
Stevens & Clark, Inc. Treasurer and Director
Valerie F. Malter*#(38) Vice President Principal of Scudder, Stevens & ----
Clark, Inc.
Steven M. Meltzer+ (38) Vice President Managing Director of Scudder, ----
Stevens & Clark, Inc.
Gerald J. Moran*#(57) Vice President Principal of Scudder, Stevens & ----
Clark, Inc.
Randall K. Zeller# (42) Vice President Managing Director of Scudder, ----
Stevens & Clark, Inc.
Thomas F. McDonough+ (50) Vice President and Principal of Scudder, Stevens & Clerk
Secretary Clark, Inc.
Pamela A. McGrath+ (43) Vice President and Managing Director of Scudder, ----
Treasurer Stevens & Clark, Inc.
Edward J. O'Connell# (51) Vice President and Principal of Scudder, Stevens & Assistant Treasurer
Assistant Treasurer Clark, Inc.
Kathryn L. Quirk# (44) Vice President and Managing Director of Scudder, Vice President
Assistant Secretary 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).
** Unless otherwise stated, all the officers and Trustees have
been associated with their respective companies for more
than five years, but not necessarily in the same capacity.
@ Peter B. Freeman, Daniel Pierce and David B. Watts are members of the Executive Committee, which
has the power to declare dividends from ordinary income and distributions of realized capital
gains to the same extent as the Board is so empowered.
+ Address: Two International Place, Boston, Massachusetts 02110-4103
# Address: 345 Park Avenue, New York, New York 10154
++ Address: 600 Vine Street - Suite 2000, Cincinnati, Ohio 45202
*** Address: 111 E. Wacker Drive - Suite 2200, Chicago, Illinois 60601
</TABLE>
49
<PAGE>
Certain of the Trustees and officers of the Fund also serve in similar
capacities with other Scudder Funds.
REMUNERATION
Responsibilities of the Board--Board and Committee Meetings
The Board of Trustees is responsible for the general oversight of the
Fund's business. A majority of the Board's members are not affiliated with
Scudder, Stevens & Clark, Inc. (The "Advisor"). These "Independent Trustees"
have primary responsibility for assuring that the Fund is managed in the best
interests of its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of the Fund and other operational matters, including policies and
procedures designated to assure compliance with various regulatory requirements.
At least annually, the Independent Trustees review the fees paid to the Adviser
and its affiliates for investment advisory services and other administrative and
shareholder services. In this regard, they evaluate, among other things, each
Funds' investment performance, the quality and efficiency of the various other
services provided, costs incurred by the Adviser and its affiliates, and
comparative information regarding fees and expenses of competitive funds. They
are assisted in this process by the Fund's independent public accountants and by
independent legal counsel selected by the Independent Trustees.
All of the Independent Trustees serve on the Committee on Independent
Trustees, which nominates Independent Trustees and considers other related
matters, and the Audit Committee, which selects the Fund's independent public
accountants and reviews accounting policies and controls. In addition,
Independent Trustees from time to time have established and served on task
forces and subcommittees focusing on particular matters such as investment,
accounting and shareholder service issues.
The Independent Trustees met _____ times during 1996, including Board
and Committee meetings and meetings to review each Fund's contractual
arrangements as described above. All of the Independent Trustees attended ____%
of all such meetings.
Compensation of Officers and Trustees
The Independent Trustees receive the following compensation from Funds:
an annual trustee's fee of $12,000; a fee of $300 for attendance at each Board
meeting, audit committee meeting, or other meeting held for the purposes of
considering arrangements between the Fund and the Adviser or any affiliate of
the Adviser; $100 for any other committee meeting (although in some cases the
Independent Trustees have waived committee meeting fees); and reimbursement of
expenses incurred for travel to and from Board Meetings. No additional
compensation is paid to any Independent Trustee for travel time to meetings,
attendance at directors' educational seminars or conferences, service on
industry or association committees, participation as speakers at directors'
conferences, service on special trustee task forces or subcommittees or service
as lead or liaison trustee. Independent Trustees do not receive any employee
benefits such as pension, retirement or health insurance.
The Independent Trustees also serve in the same capacity for other
funds managed by the Adviser. These funds differ broadly in type an complexity
and in some cases have substantially different Trustee fee schedules. The
following table shows the aggregate compensation received by each Independent
Trustee during 1996 from the Trust and from all of Scudder funds as a group.
50
<PAGE>
<TABLE>
<CAPTION>
Compensation Table
for the year ended December 31, 1996
- ------------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5)
Pension or Total Compensation
Retirement From the Fund and
Benefits Accrued Estimated Fund Complex Paid
Aggregate Compensation from As Part of Fund Annual Benefits to Trustee
Name of Person, the Scudder Variable Life Expenses Upon Retirement
Position Investment Fund*
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dr. Kenneth Black, Jr., $ 26,233 N/A N/A $ 26,233
Trustee (7 funds)
Dr. Rosita P. Chang, $ 26,233 N/A N/A $ 26,233
Trustee (7 funds)
Peter B. Freeman, Trustee $ 16,483 N/A N/A $ 131,734
(33 funds)
Dr. J.D. Hammond, $ 26,233 N/A N/A $ 26,233
Trustee (7 funds)
</TABLE>
* 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.
Members of the Board of Trustees who are employees of Scudder or its
affiliates receive no direct compensation from the Fund, although they are
compensated as employees of Scudder, or its affiliates, as a result of which
they may be deemed to participate in fees paid by the Fund.
NET ASSET VALUE
(See "NET ASSET VALUE" and "VALUATION OF PORTFOLIO SECURITIES"
in the Fund's prospectus)
The net asset value of shares of each Portfolio of the Fund is computed
as of the close of regular trading on the Exchange on each day the Exchange is
open for trading (the "Value Time"). The Exchange is scheduled to be closed on
the following holidays: New Year's Day, Presidents Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving and Christmas. Net asset value
per share is determined by dividing the value of the total assets of a Fund,
less all liabilities, by the total number of shares outstanding.
The valuation of the Money Market Portfolio securities is based upon
their amortized cost, which does not take into account unrealized securities
gains or losses. This method involves initially valuing an instrument at its
cost and thereafter assuming a constant amortization to maturity of any discount
or premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Money Market Portfolio would receive if it
sold the instrument. During periods of declining interest rates, the quoted
yield on shares of the Money Market Portfolio may tend to be higher than a like
computation made by a fund with identical investments utilizing a method of
valuation based upon market prices and estimates of market prices for all of its
portfolio instruments. Thus, if the use of amortized cost by the Portfolio
resulted in a lower aggregate portfolio value on a particular day, a prospective
investor in the Money Market Portfolio would be able to obtain a somewhat higher
yield if he purchased shares of the Money Market Portfolio on that day, than
would result/from investment in a fund utilizing solely market values, and
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<PAGE>
existing investors in the Money Market Portfolio would receive less investment
income. The converse would apply in a period of rising interest rates.
An exchange-traded equity security (not subject to resale restrictions)
is valued at its most recent sale price as of the Value Time. Lacking any sales,
the security is valued at the calculated mean between the most recent bid
quotation and the most recent asked quotation (the "Calculated Mean"). If there
are no bid and asked quotations, the security is valued at the most recent bid
quotation. An unlisted equity security which is traded on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") system is
valued at the most recent sale price. If there are no such sales, the security
is valued at the high or "inside" bid quotation. The value of an equity security
not quoted on the NASDAQ System, but traded in another over-the-counter market,
is the most recent sale price. If there are no such sales, the security is
valued at the Calculated Mean. If there is no Calculated Mean, the security is
valued at the most recent bid quotation.
Debt securities, other than short-term securities, are valued at prices
supplied by the Fund's pricing agent which reflect broker/dealer supplied
valuations and electronic data processing techniques. Short-term securities with
remaining maturities of sixty days or less are valued by the amortized cost
method, which the Board believes approximates market value. If it is not
possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If no such bid quotation is available, the Adviser may
calculate the price of that debt security, subject to limitations established by
the Board.
Option contracts on securities, currencies, futures and other financial
instruments traded on an exchange are valued at their most recent sale price on
the exchange. If no sales are reported, the value is the Calculated Mean, or if
the Calculated Mean is not available, the most recent bid quotation in the case
of purchased options, or the most recent asked quotation in the case of written
options. Option contracts traded over-the-counter are valued at the most recent
bid quotation in the case of purchased options and at the most recent asked
quotation in the case of written options. Futures contracts are valued at the
most recent settlement price. Foreign currency forward contracts are valued at
the value of the underlying currency at the prevailing currency exchange rate.
If a security is traded on more than one exchange, or on one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of the Fund's Valuation Committee, the value of an
asset as determined in accordance with these procedures does not represent the
fair market value of the asset, the value of the asset is taken to be an amount
which, in the opinion of the Valuation Committee, represents fair market value
on the basis of all available information. The value of other portfolio holdings
owned by the Fund is determined in a manner which, in the discretion of the
Valuation Committee most fairly reflects fair market value of the property on
the valuation date.
Following the valuations of securities or other portfolio assets in
terms of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rates on the valuation date.
TAX STATUS
(See "TAX STATUS, DIVIDENDS AND DISTRIBUTIONS" in the Fund's prospectus.)
Each Portfolio of the Fund has elected to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). Such qualification does not involve governmental
supervision or management of investment practices or policy.
Each Portfolio intends to comply with the provisions of Section 817(h)
of the Code relating to diversification requirements for variable annuity,
endowment and life insurance contracts. Specifically, each Portfolio intends to
comply with either (i) the requirement of Section 817(h)(1) of the Code that its
assets be adequately diversified, or (ii) the "Safe Harbor for Diversification"
specified in Section 817(h)(2) of the Code, or (iii) the diversification
requirement of Section 817(h)(1) of the Code by having all or part of its assets
52
<PAGE>
invested in U.S. Treasury securities which qualify for the "Special Rule for
Investments in United States Obligations" specified in Section 817(h)(3) of the
Code.
A regulated investment company qualifying under Subchapter M of the
Code is required to distribute to its shareholders at least 90 percent of its
investment company taxable income and generally is not subject to federal income
tax to the extent that it distributes annually its investment company taxable
income and net realized capital gains in the manner required under the Code.
Investment company taxable income of a Portfolio generally is made up
of dividends, interest, certain currency gains and losses and net-short-term
capital gains in excess of net long-term capital losses, less expenses. Net
realized capital gains of a Portfolio for a fiscal year are computed by taking
into account any capital loss carryforward of the Portfolio.
At December 31, 1994 the Bond Portfolio had a net tax basis capital
loss carryforward of approximately $4,153,327 which may be applied against any
realized net taxable capital gains of each succeeding year until fully utilized
or until December 31, 2002, whichever occurs first. In addition, from November
1, 1994 through December 31, 1994, the Balanced Portfolio incurred $275,417 of
net realized capital losses which the Fund intends to defer and treat as arising
in the fiscal year ended December 31, 1995.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by a Portfolio for reinvestment,
requiring federal income taxes to be paid thereon by the Portfolio, such
Portfolio intends to elect to treat such capital gains as having been
distributed to shareholders. As a result, each shareholder will report such
capital gains as long-term capital gains, will be able to claim its share of
federal income taxes paid by the Portfolio on such gains as a credit against its
own federal income tax liability, and will be entitled to increase the adjusted
tax basis of its shares of the Portfolio by the difference between its pro rata
share of such gains and its tax credit.
Distributions of investment company taxable income are taxable to
shareholders as ordinary income.
Distributions of the excess of net long-term capital gain over net
short-term capital loss are taxable to shareholders as long-term capital gain,
regardless of the length of time the shares of the relevant Portfolio have been
held by such shareholders. Any loss realized upon the redemption of shares held
at the time of redemption for six months or less will be treated as a long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gain during such six-month period.
Distributions of investment company taxable income and net realized
capital gains will be taxable as described above, whether reinvested in
additional shares or in cash. Shareholders electing to receive distributions in
the form of additional shares will have a cost basis for federal income tax
purposes in each share so received equal to the net asset value of a share on
the reinvestment date.
All distributions of investment company taxable income and net realized
capital gain, whether reinvested in additional shares or in cash, must be
reported by each shareholder on its federal income tax return. Dividends
declared in October, November or December with a record date in such a month
will be deemed to have been received by shareholders on December 31 if paid
during January of the following year. Redemptions of shares may result in tax
consequences (gain or loss) to the shareholder and are also subject to these
reporting requirements.
Distributions by a Portfolio (except the Money Market Portfolio) result
in a reduction in the net asset value of the Portfolio's shares. Should a
distribution reduce the net asset value below a shareholder's cost basis, such
distribution would nevertheless be taxable to the shareholder as ordinary income
or capital gain as described above, even though, from an investment standpoint,
it may constitute a partial return of capital. In particular, investors should
consider the tax implications of buying shares just prior to a distribution. The
price of shares purchased at that time includes the amount of the forthcoming
distribution. Those purchasing just prior to a distribution will then receive a
partial return of capital upon the distribution, which will nevertheless be
taxable to them.
If the Balanced, Growth and Income, Capital Growth, Global Discovery or
International Portfolios invest in stock of certain foreign investment
companies, the Portfolios may be subject to U.S. federal income taxation on a
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<PAGE>
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 a Portfolio's holding period for the
stock. The distribution or gain so allocated to any taxable year of a Portfolio,
other than the taxable year of the excess distribution or disposition, would be
taxed to a Portfolio at the highest ordinary income rate in effect for such
year, and the tax would be further increased by an interest charge to reflect
the value of the tax deferral deemed to have resulted from the ownership of the
foreign company's stock. Any amount of distribution or gain allocated to the
taxable year of the distribution or disposition would be included in a
Portfolio's investment company taxable income and, accordingly, would not be
taxable to a Portfolio to the extent distributed by a Portfolio as a dividend to
its shareholders.
Proposed regulations have been issued which may allow the Balanced,
Growth and Income, Capital Growth and International Portfolios to make an
election to mark to market their shares of these foreign investment companies in
lieu of being subject to U.S. federal income taxation. At the end of each
taxable year to which the election applies, the Balanced, Capital Growth,
International and Growth and Income Portfolios would report as ordinary income
the amount by which the fair market value of the foreign company's stock exceeds
the Balanced, Capital Growth, International and Growth and Income Portfolios'
adjusted basis in these shares. No mark to market losses would be recognized.
The effect of the election would be to treat excess distributions and gain on
dispositions as ordinary income which is not subject to a fund level tax when
distributed to shareholders as a dividend. Alternatively, the Portfolios may
elect to include as income and gain their share of the ordinary earnings and net
capital gain of certain foreign investment companies in lieu of being taxed in
the manner described above.
Equity options (including options on stock and options on narrow-based
stock indexes) and over-the-counter options on debt securities written or
purchased by a Portfolio will be subject to tax under Section 1234 of the Code.
In general, no loss is recognized by a Portfolio upon payment of a premium in
connection with the purchase of a put or call option. The character of any gain
or loss recognized (i.e., long-term or short-term) will generally depend in the
case of a lapse or sale of the option on the Portfolio's holding period for the
option and in the case of an exercise of a put option on the Portfolio's holding
period for the underlying security. The purchase of a put option may constitute
a short sale for federal income tax purposes, causing an adjustment in the
holding period of the underlying security or a substantially identical security
of the Portfolio. If the Portfolio writes a put or call option, no gain is
recognized upon its receipt of a premium. If the option lapses or is closed out,
any gain or loss is treated as a short-term capital gain or loss. If a call
option written by a Portfolio is exercised, the character of the gain or loss
depends on the holding period of the underlying security. The exercise of a put
option written by a Portfolio is not a taxable transaction for the Portfolio.
Many futures contracts, certain foreign currency forward contracts
entered into by a Portfolio and all listed nonequity options written or
purchased by the Portfolio (including options on debt securities, options on
futures contracts, options on securities indexes and options on broad-based
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 a Portfolio will be treated as ordinary income. Under certain
circumstances, entry into a futures contract to sell a security may constitute a
short sale for federal income tax purposes, causing an adjustment in the holding
period of the underlying security or a substantially identical security owned by
the Portfolio.
Subchapter M of the Code requires that each Portfolio realize less than
30% of its annual gross income from the sale or other disposition of stock,
securities and certain options, futures and forward contracts held for less than
three months. Certain options, futures and forward activities of a Portfolio may
increase the amount of gains realized by a Portfolio that are subject to the 30%
limitation. Accordingly, the amount of such transactions that a Portfolio may
undertake may be limited.
Positions of a Portfolio which consist of at least one stock and at
least one stock option or other position with respect to a related security
which substantially diminishes the Portfolio's risk of loss with respect to such
stock could be treated as a "straddle" which is governed by Section 1092 of the
Code, the operation of which may cause deferral of losses, adjustments in the
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<PAGE>
holding periods of stock or securities and conversion of short-term capital
losses into long-term capital losses. An exception to these straddle rules
exists for any "qualified covered call options" on stock written by a Portfolio.
Positions of a Portfolio which consist of at least one position not
governed by Section 1256 and at least one futures contract, foreign currency
forward contract or nonequity option governed by Section 1256 which
substantially diminishes the Portfolio's risk of loss with respect to such other
position will be treated as a "mixed straddle." Although mixed straddles are
subject to the straddle rules of Section 1092 of the Code, certain tax elections
exist for them which reduce or eliminate the operation of these rules. Each
Portfolio will monitor its transactions in options and futures and may make
certain tax elections in connection with these investments.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time a Portfolio accrues receivables or
liabilities denominated in a foreign currency and the time the Portfolio
actually collects such receivables or pays such liabilities generally are
treated as ordinary income or ordinary loss. Similarly, on disposition of debt
securities denominated in a foreign currency and on disposition of certain
futures contracts, forward contracts and options, gains or losses attributable
to fluctuations in the value of foreign currency between the date of acquisition
of the security or contract and the date of disposition are also treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"Section 988" gains or losses, may increase or decrease the amount of a
Portfolio's investment company taxable income to be distributed to its
shareholders as ordinary income.
If a Portfolio holds zero coupon securities or other securities which
are issued at a discount, a portion of the difference between the issue price of
zero coupon securities and the face value ("original issue discount") will be
treated as income to the Portfolio each year, even though the Portfolio will not
receive cash interest payments from these securities. This original issue
discount (imputed income) will comprise a part of the investment company taxable
income of the Portfolio which must be distributed to shareholders in order to
maintain the qualification of the Portfolio as a regulated investment company
and to avoid federal income tax at the Portfolio level. Shareholders will be
subject to income tax on such original issue discount, whether or not they elect
to receive their distributions in cash. If a Portfolio acquires a debt
instrument at a market discount, a portion of the gain recognized, if any, on
disposition of such instrument may be treated as ordinary income.
Dividend and interest income received by the Portfolios from sources
outside the U.S. may be subject to withholding and other taxes imposed by such
foreign jurisdictions. Tax conventions between certain countries and the U.S.
may reduce or eliminate these foreign taxes, however, and foreign countries
generally do not impose taxes on capital gains respecting investments by foreign
investors.
Each Portfolio will be required to report to the Internal Revenue
Service all distributions of investment company taxable income and capital gains
as well as gross proceeds from the redemption or exchange of shares, except in
the case of certain exempt shareholders, which include most corporations. Under
the backup withholding provisions of Section 3406 of the Code, distributions of
taxable income and capital gains and proceeds from the redemption or exchange of
the shares of a regulated investment company may be subject to withholding of
federal income tax at the rate of 31% in the case of non-exempt shareholders who
fail to furnish the investment company with their taxpayer identification
numbers and with required certifications regarding their status under the
federal income tax law. Withholding may also be required if a Portfolio is
notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. Participating Insurance Companies
that are corporations should furnish their taxpayer identification numbers and
certify their status as corporations in order to avoid possible erroneous
application of backup withholding.
Shareholders of the Portfolios may be subject to state and local taxes
on distributions received from such Portfolios and on redemptions of their
shares.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution.
The Fund is organized as a Massachusetts business trust, and neither
the Fund nor the Portfolios are liable for any income or franchise tax in the
Commonwealth of Massachusetts providing each Portfolio continues to qualify as a
regulated investment company under Subchapter M of the Code.
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<PAGE>
The foregoing discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. persons. Each shareholder which is not a
U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the Portfolio, including the possibility that such a shareholder
may be subject to a U.S. withholding tax at a rate of 30% (or at a lower rate
under an applicable income tax treaty) on amounts constituting ordinary income
received by it, where such amounts are treated as income from U.S. sources under
the Code.
For further information concerning federal income tax consequences for
the holders of the VA contracts and VLI policies, shareholders should consult
the prospectus used in connection with the issuance of their particular
contracts or policies. Shareholders should consult their tax advisers about the
application of the provisions of tax law described in this statement of
additional information in light of their particular tax situations.
DIVIDENDS AND DISTRIBUTIONS
(See "TAX STATUS, DIVIDENDS AND DISTRIBUTIONS" in the Fund's prospectus.)
Money Market Portfolio
The net investment income of the Money Market Portfolio is determined
as of the close of regular trading on the Exchange (normally 4 p.m. eastern
time) on each day on which the Exchange is open for business. All of the net
income so determined normally will be declared as a dividend to shareholders of
record as of the close of regular trading on such Exchange after the purchase
and redemption of shares. Unless the business day before a weekend or holiday is
the last day of an accounting period, the dividend declared on that day will
include an amount in respect of the Portfolio's income for the subsequent
non-business day or days. No daily dividend will include any amount of net
income in respect of a subsequent semi-annual accounting period. Dividends
commence on the next business day after the date of purchase. Dividends will be
invested in additional shares of the Portfolio at the net asset value per share,
normally $1.00, determined as of the first business day of each month unless
payment of the dividend in cash has been requested.
Net investment income of the Money Market Portfolio consists of all
interest income accrued on portfolio assets less all expenses of the Portfolio
and amortized market premium. Accreted market discount is included in interest
income. The Portfolio does not anticipate that it will normally realize any
long-term capital gains with respect to its portfolio.
Normally the Money Market Portfolio will have a positive net income at
the time of each determination thereof. Net income may be negative if an
unexpected liability must be accrued or a loss realized. If the net income of
the Portfolio determined at any time is a negative amount, the net asset value
per share will be reduced below $1.00 unless one or more of the following steps
are taken: the Trustees have the authority (1) to reduce the number of shares in
each shareholder's account, (2) to offset each shareholder's pro rata portion of
negative net income from the shareholder's accrued dividend account or from
future dividends, or (3) to combine these methods in order to seek to maintain
the net asset value per share at $1.00. The Fund may endeavor to restore the
Portfolio's net asset value per share to $1.00 by not declaring dividends from
net income on subsequent days until restoration, with the result that the net
asset value per share will increase to the extent of positive net income which
is not declared as a dividend.
Should the Money Market Portfolio incur or anticipate, with respect to
its portfolio, any unusual or unexpected significant expense or loss which would
affect disproportionately the Portfolio's income for a particular period, the
Trustees would at that time consider whether to adhere to the dividend policy
described above or to revise it in light of the then prevailing circumstances in
order to ameliorate to the extent possible the disproportionate effect of such
expense or loss on then existing shareholders. Such expenses or losses may
nevertheless result in a shareholder's receiving no dividends for the period
during which the shares are held and in receiving upon redemption a price per
share lower than that which was paid. Similarly, should the Money Market
Portfolio incur or anticipate any unusual or unexpected significant income,
appreciation or gain which would affect disproportionately the fund's income for
a particular period, the Trustees or the Executive Committee of the Trustees may
consider whether to adhere to the dividend policy described above or to revise
it in light of the then prevailing circumstances in order to ameliorate to the
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<PAGE>
extent possible the disproportionate effect of such income, appreciation or gain
on the dividend received by existing shareholders. Such actions may reduce the
amount of the daily dividend received by existing shareholders.
Global Discovery Portfolio and International Portfolio
The Global Discovery Portfolio and International Portfolio will each
follow the practice of distributing substantially all of its investment company
taxable income. The Portfolios intend 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 each
Portfolio unless a shareholder has elected to receive cash.
Other Portfolios
Each of the Bond, Capital Growth, Balanced and Growth and Income
Portfolios has followed the practice of declaring and distributing a dividend of
investment company taxable income, if any, quarterly, in January, April, July
and October. Each Portfolio has distributed its net capital gain within three
months of the end of each fiscal year. Both dividends and capital gain
distributions will be reinvested in additional shares of such a Portfolio unless
an election is made on behalf of a separate account to receive dividends and
capital gain distributions in cash.
PERFORMANCE INFORMATION
(See "Performance Information" in the Fund's prospectus)
From time to time, quotations of a Portfolio's performance may be
included in advertisements, sales literature or reports to shareholders or
prospective investors. These performance figures may be calculated in the
following manner:
Money Market Portfolio
A. Yield is the net annualized yield based on a specified seven
calendar days calculated at simple interest rates. Yield is
calculated by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account
having a balance of one share at the beginning of the period
subtracting a hypothetical charge reflecting deductions from
shareholder accounts and dividing the difference by the value
of the account at the beginning of the base period to obtain
the base period return. The yield is annualized by multiplying
the base period return by 365/7. The yield figure is stated to
the nearest hundredth of one percent. The yield of the Money
Market Portfolio for the seven-day period ended December 31,
1995, was 5.28%.
B. Effective yield is the net annualized yield for a specified
seven calendar days assuming a reinvestment of the income or
compounding. Effective yield is calculated by the same method
as yield except the yield figure is compounded by adding 1,
raising the sum to a power equal to 365 divided by 7, and
subtracting one from the result, according to the following
formula:
Effective Yield = [(Base Period Return + 1)^365/7] - 1.
The net annualized yield of the Portfolio for the seven-day
period ended December 31, 1996, was 5.04%.
As described above, yield and effective yield are based on historical
earnings and show the performance of a hypothetical investment and are not
intended to indicate future performance. Yield and effective yield will vary
based on changes in market conditions and the level of expenses.
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<PAGE>
In connection with communicating its yield or effective yield to
current or prospective shareholders, the Money Market Portfolio also may compare
these figures to the performance of other mutual funds tracked by mutual fund
rating services or to other unmanaged indexes which may assume reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs.
From time to time, in marketing pieces and other fund literature, the
Fund's yield and performance over time may be compared to the performance of
broad groups of comparable mutual funds, bank money market deposit accounts and
fixed-rate insured certificates of deposit (CDs), or unmanaged indexes of
securities that are comparable to money market funds in their terms and intent,
such as Treasury bills, bankers' acceptances, negotiable order of withdrawal
accounts, and money market certificates. Most bank CDs differ from money market
funds in several ways: the interest rate is fixed for the term of the CD, there
are interest penalties for early withdrawal of the deposit, and the deposit
principal is insured by the FDIC.
Bond Portfolio
Yield is the net annualized yield based on a specified 30-day (or one
month) period assuming a semiannual compounding of income. Yield is
calculated by dividing the net investment income per share earned
during the period by the maximum offering price per share on the last
day of the period, according to the following formula:
YIELD = 2[((a-b)/cd + 1)^6 - 1]
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = the maximum offering price per share on the last
day of the period.
Yield for the 30-day period ended December 31, 1996
Bond Portfolio __%
All Portfolios
A. Average Annual Total Return is the average annual compound
rate of return for the periods of one year and five years (or
such shorter periods as may be applicable dating from the
commencement of the Portfolio's operations) all ended on the
date of a recent calendar quarter.
Average annual total return quotations reflect changes in the
price of a Portfolio's shares and assume that all dividends
and capital gains distributions during the respective periods
were reinvested in Portfolio shares. Average annual total
return is calculated by finding the average annual compound
rates of return of a hypothetical investment over such
periods, according to the following formula (average annual
total return is then expressed as a percentage):
T = (ERV/P)1/n - 1
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.
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<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return for periods ended December 31, 1995
One Year Five Years Ten Years Life of Fund
<S> <C> <C> <C> <C>
Money Market Portfolio 5.65% 4.20% 5.65% (1) -- %
Bond Portfolio 2.82 6.83 7.74 (1) --
Balanced Portfolio* 11.89 9.79 10.30 (1) --
Growth and Income Portfolio 22.17 -- -- 21.69 (3)
Capital Growth Portfolio 20.13 12.42 13.05 (1)
Global Discovery Portfolio -- -- -- -- (4)
International Portfolio 14.78 11.05 -- 9.93 (2)
</TABLE>
(1) For the period beginning July 16, 1985 (commencement of operations)
(2) For the period beginning May 1, 1987 (commencement of operations)
(3) For the period beginning May 2, 1994 (commencement of operations)
(4) For the period beginning May 1, 1996 (commencement of operations)
B. Cumulative Total Return is the cumulative rate of return on a
hypothetical initial investment of $1,000 for a specified
period. Cumulative total return quotations reflect changes in
the price of a Fund's shares and assume that all dividends and
capital gains distributions during the period were reinvested
in Fund shares. Cumulative total return is calculated by
finding the cumulative rates of return of a hypothetical
investment over such periods, according to the following
formula (cumulative total return is then expressed as a
percentage):
C = (ERV/P) - 1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.
<TABLE>
<CAPTION>
Cumulative Total Return for periods ended December 31, 1995
One Year Five Years Ten Years Life of Fund
<S> <C> <C> <C> <C>
Money Market Portfolio 5.65% 22.85% 73.27% (1) -- %
Bond Portfolio 2.82 39.12 110.71 (1) --
Balanced Portfolio* 11.89 59.55 166.55 (1) --
Growth and Income Portfolio 22.17 -- -- 68.84 (3)
Capital Growth Portfolio 20.13 79.59 240.95 (1) --
Global Discovery Portfolio -- -- -- 5.5 (4)
International Portfolio 14.78 68.90 -- 149.86 (2)
</TABLE>
(1) For the period beginning July 16, 1985 (commencement of operations)
(2) For the period beginning May 1, 1987 (commencement of operations)
(3) For the period beginning May 2, 1994 (commencement of operations)
(4) For the period beginning May 1, 1996 (commencement of operations)
- ------------------------------------
* On May 1, 1993, the Portfolio adopted its present name and investment
objective which is a balance of growth and income from a diversified
portfolio of equity and fixed income securities. Prior to that date,
the Portfolio was known as the Managed Diversified Portfolio and its
investment objective was to realize a high level of long-term total
rate of return consistent with prudent investment risk. Performance
information for the five years and life of Fund periods should not be
considered representative of the present Portfolio.
59
<PAGE>
As described above, average annual total return, cumulative total
return and yield are based on historical earnings and are not intended to
indicate future performance. Average annual total return, cumulative total
return and yield for a Portfolio will vary based on changes in market conditions
and the level of the Portfolio's expenses.
In connection with communicating its total return or yield to current
or prospective shareholders, the Fund also may compare these figures for a
Portfolio to the performance of other mutual funds tracked by mutual fund rating
services or to other unmanaged indexes which may assume reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs.
Quoted yields on shares of the Fund's Portfolios will be of limited
usefulness to policy and contract holders for comparable purposes because such
quoted yields will be more than yields on participating contracts and policies
due to charges imposed at the separate account level.
Comparison of Portfolio Performance
A comparison of the quoted non-standard performance offered for 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 effects of the methods used to calculate performance when comparing
performance of a Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or
prospective shareholders, a Fund also may compare these figures to the
performance of unmanaged indices which may assume reinvestment of dividends or
interest but generally do not reflect deductions for administrative and
management costs. Examples include, but are not limited to the Dow Jones
Industrial Average, the Consumer Price Index, Standard & Poor's 500 Composite
Stock Price Index (S&P 500), the NASDAQ OTC Composite Index, the NASDAQ
Industrials Index, the Russell 2000 Index, and statistics published by the Small
Business Administration.
Because some or all each Fund's investments are denominated in foreign
currencies, the strength or weakness of the U.S. dollar as against these
currencies may account for part the Fund's investment performance. Historical
information on the value of the dollar versus foreign currencies may be used
from time to time in advertisements concerning the Funds. Such historical
information is not indicative of future fluctuations in the value of the U.S.
dollar against these currencies. In addition, marketing materials may cite
country and economic statistics and historical stock market performance for any
of the countries in which either Fund invests, including, but not limited to,
the following: population growth, gross domestic product, inflation rate,
average stock market price-earnings ratios and the total value of stock markets.
Sources for such statistics may include official publications of various foreign
governments and exchanges.
From time to time, in advertising and marketing literature, a Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations such as,
Investment Company Data, Inc. ("ICD"), Lipper Analytical Services, Inc.
("Lipper"), CDA Investment Technologies, Inc. ("CDA"), Morningstar, Inc., Value
Line Mutual Fund Survey and other independent organizations. When these
organizations' tracking results are used, a Fund will be compared to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the appropriate volatility grouping, where volatility is a measure of a
fund's risk. For instance, a Scudder growth fund will be compared to funds in
the growth fund category; a Scudder income fund will be compared to funds in the
income fund category; and so on. Scudder funds (except for money market funds)
may also be compared to funds with similar volatility, as measured statistically
by independent organizations. In addition, a Fund's performance may also be
compared to the performance of broad groups of comparable mutual funds.
Unmanaged indices with which a Fund's performance may be compared include, but
are not limited to, the following:
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<PAGE>
The Europe/Australia/Far East (EAFE) Index
International Finance Corporation's Latin America Investable
Total Return Index
Morgan Stanley Capital International World Index
J.P. Morgan Global Traded Bond Index
Salomon Brothers World Government Bond Index
NASDAQ Composite Index
Wilshire 5000 Stock Index
From time to time, in marketing and other Fund literature,
(Trustees)(Directors) and officers of the Funds, the Funds' portfolio manager,
or members of the portfolio management team may be depicted and quoted to give
prospective and current shareholders a better sense of the outlook and approach
of those who manage the Funds. In addition, the amount of assets that the
Adviser has under management in various geographical areas may be quoted in
advertising and marketing materials.
The Funds may be advertised as an investment choice in Scudder's
college planning program. The description may contain illustrations of projected
future college costs based on assumed rates of inflation and examples of
hypothetical fund performance, calculated as described above.
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.
Marketing and other Fund literature may include a description of the
potential risks and rewards associated with an investment in the Funds. The
description may include a "risk/return spectrum" which compares the Funds to
other Scudder funds or broad categories of funds, such as money market, bond or
equity funds, in terms of potential risks and returns. Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The share
price and return of an equity fund also will fluctuate. The description may also
compare the Funds to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment
and money market funds seek stability of principal, these investments are
considered to be less risky than investments in either bond or equity funds,
which may involve the loss of principal. However, all long-term investments,
including investments in bank products, may be subject to inflation risk, which
is the risk of erosion of the value of an investment as prices increase over a
long time period. The risks/returns associated with an investment in bond or
equity funds depend upon many factors. For bond funds these factors include, but
are not limited to, a fund's overall investment objective, the average portfolio
maturity, credit quality of the securities held, and interest rate movements.
For equity funds, factors include a fund's overall investment objective, the
types of equity securities held and the financial position of the issuers of the
securities. The risks/returns associated with an investment in international
bond or equity funds also will depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds. Shorter-term bond funds generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase higher quality securities relative to bond funds that purchase
lower quality securities. Growth and income equity funds are generally
considered to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.
Risk/return spectrums also may depict funds that invest in both
domestic and foreign securities or a combination of bond and equity securities.
61
<PAGE>
Evaluation of Fund performance or other relevant statistical
information made by independent sources may also be used in advertisements
concerning the Funds, including reprints of, or selections from, editorials or
articles about these Funds. Sources for Fund performance information and
articles about the Funds include the following:
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by Masterfund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
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 Money Fund Report, a weekly publication of IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity and including certain averages as performance
benchmarks, specifically "IBC's Money Fund Average," and "IBC'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 Business 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.
62
<PAGE>
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.
Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance, risk and portfolio
characteristics.
The New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter, published by Sheldon Jacobs,
that includes mutual fund performance data and recommendations for the mutual
fund investor.
No-Load Fund*X, a monthly newsletter, published by DAL Investment Company, Inc.,
that reports on mutual fund performance, rates funds and discusses investment
strategies for the mutual fund investor.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
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 news weekly that periodically reports
mutual fund performance data.
Value Line Mutual Fund Survey, an independent organization that provides
biweekly performance and other information on mutual funds.
The 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.
63
<PAGE>
Taking a Global Approach
Many U.S. investors limit their holdings to U.S. securities because
they assume that international or global investing is too risky. While there are
risks connected with investing overseas, it's important to remember that no
investment -- even in blue-chip domestic securities -- is entirely risk free.
Looking outside U.S. borders, an investor today can find opportunities that
mirror domestic investments -- everything from large, stable multinational
companies to start-ups in emerging markets. To determine the level of risk with
which you are comfortable, and the potential for reward you're seeking over the
long term, you need to review the type of investment, the world markets, and
your time horizon.
The U.S. is unusual in that it has a very broad economy that is well
represented in the stock market. However, many countries around the world are
not only undergoing a revolution in how their economies operate, but also in
terms of the role their stock markets play in financing activities. There is
vibrant change throughout the global economy and all of this represents
potential investment opportunity.
Investing beyond the United States can open this world of opportunity,
due partly to the dramatic shift in the balance of world markets. In 1970, the
United States alone accounted for two-thirds of the value of the world's stock
markets. Now, the situation is reversed -- only 35% of global stock market
capitalization resides here. There are companies in Southeast Asia that are
starting to dominate regional activity; there are companies in Europe that are
expanding outside of their traditional markets and taking advantage of faster
growth in Asia and Latin America; other companies throughout the world are
getting out from under state control and restructuring; developing countries
continue to open their doors to foreign investment.
Stocks in many foreign markets can be attractively priced. The global
stock markets do not move in lock step. When the valuations in one market rise,
there are other markets that are less expensive. There is also volatility within
markets in that some sectors may be more expensive while others are depressed in
valuation. A wider set of opportunities can help make it possible to find the
best values available.
International or global investing offers diversification because the
investment is not limited to a single country or economy. In fact, many experts
agree that investment strategies that include both U.S. and non-U.S.
investments strike the best balance between risk and reward.
Scudder's 30% Solution
The 30 Percent Solution -- A Global Guide for Investors Seeking Better
Performance With Reduced Portfolio Risk is a booklet, created by Scudder, to
convey its vision about the new global investment dynamic. This dynamic is a
result of the profound and ongoing changes in the global economy and the
financial markets. The booklet explains how Scudder believes an equity
investment portfolio with up to 30% in international holdings and 70% in
domestic holdings can improve long-term performance while simultaneously helping
to reduce overall risk.
SHAREHOLDER COMMUNICATIONS
Owners of policies and contracts issued by Participating Insurance
Companies for which shares of one or more Portfolios are the investment vehicle
will receive from the Participating Insurance Companies unaudited semi-annual
financial statements and audited year-end financial statements certified by the
Fund's independent public accountants. Each report will show the investments
owned by the Fund and the market values thereof as determined by the Trustees
and will provide other information about the Fund and its operations.
Participating Insurance Companies with inquiries regarding the Fund may
call the Fund's underwriter, Scudder Investor Services, Inc., at 617-295-1000 or
write Scudder Investor Services, Inc., Two International Place, Boston,
Massachusetts 02110-4103.
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<PAGE>
ORGANIZATION AND CAPITALIZATION
(See "ADDITIONAL INFORMATION - Shareholder
Indemnification" in the Fund's prospectus.)
General
The Fund is an open-end investment company established under the laws
of The Commonwealth of Massachusetts by Declaration of Trust dated March 15,
1985.
As of December 31, 1996, AEtna Life Insurance and Annuity Company (151
Farmington Avenue TS41, Hartford, CT 06156), owned of record and beneficially
46.9% of the International Portfolio; they owned of record and beneficially
7.75% 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 1.3% of the Money Market Portfolio, 2.0% of the Bond Portfolio,
7.1% of the Balanced Portfolio, 0.7% of the International Portfolio, 5.0% of the
Growth and Income Portfolio, 4.4% of the Global Discovery Portfolio and 21.0% of
the Capital Growth Portfolio; they owned of record and beneficially 2.3% 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 56.1% of the Money Market Portfolio,
33.9% of the Bond Portfolio, 62.3% of the Balanced Portfolio, 25.8% of the
Capital Growth Portfolio, 88.0% of the Growth and Income Portfolio, 95.6% of the
Global Discovery Portfolio and 13.1% of the International Portfolio; they owned
of record and beneficially 53.1% 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 0.4% 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 (206 South 13th Street, Ste.
300, Lincoln, NE 68508) owned of record and beneficially 4.1% of the Bond
Portfolio and 6.8% of the Balanced Portfolio; they owned of record and
beneficially 0.96% of the Fund's total outstanding shares; and Mutual of America
Life Insurance Company of New York (320 Park Ave., 6th Fl., New York, NY 10022,
a New York corporation) and its subsidiary, American Life Insurance Company (666
5th Avenue, New York, NY 10103), owned of record and beneficially 40.3% of the
Bond Portfolio, 55.9% of the Capital Growth Portfolio and 23.5% of the
International Portfolio; they owned of record and beneficially 23.73% of the
Fund's total outstanding shares; and Paragon Life Insurance Company (100 South
Brentwood, St. Louis, MO 63105) owned of record and beneficially 0.2% of the
Bond Portfolio, 0.2% of the Capital Growth Portfolio, 0.4% of the Balanced
Portfolio, 0.1% of the Growth and Income Portfolio, and 0.1% of the
International Portfolio; they owned of record and beneficially 0.11% of the
Fund's total outstanding shares; and Providentmutual Life and Annuity Company of
America, (1050 Westlakes Dr., Berwyn, PA 19312) owned of record and beneficially
9.3% of the Bond Portfolio, 5.6% of the Growth and Income Portfolio, and 0.8% of
the International Portfolio; they owned of record and beneficially 1.08% 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 23.4% of the
Balanced Portfolio and 3.7% of the International Portfolio; they owned of record
and beneficially 2.1% of the Fund's total outstanding shares; and Security First
Life Insurance Company (11365 West Olympic Blvd., Los Angeles, CA 90064) owned
of record and beneficially 0.3% of the International Portfolio; and Southwestern
Life Insurance Company (500 North Akard, Dallas, TX 75201) owned of record and
beneficially 1.5% of the Capital Growth Portfolio; and The Union Central Life
Insurance Company (1876 Waycross Road, Cincinnati, OH 45240) owned of record and
beneficially 39.7% of the Money Market Portfolio, 6.2% of the Capital Growth
Portfolio and 8.2% of the International Portfolio; they owned of record and
beneficially 8.31% of the Fund's total outstanding shares; and United Companies
Life Insurance Company (8545 United Plaza Blvd., Baton Rouge, LA 70809) owned of
record and beneficially 2.4% of the Money Market Portfolio and 0.2% of the
International Portfolio; and United of Omaha Life Insurance Company (Mutual of
Omaha Plaza, Law Division, 3301 Dodge Street, Omaha, NE 68131) owned of record
and beneficially 0.3% of the Money Market Portfolio, 0.6% of the Bond Portfolio,
and 2.1% of the International Portfolio; they owned of record and beneficially
0.16% of the Fund's total outstanding shares and USAA Life Insurance Company
(R.A.F.A., F-2-E, 9800 Fredericksburg Rd., San Antonio, TX 78288) owned of
65
<PAGE>
record and beneficially 2.3% of the Capital Growth Portfolio; and Washington
National Life Insurance Company (c/o United Presidential Life Insurance Co., One
Presidential Pkwy., Kokomo, IN 46904) owned of record and beneficially 0.5% of
the Money Market Portfolio, 9.3% of the Bond Portfolio, 1.3% of the Growth and
Income Portfolio and 6.0% of the Capital Growth Portfolio.
Shares entitle their holders to one vote per share; however, separate
votes will be taken by each Portfolio on matters affecting an individual
Portfolio. For example, a change in investment policy for the Money Market
Portfolio would be voted upon only by shareholders of the Money Market
Portfolio. Additionally, approval of the investment advisory agreement covering
a Portfolio is a matter to be determined separately by each Portfolio. Approval
by the shareholders of one Portfolio is effective as to that Portfolio. Shares
have noncumulative voting rights, which means that holders of more than 50% of
the shares voting for the election of Trustees can elect all Trustees and, in
such event, the holders of the remaining shares voting for the election of
Trustees will not be able to elect any person or persons as Trustees. Shares
have no preemptive or subscription rights, and are transferable.
Shareholders have certain rights, as set forth in the Declaration of
Trust of the Fund, including the right to call a meeting of shareholders for the
purpose of voting on the removal of one or more Trustees. Such removal can be
effected upon the action of two-thirds of the outstanding shares of beneficial
interest of the Fund.
Shareholder and Trustee Liability
The Fund is an entity of the type commonly known as a "Massachusetts
business trust". Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the trust. The Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Fund. Notice
of such disclaimer will normally be given in each agreement, obligation, or
instrument entered into or executed by the Fund or the Trustees. The Declaration
of Trust provides for indemnification out of the Fund property of any
shareholder held personally liable for the obligations of the Fund. The
Declaration of Trust also provides that the Fund shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the Fund and satisfy any judgment thereon. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund itself would be unable to meet its obligations.
The Trustees believe that, in view of the above, the risk of personal liability
of shareholders is remote.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
ALLOCATION OF PORTFOLIO BROKERAGE
To the maximum extent feasible, the Adviser places orders for portfolio
transactions through its affiliate, the Distributor, which in turn places orders
on behalf of the Fund with the issuer, underwriters or other brokers and
dealers. The Distributor will receive no commissions, fees or other remuneration
for this service. Allocation of brokerage is supervised by the Adviser.
The Fund's purchases and sales of portfolio securities of the Money
Market Portfolio and the Bond Portfolio and of debt securities acquired for the
other Portfolios, are generally placed by the Adviser with primary market makers
for these securities on a net basis, without any brokerage commission being paid
by the Fund. Trading does, however, involve transaction costs. Transactions with
dealers serving as primary market makers reflect the spread between the bid and
asked prices. Purchases of underwritten issues may be made which will include an
underwriting fee paid to the underwriter. Transactions in equity securities
generally involve the payment of a brokerage commission.
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for any Portfolio is to obtain the most favorable net
results taking into account such factors as price, commission (negotiable in the
case of U.S. stock exchange transactions but which is generally fixed in the
case of foreign exchange transactions), if any, size of order, difficulty of
execution and skill required of the executing broker/dealer. Subject to the
foregoing, the Adviser may consider sales of variable life insurance policies
and variable annuity contracts for which the Fund is an investment option as a
66
<PAGE>
factor in the selection of firms to execute portfolio transactions. The Adviser
seeks to evaluate the overall reasonableness of brokerage commissions paid
through the familiarity of the Distributor with commissions charged on
comparable transactions, as well as by comparing commissions paid by the Fund to
reported commissions paid by others. The Adviser reviews on a routine basis
commission rates, execution and settlement services performed, making internal
and external comparisons.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
brokers and dealers who supply 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 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.
In the years ended December 31, 1994, 1995 and 1996, the Fund paid
brokerage commissions of $2,006,264, $2,669,610, and $2,106,414, respectively.
In the years ended December 31, 1994, 1995, and 1996, the International
Portfolio paid brokerage commissions of $1,471,275, $1,813,248, and $1,403,778,
respectively, the Capital Growth Portfolio paid brokerage commissions of
$420,391, $788,596, and $505,817, respectively and the Balanced Portfolio paid
brokerage commissions of $79,629, $67,758, and $67,828, respectively. The Growth
and Income Portfolio paid brokerage commissions of $34,967, $54,235, and
$78,517, respectively. In the year ended December 31, 1996, $967,678 (69%) of
the total brokerage commissions paid by the International Portfolio, $447,832
(89%) of the total brokerage commissions paid by the Capital Growth Portfolio,
$59,359 (76%) of the total brokerage commissions paid by the Growth and Income
Portfolio, $59,289 (87%) of the total brokerage commissions paid by the Balanced
Portfolio, and $47,463 (94%) of the total brokerage commissions paid by the
Global Discovery Portfolio resulted from orders placed, consistent with the
policy of obtaining the most favorable net results, with brokers and dealers who
provided supplementary research information to the Portfolios or the Adviser.
The amount of such transactions aggregated $309,783,591 for the International
Portfolio (66% of all brokerage transactions), $373,506,365 for the Capital
Growth Portfolio (72% of all brokerage transactions), $38,460,391 for the Growth
and Income Portfolio (57% of all brokerage transactions), $43,374,165 (40% of
all brokerage transactions) for the Balanced Portfolio and $19,601,728 (85% of
all brokerage transactions) for the Global Discovery Portfolio. The balance of
such brokerage was not allocated to any particular broker or dealer with regard
to the above-mentioned or other special factors.
The Trustees will periodically review whether the recapture for the
benefit of the Fund of some portion of the brokerage commissions or similar fees
paid by the Fund on portfolio transactions is legally permissible and advisable.
No recapture arrangements are currently in effect.
67
<PAGE>
PORTFOLIO TURNOVER
The average annual portfolio turnover rate for each Portfolio, i.e. the
ratio of the lesser of annual sales or purchases to the monthly average value of
the portfolio (excluding from both the numerator and the denominator securities
with maturities at the time of acquisition of one year or less), for the years
ended December 31, 1995 and 1996, respectively, was:
December 31,
1995 1996
Bond Portfolio 177.21% 85.11%
Balanced Portfolio 87.98 67.56
Growth and Income Portfolio 24.33 32.18
Capital Growth Portfolio 119.41 65.56
Global Discovery Portfolio -- 50.31
International Portfolio 45.76 32.63
Under the above definition, the Money Market Portfolio will have no
portfolio turnover. Purchases and sales, for these Portfolios, are made for the
Portfolio whenever necessary, in management's opinion, to meet the Portfolio's
objective.
EXPERTS
The Financial Highlights of the Fund included in the prospectus and the
Financial Statements incorporated by reference in this Statement of Additional
Information have been audited by Coopers & Lybrand L.L.P., One Post Office
Square, Boston, Massachusetts 02109, independent accountants, and have been so
included or incorporated by reference in reliance upon the accompanying report
of said firm, which report is given upon their authority as experts in
accounting and auditing.
COUNSEL
The firm of Dechert Price & Rhoads, Ten Post Office Square, Suite 1230,
Boston, Massachusetts 02109, is counsel for the Fund.
ADDITIONAL INFORMATION
The activities of the Fund are supervised by its Trustees, who are
elected by shareholders. Shareholders have one vote for each share held.
Fractional shares have fractional votes.
Portfolio securities of the Money Market, Bond, Balanced, Growth and
Income, and Capital Growth Portfolios are held separately, pursuant to a
custodian agreement, by State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110, as custodian. Portfolio securities of
Global Discovery and International Portfolios 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 Portfolios. Money Market Portfolio pays SFAC an annual fee
equal to 0.020% of the first $150 million of average daily net assets, 0.0060%
of such assets in excess of $150 million and 0.0035% of such assets in excess of
$1 billion, plus holding and transaction charges for this service. Bond
Portfolio, Balanced Portfolio, Growth and Income Portfolio and Capital Growth
Portfolio each pay SFAC an annual fee equal to 0.025% of the first $150 million
of average daily net assets, 0.0075% of such assets in excess of $150 million
and 0.0045% of such assets in excess of $1 billion, plus holding and transaction
charges for this service. Global Discovery and International Portfolios pay 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
68
<PAGE>
service. SFAC computes net asset value for the Fund. The Fund 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 financial statements of Scudder Variable Life Investment Fund are
comprised of the following:
Money Market Portfolio
Balanced Portfolio
Bond Portfolio
Growth and Income Portfolio
Capital Growth Portfolio
International Portfolio
The financial statements, including the investment portfolios of
Scudder Variable Life Investment Fund, together with the Report of Independent
Accountants, Financial Highlights and notes to financial statements are
incorporated by reference and attached hereto, in the Annual Report to the
Shareholders of the Fund dated December 31, 1996, and are hereby deemed to be
part of this Statement of Additional Information.
69
<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
indicates the least degree of speculation. While such debt will likely have some
<PAGE>
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 debt
considered short-term in the relevant market. The A-1
designation indicates the degree of safety regarding timely
payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a
plus (+) sign designation.
<PAGE>
Scudder Variable Life
Investment Fund
Annual Report
December 31, 1996
An open-end management investment company that offers shares
of beneficial interest in seven types of diversified portfolios.
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
Contents
Letter from the Fund's President ............................................ 2
Money Market Portfolio Management Discussion ................................ 3
Bond Portfolio Management Discussion ........................................ 4
Bond Portfolio Summary ...................................................... 5
Balanced Portfolio Management Discussion .................................... 6
Balanced Portfolio Summary .................................................. 7
Growth and Income Portfolio Management Discussion ........................... 8
Growth and Income Portfolio Summary ......................................... 9
Capital Growth Portfolio Management Discussion .............................. 10
Capital Growth Portfolio Summary ............................................ 11
Global Discovery Portfolio Management Discussion ............................ 12
Global Discovery Portfolio Summary .......................................... 13
International Portfolio Management Discussion ............................... 14
International Portfolio Summary ............................................. 15
Investment Portfolios, Financial Statements, and Financial Highlights
Money Market Portfolio ........................................... 16
Bond Portfolio ................................................... 22
Balanced Portfolio ............................................... 29
Growth and Income Portfolio ...................................... 38
Capital Growth Portfolio ......................................... 47
Global Discovery Portfolio ....................................... 55
International Portfolio .......................................... 64
Notes to Financial Statements ............................................... 74
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
LETTER FROM THE FUND'S PRESIDENT
- --------------------------------------------------------------------------------
Dear Shareholders,
Perhaps the most important lesson we learned from 1996 is to expect the
unexpected. After very strong domestic equity performance in 1995, stocks
delivered another year of outstanding results. However, this attractive
performance masked the challenging environment of conflicting economic signals
and rapid sector rotation that characterized much of the year.
Bond investors were challenged by rising U.S. interest rates in the first
half of the year which contributed to increased stock market volatility, as
stronger than expected economic growth raised fears of accelerating inflation.
Growth slowed in the second half of the year, relieving upward pressure on
interest rates, and permitting the stock rally to resume.
The U.S. stock market's upward march was fueled by strong corporate
earnings, benign inflation, and relatively low interest rates. Overseas, the
picture was significantly different. Many foreign economies continued to
struggle with slow economic growth, prompting governments to lower interest
rates to stimulate their economies. Selected markets responded by rebounding
strongly from depressed levels.
New Portfolio Added in 1996
Reflecting our continuing commitment to providing investors with a wide
range of investment choices, we introduced Global Discovery Portfolio in May.
This portfolio invests in small company stocks from around the world, with an
emphasis on individual stock selection. With more than two-thirds of the world's
stock market capitalization based outside the United States, we see many
investment opportunities among small, rapidly growing companies. Many of these
companies have not been well-covered by Wall Street and have accelerating growth
rates. Because their businesses are often tied more closely to local or regional
economies, they tend to offer an added element of diversification for U.S.
investors. Of course, investing overseas carries special risks and the potential
for greater price fluctuations, but we believe Global Discovery Portfolio can
provide the opportunity for valuable diversification and maximum capital
appreciation for long-term investors.
Scudder Variable Life Investment Fund provides a broad selection of
portfolios to fit your particular investment objectives. Combined with its
comparatively low fees, we believe the Fund can provide investors with a
powerful savings advantage over the long term.
Thank you for your continued investment in Scudder Variable Life Investment
Fund.
Sincerely,
/s/David B. Watts
David B. Watts
President,
Scudder Variable Life Investment Fund
2
<PAGE>
MONEY MARKET PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
- --------------------------------------------------------------------------------
Dear Shareholders,
In 1996, money market funds provided investors with respectable yields, as
well as a haven for those uncomfortable with stock and bond market gyrations.
Money Market Portfolio posted a 5.04% 7-day net annualized yield as of December
31, 1996. The Portfolio's total return was 5.09% for the full 12-month period.
Locating Opportunities
Money managers spent much of the year with their eyes on the Federal
Reserve, anticipating a potential interest rate hike. As a result, many money
funds defensively shortened their average maturities. Volatile sentiment in the
market caused us to keep Money Market Portfolio's average maturity in the 40-45
day range for much of the year, as investors prepared for potentially rising
short-term rates that never materialized. While the defensive position prepared
us for a rate increase, the tradeoff was the lost opportunity to capture the
superior yields offered by longer maturity instruments. After the September
meeting of the Federal Reserve in which no action was taken to raise short-term
interest rates, market sentiment shifted, prompting us to increase the
Portfolio's average maturity. As of December 31, the Portfolio's average
maturity stood at 58 days.
[CALLOUT NEXT TO PRECEDING PARAGRAPH]
Interest rates generally
rose over the year for
money market instruments.
At the close of the period, 90% of the Portfolio was invested in commercial
paper. Commercial paper with one-year maturities also provided a boost to the
Portfolio's yield. The remainder of the Portfolio's assets was principally
invested in short-term notes. A small portion (5%) was invested in repurchase
agreements.
The Coming Months
Absent any unforeseen shocks, we believe 1997 should provide investors with
moderate economic growth, stable to higher stock prices, and stable to
moderately lower interest rates. While always a possibility, we don't expect the
Federal Reserve to lower short-term interest rates any time soon.
In this environment, we plan to favor money market securities at the longer
end of the maturity spectrum in order to lock in attractive yields. Our focus
will remain on quality as we select investments to maintain the Portfolio's
stable share price and competitive yield. We believe Money Market Portfolio
continues to offer a vehicle for meeting your short-term investment needs.
Sincerely,
Your Portfolio Management Team
/s/Stephen L. Akers /s/David Wines
Stephen L. Akers David Wines
Lead Portfolio Manager
/s/Debra A. Hanson /s/Nicca B. Alcantara
Debra A. Hanson Nicca B. Alcantara
3
<PAGE>
BOND PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
- --------------------------------------------------------------------------------
Dear Shareholders,
Stronger-than-expected economic growth in the first half of 1996 resulted
in higher interest rates and lower bond prices for the year. However, the
increase in rates from point-to-point did not fully reflect the increased price
volatility that pervaded the bond markets during the year. Despite this
challenging environment, Bond Portfolio provided a total return of 2.82% for the
12-month period ended December 31, 1996. For the same period, the unmanaged
Lehman Brothers Aggregate Bond Index returned 3.63%.
Bonds provided positive but modest total returns in 1996. Yields rose
during the first half of the year and eased in the second half, but still ended
the year higher. The economy turned out to be much stronger than expected,
causing yields to rise and bond prices to decline. Later in the year growth
moderated, enabling yields to ease and bond prices to recover, though not to
levels seen at the beginning of 1996.
During the 12-month period we managed the portfolio actively, seeking to
capitalize on shifts in relative valuation among the Treasury, mortgage, and
corporate sectors. Our strategy in this more volatile environment was a
defensive one. We attempted to reduce sensitivity to changes in interest rates
by shortening the Portfolio's duration. We achieved a shorter duration primarily
by reducing our holdings of Treasury securities, with most of the reduction
occurring during the first half of the year. We redeployed assets in several
areas, including corporate bonds, mortgage securities, and cash.
[CALLOUT NEXT TO PRECEDING PARAGRAPH]
Rising interest rates
created a challenging
environment for bond
investors.
Corporate bonds turned out to be the strongest performing sector of the
bond market in 1996. We held an overweighted position in corporates at the
beginning of the year and continued to add to our position throughout 1996. We
maintained the Fund's high quality portfolio composition, closing the year with
an average quality rating of AA.
Mortgage securities also constituted an increasing share of the Portfolio
during the year. These securities, which typically offer a yield premium over
Treasuries, became increasingly attractive values as interest rates rose in the
first half of the year. We added mortgage securities to the Portfolio primarily
between March and July. These securities played a significant role in providing
stability, diversification, and attractive income to the Portfolio.
Heading into 1997, we anticipate at least a neutral environment for bond
investors. We expect economic growth to moderate and inflation to remain under
control. We believe this should help to relieve upward pressure on interest
rates. There are no major excesses in the corporate sector, and inventories are
being managed well. Longer term, if the current enthusiasm for the stock market
wanes, we could see renewed interest in bonds for their attractive yields and
relative price stability.
Sincerely,
Your Portfolio Management Team
/s/William M. Hutchinson /s/Ruth Heisler
William M. Hutchinson Ruth Heisler
Lead Portfolio Manager
4
<PAGE>
BOND PORTFOLIO
PORTFOLIO SUMMARY as of December 31, 1996
- --------------------------------------------------------------------------------
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
BOND PORTFOLIO
- ----------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/96 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $10,282 2.82% 2.82%
5 Year $13,912 39.12% 6.83%
10 Year $21,071 110.71% 7.74%
LB AGGREGATE BOND INDEX
- --------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/96 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $10,363 3.63% 3.63%
5 Year $14,050 40.50% 7.03%
10 Year $22,547 125.47% 8.46%
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
YEARLY PERIODS ENDED DECEMBER 31
Bond Portfolio
Year Amount
- ----------------------
86 $10,000
87 $10,122
88 $10,675
89 $11,918
90 $12,879
91 $15,147
92 $16,208
93 $18,214
94 $17,343
95 $20,494
96 $21,071
LB Aggregate Bond Index
Year Amount
- ----------------------
86 $10,000
87 $10,276
88 $11,086
89 $12,697
90 $13,834
91 $16,048
92 $17,236
93 $18,916
94 $18,365
95 $21,757
96 $22,547
The Lehman Brothers (LB) Aggregate Bond Index is an unmanaged market
value-weighted measure of treasury issues, agency issues, corporate
bond issues and mortgage securities. Index returns assume reinvestment
of dividends and, unlike Fund returns, do not reflect any fees or
expenses.
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return
and principal value will fluctuate, so an investor's shares, when redeemed,
may be worth more or less than when purchased. Total returns in some
periods were higher due to maintenance of the Fund's expenses. See Financial
Highlights for the Bond Portfolio.
- -------------------------------------------------------------------
ASSET QUALITY
- -------------------------------------------------------------------
By Quality
- -------------------
AAA 60%
AA 5% Shortening the portfolio's
A 21% duration helped to limit the
BBB 13% effects of higher interest
BB 1% rates.
----
100%
====
- -------------------
Average Quality: AA
A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.
- -------------------------------------------------------------------
EFFECTIVE MATURITY
- -------------------------------------------------------------------
- ---------------------------
Less than 1 year 11%
1 - 3 years 8%
3 - 7 years 35%
7 - 12 years 25%
12 years or greater 21%
----
100%
====
- ---------------------------
Weighted average effective maturity: 9 years
- -------------------------------------------------------------------
DIVERSIFICATION
- -------------------------------------------------------------------
- -----------------------------------
Corporate Bonds 34%
U.S. Government Agency 21%
U.S. Treasury Obligations 16%
Repurchase Agreement 12%
Asset-Backed Securities 7%
U.S. Government Guaranteed
Mortgages 7%
Foreign Bonds 3%
----
100%
====
- -----------------------------------
5
<PAGE>
BALANCED PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
- --------------------------------------------------------------------------------
Dear Shareholders,
Investor concern over stronger than expected economic growth and the
possibility of accelerating inflation fueled an environment of volatile price
changes for stocks and bonds in 1996. Nevertheless, the stock market completed
its second consecutive year of strong overall performance as evidenced by the
22.96% total return of the S&P 500. In contrast, the bond market provided
positive but more modest total returns, as measured by the unmanaged Lehman
Brothers Aggregate Bond Index, which returned 3.63% for the year. Balanced
Portfolio's conservative approach to investing in stocks and bonds resulted in a
total return of 11.89% for the same period. At the end of the period, the
Portfolio's assets were allocated 59% in equities and 41% in fixed income
securities (including cash).
The Portfolio's equity holdings were invested with the expectation that the
economic environment would be lackluster, inflation would remain under control,
and rapid earnings growth would be increasingly hard to sustain for the more
cyclically sensitive companies and industries. While the Fund's sector breakdown
remained relatively unchanged during the period, we made some strategic shifts
within sectors such as technology.
Although the health care sector was a poor performer during 1996, we
maintained our exposure as we believed the stocks owned by the Portfolio were
among the best positioned in the sector. This proved a sensible strategy, as
health care was one of the Portfolio's best performing sectors later in the
year.
Over the 12 months covered by this report, our exposure to the
manufacturing sector increased. On more than one occasion during the period,
signs of a strengthening economy led investors toward manufacturing stocks,
which generally respond well to an acceleration of economic activity.
In the bond portion of the Portfolio we took an active approach seeking to
capitalize on shifts in relative valuation among the Treasury, mortgage, and
corporate sectors. We pursued a defensive strategy by shortening the duration of
our bond holdings in an effort to reduce sensitivity to changes in interest
rates. We achieved this primarily by trimming our holdings of Treasury
securities, with most of the reduction occurring during the first half of the
year. We redeployed assets in several areas including corporate bonds, mortgage
securities, and cash.
Looking ahead, we believe quality growth stocks and bonds should benefit
from the current environment of slower economic growth and low inflation. With
the probability of rapid economic expansion low at this stage of the cycle, we
believe that higher interest rates are less likely. This scenario is typically
viewed as positive by the stock and bond markets, and should particularly
benefit investors in the months ahead.
[CALLOUT NEXT TO PRECEDING PARAGRAPH]
The strong performance
of stocks more than offset
the effects of rising rates
on bonds.
Sincerely,
Your Portfolio Management Team
/s/Valerie F. Malter /s/William M. Hutchinson
Valerie F. Malter William M. Hutchinson
Lead Portfolio Manager
/s/Ruth Heisler
Ruth Heisler
6
<PAGE>
BALANCED PORTFOLIO
PORTFOLIO SUMMARY as of December 31, 1996
- --------------------------------------------------------------------------------
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
BALANCED PORTFOLIO
- ----------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/96 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $11,189 11.89% 11.89%
5 Year $15,855 59.55% 9.79%
10 Year $26,655 166.55% 10.30%
S&P 500 INDEX (60%)
AND LBAB INDEX (40%)
- --------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/96 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $11,496 14.96% 14.96%
5 Year $17,583 75.89% 11.94%
10 Year $33,291 232.91% 12.77%
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
YEARLY PERIODS ENDED DECEMBER 31
Balanced Portfolio
Year Amount
- ----------------------
86 $10,000
87 $ 9,632
88 $11,229
89 $13,419
90 $13,162
91 $16,706
92 $17,870
93 $19,202
94 $18,807
95 $23,823
96 $26,575
S&P 500 Index
Year Amount
- ----------------------
86 $10,000
87 $10,525
88 $12,273
89 $15,162
90 $15,660
91 $20,431
92 $21,988
93 $24,204
94 $24,524
95 $33,739
96 $41,485
LBAB Index
Year Amount
- ----------------------
86 $10,000
87 $10,276
88 $10,085
89 $12,697
90 $13,834
91 $16,040
92 $17,236
93 $18,916
94 $18,265
95 $21,757
96 $22,547
The Standard & Poor's (S&P) 500 Index is an unmanaged capitalization-
weighted measure of 500 widely held common stocks listed on the New York
Stock Exchange, American Stock Exchange, and Over-The-Counter market and
The Lehman Brothers Aggregate Bond (LBAB) Index is an unmanaged market
value-weighted measure of treasury issues, agency issues, corporate bond
issues and mortgage securities. Index returns assume reinvestment of
dividends and, unlike Fund returns, do not reflect any fees or expenses.
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return
and principal value will fluctuate, so an investor's shares, when redeemed,
may be worth more or less than when purchased. Total returns in some
periods were higher due to maintenance of the Fund's expenses. See Financial
Highlights for the Balanced Portfolio. The Balanced Portfolio, with its
current name and investment objective, commenced operations on May 1, 1993.
Performance figures include the performance of its predecessor, the Managed
Diversified Portfolio. Since adopting its current objectives, the cumulative
and average annual returns are 48.78% and 11.43%, respectively.
- -------------------------------------------------------------------
EQUITY HOLDINGS
- -------------------------------------------------------------------
Sector breakdown of the Five Largest Equity Holdings
Portfolio's equity holdings ----------------------------
- --------------------------- 1. PHILIP MORRIS COMPANIES INC.
Consumer Staples 21% Tobacco, food products and brewing
Health 17%
Technology 15% 2. COCA-COLA CO, INC.
Manufacturing 12% International soft drink company
Service Industries 9%
Financial 8% 3. GENERAL ELECTRIC CO.
Consumer Discretionary 8% Leading producer of electrical
Media 5% equipment
Durables 4%
Energy 1% 4. MERCK & CO. INC.
---- Leading drug manufacturer
100%
==== 5. COLGATE-PALMOLIVE CO.
- --------------------------- Manufacturer of household and
personal care products
- -------------------------------------------------------------------
FIXED INCOME HOLDINGS
- -------------------------------------------------------------------
By Asset Type By Quality
- ----------------------------------- -----------------
Corporate Bonds 26% AAA 70%
U.S. Treasury Obligations 25% AA 3%
U.S. Government Agency A 14%
Pass-Thrus 22% BBB 13%
Cash Equivalents 11% ----
U.S. Government Guaranteed 100%
Mortgages 8% ====
Asset-Backed Securities 7% -----------------
Foreign Bonds 1%
----
100%
====
- -----------------------------------
7
<PAGE>
GROWTH AND INCOME PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
- --------------------------------------------------------------------------------
Dear Shareholders,
For the second year in a row, both the Dow Jones Industrial Average and the
S&P 500 reached new heights. Growth and Income Portfolio returned 22.17% for the
year versus a return of 22.96% for the market as represented by the unmanaged
S&P 500 Index. We are pleased with the Portfolio's return given the year's
challenging environment of conflicting economic signals and rapid sector
rotation.
Unlike 1995, when the market was driven largely by a one percentage point
drop in long-term interest rates and 18% growth in corporate profits, 1996
marked a slowing of corporate profit growth to 8% and a decidedly more volatile
bond market. Overall, the year was characterized by market forecasts which
seemed to flip-flop with each new release of corporate earnings or economic
data. In the end, however, nothing seemed to be able to hold back the market for
long.
[CALLOUT NEXT TO PRECEDING PARAGRAPH]
Stocks posted a second
consecutive year of strong
performance despite
increased volatility.
Early in the year, portfolio changes were concentrated in the cyclical
area, where we used depressed valuations in chemicals, paper, and retailing as
an opportunity to increase holdings. At the same time, we scaled back more
defensive consumer products and health care stocks, which had outperformed
significantly.
During the fourth quarter, we accelerated our trimming of health care and
consumer staples. We used a portion of the proceeds from the sales to increase
the Portfolio's position in Regional Bell Operating Companies and domestic
electric utilities, where we have been underweighted. In the communications
sector, we initiated positions in BellSouth and Frontier, and increased our
weighting in Bell Atlantic and NYNEX. With respect to electric utilities, we
believe that while uncertainty remains in the restructuring of the industry, the
process is proceeding at an appropriate pace, with many states allowing
utilities ample time to make the transition. On the sell side, we eliminated
positions in Bausch & Lomb and Reader's Digest due to company fundamentals which
no longer supported a strong case for ownership in the Portfolio.
While we watch the endless stream of economic data and the trends in
corporate profit growth, and remain cautious with respect to the current level
of the stock market, we will not place large sector bets in the portfolio based
on financial market forecasts. We have seen, particularly in 1996, how
expectations can shift overnight, only to come full circle in a short a time
period. Rather than attempt to outguess the market, we remain focused on our
primary activity -- investing in undervalued securities with above-average
dividend yields -- which we believe is a superior strategy in almost any market
environment.
Sincerely,
Your Portfolio Management Team
/s/Robert T. Hoffman /s/Kathleen T. Millard
Robert T. Hoffman Kathleen T. Millard
Lead Portfolio Manager
/s/Benjamin W. Thorndike /s/Lori J. Ensinger
Benjamin W. Thorndike Lori J. Ensinger
8
<PAGE>
GROWTH AND INCOME PORTFOLIO
PORTFOLIO SUMMARY as of December 31, 1996
- --------------------------------------------------------------------------------
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
GROWTH AND INCOME PORTFOLIO
- ----------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/96 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $12,217 22.17% 22.17%
Life of
Fund* $16,884 68.84% 21.69%
S&P 500 INDEX
- --------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/96 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $12,295 22.96% 22.96%
Life of
Fund* $17,590 75.90% 23.57%
*The Fund commenced operations on May 2, 1994.
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
Growth and Income Portfolio
Year Amount
- ----------------------
5/2/94* $10,000
6/94 $ 9,854
9/94 $10,488
12/94 $10,235
3/95 $10,903
6/95 $11,817
9/95 $12,688
12/95 $13,483
3/96 $14,300
6/96 $14,645
9/96 $15,199
12/96 $16,472
S&P 500 Index
Year Amount
- ----------------------
5/2/94* $10,000
6/94 $ 9,915
9/94 $10,400
12/94 $10,398
3/95 $11,411
6/95 $12,500
9/95 $13,493
12/95 $14,305
3/96 $15,073
6/96 $15,750
9/96 $16,237
12/96 $17,590
The Standard & Poor's (S&P) 500 Index is an unmanaged capitalization-
weighted measure of 500 widely held common stocks listed on the New York
Stock Exchange, American Stock Exchange, and Over-The-Counter market.
Index returns assume reinvestment of dividends and, unlike Fund returns,
do not reflect any fees or expenses.
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return
and principal value will fluctuate, so an investor's shares, when redeemed,
may be worth more or less than when purchased. Total returns were higher
due to maintenance of the Fund's expenses. See Financial
Highlights for the Growth and Income Portfolio.
- -------------------------------------------------------------------
DIVERSIFICATION
- -------------------------------------------------------------------
- --------------------------- Sector breakdown of the
Equity Securities 95% Portfolio's equity holdings
Cash Equivalents 5% ---------------------------
---- Financial 21%
100% Manufacturing 17%
==== Consumer Staples 11%
- --------------------------- Health 8%
Energy 8%
A graph in the form of a pie chart Durables 8%
appears here, illustrating the Communications 7%
exact data points in the table Utilities 5%
to the right. Consumer Discretionary 4%
Other 6%
----
95%
====
Our value approach focused on
cyclicals early in the year
followed by emphasis on
Regional Bells and utilities.
- -------------------------------------------------------------------
TEN LARGEST EQUITY HOLDINGS (18% of Portfolio)
- -------------------------------------------------------------------
1. XEROX CORP.
Leading manufacturer of copiers and duplicators
2. PHILIP MORRIS COMPANIES INC.
Tobacco, food products and brewing
3. STUDENT LOAN MARKETING ASSOCIATION
Student loan financing programs
4. TRW INC.
Defense electronics, automotive parts and systems
5. UNITED TECHNOLOGIES CORP.
Manufacturer of aerospace, climate control systems, and elevators
6. BANKERS TRUST NEW YORK CORP.
Commercial banking
7. H.J. HEINZ CO.
Major manufacturer of processed foods
8. CHASE MANHATTAN CORP.
Commercial banking
9. E.I du PONT DE NEMOURS & CO.
Chemical producer
10. SHERLING-PLOUGH CORP.
Pharmaceutical and consumer products
9
<PAGE>
CAPITAL GROWTH PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
- --------------------------------------------------------------------------------
Dear Shareholders,
The U.S. stock market completed a second consecutive year of strong
performance, with the S&P 500 climbing 22.96% for the 12-month period ended
December 31, 1996. However, the market environment was punctuated by rapid
sector rotation and increased volatility. In this changing environment, the
Portfolio returned 20.13%. The Portfolio's best performing groups included the
technology, consumer staples, finance, service, and manufacturing sectors.
[CALLOUT NEXT TO PRECEDING PARAGRAPH]
As stocks rose over
the year, we remained
committed to our criteria
of individual selection.
In the technology area we continued to be broadly diversified, emphasizing
high quality market leaders such as Intel. The company's dominance in
microprocessors seems to be unchallenged at this juncture. Applied Materials,
the leading supplier of semiconductor manufacturing equipment, also turned in
good performance, especially during the fourth quarter.
Consistent with our view of slowing economic growth and little pressure on
interest rates, the Portfolio held a number of finance issues. In a relatively
expensive stock market many of these issues trade at a discount to both the S&P
500 and their growth rates. In this category we include a number of specialty
names such as insurance companies American International Group and Excel Ltd.
With health care costs rising at the rate of inflation, political pressure
to regulate the industry may have diminished. The Portfolio holds issues of a
number of leading pharmaceutical companies that have strong product pipelines
which we expect should drive sustainable earnings growth. One of our better
performers in this area was Warner Lambert, which rose on news of FDA approval
of two of its new products, troglidazone and atorvastatin.
Significant exposure to the energy sector was also maintained. We believe
that stock prices in this sector have yet to reflect the increase in oil prices
over the last year, and the more favorable supply and demand environment. Exxon
was among the strongest issues in the Portfolio, with Amoco and Royal Dutch
Petroleum also performing well.
In view of high consumer debt levels, we have consistently maintained a
relatively modest exposure to consumer discretionary stocks. The few issues in
the Portfolio did not add to performance. J.C. Penney declined, reflecting the
challenging retail environment. Despite inroads overseas, McDonalds has had a
particularly hard time getting its domestic business to show growth.
Our strategy remains focused on buying stocks with sustainable earnings
growth at reasonable valuations. We intend to maintain a broadly diversified
portfolio with balanced sector representation in the months ahead.
Sincerely,
Your Portfolio Management Team
/s/William F. Gadsden /s/Bruce F. Beaty
William F. Gadsden Bruce F. Beaty
Lead Portfolio Manager
10
<PAGE>
CAPITAL GROWTH PORTFOLIO
PORTFOLIO SUMMARY as of December 31, 1996
- --------------------------------------------------------------------------------
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
CAPITAL GROWTH PORTFOLIO
- ----------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/96 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $12,013 20.13% 20.13%
5 Year $17,959 79.59% 12.42%
10 Year $34,095 240.95% 13.05%
S&P 500 INDEX
- --------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/96 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $12,296 22.96% 22.96%
5 Year $20,305 103.05% 15.20%
10 Year $41,485 314.85% 15.26%
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
YEARLY PERIODS ENDED DECEMBER 31
Capital Growth Portfolio
Year Amount
- ----------------------
86 $10,000
87 $10,525
88 $12,273
89 $16,162
90 $15,660
91 $20,431
92 $21,988
93 $24,204
94 $24,524
95 $33,739
96 $41,485
S&P 500 Index
Year Amount
- ----------------------
86 $10,000
87 $ 9,811
88 $11,975
89 $14,699
90 $13,604
91 $18,985
92 $20,204
93 $24,423
94 $22,061
95 $29,381
96 $34,095
The Standard & Poor's (S&P) 500 Index is an unmanaged capitalization-
weighted measure of 500 widely held common stocks listed on the New York
Stock Exchange, American Stock Exchange, and Over-The-Counter market.
Index returns assume reinvestment of dividends and, unlike Fund returns,
do not reflect any fees or expenses.
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return
and principal value will fluctuate, so an investor's shares, when redeemed,
may be worth more or less than when purchased. Total returns in some
periods were higher due to maintenance of the Fund's expenses. See
Financial Highlights for the Capital Growth Portfolio.
- -------------------------------------------------------------------
DIVERSIFICATION
- -------------------------------------------------------------------
- --------------------------- Sector breakdown of the
Equity Securities 97% Portfolio's equity holdings
Cash Equivalents 3% ---------------------------
---- Financial 18%
100% Technology 16%
==== Health 14%
- --------------------------- Energy 13%
Manufacturing 12%
A graph in the form of a pie chart Consumer Discretionary 6%
appears here, illustrating the Consumer Staples 6%
exact data points in the table Durables 5%
to the right. Service Industries 4%
Other 3%
----
97%
====
The portfolio's
diversification helped to
mitigate increased
volatility and sector
rotation in 1996
- -------------------------------------------------------------------
TEN LARGEST EQUITY HOLDINGS (25% of Portfolio)
- -------------------------------------------------------------------
1. FEDERAL NATIONAL MORTGAGE ASSOCIATION
Insurer and holder of mortgage loans
2. INTEL CORP.
Semiconductor memory circuits
3. CITICORP
Provider of a broad range of financial services,
including banking and consumer finance
4. AMERICAN EXPRESS CREDIT CORP.
Travel and investment services, insurance, and banking
5. COLUMBIA/HCA HEALTHCARE CORP.
Leading hospital management company
6. ROYAL DUTCH PETROLEUM CO.
International energy company
7. WARNER-LAMBERT CO.
Drugs, toiletries, and food products
8. AMERICAN INTERNATIONAL GROUP, INC.
Major international insurance holding company
9. MBIA, INC.
Insurer of municipal bonds
10. GENERAL MOTORS CORP. "H"
Producer of high technology electronics
11
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
- --------------------------------------------------------------------------------
Dear Shareholders,
For the eight months from the Portfolio's inception to the end of the
fiscal period May 1 to December 31, 1996, Global Discovery Portfolio provided a
total return of 5.50%. This performance exceeded the total return of the Fund's
benchmark, the unmanaged Salomon Brothers World Equity Extended Market Index,
which returned 1.20% for the same period. With the notable exception of Japan,
performance of the major international equity markets was generally robust. In
the United States, the prolonged expansion of the economy continued as did the
domestic stock market's upward swing, despite periods of volatility brought on
by investor fears of accelerating inflation.
There were a number of changes in the Portfolio's top holdings of small
company stocks. Notable in their departure were German-based software company
SAP and U.S.-based semiconductor producer Atmel. Both had reached "oversized"
status after contributing significantly to the Portfolio's past performance.
Replacing SAP and Atmel as top portfolio holdings are IHC/Caland NV, the
Netherlands-based manufacturer of dredgers and offshore production platforms for
the oil industry, and the U.S.-based HBO & Co., the leading consolidator in the
booming hospital information systems industry.
[CALLOUT NEXT TO PRECEDING PARAGRAPH]
Strong performance was
evident in the United
States and abroad with
the exception of Japan.
Our approach to portfolio management focuses on individual stock selection.
The country or regional decision is secondary to this "bottom up" emphasis on
companies with good management, solid balance sheets and, above all, excellent
prospects for above average growth. We think this is appropriate because the
domicile of the company headquarters is becoming less relevant to the investment
decision. For example, two of the leading holdings, CETV and Benton Oil, are
classified as "developed" country holdings with corporate headquarters located
in the U.K. and California, respectively. Despite its London base, the major
earnings asset of CETV is a television station in Prague. Benton's profits are
entirely derived from its drilling operations in Venezuela. Both of these
companies, therefore, depend entirely on earnings from "developing" nations.
Regardless of how the portfolio is constructed, it can be viewed from a
"top down" perspective. From this standpoint, the portfolio is overweighted in
Europe and substantially underweighted in Japan. Moreover, we have restructured
our Japanese holdings so as to concentrate on consumer stocks with strongly
defined niches and good growth prospects.
In the U.S., health care stocks have been emphasized as the virtual
revolution in this sector of the economy continues unabated. Consolidation will
provide many opportunities in the areas of kidney dialysis services and
physician practice. We believe growth prospects for hospital information
services are excellent.
While we continue to be cautious regarding the level of markets, we think
that there are many companies already in the Portfolio that have the
characteristics to weather whatever storms arise.
Sincerely,
Your Portfolio Management Team
/s/Gerald J. Moran /s/Sewall F. Hodges
Gerald J. Moran Sewall F. Hodges
Lead Portfolio Manager
12
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
PORTFOLIO SUMMARY as of December 31, 1996
- --------------------------------------------------------------------------------
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
GLOBAL DISCOVERY PORTFOLIO
- ----------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/95 $10,000 Cumulative Annual
- -------- ------- ---------- ------
Life of
Fund* $10,550 5.5% --
SALOMON BROTHERS WORLD EQUITY EMI INDEX
- --------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/95 $10,000 Cumulative Annual
- -------- ------- ---------- ------
Life of
Fund* $10,120 1.20% --
*The Fund commenced operations on May 1, 1996.
Index comparisons begin May 31, 1996.
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
YEARLY PERIODS ENDED DECEMBER 31
Global Discovery Portfolio
Year Amount
- ----------------------
5/96* $10,000
6/96 $ 9,857
7/96 $ 9,592
8/96 $ 9,886
9/96 $10,190
10/96 $10,147
11/96 $10,943
12/96 $10,343
Salomon Brothers World Equity EMI Index
Year Amount
- ----------------------
5/96* $10,000
6/96 $ 9,671
7/96 $ 9,337
8/96 $ 9,637
9/96 $ 9,670
10/96 $ 9,626
11/96 $10,136
12/96 $10,120
The Salomon Brothers World Equity EMI Index is an unmanaged small capitalization
universe of 22 countries. Index returns assume reinvestment of dividends and,
unlike Fund Returns, do not reflect any fees or expenses.
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return
and principal value will fluctuate, so an investor's shares, when redeemed,
may be worth more or less than when purchased. Total returns in some
periods were higher due to maintenance of the Fund's expenses. See Financial
Highlights for the Global Discovery Portfolio.
- -------------------------------------------------------------------
DIVERSIFICATION
- -------------------------------------------------------------------
By Region By Sector
(Excluding 6% Cash Equivalents) (Equity Holdings)
- ---------------------------- ---------------------------
Europe 43% Financial 16%
U.S. & Canada 41% Health 16%
Japan 10% Service Industries 13%
Latin America 4% Consumer Staples 11%
Pacific Basin 1% Technology 10%
Other 1% Energy 9%
---- Manufacturing 7%
100% Consumer Discretionary 5%
==== Durables 5%
Other 8%
----
100%
====
Graphs in the form of pie charts appears here,
illustrating the exact data points in the above table.
- -------------------------------------------------------------------
TEN LARGEST EQUITY HOLDINGS (25% of Portfolio)
- -------------------------------------------------------------------
1. IHC CALAND N.V
Dredging and offshore services in the Netherlands
2. SERCO GROUP PLC
Facilities management company in the United Kingdom
3. MARSCHOLLCK LAUTENSCHLAGER UND PARTNER AG
Leading independent life insurance company in Germany
4. BANK OF IRELAND PLC
Bank in Ireland
5. CENTRAL EUROPEAN MEDIA ENTERPRISE LTD.
Owner and operator of national and regional private commercial
television stations in Central Europe and Germany
6. AUTOLLV AG.
Manufacturer of automobile safety bags in Sweden
7. JERONIMO MARTINS
Food producer and retailer in Portugal
8. HBO & COMPANY
Designer of computerized information systems to the healthcare
industry in the United States
9. BILLING INFORMATION CONCEPTS
Billing and information management services in the United States
10. SHOHKOH FUND & CO., LTD.
Finance Company for small and medium-sized firms in Japan
13
<PAGE>
INTERNATIONAL PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
- --------------------------------------------------------------------------------
Dear Shareholders,
For the 12 months ended December 31, 1996, International Portfolio provided
a total return of 14.78%, comparing very favorably to the performance of the
unmanaged MSCI EAFE and Canada Index, which returned 6.87% for the same period.
The Portfolio's performance was aided by an underweighting in Japan, one of the
worst performing markets over the period, as well as good stock selection in
Europe.
[CALLOUT NEXT TO PRECEDING PARAGRAPH]
We continue to focus on
companies in Europe with
sound management
strategies.
Falling interest rates, ongoing corporate restructuring, takeover activity,
and greater management focus on shareholder value propelled European markets
upwards. German equities were particular beneficiaries of corporate
restructuring, including portfolio holdings Hoechst, BASF, and Daimler Benz.
Japan's market faltered over the period, as concerns developed over the feeble
economic recovery and domestic investors remained absent from the market. Korean
equities traded lower as well, troubled by weak corporate earnings, a widening
trade gap, a depreciating currency, and the collapse in semiconductor prices.
The Hong Kong market rallied towards the end of the year as concerns about the
1997 hand-over to China faded. Brazil was a standout among Latin American
markets, driven by continued progress on the privatization front and the
perception that, for the first time since the 1940s, Brazilians are likely to
experience an extended period of low, even single digit, inflation.
In Europe, we continue to focus on companies with sound management
strategies positioned to benefit from the important changes taking place today
in the region. The drive for growth at any cost has been supplanted at many
companies by the desire to generate returns for shareholders. Though the
restructuring theme is most notable in Germany at present, it is also evident
elsewhere in Europe. Industry consolidation continues to be a successful theme
in the portfolio as well. In Japan, we continue to seek out domestic companies
with a unique franchise (Nichiei) and high quality global blue chip stocks
benefiting from a weaker yen (Canon). Elsewhere in Asia, our strategy is to
identify dominant regional companies, low-cost producers, and companies that
stand to benefit from the region's rising disposable income.
Looking ahead, while there may be transitional jitters in Europe from time
to time, the potential rewards to investors from the favorable changes underway
there are exciting. In Japan, there is evidence of momentum in selected areas of
the economy: interest rates are at record lows; valuation criteria are
attractive by historical standards; and currency depreciation has boosted
corporate earnings. Our outlook for Japan is tempered, however, by the continued
absence of domestic participation in the market and the slow pace of
deregulation in an economy impeded by structural imbalances. Going forward,
International Portfolio will seek to continue to provide important exposure to
the many opportunities for capital appreciation to be found overseas.
Sincerely,
Your Portfolio Management Team
/s/Carol L. Franklin /s/Nicholas Bratt
Carol L. Franklin Nicholas Bratt
Lead Portfolio Manager
/s/Joan R. Gregory
Joan R. Gregory
14
<PAGE>
INTERNATIONAL PORTFOLIO
PORTFOLIO SUMMARY as of December 31, 1996
- --------------------------------------------------------------------------------
- -----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
- -----------------------------------------------------------------
INTERNATIONAL PORTFOLIO
- ----------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/96 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $11,478 14.78% 14.78%
5 Year $16,890 68.90% 11.05%
Life of
Fund* $24,966 149.86% 9.93%
MSCI EAFE & CANADA INDEX
- --------------------------------------
Total Return
Period Growth --------------
Ended of Average
12/31/96 $10,000 Cumulative Annual
- -------- ------- ---------- ------
1 Year $10,687 6.87% 6.87%
5 Year $14,817 48.17% 8.17%
Life of
Fund* $16,574 65.74% 5.41%
*The Fund commenced operations on May 1, 1987.
Index comparisons begin May 31, 1987.
A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:
YEARLY PERIODS ENDED DECEMBER 31
International Portfolio
Year Amount
- ----------------------
5/31/87* $10,000
87 $ 8,997
88 $10,502
89 $14,470
90 $13,363
91 $14,893
92 $14,433
93 $19,891
94 $19,723
95 $21,915
96 $25,154
MSCI EAFE & Canada Index
Year Amount
- ----------------------
5/31/87* $10,000
87 $ 9,138
88 $11,682
89 $12,968
90 $ 9,980
91 $11,186
92 $ 9,824
93 $12,961
94 $13,915
95 $15,509
96 $16,574
The Morgan Stanley Capital International (MSCI) Europe, Australia, the Far
East (EAFE) & Canada Index is an unmanaged capitalization-weighted measure
of stock markets in Europe, Australia, the Far East and Canada. Index returns
assume dividends reinvested net of witholding tax and, unlike Fund returns,
do not reflect any fees or expenses.
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return
and principal value will fluctuate, so an investor's shares, when redeemed,
may be worth more or less than when purchased. Total returns in some
periods were higher due to maintenance of the Fund's expenses. See Financial
Highlights for the International Portfolio.
- -------------------------------------------------------------------
DIVERSIFICATION
- -------------------------------------------------------------------
By Region By Sector
(Excluding Cash Equivalents) (Equity Holdings)
- ---------------------------- ---------------------------
Europe 59% Manufacturing 23%
Japan 18% Financial 11%
Pacific Basin 14% Durables 8%
Latin America 6% Communications 7%
Canada 3% Utilities 7%
---- Metals & Minerals 7%
100% Service Industries 8%
==== Health 8%
Technology 8%
Other 22%
----
100%
====
Graphs in the form of pie charts appears here,
illustrating the exact data points in the above table.
- -------------------------------------------------------------------
TEN LARGEST EQUITY HOLDINGS (13% of Portfolio)
- -------------------------------------------------------------------
1. HOSCHET AG
Chemical producer in Germany
2. NOVARTIS AG
Pharmaceutical company in Switzerland
3. VEBA AG
Electric utility and distributor of oil and chemicals in Germany
4. HUTCHISON WHAMPOA, LTD.
Container terminal and real estate company in Hong Kong
5. CARREFOUR HYPERMARKET
Hypermarket operator and food retailer in France.
6. AUTOLIV AB
Manufacturer of automoblie safety bags in Sweden
7. MANNESMANN AG
Diversified construction and technology company in Germany
8. PORTUGAL TELECOM SA
Telecommunication services
9. SMITHKLINE BEECHAM PLC
Manufacturer of drugs and healthcare products in the United Kingdom
10. MATSUSHITA ELECTRICAL INDUSTRIAL CO., LTD.
Leading manufacturer of consumer electronic products in Japan
15
<PAGE>
MONEY MARKET PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Principal Value ($)
Portfolio Amount ($) (Note A)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
4.6% REPURCHASE AGREEMENT
4,355,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 12/31/96 at 6.7% to be repurchased at
$4,356,621 on 1/2/97, collateralized by a $4,284,000
U.S. Treasury Note, 5.875%, 7/31/97 (Cost $4,355,000) ..... 4,355,000
----------
90.3% COMMERCIAL PAPER
Financial 82.9%
Banks 8.4% 4,000,000 Deutsche Bank Financial Inc., 5.23%, 3/4/97 ................ 3,963,698
4,000,000 Prudential Funding Corp., 5.26%, 2/25/97 ................... 3,967,550
----------
7,931,248
----------
Business Finance 6.3% 3,000,000 New Center Asset Trust, 5.21%, 2/19/97 ..................... 2,978,440
3,000,000 Norwest Corp., 5.26%, 3/11/97 .............................. 2,969,640
----------
5,948,080
----------
Consumer Finance 23.8% 3,500,000 American Express Credit Corp., 5.11%, 1/23/97 .............. 3,488,600
4,000,000 Bell Atlantic Financial Services Inc., 5.26%, 1/27/97 ...... 3,984,284
4,000,000 Beneficial Corp., 5.41%, 6/25/97 ........................... 3,896,945
2,300,000 Ford Motor Credit Corp., 4.65%, 1/8/97 ..................... 2,297,625
2,000,000 Ford Motor Credit Corp., 5.19%, 2/4/97 ..................... 1,989,951
3,700,000 General Electric Capital Corp., 5.16%, 1/30/97 ............. 3,684,143
3,000,000 Household Finance Corp., 4.44%, 1/6/97 ..................... 2,997,779
----------
22,339,327
----------
Other Financial
Companies 44.4% 4,000,000 Abbey National North America, 5.30%, 3/11/97 ............... 3,959,213
3,000,000 American General Finance Corp., 5.32%, 4/24/97 ............. 2,950,280
4,000,000 Ameritech Corp., 5.29%, 3/31/97 ............................ 3,947,787
1,600,000 Associates Corp. of North America, 4.94%, 1/14/97 .......... 1,596,932
3,000,000 Associates Corp. of North America, 5.34%, 4/7/97 ........... 2,957,440
3,000,000 Centric Funding Corp., 5.41%, 3/25/97 ...................... 2,962,581
3,500,000 Ciesco L.P., 4.96%, 1/15/97 ................................ 3,492,786
2,000,000 Dresdner U.S. Finance, 5.19%, 2/4/97 ....................... 1,989,951
4,000,000 Matterhorn Capital Corp., 5.17%, 1/16/97 ................... 3,990,833
3,000,000 Preferred Receivables Funding Corp., 4.44%, 1/6/97 ......... 2,997,779
4,000,000 Private Export Funding Corp., 5.20%, 2/11/97 ............... 3,975,901
3,000,000 Receivables Capital Corp., 5.32%, 2/28/97 .................. 2,974,093
4,000,000 UBS Finance (DE) INC., 5.30%, 1/21/97 ...................... 3,987,667
----------
41,783,243
----------
Manufacturing 4.2%
Chemicals 4,000,000 E.I. du Pont de Nemours & Co., 5.13%, 1/23/97 .............. 3,986,922
----------
Utilities 3.2%
Electric Utilities 3,000,000 Virginia Electric & Power Co., 5.26%, 2/13/97 .............. 2,980,829
Total Commercial Paper (Cost $84,969,649) .................. 84,969,649
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Principal Value ($)
Portfolio Amount ($) (Note A)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5.1% SHORT-TERM NOTES
1,000,000 Bank of America Illinois, 5.700%, 5/28/97 .................. 999,569
3,000,000 FCC National Bank Note, 5.590%, 11/7/97 .................... 2,999,145
750,000 General Electric Capital Corp., 5.290%, 1/13/97 ............ 749,983
----------
Total Short-Term Notes (Cost $4,748,697) ................... 4,748,697
----------
Total Investment Portfolio-- 100.0% (Cost $94,073,346) (a) ................ 94,073,346
==========
(a) Cost for federal income tax purposes is $94,073,346.
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
MONEY MARKET PORTFOLIO
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
December 31, 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments securities (cost $94,073,346) (Note A) ........................ $ 94,073,346
Cash ...................................................................... 526
Interest receivable ....................................................... 72,784
Receivable for Portfolio shares sold ...................................... 4,093,556
------------
Total assets ........................................................ 98,240,212
Liabilities
Dividends payable ......................................................... $ 407,369
Payable for Portfolio shares redeemed ..................................... 17,495
Accrued management fee (Note B) ........................................... 29,722
------------
Total liabilities ...................................................... 454,586
------------
Net assets, at value ...................................................... $ 97,785,626
============
Net Assets
Net assets consist of:
Accumulated net realized loss .......................................... (2,483)
Paid-in capital ........................................................ 97,788,109
------------
Net assets, at value ...................................................... $ 97,785,626
============
Net asset value, offering and redemption price per share
($97,785,626/97,786,551 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) ......... $ 1.00
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment income
Interest ............................................................... $ 4,794,163
Expenses (Note A):
Management fee (Note B) ............................................. $ 325,791
Custodian and accounting fees (Note B) ............................. 46,495
Trustees' fees and expenses (Note B) ............................... 16,326
Legal ............................................................... 2,425
Auditing ............................................................ 10,145
Other .................................................................. 7,026 408,208
------------ ------------
Net investment income .................................................. 4,385,955
------------
Net realized loss from Investments ..................................... (917)
------------
Net increase in net assets resulting from operations ...................... $ 4,385,038
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
Increase (Decrease) in Net Assets 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income .................................................... $ 4,385,955 $ 4,571,604
Net realized loss from investment transactions ........................... (917) --
------------- -------------
Net increase in net assets resulting from operations ..................... 4,385,038 4,571,604
------------- -------------
Distributions to shareholders from net investment income ................. (4,385,955) (4,571,604)
------------- -------------
Portfolio share transactions at net asset value of $1.00 per share:
Proceeds from shares sold ............................................. 201,403,309 148,542,887
Net asset value of shares issued to shareholders in
reinvestment of distributions from net investment income ........... 4,385,955 4,571,604
Cost of shares redeemed ............................................... (187,750,612) (163,864,512)
------------- -------------
Net increase (decrease) in net assets from Portfolio share transactions 18,038,652 (10,750,021)
------------- -------------
Increase (decrease) in net assets ........................................ 18,037,735 (10,750,021)
Net assets at beginning of period ........................................ 79,747,891 90,497,912
------------- -------------
Net assets at end of period .............................................. $ 97,785,626 $ 79,747,891
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ...... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income ................. .050 .055 .037 .025 .033 .057 .076 .088 .068 .060
Less distributions from
net investment income .... (.050) (.055) (.037) (.025) (.033) (.057) (.076) (.088) (.068) (.060)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period .............. $ 1.00 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return (%) ........... 5.09 5.65 3.72 2.54 3.33 5.81 7.83 8.84 7.08 5.95
Ratios and
Supplemental Data
Net assets, end of
period ($ millions) ...... 98 80 90 49 34 28 32 15 11 8
Ratio of operating
expenses, net to
average daily net
assets (%) ............... .46 .50 .56 .66 .64 .67 .69 .72 .75 .75
Ratio of operating expenses
before expense reductions,
to average daliy net
assets (%) ............... .46 .50 .56 .66 .64 .67 .69 .81 1.04 1.12
Ratio of net
investment income
to average daily
net assets (%) ........... 4.98 5.51 3.80 2.55 3.26 5.67 7.57 8.53 6.99 6.06
</TABLE>
21
<PAGE>
BOND PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
11.9% REPURCHASE AGREEMENT
7,959,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette dated
12/31/96 at 6.7% to be repurchased at $7,961,962
on 1/2/97 collateralized by a $7,632,000 U.S. Treasury
Note, 7.75%, 11/30/99 (Cost $7,959,000) .............. 7,959,000
----------
15.8% U.S. TREASURY OBLIGATIONS
1,000,000 U.S. Treasury Note, 6.125%, 7/31/00 ..................... 1,000,000
9,750,000 U.S. Treasury Note, 5.625%, 11/30/00 .................... 9,573,233
----------
Total U.S. Treasury Obligations (Cost $10,807,479) .... 10,573,233
----------
6.9% U.S. GOV'T GUARANTEED MORTGAGES
1,444,741 Government National Mortgage Association
10%, 8/15/20 (a) ..................................... 1,589,894
2,928,088 Government National Mortgage Association
8.5%, 4/15/25 (a) .................................... 3,036,955
----------
Total U.S. Gov't Guaranteed
Mortgages (Cost $4,555,736) ......................... 4,626,849
----------
20.9% U.S. GOVERNMENT AGENCY PASS-THRUS
655,216 Federal Home Loan Mortgage Corp., 8%, 4/1/08 (a) ........ 674,564
1,954,508 Federal National Mortgage Association 6.5%, 2/1/26 (a) .. 1,866,555
3,015,599 Federal National Mortgage Association 7%, 7/1/26 (a) .... 2,948,682
1,698,829 Federal National Mortgage Association, 8%, 12/1/09 (a) .. 1,749,913
1,996,810 Federal National Mortgage Association, 6.5%, 3/1/26 (a) . 1,904,458
4,941,162 Federal National Mortgage Association, 7%, 4/1/26 (a) ... 4,831,518
----------
Total U.S. Government Agency Pass-Thrus
(Cost $13,914,092) ................................... 13,975,690
----------
0.1% COLLATERALIZED MORTGAGE OBLIGATIONS
32,214 Federal National Mortgage Association, REMIC,
8.5%, 4/25/18 (Cost $30,583) ......................... 32,153
----------
3.2% FOREIGN BONDS-U.S. $ DENOMINATED
1,000,000 Korea Development Bank, 9.6%, 12/1/00 ................... 1,101,110
1,000,000 Nippon Telegraph & Telephone Corp., 9.5%, 7/27/98 ....... 1,050,980
----------
Total Foreign Bonds-U.S. $ Denominated
(Cost $2,118,349) .................................... 2,152,090
----------
7.2% ASSET-BACKED SECURITIES
Automobile Receivables 1.5%
1,000,000 Premier Auto Trust Asset Backed Certificate Series 1996-
A4, 6.75%, 11/6/00 ................................... 1,011,250
----------
Credit Card Receivables 1.5%
1,000,000 Standard Credit Card Trust, Series 1990-3B, 9.85%,
7/10/97 .............................................. 1,018,750
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
22
<PAGE>
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Home Equity Loans 2.7%
1,499,989 Contimortgage Home Equity Loan Trust, Series 1996-1 A2,
5.58%, 1/15/11 ....................................... 1,489,207
307,952 United Companies Financial Corp., Home Equity Loan
Series 1993-B1, 6.075%, 7/25/14 ...................... 302,707
----------
1,791,914
----------
Manufactured Housing
Receivables 1.5%
964,749 Green Tree Financial Corp., Securitized NIM Series
1994-B, 7.85%, 7/15/04 ............................... 973,492
----------
Total Asset-Backed Securities (Cost $4,894,031) ....... 4,795,406
----------
34.0% CORPORATE BONDS
Consumer Staples 1.7%
1,000,000 J. Seagram & Sons Inc., 9%, 8/15/21 ..................... 1,159,270
----------
Financial 14.1%
2,000,000 Associates Corp. of North America, 6.625%, 5/15/01 ...... 1,999,160
1,000,000 BankAmerica Corp., 7.125%, 5/1/06 ....................... 1,005,450
1,750,000 First Union Capital II, 7.85%, 1/1/27 ................... 1,734,023
1,500,000 Highwoods/Forsyth L.P., 7%, 12/1/06 ..................... 1,479,330
1,500,000 Midland Bank PLC, 6.95%, 3/15/11 ........................ 1,447,185
750,000 Spieker Properties, Inc., 7.875%, 12/1/16 ............... 744,375
1,000,000 Susa Partnership L.P., 7.125%, 11/1/03 .................. 992,850
----------
9,402,373
----------
Media 3.1%
1,000,000 Tele-Communications, Inc., 8.65%, 9/15/04 ............... 1,004,910
1,000,000 Time Warner Inc., 9.125%, 1/15/13 ....................... 1,091,700
----------
2,096,610
----------
Durables 3.9%
1,000,000 Lockheed Martin Corp., 9%, 1/15/22 ...................... 1,156,540
1,500,000 Northrop Grumman Corp., 7.875%, 3/1/26 .................. 1,503,495
----------
2,660,035
----------
Manufacturing 4.3%
1,000,000 ARCO Chemical Co., 9.375%, 12/15/05 ..................... 1,159,110
1,000,000 Monsanto Co., 8.7%, 10/15/21 ............................ 1,143,550
500,000 Newport News Shipbuilding Co., 8.625%, 12/1/06 .......... 512,500
----------
2,815,160
----------
Technology 1.7%
1,000,000 Loral Corp., 8.375%, 6/15/24 ............................ 1,107,010
----------
Energy 3.4%
1,000,000 Atlantic Richfield Co., 9.125%, 8/1/31 .................. 1,211,550
1,000,000 Enron Corp., 10%, 6/1/98 ................................ 1,050,400
----------
2,261,950
----------
Transportation 1.8%
600,000 American Airlines, 8.8%, 9/16/15 ........................ 654,894
</TABLE>
The accompanying notes are an integral part of the financial statements.
23
<PAGE>
BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
575,000 American Airlines, 8.39%, 1/2/17 ........................ 608,810
----------
1,263,704
----------
Total Corporate Bonds (Cost $21,685,522) .............. 22,766,112
----------
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0%
(Cost $65,964,792) (b) ............................... 66,880,533
==========
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Effective maturities will be shorter due to prepayments.
(b) At December 31, 1996, the net unrealized appreciation on investments based on cost for federal
income tax purposes of $65,972,685 was as follows:
Aggregate gross unrealized appreciation for all investments in which there is an excess of market $ 1,414,221
value over tax cost
Aggregate gross unrealized depreciation for all investments in which there is an excess of tax (506,373)
---------------
cost over market value
Net unrealized appreciation $ 907,848
==============
- ------------------------------------------------------------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term investments and U.S. Government securities), for the year
ended December 31, 1996, aggregated $35,306,379 and $18,229,980, respectively. Purchases and sales of U.S. Government
securities for the year ended December 31, 1996, aggregated $13,912,703 and $60,025,147, respectively.
- ------------------------------------------------------------------------------------------------------------------------------------
The aggregate face value of futures contracts opened and closed during the year ended December 31, 1996, for the Bond
Portfolio, was $227,390,005 and $227,390,005.
</TABLE>
The accompanying notes are an integral part of the financial statements.
24
<PAGE>
BOND PORTFOLIO
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
December 31, 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments, at market (including repurchase agreements of
$7,959,000)(identified cost $65,964,792) (Note A) ...................... $ 66,880,533
Cash ...................................................................... 779
Receivables:
Interest ............................................................... 658,959
Portfolio shares sold .................................................. 50,332
------------
Total assets ........................................................ 67,590,603
Liabilities
Payables:
Investments purchased .................................................. $ 1,753,343
Portfolio shares redeemed .............................................. 25,442
Accrued management fee (Note B) ........................................ 26,968
Other accrued expenses (Note B) ........................................ 15,429
------------
Total liabilities ................................................... 1,821,182
------------
Net assets, at market value ............................................... $ 65,769,421
============
Net Assets
Net assets consist of:
Undistributed net investment income .................................... $ 1,075,196
Net unrealized appreciation on investments ............................. 915,741
Accumulated net realized gain .......................................... 89,617
Paid-in capital ........................................................ 63,688,867
------------
Net assets, at market value ............................................... $ 65,769,421
============
Net asset value, offering and redemption price per share
($65,769,4219,775,320 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) ............ $ 6.73
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
25
<PAGE>
BOND PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment income
Interest ............................................................... $ 4,183,772
Expenses (Note A):
Management fee (Note B) ............................................. $ 291,740
Custodian and accounting fees (Note B) .............................. 53,210
Trustees' fees (Note B) ............................................. 15,916
Auditing ............................................................ 6,818
Legal ............................................................... 3,046
Other .................................................................. 6,308 377,038
------------ ------------
Net investment income .................................................. 3,806,734
------------
Net realized and unrealized gain (loss) on investment transactions
Net realized gain (loss) from:
Investments ......................................................... 199,592
Futures ............................................................. 306,666
Foreign currency related transactions ............................... 92,728 598,986
------------
Net unrealized appreciation (depreciation) during the period on:
Investments ......................................................... (2,534,446)
Foreign currency related transactions .................................. 20,098 (2,514,348)
------------ ------------
Net loss on investment transactions .................................... (1,915,362)
------------
Net increase in net assets resulting from operations ...................... $ 1,891,372
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
26
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
Increase (Decrease) in Net Assets 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income .................................................. $ 3,806,734 $ 8,707,166
Net realized gain from investment transactions ......................... 598,986 5,636,324
Net unrealized appreciation (depreciation) on investment
transactions during the period ...................................... (2,514,348) 8,197,950
Net increase in net assets resulting from operations ...................... 1,891,372 22,541,440
------------- -------------
Distributions to shareholders from net investment income .................. (5,405,378) (9,011,114)
------------- -------------
Portfolio share transactions:
Proceeds from shares sold .............................................. 27,555,910 57,366,869
Net asset value of shares issued to shareholders in
reinvestment of distributions ....................................... 5,405,378 9,011,114
Cost of shares redeemed ................................................ (36,192,318) (149,798,464)
------------- -------------
Net decrease in net assets from Portfolio share transactions .............. (3,231,030) (83,420,481)
------------- -------------
Decrease in net assets .................................................... (6,745,036) (69,890,155)
Net assets at beginning of period ......................................... 72,514,457 142,404,612
------------- -------------
Net assets at end of period (including undistributed net investment
income of $1,075,196 and $2,587,204, respectively) ..................... $ 65,769,421 $ 72,514,457
============= =============
Other Information
Increase (decrease) in Portfolio shares
Shares outstanding at beginning of period ................................. 10,126,562 21,973,579
------------- -------------
Shares sold ............................................................ 4,122,227 8,433,349
Shares issued to shareholders in reinvestment of distributions ......... 806,843 1,343,624
Shares redeemed ........................................................ (5,280,312) (21,623,990)
------------- -------------
Net decrease in Portfolio shares ....................................... (351,242) (11,847,017)
------------- -------------
Shares outstanding at end of period ....................................... 9,775,320 10,126,562
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
27
<PAGE>
BOND PORTFOLIO
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended December 31, (a)
------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ..... $ 7.16 $ 6.48 $ 7.42 $ 7.19 $ 7.37 $ 6.73 $ 6.72 $ 6.39 $ 6.47 $ 6.67
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from
investment operations:
Net investment
income ............... .41 .44 .43 .48 .49 .52 .53 .54 .54 .49
Net realized and
unrealized gain
(loss) on
investment
transactions ........... (.22) .69 (.77) .38 (.02) .61 (.02) .18 (.19) (.40)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ................. .19 1.13 (.34) .86 .47 1.13 .51 .72 .35 .09
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions from:
Net investment
income ................. (.62) (.45) (.43) (.48) (.46) (.47) (.50) (.39) (.43) (.29)
Net realized gains
on investment
transactions ........... -- -- (.17) (.15) (.19) (.02) -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions ........ (.62) (.45) (.60) (.63) (.65) (.49) (.50) (.39) (.43) (.29)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period .............. $ 6.73 $ 7.16 $ 6.48 $ 7.42 $ 7.19 $ 7.37 $ 6.73 $ 6.72 $ 6.39 $ 6.47
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return (%) ........... 2.82 18.17 (4.79) 12.38 7.01 17.61 8.06 11.65 5.46 1.22
Ratios and
Supplemental Data
Net assets, end of
period ($ millions) ...... 66 73 142 129 113 74 42 22 3 3
Ratio of operating
expenses, net to
average net
assets (%) ............... .61 .56 .58 .61 .63 .69 .73 .75 .75 .75
Ratio of operating expenses
before expense reductions,
to average daliy net
assets (%) ............... .61 .56 .58 .61 .63 .69 .73 .84 1.40 2.01
Ratio of net investment
income to average
net assets (%) ........... 6.2 6.29 6.43 6.59 6.89 7.51 8.05 8.04 7.86 7.53
Portfolio turnover
rate (%) ................. 85.11 177.21 96.55 125.15 87.00 115.86 71.02 103.41 245.23 186.05
(a) Based on monthly average shares outstanding during the period.
</TABLE>
28
<PAGE>
BALANCED PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
4.5% REPURCHASE AGREEMENT
4,003,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 12/31/96 at 6.7% to be repurchased at $4,004,490
on 1/2/97, collateralized by a $3,703,000 U.S. Treasury
Note, 8.5%, 11/15/00 (Cost $4,003,000) ............... 4,003,000
----------
10.2% U.S. GOVERNMENT & AGENCIES
1,200,000 U.S. Treasury Bond, 7.25%, 5/15/16 .................... 1,267,128
300,000 U.S. Treasury Bond, 8.125%, 5/15/21 ................... 348,093
1,850,000 U.S. Treasury Bond, 6.25%, 8/15/23 .................... 1,734,375
550,000 U.S. Treasury Note, 4.75%, 2/15/97 .................... 549,400
250,000 U.S. Treasury Note, 6.125%, 5/31/97 ................... 250,703
1,000,000 U.S. Treasury Note, 5.25%, 7/31/98 .................... 991,720
2,000,000 U.S. Treasury Note, 5.75%, 12/31/98 ................... 1,995,320
500,000 U.S. Treasury Note, 6.125%, 7/31/00 ................... 500,000
1,150,000 U.S. Treasury Note, 5.625%, 11/30/00 .................. 1,129,150
800,000 U.S. Treasury Separate Trading Registered Interest and
Principal Securities, 11/15/10 (6.75%)** ............. 318,624
----------
Total U.S. Government & Agencies (Cost $9,081,356) .... 9,084,513
----------
3.1% U.S. GOV'T GUARANTEED MORTGAGES
535,318 Government National Mortgage Association, 10%,
8/15/20 (a) .......................................... 589,101
528,233 Government National Mortgage Association, 8.75%,
12/15/24 (a) ......................................... 544,739
1,567,723 Government National Mortgage Association, 8.5%,
with various maturities to 9/15/26 (a) ............... 1,625,742
----------
Total U.S. Gov't Guaranteed Mortgages (Cost $2,685,721) 2,759,582
----------
9.3% U.S. GOVERNMENT AGENCY PASS-THRUS
1,092,026 Federal Home Loan Mortgage Corp., 8%, 4/1/08 (a) ...... 1,124,273
2,577,568 Federal National Mortgage Association, 6.5%, with
various maturities to 2/1/26 (a) ..................... 2,461,576
2,471,628 Federal National Mortgage Association, 7%, 4/1/26 (a) . 2,416,782
2,259,913 Federal National Mortgage Association, 7%, 9/1/26 (a) 2,209,765
----------
Total U.S. Government Agency Pass-Thrus
(Cost $8,177,335) .................................... 8,212,396
----------
0.0% COLLATERALIZED MORTGAGE OBLIGATIONS
32,214 Federal National Mortgage Association, REMIC, 8.5%,
4/25/18 (Cost $30,945) ............................... 32,153
----------
0.5% FOREIGN BONDS - U.S. $ DENOMINATED
250,000 ABN-AMRO Bank NV, 7.75%, 5/15/23 ...................... 257,010
250,000 Seagram Co., Ltd., 6.875%, 9/1/23 ..................... 230,900
----------
Total Foreign Bonds - U.S. $ Denominated
(Cost $461,469) ....................................... 487,910
----------
2.8% ASSET-BACKED SECURITIES
Automobile Receivables 0.7% 98,937 Premier Auto Trust Asset Backed Certificate Series
1994-3, 6.8%, 12/2/99 99,400
</TABLE>
The accompanying notes are an integral part of the financial statements.
29
<PAGE>
BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
500,000 Premier Auto Trust Asset Backed Certificate Series
1996-3, 6.5%, 3/6/00 ................................. 503,435
----------
602,835
----------
Credit Card Receivables 1.3% 850,000 Sears Credit Account Master Trust, Series 1995-4, 6.25%,
1/15/03 .............................................. 853,451
250,000 Standard Credit Card Trust, Series 1990-6B, 9.625%,
9/10/97 .............................................. 255,703
----------
1,109,154
----------
Home Equity Loans 0.7% 499,996 Contimortgage Home Equity Loan Trust, Series 1996-1 A2,
5.58%, 1/15/11 ........................................ 496,402
76,988 United Companies Financial Corp., Home Equity Loan
Series 1993-B1, 6.075%, 7/25/14 ...................... 75,676
----------
.................................................................................................................. 572,078
----------
Manufactured Housing
Receivables 0.1% 119,990 Green Tree Financial Corp. Series 1995-7 A1, 6%, 10/15/26 120,027
----------
Total Asset-Backed Securities (Cost $2,418,966) ....... 2,404,094
----------
10.9% CORPORATE BONDS
Consumer Discretionary 0.3% 250,000 Price/Costco Inc., 7.125%, 6/15/05 .................... 250,030
----------
Consumer Staples 0.3% 270,000 J. Seagram & Sons Inc., 7%, 4/15/08 ................... 266,406
----------
Financial 5.3% 750,000 Associates Corp. of North America, 6.625%, 5/15/01 .... 749,685
1,000,000 Highwoods/Forsyth L.P., 7%, 12/1/06 ................... 986,220
500,000 Midland Bank PLC, 6.95%, 3/15/11 ...................... 482,395
250,000 NationsBank Corp., 7.25%, 10/15/25 .................... 240,265
1,000,000 Southern National Corp., 7.05%, 5/23/03 ............... 1,009,060
750,000 Spieker Properties, Inc., 7.875%, 12/1/16 ............. 744,375
500,000 Wells Fargo & Co., 6.875%, 4/1/06 ..................... 491,665
----------
4,703,665
----------
Media 1.8% 500,000 Tele-Communications, Inc., 8.65%, 9/15/04 ............. 502,455
1,000,000 Time Warner Inc., 9.125%, 1/15/13 ..................... 1,091,700
----------
1,594,155
----------
Durables 0.9% 250,000 Lockheed Martin Corp., 9%, 1/15/22 .................... 289,135
500,000 Northrop Grumman Corp., 7.875%, 3/1/26 ................ 501,165
----------
790,300
----------
Manufacturing 0.3% 250,000 Corning Inc., 8.75%, 7/15/99 .......................... 261,308
----------
Technology 0.6% 500,000 Loral Corp., 8.375%, 6/15/24 .......................... 553,505
----------
Energy 0.9% 500,000 Atlantic Richfield Co., 8.25%, 2/1/22 ................. 550,965
250,000 Enron Corp., 10%, 6/1/98 .............................. 262,600
----------
813,565
----------
Transportation 0.2% 100,000 American Airlines, 8.8%, 9/16/15 ...................... 109,149
100,000 American Airlines, 8.39%, 1/2/17 ...................... 105,880
----------
215,029
----------
Utilities 0.3% 250,000 Commonwealth Edison Co., 9.05%, 10/15/99 .............. 263,093
----------
Total Corporate Bonds (Cost $9,479,915) ............... 9,711,056
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
30
<PAGE>
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
58.7% COMMON STOCKS
Consumer Discretionary 4.8%
Department &
Chain Stores 3.2% 14,200 Federated Department Stores, Inc.* .................... 484,575
10,300 Home Depot, Inc. ...................................... 516,288
38,900 Price/Costco Inc.* .................................... 977,363
37,400 Wal-Mart Stores Inc. .................................. 855,525
----------
2,833,751
----------
Hotels & Casinos 0.7% 39,000 Host Marriott Corp. ................................... 624,000
----------
Specialty Retail 0.9% 26,800 Corporate Express, Inc.* .............................. 788,925
----------
Consumer Staples 12.1%
Alcohol & Tobacco 3.6% 27,000 Anheuser-Busch Companies, Inc. ........................ 1,080,000
18,400 Philip Morris Companies Inc. .......................... 2,072,300
----------
3,152,300
----------
Consumer Electronic &
Photographic Products 0.7%
8,900 Duracell International Inc. ........................... 621,888
----------
Food & Beverage 2.2% 37,300 Coca-Cola Co., Inc. ................................... 1,962,913
----------
Package Goods/
Cosmetics 5.6% 19,500 Avon Products Inc. .................................... 1,113,938
14,500 Colgate-Palmolive Co. ................................. 1,337,625
8,900 Gillette Co. .......................................... 691,975
12,400 Procter & Gamble Co. .................................. 1,333,000
18,700 Revlon, Inc. "A"* ..................................... 558,662
----------
5,035,200
----------
Health 9.9%
Biotechnology 0.7% 11,900 Amgen Inc.* ........................................... 647,063
----------
Health Industry Services 1.3% 9,900 HBO & Company ......................................... 587,813
12,200 United Healthcare Corp. ............................... 549,000
----------
1,136,813
----------
Medical Supply &
Specialty 0.9% 11,700 Medtronic Inc. ........................................ 795,600
----------
Pharmaceuticals 7.0% 9,900 American Home Products Corp. .......................... 580,387
8,058 Eli Lilly & Co. ....................................... 588,234
22,600 Johnson & Johnson ..................................... 1,124,350
17,900 Merck & Co. Inc. ...................................... 1,418,575
10,000 Novartis AG (ADR) ..................................... 571,875
13,100 Pfizer, Inc. .......................................... 1,085,662
12,700 SmithKline Beecham PLC (ADR) .......................... 863,600
----------
6,232,683
----------
Financial 5.0%
Banks 1.5% 5,600 NationsBank Corp. ..................................... 547,400
</TABLE>
The accompanying notes are an integral part of the financial statements.
31
<PAGE>
BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
12,400 State Street Boston Corp. ............................. 799,800
----------
1,347,200
----------
Insurance 2.4% 11,550 American International Group, Inc. .................... 1,250,288
8,400 MBIA Inc. ............................................. 850,500
----------
2,100,788
----------
Consumer Finance 0.5% 9,500 Associates First Capital Corp. ........................ 419,188
----------
Other Financial
Companies 0.6% 14,700 Federal National Mortgage Association ................. 547,575
----------
Media 3.0%
Advertising 1.2% 21,900 Interpublic Group of Companies Inc. ................... 1,040,250
----------
Broadcasting &
Entertainment 1.8% 29,800 Clear Channel Communications, Inc.* ................... 1,076,525
7,500 Walt Disney Co. ....................................... 522,188
----------
1,598,713
----------
Service Industries 5.1%
Electronic Data
Processing Services 2.2% 27,700 Electronic Data Systems Corp. ......................... 1,198,025
20,200 First Data Corp. ...................................... 737,300
----------
1,935,325
----------
Environmental Services 0.3% 10,000 U.S. Filter Corp.* .................................... 317,500
----------
Miscellaneous Commercial
Services 0.5% 24,800 Sensormatic Electronics Corp. ......................... 415,400
----------
Miscellaneous Consumer
Services 1.4% 22,700 CUC International Inc.* ............................... 539,125
24,100 Service Corp. International ........................... 674,800
----------
1,213,925
----------
Printing/Publishing 0.7% 8,800 Reuters Holdings PLC "B" (ADR) ........................ 673,200
----------
Durables 2.1%
Telecommunications
Equipment 11,200 Ascend Communications, Inc.* .......................... 695,800
6,900 Cascade Communications Corp.* ......................... 380,363
12,900 Nokia AB Oy (ADR) ..................................... 743,363
----------
1,819,526
----------
Manufacturing 7.2%
Chemicals 1.7% 24,300 Monsanto Co. .......................................... 944,663
12,500 Praxair Inc. .......................................... 576,563
----------
1,521,226
----------
Diversified
Manufacturing 2.6% 18,100 General Electric Co. .................................. 1,789,638
8,600 Honeywell, Inc. ....................................... 565,450
----------
2,355,088
----------
Electrical Products 1.9% 12,000 Emerson Electric Co. .................................. 1,161,000
14,900 FORE Systems, Inc.* ................................... 489,838
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
32
<PAGE>
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,650,838
----------
Office Equipment/
Supplies 1.0% 16,800 Xerox Corp. ........................................... 884,100
----------
Technology 8.6%
Computer Software 3.3% 11,650 Computer Associates International, Inc. ............... 579,588
28,600 Informix Corp.* ....................................... 582,725
15,800 Microsoft Corp.* ...................................... 1,305,475
10,200 Oracle Systems Corp.* ................................. 425,850
----------
2,893,638
----------
Electronic Data
Processing 0.7% 15,300 Ceridian Corp.* ....................................... 619,650
----------
Office/Plant Automation 2.4% 7,400 3Com Corp.* ........................................... 542,975
23,400 Cabletron Systems Inc.* ............................... 778,050
13,100 Cisco Systems, Inc.* .................................. 833,488
----------
2,154,513
----------
Semiconductors 2.2% 21,500 Advanced Micro Devices Inc.* .......................... 553,625
18,600 Atmel Corp.* .......................................... 616,125
6,100 Intel Corp. ........................................... 798,718
----------
1,968,468
----------
Energy 0.9%
Oil/Gas Transmission 17,900 Enron Corp. ........................................... 771,938
----------
Total Common Stocks (Cost $41,878,330) ................ 52,079,185
----------
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0%
(Cost $78,217,037) (b) ............................... 88,773,889
==========
- ------------------------------------------------------------------------------------------------------------------------------------
* Non-income producing security.
** Yield; bond equivalent yield to maturity; not a coupon rate (unaudited).
(a) Effective maturities will be shorter due to prepayments.
(b) At December 31, 1996, the net unrealized appreciation on investments based on cost for federal income
tax purposes of $78,237,142 was as follows:
Aggregate gross unrealized appreciation for all investments in which there is an excess of market ......... 11,609,029
value over tax cost
Aggregate gross unrealized depreciation for all investments in which there is an excess of tax ............ (1,072,282)
---------------
cost over market value
Net unrealized appreciation ............................................................................... $ 10,536,747
==============
- ------------------------------------------------------------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term investments and U.S. Government securities), for the year
ended December 31, 1996, aggregated $56,672,487 and $39,756,709, respectively. Purchases and sales of U.S. Government
securities for the year ended December 31, 1996, aggregated $5,463,914 and $8,207,745, respectively.
</TABLE>
The accompanying notes are an integral part of the financial statements.
33
<PAGE>
BALANCED PORTFOLIO
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
December 31, 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments, at market (identified cost $78,217,037) (Note A) $ 88,773,889
Cash 1,306
Receivables:
Dividends and interest 437,539
Portfolio shares sold 340,753
------------
Total assets 89,553,487
Liabilities
Payables:
Investments purchased $ 1,150,199
Accrued management fee (Note B) 35,508
Other accrued expenses (Note B) 24,943
------------
Total liabilities 1,210,650
------------
Net assets, at market value $ 88,342,837
============
Net Assets
Net assets consist of:
Undistributed net investment income $ 672,177
Net unrealized appreciation on investments 10,556,852
Accumulated net realized gain 4,797,576
Paid-in capital 72,316,232
------------
Net assets, at market value $ 88,342,837
============
Net asset value, offering and redemption price per share
($88,342,837/7,608,722 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) $ 11.61
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
34
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment income
Income:
Interest ............................................................ $ 2,099,138
Dividends (net of foreign taxes withheld of $5,019) ................. 580,951
------------
2,680,089
Expenses (Note A):
Management fee (Note B) ............................................. $ 372,176
Custodian and accounting fees (Note B) .............................. 60,938
Trustees' fees (Note B) ............................................. 16,326
Auditing ............................................................ 9,672
Legal ............................................................... 388
Registration fees ................................................... 4,946
Other ............................................................... 6,896 471,342
------------ ------------
Net investment income .................................................. 2,208,747
------------
Net realized and unrealized gain on investment transactions
Net realized gain from:
Investments ......................................................... 4,867,034
Foreign currency related transactions ............................... 32,727 4,899,761
------------
Net unrealized appreciation during the period on:
Investments ......................................................... 1,629,706
Foreign currency related transactions ............................... 5,965 1,635,671
------------ ------------
Net gain on investment transactions .................................... 6,535,432
------------
Net increase in net assets resulting from operations ...................... $ 8,744,179
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
35
<PAGE>
BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
Increase (Decrease) in Net Assets 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income .................................................. $ 2,208,747 $ 1,709,893
Net realized gain from investment transactions ......................... 4,899,761 2,307,029
Net unrealized appreciation on investment transactions
during the period ................................................... 1,635,671 9,159,100
------------ ------------
Net increase in net assets resulting from operations ...................... 8,744,179 13,176,022
------------ ------------
Distributions to shareholders from:
Net investment income .................................................. (2,028,500) (1,673,390)
------------ ------------
Net realized gains from investment transactions ........................ (1,925,657) (316,977)
------------ ------------
Portfolio share transactions:
Proceeds from shares sold .............................................. 25,991,787 16,676,142
Net asset value of shares issued to shareholders in
reinvestment of distributions ....................................... 3,954,157 1,990,367
Cost of shares redeemed ................................................ (14,318,918) (7,450,950)
------------ ------------
Net increase in net assets from portfolio share transactions .............. 15,627,026 11,215,559
------------ ------------
Increase in net assets .................................................... 20,417,048 22,401,214
Net assets at beginning of period ......................................... 67,925,789 45,524,575
------------ ------------
Net assets at end of period (including undistributed net
investment income of $672,177 and $483,837, respectively) .............. $ 88,342,837 $ 67,925,789
============ ============
Other Information
Increase (decrease) in Portfolio shares
Shares outstanding at beginning of period ................................. 6,206,064 5,076,236
------------ ------------
Shares sold ............................................................ 2,336,334 1,667,336
Shares issued to shareholders in reinvestment of distributions ......... 360,527 204,454
Shares redeemed ........................................................ (1,294,203) (741,962)
------------ ------------
Net increase in Portfolio shares ....................................... 1,402,658 1,129,828
------------ ------------
Shares outstanding at end of period ....................................... 7,608,722 6,206,064
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
36
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended December 31, (a)
---------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ........ $10.95 $ 8.97 $10.23 $10.02 $ 9.85 $ 8.10 $ 8.75 $ 7.62 $ 6.88 $ 7.35
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from
investment operations:
Net investment income ...... .31 .30 .29 .30 .29 .35 .42 .40 .33 .34
Net realized and unrealized
gain (loss) on investment
transactions ............. .95 2.04 (.48) .42 .36 1.77 (.59) 1.06 .64 (.45)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ................. 1.26 2.34 (.19) .72 .65 2.12 (.17) 1.46 .97 (.11)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions from:
Net investment income ...... (.30) (.30) (.30) (.28) (.29) (.37) (.43) (.33) (.23) (.23)
Net realized gains on
investment transactions .. (.30) (.06) (.77) (.23) (.19) -- (.05) -- -- (.13)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions .......... (.60) (.36) (1.07) (.51) (.48) (.37) (.48) (.33) (.23) (.36)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of period .............. $11.61 $10.95 $ 8.97 $10.23 $10.02 $ 9.85 $ 8.10 $ 8.75 $ 7.62 $ 6.88
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return (%) ............. 11.89 26.67 (2.05) 7.45 6.96 26.93 (1.91) 19.50 14.21 (1.68)
Ratios and
Supplemental Data
Net assets, end of
period ($ millions) ........ 88 68 46 45 37 25 16 18 11 12
Ratio of operating expenses,
net to average net
assets (%) ................. .60 .65 .75 .75 .75 .75 .75 .75 .75 .75
Ratio of operating expense
before expense reductions,
to average daily net assets .60 .65 .75 .75 .75 .81 .75 .89 1.14 1.20
Ratio of net investment income
to average net assets (%) .. 2.82 3.01 3.19 3.01 3.01 4.00 5.15 4.74 4.48 4.42
Portfolio turnover rate (%) .. 67.56 87.98 101.64 133.95* 51.66 62.03 49.03 77.98 109.95 111.00
Average commission
rate paid (b) .............. $.0535 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred securities is calculated for fiscal years beginning on or after
September 1, 1995.
* On May 1, 1993, the Portfolio adopted its present name and investment objective which is a balance of growth and income, as
well as long-term preservation of capital, from a diversified portfolio of equity and fixed income securities. Prior to that
date, the Portfolio was known as the Managed Diversified Portfolio and its investment objective was to realize a high level of
long-term total rate of return consistent with prudent investment risk. The portfolio turnover rate increased due to
implementing the present investment objective. Financial highlights for the seven periods ended December 31, 1993 should not be
considered representative of the present Portfolio.
</TABLE>
37
<PAGE>
GROWTH AND INCOME PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
4.6% REPURCHASE AGREEMENT
4,176,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 12/31/96 at 6.7%to be repurchased at $4,177,554
on 1/2/97, collateralized by a $4,005,000 U.S. Treasury
Note, 7.75%, 11/30/99 (Cost $4,176,000) .................. 4,176,000
----------
1.2% CONVERTIBLE BONDS
Health 0.2%
Pharmaceuticals 140,000 Sandoz Capital BVI Ltd., 2%, 10/6/02 ....................... 150,500
----------
Financial 0.1%
Other Financial
Companies 40,000 First Financial Management Corp., 5%, 12/15/99 ............. 70,300
----------
Service Industries 0.3%
Miscellaneous
Commercial Services 335,000 ADT Operations Inc. LYON, 7/6/10 ........................... 216,494
54,000 Jardine Strategic Holdings Ltd., 7.5%, 5/7/49 .............. 64,800
----------
281,294
----------
Energy 0.6%
Oil Companies 25,000 Atlantic Richfield Co. 9% Exchange Note 9/15/97 ............ 537,500
----------
Total Convertible Bonds (Cost $1,078,290) .................. 1,039,594
----------
2.7% CONVERTIBLE PREFERRED STOCKS
Shares
Consumer Discretionary 0.4%
Department & Chain
Stores 7,400 K mart 7.75% ............................................... 360,750
----------
Financial 0.7%
Consumer Finance 0.5% 10,400 Advanta Corp. 6.75% ........................................ 421,200
----------
Real Estate 0.2% 5,000 Security Capital Industrial Trust "B", 7% .................. 136,250
----------
Manufacturing 1.6%
Containers & Paper 1.3% 25,600 Boise Cascade Corp. "G", Cum $1.58 ......................... 668,800
10,800 Bowater, Inc. "B", 7% ...................................... 329,400
4,500 International Paper Co. 5.25% .............................. 205,875
----------
1,204,075
----------
Industrial Specialty 0.2% 10,000 Cooper Industries, Inc. 6% ................................. 193,750
Wholesale Distributors 0.1% 1,400 Alco Standard Corp. 6.5% ................................... 133,700
----------
Total Convertible Preferred Stocks (Cost $2,457,717) ....... 2,449,725
----------
91.5% COMMON STOCKS
Consumer Discretionary 3.9%
Department &
Chain Stores 3.8% 19,200 J.C. Penney Co., Inc. ...................................... 936,000
11,500 May Department Stores ...................................... 537,625
</TABLE>
The accompanying notes are an integral part of the financial statements.
38
<PAGE>
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
30,600 Rite Aid Corp. ............................................. 1,216,350
----------
16,700 Sears, Roebuck & Co. ....................................... 770,288
----------
3,460,263
Hotels & Casinos 0.1% 5,311 Homestead Village, Inc.* ................................... 95,596
3,563 Homestead Village, Inc. Warrants* (Expires 10/29/97) ....... 28,949
----------
124,545
----------
Consumer Staples 10.5%
Alcohol & Tobacco 3.8% 24,800 Anheuser-Busch Companies, Inc. ............................. 992,000
17,300 Philip Morris Companies Inc. ............................... 1,948,413
15,080 RJR Nabisco Holdings Corp. ................................. 512,720
----------
3,453,133
----------
Consumer Electronic &
Photographic Products 1.0% 18,900 Whirlpool Corp. ............................................ 881,213
Food & Beverage 3.6% 13,000 General Mills, Inc. ........................................ 823,875
37,500 H.J. Heinz Co. ............................................. 1,340,625
6,400 Unilever NV (New York shares) .............................. 1,121,600
----------
3,286,100
----------
Package Goods/
Cosmetics 2.1% 4,400 Avon Products Inc. ......................................... 251,350
13,100 Kimberly-Clark Corp. ....................................... 1,247,775
9,500 Tambrands Inc. ............................................. 388,313
----------
1,887,438
----------
Health 8.1%
Pharmaceuticals 16,500 American Home Products Corp. ............................... 967,313
29,100 Baxter International Inc. .................................. 1,193,100
11,300 Bristol-Myers Squibb Co. ................................... 1,228,875
19,900 Schering-Plough Corp. ...................................... 1,288,525
10,900 SmithKline Beecham PLC (ADR) ............................... 741,200
16,600 Warner-Lambert Co. ......................................... 1,245,000
18,200 Zeneca Group PLC ........................................... 512,556
1,300 Zeneca Group PLC (ADR) ..................................... 109,200
----------
7,285,769
----------
Communications 7.1%
Telephone/Communications 23,800 Alltel Corp. ............................................... 746,725
16,100 Bell Atlantic Corp. ........................................ 1,042,475
14,000 BellSouth Corp. ............................................ 565,250
21,100 Frontier Corp. ............................................. 477,388
22,100 GTE Corp. .................................................. 1,005,550
12,300 Koninklijke PTT Nederland .................................. 469,188
20,900 NYNEX Corp. ................................................ 1,005,813
22,700 Sprint Corp. ............................................... 905,163
33,000 Telecom Corp. of New Zealand ............................... 168,438
----------
6,385,990
----------
Financial 20.0%
Banks 7.9% 14,200 Banc One Corp. ............................................. 610,600
15,800 Bankers Trust New York Corp. ............................... 1,362,750
15,000 Chase Manhattan Corp. ...................................... 1,338,750
15,900 CoreStates Financial Corp. ................................. 824,813
12,400 First Bank System Inc. ..................................... 846,300
12,400 J.P. Morgan & Co., Inc. .................................... 1,210,550
18,300 KeyCorp .................................................... 924,150
----------
7,117,913
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
39
<PAGE>
GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Insurance 3.3% 20,200 EXEL, Ltd. ................................................. 765,075
6,900 Hartford Steam Boiler Inspection & Insurance Co. ........... 319,988
21,800 Lincoln National Corp. ..................................... 1,144,500
12,900 Mid Ocean Limited* ......................................... 677,250
900 Transamerica Corp. ......................................... 71,100
----------
2,977,913
----------
Other Financial
Companies 2.9% 22,200 Federal National Mortgage Association ...................... 826,950
19,200 Student Loan Marketing Association ......................... 1,788,000
----------
2,614,950
----------
Real Estate 5.9% 1,100 Charles E. Smith Residential Realty, Inc. (REIT) ........... 32,175
3,900 Developers Diversified Realty Corp. ........................ 144,788
8,300 Equity Residential Properties Trust (REIT) ................. 342,375
10,200 General Growth Properties, Inc. (REIT) ..................... 328,950
20,500 Health Care Property Investment Inc. (REIT) ................ 717,500
20,400 Meditrust SBI (REIT) ....................................... 816,000
31,400 Nationwide Health Properties Inc. (REIT) ................... 761,450
7,800 Omega Healthcare Investors (REIT) .......................... 259,350
47,900 Security Capital Atlantic Inc. ............................. 1,173,550
16,141 Security Capital Industrial Trust (REIT) ................... 345,014
15,096 Simon DeBartolo Group, Inc. ................................ 467,976
----------
5,389,128
----------
Durables 7.6%
Aerospace 4.2% 865 Boeing Co. ................................................. 92,014
10,288 Lockheed Martin Corp. ...................................... 941,352
1,400 Northrop Grumman Corp. ..................................... 115,850
20,600 Rockwell International Corp.(New) .......................... 1,254,025
21,400 United Technologies Corp. .................................. 1,412,400
----------
3,815,641
----------
Automobiles 2.7% 21,100 Dana Corp. ................................................. 688,388
10,100 Eaton Corp. ................................................ 704,475
22,300 Ford Motor Co. ............................................. 710,813
8,200 Genuine Parts Co. .......................................... 364,900
----------
2,468,576
----------
Construction/
Agricultural Equipment 0.7% 9,900 PACCAR, Inc. ............................................... 673,200
----------
Manufacturing 15.6%
Chemicals 5.0% 15,200 DSM NV (ADR) ............................................... 374,300
8,300 Dow Chemical Co. ........................................... 650,513
13,800 E.I. du Pont de Nemours & Co. .............................. 1,302,375
17,700 Eastman Chemical Co. ....................................... 977,925
15,700 Imperial Chemical Industries PLC (ADR) (New) ............... 816,400
16,200 Lyondell Petrochemical Co. ................................. 356,400
----------
4,477,913
----------
Containers & Paper 1.1% 28,800 Stone Container Corp. ...................................... 428,400
19,300 Westvaco Corp. ............................................. 554,875
----------
983,275
----------
Diversified
Manufacturing 2.8% 6,600 Dresser Industries Inc. .................................... 204,600
14,400 Olin Corp. ................................................. 541,800
35,600 TRW Inc. ................................................... 1,762,200
----------
2,508,600
----------
Electrical Products 2.2% 29,100 Philips NV (New York shares) ............................... 1,164,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
40
<PAGE>
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
18,500 Thomas & Betts Corp. ....................................... 820,938
----------
1,984,938
----------
Office Equipment/
Supplies 3.2% 54,900 Xerox Corp. ................................................ 2,889,113
Specialty Chemicals 1.3% 14,400 BetzDearborn Inc. .......................................... 842,400
9,900 Witco Corp. ................................................ 301,950
----------
1,144,350
----------
Energy 7.5%
Oil & Gas Production 0.2% 5,081 Union Pacific Resources Group .............................. 148,619
Oil Companies 7.1% 6,700 Exxon Corp. ................................................ 656,600
15,900 Murphy Oil Corp. ........................................... 884,438
9,600 Pennzoil Co. ............................................... 542,400
11,100 Repsol SA (ADR) ............................................ 423,188
5,000 Royal Dutch Petroleum Co. (New York shares) ................ 853,750
19,556 Societe Nationale Elf Aquitaine (ADR) ...................... 884,909
4,300 Texaco Inc. ................................................ 421,938
22,366 Total SA (ADR) ............................................. 900,232
33,300 YPF S.A. "D" (ADR) ......................................... 840,825
----------
6,408,280
----------
Oil/Gas Transmission 0.2% 4,500 PanEnergy Corp. ............................................ 202,500
----------
Metals & Minerals 2.6%
Steel & Metals 39,152 Allegheny Teledyne Inc. .................................... 900,496
28,000 Freeport McMoRan Copper & Gold, Inc. "A" ................... 787,500
13,500 Oregon Steel Mills, Inc. ................................... 226,125
6,700 Phelps Dodge Corp. ......................................... 452,250
----------
2,366,371
----------
Construction 2.2%
Building Materials 0.3% 10,638 Martin Marietta Materials, Inc. ............................ 247,334
Forest Products 1.9% 11,100 Georgia Pacific Corp. ...................................... 799,200
25,500 Louisiana-Pacific Corp. .................................... 538,688
8,700 Weyerhaeuser Co. ........................................... 412,163
----------
1,750,051
----------
Transportation 1.6%
Railroads 10,700 CSX Corp. .................................................. 452,075
15,700 Canadian National Railway Co. .............................. 597,211
6,000 Union Pacific Corp. ........................................ 360,750
----------
1,410,036
----------
Utilities 4.8%
Electric Utilities 3,200 Boston Edison Co. .......................................... 86,000
9,800 CINergy Corp. .............................................. 327,075
2,600 Duke Power Co. ............................................. 120,250
22,100 National Power PLC (ADR) ................................... 748,638
15,400 PacifiCorp ................................................. 315,700
37,100 Pacific Gas & Electric Co. ................................. 779,100
20,800 PowerGen PLC (Sponsored ADR) ............................... 821,600
13,000 Southern Company ........................................... 294,125
----------
3,100 Texas Utilities Co., Inc. .................................. 126,325
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
41
<PAGE>
GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
26,900 Unicom Corp. ............................................... 729,652
----------
4,348,465
----------
Total Common Stocks (Cost $67,018,600) ..................... 82,691,617
----------
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0%
(Cost $74,730,607) (a) ................................... 90,356,936
==========
* Non-income producing security.
(a) At December 31, 1996, the net unrealized appreciation of investments based on cost for
federal income tax purposes of $74,727,583 was as follows:
Aggregate gross unrealized appreciation for all investments in which there is an excess
of market value over tax cost ........................................................................ $16,326,918
Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over
market value ......................................................................................... (697,565)
------------
Net unrealized appreciation .............................................................................. $15,629,353
===========
- ------------------------------------------------------------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term investments), for the year ended December 31, 1996,
aggregated $47,137,445 and $21,525,631, respectively.
</TABLE>
The accompanying notes are an integral part of the financial statements.
42
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
December 31, 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments, at market (identified cost $74,730,607) (Note A) .......... $ 90,356,936
Cash ................................................................... 850
Foreign currency, at value (cost $2,214) ............................... 2,216
Receivables:
Investments sold ................................................... 267,502
Dividends and interest ............................................. 260,160
Portfolio shares sold .............................................. 331,847
Foreign taxes recoverable .......................................... 20,010
------------
Total assets ................................................... 91,239,521
Liabilities
Payables:
Investments purchased .............................................. $ 76,620
Portfolio shares redeemed .......................................... 99
Accrued management fee (Note B) .................................... 35,291
Other accrued expenses (Note B) .................................... 35,964
------------
Total liabilities .............................................. 147,974
------------
Net assets, at market value ............................................ $ 91,091,547
============
Net Assets
Net assets consist of:
Undistributed net investment income ................................ $ 713,479
Net unrealized appreciation on:
Investments .................................................... 15,626,329
Foreign currency related transactions .......................... 11
Accumulated net realized gain ...................................... 3,799,669
Paid-in capital .................................................... 70,952,059
------------
Net assets, at market value ............................................ $ 91,091,547
============
Net asset value, offering and redemption price per share
($91,091,5479,724,734 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) ..... $ 9.37
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
43
<PAGE>
GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment income
Income:
Dividends (net of foreign taxes withheld of $52,815) ........... $ 2,451,899
Interest ....................................................... 154,234
------------
2,606,133
Expenses (Note A):
Management fee (Note B) ........................................ $ 326,033
Custodian and accounting fees (Note B) ......................... 83,934
Trustees' fees (Note B) ........................................ 16,634
Auditing ....................................................... 10,677
Registration fees .............................................. 9,697
Legal .......................................................... 203
Other .......................................................... 3,673 450,851
------------ ------------
Net investment income .............................................. 2,155,282
------------
Net realized and unrealized gain on investment transactions
Net realized gain from:
Investments .................................................... 3,798,564
Foreign currency related transactions .......................... 3 3,798,567
------------
Net unrealized appreciation during the period on:
Investments .................................................... 7,841,863
Foreign currency related transactions .......................... 11 7,841,874
------------ ------------
Net gain on investment transactions ................................ 11,640,441
Net increase in net assets resulting from operations ................... $ 13,795,723
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
44
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
Increase (Decrease) in Net Assets 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income .............................................. $ 2,155,282 $ 1,140,276
Net realized gain from investment transactions ..................... 3,798,567 685,486
Net unrealized appreciation on investment
transactions during the period ................................. 7,841,874 8,112,233
------------ ------------
Net increase in net assets resulting from operations ................... 13,795,723 9,937,995
------------ ------------
Distributions to shareholders from:
Net investment income .............................................. (1,781,057) (895,880)
------------ ------------
Net realized gains from investment transactions .................... (729,093) (150,289)
------------ ------------
Portfolio share transactions:
Proceeds from shares sold .......................................... 48,549,524 29,272,260
Net asset value of shares issued to shareholders
in reinvestment of distributions ............................... 2,510,150 1,046,169
Cost of shares redeemed ............................................ (23,216,134) (7,322,663)
------------ ------------
Net increase in net assets from Portfolio share transactions ........... 27,843,540 22,995,766
------------ ------------
Increase in net assets ................................................. 39,129,113 31,887,592
Net assets at beginning of period ...................................... 51,962,434 20,074,842
------------ ------------
Net assets at end of period (including undistributed net
investment income of $713,479 and $403,970, respectively) .......... $ 91,091,547 $ 51,962,434
============ ============
Other Information
Increase (decrease) in Portfolio shares
Shares outstanding at beginning of period .............................. 6,510,714 3,204,882
------------ ------------
Shares sold ........................................................ 5,669,994 4,166,992
Shares issued to shareholders in reinvestment of distributions ..... 301,924 151,454
Shares redeemed .................................................... (2,757,898) (1,012,614)
------------ ------------
Net increase in Portfolio shares ................................... 3,214,020 3,305,832
------------ ------------
Shares outstanding at end of period .................................... 9,724,734 6,510,714
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
45
<PAGE>
GROWTH AND INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period (a) and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
For the Period
May 2, 1994
(commencement
Years Ended December 31, of operations)
------------------------- to December 31,
1996 1995 1994
------------------------- ----------------
<S> <C> <C> <C>
Net asset value, beginning of period ............................................ $ 7.98 $ 6.26 $ 6.00(b)
-------- -------- --------
Income from investment operations:
Net investment income ......................................................... .27 .23 .13
Net realized and unrealized gain on investment transactions ................... 1.46 1.72 .17(d)
-------- -------- --------
Total from investment operations ................................................ 1.73 1.95 .30
-------- -------- --------
Less distributions from:
Net investment income ......................................................... (.23) (.19) (.04)
Net realized gains on investment transactions ................................. (.11) (.04) --
-------- --------
Total distributions ............................................................. (.34) (.23) (.04)
-------- -------- --------
Net asset value, end of period .................................................. $ 9.37 $ 7.98 $ 6.26
======== ======== ========
Total Return (%) ................................................................ 22.17 31.74 4.91**
Ratios and Supplemental Data
Net assets, end of period ($ millions) .......................................... 91 52 20
Ratio of operating expenses, net to average net assets (%) ...................... .66 .75 .75*
Ratio of operating expenses, before reductions, to average daily net assets (%) . .66 .75 .1.62*
Ratio of net investment income to average net assets (%) ........................ 3.14 3.18 3.63*
Portfolio turnover rate (%) ..................................................... 32.18 24.33 28.41*
Average commission rate paid (c) ................................................ $ .0502 $ -- $ --
(a) Based on monthly average shares outstanding during the period.
(b) Original capital
(c) Average commission rate paid per share of common and preferred securities is calculated for fiscal years beginning on or after
September 1, 1995.
(d) The amount shown for a share outstanding throughout the period does not accord with the change in the aggregate gains and
losses in the portfolio securities during the period because of the timing of sales and purchases of Portfolio shares in
relation to fluctuating market values during the period.
* Annualized
** Not annualized
</TABLE>
46
<PAGE>
CAPITAL GROWTH PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
3.2% REPURCHASE AGREEMENT
14,154,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 12/31/96 at 6.7% to be repurchased at $14,159,268
on 1/2/97, collateralized by a $14,070,000 U.S. Treasury
Note, 6.125%, 9/30/00 (Cost $14,154,000) 14,154,000
------------
96.8% COMMON STOCKS
Shares
- ------------------------------------------------------------------------------------------------------------------------------------
Consumer Discretionary 6.0%
Department &
Chain Stores 4.0% 95,000 Home Depot, Inc. .......................................... 4,761,875
75,000 J.C. Penney Co., Inc. ..................................... 3,656,250
90,000 May Department Stores ..................................... 4,207,500
120,000 Walgreen Co. .............................................. 4,800,000
----------
17,425,625
----------
Restaurants 1.0% 101,400 McDonald's Corp. .......................................... 4,588,350
----------
Specialty Retail 1.0% 120,000 Tiffany & Co. ............................................. 4,395,000
----------
Consumer Staples 5.5%
Alcohol & Tobacco 1.8% 196,400 Anheuser-Busch Companies, Inc. ............................ 7,856,000
----------
Food & Beverage 1.1% 100,000 ConAgra Inc. .............................................. 4,975,000
----------
Package Goods/
Cosmetics 2.6% 60,000 Clorox Co. ................................................ 6,022,500
50,000 Procter & Gamble Co. ...................................... 5,375,000
----------
11,397,500
----------
Health 13.6%
Hospital Management 2.5% 275,600 Columbia/HCA Healthcare Corp. ............................. 11,230,700
----------
Medical Supply &
Specialty 2.7% 155,000 Becton, Dickinson & Co. ................................... 6,723,125
120,000 STERIS Corp.* ............................................. 5,220,000
------------
11,943,125
------------
Pharmaceuticals 8.4%
70,000 American Home Products Corp. .............................. 4,103,750
90,000 Johnson & Johnson ......................................... 4,477,500
50,000 Merck & Co. Inc. .......................................... 3,962,500
101,000 Novartis AG (ADR) ......................................... 5,775,938
68,600 Pfizer, Inc. .............................................. 5,685,225
47,000 Schering-Plough Corp. ..................................... 3,043,250
130,000 Warner-Lambert Co. ........................................ 9,750,000
------------
36,798,163
------------
Financial 17.5%
Banks 4.5%
112,500 Citicorp .................................................. 11,587,500
40,000 J.P. Morgan & Co., Inc. ................................... 3,905,000
100,000 Norwest Corp. ............................................. 4,350,000
------------
19,842,500
------------
Insurance 6.0% 90,000 American International Group, Inc. ........................ 9,742,500
</TABLE>
The accompanying notes are an integral part of the financial statements.
47
<PAGE>
CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
210,000 EXEL, Ltd. ................................................ 7,953,750
85,000 MBIA Inc. ................................................. 8,606,250
------------
26,302,500
------------
Consumer Finance 1.1% 110,100 Associates First Capital Corp. ............................ 4,858,163
----------
Other Financial
Companies 5.9% 205,000 American Express Credit Corp. ............................. 11,582,500
384,000 Federal National Mortgage Association ..................... 14,304,000
------------
25,886,500
------------
Media 1.0%
Advertising 92,500 Omnicom Group, Inc. ....................................... 4,231,875
------------
Service Industries 4.3%
Investment 2.7% 92,500 Franklin Resources Inc. ................................... 6,324,688
70,200 Merrill Lynch & Co., Inc. ................................. 5,721,300
------------
12,045,988
------------
Miscellaneous
Commercial Services 1.6% 148,000 Manpower, Inc. ............................................ 4,810,000
83,100 Sabre Group Holdings Inc.* ................................ 2,316,413
------------
7,126,413
------------
Durables 5.4%
Aerospace 4.7% 74,414 Lockheed Martin Corp. ..................................... 6,808,881
110,000 Rockwell International Corp. (New)* ....................... 6,696,250
110,000 United Technologies Corp. ................................. 7,260,000
------------
20,765,131
------------
Telecommunications
Equipment 0.7% 50,000 Ascend Communications, Inc.* .............................. 3,106,250
------------
Manufacturing 11.6%
Chemicals 3.6% 65,000 E.I. du Pont de Nemours & Co. ............................. 6,134,375
103,900 Praxair Inc. .............................................. 4,792,388
75,000 Sigma-Aldrich Corp. ....................................... 4,682,813
------------
15,609,576
------------
Diversified
Manufacturing 3.5% 35,600 General Electric Co. ...................................... 3,519,950
120,000 TRW Inc. .................................................. 5,940,000
65,000 Textron, Inc. ............................................. 6,126,250
------------
15,586,200
------------
Electrical Products 1.9% 37,500 ABB AB (ADR) .............................................. 4,190,625
45,000 Emerson Electric Co. ...................................... 4,353,750
------------
8,544,375
------------
Machinery/
Components/ Controls 2.6% 100,000 Ingersoll-Rand Co. ........................................ 4,450,000
176,000 Parker-Hannifin Group ..................................... 6,820,000
------------
11,270,000
------------
Technology 16.2%
Diverse Electronic
Products 3.7% 215,000 Applied Materials, Inc.* .................................. 7,726,563
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
48
<PAGE>
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
150,000 General Motors Corp. "H" .................................. 8,437,500
------------
16,164,063
------------
Electronic Data
Processing 5.8% 100,000 Compaq Computer Corp.* .................................... 7,425,000
143,000 Hewlett-Packard Co. ....................................... 7,185,750
25,000 International Business Machines Corp. ..................... 3,775,000
280,000 Sun Microsystems, Inc.* ................................... 7,192,500
------------
25,578,250
------------
Military Electronics 0.8% 75,000 Raytheon Co. .............................................. 3,609,375
------------
Office/Plant
Automation 1.5% 90,000 Cabletron Systems Inc.* ................................... 2,992,500
53,400 Cisco Systems, Inc.* ...................................... 3,397,575
------------
6,390,075
------------
Semiconductors 4.4% 175,000 Atmel Corp.* .............................................. 5,796,875
105,000 Intel Corp. ............................................... 13,748,438
------------
19,545,313
------------
Energy 12.6%
Engineering 0.8% 55,000 Fluor Corp. ............................................... 3,451,250
----------
Oil & Gas Production 0.6% 58,800 Triton Energy Ltd.* ....................................... 2,851,800
----------
Oil Companies 9.7% 62,800 Amoco Corp. ............................................... 5,055,400
57,500 Atlantic Richfield Co. .................................... 7,618,750
77,600 Exxon Corp. ............................................... 7,604,800
52,600 Mobil Corp. ............................................... 6,430,350
125,000 Repsol SA (ADR) ........................................... 4,765,625
65,000 Royal Dutch Petroleum Co. (New York shares) ............... 11,098,750
------------
42,573,675
------------
Oil/Gas Transmission 1.5% 110,000 Enron Corp. ............................................... 4,743,750
52,500 Williams Companies., Inc. ................................. 1,968,750
------------
6,712,500
------------
Transportation 2.0%
Airlines 1.2% 60,000 AMR Corp.* ................................................ 5,287,500
------------
Railroads 0.8% 125,000 Canadian Pacific Ltd. ..................................... 3,312,500
------------
Utilities 1.1%
Electric Utilities 9,300 CILCORP, Inc. ............................................. 340,613
50,000 Eastern Utilities Association ............................. 868,750
50,000 National Power PLC ........................................ 417,728
155,000 PowerGen PLC .............................................. 1,517,860
60,000 Unicom Corp. .............................................. 1,627,495
------------
4,772,446
------------
Total Common Stocks (Cost $354,422,394) ................... 426,033,681
------------
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0%
(Cost $368,576,394) (a) .................................. 440,187,681
===========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
49
<PAGE>
CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
* Non-income producing security.
(a) At December 31, 1996, the net unrealized appreciation on investments based on cost for federal income
tax purposes of $368,676,915 was as follows:
Aggregate gross unrealized appreciation for all investments in which there is an excess of market
value over tax cost ....................................................................................... $ 76,489,565
Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost
over market value ......................................................................................... (4,978,799)
---------------
Net unrealized appreciation ............................................................................... $ 71,510,766
==============
- ------------------------------------------------------------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term investments), for the year ended
December 31, 1996, aggregated $291,221,742 and $248,397,136, respectively.
</TABLE>
The accompanying notes are an integral part of the financial statements.
50
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
December 31, 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments, at market (identified cost $368,576,394) (Note A) ............ $440,187,681
Cash ...................................................................... 839
Foreign currency, at value, (cost $20,844) ................................ 20,838
Receivables:
Investments sold ....................................................... 1,948,303
Portfolio shares sold .................................................. 425,009
Dividends and interest ................................................. 345,170
Foreign taxes recoverable .............................................. 4,910
------------
Total assets ........................................................ 442,932,750
Liabilities
Payables:
Portfolio shares redeemed .............................................. $ 2,229,711
Accrued management fee (Note B) ........................................ 175,385
Other accrued expenses (Note B) ........................................ 46,346
------------
Total liabilities ................................................... 2,451,442
------------
Net assets, at market value ............................................... $440,481,308
============
Net Assets
Net assets consist of:
Undistributed net investment income .................................... $ 1,565,989
Net unrealized appreciation on:
Investments ......................................................... 71,611,287
Foreign currency related transactions ............................... 47
Accumulated net realized gain .......................................... 33,760,206
Paid-in capital ........................................................ 333,543,779
------------
Net assets, at market value ............................................... $440,481,308
============
Net asset value, offering and redemption price per share
($440,481,30826,691,077 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) ......... $ 16.50
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
51
<PAGE>
CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment income
Income:
Dividends (net of foreign taxes withheld of $163,344) ............... $ 6,354,599
Interest ............................................................ 723,916
------------
7,078,515
Expenses (Note A):
Management fee (Note B) ............................................. $ 1,870,361
Custodian and accounting fees (Note B) .............................. 115,868
Trustees' fees (Note B) ............................................. 18,813
Auditing ............................................................ 40,672
Legal ............................................................... 2,513
Registration fees ................................................... 19,999
Other ............................................................... 17,285 2,085,511
------------ ------------
Net investment income .................................................. 4,993,004
------------
Net realized and unrealized gain (loss) on investment transactions
Net realized gain (loss) from:
Investments ......................................................... 33,866,057
Foreign currency related transactions ............................... (8,845) 33,857,212
------------
Net unrealized appreciation during the period on:
Investments ......................................................... 33,028,791
Foreign currency related transactions ............................... 26 33,028,817
------------ ------------
Net gain on investment transactions .................................... 66,886,029
------------
Net increase in net assets resulting from operations ...................... $ 71,879,033
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
52
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
Increase (Decrease) in Net Assets 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income .................................................. $ 4,993,004 $ 3,089,532
Net realized gain from investment transactions ......................... 33,857,212 28,439,406
Net unrealized appreciation on investment
transactions during the period ...................................... 33,028,817 40,615,497
------------- -------------
Net increase in net assets resulting from operations ...................... 71,879,033 72,144,435
------------- -------------
Distributions to shareholders from:
Net investment income .................................................. (4,669,020) (2,245,727)
------------- -------------
Net realized gain from investment transactions ......................... (28,547,850) (8,804,833)
------------- -------------
Portfolio share transactions:
Proceeds from shares sold .............................................. 176,019,020 125,834,281
Net asset value of shares issued to shareholders in
reinvestment of distributions ....................................... 33,216,870 11,050,560
Cost of shares redeemed ................................................ (145,085,225) (116,840,991)
------------- -------------
Net increase in net assets from Portfolio share transactions .............. 64,150,665 20,043,850
------------- -------------
Increase in net assets .................................................... 102,812,828 81,137,725
Net assets at beginning of period ......................................... 337,668,480 256,530,755
------------- -------------
Net assets at end of period (including undistributed net
investment income of $1,565,989 and $1,250,850, respectively) .......... $ 440,481,308 $ 337,668,480
============= =============
Other Information
Increase (decrease) in Portfolio shares
Shares outstanding at beginning of period ................................. 22,392,030 20,979,934
------------- -------------
Shares sold ............................................................ 11,627,337 9,213,682
Shares issued to shareholders in reinvestment of distributions ......... 2,233,815 896,773
Shares redeemed ........................................................ (9,562,105) (8,698,359)
------------- -------------
Net increase in Portfolio shares ....................................... 4,299,047 1,412,096
------------- -------------
Shares outstanding at end of period ....................................... 26,691,077 22,392,030
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
53
<PAGE>
CAPITAL GROWTH PORTFOLIO
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended December 31, (a)
---------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ......... $15.08 $12.23 $14.95 $12.71 $12.28 $ 8.99 $10.21 $ 8.53 $ 7.06 $ 7.67
Income from
investment operations:
Net investment income ....... .19 .14 .06 .06 .11 .16 .25 .35 .16 .15
Net realized and unrealized
gain (loss) on investment
transactions .............. 2.68 3.25 (1.42) 2.52 .66 3.35 (1.00) 1.58 1.40 (.28)
Total from investment
operations .................. 2.87 3.39 (1.36) 2.58 .77 3.51 (.75) 1.93 1.56 (.13)
Less distributions from:
Net investment income ....... (.19) (.11) (.05) (.07) (.11) (.22) (.24) (.25) (.09) (.09)
Net realized gains on
investment transactions ... (1.26) (.43) (1.31) (.27) (.23) -- (.23) -- -- (.39)
Total distributions ........... (1.45) (.54) (1.36) (.34) (.34) (.22) (.47) (.25) (.09) (.48)
Net asset value,
end of period ............... $16.50 $15.08 $12.23 $14.95 $12.71 $12.28 $ 8.99 $10.21 $ 8.53 $ 7.06
Total Return (%) .............. 20.13 28.65 (9.67) 20.88 6.42 39.56 (7.45) 22.75 22.07 (1.88)
Ratios and
Supplemental Data
Net assets, end of
period ($ millions) ......... 440 338 257 257 167 108 45 45 17 10
Ratio of operating expenses,
net to average net
assets (%) .................. .53 .57 .58 .60 .63 .71 .72 .75 .75 .75
Ratio of operating expenses
before expense reductions, to
average daily net assets (%) .53 .57 .58 .60 .63 .71 .72 .85 1.11 1.24
Ratio of net investment income
to average net assets (%) ... 1.27 1.06 .47 .46 .95 1.49 2.71 3.51 2.17 1.68
Portfolio turnover rate (%) ... 65.56 119.41 66.44 95.31 56.29 58.88 61.39 63.96 129.75 113.34
Average commission
rate paid (b) ............... $.0585 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred securities is calculated for fiscal years beginning on or after
September 1, 1995.
</TABLE>
54
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
6.1% REPURCHASE AGREEMENT
1,031,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 12/31/96 at 6.7% to be repurchased at $1,031,384
on 1/2/97, collateralized by a $1,032,000 U.S. Treasury
Note, 6.25%, 5/31/00 (Cost $1,031,000) .................... 1,031,000
----------
0.2% BONDS
Portugal
591 Jeronimo Martins, 9/15/03 (Cost $30,750) (a) .............. 29,224
----------
4.2% PREFERRED STOCKS
Shares
- ------------------------------------------------------------------------------------------------------------------------------------
Germany
768 Fresenius AG (Manufacturer and distributor of
pharmaceutical and medical systems products) .............. 158,654
2,860 Marschollek Lautenschlaeger und Partner AG (Leading
independent life insurance company) ....................... 397,596
2,300 Moebel Walther AG (Furniture retailer) .................... 150,908
----------
Total Preferred Stocks (Cost $576,250) 707,158
----------
89.5% COMMON STOCKS
Argentina 0.8%
48,300 Dalmine Siderca (Steel producer) .......................... 88,164
6,200 Quilmes Industrial S.A. (Leading beer distributor) ........ 49,600
1,932 Siderar SAIC (Manufacturer of hot and cold rolled sheets
of steel) ................................................. 5,565
----------
143,329
----------
Austria 0.7%
1,000 VAE Eisenbahnsysteme AG (Manufacturer of electronic
railroad control systems) ................................. 113,465
----------
Bermuda 0.9%
7,000 Terra Nova (Bermuda) Holdings Ltd. "A" (Property,
casualty and marine insurance and reinsurance
company) .................................................. 150,500
----------
Brazil 1.0%
13,000,000 Banco Bradesco S.A. (pfd.) (Commercial bank) .............. 94,207
1,500,000 Lojas Renner S.A. (pfd.) (Specialty retailer of apparel,
cosmetics, electronics, household appliances and
furniture) ................................................ 69,291
----------
163,498
----------
Chile 0.8%
6,000 Santa Isabel S.A. (Supermarket chain) ..................... 135,750
----------
Czech Republic 2.2%
11,900 Central European Media Enterprises Ltd. "A"* (Owner
and operator of national and regional private
commercial television stations in Central Europe and
Germany) .................................................. 377,825
----------
Finland 0.9%
3,800 Orion-yhtyma Oy "B" (Developer and producer of
pharmaceuticals, bulk drug substances and other
health care products) ..................................... 146,217
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
55
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
France 2.6%
3,171 Dassault Systemes SA*(Computer aided design,
manufacturing and engineering software products) .......... 146,293
635 Essilor International (Manufacturer of various types of
lenses, eyeglasses, contact lenses and optical measuring
instruments) .............................................. 192,814
7,300 Group AB SA (ADR)* (Producer and distributor of television
programming) ............................................. 104,952
----------
444,059
----------
Hong Kong 0.2%
29,600 Jinhui Shipping & Transportation Ltd. (ADR) (Operator of
fleet transporting steel, iron ore and non-ferrous metals,
agricultural products) .................................... 29,600
----------
Indonesia 0.4%
8,000 Modern Photo Film Co.(Foreign registered)
(Photographic film distributor) ........................... 25,402
34,500 Mustika Ratu (Foreign registered) (Consumer cosmetics
producer) (a) ............................................. 46,740
----------
72,142
----------
Ireland 4.0%
42,600 Bank of Ireland PLC (Bank) ................................ 388,359
6,000 Irish Continental Group PLC (Transport of passengers,
freight and containers between Ireland, the U.K. and the
continent) ................................................ 42,701
37,700 Irish Life PLC (Provider of life and disability insurance
and pensions) ............................................. 174,719
8,600 Irish Permanent PLC (Retail financial services group) ..... 70,678
----------
676,457
----------
Italy 4.1%
7,500 Bulgari SpA (Manufacturer and retailer of fine jewelry,
luxury watches and perfumes) .............................. 152,128
3,400 Gucci Group (New York Shares) (Designer and producer of
personal luxury accessories and apparel) .................. 217,175
1,300 Luxottica Group SpA (ADR)(Manufacturer and marketer of
eyeglasses) ............................................... 67,600
6,50 Saes Getters SpA di Risparmio (Manufacturer of getters,
refined chemicals used in cathode ray tubes and other
monitors) ................................................. 79,278
39,500 Saipem SpA (International contractor in oil and gas
exploration and drilling, construction of refineries and
pipelines) ................................................ 181,573
----------
697,754
----------
Japan 9.6%
9,000 Albis Co Limited (Food wholesaler) (a) .................... 108,022
4,000 Ariake Japan Co., Ltd. (Leading maker of natural
seasonings made from meat extracts) (a) ................... 128,486
2,000 Japan Associated Finance Co. (Venture capital company) .... 158,017
5,200 Matsumotokiyoshi (Operator of supermarket chain) .......... 170,624
11,000 Nippon Electric Glass Co., Ltd. (Leading producer of
cathode-ray tube glass) ................................... 169,070
2,400 Riso Kagaku Corp. (Manufacturer of copying machines) ...... 154,184
6,000 Sagami Chain Co., Ltd. (Operator of noodle restaurant
chain) .................................................... 101,546
1,500 Shohkoh Fund & Co., Ltd. (Finance company for small
and medium-sized firms) ................................... 326,397
4,900 Square Co., Ltd. (Producer of software for video games) ... 247,517
2,000 Sundrug Co., Ltd. (Operator of outlet drug store chain) ... 66,488
----------
1,630,351
----------
Luxembourg 1.1%
5,900 Millicom International Cellular SA* (Developer and
operator of cellular telephone networks) ................. 189,538
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
56
<PAGE>
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mexico 0.8%
6,800 Grupo Casa Autrey SA (ADR) (Consumer specialty
manufacturer) ............................................. 132,600
----------
Netherlands 5.9%
12,500 Boskalis Westminster NV (International contractor
specializing in dredging activities) ...................... 253,241
2,400 De Telegraaf Holding NV (Leading publisher of
newspapers, magazines and books) .......................... 50,567
11,300 IHC Caland NV (Dredging and offshore services) ............ 645,583
1,600 Qiagen NV* (Biopharmaceutical company) .................... 41,200
----------
990,591
----------
Portugal 2.2%
3,550 Jeronimo Martins (Food producer and retailer) ............. 183,098
3,549 Jeronimo Martins (New) (a) ................................ 182,775
591 Jeronimo Martins Warrants * (Expires 9/15/03) (a) ......... 2,032
----------
367,905
----------
Singapore 0.3%
17,500 GP Batteries International, Ltd. (Developer, manufacturer
and distributor of batteries and battery-related products)
58,275
South Africa 0.3%
16,000 Metro Cash and Carry Ltd. (Wholesale cash and carry
distributor) ............................................. 53,008
----------
Spain 0.5%
1,300 Mapfre Vida Seguros (Life insurance) ...................... 90,121
----------
Sweden 2.2%
8,500 Autoliv AB (Manufacturer of automobile safety bags) ....... 372,684
----------
Switzerland 1.7%
327 Phoenix Mecano AG (Bearer) (Manufacturer of housings
and components for computers) ............................. 170,885
100 Schindler Holdings AG (PC) (Leading elevator and escalator
manufacturer) ............................................. 108,623
----------
279,508
----------
United Kingdom 8.0%
10,100 Brake Brothers PLC (Specialist supplier of frozen foods
to the catering industry) ................................. 95,275
14,500 Expro International Group PLC (Provider of oilfield services) 117,914
32,700 Hardy Oil & Gas PLC (Oil and gas exploration and
development) .............................................. 167,387
7,000 Pace Micro Technology PLC* (Develops, manufactures
and distributes analog and digital receivers) ............. 27,563
32,500 Provident Financial PLC (Personal finance group) .......... 278,756
35,400 Serco Group PLC (Facilities management company) ........... 407,870
23,200 Tibbett and Britten Group PLC (Transportation services for
manufacturing and retail industries) ...................... 254,198
----------
1,348,963
----------
United States 38.3%
3,000 Alaska Air Group Inc.* (Scheduled and charter airline
services) ................................................. 63,000
6,500 Applied Analytical Industries, Inc.* (Provides product
development and support services to the worldwide
pharmaceutical and biotechnology industries) .............. 124,313
4,700 Aptargroup, Inc. (Manufacturer of packaging equipment
components) ............................................... 165,675
4,900 Axogen Ltd. Units* (Future development of therapeutic
products for treatment of neurological disorders) ......... 115,150
5,400 BE Aerospace * (Airline audio/video control systems) ...... 146,475
3,700 Barrett Resources Corp.* (Oil and gas exploration and
production) ............................................... 157,713
4,900 Bell & Howell Holdings Co.* (Information access and
dissemination services) ................................... 116,375
</TABLE>
The accompanying notes are an integral part of the financial statements.
57
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10,300 Benton Oil & Gas Co.* (Oil and gas exploration,
development and production) ............................... 233,038
11,600 Billing Information Concepts* (Billing and information
management services) ...................................... 333,500
7,900 CapMAC Holdings Inc. (Provider of financial guaranty
insurance) ................................................ 261,688
2,800 Cintas Corp. (Uniform rentals) ............................ 164,500
3,900 ContiFinancial Corp.* (Provider of financing for a broad
range of loans) ........................................... 140,888
9,100 CytoTherapeutics, Inc.* (Developer of therapeutic products
for treatment of certain chronic and disabling diseases) .. 81,900
6,000 Enron Global Power & Pipelines L.L.C. (Owner and
manager of power plants and a natural gas pipeline
system) ................................................... 162,000
500 Factset Research Systems Inc.* (Provides on-line integrated
financial database services) .............................. 10,500
6,400 Fiserv Inc.* (Data processing services) ................... 235,200
5,800 HBO & Company (Designer of computerized information
systems to the heathcare industry) ........................ 344,375
14,300 IGEN Inc.* (Producer of medical supplies) ................. 71,500
4,700 Karrington Health, Inc.* (Owner and operator of private pay
assisted living residences) ............................... 58,750
4,900 Matrix Pharmaceutical, Inc.* (Developer of site-specific
treatments for cancer and serious skin diseases) .......... 30,013
3,100 Midwest Express Holding, Inc.* (Operator of passenger
airline catering to business travelers) ................... 111,600
3,400 National Processing, Inc.* (Low-cost, high-volume card
and check transaction processing) ......................... 54,400
6,400 Network Appliance, Inc.* (Designer and manufacturer of
network data storage devices) ............................. 325,600
4,800 Neurogen Corp.* (Developer of biopharmaceuticals for
treatment of psychiatric and neurological disorders) ...... 92,400
1,000 Nordson Corp. (Industrial application equipment) .......... 63,750
6,300 OccuSystems Inc.* (Provider of primary care physician and
case management services) ................................. 170,100
14,300 Octel Communications Corp.* (Manufacturer of voice
processing systems) ....................................... 250,250
4,200 PHAMIS, Inc.* (Developer and installer of patient-centered
healthcare information systems) ........................... 54,075
3,400 R.P. Scherer Corp.* (Manufacturer of drug delivery system) 170,850
9,100 Raytel Medical Corp.* (Provider of healthcare services) ... 100,100
5,300 Ribozyme Pharmaceuticals, Inc.* (Developer of human
therapeutics) ............................................. 58,300
8,700 Silicon Valley Group Inc.* (Manufacturer of equipment for
semiconductor industry) ................................... 175,088
4,700 Somatogen Inc.* (Developer of human blood substitute) ..... 51,700
9,025 Sterling Commerce, Inc.* (Producer of electronic data
interchange products and services) ........................ 318,131
5,800 Sterling Software Inc. (Computer software products) ....... 183,425
2,300 Sunrise Assisted Living, Inc.* (Provider of assisted living to
the elderly) .............................................. 64,113
5,000 Tech Data Corp.* (Distributor of microcomputers, hardware
and software) ............................................. 136,875
4,000 Thomas Nelson, Inc. (Publisher) ........................... 59,500
4,400 Tiffany & Co. (Retailer of jewelry and gift items) ........ 161,150
4,000 Total Renal Care Holdings, Inc.* (Dialysis services for
treatment of chronic kidney failure) ...................... 145,000
3,400 Triton Energy Ltd.* (Independent oil and gas exploration
and production company) ................................... 164,900
1,000 Vincam Group Inc.* (Provider of solutions to complexities
and costs of employment and personnel) .................... 43,875
2,700 Vitesse Semiconductor Corp.* (Manufacturer of digital
integrated circuits) ...................................... 122,850
5,500 Vivra, Inc.* (Provider of dialysis services) .............. 151,938
</TABLE>
The accompanying notes are an integral part of the financial statements.
58
<PAGE>
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
4,200 Wandel & Goltermann Technologies, Inc.* (Manufacturer
of test, measurement, diagnostic and monitoring
products for local and wide area networks) ................ 122,850
2,300 Watson Pharmaceuticals, Inc.* (Producer of medications
and drug delivery systems) ................................ 103,352
----------
6,472,725
----------
Total Common Stocks (Cost $14,606,126) (b) ................ 15,136,865
----------
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0%
(Cost $16,244,126) (b) .................................... 16,904,247
- ------------------------------------------------------------------------------------------------------------------------------------
* Non-income producing security.
(a) Securities valued in good faith by the Valuation Committee of the Board of Directors at fair value
amounted to $497,279 (2.97% of net assets). Their values have been estimated by the Board of
Directors in the absence of readily ascertainable market values. However, because of the inherent
uncertainty of valuation, those estimated values may differ significantly from the values that would
have been used had a ready market for the securities existed, and the difference could be material.
The cost of these securities at December 31, 1996 aggregated $439,559. These securities may also have
certain restrictions as to resale.
(b) At December 31, 1996, the net unrealized appreciation on investments based on cost for federal income
tax purposes of $16,282,387 was as follows:
Aggregate gross unrealized appreciation for all investments in which there is an excess of market
value over tax cost $ 1,668,712
Aggregate gross unrealized depreciation for all investments in which there is an excess of tax
cost over market value (1,046,852)
--------------
Net unrealized appreciation $ 621,860
==============
- ------------------------------------------------------------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term investments), for the year ended December 31, 1996,
aggregated $19,160,797 and $3,966,432, respectively.
- ------------------------------------------------------------------------------------------------------------------------------------
Sector breakdown of the Global Discovery Portfolio's equity securities is noted on the Portfolio Summary.
- ------------------------------------------------------------------------------------------------------------------------------------
Forward Currency Exchange Contracts:
As of December 31, 1996, the Global Discovery Portfolio entered into the following forward foreign currency exchange
contracts resulting in net unrealized appreciation of $16,537.
Net Unrealized
Appreciation/
Settlement Depreciation
Contracts to Deliver In Exchange For Date (U.S.$)
-------------------------------- -------------------------------------- ---------------------- ---------------------------
Japanese Yen 29,688,000 U.S. Dollars 273,076 1/8/97 16,537
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
59
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
December 31, 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments, at market (identified cost $16,244,126) (Note A) ............ $ 16,904,247
Cash ...................................................................... 371
Net receivable on closed forward currency exchange contracts (Note A) ..... 11,864
Unrealized appreciation on forward currency exchange contracts (Note A) ... 16,537
Receivables:
Investments sold ....................................................... 232,522
Portfolio shares sold .................................................. 27,030
Foreign taxes recoverable .............................................. 658
Dividends and interest ................................................. 7,539
------------
Total assets ........................................................ 17,200,768
Liabilities
Payables:
Investments purchased .................................................. $ 363,526
Portfolio shares redeemed .............................................. 25,328
Accrued expenses (Note B) .............................................. 54,369
Other payables ......................................................... 281
------------
Total liabilities ................................................... 443,504
------------
Net assets, at market value ............................................... $ 16,757,264
============
Net Assets
Net assets consist of:
Undistributed net investment income .................................... $ 44,728
Net unrealized appreciation on:
Investments ......................................................... 660,121
Foreign currency related transactions ............................... 16,667
Accumulated net realized loss .......................................... (18,886)
Paid-in capital ........................................................ 16,054,634
------------
Net assets, at market value ............................................... $ 16,757,264
============
Net asset value, offering and redemption price per share
($16,757,264/2,647,089 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) ......... $ 6.33
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
60
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
for the period May 1, 1996
(commencement of operations) to December 31, 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment income
Income:
Interest ........................................................................... $ 73,358
Dividends (net of foreign taxes withheld of $3,176) ................................ 39,856
------------
113,214
Expenses (Note A):
Management fee (Note B) ............................................. $ 80,681
Trustees' fees (Note B) ............................................. 11,152
Custodian and accounting fees ....................................... 77,659
Auditing ............................................................ 4,312
Legal ............................................................... 3,643
Registration fees ................................................... 4,887
Other ............................................................... 10,100
------------
Total expenses before reductions .................................... 192,434
Expense reductions .................................................. (68,074)
------------
Expenses, net .......................................................... 124,360
------------
Net investment loss .................................................... (11,146)
------------
Net realized and unrealized gain on investment transactions
Net realized gain from:
Investments ......................................................... 18,758
Foreign currency related transactions ............................... 18,229 36,987
------------
Net unrealized appreciation during the period on:
Investments ......................................................... 660,121
Foreign currency related transactions ............................... 16,667 676,788
------------ ------------
Net gain on investment transactions .................................... 713,775
------------
Net increase in net assets resulting from operations ...................... $ 702,629
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
61
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Period
May 1, 1996
(commencement
of operations) to
December 31,
Increase (Decrease) in Net Assets 1996
- ----------------------------------------------------------------------------------------------
<S> <C>
Operations:
Net investment loss .................................................... $ (11,146)
Net realized gain from investment transactions ......................... 36,987
Net unrealized appreciation on investment
transactions during the period ...................................... 676,788
------------
Net increase in net assets resulting from operations ...................... 702,629
------------
Portfolio share transactions:
Proceeds from shares sold .............................................. 18,871,561
Cost of shares redeemed ................................................ (2,817,526)
------------
Net increase in net assets from Portfolio share transactions .............. 16,054,035
------------
Increase in net assets .................................................... 16,756,664
Net assets at beginning of period ......................................... 600
------------
Net assets at end of period (including undistributed net investment
income of $44,728) ..................................................... $ 16,757,264
============
Other Information
Increase (decrease) in Portfolio shares
Shares outstanding at beginning of period .............................. 100
------------
Shares sold ............................................................ 3,107,414
Shares redeemed ........................................................ (460,425)
------------
Net increase in Portfolio shares ....................................... 2,646,989
------------
Shares outstanding at end of period ....................................... 2,647,089
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
62
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
the period (a) and other performance information derived from the financial
statements.
For the Period
May 1, 1996
(commencement
of operations)
to December 31,
1996
---------------
Net asset value, beginning of period ............................ $ 6.00(c)
--------
Income from investment operations:
Net investment loss ........................................... (.01)
Net realized and unrealized gain on investment transactions ... .34
--------
Total from investment operations ................................ .33
--------
Net asset value, end of period .................................. $ 6.33
========
Total Return (%) ................................................ 5.50**
Ratios and Supplemental Data
Net assets, end of period ($ millions) .......................... 17
Ratio of operating expenses, net to average net assets (%) ...... 1.50*
Ratio of operating expenses before expense reductions, to
average daily net assets (%) .................................. 2.32*
Ratio of net investment loss to average net assets (%) .......... (.13)*
Portfolio turnover rate (%) ..................................... 50.31*
Average commission rate paid (b) ................................ $ .0029
(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred stocks.
(c) Original capital
* Annualized
**Not annualized
63
<PAGE>
INTERNATIONAL PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8.4% REPURCHASE AGREEMENT
U.S.$ 60,487,000 Repurchase Agreement with Donaldson, Lufkin &
Jenrette dated 12/31/96 at 6.7%, to be repurchased
at $60,509,515 on 1/2/97, collateralized by a
$48,029,000 U.S. Treasury Bond, 8.875%, 8/15/17
(Cost $60,487,000) ........................................ 60,487,000
----------
0.5% CONVERTIBLE BONDS
Japan 0.4%
JPY 400,000,000 Softbank Corp., 0.5%, 3/29/02 ............................. 3,212,158
----------
Malaysia 0.1%
MYR 420,000 Renong Berhad. (ICUL), 4%, 5/21/01 ........................ 176,282
----------
Total Convertible Bonds (Cost $4,152,237) ................. 3,388,440
----------
1.3% PREFERRED STOCKS
Shares
------------------------------------------------------------------------------------------------
Germany
185,000 RWE AG (Producer and marketer of petroleum and
chemical products) ....................................... 6,249,391
22,500 SAP AG (Computer software manufacturer) ................... 3,142,560
----------
Total Preferred Stocks (Cost $5,594,617) .................. 9,391,951
----------
89.9% COMMON STOCKS
Argentina 0.6%
170,000 YPF S.A. "D" (ADR) (Petroleum company) .................... 4,292,500
----------
Australia 0.9%
342,535 National Australia Bank, Ltd. (Commercial bank) ........... 4,029,506
1,824,340 Normandy Mining Ltd. (Invests in mining and oil
enterprises in Australia) ................................. 2,523,133
----------
6,552,639
----------
Brazil 4.6%
8,578,870 Centrais Eletricas Brasileiras S/A "B" (pfd.)
(Electric utility) ........................................ 3,186,838
5,086,206 Companhia Cervejaria Brahma (pfd.) (Leading beer
producer and distributor) ................................. 2,780,257
237,000,000 Companhia Energetica de Minas Gerais (pfd.)
(Electric power utility) .................................. 8,074,103
124,880 Companhia Vale do Rio Doce (pfd.) (Diverse mining
and industrial complex) ................................... 2,427,655
30,000,000 Petroleo Brasileiro S/A (pfd.) (Petroleum company) ........ 4,778,173
65,040,000 Telecomunicacoes Brasileiras S.A. (pfd.)
(Telecommunication services) .............................. 5,007,410
6,530,000,000 Usinas Siderurgicas de Minas Gerais S/A (pfd.)
(Non-coated flat products and electrolytic galvanized
products) ................................................ 6,661,342
----------
32,915,778
----------
Canada 2.9%
160,000 Barrick Gold Corp. (Gold exploration and production
in North and South America) ............................... 4,585,113
296,000 Battle Mountain Canada (Gold and silver mining) ........... 2,053,079
206,500 Canadian National Railway Co. (Operator of one of
Canada's two principal railroads) ......................... 7,855,036
</TABLE>
The accompanying notes are an integral part of the financial statements.
64
<PAGE>
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
255,411 Canadian Pacific Ltd. (Ord.) (Transportation and
natural resource conglomerate) ............................ 6,722,559
----------
21,215,787
----------
China 0.6%
191,837 Guangshen Railway Co. Ltd. (ADR)* (Operator of only
railroad in the Pearl River delta) ........................ 3,956,638
----------
Finland 1.3%
116,000 Nokia AB Oy "A" (Leading manufacturer of
cellular telephones) ...................................... 6,728,000
132,000 Outokumpu Oy "A" (Metals and minerals) .................... 2,252,609
----------
8,980,609
----------
France 7.9%
78,857 AXA SA (Insurance group providing insurance,
finance and real estate services) ......................... 5,016,929
13,950 Carrefour (Hypermarket operator and food retailer) ........ 9,079,468
57,453 Compagnie Financiere de Paribas* (Finance and
investment company) ....................................... 3,886,689
48,000 Compagnie Generale des Eaux (Water utility) ............... 5,950,260
12,000 LVMH Moet-Hennessy Louis Vuitton SA (Producer of
wines, spirits and luxury products) ....................... 3,352,227
55,000 Lafarge SA (Leading producer of cement, concrete and
aggregates) ............................................... 3,300,848
128,898 Michelin "B" (Leading tire manufacturer) .................. 6,960,542
13,128 Pinault-Printemps, SA (Distributor of consumer goods) ..... 5,208,680
20,335 Rhone-Poulenc SA "A" (Medical, agricultural and
consumer chemicals) ....................................... 693,515
132,055 Schneider SA* (Manufacturer of electronic components
and automated manufacturing systems) ...................... 6,107,576
74,425 Total SA "B" (International oil and gas exploration,
development and production) ............................... 6,055,013
26,872 Valeo SA (Automobile and truck components manufacturer) ... 1,657,806
----------
57,269,553
----------
Germany 11.0%
214,000 BASF AG (Leading international chemical producer) ......... 8,241,089
190,000 Bayer AG (Leading chemical producer) ...................... 7,751,324
148,000 Bayerische Vereinsbank AG (Commercial bank) ............... 6,076,331
210,000 Commerzbank AG* (Worldwide multi-service bank) ............ 5,334,070
101,000 Daimler-Benz AG (Automobile and truck manufacturer) ....... 6,954,884
70,744 Deutsche Telekom AG (Telecommunication services) .......... 1,491,307
94,542 Deutsche Telekom AG (ADR)* (Telecommunication
services) ................................................. 1,926,293
257,000 Hoechst AG (Chemical producer) ............................ 12,137,526
20,360 Mannesmann AG (Bearer) (Diversified construction
and technology company) ................................... 8,821,983
69,000 Schering AG (Pharmaceutical and chemical producer) ........ 5,822,652
101,270 Siemens AG (Leading electrical engineering and
electronics company) ...................................... 4,769,594
171,200 VEBA AG (Electric utility and distributor of oil and
chemicals) ................................................ 9,898,204
----------
79,225,257
----------
Hong Kong 5.2%
4,341,545 First Pacific Co., Ltd. (International management and
investment company) ....................................... 5,641,286
217,376 HSBC Holdings Ltd. (Bank) ................................. 4,651,332
3,240,181 Hong Kong & China Gas Co., Ltd. (Gas utility) ............. 6,283,886
270,015 Hong Kong & China Gas Co., Ltd. Warrants*
(Expires 9/30/97) ......................................... 150,115
1,182,000 Hutchison Whampoa, Ltd. (Container terminal and real
estate company) ........................................... 9,283,923
2,013,000 Kerry Properties Ltd.* (Real estate company) .............. 5,517,564
1,510,000 Television Broadcasts, Ltd. (Television broadcasting) ..... 6,032,581
37,560,687
</TABLE>
The accompanying notes are an integral part of the financial statements.
65
<PAGE>
INTERNATIONAL PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Indonesia 1.0%
21,100 Asia Pacific Resources International Holdings Ltd.*
(Manufacturer of rayon fiber for Asian textile markets,
owner of world's leading paper pulp mill) ................. 118,688
56,340 Asia Pulp & Paper Co., Ltd. (ADR) (Producer of pulp
and paper)* ............................................... 640,868
740,000 HM Sampoerna (Foreign registered) (Tobacco company) ....... 3,947,502
1,525,500 Indah Kiat Pulp & Paper (Foreign registered)* (Producer
of pulp and paper) ........................................ 1,114,093
183,300 Indah Kiat Pulp & Paper Warrants* (Expires 4/13/01) ....... 56,263
400,000 Indocement Tunggal Prakarsa (Foreign Registered)
(Multi-business group with three major divisions namely
cement, food and property) ................................ 609,653
924,570 Pabrik Kertas Tjiwi Kimia (Operator of pulp and
paper factory) ............................................ 919,873
----------
7,406,940
----------
Italy 1.6%
65,000 Luxottica Group SpA (ADR) (Manufacturer and marketer
of eyeglasses) ............................................ 3,380,000
3,310,000 Telecom Italia Mobile SpA (Cellular telecommunication
services) ................................................. 8,359,714
----------
11,739,714
----------
Japan 16.0%
330,000 Bridgestone Corp. (Leading automobile tire manufacturer) .. 6,268,889
358,000 Canon Inc. (Leading producer of visual image and
information equipment) .................................... 7,913,652
640 DDI Corp. (Long distance telephone and cellular operator) . 4,233,140
205,000 Fujitsu Ltd. (Leading manufacturer of computers) .......... 1,911,752
190,000 Hitachi Construction Machinery Co., Ltd. (Leading
maker of hydraulic shovels) ............................... 2,001,554
697,000 Hitachi Ltd. (General electronics manufacturer) ........... 6,499,957
180,000 Honda Motor Co., Ltd. (Leading automobile and
motorcycle manufacturer) .................................. 5,144,633
10,000 Horipro Inc. (Growing entertainment production company) ... 95,847
625,000 Ishikawajima-Harima Heavy Industries Co., Ltd. ............
(Comprehensive heavy machinery manufacturer in
aerospace and defense fields) ............................. 2,779,337
20,000 Ito-Yokado Co., Ltd. (Leading supermarket operator) ....... 870,391
465,000 Itochu Corp. (Leading general trading company) ............ 2,497,453
28,000 Japan Associated Finance Co. (Venture capital company) .... 2,212,244
125,000 Jusco Co., Ltd. (Major supermarket operator) .............. 4,241,862
250,000 Kajima Corp. (Leading contractor engaged in
large-scale civil engineering projects) ................... 1,787,410
53,000 Keyence Corp. (Specialized manufacturer of sensors) ....... 6,544,340
115,000 Kokuyo (Leading manufacturer of paper stationery) ......... 2,839,997
103,000 Kyocera Corp. (Leading ceramic package manufacturer) ...... 6,421,380
37,000 Mabuchi Motor Co., Ltd. (Manufacturer of DC motors) ....... 1,862,620
520,000 Matsushita Electric Industrial Co., Ltd. (Leading
manufacturer of consumer electronic products) ............. 8,486,314
280,000 Matsushita Electric Works, Inc. (Leading maker of
building materials and lighting equipment) ................ 2,410,500
620,000 Mitsubishi Heavy Industries, Ltd. (Diversified heavy
machinery manufacturer and leading shipbuilder) ........... 4,925,309
47,000 Nichiei Co., Ltd. (Finance company for small and
medium-sized firms) ....................................... 3,469,908
50,000 Nippon Electric Glass Co., Ltd. (Leading producer of
cathode-ray tube glass) ................................... 768,500
200,000 Pioneer Electronics Corp. (Leading manufacturer of
audio equipment) .......................................... 3,816,596
390,000 Ricoh Co., Ltd. (Leading maker of copiers and
information equipment) .................................... 4,478,888
81,500 SMC Corp. (Leading maker of pneumatic equipment) .......... 5,482,126
50,000 Secom Co., Ltd. (Electronic security system operator) ..... 3,026,509
</TABLE>
The accompanying notes are an integral part of the financial statements.
66
<PAGE>
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
48,400 Seven-Eleven Japan Co., Ltd. (Leading convenience
store operator) ........................................... 2,833,538
250,000 ShinMaywa Industries, Ltd. (Leading maker of dump
trucks and other specialty vehicles) ...................... 1,841,378
1,710,000 Sumitomo Metal Industries, Ltd (Leading integrated crude
steel producer). .......................................... 4,208,186
560,000 Sumitomo Metal Mining Co., Ltd. (Leading gold, nickel and
copper mining company) .................................... 3,776,531
----------
115,650,741
----------
Korea 0.3%
7,870 Pohang Iron & Steel Co., Ltd. (Leading steel producer) (b) 465,727
93,400 Pohang Iron & Steel Co., Ltd. (ADR) ....................... 1,891,350
1 Samsung Electronics Co., Ltd. (Major electronics
manufacturer) ............................................. 41
1 Samsung Electronics Co., Ltd. (1/2 Voting GDR)(New 1)
(Major electronics manufacturer) .......................... 38
1 Samsung Electronics Co., Ltd. (Non-voting GDS)(New)
(Major electronics manufacturer) .......................... 18
----------
2,357,174
----------
Malaysia 1.2%
275,000 Malayan Banking Berhad (Leading banking and financial
services group) ........................................... 3,048,901
723,000 Malaysian Airline System Berhad (Air transportation and
related services) ......................................... 1,875,134
2,100,000 Renong Berhad (Holding company involved in
engineering, construction, financial services,
telecommunication and information technology) ............. 3,725,203
----------
8,649,238
----------
Mexico 0.7%
155,000 Telefonos de Mexico S.A. de C.V. "L" (ADR)
(Telecommunication services) .............................. 5,115,000
----------
Netherlands 4.9%
130,000 AEGON Insurance Group NV (Insurance company) .............. 8,284,904
24,000 Akzo-Nobel NV (Chemical producer) ......................... 3,278,537
204,870 Elsevier NV (International publisher of scientific,
professional, business, and consumer information books) ... 3,462,725
186,304 Getronics NV (Provider of computer installation and
maintenance services) ..................................... 5,057,686
43,750 Heineken Holdings NV "A" (Brewery) ........................ 6,837,520
114,000 Philips Electronics NV (Leading manufacturer of
electrical equipment) ..................................... 4,619,125
26,935 Wolters Kluwer CVA (Publisher) ............................ 3,578,133
----------
35,118,630
----------
New Zealand 0.9%
1,200,000 Telecom Corp. of New Zealand (Telecommunication
services) ................................................. 6,125,016
----------
Norway 0.6%
271,889 Saga Petroleum AS "A" (Oil and gas
exploration and production) ............................... 4,545,640
----------
Philippines 2.3%
2,700,000 Ayala Land, Inc. "B" (Real estate and land developer) ..... 3,079,848
9,312,000 C & P Homes, Inc. (Home construction company) ............. 4,779,924
714,987 Manila Electric Co. "B" (Electric utility) ................ 5,844,951
125,000 Metropolitan Bank and Trust Company (Commercial
bank and trust company) ................................... 3,089,354
----------
16,794,077
----------
Portugal 1.6%
30,192 Jeronimo Martins (Food producer and retailer) ............. 1,557,210
30,192 Jeronimo Martins (New)* (a) ............................... 1,554,898
301,000 Portugal Telecom SA (Telecommunication services) .......... 8,580,587
----------
11,692,695
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
67
<PAGE>
INTERNATIONAL PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
% of Market
Portfolio Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Spain 2.5%
51,140 Acerinox, S.A. (Stainless steel producer) ................. 7,389,843
22,000 Banco Popular Espanol, S.A. (Retail bank) ................. 4,321,202
280,000 Compania Telefonica Nacional de Espana S.A ................
(Telecommunication services) .............................. 6,502,600
-----------
18,213,645
-----------
Sweden 4.3%
211,000 AGA AB "B" (Free) (Producer and distributor of
industrial and medical gases) ............................. 3,155,973
202,000 Autoliv AB (Manufacturer of automobile safety bags) ....... 8,856,726
256,400 L.M. Ericsson Telephone Co. "B" (ADR) (Leading
manufacturer of cellular telephone equipment) ............. 7,740,075
144,000 S.K.F. AB "B" (Free) (Manufacturer of roller bearings) .... 3,410,246
270,000 Skandia Foersaekrings AB (Free) (Financial conglomerate) .. 7,641,379
-----------
30,804,399
-----------
Switzerland 5.0%
5,180 ABB AG (Bearer) (Manufacturer of electrical equipment) .... 6,438,746
5 ABB AG (Registered) ....................................... 1,209
60,000 CS Holdings (Registered) (Provider of bank services,
management services and life insurance) ................... 6,159,015
12,671 Clariant AG (Registered)(Manufacturer of color chemicals) . 5,420,293
5,013 Novartis AG (Bearer) (Pharmaceutical company) ............. 5,733,420
5,000 Novartis AG (Registered) (Pharmaceutical company) ......... 5,722,284
2,610 SGS Holdings SA (Bearer) (Trade inspection company) ....... 6,410,526
-----------
35,885,493
-----------
Thailand 0.0%
65,652 Thai Farmers Bank PCL Warrants, * (Expire 9/15/02)
(Commercial bank) ......................................... 62,078
-----------
United Kingdom 12.0%
420,000 BOC Group PLC (Producer of industrial gases) .............. 6,284,411
622,082 British Petroleum PLC (Major integrated world oil company) 7,455,033
890,000 Carlton Communications PLC (Television post
production products and services) ......................... 7,795,152
1,100,000 General Electric Co., PLC (Manufacturer of power,
communications and defense equipment and other
various electrical components) ............................ 7,212,658
370,000 Glaxo Wellcome PLC (Pharmaceutical company) ............... 6,017,682
575,000 Pearson PLC (Diversified media and entertainment
holding company) .......................................... 7,333,782
655,128 PowerGen PLC (Electric utility) ........................... 6,415,434
440,059 RTZ Corp., PLC (Mining and finance company) ............... 7,066,716
489,200 Reuters Holdings PLC (International news agency) .......... 6,285,517
618,320 SmithKline Beecham PLC (Manufacturer of ethical drugs
and healthcare products) .................................. 8,553,198
1,890,000 WPP Group PLC (Advertising agency) ........................ 8,186,273
300,000 Zeneca Group PLC (Holding company: manufacturing
and marketing of pharmaceutical and agrochemical
products and specialty chemicals) ......................... 8,448,712
-----------
87,054,568
-----------
Total Common Stocks (Cost $517,432,357) ................... 649,184,496
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0%
(Cost $587,666,211) (c) ................................... 722,451,887
===========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
68
<PAGE>
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
* Non-income producing security.
(a) Securities valued in good faith by the Valuation Committee of the Board of Trustees at fair value
amounted to $1,554,898 (.22% of net assets). Their values have been estimated by the Board of
Trustees in the absence of readily ascertainable market values. However, because of the inherent
uncertainty of valuation, those estimated values may differ significantly from the values that would
have been used had a ready market for the securities existed, and the difference could be material.
The cost of these securities at December 31, 1996 aggregated $249,296. These securities may also have
certain restrictions as to resale.
(b) Securities that have met the foreign-ownership limitation valued at a premium in good faith by the
Valuation Committee of the Board of Trustees. The cost of these securities at December 31, 1996 was
$736,139. The aggregate premium ($125,780) over the local share price ($339,947) for these securities
valued by the Valuation Committee was approximately 0.01% of the Portfolio's net assets at December
31, 1996.
(c) At December 31, 1996, the net unrealized appreciation on investments based on cost for federal income
tax purposes of $587,720,164 was as follows:
Aggregate gross unrealized appreciation for all investments in which there is an excess of market
value over tax cost .................................................................................... $ 152,896,529
Aggregate gross unrealized depreciation for all investments in which there is an excess of tax
cost over market value ................................................................................. (18,164,806)
---------------
Net unrealized appreciation ............................................................................ $ 134,731,723
==============
- ------------------------------------------------------------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term investments), for the year ended December 31, 1996,
aggregated $276,115,066 and $195,075,817, respectively.
- ------------------------------------------------------------------------------------------------------------------------------------
Sector breakdown of the International Portfolio's equity securities is noted on the Portfolio Summary.
</TABLE>
The accompanying notes are an integral part of the financial statements.
69
<PAGE>
INTERNATIONAL PORTFOLIO
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
December 31, 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments, at market (identified cost $587,666,211) (Note A) ........... $722,451,887
Cash ..................................................................... 431
Foreign currency, at value, (cost $4,591,190) ............................ 4,606,023
Net receivable on closed forward currency exchange contracts ............. 642,355
Receivables:
Investments sold ...................................................... 446,785
Portfolio shares sold ................................................. 592,374
Foreign taxes recoverable ............................................. 635,158
Dividends and interest ................................................ 681,621
------------
Total assets ....................................................... 730,056,634
Liabilities
Payables:
Investments purchased ................................................. $ 1,838,662
Portfolio shares redeemed ............................................. 1,376,946
Accrued management fee (Note B) ....................................... 500,960
Other accrued expenses (Note B) ....................................... 265,265
Other payables ........................................................ 36,274
------------
Total liabilities .................................................. 4,018,107
------------
Net assets, at market value .............................................. $726,038,527
============
Net Assets
Net assets consist of:
Undistributed net investment income ................................... $ 10,702,948
Net unrealized appreciation on:
Investments ........................................................ 134,785,676
Foreign currency related transactions .............................. 8,404
Accumulated net realized gain ......................................... 6,633,433
Paid-in capital ....................................................... 573,908,066
------------
Net assets, at market value .............................................. $726,038,527
============
Net asset value, offering and redemption price per share
($726,038,527 54,809,210 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) ........ $ 13.25
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
70
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment income
Income:
Dividends (net of foreign taxes withheld of $1,429,380) ............ $ 10,364,446
Interest (net of foreign taxes withheld of $2,537) ................. 2,548,158
------------
12,912,604
Expenses (Note A):
Management fee (Note B) ............................................ $ 5,590,601
Custodian and accounting fees (Note B) ............................. 974,459
Trustees' fees (Note B) ............................................ 21,062
Auditing ........................................................... 68,095
Registration fees .................................................. 38,239
Legal .............................................................. 12,988
Other .............................................................. 68,398 6,773,842
------------ ------------
Net investment income ................................................. 6,138,762
------------
Net realized and unrealized gain (loss) on investment transactions
Net realized gain from:
Investments ........................................................ 14,588,107
Foreign currency related transactions .............................. 13,654,103 28,242,210
------------
Net unrealized appreciation (depreciation) during the period on:
Investments ........................................................ 62,989,856
Foreign currency related transactions .............................. (7,755,206) 55,234,650
------------ ------------
Net gain on investment transactions ................................... 83,476,860
------------
Net increase in net assets resulting from operations ..................... $ 89,615,622
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
71
<PAGE>
INTERNATIONAL PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
Increase (Decrease) in Net Assets 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ................................................. $ 6,138,762 $ 4,713,698
Net realized gain (loss) from investment transactions ................. 28,242,210 (7,926,588)
Net unrealized appreciation on investment
transactions during the period ..................................... 55,234,650 56,119,932
------------- -------------
Net increase in net assets resulting from operations ..................... 89,615,622 52,907,042
------------- -------------
Distributions to shareholders from:
Net investment income ................................................. (13,901,339) (572,293)
------------- -------------
Net realized gain from investment transactions ........................ -- (1,628,833)
------------- -------------
Portfolio share transactions:
Proceeds from shares sold ............................................. 250,971,681 383,866,201
Net asset value of shares issued to shareholders in
reinvestment of distributions ...................................... 13,901,339 2,201,126
Cost of shares redeemed ............................................... (162,751,269) (360,607,349)
------------- -------------
Net increase in net assets from Portfolio share transactions ............. 102,121,751 25,459,978
------------- -------------
Increase in net assets ................................................... 177,836,034 76,165,894
Net assets at beginning of period ........................................ 548,202,493 472,036,599
------------- -------------
Net assets at end of period (including undistributed net
investment income of $10,702,948 and $5,598,231, respectively) ........ $ 726,038,527 $ 548,202,493
============= =============
Other Information
Increase (decrease) in Portfolio shares
Shares outstanding at beginning of period ................................ 46,398,169 44,139,826
------------- -------------
Shares sold ........................................................... 20,288,490 34,890,301
Shares issued to shareholders in reinvestment of distributions ........ 1,166,953 216,220
Shares redeemed ....................................................... (13,044,402) (32,848,178)
------------- -------------
Net increase in Portfolio shares ...................................... 8,411,041 2,258,343
------------- -------------
Shares outstanding at end of period ...................................... 54,809,210 46,398,169
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
72
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
For the Period
May 1, 1987
(commencement
Years Ended December 31, of operations) to
---------------------------------------------------------------------------------------- December 31,
1996(a) 1995(a) 1994(a) 1993(a) 1992(a) 1991(a) 1990(a) 1989(a) 1988 1987
---------------------------------------------------------------------------------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period ............... $11.82 $10.69 $10.85 $ 8.12 $ 8.47 $ 7.78 $ 8.46 $ 6.14 $ 5.26 $ 6.00(c)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment
income ............. .12 .11 .06 .09 .10 .12 .25 .10 .09 --
Net realized and
unrealized gain
(loss) on investment
transactions ....... 1.60 1.07 (.15) 2.90 (.36) .77 (.89) 2.22(d) .79 (.64)
Total from investment
operations ........... 1.72 1.18 (.09) 2.99 (.26) .89 (.64) 2.32 .88 (.64)
Less distributions:
From net investment
income ............. (.29) (.01) (.07) (.14) (.09) (.20) (.04) -- -- --
In excess of net
investment income .. -- -- -- (.12) -- -- -- -- -- --
From net realized
gains on investment
transactions ....... -- (.04) -- -- -- -- -- -- -- (.10)
Total distributions .. (.29) (.05) (.07) (.26) (.09) (.20) (.04) -- -- (.10)
Net asset value, end
of period ............ $13.25 $11.82 $10.69 $10.85 $ 8.12 $ 8.47 $ 7.78 $ 8.46 $ 6.14 $ 5.26
Total Return (%) ....... 14.78 11.11 (.85) 37.82 (3.08) 11.45 (7.65) 37.79 16.73 (10.64)**
Ratios and
Supplemental Data
Net assets, end of
period ($ millions) .. 726 548 472 238 65 41 35 17 3 2
Ratio of operating
expenses, net to
average net assets
(%) .................. 1.05 1.08 1.08 1.20 1.31 1.39 1.38 1.50 1.50 1.50*
Ratio of operating
expenses before
expense reductions,
to average daily net
assets (%) ........... 1.05 1.08 1.08 1.20 1.31 1.39 1.38 1.80 4.15 4.06*
Ratio of net investment
income to average
net assets (%) ....... .95 .95 .57 .91 1.23 1.43 2.89 1.30 1.59 .02*
Portfolio turnover
rate (%) ............. 32.63 45.76 33.52 20.36 34.42 45.01 26.67 57.69 110.42 146.08*
Average commission
rate paid (b) ........ $.0002 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred securities is
calculated for fiscal years beginning on or after September 1, 1995.
(c) Original capital
(d) Includes provision for federal income tax of $.03 per share.
* Annualized
**Not annualized
73
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A. Significant Accounting Policies
Scudder Variable Life Investment Fund (the "Fund") is organized as a
Massachusetts business trust and is registered under the Investment Company Act
of 1940, as amended, as an open-end, diversified management investment company.
Its shares are divided into seven separate diversified series, called
"Portfolios." The Portfolios are comprised of the Money Market Portfolio, Bond
Portfolio, Balanced Portfolio, Growth and Income Portfolio, Capital Growth
Portfolio, Global Discovery Portfolio (which commenced operations on May 1,
1996), and International Portfolio. Effective May 1, 1996, the Fund offers one
class of shares for the Money Market Portfolio and two classes of shares (Class
A shares and Class B shares) for the other portfolios. Class B shares are
subject to a 12b-1 fee under the Investment Company Act of 1940, equal to an
annual rate of up to 0.25% of the average daily net asset value of the Class B
shares of the applicable portfolio. Class A shares are not subject to such fees.
Expenses are borne pro-rata by the holders of all classes of shares except that
each class bears expenses unique to that class (including the applicable 12b-1
fee). Shares of each class would receive their pro-rata share of net assets if
the Fund were liquidated. As of December 31, 1996, there have been no sales of
class B shares.
The Fund is intended to be the funding vehicle for variable annuity contracts
and variable life insurance policies to be offered by the separate accounts of
certain life insurance companies ("Participating Insurance Companies"). As of
December 31, 1996, ownership breakdown of the Portfolios by each Participating
Insurance Company is as follows:
<TABLE>
<CAPTION>
Portfolios
-----------------------------------------------------------------------------------------
Growth
Participating Money and Capital Global
Insurance Companies Market Bond Balanced Income Growth Discovery International
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Aetna Life Insurance & Annuity Co. ..... -- % -- % -- % -- % -- % -- % 46.9%
Banner Life Insurance Co. .............. 1.3 2.0 7.1 5.0 2.1 4.4 0.7
Charter National Life Insurance Co. .... 51.7 30.9 57.7 79.3 23.7 83.4 11.8
Companion Life Insurance Co. ........... -- 0.3 -- -- -- -- --
of New York
Fortis Benefits Insurance Co. .......... -- -- -- -- -- -- 0.4
Intramerica Life Insurance Co. ......... 4.4 3.0 4.6 8.7 2.1 12.2 1.3
Lincoln Benefit Life Co. ............... -- 4.1 6.8 -- -- -- --
Mutual of America Life Insurance Co. ... -- 40.3 -- -- 55.9 -- 23.5
Paragon Life Insurance Co. ............. -- 0.2 0.4 0.1 0.2 -- 0.1
Providentmutual Life and Annuity ....... -- 9.3 -- 5.6 -- -- 0.8
Co. of America
Southwestern Life Insurance Co. ........ -- -- -- -- 1.5 -- --
Washington National Life Insurance Co. . 0.5 9.3 -- 1.3 6.0 -- --
Safeco Life Insurance Co. .............. -- -- 23.4 -- -- -- 3.7
Security First Life Insurance Co. ...... -- -- -- -- -- -- 0.3
Union Central Life Insurance Co. ....... 39.7 -- -- -- 6.2 -- 8.2
United Companies Life Insurance Co. .... 2.4 -- -- -- -- -- 0.2
United of Omaha Life Insurance Co. ..... -- 0.6 -- -- -- -- 2.1
USAA Life Insurance Co. ................ -- -- -- -- 2.3 -- --
-----------------------------------------------------------------------------------------
100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======== ======== ======== ========
</TABLE>
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the Fund in the
preparation of the financial statements for its Portfolios.
Security Valuation. The Money Market Portfolio values all securities utilizing
the amortized cost method permitted in accordance with Rule 2a-7 under the
Investment Company Act of 1940, as amended, and pursuant to which the Portfolio
must adhere to certain conditions. Under this method, which does not take into
account unrealized gains or losses on securities, an instrument is initially
74
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
valued at its cost and thereafter assumes a constant accretion/amortization to
maturity of any discount/premium.
Securities in each of the remaining Portfolios are valued in the following
manner:
Portfolio securities which are traded on U.S. or foreign stock exchanges are
valued at the most recent sale price reported on the exchange on which the
security is traded most extensively. If no sale occurred, the security is then
valued at the calculated mean between the most recent bid and asked quotations.
If there are no such bid and asked quotations, the most recent bid quotation is
used. Securities quoted on the National Association of Securities Dealers
Automatic Quotation ("NASDAQ") System, for which there have been sales, are
valued at the most recent sale price reported on such system. If there are no
such sales, the value is the high or "inside" bid quotation. Securities which
are not quoted on the NASDAQ System but are traded in another over-the-counter
market are valued at the most recent sale price on such market. If no sale
occurred, the security is then valued at the calculated mean between the most
recent bid and asked quotations. If there are no such bid and asked quotations,
the most recent bid quotation shall be used.
Portfolio debt securities with remaining maturities greater than sixty days are
valued by pricing agents approved by the officers of the Fund, which quotations
reflect broker/dealer-supplied valuations and electronic data processing
techniques. If the pricing agents are unable to provide such quotations, the
most recent bid quotation supplied by a bona fide market maker shall be used.
Short-term investments having a maturity of sixty days or less are valued at
amortized cost.
All other securities are valued at their fair value as determined in good faith
by the Valuation Committee of the Trustees. Their values have been estimated by
the Board of Trustees in the absence of readily ascertainable market values.
However, because of the inherent uncertainty of valuation, those estimated
values may differ significantly from the values that would have been used had a
ready market for the securities existed, and the difference could be material.
Futures Contracts. The non-money market Portfolios may enter into futures
contracts. A futures contract is an agreement between a buyer or seller and an
established futures exchange or its clearinghouse in which the buyer or seller
agrees to take or make a delivery of a specific amount of an item at a specified
price on a specific date (settlement date). During the period, the Bond
Portfolio sold interest rate futures to hedge against declines in the value of
portfolio securities.
Upon entering into a futures contract, the Portfolio is required to deposit with
a financial intermediary an amount ("initial margin") equal to a certain
percentage of the face value indicated in the futures contract. Subsequent
payments ("variation margin") are made or received by the Portfolio each day,
dependent on the daily fluctuations in the value of the underlying security, and
are recorded for financial reporting purposes as unrealized gains or losses by
the Portfolio. When entering into a closing transaction, the Portfolio will
realize a gain or loss equal to the difference between the value of the futures
contract to sell and the futures contract to buy. Futures contracts are valued
at the most recent settlement price.
Certain risks may arise upon entering into futures contracts including the risk
that an illiquid secondary market will limit the Portfolio's ability to close
out a futures contract prior to the settlement date and that a change in the
value of a futures contract may not correlate exactly with changes in the value
of the securities or currencies hedged. When utilizing futures contracts to
hedge, the Portfolio gives up the opportunity to profit from favorable price
movements in the hedged positions during the term of the contract.
Foreign Currency Translations. The books and records of the Portfolios are
maintained in U.S. dollars. Foreign currency transactions are translated into
U.S. dollars on the following basis:
(i) market value of investment securities, other assets and liabilities at
the daily rates of exchange, and
(ii) purchases and sales of investment securities, dividend and interest
income and certain expenses at the rates of exchange prevailing on the
respective dates of such transactions.
The Portfolios do not isolate that portion of gains and losses on investments
which is due to changes in foreign exchange rates from that which is due to
changes in market prices of the investments. Such fluctuations are included with
the net realized and unrealized gains and losses from investments.
75
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
- --------------------------------------------------------------------------------
Net realized and unrealized gain (loss) from foreign currency related
transactions includes gains and losses between trade and settlement dates on
securities transactions, gains and losses arising from the sales of foreign
currency, and gains and losses between the ex and payment dates on dividends,
interest, and foreign withholding taxes.
Forward Foreign Currency Exchange Contracts. A forward foreign currency exchange
contract (forward contract) is a commitment to purchase or sell a foreign
currency at the settlement date at a negotiated rate. During the period, the
non-money market Portfolios utilized forward contracts as a hedge in connection
with portfolio purchases and sales of securities denominated in foreign
currencies and the Global Discovery Portfolio and the International Portfolio
utilized forward contracts as a hedge against changes in exchange rates relating
to foreign currency denominated assets.
Forward contracts are valued at the prevailing forward exchange rate of the
underlying currencies and unrealized gain/loss is recorded daily. Forward
contracts having the same settlement date and broker are offset and any gain
(loss) is realized on the date of offset; otherwise, gain (loss) is realized on
settlement date. Realized and unrealized gains and losses which represent the
difference between the value of the forward contract to buy and the forward
contract to sell are included in net realized and unrealized gain (loss) from
foreign currency related transactions.
Certain risks may arise upon entering into forward contracts from the potential
inability of counterparties to meet the terms of their contracts. Additionally,
when utilizing forward contracts to hedge, the Fund gives up the opportunity to
profit from favorable exchange rate movements during the term of the contract.
Repurchase Agreements. The Fund on behalf of each Portfolio may enter into
repurchase agreements with U.S. and foreign banks and broker/dealers whereby the
Fund, through its custodian, receives delivery of the underlying securities, the
amount of which at the time of purchase and each subsequent business day is
required to be maintained at such a level that the market value, depending on
the maturity of the repurchase agreement and the underlying collateral, is equal
to at least 100.5% of the resale price.
Federal Income Taxes. Each Portfolio is treated as a single corporate taxpayer
as provided for in the Internal Revenue Code of 1986, as amended. It is each
Portfolio's policy to comply with the requirements of the Internal Revenue Code
which are applicable to regulated investment companies and to distribute all of
its investment company taxable income to the separate accounts of the
Participating Insurance Companies which hold its shares. Accordingly, the
Portfolios paid no federal income taxes and no provision for federal income
taxes was required.
Distribution of Income and Gains. All of the net investment income of the Money
Market Portfolio is declared as a dividend to shareholders of record as of the
close of business each day and is paid to shareholders monthly. Dividends from
the Bond Portfolio, Balanced Portfolio, Growth and Income Portfolio, and the
Capital Growth Portfolio are declared and paid quarterly in April, July, October
and January. All of the net investment income of the Global Discovery Portfolio
and the International Portfolio normally will be declared and distributed as a
dividend annually. During any particular year, net realized gains from
investment transactions for each Portfolio, in excess of available capital loss
carryforwards, would be taxable to the Portfolio if not distributed and,
therefore, will be distributed to the Participating Insurance Companies.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax regulations
which may differ from generally accepted accounting principles. The differences
primarily relate to investments in forward contracts, passive foreign investment
companies, post October loss deferral, non-taxable distributions, and certain
securities sold at a loss. As a result, net investment income (loss) and net
realized gain (loss) on investment transactions for a reporting period may
differ significantly from distributions during such period. Accordingly, the
Portfolios may periodically make reclassifications among certain of its capital
accounts without impacting the net asset value of each Portfolio.
The Portfolios use the specific identification method for determining realized
gain or loss on investments for both financial and federal income tax reporting
purposes.
76
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Expenses. Each Portfolio is charged for those expenses which are directly
attributable to it, such as management fees and custodian fees, while other
expenses (reports to shareholders, legal and audit fees) are allocated based on
relative net asset value among the Portfolios.
Other. Investment security transactions are accounted for on a trade date basis.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income is recorded on the accrual basis. All original
issue discounts are accreted for both tax and financial reporting purposes.
B. Related Parties
Under the Fund's Investment Advisory Agreement (the "Agreement") with Scudder,
Stevens and Clark, Inc. (the "Adviser"), the Fund agrees to pay the Adviser a
fee, based on average daily net assets, equal to an annual rate of 0.37% for the
Money Market Portfolio, 0.475% for the Bond Portfolio, 0.475% for the Balanced
Portfolio, 0.475% for the Growth and Income Portfolio, 0.475% for the Capital
Growth Portfolio, 0.975% for the Global Discovery Portfolio, and 0.875% for the
International Portfolio.
The Trustees authorized the Fund on behalf of each Portfolio to pay Scudder Fund
Accounting Corp., a subsidiary of the Adviser, for determining the daily net
asset value per share and maintaining the portfolio and general accounting
records of the Fund.
Related fees for such services are detailed in each Portfolio's statement of
operations.
Until May 1, 1996, for a period of five years from the date of execution of a
Participation Agreement with the Fund, and from year to year thereafter as
agreed by the Fund and the Participating Insurance Companies, each of the
Participating Insurance Companies had agreed to reimburse the Fund to the extent
that the annual operating expenses of any Portfolio of the Fund, other than the
Global Discovery Portfolio and the International Portfolio, exceeded
three-quarters of one percent (0.75 of 1%) of that Portfolio's average annual
net assets. The Participating Insurance Companies had agreed to reimburse the
Fund to the extent that such expenses of the International Portfolio exceeded
one and one-half percent (1.50 of 1%) of the Portfolio's average annual net
assets. The Trustees of the Fund approved a new form of Participation Agreement
effective May 1, 1996, which no longer requires the Participating Insurance
Companies to reimburse the Fund as described above. Until April 30, 1998, the
Adviser has agreed to waive part or all of its fees for the Global Discovery
Portfolio to the extent that the Portfolio's expenses will be maintained at
1.50% of average annual net assets.
The Fund pays each Trustee not affiliated with the Adviser and not a Trustee of
other Scudder affiliated funds $14,000 annually plus specified amounts for
attended board and committee meetings. The Fund pays each Trustee not affiliated
with the Adviser and who is a Trustee of other Scudder affiliated funds $8,750
annually plus specified amounts for attended board and committee meetings.
Allocated Trustees' fees for each Portfolio for the year ended December 31, 1996
are detailed in each Portfolio's statement of operations.
C. Lines of Credit
The International Portfolio and several other Funds (the "Participants") share
in a $500 million revolving credit facility for temporary or emergency purposes,
including the meeting of redemption requests that otherwise might require the
untimely disposition of securities. The Participants are charged an annual
commitment fee which is allocated among each of the Participants. Interest is
calculated based on the market rates at the time of the borrowing. The
International Portfolio may borrow up to a maximum of 25 percent of its net
assets under the agreement. In addition, the International Portfolio also
maintains an uncommitted line of credit.
77
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Trustees and Shareholders of Scudder Variable Life Investment Fund:
We have audited the accompanying statements of assets and liabilities of Scudder
Variable Life Investment Fund (comprised of the seven Portfolios identified in
Note A), including the investment portfolios, as of December 31, 1996, and the
related statements of operations, the statements of changes in net assets, and
the financial highlights for each of the periods indicated herein. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Scudder Variable Life Investment Fund (comprised of the seven Portfolios
identified in Note A) as of December 31, 1996, the results of their operations,
the changes in their net assets, and their financial highlights for each of the
periods indicated herein conformity with generally accepted accounting
principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
February 7, 1997
78
<PAGE>
TAX INFORMATION
- --------------------------------------------------------------------------------
The Balanced Portfolio, Capital Growth Portfolio, and Growth and Income
Portfolio paid distributions of $0.125, $0.595, and $0.09 per share,
respectively, from net long-term capital gains during the year ended December
31, 1996.
Pursuant to section 852 of the Internal Revenue Code, the Balanced Portfolio,
Bond Portfolio, Capital Growth Portfolio, Growth and Income Portfolio, and
International Portfolio designate $4,985,685, $201,136, $20,148,284, $3,659,155,
and $5,991,078, respectively, as capital gain dividends for the year ended
December 31, 1996.
Pursuant to section 854 of the Internal Revenue Code, the percentages of income
dividends paid in calendar year 1996 which qualify for the dividends received
deduction for corporations are as follows: Balanced Portfolio 26.7%, Capital
Growth Portfolio 88.7%, and Growth and Income Portfolio 100.0%.
79
<PAGE>
(This page intentionally left blank.)
80
<PAGE>
Celebrating Over 75 Years of Serving Investors
- --------------------------------------------------------------------------------
Established in 1919 by Theodore Scudder, Sidney Stevens, and F. Haven
Clark, Scudder, Stevens & Clark was the first independent investment counsel
firm in the United States. Since its birth, Scudder's pioneering spirit and
commitment to professional long-term investment management have helped shape the
investment industry. In 1928, we introduced the nation's first no-load mutual
fund. Today we offer 37 pure no load(TM) funds, including the first
international mutual fund offered to U.S. investors.
Over the years, Scudder's global investment perspective and dedication to
research and fundamental investment disciplines have helped Scudder become one
of the largest and most respected investment managers in the world. Though times
have changed since our beginnings, we remain committed to our long-standing
principles: managing money with integrity and distinction; keeping the interests
of our clients first; providing access to investments and markets that may not
be easily available to individuals; and making investing as simple and
convenient as possible through friendly, comprehensive service.
An investment in the Money Market Portfolio is neither insured nor
guaranteed by the United States Government and there can be no assurance that
the Portfolio will be able to maintain a stable net asset value of $1.00 per
share.
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
Two International Place
Boston, Massachusetts 02110-4103
An open-end management investment company which currently offers
shares of beneficial interest of seven diversified Portfolios which seek,
respectively, (i) stability and current income from a portfolio
of money market instruments, (ii) high income from a high
quality portfolio of bonds, (iii) a balance of growth and
income, as well as long-term preservation of capital,
from a diversified portfolio of equity and fixed
income securities, (iv) long-term growth of capital,
current income and growth of income from a portfolio
consisting primarily of common stocks and securities
convertible into common stocks, (v) long-term capital
growth from a a portfolio consisting primarily of equity
securities, (vi) above-average
capital appreciation over the long term by investing
primarily in the equity securities of small companies
located throughout the world, and
(vii) long-term growth of capital principally from a
diversified portfolio of foreign equity securities
(A Mutual Fund)
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1997
CLASS B SHARES OF BENEFICIAL INTEREST
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the prospectus of Scudder Variable Life Investment
Fund dated May 1, 1997, as may be amended from time to time, a copy of which may
be obtained without charge by calling a Participating Insurance Company or by
writing to broker/dealers offering certain variable annuity contracts and
variable life insurance policies, or Scudder Investor Services, Inc., Two
International Place, Boston, Massachusetts 02110-4103.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES....................................................................................1
Money Market Portfolio.......................................................................................1
Bond Portfolio...............................................................................................2
Balanced Portfolio...........................................................................................3
Growth and Income Portfolio..................................................................................5
Capital Growth Portfolio.....................................................................................5
Global Discovery Portfolio...................................................................................6
Risk Factors Regarding Global Discovery Portfolio............................................................8
International Portfolio.....................................................................................13
POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS.................................................................14
Repurchase Agreements.......................................................................................14
Debt Securities.............................................................................................15
Illiquid or Restricted Securities...........................................................................15
Trust Preferred Securities..................................................................................16
Zero Coupon Securities......................................................................................16
Real Estate Investment Trusts...............................................................................17
Mortgage-Backed Securities and Mortgage Pass-Through Securities.............................................17
Collateralized Mortgage Obligations ("CMOs")................................................................18
FHLMC Collateralized Mortgage Obligations...................................................................19
Other Mortgage-Backed Securities............................................................................19
Other Asset-Backed Securities...............................................................................20
Municipal Obligations.......................................................................................21
Convertible Securities......................................................................................21
Depositary Receipts.........................................................................................22
Foreign Securities..........................................................................................22
Limitations on Holdings of Foreign Securities for the Bond, Balanced, Growth and Income and
International Portfolios...............................................................................23
Indexed Securities..........................................................................................23
When-Issued Securities......................................................................................24
Loans of Portfolio Securities...............................................................................24
Borrowing...................................................................................................24
Options for the Bond, Balanced, Growth and Income and International Portfolios..............................25
Securities Index Options....................................................................................27
Futures Contracts...........................................................................................27
Futures on Debt Securities..................................................................................27
Limitations on the Use of Futures Contracts and Options on Futures..........................................29
Foreign Currency Transactions...............................................................................30
Strategic Transactions and Derivatives Applicable to the Global Discovery Portfolio.........................32
Debt Securities.............................................................................................39
High Yield, High Risk Securities............................................................................39
Combined Transactions.......................................................................................40
Risks of Specialized Investment Techniques Abroad...........................................................40
INVESTMENT RESTRICTIONS..............................................................................................40
PURCHASES AND REDEMPTIONS............................................................................................42
INVESTMENT ADVISER AND DISTRIBUTOR...................................................................................43
Investment Adviser..........................................................................................43
Personal Investments by Employees of the Adviser............................................................46
Distributor.................................................................................................46
MANAGEMENT OF THE FUND...............................................................................................48
Trustees and Officers.......................................................................................48
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TABLE OF CONTENTS (continued)
Page
REMUNERATION.........................................................................................................50
Responsibilities of the Board--Board and Committee Meetings.................................................50
Compensation of Officers and Trustees.......................................................................50
NET ASSET VALUE......................................................................................................51
TAX STATUS...........................................................................................................52
DIVIDENDS AND DISTRIBUTIONS..........................................................................................56
Money Market Portfolio......................................................................................56
Global Discovery Portfolio and International Portfolio......................................................57
Other Portfolios............................................................................................57
PERFORMANCE INFORMATION..............................................................................................57
Money Market Portfolio......................................................................................57
Bond Portfolio..............................................................................................58
All Portfolios..............................................................................................58
Comparison of Portfolio Performance.........................................................................60
SHAREHOLDER COMMUNICATIONS...........................................................................................64
ORGANIZATION AND CAPITALIZATION......................................................................................64
General.....................................................................................................64
Shareholder and Trustee Liability...........................................................................66
ALLOCATION OF PORTFOLIO BROKERAGE....................................................................................66
PORTFOLIO TURNOVER...................................................................................................68
EXPERTS..............................................................................................................68
COUNSEL..............................................................................................................68
ADDITIONAL INFORMATION...............................................................................................68
FINANCIAL STATEMENTS.................................................................................................69
APPENDIX
</TABLE>
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INVESTMENT OBJECTIVES AND POLICIES
(See "INVESTMENT CONCEPT OF THE FUND" and
"INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS"
in the Fund's prospectus.)
Scudder Variable Life Investment Fund (the "Fund") is an open-end,
diversified registered management investment company established as a
Massachusetts business trust. The Fund is a series fund consisting of the Money
Market Portfolio, Bond Portfolio, Balanced Portfolio, Growth and Income
Portfolio, Capital Growth Portfolio, Global Discovery Portfolio, and
International Portfolio (individually or collectively hereinafter referred to as
a "Portfolio" or the "Portfolios"). 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").
Except for the Money Market Portfolio, which does not offer separate
classes of shares, two classes of shares of each Portfolio of the Fund are
currently 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 a Distribution Plan.
Except for the Money Market Portfolio, this Statement of Additional Information
pertains to Class B shares ("Shares") only.
Each Portfolio has a different investment objective which it pursues
through separate investment policies, as described below. The differences in
objectives and policies among the Portfolios can be expected to affect the
degree of market and financial risk to which each Portfolio is subject and the
return of each Portfolio. The investment objectives and policies of each
Portfolio may, unless otherwise specifically stated, be changed by the Trustees
of the Fund without a vote of the shareholders. There is no assurance that the
objectives of any Portfolio will be achieved.
Money Market Portfolio
The Money Market Portfolio seeks to maintain the stability of capital
and, consistent therewith, to maintain the liquidity of capital and to provide
current income. The Portfolio seeks to maintain a constant net asset value of
$1.00 per share, although there can be no assurance that this will be achieved.
The Portfolio will use the amortized cost method of securities valuation.
The Money Market Portfolio purchases U.S. Treasury bills, notes and
bonds; obligations of agencies and instrumentalities of the U.S. Government;
domestic and foreign bank certificates of deposit; bankers' acceptances; finance
company and corporate commercial paper; and repurchase agreements and corporate
obligations. Investments are limited to those that are dollar-denominated and at
the time of purchase are rated, or judged by the Fund's investment adviser,
Scudder, Stevens & Clark, Inc. (the "Adviser"), subject to the supervision of
the Trustees, to be equivalent to those rated high quality (i.e., rated in the
two highest categories) by any two nationally-recognized rating services such as
Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's ("S&P"). In
addition, the Adviser seeks through its own credit analysis to limit investments
to high quality instruments presenting minimal credit risks. Securities eligible
for investment by the Money Market Portfolio which are rated in the highest
category by at least two rating services (or by one rating service, if no other
rating service has issued a rating with respect to that security) are known as
"first tier securities." Securities rated in the top two categories which are
not first tier securities are known as "second tier securities." Investments in
commercial paper and finance company paper will be limited to securities which,
at the time of purchase, will be rated A-1 or A-2 by S&P or Prime 1 or Prime 2
by Moody's or the equivalent by any nationally-recognized rating service or
judged to be equivalent by the Adviser. Obligations which are subject to
repurchase agreements will be limited to those of the type and quality described
above. The Money Market Portfolio may also hold cash. Shares of the Portfolio
are not insured by an agency of the U.S. Government. Securities and instruments
in which the Portfolio may invest may be issued by the U.S. Government, its
agencies and instrumentalities, corporations, trusts, banks, finance companies
and other business entities.
The Money Market Portfolio may invest in certificates of deposit and
bankers' acceptances of large domestic banks (i.e., banks which at the time of
their most recent annual financial statements show total assets in excess of $1
billion) including foreign branches of such domestic banks, which involve
different risks than those associated with investments in certificates of
<PAGE>
deposit of domestic banks, and of smaller banks as described below. The
Portfolio will invest in U.S. dollar-denominated certificates of deposit and
bankers' acceptances of foreign banks if such banks meet the stated
qualifications. Although the Portfolio recognizes that the size of a bank is
important, this fact alone is not necessarily indicative of its
creditworthiness. Investment in certificates of deposit and bankers' acceptances
issued by foreign banks and foreign branches of domestic banks involves
investment risks that are different in some respects from those associated with
investments in certificates of deposit and bankers' acceptances issued by
domestic banks. (See "Foreign Securities" in this Statement of Additional
Information for further risks of foreign investment.)
The Money Market Portfolio may also invest in certificates of deposit
issued by banks and savings and loan institutions which had at the time of their
most recent annual financial statements total assets of less than $1 billion,
provided that (i) the principal amounts of such certificates of deposit are
insured by an agency of the U.S. Government, (ii) at no time will the Portfolio
hold more than $100,000 principal amount of certificates of deposit of any one
such bank, and (iii) at the time of acquisition, no more than 10% of the
Portfolio's assets (taken at current value) are invested in certificates of
deposit of such banks having total assets not in excess of $1 billion.
The assets of the Money Market Portfolio consist entirely of cash items
and investments having a remaining maturity date of 397 calendar days or less
from date of purchase. The Portfolio will be managed so that the average
maturity of all instruments in the portfolio (on a dollar-weighted basis) will
be 90 days or less. The average maturity of the Portfolio's investments varies
according to the Adviser's appraisal of money market conditions.
To ensure diversity of the Portfolio's investments, as a matter of
non-fundamental policy the Portfolio will not invest more than 5% of its total
assets in the securities of a single issuer, other than the U.S. Government. The
Portfolio may, however, invest more than 5% of its total assets in the first
tier securities of a single issuer for a period of up to three business days
after purchase, although the Portfolio may not make more than one such
investment at any time. The Portfolio may not invest more than 5% of its total
assets in securities which were second tier securities when acquired by the
Portfolio. Further, the Portfolio may not invest more than the greater of (1) 1%
of its total assets, or (2) one million dollars, in the securities of a single
issuer which were second tier securities when acquired by the Portfolio.
The net investment income of the Portfolio is declared as a dividend to
shareholders daily and distributed monthly in cash or reinvested in additional
shares.
Bond Portfolio
The Bond Portfolio pursues a policy of investing for a high level of
income consistent with a high quality portfolio of debt securities. Under normal
circumstances the Portfolio invests at least 65% of its assets in bonds
including those of the U.S. Government and its agencies and those of
corporations and other notes and bonds paying high current income. The Portfolio
may also invest in preferred stocks consistent with the Portfolio's objectives.
It will attempt to moderate the effect of market price fluctuation relative to
that of a long-term bond by investing in securities with varying maturities and
making use of futures contracts on debt securities and related options for
hedging purposes.
The Bond Portfolio may purchase corporate notes and bonds including
issues convertible into common stock and obligations of municipalities. The
Portfolio may purchase securities of real estate investment trusts ("REITs") and
certain mortgage-backed securities. It may purchase U.S. Government securities
and obligations of federal agencies that are not backed by the full faith and
credit of the U.S. Government, such as obligations of Federal Home Loan Banks,
Farm Credit Banks and the Federal Home Loan Mortgage Corporation. The Portfolio
may also purchase obligations of international agencies such as the
International Bank for Reconstruction and Development and the Inter-American
Development Bank. Other eligible investments include foreign securities,
including non-U.S. dollar-denominated foreign debt securities and U.S.
dollar-denominated foreign debt securities (such as those issued by the Dominion
of Canada and its provinces), including without limitation, Eurodollar Bonds and
Yankee Bonds, mortgage and other asset-backed securities and money market
instruments such as commercial paper and bankers' acceptances and certificates
of deposit issued by domestic and foreign branches of U.S. banks. The Portfolio
may also enter into repurchase agreements and may invest in zero coupon
securities. The Portfolio invests in a broad range of short-, intermediate-, and
long-term securities. Proportions among maturities and types of securities may
vary depending upon the prospects for income relative to the outlook for the
economy and the securities markets, the quality of available investments, the
level of interest rates, and other factors.
2
<PAGE>
The Bond Portfolio invests primarily in high quality securities. Under
normal market conditions, the Portfolio will invest at least 65% of its assets
in securities rated within the three highest quality rating categories of
Moody's (Aaa, Aa and A) or S&P (AAA, AA and A), or if unrated, in bonds judged
by the Fund's Adviser, to be of comparable quality at the time of purchase. The
Portfolio may invest up to 20% of its assets in debt securities rated lower than
Baa or BBB or, if unrated, of equivalent quality as determined by the Adviser,
but will not purchase bonds rated below B3 by Moody's or B- by S&P or their
equivalent.
See the Appendix to this Statement of Additional Information for a more
complete description of the ratings assigned by ratings organizations and their
respective characteristics.
Except for limitations imposed by the Bond Portfolio's investment
restrictions, there is no limit as to the proportions of the Portfolio which may
be invested in any of the eligible investments; however, it is a policy of the
Portfolio that its non-governmental investments will be spread among a variety
of companies and will not be concentrated in any industry.
The Bond Portfolio may invest in securities of the Government National
Mortgage Agency, a Government corporation within the U.S. Department of Housing
and Urban Development ("GNMAs"). GNMAs are mortgaged-backed securities
representing part ownership of a pool of mortgage loans. These loans, which are
issued by lenders such as mortgage bankers, commercial banks and savings and
loan associations, are either insured by the Federal Housing Administration
(FHA) or guaranteed by the Veterans Administration (VA). Once approved by GNMA,
the timely payment of interest and principal is guaranteed by the full faith and
credit of the U.S. Government.
The Bond Portfolio cannot guarantee a gain or eliminate the risk of
loss. The net asset value of the Portfolio's shares will fluctuate with changes
in the market prices of the Portfolio's investments, which tend to vary
inversely with changes in prevailing interest rates and, to a lesser extent,
changes in foreign currency exchange rates. As interest rates fall, the prices
of debt securities tend to rise and vice versa.
Balanced Portfolio
The Balanced Portfolio seeks a balance of growth and income from a
diversified portfolio of equity and fixed income securities. The Portfolio also
seeks long-term preservation of capital through a quality-oriented investment
approach that is designed to reduce risk.
In seeking its objectives of a balance of growth and income, as well as
long-term preservation of capital, the Portfolio invests in a diversified
portfolio of equity and fixed income securities. The Portfolio invests, under
normal circumstances, at least 50%, but no more than 75%, of its net assets in
common stocks and other equity investments. The Portfolio's equity investments
consist of common stocks, preferred stocks, warrants and securities convertible
into common stocks, of companies that, in the Adviser's judgment, are of
above-average financial quality and offer the prospect for above-average growth
in earnings, cash flow, or assets relative to the overall market as defined by
the Standard and Poor's 500 Composite Stock Price Index ("S&P 500"). The
Portfolio will invest primarily in securities issued by medium-to-large sized
domestic companies with annual revenues or market capitalization of at least
$600 million, and which, in the opinion of the Adviser, offer above-average
potential for price appreciation. The Portfolio seeks to invest in companies
that have relatively consistent and above-average rates of growth; companies
that are in a strong financial position with high credit standings and
profitability; firms with important business franchises, leading products, or
dominant marketing and distribution systems; companies guided by experienced and
motivated managements; and companies selling at attractive market valuations.
The Adviser believes that companies with these characteristics will be rewarded
by the market with higher stock prices over time and provide investment returns,
on average, in excess of the S&P 500.
At least 65% of the value of the Portfolio's common stocks will be of
issuers which qualify, at the time of purchase, for one of the three highest
equity earnings and dividends ranking categories (A+, A, or A-) of S&P, or if
not ranked by S&P, are judged to be of comparable quality by the Adviser. S&P
assigns earnings and dividends rankings to corporations based on a number of
factors, including stability and growth of earnings and dividends. Rankings by
S&P are not an appraisal of a company's creditworthiness, as is true for S&P's
debt security ratings, nor are these rankings intended as a forecast of future
3
<PAGE>
stock market performance. In addition to using S&P rankings of earnings and
dividends of common stocks, the Adviser conducts its own analysis of a company's
history, current financial position, and earnings prospects.
To enhance income and stability, the Portfolio's remaining assets are
allocated to bonds and other fixed income securities, including cash reserves.
The Portfolio will normally invest 25% to 50% of its net assets in fixed income
securities. However, at least 25% of the Portfolio's net assets will always be
invested in fixed income securities. The Portfolio can invest in a broad range
of corporate bonds and notes, convertible bonds, and preferred and convertible
preferred securities. It may also purchase U.S. Government securities and
obligations of federal agencies and instrumentalities that are not backed by the
full faith and credit of the U.S. Government, such as obligations of the Federal
Home Loan Banks, Farm Credit Banks, and the Federal Home Loan Mortgage
Corporation. The Portfolio may also invest in obligations of international
agencies, foreign debt securities (both U.S. and non-U.S. dollar-denominated),
mortgage-backed and other asset-backed securities, municipal obligations,
restricted securities issued in private placements and zero coupon securities.
Zero coupon securities are subject to greater market value fluctuations from
changing interest rates than debt obligations of comparable maturities that make
current cash distributions of interest. The Portfolio may invest in special
purpose trust securities ("Trust Preferred Securities").
For liquidity and defensive purposes, the Portfolio may invest without
limit in cash and in money market securities such as commercial paper, bankers'
acceptances, and certificates of deposit issued by domestic and foreign branches
of U.S. banks. The Portfolio may also enter into repurchase agreements with
respect to U.S. Government securities.
Not less than 50% of the Portfolio's debt securities will be invested
in debt obligations, including money market instruments, that (a) are issued or
guaranteed by the U.S. Government, (b) are rated at the time of purchase within
the two highest ratings categories by any nationally-recognized rating service
or (c) if not rated, are judged at the time of purchase, by the Adviser to be of
a quality comparable to obligations rated as described in (b) above. Not less
than 80% of the debt obligations in which the Portfolio invests will, at the
time of purchase, be rated within the three highest ratings categories of any
such service or, if not rated, will be judged to be of comparable quality by the
Adviser. Up to 20% of the Portfolio's debt securities may be invested in bonds
rated below A but no lower than B by Moody's or S&P, or unrated securities
judged by the Adviser to be of comparable quality. Debt securities which are
rated below investment-grade (that is, rated below Baa by Moody's or below BBB
by S&P and commonly referred to as "junk bonds") and unrated securities of
comparable quality, which usually entail greater risk (including the possibility
of default or bankruptcy of the issuers of such securities), generally involve
greater volatility of price and risk of principal and income, and may be less
liquid than securities in the higher rating categories. Securities rated B
involve a high degree of speculation with respect to the payment of principal
and interest. Should the rating of any security held by the Portfolio be
downgraded after the time of purchase, the Adviser will determine whether it is
in the best interest of the Portfolio to retain or dispose of the security.
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.
The Portfolio will, on occasion, adjust its mix of investments among
equity securities, bonds, and cash reserves. In reallocating investments, the
Adviser weighs the relative values of different asset classes and expectations
for future returns. In doing so, the Adviser analyzes, on a global basis, the
level and direction of interest rates, capital flows, inflation expectations,
anticipated growth of corporate profits, monetary and fiscal policies around the
world, and other related factors. The Portfolio does not take extreme investment
positions as part of an effort to "time the market." Shifts between stocks and
fixed income investments are expected to occur in generally small increments
within the guidelines adopted in this Statement of Additional Information. The
Portfolio is designed as a conservative long-term investment program.
While the Portfolio emphasizes U.S. equity and debt securities, it may
invest a portion of its assets in foreign securities, including depositary
receipts. The Portfolio's foreign holdings will meet the criteria applicable to
its domestic investments. The international component of the Portfolio's
investment program is intended to increase diversification, thus reducing risk,
while providing the opportunity for higher returns.
4
<PAGE>
In addition, the Portfolio may invest in securities on a when-issued or
forward delivery basis. The Portfolio may, for hedging purposes, purchase
forward foreign currency exchange contracts and foreign currencies in the form
of bank deposits. The Portfolio may also purchase other foreign money market
instruments including, but not limited to, bankers' acceptances, certificates of
deposit, commercial paper, short-term government obligations and repurchase
agreements.
The Balanced Portfolio cannot guarantee a gain or eliminate the risk of
loss. The net asset value of the shares of the Portfolio will increase or
decrease with changes in the market price of the Portfolio's investments and, to
a lesser extent, changes in foreign currency exchange rates.
Growth and Income Portfolio
The Growth and Income Portfolio seeks long-term growth of capital,
current income and growth of income. In pursuing these three objectives, the
Portfolio invests primarily in common stocks, preferred stocks, and securities
convertible into common stocks of companies which offer the prospect for growth
of earnings while paying higher than average current dividends. Over time,
continued growth of earnings tends to lead to higher dividends and enhancement
of capital value. The Portfolio allocates its investments among different
industries and companies, and changes its portfolio securities for investment
considerations and not for trading purposes. The Adviser believes that a
portfolio investing in these kinds of securities can perform well whether a
growth or value investment style is in favor and that the Portfolio's dividend
strategy can improve its performance in down markets. The Adviser believes these
characteristics can help a shareholder feel comfortable holding onto the
Portfolio for the long run, despite short-term changes in the investment
climate.
The Portfolio attempts to achieve its investment objectives by
investing primarily in dividend paying common stocks, preferred stocks and
securities convertible into common stocks. The Portfolio may also purchase such
securities which do not pay current dividends but which offer prospects for
growth of capital and future income. Convertible securities (which may be
current coupon or zero coupon securities) are bonds, notes, debentures,
preferred stocks and other securities which may be converted or exchanged at a
stated or determinable exchange ratio into underlying shares of common stock.
The Portfolio may also invest in nonconvertible preferred stocks consistent with
the Portfolio's objectives. From time to time, for temporary defensive purposes,
when the Adviser feels such a position is advisable in light of economic or
market conditions, the Portfolio may invest a portion of its assets in cash and
cash equivalents. The Portfolio may invest in foreign securities and in
repurchase agreements. The Portfolio may purchase securities of real estate
investment trusts ("REITs") and certain mortgage-backed securities.
When evaluating a security for purchase or sale, the Adviser may
consider a security's dividend yield relative to the average dividend yield of
the S&P 500.
The Portfolio may, for hedging purposes, purchase forward foreign
currency exchange contracts and foreign currencies in the form of bank deposits.
The Portfolio may also purchase other foreign money market instruments,
including, but not limited to, bankers' acceptances, certificates of deposit,
commercial paper, short-term government obligations and repurchase agreements.
The Growth and Income Portfolio cannot guarantee a gain or eliminate
the risk of loss. The net asset value of the Portfolio's shares will increase or
decrease with changes in the market prices of the Portfolio's investments and,
to a lesser extent, changes in foreign currency exchange rates.
Capital Growth Portfolio
The Capital Growth Portfolio seeks to maximize long-term capital growth
through a broad and flexible investment program. The Portfolio invests in
marketable securities, principally common stocks and, consistent with its
objective of long-term capital growth, preferred stocks. However, in order to
reduce risk, as market or economic conditions periodically warrant, the
Portfolio may also invest up to 25% of its assets in short-term debt
instruments.
5
<PAGE>
Important considerations to the Adviser in its examination of potential
investments include certain qualitative considerations such as a company's
financial strength, management reputation, absolute size and overall industry
position.
Equity investments can have diverse financial characteristics, and the
Trustees believe that the opportunity for capital growth may be found in many
different sectors of the market at any particular time. In contrast to the
specialized investment policies of some capital appreciation funds, the
Portfolio is therefore free to invest in a wide range of marketable securities
offering the potential for growth. This enables the Portfolio to pursue
investment values in various sectors of the stock market, including:
1. Companies that generate or apply new technologies, new and
improved distribution techniques, or new services, such as
those in the business equipment, electronics, specialty
merchandising, and health service industries.
2. Companies that own or develop natural resources, such as
energy exploration or precious metals companies.
3. Companies that may benefit from changing consumer demands and
lifestyles, such as financial service organizations and
telecommunications companies.
4. Foreign companies.
While emphasizing investments in companies with above-average growth
prospects, the Portfolio may also purchase and hold equity securities of
companies that may have only average growth prospects, but seem undervalued due
to factors thought to be of a temporary nature which may cause their securities
to be out of favor and to trade at a price below their potential value.
The Portfolio, as a matter of nonfundamental policy, may invest up to
20% of its net assets in intermediate to longer term debt securities when
management anticipates that the total return on debt securities is likely to
equal or exceed the total return on common stocks over a selected period of
time. The Portfolio may purchase investment-grade debt securities, which are
those rated Aaa, Aa, A or Baa by Moody's, or AAA, AA, A or BBB by S&P, or, if
unrated, of equivalent quality as determined by the Adviser. Bonds that are
rated Baa by Moody's or BBB by S&P have some speculative characteristics. The
Portfolio's intermediate to longer term debt securities may also include those
which are rated below investment grade as long as no more than 5% of its net
assets are invested in such securities. As interest rates fall the prices of
debt securities tend to rise and vice versa. Should the rating of any security
held by the Portfolio be downgraded after the time of purchase, the Adviser will
determine whether it is in the best interest of the Portfolio to retain or
dispose of the security. (See "High Yield, High Risk Securities.")
The Capital Growth Portfolio cannot guarantee a gain or eliminate the
risk of loss. The net asset value of the shares of the Portfolio will increase
or decrease with changes in the market price of the Portfolio's investments and,
to a lesser extent, changes in foreign currency exchange rates.
Global Discovery Portfolio
The Global Discovery 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.
6
<PAGE>
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
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.
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Risk Factors Regarding Global Discovery Portfolio
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
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.
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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
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
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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
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
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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
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
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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.
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.
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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.
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.")
International Portfolio
The International Portfolio seeks long-term growth of capital primarily
through diversified holdings of marketable foreign equity investments. The
Portfolio invests in companies, wherever organized, which do business primarily
outside the United States. The Fund, on behalf of the Portfolio, intends to
diversify investments among several countries and to have represented in the
program business activities in not less than three different countries. The
management considers it consistent with this policy for the Portfolio to acquire
securities of companies incorporated in the United States and having their
principal activities and interests outside of the United States, and such
investments may be included in the program.
It is not the policy of the Portfolio to concentrate its investments in
any particular industry, and the Portfolio's management does not intend to make
acquisitions in particular industries which would increase the percentage of the
market value of the Portfolio's assets above 25% for any one industry. The
Portfolio does not invest for the purpose of controlling or managing other
companies.
The major portion of the Portfolio's assets consists of equity
securities of established companies listed on recognized exchanges; the Adviser
expects this condition to continue, although the Portfolio may invest in other
securities. Investments may also be made in fixed income securities of foreign
governments and companies with a view toward total investment return. In
determining the location of the principal activities and interests of a company,
the Adviser takes into account such factors as the location of the company's
assets, personnel, sales and earnings. In selecting securities for the
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Portfolio, the Adviser seeks to identify companies whose securities prices do
not adequately reflect their established positions in their fields. In analyzing
companies for investment, the Adviser ordinarily looks for one or more of the
following characteristics: above-average earnings growth per share, high return
on invested capital, healthy balance sheets and overall financial strength,
strong competitive advantages, strength of management and general operating
characteristics which will enable the companies to compete successfully in their
marketplace. Investment decisions are made without regard to arbitrary criteria
such as minimum asset size, debt-equity ratios or dividend history of Portfolio
companies.
The Portfolio may invest in any type of security including, but not
limited to shares, preferred or common, bonds and other evidences of
indebtedness, and other securities of issuers wherever organized, and not
excluding evidences of indebtedness of governments and their political
subdivisions. Although no particular proportion of stocks, bonds or other
securities is required to be maintained, the Fund, on behalf of the Portfolio,
in view of the Portfolio's investment objective, intends under normal conditions
to maintain holdings consisting primarily of a diversified list of equity
securities.
Under exceptional economic or market conditions abroad, the Portfolio
may temporarily, until normal conditions return, invest all or a major portion
of its assets in Canadian or U.S. Government obligations or currencies, or
securities of companies incorporated in and having their principal activities in
Canada or the United States.
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 "TAXES.")
The Portfolio is intended to provide investors with an opportunity to
invest a portion of their assets in a diversified group of securities of foreign
companies and governments. Management of the Portfolio believes that
diversification of assets on an international basis decreases the degree to
which events in any one country, including the United States, will affect an
investor's entire investment holdings. In the period since World War II, many
leading foreign economies and foreign stock market indexes have grown more
rapidly than the United States economy and leading U.S. stock market indexes,
although there can be no assurance that this will be true in the future. Because
of the Portfolio's investment policy, the Portfolio is not intended to provide a
complete investment program for an investor.
Because the Portfolio normally will be invested in 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 foreign securities
markets in an attempt to take advantage of opportunities wherever they may
arise.
POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS
(See "POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS"
in the Fund's prospectus.)
Except as otherwise noted below, the following description of
additional investment policies and techniques is applicable to all of the
Portfolios.
Repurchase Agreements
On behalf of a Portfolio, the Fund may enter into repurchase agreements
with member banks of the Federal Reserve System, any foreign bank and any
broker-dealer which is recognized as a reporting government securities dealer if
the creditworthiness of the bank or broker-dealer has been determined by the
Adviser to be at least equal to that of issuers of commercial paper rated within
the two highest categories assigned by Moody's or S&P. A repurchase agreement
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with a member bank of the Federal Reserve System, which provides a means for the
Portfolio to earn income on funds for periods as short as overnight, is an
arrangement through which the Portfolio acquires a U.S. Government or other high
quality short-term debt obligation (the "Obligation") and the seller agrees, at
the time of sale, to repurchase the Obligation at a specified time and price. A
repurchase agreement with foreign banks may be available with respect to
government securities of the particular foreign jurisdiction. The repurchase
price may be higher than the purchase price, the difference being income to the
Portfolio, or the purchase and repurchase prices may be the same, with interest
at a stated rate due to the Portfolio together with the repurchase price on
repurchase. In either case, the income to the Portfolio is unrelated to the
interest rate on the Obligation subject to the repurchase agreement. For
purposes of the Investment Company Act of 1940, as amended (the "1940 Act"), a
repurchase agreement is deemed to be a loan from the Portfolio to the seller of
the Obligation subject to the repurchase agreement and is therefore subject to
the Portfolio's investment restriction applicable to loans. It is not clear
whether a court would consider the Obligation purchased by the Portfolio subject
to a repurchase agreement as being owned by the Portfolio or as being collateral
for a loan by the Portfolio to the seller. In the event of the commencement of
bankruptcy or insolvency proceedings of the seller of the Obligation before
repurchase of the Obligation under a repurchase agreement, the Portfolio may
encounter delay and incur costs before being able to sell the security. Delays
may involve loss of interest or decline in price of the Obligation. If the court
characterizes the transaction as a loan and the Portfolio has not perfected a
security interest in the Obligation, the Portfolio may be required to return the
Obligation to the seller's estate and be treated as an unsecured creditor of the
seller. As an unsecured creditor, the Portfolio would be at the risk of losing
some or all of the principal and income involved in the transaction. As with any
unsecured debt instrument purchased for the Portfolio, the Fund seeks to
minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the obligor, in this case the seller of the Obligation.
Apart from the risk of bankruptcy or insolvency proceedings, there is also the
risk that the seller may fail to repurchase the security. However, if the market
value of the Obligation subject to the repurchase agreement becomes less than
the repurchase price (including interest), the Portfolio will direct the seller
of the Obligation to deliver additional securities so that the market value of
all securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that the Portfolio will be unsuccessful in
seeking to impose on the seller a contractual obligation to deliver additional
securities.
Debt Securities
The Bond, Balanced, Capital Growth and Global Discovery Portfolios may
each invest in debt securities rated below investment-grade (those rated below
Baa or BBB). These securities are commonly referred to as "junk bonds" and can
entail greater price volatility and involve a higher degree of speculation with
respect to the payment of principal and interest than higher quality
fixed-income securities. The market prices of such lower rated debt securities
may decline significantly in periods of general economic difficulty. The trading
market for these securities is generally less liquid than for higher rated
securities, and a Portfolio may have difficulty disposing of these securities at
the time it wishes to do so. The lack of a liquid secondary market for certain
securities may also make it more difficult for a Portfolio to obtain accurate
market quotations for purposes of valuing its portfolio and calculating its net
asset value. The lower the ratings of such debt securities, the greater their
risks render them like equity securities. In addition, as interest rates fall,
the prices of debt securities tend to rise and vice versa. Should the rating of
any security held by a Portfolio be downgraded after the time of purchase, the
Adviser will determine whether it is in the best interest of the Portfolio to
retain or dispose of the security.
Illiquid or Restricted Securities
The Portfolios may each 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.
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. A Portfolio may be deemed to be an "underwriter"
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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.
Trust Preferred Securities
The Bond Portfolio and Balanced Portfolio may each invest in Trust
Preferred Securities, which are hybrid instruments issued by a special purpose
trust (the "Special Trust"), the entire equity interest of which is owned by a
single issuer. The proceeds of the issuance to the Portfolios of Trust Preferred
Securities are typically used to purchase a junior subordinated debenture, and
distributions from the Special Trust are funded by the payments of principal and
interest on the subordinated debenture.
If payments on the underlying junior subordinated debentures held by
the Special Trust are deferred by the debenture issuer, the debentures would be
treated as original issue discount ("OID") obligations for the remainder of
their term. As a result, holders of Trust Preferred Securities, such as the
Portfolios, would be required to accrue daily for Federal income tax purposes,
their share of the stated interest and the de minimis OID on the debentures
(regardless of whether a Portfolio receives any cash distributions from the
Special Trust), and the value of Trust Preferred Securities would likely be
negatively affected. Interest payments on the underlying junior subordinated
debentures typically may only be deferred if dividends are suspended on both
common and preferred stock of the issuer. The underlying junior subordinated
debentures generally rank slightly higher in terms of payment priority than both
common and preferred securities of the issuer, but rank below other subordinated
debentures and debt securities. Trust Preferred Securities may be subject to
mandatory prepayment under certain circumstances. The market values of Trust
Preferred Securities may be more volatile than those of conventional debt
securities. Trust Preferred Securities may be issued in reliance on Rule 144A
under the Securities Act of 1933, as amended, and, unless and until registered,
are restricted securities; there can be no assurance as to the liquidity of
Trust Preferred Securities and the ability of holders of Trust Preferred
Securities, such as the Portfolios, to sell their holdings.
Zero Coupon Securities
The Bond, Balanced, Growth and Income, Capital Growth, Global Discovery
and International Portfolios may each invest in zero coupon securities which pay
no cash income and are sold at substantial discounts from their value at
maturity. When held to maturity, their entire income, which consists of
accretion of discount, comes from the difference between the issue price and
their value at maturity. Zero coupon securities are subject to greater market
value fluctuations from changing interest rates than debt obligations of
comparable maturities which make current distributions of interest (cash). Zero
coupon convertible securities offer the opportunity for capital appreciation (or
depreciation) as increases (or decreases) in market value of such securities
closely follow the movements in the market value of the underlying common stock.
Zero coupon convertible securities generally are expected to be less volatile
than the underlying common stocks because zero coupon convertible securities are
usually issued with shorter maturities (15 years or less) and with options
and/or redemption features exercisable by the holder of the obligation entitling
the holder to redeem the obligation and receive a defined cash payment.
Zero coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of securities firms and
banks have stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" ("TIGRS") and Certificate of Accrual on Treasuries
("CATS"). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates or other evidences of ownership of the U.S.
Treasury securities has stated that for federal tax and securities purposes, in
their opinion purchasers of such certificates, such as the Portfolios, most
likely will be deemed the beneficial holders of the underlying U.S. government
securities.
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The Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupons and corpus payments on Treasury securities through the Federal
Reserve book-entry record-keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program,
the Portfolio will be able to have its beneficial ownership of zero coupon
securities recorded directly in the book-entry record-keeping system in lieu of
having to hold certificates or other evidences of ownership of the underlying
U.S. Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold in such bundled form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells
itself.
Real Estate Investment Trusts
The Bond Portfolio and the Growth and Income Portfolio may each invest
in REITs. REITs are sometimes informally characterized as equity REITs, mortgage
REITs and hybrid REITs. Investment in REITs may subject a Portfolio to risks
associated with the direct ownership of real estate, such as decreases in real
estate values, overbuilding, increased competition and other risks related to
local or general economic conditions, increases in operating costs and property
taxes, changes in zoning laws, casualty or condemnation losses, possible
environmental liabilities, regulatory limitations on rent and fluctuations in
rental income. Equity REITs generally experience these risks directly through
fee or leasehold interests, whereas mortgage REITs generally experience these
risks indirectly through mortgage interests, unless the mortgage REIT forecloses
on the underlying real estate. Changes in interest rates may also affect the
value of a Portfolio's investment in REITs. For instance, during periods of
declining interest rates, certain mortgage REITs may hold mortgages that the
mortgagors elect to prepay, which prepayment may diminish the yield on
securities issued by those REITs.
Certain REITs have relatively small market capitalization, which may
tend to increase the volatility of the market price of their securities.
Furthermore, REITs are dependent upon specialized management skills, have
limited diversification and are, therefore, subject to risks inherent in
operating and financing a limited number of projects. REITs are also subject to
heavy cash flow dependency, defaults by borrowers and the possibility of failing
to qualify for tax-free pass-through of income under the Internal Revenue Code
of 1986, as amended and to maintain exemption from the registration requirements
of the 1940 Act. By investing in REITs indirectly through a Portfolio, a
shareholder will bear not only his or her proportionate share of the expenses of
the Portfolio, but also, indirectly, similar expenses of the REITs. In addition,
REITs depend generally on their ability to generate cash flow to make
distributions to shareholders.
Mortgage-Backed Securities and Mortgage Pass-Through Securities
The Bond, Balanced, and Growth and Income Portfolios may also invest in
mortgage-backed securities, which are interests in pools of mortgage loans,
including mortgage loans made by savings and loan institutions, mortgage
bankers, commercial banks, and others. Pools of mortgage loans are assembled as
securities for sale to investors by various governmental, government-related,
and private organizations as further described below. The Portfolios may also
invest in debt securities which are secured with collateral consisting of
mortgage-backed securities (see "Collateralized Mortgage Obligations"), and in
other types of mortgage-related securities.
A decline in interest rates may lead to a faster rate of repayment of
the underlying mortgages, and expose the Portfolios to a lower rate of return
upon reinvestment. To the extent that such mortgage-backed securities are held
by the Portfolios, the prepayment right will tend to limit to some degree the
increase in net asset value of the Portfolios because the value of the
mortgage-backed securities held by the Portfolios may not appreciate as rapidly
as the price of non-callable debt securities.
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Interests in pools of mortgage-backed securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by repayments of principal resulting
from the sale of the underlying property, refinancing, or foreclosure, net of
fees or costs which may be incurred. Some mortgage-related securities such as
securities issued by the Government National Mortgage Association ("GNMA") are
described as "modified pass-through." These securities entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
certain fees, at the scheduled payment dates regardless of whether or not the
mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
GNMA. GNMA is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks, and mortgage bankers) and backed by
pools of FHA-insured or VA-guaranteed mortgages. These guarantees, however, do
not apply to the market value or yield of mortgage-backed securities or to the
value of Portfolio shares. Also, GNMA securities often are purchased at a
premium over the maturity value of the underlying mortgages. This premium is not
guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) mortgages from a list of approved seller/servicers which include state
and federally-chartered savings and loan associations, mutual savings banks,
commercial banks, credit unions, and mortgage bankers. Pass-through securities
issued by FNMA are guaranteed as to timely payment of principal and interest by
FNMA but are not backed by the full faith and credit of the U.S. Government.
FHLMC is a corporate instrumentality of the U.S. Government and was
created by Congress in 1970 for the purpose of increasing the availability of
mortgage credit for residential housing. Its stock is owned by the twelve
Federal Home Loan Banks. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal, but PCs are not backed by the full faith and credit of the U.S.
Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers, and other secondary market issuers also
create pass-through pools of conventional mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance, and
letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers, and the mortgage poolers. Such insurance and
guarantees and the creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets the Portfolios' investment
quality standards. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. The Portfolios may buy mortgage-related securities without
insurance or guarantees, if through an examination of the loan experience and
practices of the originators/servicers and poolers, the Adviser determines that
the securities meet the Portfolios' quality standards. Although the market for
such securities is becoming increasingly liquid, securities issued by certain
private organizations may not be readily marketable.
Collateralized Mortgage Obligations ("CMOs")
A CMO is a hybrid between a mortgage-backed bond and a mortgage
pass-through security. Similar to a bond, interest and prepaid principal are
paid, in most cases, semiannually. CMOs may be collateralized by whole mortgage
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loans but are more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, FHLMC, or FNMA, and their income
streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
In a typical CMO transaction, a corporation issues multiple series,
(e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are
used to purchase mortgages or mortgage pass-through certificates ("Collateral").
The Collateral is pledged to a third party trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on
the Bonds in the order A, B, C, Z. The Series A, B, and C bonds all bear current
interest. Interest on the Series Z Bond is accrued and added to principal and a
like amount is paid as principal on the Series A, B, or C Bond currently being
paid off. When the Series A, B, and C Bonds are paid in full, interest and
principal on the Series Z Bond begins to be paid currently. With some CMOs, the
issuer serves as a conduit to allow loan originators (primarily builders or
savings and loan associations) to borrow against their loan portfolios.
FHLMC Collateralized Mortgage Obligations
FHLMC CMOs are debt obligations of FHLMC issued in multiple classes
having different maturity dates which are secured by the pledge of a pool of
conventional mortgage loans purchased by FHLMC. Unlike FHLMC PCs, payments of
principal and interest on the CMOs are made semiannually, as opposed to monthly.
The amount of principal payable on each semiannual payment date is determined in
accordance with FHLMC's mandatory sinking fund schedule, which, in turn, is
equal to approximately 100% of FHA prepayment experience applied to the mortgage
collateral pool. All sinking fund payments in the CMOs are allocated to the
retirement of the individual classes of bonds in the order of their stated
maturities. Payment of principal on the mortgage loans in the collateral pool in
excess of the amount of FHLMC's minimum sinking fund obligation for any payment
date are paid to the holders of the CMOs as additional sinking fund payments.
Because of the "pass-through" nature of all principal payments received on the
collateral pool in excess of FHLMC's minimum sinking fund requirement, the rate
at which principal of the CMOs is actually repaid is likely to be such that each
class of bonds will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage
loans during any semiannual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.
Other Mortgage-Backed Securities
The Adviser expects that governmental, government-related, or private
entities may create mortgage loan pools and other mortgage-related securities
offering mortgage pass-through and mortgage-collateralized investments in
addition to those described above. The mortgages underlying these securities may
include alternative mortgage instruments, that is, mortgage instruments whose
principal or interest payments may vary or whose terms to maturity may differ
from customary long-term fixed rate mortgages. The Bond Portfolio and the
Balanced Portfolio will not purchase mortgage-backed securities or any other
assets which, in the opinion of the Adviser, are illiquid if, as a result, more
than 10% of the value of the Portfolio's total assets will be illiquid. As new
types of mortgage-related securities are developed and offered to investors, the
Adviser will, consistent with the Portfolio's investment objectives, policies,
and quality standards, consider making investments in such new types of
mortgage-related securities.
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Other Asset-Backed Securities
The securitization techniques used to develop mortgaged-backed
securities are now being applied to a broad range of assets. Through the use of
trusts and special purpose corporations, various types of assets, including
automobile loans, computer leases and credit card receivables, are being
securitized in pass-through structures similar to the mortgage pass-through
structures described above or in a structure similar to the CMO structure.
Consistent with the Bond Portfolio's and the Balanced Portfolio's investment
objectives and policies, the Portfolios may invest in these and other types of
asset-backed securities that may be developed in the future. In general, the
collateral supporting these securities is of shorter maturity than mortgage
loans and is less likely to experience substantial prepayments with interest
rate fluctuations.
Several types of asset-backed securities have already been offered to
investors, including Certificates for Automobile ReceivablesSM ("CARSSM").
CARSSM represent undivided fractional interests in a trust ("Trust") whose
assets consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARSSM are passed through monthly to certificate holders, and
are guaranteed up to certain amounts and for a certain time period by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the Trust. An investor's return on CARSSM may be affected by early
prepayment of principal on the underlying vehicle sales contracts. If the letter
of credit is exhausted, the Trust may be prevented from realizing the full
amount due on a sales contract because of state law requirements and
restrictions relating to foreclosure sales of vehicles and the obtaining of
deficiency judgments following such sales or because of depreciation, damage to
or loss of a vehicle, the application of federal and state bankruptcy and
insolvency laws, or other factors. As a result, certificate holders may
experience delays in payments or losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security interest in the related assets. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. There is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection, and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
results from payment of the insurance obligations on at least a portion of the
assets in the pool. This protection may be provided through guarantees, policies
or letters of credit obtained by the issuer or sponsor from third parties,
through various means of structuring the transaction or through a combination of
such approaches. The Bond Portfolio and the Balanced Portfolio will not pay any
additional or separate fees for credit support. The degree of credit support
provided for each issue is generally based on historical information respecting
the level of credit risk associated with the underlying assets. Delinquency or
loss in excess of that anticipated, or failure of the credit support could
adversely affect the return on an investment in such a security.
The Bond Portfolio and the Balanced Portfolio may also invest in
residual interests in asset-backed securities. In the case of asset-backed
securities issued in a pass-through structure, the cash flow generated by the
underlying assets is applied to make required payments on the securities and to
pay related administrative expenses. The residual in an asset-backed security
pass-through structure represents the interest in any excess cash flow remaining
after making the foregoing payments. The amount of residual cash flow resulting
from a particular issue of asset-backed securities will depend on, among other
things, the characteristics of the underlying assets, the coupon rates on the
securities, prevailing interest rates, the amount of administrative expenses and
the actual prepayment experience on the underlying assets. Asset-backed security
residuals not registered under the Securities Act of 1933 may be subject to
certain restrictions on transferability. In addition, there may be no liquid
market for such securities.
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The availability of asset-backed securities may be affected by
legislative or regulatory developments. It is possible that such developments
may require the Bond Portfolio and the Balanced Portfolio to dispose of any then
existing holdings of such securities.
Municipal Obligations
The Bond Portfolio and the Balanced Portfolio may each invest in
municipal obligations, which are issued by or on behalf of states, territories,
and possessions of the U.S., and their political subdivisions, agencies, and
instrumentalities, and the District of Columbia to obtain funds for various
public purposes. The interest on these obligations is generally exempt from
federal income tax in the hands of most investors. The two principal
classifications of municipal obligations are "notes" and "bonds." The return on
municipal obligations is ordinarily lower than that of taxable obligations. The
Bond Portfolio and the Balanced Portfolio may each acquire municipal obligations
when, due to disparities in the debt securities markets, the anticipated total
return on such obligations is higher than that on taxable obligations. The Bond
Portfolio and the Balanced Portfolio have no current intention of purchasing
tax-exempt municipal obligations that would amount to greater than 5% of the
Portfolio's total assets.
Convertible Securities
The Bond, Balanced, Growth and Income, Capital Growth, Global Discovery
and International Portfolios may each invest in convertible securities; that is,
bonds, notes, debentures, preferred stocks and other securities which are
convertible into common stock. Investments in convertible securities can provide
an opportunity for capital appreciation and/or income through interest and
dividend payments by virtue of their conversion or exchange features.
The convertible securities in which the Portfolios may invest include
fixed-income or zero coupon debt securities which may be converted or exchanged
at a stated or determinable exchange ratio into underlying shares of common
stock. The exchange ratio for any particular convertible security may be
adjusted from time to time due to stock splits, dividends, spin-offs, other
corporate distributions or scheduled changes in the exchange ratio. Convertible
securities and convertible preferred stocks, until converted, have general
characteristics similar to both debt and equity securities. Although to a lesser
extent than with debt securities generally, the market value of convertible
securities tends to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. In addition, because of the conversion or
exchange feature, the market value of convertible securities typically changes
as the market value of the underlying common stocks changes, and, therefore,
also tends to follow movements in the general market for equity securities. A
unique feature of convertible securities is that as the market price of the
underlying common stock declines, convertible securities tend to trade
increasingly on a yield basis, and so may not experience market value declines
to the same extent as the underlying common stock. When the market price of the
underlying common stock increases, the prices of the convertible securities tend
to rise as a reflection of the value of the underlying common stock, although
typically not as much as the underlying common stock. While no securities
investments are without risk, investments in convertible securities generally
entail less risk than investments in common stock of the same issuer.
As fixed income securities, convertible securities are investments
which provide for a stream of income (or in the case of zero coupon securities,
accretion of income) with generally higher yields than common stocks. Of course,
like all fixed income securities, there can be no assurance of income or
principal payments because the issuers of the convertible securities may default
on their obligations. Convertible securities generally offer lower yields than
non-convertible securities of similar quality because of their conversion or
exchange features.
Convertible securities are generally subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar
non-convertible securities.
Convertible securities may be issued as fixed income obligations that
pay current income or as zero coupon notes and bonds, including Liquid Yield
Option Notes ("LYONs"). Zero coupon securities pay no cash income and are sold
at substantial discounts from their value at maturity. When held to maturity,
their entire income, which consists of accretion of discount, comes from the
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difference between the purchase price and their value at maturity. Zero coupon
convertible securities offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follows the
movements in the market value of the underlying common stock. Zero coupon
convertible securities are generally expected to be less volatile than the
underlying common stocks as they are usually issued with short to medium length
maturities (15 years or less) and are issued with options and/or redemption
features exercisable by the holder of the obligation entitling the holder to
redeem the obligation and receive a defined cash payment.
Depositary Receipts
The Balanced, Growth and Income, Capital Growth, Global Discovery and
International Portfolios may each 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 Balanced, Growth and Income, Capital Growth and International Portfolios'
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.
Foreign Securities
The Bond, Balanced, Growth and Income, Capital Growth, Global Discovery
and International Portfolios (collectively, the "Non-Money Market Portfolios")
may each invest, without limit, except as applicable to debt securities
generally, in U.S. dollar-denominated foreign debt securities (including those
issued by the Dominion of Canada and its provinces and other debt securities
which meet the criteria applicable to the Portfolio's domestic investments), and
in certificates of deposit issued by foreign banks and foreign branches of
United States banks, to any extent deemed appropriate by the Adviser. The Bond
Portfolio may invest up to 20% of its assets in non-U.S. dollar-denominated
foreign debt securities. The Balanced Portfolio may invest up to 20% of its debt
securities in non-U.S. dollar-denominated foreign debt securities, and may
invest up to 25% of its equity securities in non-U.S. dollar-denominated foreign
equity securities. The Growth and Income Portfolio may invest up to 25% of its
assets in non-U.S. dollar denominated equity securities of foreign issuers. The
Capital Growth Portfolio may invest up to 25% of its assets, and the
International Portfolio may invest without limit, in non-U.S. dollar-denominated
equity securities of foreign issuers.
Investors should recognize that investing in foreign securities
involves certain special considerations, including those set forth below, which
are not typically associated with investing in U.S. securities and which may
favorably or unfavorably affect the Non-Money Market Portfolios' performance. As
foreign companies are not generally subject to uniform accounting and auditing
and financial reporting standards, practices and requirements comparable to
those applicable to domestic companies, there may be less publicly available
information about a foreign company than about a domestic company. Many foreign
stock markets, while growing in volume of trading activity, have substantially
less volume than the New York Stock Exchange (the "Exchange"), and securities of
some foreign companies are less liquid and more volatile than securities of
domestic companies. Similarly, volume and liquidity in most foreign bond markets
are less than the volume and liquidity in the U.S. and at times, volatility of
price can be greater than in the U.S. Further, foreign markets have different
clearance and settlement procedures and in certain markets there have been times
when settlements have been unable to keep pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of the Portfolios are
uninvested and no return is earned thereon. The inability of the Portfolios to
make intended security purchases due to settlement problems could cause the
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Portfolios to miss attractive investment opportunities. Inability to dispose of
portfolio securities due to settlement problems either could result in losses to
the Portfolios due to subsequent declines in value of the portfolio security or,
if the Portfolios have entered into a contract to sell the security, could
result in possible liability to the purchaser. Fixed commissions on some foreign
stock exchanges are generally higher than negotiated commissions on U.S.
exchanges, although the Portfolios will endeavor to achieve the most favorable
net results on its portfolio transactions. Further, the Portfolios may encounter
difficulties or be unable to pursue legal remedies and obtain judgments in
foreign courts. There is generally less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the U.S. It may be more difficult for the Portfolios' agents to keep
currently informed about corporate actions such as stock dividends or other
matters which may affect the prices of portfolio securities. Communications
between the U.S. and foreign countries may be less reliable than within the
U.S., thus increasing the risk of delayed settlements of portfolio transactions
or loss of certificates for portfolio securities. In addition, with respect to
certain foreign countries, there is the possibility of nationalization,
expropriation, the imposition of withholding or confiscatory taxes, political,
social, or economic instability, devaluations in the currencies in which a
Portfolio's securities are denominated, or diplomatic developments which could
affect U.S. investments in those countries. Investments in foreign securities
may also entail certain risks, such as possible currency blockages or transfer
restrictions, and the difficulty of enforcing rights in other countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
These considerations generally are more of a concern in developing
countries. For example, the possibility of revolution and the dependence on
foreign economic assistance generally is greater in these countries than in
developed countries. The management of the Non-Money Market Portfolios seeks to
mitigate the risks associated with these considerations through diversification
and active professional management. Although investments in companies domiciled
in developing countries may be subject to potentially greater risks than
investments in developed countries, the Portfolios will not invest in any
securities of issuers located in developing countries if the securities, in the
judgment of the Adviser, are speculative.
To the extent that the Non-Money Market Portfolios invest in foreign
securities, the Portfolios' share price could reflect the movements of both the
different stock and bond markets in which it is invested and the currencies in
which the investments are denominated; the strength or weakness of the U.S.
dollar against foreign currencies could account for part of the Portfolios'
investment performance.
Limitations on Holdings of Foreign Securities for the Bond, Balanced, Growth and
Income and International Portfolios
Each Portfolio that invests in foreign securities shall invest in no
less than five foreign countries; provided that, (i) if foreign securities
comprise less than 80% of the value of the Portfolio's net assets, the Portfolio
shall invest in no less than four foreign countries; (ii) if foreign securities
comprise less than 60% of the value of the Portfolio's net assets, the Portfolio
shall invest in no less than three foreign countries; (iii) if foreign
securities comprise less than 40% of the value of the Portfolio's net assets,
the Portfolio shall invest in no less than two foreign countries; and (iv) if
foreign securities comprise less than 20% of the value of the Portfolio's net
assets the Portfolio may invest in a single foreign country.
Each Portfolio shall invest no more than 20% of the value of its net
assets in securities of issuers located in any one country; provided that an
additional 15% of the value of each Portfolio's net assets may be invested in
securities of issuers located in any one of the following countries: Australia,
Canada, France, Japan, the United Kingdom and Germany; and provided further that
100% of a Portfolio's assets may be invested in securities of issuers located in
the United States.
Indexed Securities
The Bond Portfolio and the Balanced Portfolio may each invest in
indexed securities, the value of which is linked to currencies, interest rates,
commodities, indices or other financial indicators ("reference instruments").
Most indexed securities have maturities of three years or less.
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Indexed securities differ from other types of debt securities in which
the Fund may invest in several respects. First, the interest rate or, unlike
other debt securities, the principal amount payable at maturity of an indexed
security may vary based on changes in one or more specified reference
instruments, such as an interest rate compared with a fixed interest rate or the
currency exchange rates between two currencies (neither of which need be the
currency in which the instrument is denominated). The reference instrument need
not be related to the terms of the indexed security. For example, the principal
amount of a U.S. dollar denominated indexed security may vary based on the
exchange rate of two foreign currencies. An indexed security may be positively
or negatively indexed; that is, its value may increase or decrease if the value
of the reference instrument increases. Further, the change in the principal
amount payable or the interest rate of an indexed security may be a multiple of
the percentage change (positive or negative) in the value of the underlying
reference instrument(s).
Investment in indexed securities involves certain risks. In addition to
the credit risk of the security's issuer and the normal risks of price changes
in response to changes in interest rates, the principal amount of indexed
securities may decrease as a result of changes in the value of reference
instruments. Further, in the case of certain indexed securities in which the
interest rate is linked to a reference instrument, the interest rate may be
reduced to zero, and any further declines in the value of the security may then
reduce the principal amount payable on maturity. Finally, indexed securities may
be more volatile than the reference instruments underlying indexed securities.
When-Issued Securities
A Portfolio may from time to time purchase securities on a
"when-issued" or "forward delivery" basis. Debt securities are often issued on
this basis. The price of such securities, which may be expressed in yield terms,
is fixed at the time a commitment to purchase is made, but delivery and payment
for the when-issued or forward delivery securities take place at a later date.
During the period between purchase and settlement, no payment is made by the
Portfolio and no interest accrues to the Portfolio. To the extent that assets of
a Portfolio are held in cash pending the settlement of a purchase of securities,
that Portfolio would earn no income; however, it is the Fund's intention that
each Portfolio will be fully invested to the extent practicable and subject to
the policies stated above. While when-issued or forward delivery securities may
be sold prior to the settlement date, the Portfolio intends to purchase such
securities with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time the Fund makes the commitment on
behalf of a Portfolio to purchase a security on a when-issued or forward
delivery basis, it will record the transaction and reflect the amount due and
the value of the security in determining the Portfolio's net asset value. The
market value of the when-issued or forward delivery securities may be more or
less than the purchase price payable at settlement date. The Fund does not
believe that a Portfolio's net asset value or income will be adversely affected
by the purchase of securities on a when-issued or forward delivery basis. Each
Portfolio will establish a segregated account in which it will maintain cash,
U.S. Government securities and other high-grade debt obligations at least equal
in value to commitments for when-issued or forward delivery securities. Such
segregated securities either will mature or, if necessary, be sold on or before
the settlement date.
Loans of Portfolio Securities
The Fund may lend the portfolio securities of any Portfolio (other than
the Money Market Portfolio) provided: (1) the loan is secured continuously by
collateral consisting of U.S. Government securities, cash or cash equivalents
adjusted daily to have market value at least equal to the current market value
of the securities loaned; (2) the Fund may at any time call the loan and regain
the securities loaned; (3) the Portfolio will receive any interest or dividends
paid on the loaned securities; and (4) the aggregate market value of securities
loaned will not at any time exceed one-third of the total assets of the
Portfolio. In addition, it is anticipated that the Portfolio may share with the
borrower some of the income received on the collateral for the loan or that it
will be paid a premium for the loan. Before the Portfolio enters into a loan,
the Adviser considers all relevant facts and circumstances including the
creditworthiness of the borrower.
Borrowing
The Board of Trustees has adopted a policy whereby each Portfolio of
the Fund may borrow up to 10% of its total assets; provided, however, that each
Portfolio may borrow up to 25% of its total assets for extraordinary or
emergency purposes, including the facilitation of redemptions. A Portfolio may
only borrow money from banks as a temporary measure for extraordinary or
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emergency purposes (each Portfolio is required to maintain asset coverage
(including borrowings) of 300% for all borrowings) and no purchases of
securities for a Portfolio will be made while borrowings of that Portfolio
exceed 5% of the Portfolio's assets. Borrowings by the Fund increase exposure to
capital risk. In addition, borrowed funds are subject to interest costs that may
offset or exceed the return earned on investment of such funds.
Options for the Bond, Balanced, Growth and Income and International Portfolios
The Fund may, on behalf of each of the Bond, Balanced, Growth and
Income, Capital Growth and International Portfolios, write covered call options
on the portfolio securities of such Portfolio in an attempt to enhance
investment performance. A call option is a contract generally having a duration
of nine months or less which gives the purchaser of the option, in return for a
premium paid, the right to buy, and the writer the obligation to sell, the
underlying security at the exercise price at any time upon the assignment of an
exercise notice prior to the expiration of the option, regardless of the market
price of the security during the option period. A covered call option is an
option written on a security which is owned by the writer throughout the option
period.
The Fund will write, on behalf of a Portfolio, covered call options
both to reduce the risks associated with certain of its investments and to
increase total investment return. In return for the premium income, the
Portfolio will give up the opportunity to profit from an increase in the market
price of the underlying security above the exercise price so long as its
obligations under the contract continue, except insofar as the premium
represents a profit. Moreover, in writing the option, the Portfolio will retain
the risk of loss should the price of the security decline, which loss the
premium is intended to offset in whole or in part. Unlike the situation in which
the Fund owns securities not subject to a call option, the Fund, in writing call
options, must assume that the call may be exercised at any time prior to the
expiration of its obligations as a writer, and that in such circumstances the
net proceeds realized from the sale of the underlying securities pursuant to the
call may be substantially below the prevailing market price. The Fund may forego
the benefit of appreciation in its Portfolios on securities sold pursuant to
call options.
When the Portfolio writes a covered call option, it gives the purchaser
of the option the right to buy the underlying security at the price specified in
the option (the "exercise price") by exercising the option at any time during
the option period, generally ranging up to nine months. Some of the options
which the Fund writes may be of the European type which means they may be
exercised only at a specified time. If the option expires unexercised, the
Portfolio will realize income in an amount equal to the premium received for the
written option. If the option is exercised, a decision over which the Portfolio
has no control, the Portfolio must sell the underlying security to the option
holder at the exercise price. By writing a covered call option, the Portfolio
forgoes, in exchange for the premium less the commission ("net premium"), the
opportunity to profit during the option period from an increase in the market
value of the underlying security above the exercise price.
The Balanced, Growth and Income, Capital Growth, Global Discovery and
International Portfolios may each write covered call and put options to a
limited extent in an attempt to earn additional income on their portfolios,
consistent with their investment objectives. The Portfolios may forego the
benefits of appreciation on securities sold or depreciation on securities
acquired pursuant to call and put options written by the Portfolios. Each
Portfolio has no current intention of writing options on more than 5% of its net
assets.
When the Fund, on behalf of the Balanced, Growth and Income, Capital
Growth, Global Discovery and International Portfolios, writes a put option, it
gives the purchaser of the option the right to sell the underlying security to
the Portfolio at the specified exercise price at any time during the option
period. Some of the European type options which the Fund writes may be exercised
only at a specified time. If the option expires unexercised, the Portfolio will
realize income in the amount of the premium received for writing the option. If
the put option is exercised, a decision over which the Portfolio has no control,
the Portfolio must purchase the underlying security from the option holder at
the exercise price. By writing a put option, the Portfolio, in exchange for the
net premium received, accepts the risk of a decline in the market value of the
underlying security below the exercise price. With respect to each put option it
writes, the Portfolio will have deposited in a separate account with its
custodian U.S. Treasury obligations, high-grade debt securities or cash equal in
value to the exercise price of the put option, will have purchased a put option
with a higher exercise price that will expire no earlier than the put option
written or will have used some combination of these two methods. The Fund on
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behalf of each Portfolio, will only write put options involving securities for
which a determination is made that it wishes to acquire the securities at the
exercise price at the time the option is written.
A Portfolio may terminate its obligation as a writer of a call or put
option by purchasing an option with the same exercise price and expiration date
as the option previously written. This transaction is called a "closing purchase
transaction."
When a Portfolio writes an option, an amount equal to the net premium
received by the Portfolio is included in the liability section of the Portfolio
Statement of Assets and Liabilities as a deferred credit. The amount of the
deferred credit will be subsequently marked to market to reflect the current
market value of the option written. The current market value of a traded option
is the last sale price or, in the absence of a sale, the mean between the
closing bid and asked price. If an option expires on its stipulated expiration
date or if the Portfolio enters into a closing purchase transaction, the
Portfolio will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the premium received when the option was sold), and the
deferred credit related to such option will be eliminated. If a call option is
exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security and the proceeds of the sale will be increased by the
premium originally received. The writing of covered call options may be deemed
to involve the pledge of the securities against which the option is being
written. Securities against which call options are written will be segregated on
the books of the custodian for the Portfolio.
The Portfolio may purchase call options on any securities in which it
may invest in anticipation of an increase in the market value of such
securities. The purchase of a call option would entitle the Portfolio, in
exchange for the premium paid, to purchase a security at a specified price
during the option period. The Portfolio would ordinarily have a gain if the
value of the securities increased above the exercise price sufficiently to cover
the premium and would have a loss if the value of the securities remained at or
below the exercise price during the option period.
The Balanced, Growth and Income, Capital Growth, Global Discovery and
International Portfolios will normally purchase put options in anticipation of a
decline in the market value of securities in their portfolios ("protective
puts") or securities of the type in which they are permitted to invest. The
purchase of a put option would entitle the Portfolio, in exchange for the
premium paid, to sell a security, which may or may not be held by the Portfolio,
at a specified price during the option period. The purchase of protective puts
is designed merely to offset or hedge against a decline in the market value of
the Portfolio's portfolio securities. Put options may also be purchased by the
Portfolio for the purpose of affirmatively benefiting from a decline in the
price of securities which the Portfolio does not own. The Portfolio would
ordinarily recognize a gain if the value of the securities decreased below the
exercise price sufficiently to cover the premium and would recognize a loss if
the value of the securities remained at or above the exercise price. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying portfolio securities.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying securities
markets that cannot be reflected in the option markets. Exchange markets in
securities options are a relatively new and untested concept. It is impossible
to predict the volume of trading that may exist in such options, and there can
be no assurance that viable exchange markets will develop or continue.
The Fund may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. At present, approximately
thirty broker-dealers make these markets and the Adviser will consider risk
factors such as their creditworthiness when determining a broker-dealer with
which to engage in options transactions. The ability to terminate
over-the-counter option positions is more limited than with exchange-traded
option positions because the predominant market is the issuing broker rather
than an exchange, and may involve the risk that broker-dealers participating in
such transactions will not fulfill their obligations. Written over-the-counter
options purchased by the Fund and portfolio securities "covering" the Fund's
obligation pursuant to an over-the-counter option may be deemed to be illiquid
and may not be readily marketable. The Adviser will monitor the creditworthiness
of dealers with whom the Fund enters into such options transactions under the
general supervision of the Fund's Trustees.
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Securities Index Options
The Bond, Balanced, Growth and Income, Capital Growth, Global Discovery
and International Portfolios may each purchase call and put options on
securities indexes for the purpose of hedging against the risk of unfavorable
price movements adversely affecting the value of a Portfolio's securities.
Options on securities indexes are similar to options on stock except that the
settlement is made in cash.
Unlike a securities option, which gives the holder the right to
purchase or sell a specified security at a specified price, an option on a
securities index gives the holder the right to receive a cash "exercise
settlement amount" equal to (i) the difference between the exercise price of the
option and the value of the underlying securities index on the exercise date,
multiplied by (ii) a fixed "index multiplier." In exchange for undertaking the
obligation to make such cash payment, the writer of the securities index option
receives a premium.
A securities index fluctuates with changes in the market values of the
securities so included. Some securities index options are based on a broad
market index such as the S&P 500 or the NYSE Composite Index, or a narrower
market index such as the S&P 100. Indices are also based on an industry or
market segment such as the AMEX Oil and Gas Index or the Computer and Business
Equipment Index. Options on securities indexes are currently traded on exchanges
including the Chicago Board Options Exchange, Philadelphia Exchange, New York
Stock Exchange, and American Stock Exchange.
The effectiveness of hedging through the purchase of securities index
options will depend upon the extent to which price movements in the portion of
the securities portfolio being hedged correlate with price movements in the
selected securities index. Perfect correlation is not possible because the
securities holdings of a Portfolio will not exactly match the composition of the
securities indexes on which options are written. In addition, the purchase of
securities index options involves essentially the same risks as the purchase of
options on futures contracts. The principal risk is that the premium and
transactions costs paid by a Portfolio in purchasing an option will be lost as a
result of unanticipated movements in prices of the securities comprising the
securities index on which the option is written. Options on securities indexes
also entail the risk that a liquid secondary market to close out the option will
not exist, although a Portfolio will generally only purchase or write such an
option if the Adviser believes the option can be closed out.
Futures Contracts
The Fund may, on behalf of the Bond, Balanced and International
Portfolios, purchase and sell futures contracts on debt securities to hedge
against anticipated changes in interest rates that might otherwise have an
adverse effect upon the value of the Portfolio's debt securities. In addition,
the Fund may, on behalf of the Non-Money Market Portfolios, purchase and sell
securities index futures to hedge the equity securities of a Portfolio with
regard to market (systematic) risk as distinguished from stock-specific risk.
Each of these five Portfolios may also purchase and write put and call options
on futures contracts of the type which such Portfolio is authorized to enter
into and may engage in related closing transactions. All of such futures on debt
securities, stock index futures and related options will be traded on exchanges
that are licensed and regulated by the Commodity Futures Trading Commission
("CFTC") or on appropriate foreign exchanges, to the extent permitted by law.
Even though at the present time no contracts based on global indices which meet
the International Portfolio's investment criteria are available, there are U.S.
stock indices which may be used to hedge U.S. securities held in that Portfolio.
Futures on Debt Securities
A futures contract on a debt security is a binding contractual
commitment which, if held to maturity, will result in an obligation to make or
accept delivery, during a particular future month, of securities having a
standardized face value and rate of return. By purchasing futures on debt
securities--assuming a "long" position--the Fund, on behalf of a Portfolio, will
legally obligate itself to accept the future delivery of the underlying security
and pay the agreed price. By selling futures on debt securities--assuming a
"short" position--it will legally obligate itself to make the future delivery of
the security against payment of the agreed price. Open futures positions on debt
securities will be valued at the most recent settlement price, unless such price
does not appear to the Trustees to reflect the fair value of the contract, in
which case the positions will be valued by or under the direction of the
Trustees.
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Positions taken in the futures markets are normally not held to
maturity, but are instead liquidated through offsetting transactions which may
result in a profit or a loss. While futures positions taken by the Fund on
behalf of a Portfolio will usually be liquidated in this manner, the Fund may
instead make or take delivery of the underlying securities whenever it appears
economically advantageous to the Portfolio to do so. A clearing corporation
associated with the exchange on which futures are traded assumes responsibility
for closing-out and guarantees that the sale and purchase obligations will be
performed with regard to all positions that remain open at the termination of
the contract.
Hedging by use of futures on debt securities seeks to establish more
certainly than would otherwise be possible the effective rate of return on
portfolio securities. A Portfolio may, for example, take a "short" position in
the futures market by selling contracts for the future delivery of debt
securities held by the Portfolio (or securities having characteristics similar
to those held by the Portfolio) in order to hedge against an anticipated rise in
interest rates that would adversely affect the value of the Portfolio's
portfolio securities. When hedging of this character is successful, any
depreciation in the value of portfolio securities will be substantially offset
by appreciation in the value of the futures position.
On other occasions, the Portfolio may take a "long" position by
purchasing futures on debt securities. This would be done, for example, when the
Fund intends to purchase for the Portfolio particular securities when it has the
necessary cash, but expects the rate of return available in the securities
markets at that time to be less favorable than rates currently available in the
futures markets. If the anticipated rise in the price of the securities should
occur (with its concomitant reduction in yield), the increased cost to the
Portfolio of purchasing the securities will be offset, at least to some extent,
by the rise in the value of the futures position taken in anticipation of the
subsequent securities purchase.
Stock Index Futures. A stock index futures contract does not require the
physical delivery of securities, but merely provides for profits and losses
resulting from changes in the market value of the contract to be credited or
debited at the close of each trading day to the respective accounts of the
parties to the contract. On the contract's expiration date a final cash
settlement occurs and the futures positions are simply closed out. Changes in
the market value of a particular stock index futures contract reflect changes in
the specified index of equity securities on which the future is based. That
index is designed to reflect overall price trends in the market for equity
securities.
Stock index futures may be used to hedge the equity securities of each
of the Balanced, Growth and Income, Capital Growth or International Portfolios
with regard to market (systematic) risk (involving the market's assessment of
over-all economic prospects), as distinguished from stock-specific risk
(involving the market's evaluation of the merits of the issuer of a particular
security). By establishing an appropriate "short" position in stock index
futures, the Fund may seek to protect the value of the equity of a Portfolio's
securities against an overall decline in the market for equity securities.
Alternatively, in anticipation of a generally rising market, the Fund can seek
on behalf of a Portfolio to avoid losing the benefit of apparently low current
prices by establishing a "long" position in stock index futures and later
liquidating that position as particular equity securities are in fact acquired.
To the extent that these hedging strategies are successful, the Portfolio will
be affected to a lesser degree by adverse overall market price movements,
unrelated to the merits of specific portfolio equity securities, than would
otherwise be the case.
Options on Futures. For bona fide hedging purposes, the Fund may also purchase
and write, on behalf of each of the Bond, Balanced, Growth and Income, Capital
Growth and International Portfolios, call and put options on futures contracts,
which are traded on exchanges that are licensed and regulated by the CFTC or on
any foreign exchange for the purpose of options trading, to the extent permitted
by law. A "call" option on a futures contract gives the purchaser the right, in
return for the premium paid, to purchase a futures contract (assume a "long"
position) at a specified exercise price at any time before the option expires. A
"put" option gives the purchaser the right, in return for the premium paid, to
sell a futures contract (assume a "short" position), for a specified exercise
price, at any time before the option expires.
Upon the exercise of a "call," the writer of the option is obligated to
sell the futures contract (to deliver a "long" position to the option holder) at
the option exercise price, which will presumably be lower than the current
market price of the contract in the futures market. Upon exercise of a "put,"
the writer of the option is obligated to purchase the futures contract (deliver
a "short" position to the option holder) at the option exercise price, which
will presumably be higher than the current market price of the contract in the
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futures market. When a person exercises an option and assumes a long futures
position, in the case of a "call," or a short futures position, in the case of a
"put," his gain will be credited to his futures margin account, while the loss
suffered by the writer of the option will be debited to his account. However, as
with the trading of futures, most participants in the options markets do not
seek to realize their gains or losses by exercise of their option rights.
Instead, the holder of an option will usually realize a gain or loss by buying
or selling an offsetting option at a market price that will reflect an increase
or a decrease from the premium originally paid.
Options on futures can be used by a Portfolio to hedge substantially
the same risks as might be addressed by the direct purchase or sale of the
underlying futures contracts. If the Portfolio purchases an option on a futures
contract, it may obtain benefits similar to those that would result if it held
the futures position itself. But in contrast to a futures transaction, in which
only transaction costs are involved, benefits received in an option transaction
will be reduced by the amount of the premium paid as well as by transaction
costs. In the event of an adverse market movement, however, the Portfolio will
not be subject to a risk of loss on the option transaction beyond the price of
the premium it paid plus its transaction costs, and may consequently benefit
from a favorable movement in the value of its portfolio securities that would
have been more completely offset if the hedge had been effected through the use
of futures.
If a Portfolio writes options on futures contracts, the Portfolio will
receive a premium but will assume a risk of adverse movement in the price of the
underlying futures contract comparable to that involved in holding a futures
position. If the option is not exercised, the Portfolio will gain the amount of
the premium, which may partially offset unfavorable changes in the value of
securities held in or to be acquired for the Portfolio. If the option is
exercised, the Portfolio will incur a loss in the option transaction, which will
be reduced by the amount of the premium it has received, but which may partially
offset favorable changes in the value of its portfolio securities.
While the holder or writer of an option on a futures contract may
normally terminate its position by selling or purchasing an offsetting option of
the same series, the Portfolio's ability to establish and close out options
positions at fairly established prices will be subject to the maintenance of a
liquid market. A Portfolio will not purchase or write options on futures
contracts unless, in the Adviser's opinion, the market for such options has
sufficient liquidity that the risks associated with such options transactions
are not at unacceptable levels.
Limitations on the Use of Futures Contracts and Options on Futures
All of the futures contracts and options on futures transactions into
which the Fund will enter will be for bona fide hedging or other appropriate
risk management purposes as permitted by CFTC regulations and to the extent
consistent with requirements of the Securities and Exchange Commission (the
"SEC").
To ensure that its futures and options transactions meet this standard,
the Fund will enter into them only for the purposes or with the intent specified
in CFTC regulations, subject to the requirements of the SEC. The Fund will
further seek to assure that fluctuations in the price of the futures contracts
and options on futures that it uses for hedging purposes will be substantially
correlated to fluctuations in the price of the securities held by a Portfolio or
which it expects to purchase, though there can be no assurance that this result
will be achieved. The Fund will sell futures contracts or acquire puts to
protect against a decline in the price of securities that a Portfolio owns. The
Fund will purchase futures contracts or calls on futures contracts to protect a
Portfolio against an increase in the price of securities the Fund intends later
to purchase for the Portfolio before it is in a position to do so.
As evidence of this hedging intent, the Fund expects that on 75% or
more of the occasions on which it purchases a long futures contract or call
option on futures for a Portfolio the Fund will effect the purchase of
securities in the cash market or take delivery as it closes out a Portfolio's
futures position. In particular cases, however, when it is economically
advantageous to the Portfolio, a long futures position may be terminated (or an
option may expire) without the corresponding purchase of securities.
As an alternative to literal compliance with the bona fide hedging
definition, a CFTC definition now permits the Fund to elect to comply with a
different test, under which its long futures positions will not exceed the sum
of (a) cash or cash equivalents segregated for this purpose, (b) cash proceeds
on existing investments due within thirty days and (c) accrued profits on the
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particular futures or options positions. However, the Fund will not utilize this
alternative unless it is advised by counsel that to do so is consistent with the
requirements of the SEC.
Futures on debt securities and stock index futures are at present
actively traded on exchanges that are licensed and registered by the CFTC, or
consistent with the CFTC regulations on foreign exchanges. Portfolios will incur
brokerage fees in connection with their futures and options transactions, and
will be required to deposit and maintain funds with brokers as margin to
guarantee performance of futures obligations. In addition, while futures
contracts and options on futures will be purchased and sold to reduce certain
risks, those transactions themselves entail certain other risks. Thus, while a
Portfolio may benefit from the use of futures and options on futures,
unanticipated changes in interest rates or stock price movements may result in a
poorer overall performance for the Portfolio than if it had not entered into any
futures contracts or options transactions. Moreover, in the event of an
imperfect correlation between the futures position and the portfolio position
which is intended to be protected, the desired protection may not be obtained
and the Portfolio may be exposed to risk of loss.
Each Portfolio, in dealing in futures contracts and options on futures,
is subject to the 300% asset coverage requirement for borrowings set forth under
"Investment Restrictions" in the Fund's prospectus. The Trustees have also
adopted a policy (which is not fundamental and may be modified by the Trustees
without a shareholder vote) that, immediately after the purchase or sale of a
futures contract or option thereon, the value of the aggregate initial margin
with respect to all futures contracts and premiums on options on futures
contracts entered into by a Portfolio will not exceed 5% of the fair market
value of the Portfolio's total assets. Additionally, the value of the aggregate
premiums paid for all put and call options held by the Portfolio will not exceed
2% of its net assets. A futures contract for the receipt of a debt security and
long index futures will be offset by assets of the Portfolio held in a
segregated account in an amount equal to the total market value of the futures
contracts less the amount of the initial margin for the contracts.
Foreign Currency Transactions
The Non-Money Market Portfolios may enter into forward foreign currency
exchange contracts ("forward contracts") for hedging purposes. These Portfolios
may also, for hedging purposes, purchase foreign currencies in the form of bank
deposits as well as other foreign money market instruments, including but not
limited to, bankers' acceptances, certificates of deposit, commercial paper,
short-term government and corporate obligations and repurchase agreements. The
International Portfolio may also enter into foreign currency futures contracts
and foreign currency options.
Because investments in foreign companies usually will involve
currencies of foreign countries, and because the Non-Money Market Portfolios
temporarily may hold funds in bank deposits in foreign currencies during the
completion of investment programs, the value of their assets as measured in U.S.
dollars may be affected favorably or unfavorably by changes in foreign currency
exchange rates and exchange control regulations, and they may incur costs in
connection with conversions between various currencies. Although the Non-Money
Market Portfolios value their assets daily in terms of U.S. dollars, they do not
intend to convert their holdings of foreign currencies into U.S. dollars on a
daily basis. They will do so from time to time, and investors should be aware of
the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Non-Money
Market Portfolios at one rate, while offering a lesser rate of exchange should
the Non-Money Market Portfolios desire to resell that currency to the dealer.
The Non-Money Market Portfolios will conduct their foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market, or through entering into forward or, in
the case of the International Portfolio, futures contracts to purchase or sell
foreign currencies.
A forward contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades.
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A foreign currency futures contract is a standardized contract for the
future delivery of a specified amount of a foreign currency at a future date at
a price set at the time of the contract. The agreed price may be fixed or within
a specified range of prices. Foreign currency futures contracts traded in the
United States are designed by and traded on exchanges regulated by the CFTC,
such as the Chicago Mercantile Exchange. Futures contracts involve brokerage
costs, which may vary from less than 1% to 2.5% of the contract price, and
require parties to the contract to make "margin" deposits to secure performance
of the contract. The International Portfolio would also be required to segregate
assets to cover contracts that would require it to purchase foreign currencies.
The International Portfolio would enter into futures contracts solely for
hedging or other appropriate risk management purposes as defined in CFTC
regulations.
Forward contracts differ from foreign currency futures contracts in
certain respects. For example, the maturity date of a forward contract may be
any fixed number of days from the date of the contract agreed upon by the
parties, rather than a predetermined date in a given month, and they may be in
any amounts agreed upon by the parties rather than predetermined amounts. Also,
forward contracts are traded directly between currency traders so that no
intermediary is required. A forward contract generally requires no margin or
other deposit.
Upon the maturity of a forward or foreign currency futures contract a
Portfolio may either accept or make delivery of the currency specified in the
contract or, at or prior to maturity, enter into a closing purchase transaction
involving the purchase or sale of an offsetting contract. Closing purchase
transactions with respect to forward contracts are usually effected with the
currency trader who is a party to the original forward contract. Closing
purchase transactions with respect to futures contracts are effected on a
commodities exchange; a clearing corporation associated with the exchange
assumes responsibility for closing out such contracts.
A Portfolio may enter into forward contracts and foreign currency
futures contracts under certain circumstances. When a Portfolio enters into a
contract for the purchase or sale of a security denominated in a foreign
currency, or when a Portfolio anticipates the receipt in a foreign currency of
dividends or interest payments on such a security which it holds, the Portfolio
may desire to "lock in" the U.S. dollar price of the security or the U.S. dollar
equivalent of such dividend or interest payment, as the case may be. By entering
into a forward or futures contract for the purchase or sale, for a fixed amount
of dollars, of the amount of foreign currency involved in the underlying
transactions, the Portfolio will attempt to protect itself against a possible
loss resulting from an adverse change in the relationship between the U.S.
dollar and the foreign currency during the period between the date on which the
security is purchased or sold, or on which the dividend or interest payment is
declared, and the date on which such payments are made or received.
Additionally, when management of a Portfolio believes that the currency
of a particular foreign country may suffer a substantial decline against the
U.S. dollar, it may enter into a forward or futures contract to sell, for a
fixed amount of dollars, the amount of foreign currency approximating the value
of some or all of the Portfolio's securities denominated in such foreign
currency. The precise matching of the forward or futures contract amounts and
the value of the securities involved will not generally be possible because the
future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date on which the contract is entered into and the date it matures. The precise
projection of short-term currency market movements is not possible, and
short-term hedging provides a means of fixing the dollar value of a portion of
the Portfolio's foreign assets.
The Non-Money Market Portfolios do not intend to enter into such
forward or futures contracts to protect the value of their portfolio securities
on a regular continuous basis, and will not do so if, as a result, a Portfolio
will have more than 15% of the value of its total assets committed to the
consummation of such contracts. A Portfolio also will not enter into such
forward or foreign currency futures contracts or maintain a net exposure to such
contracts where the consummation of the contracts would obligate the Portfolio
to deliver an amount of foreign currency in excess of the value of the
Portfolio's securities or other assets denominated in that currency. Under
normal circumstances, consideration of the prospect for currency parities will
be incorporated into the long-term investment decisions made with regard to
overall diversification strategies. However, the Non-Money Market Portfolios
believe that it is important to have the flexibility to enter into such forward
or foreign currency futures contracts when each determines that the best
interests of the Portfolio will be served.
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Except when a Portfolio enters into a forward contract for the purpose
of the purchase or sale of a security denominated in a foreign currency, State
Street Bank and Trust Company (the "Custodian"), will place cash or liquid
securities into a segregated account of the Portfolio in an amount equal to the
value of the Portfolio's total assets committed to the consummation of forward
contracts (or the Portfolio's forward contracts will be otherwise covered
consistent with applicable regulatory policies) and foreign currency futures
contracts that require the Portfolio to purchase foreign currencies. If the
value of the securities placed in the segregated account declines, additional
cash or securities will be placed in the account on a daily basis so that the
value of the account will equal the amount of the Portfolio's commitments with
respect to such contracts.
The Non-Money Market Portfolios generally will not enter into a forward
or foreign currency futures contract with a term of greater than one year. It
also should be realized that this method of protecting the value of a
Portfolio's securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange which the Portfolio can achieve at some future
point in time.
While the Non-Money Market Portfolios will enter into forward and, in
the case of the International Portfolio, foreign currency futures contracts and
foreign currency options to reduce currency exchange rate risks, transactions in
such contracts involve certain other risks. Thus, while a Portfolio may benefit
from such transactions, unanticipated changes in currency prices may result in a
poorer overall performance for the Portfolio than if it had not engaged in any
such transaction. Moreover, there may be imperfect correlation between the value
of the Portfolio's holdings of securities denominated in a particular currency
and forward or futures contracts entered into by the Portfolio. Such imperfect
correlation may prevent the Portfolio from achieving a complete hedge or expose
the Portfolio to risk of foreign exchange loss.
The International Portfolio may purchase options on foreign currencies
for hedging purposes in a manner similar to that of transactions in forward
contracts. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such decreases in the value of portfolio securities,
the Portfolio may purchase put options on the foreign currency. If the value of
the currency declines, the Portfolio will have the right to sell such currency
for a fixed amount of dollars which exceeds the market value of such currency.
This would result in a gain that may offset, in whole or in part, the negative
effect of currency depreciation on the value of the Portfolio's securities
denominated in that currency.
Conversely, if a rise in the dollar value of a currency is projected
for those securities to be acquired, thereby increasing the cost of such
securities, the International Portfolio may purchase call options on such
currency. If the value of such currency increased, the purchase of such call
options would enable the Portfolio to purchase currency for a fixed amount of
dollars which is less than the market value of such currency. Such a purchase
would result in a gain that may offset, at least partially, the effect of any
currency related increase in the price of securities the Portfolio intends to
acquire. As in the case of other types of options transactions, however, the
benefit the Portfolio derives from purchasing foreign currency options will be
reduced by the amount of the premium and related transaction costs. In addition,
if currency exchange rates do not move in the direction or to the extent
anticipated, the Portfolio could sustain losses on transactions in foreign
currency options which would deprive it of a portion or all of the benefits of
advantageous changes in such rates.
The International Portfolio may close out its position in a currency
option by either selling the option it has purchased or entering into an
offsetting option.
Strategic Transactions and Derivatives Applicable to the Global Discovery
Portfolio
The Global Discovery 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.
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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
option the right to buy, and the seller the obligation to sell, the underlying
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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
OTC options purchased by the Portfolio, and portfolio securities "covering" the
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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
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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
and considerations as other transactions with similar instruments. Currency
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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
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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 cash or
liquid 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 cash or liquid 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 cash or liquid 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 cash or
liquid 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
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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.")
Debt Securities
If the Adviser determines that the capital appreciation of debt
securities is likely to exceed that of common stocks, the Global Discovery
Portfolio may invest in debt securities of foreign and U.S. issuers. Global
Discovery 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 Global Discovery 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 Global
Discovery 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
The Bond, Balanced, Capital Growth and Global Discovery Portfolios may
each invest in below investment grade securities (rated Ba and lower by Moody's
and BB and lower by S&P) or unrated securities. Such securities carry a high
degree of risk (including the possibility of default or bankruptcy of these
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 ratings categories and are considered speculative. The Global Discovery
Portfolio may invest up to 5% of its net assets in such securities. The lower
the ratings of such debt securities, the greater their risks render them like
equity securities. See the Appendix to this Statement of Additional Information
for a more complete description of the ratings assigned by ratings organizations
and their respective characteristics.
As economic downturn may disrupt the high yield market and impair the
ability of issuers to repay principal and interest. Also, an increase in
interest rates could adversely affect the value of such obligations held by a
Portfolio. Prices and yields of high yield securities will fluctuate over time
and may affect a Portfolio's net asset value. In addition, investments in high
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yield zero coupon or pay-in-kind bonds, rather than income-bearing high yield
securities, may be more speculative and may be subject to greater fluctuations
in value due to changes in interest rates.
The trading market for high yield securities may be thin to the extent
that there is no established retail secondary market or because of a decline in
the value of such securities. A thin trading market may limit the ability of the
Trustees to value high yield securities accurately in a Portfolio and to dispose
of those securities. Adverse publicity and investor perceptions may decrease the
values and liquidity of high yield securities. These securities may also involve
special registration responsibilities, liabilities and costs.
Credit quality in the high yield securities market can change suddenly
and unexpectedly, and even recently-issued credit ratings may not fully reflect
the actual risks posed by a particular high yield security. For these reasons,
it is the policy of the Adviser not to rely exclusively on ratings issued by
established credit rating agencies, but to supplement such ratings with its own
independent and on-going review of credit quality. The achievement of the
Portfolios' investment objectives may be more dependent on the Adviser's credit
analysis than is the case for higher quality bonds. Should the rating of a
portfolio security be downgraded the Adviser will determine whether it is in the
best interest of that Portfolio to retain or dispose of the security.
Prices for below investment grade securities may be affected by
legislative and regulatory developments. For example, federal rules require
savings and loan institutions gradually to reduce their holdings of this type of
security. Also, Congress has from time to time considered legislation which
would restrict or eliminate the corporate tax deduction for interest payments in
these securities and regulate corporate restructurings. Such legislation may
significantly depress the prices of outstanding securities of this type.
Combined Transactions
Each Portfolio may enter into multiple transactions, including multiple
options transactions, multiple futures transactions, multiple foreign currency
transactions (including forward contracts) and any combination of futures,
options and foreign currency transactions ("component" transactions), instead of
a single transaction, as part of a single hedging strategy when, in the opinion
of the Adviser, it is in the best interest of a Portfolio to do so. A combined
transaction, while part of a single hedging strategy, may not offset fully the
risks of each component transaction and, therefore, may contain elements of risk
that are present in each of its component transactions. (See above for the risk
characteristics of certain transactions.)
Risks of Specialized Investment Techniques Abroad
The above described specialized investment techniques when conducted
abroad may not be regulated as effectively as in the United States; may not
involve a clearing mechanism and related guarantees, and are subject to the risk
of governmental actions affecting trading in, or the prices of, foreign
securities. The value of such positions also could be adversely affected by: (i)
other complex foreign political, legal and economic factors; (ii) lesser
availability than in the United States of data on which to make trading
decisions; (iii) delays in the Fund's ability to act upon economic events
occurring in foreign markets during on-business hours in the United States; (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the United States; and (v) lesser trading volume.
INVESTMENT RESTRICTIONS
(See "INVESTMENT RESTRICTIONS" in the Fund's prospectus.)
Unless specified to the contrary, the following restrictions may not be
changed with respect to any Portfolio without the approval of the majority of
outstanding voting securities of that Portfolio (which, under the 1940 Act and
the rules thereunder and as used in this Statement of Additional Information,
means the lesser of (1) 67% of the shares of that Portfolio present at a meeting
if the holders of more than 50% of the outstanding shares of that Portfolio are
present in person or by proxy, or (2) more than 50% of the outstanding shares of
that Portfolio). Any investment restrictions which involve a maximum percentage
of securities or assets shall not be considered to be violated unless an excess
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over the percentage occurs immediately after, and is caused by, an acquisition
or encumbrance of securities or assets of, or borrowings by or on behalf of, a
Portfolio.
In addition to the investment restrictions set forth in the Fund's
prospectus, the Fund may not on behalf of any Portfolio:
(1) purchase and sell real estate (though it may invest in
securities of companies which deal in real estate and in other
permitted investments secured by real estate) or commodities
or commodities contracts, except (a) debt securities futures
contracts and securities index futures contracts and options
thereon, and (b) in the case of the International Portfolio,
foreign currency futures contracts;
(2) participate on a joint or a joint and several basis in any
trading account in securities, but may for the purpose of
possibly achieving better net results on portfolio
transactions or lower brokerage commission rates join with
other investment company and client accounts managed by
Scudder, Stevens & Clark or its affiliates in the purchase or
sale of portfolio securities;
(3) purchase or retain securities of an issuer any of whose
officers, directors, trustees or security holders is an
officer or Trustee of the Fund or a member, officer, director
or trustee of the investment adviser of the Fund if one or
more of such individuals owns beneficially more than one-half
of one percent (1/2 of 1%) of the shares or securities or both
(taken at market value) of such issuer and such individuals
owning more than one-half of one percent (1/2 of 1%) of such
shares or securities together own beneficially more than 5% of
such shares or securities or both;
(4) purchase securities on margin or make short sales unless, by
virtue of its ownership of other securities, it has the right
to obtain securities equivalent in kind and amount to the
securities sold and, if the right is conditional, the sale is
made upon the same conditions;
(5) issue senior securities, except as appropriate to evidence
indebtedness which a Portfolio is permitted to incur pursuant
to the Investment Restrictions set forth in the Fund's
prospectus and except for shares of various additional series
which may be established by the Trustees; or
(6) act as underwriter of the securities issued by others, except
to the extent that the purchase of securities in accordance
with its investment objective and policies directly from the
issuer thereof and the later disposition thereof may be deemed
to be underwriting.
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 Global Discovery and International Portfolios:
(1) hedge by purchasing put and call options, futures contracts,
or other derivative instruments on securities in an aggregate
amount equivalent to more than 10% of the Portfolio's total
assets;
(2) make securities loans if the value of such securities loaned
exceeds 10% of the value of the Portfolio's total assets at
the time any loan is made.
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 Global Discovery 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;
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(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;
(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.
"Value" for the purposes of all investment restrictions shall mean the
value used in determining a Portfolio's net asset value. (See "NET ASSET
VALUE.")
PURCHASES AND REDEMPTIONS
(See "PURCHASES AND REDEMPTIONS" in the Fund's prospectus.)
The separate accounts of the Participating Insurance Companies purchase
and redeem shares of each Portfolio based on, among other things, the amount of
premium payments to be invested and surrender and transfer requests to be
effected on that day pursuant to variable annuity contracts and variable life
insurance policies but only on days on which the Exchange is open for trading.
Such purchases and redemptions of the shares of each Portfolio are effected at
their respective net asset values per share determined as of the close of
regular trading on the Exchange (normally 4 p.m. eastern time) on that same day
except that, in the case of the Money Market Portfolio, purchases will not be
effected until the next determination of net asset value after federal funds
have been made available to the Fund. (See "NET ASSET VALUE.") Payment for
redemptions will be made by State Street Bank and Trust Company or Brown
Brothers Harriman & Co. on behalf of the Fund and the applicable Portfolios
within seven days thereafter. No fee is charged the separate accounts of the
Participating Insurance Companies when they redeem Fund shares.
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The Fund may suspend the right of redemption of shares of any Portfolio
and may postpone payment for any period: (i) during which the Exchange is closed
other than customary weekend and holiday closings or during which trading on the
Exchange is restricted; (ii) when the SEC determines that a state of emergency
exists which may make payment or transfer not reasonably practicable, (iii) as
the SEC may by order permit for the protection of the security holders of the
Fund or (iv) at any other time when the Fund may, under applicable laws and
regulations, suspend payment on the redemption of its shares.
Should any conflict between VA contract and VLI policy holders arise
which would require that a substantial amount of net assets be withdrawn from
the Fund, orderly portfolio management could be disrupted to the potential
detriment of such contract and policy holders.
INVESTMENT ADVISER AND DISTRIBUTOR
(See "INVESTMENT ADVISER" and "DISTRIBUTOR" in the Fund's prospectus.)
Investment Adviser
The Fund has four investment advisory agreements, one for the Money
Market Portfolio, Bond Portfolio, Balanced Portfolio and Capital Growth
Portfolio, one for the International Portfolio, one for the Growth and Income
Portfolio and one for the Global Discovery Portfolio (the "Agreements"). These
Agreements are 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 $115 billion in assets
for its clients, including: more than $50 billion in U.S. and foreign bonds, and
over $10 billion in balanced portfolios for over 3,000 institutional and private
accounts. In addition, the assets of Scudder's international investment company
clients exceed $6 billion. Scudder, Stevens & Clark, Inc. was established in
1919 and pioneered the practice of providing investment counsel to individual
clients on a fee basis. In 1928, it introduced the first no-load mutual fund to
the public. The Adviser has been a leader in international investment management
and trading for over 40 years.
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice, and the firm derives no
income from brokerage or underwriting of securities. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations. In addition, it manages Montgomery Street Income Securities,
Inc., Scudder California Tax Free Trust, Scudder Cash Investment Trust, Scudder
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 Pathway Series, 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 $13 billion and includes the
AARP Growth Trust, AARP Income Trust, AARP Tax Free Income Trust, AARP Managed
Investment Portfolios 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
43
<PAGE>
could have an adverse effect on the price or amount of the securities purchased
or sold by the Fund. Purchase and sale orders for the Fund may be combined with
those of other clients of the Adviser in the interest of the most favorable net
results to the Fund.
The Adviser maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Adviser receives published
reports and statistical compilations from issuers and other sources, as well as
analyses from brokers and dealers who may execute portfolio transactions for the
Adviser's clients. However, the Adviser regards this information and material as
an adjunct to its own research activities. Scudder's international investment
management team travels the world, researching hundreds of companies. In
selecting the securities in which the Fund may invest, the conclusions and
investment decisions of the Adviser with respect to the Fund are based primarily
on the analyses of its own research department.
Under the Agreements, the Adviser regularly provides the Fund with
investment research, advice and supervision and furnishes continuously an
investment program consistent with the investment objectives and policies of
each Portfolio, and determines, for each Portfolio, what securities shall be
purchased, what securities shall be held or sold, and what portion of a
Portfolio's assets shall be held uninvested, subject always to the provisions of
the Fund's Declaration of Trust and By-Laws, and of the 1940 Act and to a
Portfolio's investment objectives, policies and restrictions, and subject
further to such policies and instructions as the Trustees may from time to time
establish. The Adviser also advises and assists the officers of the Fund in
taking such steps as are necessary or appropriate to carry out the decisions of
its Trustees and the appropriate committees of the Trustees regarding the
conduct of the business of the Fund.
The Adviser pays the compensation and expenses of all affiliated
Trustees and executive employees of the Fund and makes available, without
expense to the Fund, the services of such affiliated persons as may duly be
elected Trustees of the Fund, subject to their individual consent to serve and
to any limitations imposed by law, and pays the Fund's office rent and provides
investment advisory, research and statistical facilities and all clerical
services relating to research, statistical and investment work. For its advisory
services the Adviser receives compensation monthly at the following annual rates
for each Portfolio:
<TABLE>
<CAPTION>
% of the average
daily net asset
values of each Dollar Amount
Portfolio Portfolio 1994 1995 1996
<S> <C> <C> <C> <C>
Money Market Portfolio .370% $269,963 $306,996 $325,791
Bond Portfolio .475% 650,361 657,112 291,740
Balanced Portfolio .475% 218,621 269,230 372,176
Growth and Income Portfolio .475% 0 169,852 326,033
Capital Growth Portfolio .475% 1,199,585 1,383,919 1,870,361
Global Discovery Portfolio .975% -- -- 80,681
International Portfolio .875%* 3,363,597 4,357,541 5,590,601
</TABLE>
* For any calendar month during which the average daily net assets of
International Portfolio exceed $500,000,000, the fee payable for that
month, with respect to the excess over $500,000,000, is calculated at
an annual rate of .775%. As a result, the Adviser received compensation
at an annual rate of .863% for the fiscal year ended December 31, 1996.
Under the Agreements, 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
44
<PAGE>
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 Fund's investment advisory
agreements and underwriting agreement, have approved payments to the Adviser and
Scudder Investor Services, Inc. for clerical, accounting and certain other
services they may provide the Fund. Effective October 1, 1994, the Trustees
authorized the elimination of these administrative expenses. Under a new
agreement, effective October 1, 1994, the Trustees authorized the Fund, on
behalf of each Portfolio, to pay Scudder Fund Accounting Corporation, a
subsidiary of the Adviser, for determining the daily net asset value per share
and maintaining the portfolio and general accounting records of the Fund.
For the year ended December 31, 1994, such compensation amounted to
$40,297 for the Money Market Portfolio, $40,238 for the Bond Portfolio, $38,204
for the Balanced Portfolio, $25,179 for the Growth and Income Portfolio, $45,253
for the Capital Growth Portfolio, $45,272 for the International Portfolio;
administrative expenses not imposed aggregated $7,119 for the Balanced
Portfolio.
For the year ended December 31, 1995, such compensation amounted to
$30,000 for the Money Market Portfolio, $43,187 for the Bond Portfolio, $37,353
for the Balanced Portfolio, $38,256 for the Growth and Income Portfolio, $73,583
for the Capital Growth Portfolio and $277,867 for the International Portfolio.
For the year ended December 31, 1996, such compensation amounted to
$___ for the Money Market Portfolio, $___ for the Bond Portfolio, $___ for the
Balanced Portfolio, $___ for the Growth and Income Portfolio, $___ for the
Capital Growth Portfolio, $___ for the Global Discovery Portfolio and $___ for
the International Portfolio.
The Agreements dated November 14, 1986 (for the Money Market Portfolio,
Bond Portfolio, Balanced Portfolio and Capital Growth Portfolio), April 30, 1987
(for the International Portfolio), May 1, 1994 (for the Growth and Income
Portfolio) will remain in effect until September 30, 1997. The Agreement dated
May 1, 1996 (for the Global Discovery Portfolio) will remain in effect until
September 30, 1997. The Agreements will continue in effect from year to year
thereafter only if their continuance is approved annually by the vote of a
majority of those Trustees who are not parties to such Agreements or "interested
persons" of the Adviser or the Fund cast in person at a meeting called for the
purpose of voting on such approval and either by vote of a majority of the
Trustees or a majority of the outstanding securities of such Portfolio. The
Agreement for the Money Market Portfolio, Bond Portfolio, Balanced Portfolio and
Capital Growth Portfolio, the Agreement for the International Portfolio and the
Agreement for the Growth and Income Portfolio were last approved by such
Trustees (including a majority of the Trustees who are not such "interested
persons") on August 9, 1996. The Agreement for the Global Discovery Portfolio
was last approved by such Trustees (including a majority of the Trustees who are
not such "interested persons") on October 5, 1995. Each 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.
Each 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 Agreements and in discussions with the
Adviser concerning the Agreements, Trustees who are not "interested persons" of
the Fund are represented by independent counsel at the Fund's expense.
The Agreements provide 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 Agreements relate, except a loss resulting
from willful misfeasance, bad faith or gross negligence on the part of the
Adviser in the performance of its duties or from reckless disregard by the
Adviser of its obligations and duties under the Agreements.
Each Participating Insurance Company has agreed with the Adviser to
reimburse the Adviser for a period of five years to the extent that the
aggregate annual advisory fee paid on behalf of all Portfolios with respect to
the average daily net asset value of the shares of all Portfolios held in that
Participating Insurance Company's general or separate account (or those of
45
<PAGE>
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.
Until April 30, 1998, the Adviser has agreed to waive part or all of
both the management and administrative fees for the Global Discovery Portfolio,
excluding 12b-1 fees, to the extent that the Portfolio's expenses will be
maintained at 1.50%.
Officers and employees of the Adviser from time to time may have
transactions with various banks, including the Fund's custodian bank. It is the
Adviser's opinion that the terms and conditions of those transactions were not
influenced by existing or potential custodial or other Fund relationships.
None of the Trustees or officers of the Fund may have dealings with the
Fund as principals in the purchase or sale of securities.
Personal Investments by Employees of the Adviser
Employees of the Adviser are permitted to make personal securities
transactions, subject to requirements and restrictions set forth in the
Adviser's Code of Ethics. The Code of Ethics contains provisions and
requirements designed to identify and address certain conflicts of interest
between personal investment activities and the interests of investment advisory
clients such as the Portfolios. Among other things, the Code of Ethics, which
generally complies with standards recommended by the Investment Company
Institute's Advisory Group on Personal Investing, prohibits certain types of
transactions absent prior approval, imposes time periods during which personal
transactions may not be made in certain securities, and requires the submission
of duplicate broker confirmations and monthly reporting of securities
transactions. Additional restrictions apply to portfolio managers, traders,
research analysts and others involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
Distributor
The Fund has an underwriting agreement with Scudder Investor Services,
Inc. (the "Distributor"), a subsidiary of the Adviser, Two International Place,
Boston, Massachusetts 02110-4103. The Fund's underwriting agreement dated July
12, 1985, will remain in effect until September 30, 1997, and from year to year
thereafter only if its continuance is approved annually by a majority of the
Trustees who are not parties to such agreement or "interested persons" of any
such party and either by vote of a majority of the Trustees or a majority of the
outstanding voting securities of the Fund.
Under the principal underwriting agreement between the Fund and the
Distributor, the Fund is responsible for the payment of all fees and expenses in
connection with the preparation and filing of any registration statement and
prospectus covering the issue and sale of shares, and the registration and
qualification of shares for sale with the SEC in the various states, including
registering the Fund as a broker or dealer. The Fund will also pay the fees and
expenses of preparing, printing and mailing prospectuses annually to existing
shareholders and any notice, proxy statement, report, prospectus or other
communication to shareholders of the Fund, printing and mailing confirmations of
purchases of shares, any issue taxes or any initial transfer taxes, a portion of
toll-free telephone service for shareholders, wiring funds for share purchases
and redemptions (unless paid by the shareholder who initiates the transaction),
printing and postage of business reply envelopes and a portion of the computer
terminals used by both the Fund and the Distributor.
The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of the shares to
the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of the shares to the public. The
Distributor will pay all fees and expenses in connection with its qualification
and registration as a broker or dealer under Federal and state laws, a portion
of the toll-free telephone service and of computer terminals, and of any
activity which is primarily intended to result in the sale of shares issued by
the Fund, unless a 12b-l Plan is in effect which provides that the Fund shall
bear some or all of such expenses. The Distributor has entered into agreements
with broker-dealers authorized to offer and sell VA contracts and VLI policies
on behalf of the Participating Insurance Companies under which agreements the
broker-dealers have agreed to be responsible for the fees and expenses of any
prospectus, statement of additional information and printed information
46
<PAGE>
supplemental thereto of the Fund distributed in connection with their offer of
VA contracts and VLI policies.
As agent, the Distributor currently offers shares of each Portfolio on
a continuous basis to the separate accounts of Participating Insurance Companies
in all states in which the Portfolio or the Fund may from time to time be
registered or where permitted by applicable law. The underwriting agreement
provides that the Distributor accepts orders for shares at net asset value
without sales commission or load being charged. The Distributor has made no firm
commitment to acquire shares of any Portfolio.
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"),
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.
47
<PAGE>
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.
<TABLE>
<CAPTION>
MANAGEMENT OF THE FUND
Trustees and Officers
Position with
Underwriter, Scudder
Investor Services,
Name, Age and Address Position with Fund Principal Occupation** Inc.
- --------------------- ------------------ ---------------------- --------------------
<S> <C> <C> <C>
David B. Watts*@+ (62) President and Trustee Managing Director of Scudder, Assistant Treasurer
Stevens & Clark, Inc.
Daniel Pierce*@+ (63) Vice President and Chairman of the Board and Vice President,
Trustee Managing Director of Scudder, Director and Assistant
Stevens & Clark, Inc. Treasurer
Dr. Kenneth Black, Jr. (72) Trustee Regents' Professor Emeritus of ----
Educational Foundation, Inc. Insurance, Georgia State
35 Broad Street University
11th Floor, Room 1144
Atlanta, GA 30303
Dr. Rosita P. Chang (42) Trustee Professor of Finance, _____
PACAP Research Center University of Rhode Island
College of Business
Administration
University of Rhode Island
7 Lippitt Road
Kingston, RI 02881-0802
Peter B. Freeman@ (64) Trustee Corporate Director and Trustee ----
100 Alumni Avenue
Providence, RI 02906
Dr. J. D. Hammond (63) Trustee Dean, Smeal College of Business ----
801 Business Administration, Pennsylvania
Administration Bldg. State University
Pennsylvania State University
University Park, PA 16802
Thomas S. Crain++ (56) Vice President Managing Director of Scudder, ----
Stevens & Clark, Inc.
Carol Franklin*#(44) Vice President Managing Director of Scudder, ----
Stevens & Clark, Inc.
William F. Gadsden*#(42) Vice President Managing Director of Scudder, ----
Stevens & Clark, Inc.
Jerard K. Hartman#(64) Vice President Managing Director of Scudder, ----
Stevens & Clark, Inc.
48
<PAGE>
Position with
Underwriter, Scudder
Investor Services,
Name, Age and Address Position with Fund Principal Occupation** Inc.
- --------------------- ------------------ ---------------------- --------------------
Robert T. Hoffman*#(38) Vice President Managing Director of Scudder, ----
Stevens & Clark, Inc.
Richard A. Holt*** (55) Vice President Managing Director of Scudder, ----
Stevens & Clark, Inc.
William M. Hutchinson*+(49) Vice President Principal of Scudder, Stevens & ----
Clark, Inc.
Thomas W. Joseph+ (58) Vice President Principal of Scudder, Stevens & Vice President,
Clark, Inc. Director, Treasurer
and Assistant Clerk
David S. Lee+ (63) Vice President Managing Director of Scudder, President, Assistant
Stevens & Clark, Inc. Treasurer and Director
Valerie F. Malter*#(38) Vice President Principal of Scudder, Stevens & ----
Clark, Inc.
Steven M. Meltzer+ (38) Vice President Managing Director of Scudder, ----
Stevens & Clark, Inc.
Gerald J. Moran*#(57) Vice President Principal of Scudder, Stevens & ----
Clark, Inc.
Randall K. Zeller# (42) Vice President Managing Director of Scudder, ----
Stevens & Clark, Inc.
Thomas F. McDonough+ (50) Vice President and Principal of Scudder, Stevens & Clerk
Secretary Clark, Inc.
Pamela A. McGrath+ (43) Vice President and Managing Director of Scudder, ----
Treasurer Stevens & Clark, Inc.
Edward J. O'Connell# (51) Vice President and Principal of Scudder, Stevens & Assistant Treasurer
Assistant Treasurer Clark, Inc.
Kathryn L. Quirk# (44) Vice President and Managing Director of Scudder, Vice President
Assistant Secretary Stevens & Clark, Inc.
</TABLE>
* 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).
** Unless otherwise stated, all the officers and Trustees have been
associated with their respective companies for more than five years,
but not necessarily in the same capacity.
@ Peter B. Freeman, Daniel Pierce and David B. Watts are members of the
Executive Committee, which has the power to declare dividends from
ordinary income and distributions of realized capital gains to the same
extent as the Board is so empowered.
+ Address: Two International Place, Boston, Massachusetts 02110-4103
# Address: 345 Park Avenue, New York, New York 10154
++ Address: 600 Vine Street - Suite 2000, Cincinnati, Ohio 45202
49
<PAGE>
*** Address: 111 E. Wacker Drive - Suite 2200, Chicago, Illinois 60601
Certain of the Trustees and officers of the Fund also serve in similar
capacities with other Scudder Funds.
REMUNERATION
Responsibilities of the Board--Board and Committee Meetings
The Board of Trustees is responsible for the general oversight of the
Fund's business. A majority of the Board's members are not affiliated with
Scudder, Stevens & Clark, Inc. (The "Advisor"). These "Independent Trustees"
have primary responsibility for assuring that the Fund is managed in the best
interests of its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of the Fund and other operational matters, including policies and
procedures designated to assure compliance with various regulatory requirements.
At least annually, the Independent Trustees review the fees paid to the Adviser
and its affiliates for investment advisory services and other administrative and
shareholder services. In this regard, they evaluate, among other things, each
Funds' investment performance, the quality and efficiency of the various other
services provided, costs incurred by the Adviser and its affiliates, and
comparative information regarding fees and expenses of competitive funds. They
are assisted in this process by the Fund's independent public accountants and by
independent legal counsel selected by the Independent Trustees.
All of the Independent Trustees serve on the Committee on Independent
Trustees, which nominates Independent Trustees and considers other related
matters, and the Audit Committee, which selects the Fund's independent public
accountants and reviews accounting policies and controls. In addition,
Independent Trustees from time to time have established and served on task
forces and subcommittees focusing on particular matters such as investment,
accounting and shareholder service issues.
The Independent Trustees met _____ times during 1996, including Board
and Committee meetings and meetings to review each Fund's contractual
arrangements as described above. All of the Independent Trustees attended ____%
of all such meetings.
Compensation of Officers and Trustees
The Independent Trustees receive the following compensation from Funds:
an annual trustee's fee of $12,000; a fee of $300 for attendance at each Board
meeting, audit committee meeting, or other meeting held for the purposes of
considering arrangements between the Fund and the Adviser or any affiliate of
the Adviser; $100 for any other committee meeting (although in some cases the
Independent Trustees have waived committee meeting fees); and reimbursement of
expenses incurred for travel to and from Board Meetings. No additional
compensation is paid to any Independent Trustee for travel time to meetings,
attendance at directors' educational seminars or conferences, service on
industry or association committees, participation as speakers at directors'
conferences, service on special trustee task forces or subcommittees or service
as lead or liaison trustee. Independent Trustees do not receive any employee
benefits such as pension, retirement or health insurance.
The Independent Trustees also serve in the same capacity for other
funds managed by the Adviser. These funds differ broadly in type an complexity
and in some cases have substantially different Trustee fee schedules. The
following table shows the aggregate compensation received by each Independent
Trustee during 1996 from the Trust and from all of Scudder funds as a group.
50
<PAGE>
<TABLE>
<CAPTION>
Compensation Table
for the year ended December 31, 1996
- ------------------------------------------------------------------------------------------------------------------
(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., $ 26,233 N/A N/A $ 26,233
Trustee (7 funds)
Dr. Rosita P. Chang, $ 26,233 N/A N/A $ 26,233
Trustee (7 funds)
Peter B. Freeman, Trustee $ 16,483 N/A N/A $ 131,734
(33 funds)
Dr. J.D. Hammond, $ 26,233 N/A N/A $ 26,233
Trustee (7 funds)
</TABLE>
* 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.
Members of the Board of Trustees who are employees of Scudder or its
affiliates receive no direct compensation from the Fund, although they are
compensated as employees of Scudder, or its affiliates, as a result of which
they may be deemed to participate in fees paid by the Fund.
NET ASSET VALUE
(See "NET ASSET VALUE" and "VALUATION OF PORTFOLIO SECURITIES"
in the Fund's prospectus)
The net asset value of shares of each Portfolio of the Fund is computed
as of the close of regular trading on the Exchange on each day the Exchange is
open for trading (the "Value Time"). The Exchange is scheduled to be closed on
the following holidays: New Year's Day, Presidents Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving and Christmas. Net asset value
per share is determined by dividing the value of the total assets of a Fund,
less all liabilities, by the total number of shares outstanding.
The valuation of the Money Market Portfolio securities is based upon
their amortized cost, which does not take into account unrealized securities
gains or losses. This method involves initially valuing an instrument at its
cost and thereafter assuming a constant amortization to maturity of any discount
or premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Money Market Portfolio would receive if it
sold the instrument. During periods of declining interest rates, the quoted
yield on shares of the Money Market Portfolio may tend to be higher than a like
computation made by a fund with identical investments utilizing a method of
valuation based upon market prices and estimates of market prices for all of its
portfolio instruments. Thus, if the use of amortized cost by the Portfolio
resulted in a lower aggregate portfolio value on a particular day, a prospective
investor in the Money Market Portfolio would be able to obtain a somewhat higher
yield if he purchased shares of the Money Market Portfolio on that day, than
would result/from investment in a fund utilizing solely market values, and
51
<PAGE>
existing investors in the Money Market Portfolio would receive less investment
income. The converse would apply in a period of rising interest rates.
An exchange-traded equity security (not subject to resale restrictions)
is valued at its most recent sale price as of the Value Time. Lacking any sales,
the security is valued at the calculated mean between the most recent bid
quotation and the most recent asked quotation (the "Calculated Mean"). If there
are no bid and asked quotations, the security is valued at the most recent bid
quotation. An unlisted equity security which is traded on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") system is
valued at the most recent sale price. If there are no such sales, the security
is valued at the high or "inside" bid quotation. The value of an equity security
not quoted on the NASDAQ System, but traded in another over-the-counter market,
is the most recent sale price. If there are no such sales, the security is
valued at the Calculated Mean. If there is no Calculated Mean, the security is
valued at the most recent bid quotation.
Debt securities, other than short-term securities, are valued at prices
supplied by the Fund's pricing agent which reflect broker/dealer supplied
valuations and electronic data processing techniques. Short-term securities with
remaining maturities of sixty days or less are valued by the amortized cost
method, which the Board believes approximates market value. If it is not
possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If no such bid quotation is available, the Adviser may
calculate the price of that debt security, subject to limitations established by
the Board.
Option contracts on securities, currencies, futures and other financial
instruments traded on an exchange are valued at their most recent sale price on
the exchange. If no sales are reported, the value is the Calculated Mean, or if
the Calculated Mean is not available, the most recent bid quotation in the case
of purchased options, or the most recent asked quotation in the case of written
options. Option contracts traded over-the-counter are valued at the most recent
bid quotation in the case of purchased options and at the most recent asked
quotation in the case of written options. Futures contracts are valued at the
most recent settlement price. Foreign currency forward contracts are valued at
the value of the underlying currency at the prevailing currency exchange rate.
If a security is traded on more than one exchange, or on one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of the Fund's Valuation Committee, the value of an
asset as determined in accordance with these procedures does not represent the
fair market value of the asset, the value of the asset is taken to be an amount
which, in the opinion of the Valuation Committee, represents fair market value
on the basis of all available information. The value of other portfolio holdings
owned by the Fund is determined in a manner which, in the discretion of the
Valuation Committee most fairly reflects fair market value of the property on
the valuation date.
Following the valuations of securities or other portfolio assets in
terms of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rates on the valuation date.
TAX STATUS
(See "TAX STATUS, DIVIDENDS AND DISTRIBUTIONS" in the Fund's prospectus.)
Each Portfolio of the Fund has elected to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). Such qualification does not involve governmental
supervision or management of investment practices or policy.
Each Portfolio intends to comply with the provisions of Section 817(h)
of the Code relating to diversification requirements for variable annuity,
endowment and life insurance contracts. Specifically, each Portfolio intends to
comply with either (i) the requirement of Section 817(h)(1) of the Code that its
assets be adequately diversified, or (ii) the "Safe Harbor for Diversification"
specified in Section 817(h)(2) of the Code, or (iii) the diversification
requirement of Section 817(h)(1) of the Code by having all or part of its assets
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invested in U.S. Treasury securities which qualify for the "Special Rule for
Investments in United States Obligations" specified in Section 817(h)(3) of the
Code.
A regulated investment company qualifying under Subchapter M of the
Code is required to distribute to its shareholders at least 90 percent of its
investment company taxable income and generally is not subject to federal income
tax to the extent that it distributes annually its investment company taxable
income and net realized capital gains in the manner required under the Code.
Investment company taxable income of a Portfolio generally is made up
of dividends, interest, certain currency gains and losses and net-short-term
capital gains in excess of net long-term capital losses, less expenses. Net
realized capital gains of a Portfolio for a fiscal year are computed by taking
into account any capital loss carryforward of the Portfolio.
At December 31, 1994 the Bond Portfolio had a net tax basis capital
loss carryforward of approximately $4,153,327 which may be applied against any
realized net taxable capital gains of each succeeding year until fully utilized
or until December 31, 2002, whichever occurs first. In addition, from November
1, 1994 through December 31, 1994, the Balanced Portfolio incurred $275,417 of
net realized capital losses which the Fund intends to defer and treat as arising
in the fiscal year ended December 31, 1995.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by a Portfolio for reinvestment,
requiring federal income taxes to be paid thereon by the Portfolio, such
Portfolio intends to elect to treat such capital gains as having been
distributed to shareholders. As a result, each shareholder will report such
capital gains as long-term capital gains, will be able to claim its share of
federal income taxes paid by the Portfolio on such gains as a credit against its
own federal income tax liability, and will be entitled to increase the adjusted
tax basis of its shares of the Portfolio by the difference between its pro rata
share of such gains and its tax credit.
Distributions of investment company taxable income are taxable to
shareholders as ordinary income.
Distributions of the excess of net long-term capital gain over net
short-term capital loss are taxable to shareholders as long-term capital gain,
regardless of the length of time the shares of the relevant Portfolio have been
held by such shareholders. Any loss realized upon the redemption of shares held
at the time of redemption for six months or less will be treated as a long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gain during such six-month period.
Distributions of investment company taxable income and net realized
capital gains will be taxable as described above, whether reinvested in
additional shares or in cash. Shareholders electing to receive distributions in
the form of additional shares will have a cost basis for federal income tax
purposes in each share so received equal to the net asset value of a share on
the reinvestment date.
All distributions of investment company taxable income and net realized
capital gain, whether reinvested in additional shares or in cash, must be
reported by each shareholder on its federal income tax return. Dividends
declared in October, November or December with a record date in such a month
will be deemed to have been received by shareholders on December 31 if paid
during January of the following year. Redemptions of shares may result in tax
consequences (gain or loss) to the shareholder and are also subject to these
reporting requirements.
Distributions by a Portfolio (except the Money Market Portfolio) result
in a reduction in the net asset value of the Portfolio's shares. Should a
distribution reduce the net asset value below a shareholder's cost basis, such
distribution would nevertheless be taxable to the shareholder as ordinary income
or capital gain as described above, even though, from an investment standpoint,
it may constitute a partial return of capital. In particular, investors should
consider the tax implications of buying shares just prior to a distribution. The
price of shares purchased at that time includes the amount of the forthcoming
distribution. Those purchasing just prior to a distribution will then receive a
partial return of capital upon the distribution, which will nevertheless be
taxable to them.
If the Balanced, Growth and Income, Capital Growth, Global Discovery or
International Portfolios invest in stock of certain foreign investment
companies, the Portfolios may be subject to U.S. federal income taxation on a
portion of any "excess distribution" with respect to, or gain from the
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disposition of, such stock. The tax would be determined by allocating such
distribution or gain ratably to each day of a Portfolio's holding period for the
stock. The distribution or gain so allocated to any taxable year of a Portfolio,
other than the taxable year of the excess distribution or disposition, would be
taxed to a Portfolio at the highest ordinary income rate in effect for such
year, and the tax would be further increased by an interest charge to reflect
the value of the tax deferral deemed to have resulted from the ownership of the
foreign company's stock. Any amount of distribution or gain allocated to the
taxable year of the distribution or disposition would be included in a
Portfolio's investment company taxable income and, accordingly, would not be
taxable to a Portfolio to the extent distributed by a Portfolio as a dividend to
its shareholders.
Proposed regulations have been issued which may allow the Balanced,
Growth and Income, Capital Growth and International Portfolios to make an
election to mark to market their shares of these foreign investment companies in
lieu of being subject to U.S. federal income taxation. At the end of each
taxable year to which the election applies, the Balanced, Capital Growth,
International and Growth and Income Portfolios would report as ordinary income
the amount by which the fair market value of the foreign company's stock exceeds
the Balanced, Capital Growth, International and Growth and Income Portfolios'
adjusted basis in these shares. No mark to market losses would be recognized.
The effect of the election would be to treat excess distributions and gain on
dispositions as ordinary income which is not subject to a fund level tax when
distributed to shareholders as a dividend. Alternatively, the Portfolios may
elect to include as income and gain their share of the ordinary earnings and net
capital gain of certain foreign investment companies in lieu of being taxed in
the manner described above.
Equity options (including options on stock and options on narrow-based
stock indexes) and over-the-counter options on debt securities written or
purchased by a Portfolio will be subject to tax under Section 1234 of the Code.
In general, no loss is recognized by a Portfolio upon payment of a premium in
connection with the purchase of a put or call option. The character of any gain
or loss recognized (i.e., long-term or short-term) will generally depend in the
case of a lapse or sale of the option on the Portfolio's holding period for the
option and in the case of an exercise of a put option on the Portfolio's holding
period for the underlying security. The purchase of a put option may constitute
a short sale for federal income tax purposes, causing an adjustment in the
holding period of the underlying security or a substantially identical security
of the Portfolio. If the Portfolio writes a put or call option, no gain is
recognized upon its receipt of a premium. If the option lapses or is closed out,
any gain or loss is treated as a short-term capital gain or loss. If a call
option written by a Portfolio is exercised, the character of the gain or loss
depends on the holding period of the underlying security. The exercise of a put
option written by a Portfolio is not a taxable transaction for the Portfolio.
Many futures contracts, certain foreign currency forward contracts
entered into by a Portfolio and all listed nonequity options written or
purchased by the Portfolio (including options on debt securities, options on
futures contracts, options on securities indexes and options on broad-based
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 a Portfolio will be treated as ordinary income. Under certain
circumstances, entry into a futures contract to sell a security may constitute a
short sale for federal income tax purposes, causing an adjustment in the holding
period of the underlying security or a substantially identical security owned by
the Portfolio.
Subchapter M of the Code requires that each Portfolio realize less than
30% of its annual gross income from the sale or other disposition of stock,
securities and certain options, futures and forward contracts held for less than
three months. Certain options, futures and forward activities of a Portfolio may
increase the amount of gains realized by a Portfolio that are subject to the 30%
limitation. Accordingly, the amount of such transactions that a Portfolio may
undertake may be limited.
Positions of a Portfolio which consist of at least one stock and at
least one stock option or other position with respect to a related security
which substantially diminishes the Portfolio's risk of loss with respect to such
stock could be treated as a "straddle" which is governed by Section 1092 of the
Code, the operation of which may cause deferral of losses, adjustments in the
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holding periods of stock or securities and conversion of short-term capital
losses into long-term capital losses. An exception to these straddle rules
exists for any "qualified covered call options" on stock written by a Portfolio.
Positions of a Portfolio which consist of at least one position not
governed by Section 1256 and at least one futures contract, foreign currency
forward contract or nonequity option governed by Section 1256 which
substantially diminishes the Portfolio's risk of loss with respect to such other
position will be treated as a "mixed straddle." Although mixed straddles are
subject to the straddle rules of Section 1092 of the Code, certain tax elections
exist for them which reduce or eliminate the operation of these rules. Each
Portfolio will monitor its transactions in options and futures and may make
certain tax elections in connection with these investments.
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time a Portfolio accrues receivables or
liabilities denominated in a foreign currency and the time the Portfolio
actually collects such receivables or pays such liabilities generally are
treated as ordinary income or ordinary loss. Similarly, on disposition of debt
securities denominated in a foreign currency and on disposition of certain
futures contracts, forward contracts and options, gains or losses attributable
to fluctuations in the value of foreign currency between the date of acquisition
of the security or contract and the date of disposition are also treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"Section 988" gains or losses, may increase or decrease the amount of a
Portfolio's investment company taxable income to be distributed to its
shareholders as ordinary income.
If a Portfolio holds zero coupon securities or other securities which
are issued at a discount, a portion of the difference between the issue price of
zero coupon securities and the face value ("original issue discount") will be
treated as income to the Portfolio each year, even though the Portfolio will not
receive cash interest payments from these securities. This original issue
discount (imputed income) will comprise a part of the investment company taxable
income of the Portfolio which must be distributed to shareholders in order to
maintain the qualification of the Portfolio as a regulated investment company
and to avoid federal income tax at the Portfolio level. Shareholders will be
subject to income tax on such original issue discount, whether or not they elect
to receive their distributions in cash. If a Portfolio acquires a debt
instrument at a market discount, a portion of the gain recognized, if any, on
disposition of such instrument may be treated as ordinary income.
Dividend and interest income received by the Portfolios from sources
outside the U.S. may be subject to withholding and other taxes imposed by such
foreign jurisdictions. Tax conventions between certain countries and the U.S.
may reduce or eliminate these foreign taxes, however, and foreign countries
generally do not impose taxes on capital gains respecting investments by foreign
investors.
Each Portfolio will be required to report to the Internal Revenue
Service all distributions of investment company taxable income and capital gains
as well as gross proceeds from the redemption or exchange of shares, except in
the case of certain exempt shareholders, which include most corporations. Under
the backup withholding provisions of Section 3406 of the Code, distributions of
taxable income and capital gains and proceeds from the redemption or exchange of
the shares of a regulated investment company may be subject to withholding of
federal income tax at the rate of 31% in the case of non-exempt shareholders who
fail to furnish the investment company with their taxpayer identification
numbers and with required certifications regarding their status under the
federal income tax law. Withholding may also be required if a Portfolio is
notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. Participating Insurance Companies
that are corporations should furnish their taxpayer identification numbers and
certify their status as corporations in order to avoid possible erroneous
application of backup withholding.
Shareholders of the Portfolios may be subject to state and local taxes
on distributions received from such Portfolios and on redemptions of their
shares.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution.
The Fund is organized as a Massachusetts business trust, and neither
the Fund nor the Portfolios are liable for any income or franchise tax in the
Commonwealth of Massachusetts providing each Portfolio continues to qualify as a
regulated investment company under Subchapter M of the Code.
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The foregoing discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. persons. Each shareholder which is not a
U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the Portfolio, including the possibility that such a shareholder
may be subject to a U.S. withholding tax at a rate of 30% (or at a lower rate
under an applicable income tax treaty) on amounts constituting ordinary income
received by it, where such amounts are treated as income from U.S. sources under
the Code.
For further information concerning federal income tax consequences for
the holders of the VA contracts and VLI policies, shareholders should consult
the prospectus used in connection with the issuance of their particular
contracts or policies. Shareholders should consult their tax advisers about the
application of the provisions of tax law described in this statement of
additional information in light of their particular tax situations.
DIVIDENDS AND DISTRIBUTIONS
(See "TAX STATUS, DIVIDENDS AND DISTRIBUTIONS" in the Fund's prospectus.)
Money Market Portfolio
The net investment income of the Money Market Portfolio is determined
as of the close of regular trading on the Exchange (normally 4 p.m. eastern
time) on each day on which the Exchange is open for business. All of the net
income so determined normally will be declared as a dividend to shareholders of
record as of the close of regular trading on such Exchange after the purchase
and redemption of shares. Unless the business day before a weekend or holiday is
the last day of an accounting period, the dividend declared on that day will
include an amount in respect of the Portfolio's income for the subsequent
non-business day or days. No daily dividend will include any amount of net
income in respect of a subsequent semi-annual accounting period. Dividends
commence on the next business day after the date of purchase. Dividends will be
invested in additional shares of the Portfolio at the net asset value per share,
normally $1.00, determined as of the first business day of each month unless
payment of the dividend in cash has been requested.
Net investment income of the Money Market Portfolio consists of all
interest income accrued on portfolio assets less all expenses of the Portfolio
and amortized market premium. Accreted market discount is included in interest
income. The Portfolio does not anticipate that it will normally realize any
long-term capital gains with respect to its portfolio.
Normally the Money Market Portfolio will have a positive net income at
the time of each determination thereof. Net income may be negative if an
unexpected liability must be accrued or a loss realized. If the net income of
the Portfolio determined at any time is a negative amount, the net asset value
per share will be reduced below $1.00 unless one or more of the following steps
are taken: the Trustees have the authority (1) to reduce the number of shares in
each shareholder's account, (2) to offset each shareholder's pro rata portion of
negative net income from the shareholder's accrued dividend account or from
future dividends, or (3) to combine these methods in order to seek to maintain
the net asset value per share at $1.00. The Fund may endeavor to restore the
Portfolio's net asset value per share to $1.00 by not declaring dividends from
net income on subsequent days until restoration, with the result that the net
asset value per share will increase to the extent of positive net income which
is not declared as a dividend.
Should the Money Market Portfolio incur or anticipate, with respect to
its portfolio, any unusual or unexpected significant expense or loss which would
affect disproportionately the Portfolio's income for a particular period, the
Trustees would at that time consider whether to adhere to the dividend policy
described above or to revise it in light of the then prevailing circumstances in
order to ameliorate to the extent possible the disproportionate effect of such
expense or loss on then existing shareholders. Such expenses or losses may
nevertheless result in a shareholder's receiving no dividends for the period
during which the shares are held and in receiving upon redemption a price per
share lower than that which was paid. Similarly, should the Money Market
Portfolio incur or anticipate any unusual or unexpected significant income,
appreciation or gain which would affect disproportionately the fund's income for
a particular period, the Trustees or the Executive Committee of the Trustees may
consider whether to adhere to the dividend policy described above or to revise
it in light of the then prevailing circumstances in order to ameliorate to the
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extent possible the disproportionate effect of such income, appreciation or gain
on the dividend received by existing shareholders. Such actions may reduce the
amount of the daily dividend received by existing shareholders.
Global Discovery Portfolio and International Portfolio
The Global Discovery Portfolio and International Portfolio will each
follow the practice of distributing substantially all of its investment company
taxable income. The Portfolios intend 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 each
Portfolio unless a shareholder has elected to receive cash.
Other Portfolios
Each of the Bond, Capital Growth, Balanced and Growth and Income
Portfolios has followed the practice of declaring and distributing a dividend of
investment company taxable income, if any, quarterly, in January, April, July
and October. Each Portfolio has distributed its net capital gain within three
months of the end of each fiscal year. Both dividends and capital gain
distributions will be reinvested in additional shares of such a Portfolio unless
an election is made on behalf of a separate account to receive dividends and
capital gain distributions in cash.
PERFORMANCE INFORMATION
(See "Performance Information" in the Fund's prospectus)
From time to time, quotations of a Portfolio's performance may be
included in advertisements, sales literature or reports to shareholders or
prospective investors. These performance figures may be calculated in the
following manner:
Money Market Portfolio
A. Yield is the net annualized yield based on a specified seven
calendar days calculated at simple interest rates. Yield is
calculated by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account
having a balance of one share at the beginning of the period
subtracting a hypothetical charge reflecting deductions from
shareholder accounts and dividing the difference by the value
of the account at the beginning of the base period to obtain
the base period return. The yield is annualized by multiplying
the base period return by 365/7. The yield figure is stated to
the nearest hundredth of one percent. The yield of the Money
Market Portfolio for the seven-day period ended December 31,
1995, was 5.28%.
B. Effective yield is the net annualized yield for a specified
seven calendar days assuming a reinvestment of the income or
compounding. Effective yield is calculated by the same method
as yield except the yield figure is compounded by adding 1,
raising the sum to a power equal to 365 divided by 7, and
subtracting one from the result, according to the following
formula:
Effective Yield = [(Base Period Return + 1)^365/7] - 1.
The net annualized yield of the Portfolio for the seven-day
period ended December 31, 1996, was 5.04%.
As described above, yield and effective yield are based on historical
earnings and show the performance of a hypothetical investment and are not
intended to indicate future performance. Yield and effective yield will vary
based on changes in market conditions and the level of expenses.
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In connection with communicating its yield or effective yield to
current or prospective shareholders, the Money Market Portfolio also may compare
these figures to the performance of other mutual funds tracked by mutual fund
rating services or to other unmanaged indexes which may assume reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs.
From time to time, in marketing pieces and other fund literature, the
Fund's yield and performance over time may be compared to the performance of
broad groups of comparable mutual funds, bank money market deposit accounts and
fixed-rate insured certificates of deposit (CDs), or unmanaged indexes of
securities that are comparable to money market funds in their terms and intent,
such as Treasury bills, bankers' acceptances, negotiable order of withdrawal
accounts, and money market certificates. Most bank CDs differ from money market
funds in several ways: the interest rate is fixed for the term of the CD, there
are interest penalties for early withdrawal of the deposit, and the deposit
principal is insured by the FDIC.
Bond Portfolio
Yield is the net annualized yield based on a specified 30-day (or one
month) period assuming a semiannual compounding of income. Yield is
calculated by dividing the net investment income per share earned
during the period by the maximum offering price per share on the last
day of the period, according to the following formula:
YIELD = 2[((a-b)/cd + 1)^6 - 1]
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding
during the period that
were entitled to receive dividends.
d = the maximum offering price per share on the last
day of the period.
Yield for the 30-day period ended December 31, 1996
As of December 31, 1996, the Bond Portfolio had not begun
issuing Class B shares.
All Portfolios
A. Average Annual Total Return is the average annual compound
rate of return for the periods of one year and five years (or
such shorter periods as may be applicable dating from the
commencement of the Portfolio's operations) all ended on the
date of a recent calendar quarter.
Average annual total return quotations reflect changes in the
price of a Portfolio's shares and assume that all dividends
and capital gains distributions during the respective periods
were reinvested in Portfolio shares. Average annual total
return is calculated by finding the average annual compound
rates of return of a hypothetical investment over such
periods, according to the following formula (average annual
total return is then expressed as a percentage):
T = (ERV/P)^1/n - 1
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.
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Average Annual Total Return for periods ended December 31, 1996
One Year Five Years Ten Years Life of Fund
Money Market Portfolio 5.65% 4.20% 5.65% (1) -- %
As of December 31, 1996, each of the Portfolios (except the Money Market
Portfolio which does not offer separate classes of shares) had not begun issuing
Class B shares.*
B. Cumulative Total Return is the cumulative rate of return on a
hypothetical initial investment of $1,000 for a specified
period. Cumulative total return quotations reflect changes in
the price of a Fund's shares and assume that all dividends and
capital gains distributions during the period were reinvested
in Fund shares. Cumulative total return is calculated by
finding the cumulative rates of return of a hypothetical
investment over such periods, according to the following
formula (cumulative total return is then expressed as a
percentage):
C = (ERV/P) - 1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.
Cumulative Total Return for periods ended December 31, 1996
One Year Five Years Ten Years Life of Fund
Money Market Portfolio 5.65% 22.85% 73.27% (1) -- %
As of December 31, 1996, each of the Portfolios (except the Money Market
Portfolio which does not offer separate classes of shares) had not begun issuing
Class B shares.*
As described above, average annual total return, cumulative total
return and yield are based on historical earnings and are not intended to
indicate future performance. Average annual total return, cumulative total
return and yield for a Portfolio will vary based on changes in market conditions
and the level of the Portfolio's expenses.
In connection with communicating its total return or yield to current
or prospective shareholders, the Fund also may compare these figures for a
Portfolio to the performance of other mutual funds tracked by mutual fund rating
services or to other unmanaged indexes which may assume reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs.
Quoted yields on shares of the Fund's Portfolios will be of limited
usefulness to policy and contract holders for comparable purposes because such
quoted yields will be more than yields on participating contracts and policies
due to charges imposed at the separate account level.
- ---------------------------------
* On May 1, 1993, the Balanced Portfolio adopted its present name and
investment objective which is a balance of growth and income from a
diversified portfolio of equity and fixed income securities. Prior to
that date, the Portfolio was known as the Managed Diversified Portfolio
and its investment objective was to realize a high level of long-term
total rate of return consistent with prudent investment risk.
Performance information for the five years and life of Fund periods
should not be considered representative of the present Portfolio.
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Comparison of Portfolio Performance
A comparison of the quoted non-standard performance offered for 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 effects of the methods used to calculate performance when comparing
performance of a Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or
prospective shareholders, a Fund also may compare these figures to the
performance of unmanaged indices which may assume reinvestment of dividends or
interest but generally do not reflect deductions for administrative and
management costs. Examples include, but are not limited to the Dow Jones
Industrial Average, the Consumer Price Index, Standard & Poor's 500 Composite
Stock Price Index (S&P 500), the NASDAQ OTC Composite Index, the NASDAQ
Industrials Index, the Russell 2000 Index, and statistics published by the Small
Business Administration.
Because some or all each Fund's investments are denominated in foreign
currencies, the strength or weakness of the U.S. dollar as against these
currencies may account for part the Fund's investment performance. Historical
information on the value of the dollar versus foreign currencies may be used
from time to time in advertisements concerning the Funds. Such historical
information is not indicative of future fluctuations in the value of the U.S.
dollar against these currencies. In addition, marketing materials may cite
country and economic statistics and historical stock market performance for any
of the countries in which either Fund invests, including, but not limited to,
the following: population growth, gross domestic product, inflation rate,
average stock market price-earnings ratios and the total value of stock markets.
Sources for such statistics may include official publications of various foreign
governments and exchanges.
From time to time, in advertising and marketing literature, a Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations such as,
Investment Company Data, Inc. ("ICD"), Lipper Analytical Services, Inc.
("Lipper"), CDA Investment Technologies, Inc. ("CDA"), Morningstar, Inc., Value
Line Mutual Fund Survey and other independent organizations. When these
organizations' tracking results are used, a Fund will be compared to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the appropriate volatility grouping, where volatility is a measure of a
fund's risk. For instance, a Scudder growth fund will be compared to funds in
the growth fund category; a Scudder income fund will be compared to funds in the
income fund category; and so on. Scudder funds (except for money market funds)
may also be compared to funds with similar volatility, as measured statistically
by independent organizations. In addition, a Fund's performance may also be
compared to the performance of broad groups of comparable mutual funds.
Unmanaged indices with which a Fund's performance may be compared include, but
are not limited to, the following:
The Europe/Australia/Far East (EAFE) Index
International Finance Corporation's Latin America Investable
Total Return Index
Morgan Stanley Capital International World Index
J.P. Morgan Global Traded Bond Index
Salomon Brothers World Government Bond Index
NASDAQ Composite Index
Wilshire 5000 Stock Index
From time to time, in marketing and other Fund literature,
(Trustees)(Directors) and officers of the Funds, the Funds' portfolio manager,
or members of the portfolio management team may be depicted and quoted to give
prospective and current shareholders a better sense of the outlook and approach
of those who manage the Funds. In addition, the amount of assets that the
Adviser has under management in various geographical areas may be quoted in
advertising and marketing materials.
The Funds may be advertised as an investment choice in Scudder's
college planning program. The description may contain illustrations of projected
future college costs based on assumed rates of inflation and examples of
hypothetical fund performance, calculated as described above.
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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.
Marketing and other Fund literature may include a description of the
potential risks and rewards associated with an investment in the Funds. The
description may include a "risk/return spectrum" which compares the Funds to
other Scudder funds or broad categories of funds, such as money market, bond or
equity funds, in terms of potential risks and returns. Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The share
price and return of an equity fund also will fluctuate. The description may also
compare the Funds to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment
and money market funds seek stability of principal, these investments are
considered to be less risky than investments in either bond or equity funds,
which may involve the loss of principal. However, all long-term investments,
including investments in bank products, may be subject to inflation risk, which
is the risk of erosion of the value of an investment as prices increase over a
long time period. The risks/returns associated with an investment in bond or
equity funds depend upon many factors. For bond funds these factors include, but
are not limited to, a fund's overall investment objective, the average portfolio
maturity, credit quality of the securities held, and interest rate movements.
For equity funds, factors include a fund's overall investment objective, the
types of equity securities held and the financial position of the issuers of the
securities. The risks/returns associated with an investment in international
bond or equity funds also will depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds. Shorter-term bond funds generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase higher quality securities relative to bond funds that purchase
lower quality securities. Growth and income equity funds are generally
considered to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.
Risk/return spectrums also may depict funds that invest in both
domestic and foreign securities or a combination of bond and equity securities.
Evaluation of Fund performance or other relevant statistical
information made by independent sources may also be used in advertisements
concerning the Funds, including reprints of, or selections from, editorials or
articles about these Funds. Sources for Fund performance information and
articles about the Funds 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.
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CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
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 Money Fund Report, a weekly publication of IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity and including certain averages as performance
benchmarks, specifically "IBC's Money Fund Average," and "IBC'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 Business 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.
Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance, risk and portfolio
characteristics.
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.
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No-Load Fund*X, a monthly newsletter, published by DAL Investment Company, Inc.,
that reports on mutual fund performance, rates funds and discusses investment
strategies for the mutual fund investor.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
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 news weekly that periodically reports
mutual fund performance data.
Value Line Mutual Fund Survey, an independent organization that provides
biweekly performance and other information on mutual funds.
The 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.
Taking a Global Approach
Many U.S. investors limit their holdings to U.S. securities because
they assume that international or global investing is too risky. While there are
risks connected with investing overseas, it's important to remember that no
investment -- even in blue-chip domestic securities -- is entirely risk free.
Looking outside U.S. borders, an investor today can find opportunities that
mirror domestic investments -- everything from large, stable multinational
companies to start-ups in emerging markets. To determine the level of risk with
which you are comfortable, and the potential for reward you're seeking over the
long term, you need to review the type of investment, the world markets, and
your time horizon.
The U.S. is unusual in that it has a very broad economy that is well
represented in the stock market. However, many countries around the world are
not only undergoing a revolution in how their economies operate, but also in
terms of the role their stock markets play in financing activities. There is
vibrant change throughout the global economy and all of this represents
potential investment opportunity.
Investing beyond the United States can open this world of opportunity,
due partly to the dramatic shift in the balance of world markets. In 1970, the
United States alone accounted for two-thirds of the value of the world's stock
markets. Now, the situation is reversed -- only 35% of global stock market
capitalization resides here. There are companies in Southeast Asia that are
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starting to dominate regional activity; there are companies in Europe that are
expanding outside of their traditional markets and taking advantage of faster
growth in Asia and Latin America; other companies throughout the world are
getting out from under state control and restructuring; developing countries
continue to open their doors to foreign investment.
Stocks in many foreign markets can be attractively priced. The global
stock markets do not move in lock step. When the valuations in one market rise,
there are other markets that are less expensive. There is also volatility within
markets in that some sectors may be more expensive while others are depressed in
valuation. A wider set of opportunities can help make it possible to find the
best values available.
International or global investing offers diversification because the
investment is not limited to a single country or economy. In fact, many experts
agree that investment strategies that include both U.S. and non-U.S.
investments strike the best balance between risk and reward.
Scudder's 30% Solution
The 30 Percent Solution -- A Global Guide for Investors Seeking Better
Performance With Reduced Portfolio Risk is a booklet, created by Scudder, to
convey its vision about the new global investment dynamic. This dynamic is a
result of the profound and ongoing changes in the global economy and the
financial markets. The booklet explains how Scudder believes an equity
investment portfolio with up to 30% in international holdings and 70% in
domestic holdings can improve long-term performance while simultaneously helping
to reduce overall risk.
SHAREHOLDER COMMUNICATIONS
Owners of policies and contracts issued by Participating Insurance
Companies for which shares of one or more Portfolios are the investment vehicle
will receive from the Participating Insurance Companies unaudited semi-annual
financial statements and audited year-end financial statements certified by the
Fund's independent public accountants. Each report will show the investments
owned by the Fund and the market values thereof as determined by the Trustees
and will provide other information about the Fund and its operations.
Participating Insurance Companies with inquiries regarding the Fund may
call the Fund's underwriter, Scudder Investor Services, Inc., at 617-295-1000 or
write Scudder Investor Services, Inc., Two International Place, Boston,
Massachusetts 02110-4103.
ORGANIZATION AND CAPITALIZATION
(See "ADDITIONAL INFORMATION - Shareholder
Indemnification" in the Fund's prospectus.)
General
The Fund is an open-end investment company established under the laws
of The Commonwealth of Massachusetts by Declaration of Trust dated March 15,
1985.
As of December 31, 1996, AEtna Life Insurance and Annuity Company (151
Farmington Avenue TS41, Hartford, CT 06156), owned of record and beneficially
46.9% of the International Portfolio; they owned of record and beneficially
7.75% 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 1.3% of the Money Market Portfolio, 2.0% of the Bond Portfolio,
7.1% of the Balanced Portfolio, 0.7% of the International Portfolio, 5.0% of the
Growth and Income Portfolio, 4.4% of the Global Discovery Portfolio and 21.0% of
the Capital Growth Portfolio; they owned of record and beneficially 2.3% 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 56.1% of the Money Market Portfolio,
33.9% of the Bond Portfolio, 62.3% of the Balanced Portfolio, 25.8% of the
Capital Growth Portfolio, 88.0% of the Growth and Income Portfolio, 95.6% of the
Global Discovery Portfolio and 13.1% of the International Portfolio; they owned
of record and beneficially 53.1% of the Fund's total outstanding shares. In
1991, Charter National Life Insurance Company purchased the Colonial Penn Group,
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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 0.4% 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 (206 South 13th Street, Ste.
300, Lincoln, NE 68508) owned of record and beneficially 4.1% of the Bond
Portfolio and 6.8% of the Balanced Portfolio; they owned of record and
beneficially 0.96% of the Fund's total outstanding shares; and Mutual of America
Life Insurance Company of New York (320 Park Ave., 6th Fl., New York, NY 10022,
a New York corporation) and its subsidiary, American Life Insurance Company (666
5th Avenue, New York, NY 10103), owned of record and beneficially 40.3% of the
Bond Portfolio, 55.9% of the Capital Growth Portfolio and 23.5% of the
International Portfolio; they owned of record and beneficially 23.73% of the
Fund's total outstanding shares; and Paragon Life Insurance Company (100 South
Brentwood, St. Louis, MO 63105) owned of record and beneficially 0.2% of the
Bond Portfolio, 0.2% of the Capital Growth Portfolio, 0.4% of the Balanced
Portfolio, 0.1% of the Growth and Income Portfolio, and 0.1% of the
International Portfolio; they owned of record and beneficially 0.11% of the
Fund's total outstanding shares; and Providentmutual Life and Annuity Company of
America, (1050 Westlakes Dr., Berwyn, PA 19312) owned of record and beneficially
9.3% of the Bond Portfolio, 5.6% of the Growth and Income Portfolio, and 0.8% of
the International Portfolio; they owned of record and beneficially 1.08% 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 23.4% of the
Balanced Portfolio and 3.7% of the International Portfolio; they owned of record
and beneficially 2.1% of the Fund's total outstanding shares; and Security First
Life Insurance Company (11365 West Olympic Blvd., Los Angeles, CA 90064) owned
of record and beneficially 0.3% of the International Portfolio; and Southwestern
Life Insurance Company (500 North Akard, Dallas, TX 75201) owned of record and
beneficially 1.5% of the Capital Growth Portfolio; and The Union Central Life
Insurance Company (1876 Waycross Road, Cincinnati, OH 45240) owned of record and
beneficially 39.7% of the Money Market Portfolio, 6.2% of the Capital Growth
Portfolio and 8.2% of the International Portfolio; they owned of record and
beneficially 8.31% of the Fund's total outstanding shares; and United Companies
Life Insurance Company (8545 United Plaza Blvd., Baton Rouge, LA 70809) owned of
record and beneficially 2.4% of the Money Market Portfolio and 0.2% of the
International Portfolio; and United of Omaha Life Insurance Company (Mutual of
Omaha Plaza, Law Division, 3301 Dodge Street, Omaha, NE 68131) owned of record
and beneficially 0.3% of the Money Market Portfolio, 0.6% of the Bond Portfolio,
and 2.1% of the International Portfolio; they owned of record and beneficially
0.16% of the Fund's total outstanding shares and USAA Life Insurance Company
(R.A.F.A., F-2-E, 9800 Fredericksburg Rd., San Antonio, TX 78288) owned of
record and beneficially 2.3% of the Capital Growth Portfolio; and Washington
National Life Insurance Company (c/o United Presidential Life Insurance Co., One
Presidential Pkwy., Kokomo, IN 46904) owned of record and beneficially 0.5% of
the Money Market Portfolio, 9.3% of the Bond Portfolio, 1.3% of the Growth and
Income Portfolio and 6.0% of the Capital Growth Portfolio.
Shares entitle their holders to one vote per share; however, separate
votes will be taken by each Portfolio on matters affecting an individual
Portfolio. For example, a change in investment policy for the Money Market
Portfolio would be voted upon only by shareholders of the Money Market
Portfolio. Additionally, approval of the investment advisory agreement covering
a Portfolio is a matter to be determined separately by each Portfolio. Approval
by the shareholders of one Portfolio is effective as to that Portfolio. Shares
have noncumulative voting rights, which means that holders of more than 50% of
the shares voting for the election of Trustees can elect all Trustees and, in
such event, the holders of the remaining shares voting for the election of
Trustees will not be able to elect any person or persons as Trustees. Shares
have no preemptive or subscription rights, and are transferable.
Shareholders have certain rights, as set forth in the Declaration of
Trust of the Fund, including the right to call a meeting of shareholders for the
purpose of voting on the removal of one or more Trustees. Such removal can be
effected upon the action of two-thirds of the outstanding shares of beneficial
interest of the Fund.
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Shareholder and Trustee Liability
The Fund is an entity of the type commonly known as a "Massachusetts
business trust". Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the trust. The Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Fund. Notice
of such disclaimer will normally be given in each agreement, obligation, or
instrument entered into or executed by the Fund or the Trustees. The Declaration
of Trust provides for indemnification out of the Fund property of any
shareholder held personally liable for the obligations of the Fund. The
Declaration of Trust also provides that the Fund shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the Fund and satisfy any judgment thereon. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund itself would be unable to meet its obligations.
The Trustees believe that, in view of the above, the risk of personal liability
of shareholders is remote.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
ALLOCATION OF PORTFOLIO BROKERAGE
To the maximum extent feasible, the Adviser places orders for portfolio
transactions through its affiliate, the Distributor, which in turn places orders
on behalf of the Fund with the issuer, underwriters or other brokers and
dealers. The Distributor will receive no commissions, fees or other remuneration
for this service. Allocation of brokerage is supervised by the Adviser.
The Fund's purchases and sales of portfolio securities of the Money
Market Portfolio and the Bond Portfolio and of debt securities acquired for the
other Portfolios, are generally placed by the Adviser with primary market makers
for these securities on a net basis, without any brokerage commission being paid
by the Fund. Trading does, however, involve transaction costs. Transactions with
dealers serving as primary market makers reflect the spread between the bid and
asked prices. Purchases of underwritten issues may be made which will include an
underwriting fee paid to the underwriter. Transactions in equity securities
generally involve the payment of a brokerage commission.
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for any Portfolio is to obtain the most favorable net
results taking into account such factors as price, commission (negotiable in the
case of U.S. stock exchange transactions but which is generally fixed in the
case of foreign exchange transactions), if any, size of order, difficulty of
execution and skill required of the executing broker/dealer. Subject to the
foregoing, the Adviser may consider sales of variable life insurance policies
and variable annuity contracts for which the Fund is an investment option as a
factor in the selection of firms to execute portfolio transactions. The Adviser
seeks to evaluate the overall reasonableness of brokerage commissions paid
through the familiarity of the Distributor with commissions charged on
comparable transactions, as well as by comparing commissions paid by the Fund to
reported commissions paid by others. The Adviser reviews on a routine basis
commission rates, execution and settlement services performed, making internal
and external comparisons.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
brokers and dealers who supply 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 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
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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.
In the years ended December 31, 1994, 1995 and 1996, the Fund paid
brokerage commissions of $2,006,264, $2,669,610, and $2,106,414, respectively.
In the years ended December 31, 1994, 1995, and 1996, the International
Portfolio paid brokerage commissions of $1,471,275, $1,813,248, and $1,403,778,
respectively, the Capital Growth Portfolio paid brokerage commissions of
$420,391, $788,596, and $505,817, respectively and the Balanced Portfolio paid
brokerage commissions of $79,629, $67,758, and $67,828, respectively. The Growth
and Income Portfolio paid brokerage commissions of $34,967, $54,235, and
$78,517, respectively. In the year ended December 31, 1996, $967,678 (69%) of
the total brokerage commissions paid by the International Portfolio, $447,832
(89%) of the total brokerage commissions paid by the Capital Growth Portfolio,
$59,359 (76%) of the total brokerage commissions paid by the Growth and Income
Portfolio, $59,289 (87%) of the total brokerage commissions paid by the Balanced
Portfolio, and $47,463 (94%) of the total brokerage commissions paid by the
Global Discovery Portfolio resulted from orders placed, consistent with the
policy of obtaining the most favorable net results, with brokers and dealers who
provided supplementary research information to the Portfolios or the Adviser.
The amount of such transactions aggregated $309,783,591 for the International
Portfolio (66% of all brokerage transactions), $373,506,365 for the Capital
Growth Portfolio (72% of all brokerage transactions), $38,460,391 for the Growth
and Income Portfolio (57% of all brokerage transactions), $43,374,165 (40% of
all brokerage transactions) for the Balanced Portfolio and $19,601,728 (85% of
all brokerage transactions) for the Global Discovery Portfolio. The balance of
such brokerage was not allocated to any particular broker or dealer with regard
to the above-mentioned or other special factors.
The Trustees will periodically review whether the recapture for the
benefit of the Fund of some portion of the brokerage commissions or similar fees
paid by the Fund on portfolio transactions is legally permissible and advisable.
No recapture arrangements are currently in effect.
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PORTFOLIO TURNOVER
The average annual portfolio turnover rate for each Portfolio, i.e. the
ratio of the lesser of annual sales or purchases to the monthly average value of
the portfolio (excluding from both the numerator and the denominator securities
with maturities at the time of acquisition of one year or less), for the years
ended December 31, 1994 and 1995, respectively, was:
December 31,
1995 1996
Bond Portfolio 177.21% 85.11%
Balanced Portfolio 87.98 67.56
Growth and Income Portfolio 24.33 32.18
Capital Growth Portfolio 119.41 65.56
Global Discovery Portfolio -- 50.31
International Portfolio 45.76 32.63
Under the above definition, the Money Market Portfolio will have no
portfolio turnover. Purchases and sales, for these Portfolios, are made for the
Portfolio whenever necessary, in management's opinion, to meet the Portfolio's
objective.
EXPERTS
The Financial Highlights of the Fund included in the prospectus and the
Financial Statements incorporated by reference in this Statement of Additional
Information have been audited by Coopers & Lybrand L.L.P., One Post Office
Square, Boston, Massachusetts 02109, independent accountants, and have been so
included or incorporated by reference in reliance upon the accompanying report
of said firm, which report is given upon their authority as experts in
accounting and auditing.
COUNSEL
The firm of Dechert Price & Rhoads, Ten Post Office Square, Suite 1230,
Boston, Massachusetts 02109, is counsel for the Fund.
ADDITIONAL INFORMATION
The activities of the Fund are supervised by its Trustees, who are
elected by shareholders. Shareholders have one vote for each share held.
Fractional shares have fractional votes.
Portfolio securities of the Money Market, Bond, Balanced, Growth and
Income, and Capital Growth Portfolios are held separately, pursuant to a
custodian agreement, by State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110, as custodian. Portfolio securities of
Global Discovery and International Portfolios 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 Portfolios. Money Market Portfolio pays SFAC an annual fee
equal to 0.020% of the first $150 million of average daily net assets, 0.0060%
of such assets in excess of $150 million and 0.0035% of such assets in excess of
$1 billion, plus holding and transaction charges for this service. Bond
Portfolio, Balanced Portfolio, Growth and Income Portfolio and Capital Growth
Portfolio each pay SFAC an annual fee equal to 0.025% of the first $150 million
of average daily net assets, 0.0075% of such assets in excess of $150 million
and 0.0045% of such assets in excess of $1 billion, plus holding and transaction
charges for this service. Global Discovery and International Portfolios pay 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
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service. SFAC computes net asset value for the Fund. The Fund 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 financial statements of Scudder Variable Life Investment Fund are
comprised of the following:
Money Market Portfolio
Balanced Portfolio
Bond Portfolio
Growth and Income Portfolio
Capital Growth Portfolio
International Portfolio
The financial statements, including the investment portfolios of
Scudder Variable Life Investment Fund, together with the Report of Independent
Accountants, Financial Highlights and notes to financial statements are
incorporated by reference and attached hereto, in the Annual Report to the
Shareholders of the Fund dated December 31, 1996, and are hereby deemed to be
part of this Statement of Additional Information.
69
<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
indicates the least degree of speculation. While such debt will likely have some
<PAGE>
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 debt
considered short-term in the relevant market. The A-1
designation indicates the degree of safety regarding timely
payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a
plus (+) sign designation.
commitment to professional long-term investment management have helped shape the
investment industry. In 1928, we introduced the nation's first no-load mutual
fund. Today we offer over 40 pure no load(TM) funds, including the first
international mutual fund offered to U.S. investors.
Over the years, Scudder's global investment perspective and dedication to
research and fundamental investment disciplines have helped Scudder become one
of the largest and most respected investment managers in the world. Though times
have changed since our beginnings, we remain committed to our long-standing
principles: managing money with integrity and distinction; keeping the interests
of our clients first; providing access to investments and markets that may not
be easily available to individuals; and making investing as simple and
convenient as possible through friendly, comprehensive service.
An investment in the Money Market Portfolio is neither insured nor guaranteed by
the United States Government and there can be no assurance that the Portfolio
will be able to maintain a stable net asset value of $1.00 per share.
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
SCUDDER
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
PART C. OTHER INFORMATION
<TABLE>
<CAPTION>
Item 24. Financial Statements and Exhibits
- -------- ---------------------------------
<S> <C>
a. Financial Statements
Included in Part A of this Registration Statement:
Financial Highlights for: the ten years ended December 31, 1996 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 two years
ended December 31, 1996 for the Growth and Income Portfolio; the period
May 1, 1987 (commencement of operations) to December 31, 1987 and the
nine years ended December 31, 1996 for the International Portfolio; the
period May 1, 1996 (commencement of operations) to December 31, 1996
for the Global Discovery Portfolio.
Included in Part B of this Registration Statement:
Investment Portfolios as of December 31, 1996.
Statements of Assets and Liabilities as of December 31, 1996.
Statements of Operations for the fiscal year ended December 31, 1996.
Statements of Changes in Net Assets for the year ended December 31,
1996.
Financial Highlights for: the ten years ended December 31, 1996 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 and the fiscal year
ended December 31, 1996 for the Growth and Income Portfolio; the period
May 1, 1987 (commencement of operations) to December 31, 1987 and the
nine years ended December 31, 1996 for the International Portfolio; the
period May 1, 1996 (commencement of operations) to December 31, 1996
for the Global Discovery Portfolio.
Notes to Financial Statements are filed herein.
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.)
(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.)
Part C - Page 1
<PAGE>
(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.)
(e)(1) Establishment and Designation of Series of Beneficial Interest, without
Par Value dated February 9, 1996 is filed herein.
(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.
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.)
Part C - Page 2
<PAGE>
(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.
(Previously filed as Exhibit 5(d) to Post-Effective Amendment No. 17 to
this Registration Statement.)
(d)(1) Investment Advisory Agreement between the Registrant and Scudder, Stevens
& Clark, Inc. with respect to the Global Discovery Portfolio dated May 1,
1996.
(Incorporated by reference to Exhibit 5(d)1 to Post-Effective Amendment
No. 19 to this Registration Statement.)
(e) Investment Advisory Agreement between the Registrant and Scudder, Stevens
& Clark, Inc. with respect to the International Portfolio dated August 12,
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.)
(a)(1) Underwriting Agreement between the Registrant and Scudder Investor
Services, Inc., dated October 5, 1995 is filed herein.
(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.)
(f)(1) Prototype Participating Contract and Policy Agreement is filed herein.
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.)
(a)(1) Custodian Agreement between the Registrant and Brown Brothers Harriman &
Co. dated April 15, 1996 is filed herein.
(a)(2) Custodian Agreement between the Registrant and Brown Brothers Harriman &
Co. dated April 29, 1996 is filed herein.
(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.)
Part C - Page 4
<PAGE>
(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.)
(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)(9)(1) Prototype Participation Agreement is filed herein.
(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.)
Part C - Page 5
<PAGE>
(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.)
(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).
Part C - Page 6
<PAGE>
(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).
(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.)
(e)(7) Fund Accounting Services Agreement between the Registrant, on behalf of
the Global Discovery Portfolio, and Scudder Fund Accounting Corporation
dated May 1, 1996 is filed herein.
10. Inapplicable.
11. Consent of Independent Accountants is filed herein.
12. Inapplicable.
13. Inapplicable.
14. Inapplicable.
15. Form of Master Distribution Plan for Class B shares pursuant to Rule 12b-1 dated
February 9, 1996.
(Previously filed as Exhibit 15 to Post-Effective Amendment No. 18 to this
Registration Statement.)
Part C - Page 8
<PAGE>
(a) Master Distribution Plan for Class B shares pursuant to Rule 12b-1 dated
February 9, 1996 is filed herein.
16. Schedule of Computation of Performance Calculation.
(Previously filed as Exhibit 16 to Post-Effective Amendment No. 9 to Registration
Statement.)
17. Article 6 Financial Data Schedules are filed herein.
</TABLE>
Item 25. Persons Controlled by or under Common Control with Registrant
- -------- -------------------------------------------------------------
As of December 31, 1996, 26.1% 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, 1996)
- -------- ---------------------------------------------------------
<TABLE>
<CAPTION>
(1) (2)
Title of Class Number of Shareholders
<S> <C> <C>
Shares of beneficial interest,
of no par value
Money Market Portfolio (6)
Shares of beneficial interest,
of no par value
Bond Portfolio (10)
Shares of beneficial interest,
of no par value
Balanced Portfolio (6)
Shares of beneficial interest,
of no par value
Growth and Income Portfolio (6)
Shares of beneficial interest,
of no par value
Capital Growth Portfolio (9)
Shares of beneficial interest,
of no par value
Global Discovery Portfolio (3)
Shares of beneficial interest,
of no par value
International Portfolio (13)
</TABLE>
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.
Part C - Page 9
<PAGE>
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
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;
Part C - Page 10
<PAGE>
(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.
(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.
Part C - Page 11
<PAGE>
<TABLE>
<CAPTION>
Business and Other Connections of Board
Name of Directors of Registrant's Adviser
---- ------------------------------------
<S> <C>
Stephen R. Beckwith Director, Vice President, Assistant Treasurer, Chief Operating Officer & Chief
Financial Officer, Scudder, Stevens & Clark, Inc. (investment adviser)**
Lynn S. Birdsong Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
President & Director, The Latin America Dollar Income Fund, Inc. (investment company)**
President & Director, Scudder World Income Opportunities Fund, Inc. (investment
company)**
President, The Japan Fund, Inc. (investment company)**
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, Canadian High Income Fund (investment company)#
Director, Hot Growth Companies Fund (investment company)#
Director, Sovereign High Yield Investment Company (investment company)+
Director, Scudder, Stevens & Clark (Luxembourg) S.A. (investment manager) #
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. (President on all series except Scudder
Global Fund) (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
E. Michael Brown Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
Trustee, Scudder GNMA Fund (investment company)*
Trustee, Scudder U.S. Treasury Fund (investment company)*
Trustee, Scudder Tax Free Money Fund (investment company)*
Trustee, Scudder State Tax Free Trust (investment company)*
Trustee, Scudder Cash Investment Trust (investment company)*
Assistant Treasurer, Scudder Investor Services, Inc. (broker/dealer)*
Director & President, Scudder Realty Holding Corporation (a real estate holding
company)*
Director & President, Scudder Trust Company (a trust company)+++
Director, Scudder Trust (Cayman) Ltd.
Mark S. Casady Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
Director & Vice President, Scudder Investor Services, Inc. (broker/dealer)*
Director & Vice President, Scudder Service Corporation (in-house transfer agent)*
Director, SFA, Inc. (advertising agency)*
Part C - Page 12
<PAGE>
Linda C. Coughlin Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
Chairman & Trustee, AARP Cash Investment Funds (investment company)**
Chairman & Trustee, AARP Growth Trust (investment company)**
Chairman & Trustee, AARP Income Trust (investment company)**
Chairman & Trustee, AARP Tax Free Income Trust (investment company)**
Chairman & Trustee, AARP Managed Investment Portfolios Trust (investment company)**
Director & Senior Vice President, Scudder Investor Services, Inc. (broker/dealer)*
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 Fund, Inc. (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 Institutional Fund, Inc. (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 Pathway Series (investment company)*
Vice President, Scudder Variable Life Investment Fund (investment company)*
Vice President, The Brazil Fund, Inc. (investment company)**
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)**
Vice President & Trustee, Scudder Cash Investment Trust (investment company)*
Director, Scudder Global Fund, Inc. (investment company)**
Director, Scudder International Fund, Inc. (investment company)**
Director, Scudder Mutual Fund, Inc. (investment company)**
Trustee, Scudder Investment Trust (investment company)*
Trustee, Scudder Portfolio Trust (investment company)*
Trustee, Scudder Municipal Trust (investment company)*
Part C - Page 13
<PAGE>
Trustee, Scudder Securities Trust (investment company)*
Trustee, Scudder State Tax Free Trust (investment company)*
Trustee, Scudder Equity Trust (investment company)**
Trustee, Scudder Funds Trust (investment company)**
Vice President, Scudder U.S. Treasury Money Fund (investment company)*
President & Director, SFA, Inc. (advertising agency)*
Senior Vice President & Director, Scudder Investor Services, Inc. (broker/dealer)*
Vice President & Director, Scudder Precious Metals, Inc. xxx
John T. Packard Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
President, Montgomery Street Income Securities, Inc. (investment company) o
Chairman, Scudder Realty Advisors, Inc. (realty investment adviser) x
Daniel Pierce Chairman & Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
Chairman, Vice President & Director, Scudder Global Fund, Inc. (investment company)**
Chairman & Director, Scudder New Europe Fund, Inc. (investment company)**
Chairman & Director, The First Iberian Fund, Inc. (investment company)**
Chairman & Director, Scudder International Fund, Inc. (investment company)**
Chairman & Director, Scudder New Asia Fund, Inc. (investment company)**
President & Trustee, Scudder Equity Trust (investment company)**
President & Trustee, Scudder GNMA Fund (investment company)*
President & Trustee, Scudder Portfolio Trust (investment company)*
President & Trustee, Scudder Funds Trust (investment company)**
President & Trustee, Scudder Securities Trust (investment company)*
President & Trustee, Scudder Investment Trust (investment company)*
President & Director, Scudder Institutional Fund, Inc. (investment company)**
President & Director, Scudder Fund, Inc. (investment company)**
President & Director, Scudder Mutual Funds, Inc. (investment company)**
Vice President & Trustee, Scudder Municipal Trust (investment company)*
Vice President & Trustee, Scudder Variable Life Investment Fund (investment company)*
Vice President & Trustee, Scudder Pathway Series (investment company)*
Trustee, Scudder California Tax Free Trust (investment company)*
Trustee, Scudder State Tax Free Trust (investment company)*
Vice President, Montgomery Street Income Securities, Inc. (investment company)o
Chairman & President, Scudder, Stevens & Clark of Canada, Ltd. (Canadian investment
adviser), Toronto, Ontario, Canada
Chairman & Director, Scudder Global Opportunities Funds (investment company) Luxembourg
Chairman, Scudder, Stevens & Clark, Ltd. (investment adviser) London, England
President & Director, Scudder Precious Metals, Inc. xxx
Vice President, Director & Assistant Secretary, Scudder Realty Holdings Corporation
(a real estate holding company)*
Vice President, Director & Assistant Treasurer, Scudder Investor Services, Inc.
(broker/dealer)*
Director, Scudder Latin America Investment Trust PLC (investment 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
Incorporator, Scudder Trust Company (a trust company)+++
Kathryn L. Quirk Director & Secretary, Scudder, Stevens & Clark, Inc. (investment adviser)**
Director, Vice President & Assistant Secretary, The Argentina Fund, Inc. (investment
company)**
Director, Vice President & Assistant Secretary, Scudder International Fund, Inc.
(investment company)**
Part C - Page 14
<PAGE>
Director, Vice President & Assistant Secretary, Scudder New Asia Fund (investment
company)**
Trustee, Vice President & Assistant Secretary, Scudder Equity Trust (investment
company)**
Trustee, Vice President & Assistant Secretary, Scudder Securities Trust (investment
company)*
Trustee, Vice President & Assistant Secretary, Scudder Funds Trust (investment
company)**
Trustee, Scudder Investment Trust (investment company)*
Trustee, Scudder Municipal Trust (investment company)*
Vice President & Trustee, Scudder Tax Free Money Fund (investment company)*
Vice President & Trustee, Scudder Tax Free Trust (investment company)*
Vice President & Secretary, AARP Growth Trust (investment company)**
Vice President & Secretary, AARP Income Trust (investment company)**
Vice President & Secretary, AARP Tax Free Income Trust (investment company)**
Vice President & Secretary, AARP Cash Investment Funds (investment company)**
Vice President & Secretary, AARP Managed Investment Portfolios Trust (investment
company)**
Vice President & Secretary, The Japan Fund, Inc. (investment company)**
Vice President & Assistant Secretary, Scudder World Income Opportunities Fund, Inc.
(investment company)**
Vice President & Assistant Secretary, The Korea Fund, Inc. (investment company)**
Vice President & Assistant Secretary, The Brazil Fund, Inc. (investment company)**
Vice President & Assistant Secretary, Scudder Global Fund, Inc. (investment company)**
Vice President & Assistant Secretary, Montgomery Street Income Securities, Inc.
(investment company)o
Vice President & Assistant Secretary, Scudder Mutual Funds, Inc. (investment company)**
Vice President & Assistant Secretary, Scudder Pathway Series (investment company)*
Vice President & Assistant Secretary, Scudder New Europe Fund, Inc. (investment
company)**
Vice President & Assistant Secretary, Scudder Variable Life Investment Fund (investment
company)*
Vice President & Assistant Secretary, The First Iberian Fund, Inc. (investment
company)**
Vice President & Assistant Secretary, The Latin America Dollar Income Fund, Inc.
(investment company)**
Vice President, Scudder Fund, Inc. (investment company)**
Vice President, Scudder Institutional Fund, Inc. (investment company)**
Vice President, Scudder GNMA Fund (investment company)*
Director, Senior Vice President & Clerk, Scudder Investor Services, Inc.
(broker/dealer)*
Director, Vice President & Secretary, Scudder Fund Accounting Corporation (in-house
fund accounting agent)*
Director, Vice President & Secretary, Scudder Realty Holdings Corporation (a real
estate holding company)*
Director & Clerk, Scudder Service Corporation (in-house transfer agent)*
Director, SFA, Inc. (advertising agency)*
Vice President, Director & Assistant Secretary, Scudder Precious Metals, Inc. xxx
Cornelia M. Small Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
President, AARP Cash Investment Funds (investment company)**
President, AARP Growth Trust (investment company)**
President, AARP Income Trust (investment company)**
President, AARP Tax Free Income Trust (investment company)**
President, AARP Managed Investment Portfolio Trust (investment company)**
Part C - Page 15
<PAGE>
Edmond D. Villani Director, President & Chief Executive Officer, Scudder, Stevens & Clark, Inc.
(investment adviser)**
Chairman & Director, The Argentina Fund, Inc. (investment company)**
Chairman & Director, The Latin America Dollar Income Fund, Inc. (investment company)**
Chairman & Director, Scudder World Income Opportunities Fund, Inc. (investment
company)**
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 Japan, Inc. (investment adviser)###
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)**
Director, Scudder Realty Advisors, Inc. (realty investment adviser) x
Director, IBJ Global Investment Management S.A., (Luxembourg investment management
company) Luxembourg, Grand-Duchy of Luxembourg
Stephen A. Wohler Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
Vice President, Montgomery Street Income Securities, Inc. (investment company)o
</TABLE>
* 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
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C.
Luxembourg B 34.564
+ 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, U.K.
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 Pathway Series
Scudder Portfolio Trust
Scudder Securities Trust
Part C - Page 16
<PAGE>
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
AARP Managed Investment Portfolios Trust
The Japan Fund, Inc.
(b)
<TABLE>
<CAPTION>
(1) (2) (3)
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
<S> <C> <C> <C>
E. Michael Brown Assistant Treasurer None
Two International Place
Boston, MA 02110
Mark S. Casady Director and Vice President None
Two International Place
Boston, MA 02110
Linda Coughlin Director and Senior Vice President None
Two International Place
Boston, MA 02110
Richard W. Desmond Vice President None
345 Park Avenue
New York, NY 10154
Paul J. Elmlinger Senior Vice President and Assistant None
345 Park Avenue Clerk
New York, NY 10154
Margaret D. Hadzima Assistant Treasurer None
Two International Place
Boston, MA 02110
Thomas W. Joseph Director, Vice President, Vice President
Two International Place Treasurer and Assistant Clerk
Boston, MA 02110
Dudley H. Ladd Director and Senior Vice President None
Two International Place
Boston, MA 02110
David S. Lee Director, President and Assistant Vice President
Two International Place Treasurer
Boston, MA 02110
Part C - Page 17
<PAGE>
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
Thomas F. McDonough Assistant Clerk Vice President and
Two International Place Secretary
Boston, MA 02110
Thomas H. O'Brien Assistant Treasurer None
345 Park Avenue
New York, NY 10154
Edward J. O'Connell Assistant Treasurer Vice President and
345 Park Avenue Assistant Treasurer
New York, NY 10154
Daniel Pierce Director, Vice President Vice President and Trustee
Two International Place and Assistant Treasurer
Boston, MA 02110
Kathryn L. Quirk Director, Senior Vice President and Vice President and
345 Park Avenue Clerk Assistant Secretary
New York, NY 10154
Edmund J. Thimme Vice President None
345 Park Avenue
New York, NY 10154
Benjamin Thorndike Vice President None
Two International Place
Boston, MA 02110
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
</TABLE>
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)
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Net Underwriting Compensation on
Name of Principal Discounts and Redemptions Brokerage Other
Underwriter Commissions and Repurchases Commissions Compensation
----------- ----------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Scudder Investor None None None None
Services, Inc.
</TABLE>
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
Part C - Page 18
<PAGE>
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.
Item 32. Undertakings.
- -------- -------------
Inapplicable.
Part C - Page 19
<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 amendment to its Registration
Statement pursuant to Rule 485(b) 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 April, 1997.
SCUDDER VARIABLE LIFE INVESTMENT FUND
By Thomas F. McDonough
-----------------------------------
Thomas F. McDonough, Vice
President and 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.
<TABLE>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/David B. Watts
- --------------------------------------
David B. Watts* President (Principal Executive April 14, 1997
Officer) and Trustee
/s/Daniel Pierce
- --------------------------------------
Daniel Pierce* Vice President and Trustee April 14, 1997
/s/Dr. Kenneth Black, Jr.
- --------------------------------------
Dr. Kenneth Black, Jr.* Trustee April 14, 1997
/s/Dr. Rosita P. Chang
- --------------------------------------
Dr. Rosita P. Chang* Trustee April 14, 1997
/s/Peter B. Freeman
- --------------------------------------
Peter B. Freeman* Trustee April 14, 1997
/s/Dr. J. D. Hammond
- --------------------------------------
Dr. J. D. Hammond* Trustee April 14, 1997
/s/Pamela A. McGrath
- --------------------------------------
Pamela A. McGrath Treasurer (Principal Financial and April 14, 1997
Accounting Officer) and Vice
President
</TABLE>
*By: /s/Thomas F. McDonough
-----------------------------
Thomas F. McDonough**
** Attorney-in-fact pursuant to
the powers of attorney
contained in the signature
pages of Post-Effective
Amendment No. 9 to the
Registration Statement filed
March 3, 1989 and
Post-Effective Amendment No.
19 to the Registration
Statement filed May 1, 1996.
<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. 22
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 26
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
SCUDDER VARIABLE LIFE INVESTMENT FUND
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
EXHIBIT INDEX
Exhibit 1(e)(1)
Exhibit 5(e)
Exhibit 6(a)(1)
Exhibit 8(a)(1)
Exhibit 8(a)(2)
Exhibit 8(f)(1)
Exhibit 9(c)(9)(1)
Exhibit 9(e)(7)
Exhibit 11
Exhibit 15(a)
Exhibit 17
Exhibit 1(e)(1)
SCUDDER VARIABLE LIFE INVESTMENT FUND
Establishment and Designation of Series
of Beneficial Interest, without Par Value
The undersigned, being a majority of the duly elected and qualified
Trustees of Scudder Variable Life Investment Fund, a Massachusetts business
trust (the "Trust"), acting pursuant to Section 5.11 of the Declaration of Trust
dated March 15, 1985, as amended (the "Declaration of Trust"), hereby divide the
shares of beneficial interest of the Trust into seven separate series (each
individually a "Portfolio," or collectively the "Portfolios"), each Portfolio to
have the following special and relative rights:
1. The Portfolios shall be designated as follows:
Balanced Portfolio
Bond Portfolio
Capital Growth Portfolio
Global Discovery Portfolio
Growth and Income Portfolio
International Portfolio
Money Market Portfolio
2. Each Portfolio shall be authorized to hold cash and invest in
securities and instruments and use investment techniques as described in the
Trust's registration statement under the Securities Act of 1933, as amended.
Each share of beneficial interest of each Portfolio ("share") shall be
redeemable as provided in the Declaration of Trust, shall be entitled to one
vote (or fraction thereof in respect of a fractional share) on matters on which
shares of that Portfolio shall be entitled to vote and shall represent a pro
rata beneficial interest in the assets allocated to that Portfolio. The proceeds
of sales of shares of a Portfolio, together with any income and gain thereon,
less any diminution or expenses thereof, shall irrevocably belong to that
Portfolio, unless otherwise required by law. Each share of a Portfolio shall be
entitled to receive its pro rata share of net assets of that Portfolio upon
liquidation of that Portfolio.
3. Shareholders of each Portfolio shall vote separately as a class on any
matter to the extent required by, and any matter shall be deemed to have been
effectively acted upon with respect to that Portfolio as provided in Rule 18f-2,
<PAGE>
as from time to time in effect, under the Investment Company Act of 1940, as
amended, or any successor rule.
4. The shares of beneficial interest of the Trust outstanding on the date
hereof shall remain classified as shares of the Portfolios designated in
Paragraph 1 above as the Balanced Portfolio, Bond Portfolio, Capital Growth
Portfolio, Growth and Income Portfolio, International Portfolio, and Money
Market Portfolio.
5. The assets and liabilities of the Trust existing on the date hereof
shall, except as provided below, be allocated to the Balanced Portfolio, Bond
Portfolio, Capital Growth Portfolio, Growth and Income Portfolio, International
Portfolio, and Money Market Portfolio and, hereafter, the assets and liabilities
of the Trust shall be allocated among the Portfolios as set forth in Section
5.11 of the Declaration of Trust, except as provided below.
(a) Costs incurred in connection with the organization and
registration of shares of the Global Discovery Portfolio shall be
amortized by such Portfolio over the lesser of the life of the
Portfolio or the five-year period beginning with the month the
Portfolio commences operations.
(b) Reimbursement required under any expense limitation, other
than a voluntary expense limitation, applicable to the Trust shall
be allocated among those Portfolios whose expense ratios exceed
such limitation on the basis of the relative expense ratios of
such Portfolios.
(c) The liabilities, expenses, costs, charges or reserves of the
Trust which are not readily identifiable as belonging to any
particular Portfolio shall be allocated among the Portfolios on
the basis of their relative average daily net assets.
(d) The Trustees may from time to time in particular cases make
specific allocations of assets or liabilities among the
Portfolios.
6. The Trustees (including any successor Trustees) shall have the right at
any time and from time to time to reallocate assets and expenses or to change
the designation of any Portfolio now or hereafter created, or to otherwise
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<PAGE>
change the special and relative rights of any such Portfolio provided that such
change shall not adversely affect the rights of shareholders of a Portfolio.
The foregoing shall be effective upon execution.
/s/Kenneth Black, Jr.
- -----------------------------------
Kenneth Black, Jr., as Trustee
/s/Rosita P. Chang
- -----------------------------------
Rosita P. Chang, as Trustee
/s/Peter B. Freeman
- -----------------------------------
Peter B. Freeman, as Trustee
/s/J.D. Hammond
- -----------------------------------
J.D. Hammond, as Trustee
/s/Daniel Pierce
- -----------------------------------
Daniel Pierce, as Trustee
/s/David B. Watts
- -----------------------------------
David B. Watts, as Trustee
Dated: February 9, 1996
3
Exhibit 5(e)
SCUDDER VARIABLE LIFE INVESTMENT FUND
Two International Place
Boston, Massachusetts 02110
August 12, 1996
Scudder, Stevens & Clark, Inc.
Two International Place
Boston, MA 02110
Investment Advisory Agreement
International Portfolio
Dear Sirs:
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 ("Shares") are divided
into multiple series including International 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.
<PAGE>
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.
2. Name of Fund. The Fund may use any name derived from the name
"Scudder, Stevens & Clark", if it elects to do so, only for so long as this
Agreement, any other Investment Advisory Agreement between you and the Fund, or
any extension, renewal or amendment hereof or thereof remains in effect,
including any similar agreement with any organization which shall have succeeded
to your business as investment adviser. At such time as such an agreement shall
no longer be in effect, the Fund will (to the extent that it lawfully can) cease
to use such a name or any other name indicating that it is advised by or
otherwise connected with you or any organization which shall have so succeeded
to your business.
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
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, 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.
4. 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 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
required to pay any expenses of the Fund other than those specifically allocated
to you in this paragraph 4. 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
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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
Investment Company Act of 1940, as amended, 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.
5. Compensation of the Adviser. For all services to be rendered and
payments made as provided in paragraphs 3 and 4 hereof, the Fund on behalf of
the Portfolio will pay you on the last day of each month a fee equal to the sum
of 1/12 of .875% of the average daily net assets of the Portfolio for such
month; provided that, for any calendar month during which the average of such
values exceeds $500,000,000, the fee payable for that month based on the portion
of the average of such values in excess of $500,000,000 shall be 1/12 of .775%
of such portion. 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 Investment Company Act of 1940 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
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<PAGE>
such provisions, the determination of net asset value is suspended for any
particular business day, then for the purposes of this paragraph 5, 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 5. You may waive all or a portion of your fees provided for hereunder.
In the event 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.
6. 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.
7. 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
4
<PAGE>
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.
8. 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 Investment Company
Act of 1940, as modified by Rule 18f-2 under the 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.
9. 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.
10. 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
5
<PAGE>
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
Exhibit 6(a)(1)
SCUDDER VARIABLE LIFE INVESTMENT FUND
Two International Place
Boston, Massachusetts 02110
October 5, 1995
Scudder Investor Services, Inc.
Two International Place
Boston, Massachusetts 02110
Underwriting Agreement for Class B Shares
-----------------------------------------
Dear Sirs:
Scudder Variable Life Investment Fund (the "Fund") has been formed under
the laws of the Commonwealth of Massachusetts to engage in the business of an
investment company. The shares of beneficial interest of the Fund ("Shares") are
currently divided into certain portfolios ("Portfolios"), each of which (with
the exception of the Money Market Portfolio) is divided into two classes of
shares, Class A and Class B shares. However, additional Portfolios and/or
classes of shares may be established from time to time by action of the
Trustees. If the context requires and unless otherwise specifically provided
herein, the term "Fund" as used in this Agreement shall mean, in addition, each
separate Portfolio now existing and subsequently created. The Fund has selected
you to act as principal underwriter as such term is defined in Section 2(a)(29)
of the Investment Company Act of 1940, as amended (the "Investment Company
Act"), of the Class B Shares of the Fund and you are willing to act as such
principal underwriter and to perform the duties and functions of underwriter in
the manner and on the terms and conditions hereinafter set forth. Accordingly,
the Fund hereby 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 to
date, (the "Declaration of Trust"), including a
(b) Written Instrument to Establish and Designate Separate Series of
Shares, as amended or supplemented from time to time.
(c) Written Instrument Establishing and Designating Separate Classes of
Shares, as amended or supplemented from time to time.
(d) By-laws of the Fund.
<PAGE>
(e) Resolutions of the Trustees of the Fund selecting you as principal
underwriter and approving this form of Agreement.
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.
The Fund will furnish you promptly with properly certified or authenticated
copies of any registration statements filed by it with the Securities and
Exchange Commission under the Securities Act of 1933, as amended ("Securities
Act"), or the Investment Company Act, together with any financial statements and
exhibits included therein, and all amendments or supplements thereto hereafter
filed.
2. Registration of Additional Class B Shares. The Fund will from time to
time use its best efforts to register under the Securities Act such Class B
Shares as you may reasonably be expected to sell on behalf of the Fund. You and
the Fund will cooperate in taking such action as may be necessary from time to
time to qualify Class B Shares so registered for sale by you or the Fund in any
jurisdictions mutually agreeable to you and the Fund, and to maintain such
qualifications. This Agreement relates to the issue and sale of Class B Shares
that are duly authorized and registered and available for sale by the Fund,
including redeemed or repurchased Class B Shares if and to the extent that they
may be legally sold and if, but only if, the Fund sees fit to sell them.
3. Sale of Class B Shares. The Fund has been formed to provide an
investment vehicle for the separate accounts of life insurance companies
offering variable life insurance policies and variable annuity contracts.
Consequently, when used herein the terms "investor", "public", and similar terms
include such insurance companies and their separate accounts. No person other
than you is authorized to act as principal underwriter (as such term is defined
in the Investment Company Act) for the Class B Shares of the Fund. Subject to
the provisions of paragraph 5 and 7 hereof and to such minimum or maximum
purchase or other requirements as may from time to time be currently indicated
in the Fund's registration statement or prospectus, you are authorized to sell,
as agent on behalf of the Fund, Class B Shares authorized for issue and
registered under the Securities Act. You may also purchase as principal such
Class B Shares for resale to the public. Such sales will be made by you on
behalf of the Fund by accepting unconditional orders to purchase such Class B
Shares placed with you by investors and such purchases will be made by you only
after acceptance by you of such orders. The sales price to the public of such
Class B Shares shall be the public offering price as defined in paragraph 6
hereof.
4. Solicitation of Orders. You will use your best efforts (but only in
jurisdictions in which you may lawfully do so) to obtain from investors
unconditional orders for Class B Shares authorized for issue by the Fund and
registered under the Securities Act, provided that you may in your discretion
refuse to accept orders for Class B Shares from any particular investor.
2
<PAGE>
5. Sale of Class B Shares by the Fund. Unless you are otherwise notified by
the Fund, any right granted to you to accept orders for Class B Shares or to
make sales on behalf of the Fund or to purchase Class B Shares for resale will
not apply to Class B Shares issued in connection with the merger or
consolidation of any other investment company with the Fund or its acquisition,
by purchase or otherwise, of all or substantially all of the assets of any
investment company or substantially all the outstanding shares of any such
company and such right shall not apply to Class B Shares that may be offered by
the Fund to shareholders by virtue of their being holders of Class B Shares of
the Fund, including Class B Shares to be purchased through reinvestment of
income dividends and capital gains distributions.
6. Public Offering Price. All Class B Shares offered and sold to investors
by you will be offered and sold at the public offering price for that class of
shares. The public offering price for all accepted subscriptions for Class B
Shares will be the net asset value per Class B Share, as determined by the Fund
in accordance with the Declaration of Trust, as now in effect or as it may be
amended, next after the order is accepted by you.
7. Suspension of Sales. If and whenever the determination of net asset
value is suspended and until such suspension is terminated, no further orders
for Class B Shares shall be accepted by you except unconditional orders placed
with you before you had knowledge of the suspension. In addition, the Fund
reserves the right to suspend sales and your authority to accept orders for
Class B Shares on behalf of the Fund if, in the judgment of the Fund, it is in
the best interests of the Fund to do so, such suspension to continue for such
period as may be determined by the Fund; and in that event, no Class B Shares
will be sold by you on behalf of the Fund while such suspension remains in
effect except for Class B Shares necessary to cover unconditional orders
accepted by you before you had knowledge of the suspension.
8. Suspension, Termination or Limitation of Portfolios. You acknowledge
that the Fund may, at any time such action is deemed desirable, suspend or
terminate sales of Class B Shares of a Portfolio and that upon your receipt of
notice of such action by the Fund you will, for such period as determined by the
Fund, accept no further orders for Class B Shares of that Portfolio except
unconditional orders placed with you before you had knowledge of such action.
You acknowledge further that the Fund may from time to time set upper and lower
limits on the number of Class B Shares of a Portfolio for which a purchaser may
subscribe and may limit sales of Class B Shares of a Portfolio to their existing
shareholders.
9. Portfolio Transactions. Securities may be bought or sold for the Fund by
or through you and you may participate directly or indirectly in brokerage
commissions or "spread" in respect of transactions in securities of the Fund;
provided, however, that all sums of money received by you as a result of such
purchases and sales or as a result of such participation must, after
reimbursement of your actual expenses in connection with such activity, be paid
over by you to or for the benefit of the Fund.
3
<PAGE>
10. Expenses.
(a) The Fund shall pay or arrange for the payment of all fees and
expenses:
(1) in connection with the preparation, setting in type and filing
of any registration statement and prospectus under the Securities
Act and/or the Investment Company Act, and any amendments or
supplements thereto that may be made from time to time;
(2) in connection with the registration and qualification of Class
B Shares for sale in the various jurisdictions in which the Fund
shall determine it advisable to qualify such Class B Shares for
sale (including registering the Fund as a broker or dealer or any
officer of the Fund or other person as agent or salesman of the
Fund in any state);
(3) of preparing, setting in type, printing and mailing any
notice, proxy statement, report, prospectus or other communication
to Class B shareholders of the Fund in their capacity as such;
(4) of preparing, setting in type, printing and mailing
prospectuses annually to existing Class B shareholders;
(5) in connection with the issue and transfer of Class B Shares
resulting from the acceptance by you of orders to purchase Class B
Shares placed with you by investors, including the expenses of
printing and mailing confirmations of such purchase orders and the
expenses of printing and mailing a prospectus included with the
confirmation of such orders;
(6) of any issue taxes or any initial transfer taxes;
(7) of that portion of WATS (or equivalent) telephone lines other
than the portion allocated to you in this paragraph 10;
(8) of wiring funds in payment of Class B Share purchases or in
satisfaction of redemption or repurchase requests, unless such
expenses are paid for by the investor or shareholder who initiates
the transaction;
(9) of that portion of the cost of printing business reply
envelopes allocated to the Fund on the basis of use by existing
shareholders to place redemption requests or to request
information;
(10) of postage for all business reply envelopes;
4
<PAGE>
(11) of that portion of one or more CRT terminals connected with
the computer facilities of the transfer agent and used by the Fund
to gain access to its shareholder records, allocated on the basis
of such use;
(12) permitted to be paid or assumed by the Fund pursuant to a
plan ("12b-1 Plan") adopted by the Fund in conformity with the
requirements of Rule 12b-1 under the Investment Company Act ("Rule
12b-1") or any successor rule, notwithstanding any other provision
to the contrary herein; and
(13) not specifically allocated to you hereunder.
(b) You shall pay or arrange for the payment of all fees and expenses,
subject to the Fund reimbursing you for such fees and expenses as may
be permitted by the Fund pursuant to the Rule 12b-1 Plan in effect for
the Class B Shares:
(1) of printing and distributing any prospectuses or reports
prepared for your use in connection with the offering of Class B
Shares to the public;
(2) of preparing, setting in type, printing and mailing any other
literature used by you in connection with the offering of Class B
Shares to the public;
(3) of advertising in connection with the offering of Class B
Shares to the public;
(4) incurred in connection with your registration as a broker or
dealer or the registration or qualification of your officers,
directors, agents or representatives under Federal and state
laws;
(5) of that portion of WATS (or equivalent) telephone lines,
allocated to you on the basis of use by investors (but not
shareholders) who request information about or prospectuses of
the Fund;
(6) of that portion of printing business reply envelopes,
allocated to you on the basis of use by investors and
shareholders to purchase Class B Shares; and
(7) of any activity which is primarily intended to result in the
sale of Class B shares issued by the Fund.
Expenses which are to be allocated between you and the Fund shall be
allocated pursuant to reasonable procedures or formulae mutually agreed upon,
which procedures or formulae shall to the extent practicable reflect studies of
relevant empirical data.
5
<PAGE>
11. Selected Dealers. In connection with the offering of shares to the
separate accounts of life insurance companies, or to the extent that the offer
of variable life insurance policies and variable annuity contracts the premiums
for which are allocated to such separate accounts which invest in Class B Shares
may be deemed to include an offer of Class B Shares, you may enter into
agreements with other broker-dealers registered under the Securities Exchange
Act of 1934, as amended, provided that any such agreement shall be subject to
the approval of the Trustees of the Fund.
12. Conformity with Law. You agree that in selling Class B Shares you will
duly conform in all respects with the laws of the United States and any
jurisdiction in which such Class B Shares may be offered for sale by you
pursuant to this Agreement and to the rules and regulations of the National
Association of Securities Dealers, Inc., of which you are a member.
13. Independent Contractor. You shall be an independent contractor and
neither you nor any of your officers or employees is or shall be an employee of
the Fund in the performance of your duties hereunder. You shall be responsible
for your own conduct and the employment, control and conduct of your agents and
employees and for injury to such agents or employees or to others through your
agents or employees. You assume full responsibility for your agents or employees
under applicable statutes and agree to pay all employee taxes thereunder.
14. Services Not Exclusive. Except to the extent necessary to perform your
obligations hereunder, nothing herein shall be deemed to limit or restrict your
right or that of any of your affiliates or employees, including any of your
employees who may also be a Trustee, officer or employee of the Fund, to engage
in any other business or to devote time and attention to the distribution or
other related aspects of any other registered investment company or to render
services of any kind to any other corporation, firm, individual or association.
15. Indemnification. You agree to indemnify and hold harmless the Fund and
each of its Trustees and officers and each person, if any, who controls the Fund
within the meaning of Section 15 of the Securities Act against any and all
losses, claims, damages, liabilities or litigation (including legal and other
expenses) to which the Fund or such Trustees, officers or controlling person may
become subject under such Act, under any other statute, at common law or
otherwise, arising out of the acquisition of any Shares by any person which (i)
may be based upon any wrongful act by you or any of your employees or
representatives, or (ii) may be based upon any untrue statement or alleged
untrue statement of a material fact contained in a registration statement or
prospectus covering Shares or any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading if
such a statement or omission was made in reliance upon information furnished to
the Fund by you, or (iii) may be incurred or arise by reason of your acting as
the Fund's agent instead of purchasing and reselling Shares as principal in
6
<PAGE>
distributing Shares to the public, provided, however, that in no case (i) is
your indemnity in favor of a Trustee or officer or any other person deemed to
protect such Trustee or officer or other person against any liability to which
any such person would otherwise be subject by reason of willful misfeasance, bad
faith, or gross negligence in the performance of his duties or by reason of his
reckless disregard of obligations and duties under this Agreement or (ii) are
you to be liable under your indemnity agreement contained in this paragraph with
respect to any claim made against the Fund or any person indemnified unless the
Fund or such person, as the case may be, shall have notified you in writing
within a reasonable time after the summons or other first legal process giving
information of the nature of the claims shall have been served upon the Fund or
upon such person (or after the Fund or such person shall have received notice of
such service on any designated agent), but failure to notify you of any such
claim shall not relieve you from any liability which you have to the Fund or any
person against whom such action is brought otherwise than on account of your
indemnity agreement contained in this paragraph. You shall be entitled to
participate, at your own expense, in the defense, or, if you so elect, to assume
the defense of any suit brought to enforce any such liability, but, if you elect
to assume the defense, such defense shall be conducted by counsel chosen by you
and satisfactory to the Fund, to its officers and Trustees, or to any
controlling person or persons, defendant or defendants in the suit. In the event
that you elect to assume the defense of any such suit and retain such counsel,
the Fund, such officers and Trustees or controlling person or persons, defendant
or defendants in the suit, shall bear the fees and expenses of any additional
counsel retained by them, but, in case you do not elect to assume the defense of
any such suit, you will reimburse the Fund, such officers and Trustees or
controlling person or persons, defendant or defendants in such suit, for the
reasonable fees and expenses of any counsel retained by them. You agree promptly
to notify the Fund of the commencement of any litigation or proceedings against
it in connection with the issue and sale of any Shares.
The Fund agrees to indemnify and hold harmless you and each of your
directors and officers and each person, if any, who controls you within the
meaning of Section 15 of the Securities Act against any and all losses, claims,
damages, liabilities or litigation (including legal and other expenses) to which
you or such directors, officers or controlling person may become subject under
such Act, under any other statute, at common law or otherwise, arising out of
the acquisition of any Shares by any person which (i) may be based upon any
wrongful act by the Fund or any of its employees or representatives, or (ii) may
be based upon any untrue statement or alleged untrue statement of a material
fact contained in a registration statement or prospectus covering Shares or any
amendment thereof or supplement thereto or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading if such statements or omission was made in
reliance upon information furnished to you by the Fund; provided, however, that
in no case (i) is the Fund's indemnity in favor of a director or officer or any
other person deemed to protect such director or officer or other person against
any liability to which any such person would otherwise be subject by reason of
willful misfeasance, bad faith, or gross negligence in the performance of his
duties or by reason of his reckless disregard of obligations and duties under
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this Agreement or (ii) is the Fund to be liable under its indemnity agreement
contained in this paragraph with respect to any claims made against you or any
such director, officer or controlling person unless you or such director,
officer or controlling person, as the case may be, shall have notified the Fund
in writing within a reasonable time after the summons or other first legal
process giving information of the nature of the claim shall have been served
upon you or upon such director, officer or controlling person (or after you or
such director, officer or controlling person shall have received notice of such
service on any designated agent), but failure to notify the Fund of any claim
shall not relieve it from any liability which it may have to the person against
whom such action is brought otherwise than on account of its indemnity agreement
contained in this paragraph. The Fund will be entitled to participate at its own
expense in the defense, or, if it so elects, to assume the defense of any suit
brought to enforce any such liability, but if the Fund elects to assume the
defense, such defense shall be conducted by counsel chosen by it and
satisfactory to you, its directors, officers or controlling person or persons,
defendant or defendants, in the suit. In the event the Fund elects to assume the
defense of any such suit and retain such counsel, you, your directors, officers
or controlling person or persons, defendant or defendants in the suit, shall
bear the fees and expenses of any additional counsel retained by them, but, in
case the Fund does not elect to assume the defense of any such suit, it will
reimburse you or such directors, officers or controlling person or persons,
defendant or defendants in the suit, for the reasonable fees and expenses of any
counsel retained by them. The Fund agrees promptly to notify you of the
commencement of any litigation or proceedings against it or any of its officers
or Trustees in connection with the issuance or sale of any Shares.
16. Authorized Representations. The Fund is not authorized to give any
information or to make any representations on behalf of you other than the
information and representations contained in a registration statement or
prospectus covering Class B Shares, as such registration statement and
prospectus may be amended or supplemented from time to time, or reports prepared
for distribution to shareholders of the Fund. You are not authorized to give any
information or to make any representations on behalf of the Fund in connection
with the sale of Class B Shares other than the information and representations
contained in a registration statement or prospectus covering Class B Shares, as
such registration statement and prospectus may be amended or supplemented from
time to time, or reports prepared for distribution to shareholders of the Fund.
17. Duration and Termination of the Agreement. This Agreement shall become
effective upon the effective date of the Fund's post-effective amendment to its
registration statement under Securities Act for Class B Shares and, unless
sooner terminated as provided herein, will remain in effect until September 30,
1996 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 of the Fund 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
vote of the Trustees or of a majority of the outstanding voting securities of
the Fund. This Agreement may, on 60 days' written notice, be terminated at any
time, without the payment of any penalty, by the Trustees, by a vote of a
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majority of the outstanding voting securities of Class B Shares of the Fund, or
by you. This Agreement will automatically terminate in the event of its
assignment. In interpreting the provisions of this paragraph 17, the definitions
contained in Section 2(a) of the Investment Company Act (particularly the
definitions of "interested person," "assignment" and "majority of the
outstanding voting securities"), shall be applied.
18. Amendment of this Agreement. No provisions of this Agreement may be
changed, waived, discharged or terminated orally, but only by instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. If the Fund should at any time deem it
necessary or advisable in the best interests of the Fund that any amendment of
this Agreement be made in order to comply with the recommendations or
requirements of the Securities and Exchange Commission or other governmental
authority or to obtain any advantage under state or federal tax laws and should
notify you of the form of such amendment, and the reasons therefor, and if you
should decline to assent to such amendment, the Fund may terminate this
Agreement forthwith. If you should at any time request that a change be made in
the Fund's Declaration of Trust or By-laws or in the Fund's methods of doing
business, in order to comply with any requirements of federal law or regulations
of the Securities and Exchange Commission or of a national securities
association of which you are or may be a member relating to the sale of Class B
Shares, and the Fund should not make such necessary change within a reasonable
time, you may terminate this Agreement forthwith.
19. Miscellaneous. The captions in this Agreement are included for the
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 Fund for the enforcement of any claims against the Fund as
neither the Trustees, officers, employees, agents or shareholders assume any
personal liability for obligations entered into on behalf of the Fund, nor shall
resort be had to their private property for the satisfaction of any obligation
or claim or otherwise in connection with the affairs of the Fund.
Exhibit 8(a)(1)
CUSTODIAN AGREEMENT
Dated as of April 15, 1996
Between
SCUDDER VARIABLE LIFE INVESTMENT FUND
and
BROWN BROTHERS HARRIMAN & CO.
<PAGE>
TABLE OF CONTENTS
-----------------
ARTICLE I
APPOINTMENT OF CUSTODIAN
ARTICLE II
POWERS AND DUTIES OF CUSTODIAN
2.1. Safekeeping......................................................... 2
2.2. Manner of Holding Securities........................................ 2
2.3. Registered Name; Nominee............................................ 2
2.4. Purchases by the Fund............................................... 3
2.5. Exchanges of Securities............................................. 4
2.6. Sales of Securities................................................. 4
2.7. Depositary Receipts................................................. 5
2.8. Exercise of Rights; Tender Offers................................... 5
2.9. Stock Dividends, Rights, Etc........................................ 5
2.10. Options............................................................. 6
2.11. Futures and Forward Contracts....................................... 6
2.12. Borrowings.......................................................... 7
2.13. Bank Accounts....................................................... 7
2.14. Interest-Bearing Deposits........................................... 8
2.15. Foreign Exchange Transactions........................................ 8
2.16. Securities Loans..................................................... 9
2.17. Collections.......................................................... 9
2.18. Dividends, Distributions and
Redemptions...................................................... 10
2.19. Proxies; Communications Relating to
Portfolio Securities............................................. 10
2.20. Bills............................................................... 11
2.21. Nondiscretionary Details............................................ 11
2.22. Deposit of Fund Assets in Securities
Systems.......................................................... 11
2.23. Other Transfers..................................................... 12
2.24. Establishment of Segregated Accounts................................ 13
2.25. Custodian Advances.................................................. 13
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TABLE OF CONTENTS
-----------------
ARTICLE III
PROPER INSTRUCTIONS, SPECIAL INSTRUCTIONS
AND RELATED MATTERS
3.1. Proper Instructions and Special
Instructions..................................................... 14
3.2. Authorized Persons.................................................. 15
3.3 Persons Having Access to Assets of the Fund......................... 15
3.4. Actions of Custodian Based on Proper
Instructions and Special Instructions............................ 15
ARTICLE IV
SUBCUSTODIANS
4.1. Domestic Subcustodians.............................................. 16
4.2. Foreign Subcustodians and Interim
Subcustodians.................................................... 16
4.3. Termination of a Subcustodian....................................... 18
4.4. Agents.............................................................. 18
ARTICLE V
STANDARD OF CARE; INDEMNIFICATION
5.1. Standard of Care.................................................... 19
5.2. Liability of Custodian for Actions of
Other Persons.................................................... 20
5.3. Indemnification..................................................... 21
5.4. Investment Limitations.............................................. 22
5.5. Fund's Right to Proceed............................................. 22
ARTICLE VI
RECORDS
6.1. Preparation of Reports.............................................. 23
6.2. Custodian's Books and Records....................................... 23
6.3. Opinion of Fund's Independent Certified
Public Accountants............................................... 24
6.4. Reports of Custodian's Independent
Certified Public Accountants..................................... 24
6.5. Calculation of Net Asset Value...................................... 24
6.6. Information Regarding Foreign
Subcustodians and Foreign Depositories........................... 26
ii
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TABLE OF CONTENTS
-----------------
ARTICLE VII
CUSTODIAN FEES
ARTICLE VIII
TERMINATION
ARTICLE IX
MISCELLANEOUS
9.1. Execution of Documents........................................... 29
9.2. Entire Agreement................................................. 29
9.3. Waivers and Amendments........................................... 29
9.4. Captions......................................................... 29
9.5. Governing Law.................................................... 29
9.6. Notices.......................................................... 29
9.7. Successors and Assigns........................................... 30
9.8. Counterparts..................................................... 30
9.9. Representative Capacity; Nonrecourse
Obligations................................................... 30
Appendix A Procedures Relating to Custodian's Security Interest
Appendix B Subcustodians, Foreign Countries, and Foreign Depositories
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<PAGE>
Form of Custodian Agreement
---------------------------
CUSTODIAN AGREEMENT dated as of April 15, 1996, between Scudder
Variable Life Investment Fund (the "Fund"), a Massachusetts business trust, and
Brown Brothers Harriman & Co. (the "Custodian"), a New York limited partnership.
The Fund is entering into this Agreement on behalf of the Global Discovery
Portfolio. The Custodian shall treat the assets of each series as a separate
Fund hereunder, and any reference to "Fund" shall refer to a series of the Fund
as the context shall require. In the event the Fund establishes one or more
additional series after the date hereof, with respect to which the Fund desires
to have the Custodian render services as Custodian hereunder, the Fund shall so
notify the Custodian in writing, and if the Custodian agrees in writing to
provide such services, such series shall become a Fund or Funds hereunder.
In consideration of the mutual covenants and agreements herein
contained, the parties hereto agree as follows:
ARTICLE I
APPOINTMENT OF CUSTODIAN
The Fund hereby employs and appoints the Custodian as a
custodian for the term of and subject to the provisions of this Agreement. The
Fund agrees to deliver to the Custodian all securities, cash and other assets
owned by it, and all payments of income, payments of principal or capital
distributions received by it with respect to all securities owned by the Fund
from time to time, and the cash consideration received by it for such new or
treasury shares of beneficial interest of the Fund as may be issued or sold from
time to time.
The Custodian shall not be under any duty or obligation to
require the Fund to deliver to it any securities, cash or other assets owned by
the Fund and shall have no responsibility or liability for or on account of
securities, cash or other assets not so delivered. The Fund will deposit with
the Custodian copies of the Declaration of Trust and By-Laws (or comparable
documents) of the Fund and all amendments thereto, and copies of such votes and
other proceedings of the Fund as may be necessary for or convenient to the
Custodian in the performance of its duties.
<PAGE>
ARTICLE II
POWERS AND DUTIES OF CUSTODIAN
The Custodian shall have and perform, or cause to be performed
in accordance with this Agreement, the powers and duties set forth in this
Article II. Pursuant to and in accordance with Article IV, the Custodian may
appoint one or more Subcustodians (as that term is defined in Article IV) to
exercise the powers and perform the duties of the Custodian set forth in this
Article II and, except as the context shall otherwise require, references to the
Custodian in this Article II shall include any Subcustodian so appointed.
2.1. Safekeeping. The Custodian shall keep safely the cash,
securities and other assets of the Fund that have been delivered to the
Custodian and from time to time shall accept delivery of cash, securities and
other assets for safekeeping.
2.2. Manner of Holding Securities. (a) The Custodian shall
hold securities of the Fund (i) by physical possession of the share certificates
or other instruments representing such securities in registered or bearer form,
or the broker's receipts or confirmations for forward contracts, futures
contracts, options and similar contracts and securities, or (ii) in book-entry
form by a Securities System (as that term is defined in section 2.22) or (iii)
by a Foreign Depository (as that term is defined in section 4.2(a)).
(b) The Custodian shall identify securities and other assets
held by it hereunder as being held for the account of the Fund and shall require
each Subcustodian to identify securities and other assets held by such
Subcustodian as being held for the account of the Custodian for the Fund (or, if
authorized by Special Instructions, for customers of the Custodian) or for the
account of another Subcustodian for the Fund (or, if authorized by Special
Instructions, for customers of such Subcustodian); provided that if assets are
held for the account of the Custodian or a Subcustodian for customers of the
Custodian or such Subcustodian, the records of the Custodian shall at all times
indicate the Fund and other customers of the Custodian for which such assets are
held in such account and their respective interests therein.
2.3. Registered Name; Nominee. (a) The Custodian shall hold
registered securities and other assets of the Fund (i) in the name of the
Custodian (including any Subcustodian), the Fund, a Securities System, a Foreign
Depository or any nominee of any such person or (ii) in street certificate form,
so-called, and in any case with or without any indication of fiduciary capacity,
provided that such securities and other assets of the Fund are held in an
account of the Custodian containing only assets of the Fund or only assets held
as fiduciary or custodian for customers.
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(b) Except with respect to securities or other assets which
under local custom and practice generally accepted by Institutional Clients are
held in the investor's name, the Custodian shall not hold registered securities
or other assets in the name of the Fund, and shall require each Subcustodian not
to hold registered securities or other assets in the name of the Fund, unless
the Custodian or such Subcustodian promptly notifies the Fund that such
registered securities are being held in the Fund's name and causes the
Securities System, Foreign Depository, issuer or other relevant person to direct
all correspondence and payments to the address of the Custodian or such
Subcustodian, as the case may be.
2.4. Purchases by the Fund. Upon receipt of Proper
Instructions (as that term is defined in section 3.1(a)) and insofar as funds
are available for the purpose (or as funds are otherwise provided by the
Custodian at its discretion pursuant to section 2.25), the Custodian shall pay
for and receive securities or other assets purchased for the account of the
Fund, payment being made only upon receipt of the securities or other assets (a)
by the Custodian, or (b) by credit to an account which the Custodian may have
with a Securities System, clearing corporation of a national securities
exchange, Foreign Depository or other financial institution approved by the
Fund. Notwithstanding the foregoing, upon receipt of Proper Instructions: (i) in
the case of repurchase agreements entered into by the Fund in a transaction
involving a Securities System or a Foreign Depository, the Custodian may release
funds to the Securities System or Foreign Depository prior to the receipt of
advice from the Securities System or Foreign Depository that the securities
underlying such repurchase agreement have been transferred by book entry into
the Account (as defined in section 2.22) of the Custodian maintained with such
Securities System or similar account with a Foreign Depository, provided that
the instructions of the Custodian to the Securities System or Foreign Depository
require that the Securities System or Foreign Depository, as the case may be,
may make payment of such funds to the other party to the repurchase agreement
only upon transfer by book-entry of the securities underlying the repurchase
agreement into the Account, (ii) in the case of futures and forward contracts,
options and similar securities, foreign currency purchased from third parties,
time deposits, foreign currency call account deposits, and other bank deposits,
and transactions pursuant to sections 2.10, 2.11, 2.13, 2.14 and 2.15, the
Custodian may make payment therefor prior to delivery of the contract, currency,
option or security without receiving an instrument evidencing said contract,
currency, option, security or deposit, and (iii) in the case of the purchase of
securities or other assets the settlement of which occurs outside the United
States of America, the Custodian may make payment therefor and receive delivery
thereof in accordance with local custom and practice generally accepted by
Institutional Clients (as defined below) in the country in which settlement
occurs, provided that in every case the Custodian shall be subject to the
standard of care set forth in Article V and to any Special Instructions given in
accordance with section 3.1(b). Except in the cases provided for in the
immediately preceding sentence, in any case where payment for purchase of
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<PAGE>
securities or other assets for the account of the Fund is made by the Custodian
in advance of receipt of the securities or other assets so purchased in the
absence of Proper Instructions to so pay in advance, the Custodian shall be
absolutely liable to the Fund for such securities or other assets to the same
extent as if the securities or other assets had been received by the Custodian.
For purposes of this Agreement, "Institutional Clients" means U.S. registered
investment companies, or major, U.S.-based commercial banks, insurance
companies, pension funds or substantially similar financial institutions which,
as a substantial part of their business operations, purchase or sell securities
and make use of custodial services.
2.5. Exchanges of Securities. Upon receipt of Proper
Instructions, the Custodian shall exchange securities held by it for the account
of the Fund for other securities in connection with any reorganization,
recapitalization, split-up of shares, change of par value, conversion or other
event, and to deposit any such securities in accordance with the terms of any
reorganization or protective plan. Without Proper Instructions, the Custodian
may surrender securities in temporary form for definitive securities, may
surrender securities for transfer into a name or nominee name as permitted in
section 2.3, and may surrender securities for a different number of certificates
or instruments representing the same number of shares or same principal amount
of indebtedness, provided that the securities to be issued are to be delivered
to the Custodian.
2.6. Sales of Securities. Upon receipt of Proper Instructions,
the Custodian shall make delivery of securities or other assets which have been
sold for the account of the Fund, but only against payment therefor (a) in cash,
by a certified check, bank cashier's check, bank credit, or bank wire transfer,
or (b) by credit to the account of the Custodian with a Securities System,
clearing corporation of a national securities exchange, Foreign Depository or
other financial institution approved by the Fund by Proper Instructions.
However, (i) in the case of delivery of physical certificates or instruments
representing securities, the Custodian may make delivery to the broker acting as
agent for the buyer of the securities, against receipt therefor, for examination
in accordance with "street delivery" custom, provided that the Custodian shall
have taken reasonable steps to ensure prompt collection of the payment for, or
the return of, such securities by the broker or its clearing agent and (ii) in
the case of the sale of securities or other assets the settlement of which
occurs outside the United States of America, such securities shall be delivered
and paid for in accordance with local custom and practice generally accepted by
Institutional Clients in the country in which settlement occurs, provided that
in every case the Custodian shall be subject to the standard of care set forth
in Article V and to any Special Instructions given in accordance with section
3.1(b). Except in the cases provided for in the immediately preceding sentence,
in any case where delivery of securities or other assets for the account of the
Fund is made by the Custodian in advance of receipt of payment for the
4
<PAGE>
securities or other assets so sold in the absence of Proper Instructions to so
deliver in advance, the Custodian shall be absolutely liable to the Fund for
such payment to the same extent as if such payment had been received by the
Custodian.
2.7. Depositary Receipts. Upon receipt of Proper Instructions,
the Custodian shall surrender securities to the depositary used by an issuer of
American Depositary Receipts, European Depositary Receipts, Global Depositary
Receipts, International Depositary Receipts and other types of Depositary
Receipts (hereinafter collectively referred to as "ADRs") for such securities
against a written receipt therefor adequately describing such securities and
written evidence satisfactory to the Custodian that the depositary has
acknowledged receipt of instructions to issue ADRs with respect to such
securities in the name of the Custodian, or a nominee of the Custodian, for
delivery to the Custodian in Boston, Massachusetts, or at such other place as
the Custodian may from time to time designate.
Upon receipt of Proper Instructions, the Custodian shall
surrender ADRs to the issuer thereof against a written receipt therefor
adequately describing the ADRs surrendered and written evidence satisfactory to
the Custodian that the issuer of the ADRs has acknowledged receipt of
instructions to cause its depositary to deliver the securities underlying such
ADRs to the Custodian.
2.8. Exercise of Rights; Tender Offers. Upon receipt of Proper
Instructions, the Custodian shall (a) deliver to the issuer or trustee thereof,
or to the agent of either, warrants, puts, calls, futures contracts, options,
rights or similar securities for the purpose of being exercised or sold,
provided that the new securities and cash, if any, acquired by such action are
to be delivered to the Custodian, and (b) deposit securities upon invitations
for tenders of securities, provided that the consideration is to be paid or
delivered or the tendered securities are to be returned to the Custodian.
Notwithstanding any provision of this Agreement to the contrary, the Custodian
shall take all necessary action, unless otherwise directed to the contrary by
Proper Instructions, to comply with the terms of all mandatory or compulsory
exchanges, calls, tenders, redemptions or similar rights of security ownership
of which the Custodian receives notice or otherwise becomes aware, and shall
promptly notify the Fund of any such action in writing by facsimile transmission
or in such other manner as the Fund and the Custodian may agree in writing.
2.9. Stock Dividends, Rights, Etc. The Custodian shall receive
and collect all stock dividends, rights and other items of like nature and shall
deal with the same as it would other deposited assets or as directed in Proper
Instructions.
2.10. Options and Swaps. Upon receipt of Proper Instructions
or instructions from a third party properly given under any Procedural
Agreement, the Custodian shall (a) receive and retain confirmations or other
5
<PAGE>
documents (to the extent confirmations or other documents are provided to the
Custodian) evidencing the purchase, sale or writing of an option or swap of any
type on or in respect of a security, securities index, currency or similar form
of property by the Fund; (b) deposit and maintain in a segregated account,
either physically or by book-entry in a Securities System or Foreign Depository
or with a broker, dealer or other party designated by the Fund, securities, cash
or other assets in connection with options transactions or swap agreements
entered into by the Fund; (c) transfer securities, cash or other assets to a
Securities System, Foreign Depository, broker, dealer or other party or
organization, as margin (including variation margin) or other security for the
Fund's obligations in respect of an option or swap; and (d) pay, release and/or
transfer such securities, cash or other assets only in accordance with a notice
or other communication evidencing the expiration, termination, exercise of any
such option or default under any such option or swap furnished by The Options
Clearing Corporation, the securities or options exchange on which such option is
traded, or such other organization, party, broker or dealer as may be
responsible for handling such options or swap transactions or have authority to
give such notice or communication under a Procedural Agreement. Subject to the
standard of care set forth in Article V (and to its safekeeping duties set forth
in section 2.1), the Custodian shall not be responsible for the sufficiency of
assets held in any segregated account established and maintained in accordance
with Proper Instructions or instructions from a third party properly given under
any Procedural Agreement or for the performance by the Fund or any third party
of its obligations under any Procedural Agreement. For purposes of this
Agreement, a "Procedural Agreement" is a procedural agreement relating to
options, swaps (including caps, floors and similar arrangements), futures
contracts, forward contracts or borrowings by the Fund to which the Fund, the
Custodian and a third party are parties.
2.11. Futures and Forward Contracts. Upon receipt of Proper
Instructions or instructions from a third party properly given under any
Procedural Agreement, the Custodian shall (a) receive and retain confirmations
or other documents (to the extent confirmations or other documents are provided
to the Custodian) evidencing the purchase or sale of a futures contract or an
option on a futures contract by the Fund or the entry into a forward contract by
the Fund; (b) deposit and maintain in a segregated account, either physically or
by book entry in a Securities System or Foreign Depository, for the benefit of
any futures commission merchant, or pay to such futures commission merchant,
securities, cash or other assets designated by the Fund as initial, maintenance
or variation "margin" deposits intended to secure the Fund's performance of its
obligations under any futures contracts purchased or sold or any options on
futures contracts written, purchased or sold by the Fund or any forward
contracts entered into, in accordance with the provisions of any Procedural
Agreement designed to comply with the rules of the Commodity Futures Trading
Commission and/or any contract market, or any similar organization or
6
<PAGE>
organizations on which such contracts or options are traded; and (c) pay,
release and/or transfer securities, cash or other assets into or out of such
margin accounts only in accordance with any such agreements or rules. Subject to
the standard of care set forth in Article V, the Custodian shall not be
responsible for the sufficiency of assets held in any such margin account
established and maintained in accordance with Proper Instructions or
instructions from a third party properly given under any Procedural Agreement or
for the performance by the Fund or any third party of its obligations under any
Procedural Agreement.
2.12. Borrowings. Upon receipt of Proper Instructions or
instructions from a third party properly given under any Procedural Agreement,
the Custodian shall deliver securities of the Fund to lenders or their agents,
or otherwise establish a segregated account as agreed to by the Fund and the
Custodian, as collateral for borrowings effected by the Fund, but only against
receipt of the amounts borrowed (or to adjust the amount of such collateral in
accordance with the Procedural Agreement), provided that if such collateral is
held in book-entry form by a Securities System or Foreign Depository, such
collateral may be transferred by book-entry to such lender or its agent against
receipt by the Custodian of an undertaking by such lender to pay such borrowed
money to or upon the order of the Fund on the next business day following such
transfer of collateral.
2.13. Bank Accounts. The Custodian shall open and operate one
or more accounts in the name of the Fund on the Custodian's books subject only
to draft or order by the Custodian. All funds received by the Custodian from or
for the account of the Fund shall be deposited in said account(s). The
responsibilities of the Custodian to the Fund for deposits accepted on the
Custodian's books shall be that of a U.S. bank for a similar deposit.
Upon receipt of Proper Instructions, the Custodian may open
and operate additional accounts in such other banks or trust companies,
including any Subcustodian, as may be designated by the Fund in such
instructions (any such bank or trust company other than the Custodian so
designated by the Fund being referred to hereafter as a "Banking Institution"),
provided that any such account shall be in the name of the Custodian for the
account of the Fund (or, if authorized by Special Instructions, for the account
of the Custodian's customers generally) and subject only to the Custodian's
draft or order; provided that if assets are held in such an account for the
account of the Custodian's customers generally, the records of the Custodian
shall at all times indicate the Fund and other customers for which such assets
are held in such account and their respective interests therein. Such accounts
may be opened with Banking Institutions in the United States and in other
countries and may be denominated in U.S. Dollars or such other currencies as the
Fund may determine. So long as the Custodian exercises reasonable care and
diligence in executing Proper Instructions, the Custodian shall have no
7
<PAGE>
responsibility for the failure of any Banking Institution to make payment from
such an account upon demand.
2.14. Interest-Bearing Deposits. The Custodian shall place
interest-bearing fixed term and call deposits with such banks and in such
amounts as the Fund may authorize pursuant to Proper Instructions. Such deposits
may be placed with the Custodian or with Subcustodians or other Banking
Institutions as the Fund may determine. Deposits may be denominated in U.S.
Dollars or other currencies, as the Fund may determine, and need not be
evidenced by the issuance or delivery of a certificate to the Custodian,
provided that the Custodian shall include in its records with respect to the
assets of the Fund, appropriate notation as to the amount and currency of each
such deposit, the accepting Banking Institution and all other appropriate
details, and shall retain such forms of advice or receipt evidencing such
deposits as may be forwarded to the Custodian by the Banking Institution in
question. The responsibility of the Custodian for such deposits accepted on the
Custodian's books shall be that of a U.S. bank for a similar deposit. With
respect to interest-bearing deposits other than those accepted on the
Custodian's books, (a) the Custodian shall be responsible for the collection of
income as set forth in section 2.17, and (b) so long as the Custodian exercises
reasonable care and diligence in executing Proper Instructions, the Custodian
shall have no responsibility for the failure of any Banking Institution to make
payment in accordance with the terms of such an account. Upon receipt of Proper
Instructions, the Custodian shall take such reasonable steps as the Fund deems
necessary or appropriate to cause such deposits to be insured to the maximum
extent possible by the Federal Deposit Insurance Corporation and any other
applicable deposit insurers.
2.15. Foreign Exchange Transactions. (a) Upon receipt of
Proper Instructions, the Custodian shall settle foreign exchange contracts or
options to purchase and sell foreign currencies for spot and future delivery on
behalf and for the account of the Fund with such currency brokers or Banking
Institutions as the Fund may direct pursuant to Proper Instructions. The
Custodian shall be responsible for the transmission of cash and instructions to
and from the currency broker or Banking Institution with which the contract or
option is made, the safekeeping of all certificates and other documents and
agreements received by the Custodian evidencing or relating to such foreign
exchange transactions and the maintenance of proper records as set forth in
section 6.2. In connection with such transactions, upon receipt of Proper
Instructions, the Custodian shall be authorized to make free outgoing payments
of cash in the form of U.S. Dollars or foreign currency without receiving
confirmation of a foreign exchange contract or option or confirmation that the
countervalue currency completing the foreign exchange contract has been
delivered or that the option has been delivered or received. The Custodian shall
have no authority to select third party foreign exchange dealers and, so long as
the Custodian exercises reasonable care and diligence in executing Proper
Instructions, shall have no responsibility for the failure of any such dealer to
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settle any such contract or option in accordance with its terms. The Fund shall
reimburse the Custodian for any interest charges or reasonable out-of-pocket
expenses incurred by the Custodian resulting from the failure or delay of third
party foreign exchange dealers to deliver foreign exchange, other than interest
charges and expenses occasioned by or resulting from the negligence, misfeasance
or misconduct of the Custodian.
(b)The Custodian shall not be obligated to enter into foreign
exchange transactions as principal. However, if the Custodian has made available
to the Fund its services as principal in foreign exchange transactions, upon
receipt of Proper Instructions, the Custodian shall enter into foreign exchange
contracts or options to purchase and sell foreign currencies for spot and future
delivery on behalf of and for the account of the Fund with the Custodian as
principal. The responsibility of the Custodian with respect to foreign exchange
contracts and options executed with the Custodian as principal shall be that of
a U.S. bank with respect to a similar contract or option.
2.16. Securities Loans. Upon receipt of Proper Instructions,
the Custodian shall deliver securities of the Fund, in connection with loans of
securities by the Fund, to the borrower thereof in accordance with the terms of
a written securities lending agreement to which the Fund is a party or which is
otherwise approved by the Fund.
2.17. Collections. The Custodian shall promptly collect,
receive and deposit in the account or accounts referred to in section 2.13 all
income, payments of principal and other payments with respect to the securities
and other assets held hereunder, promptly endorse and deliver any instruments
required to effect such collections and in connection therewith deliver the
certificates or other instruments representing securities to the issuer thereof
or its agent when securities are called, redeemed, retired or otherwise become
payable; provided that the payment is to be made in such form and manner and at
such time, which may be after delivery by the Custodian of the instrument
representing the security, as is in accordance with the terms of the instrument
representing the security, such Proper Instructions as the Custodian may
receive, governmental regulations, the rules of the Securities System or Foreign
Depository in which such security is held or, with respect to securities
referred to in clause (iii) of the second sentence of section 2.4, in accordance
with local custom and practice generally accepted by Institutional Clients in
the market where payment or delivery occurs, but in all events subject to the
standard of care set forth in Article V. The Custodian shall promptly execute
ownership and other certificates and affidavits for all federal, state and
foreign tax purposes in connection with receipt of income or other payments with
respect to securities or other assets of the Fund or in connection with transfer
of securities or other assets. Pursuant to Proper Instructions, the Custodian
shall take such other actions, which may involve an investment decision, as the
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Fund may request with respect to the collection or receipt of funds or the
transfer of securities. Except in the cases provided for in the first sentence
of this section, in any case where delivery of securities for the account of the
Fund is made by the Custodian in advance of receipt of payment with respect to
such securities in the absence of Proper Instructions to so deliver in advance,
the Custodian shall be absolutely liable to the Fund for such payment to the
same extent as if such payment had been received by the Custodian. The Custodian
shall promptly notify the Fund in writing by facsimile transmission or in such
other manner as the Fund and the Custodian may agree in writing if any amount
payable with respect to securities or other assets of the Fund is not received
by the Custodian when due.
2.18. Dividends, Distributions and Redemptions. Upon receipt
of Proper Instructions, or upon receipt of instructions from the Fund's
shareholder servicing agent or agent with comparable duties (the "Shareholder
Servicing Agent") (given by such person or persons and in such manner on behalf
of the Shareholder Servicing Agent as the Fund shall have authorized by Proper
Instructions), the Custodian shall release funds or securities, insofar as
available, to the Shareholder Servicing Agent or as such Shareholder Servicing
Agent shall otherwise instruct (a) for the payment of dividends or other
distributions to Fund shareholders or (b) for payment to the Fund shareholders
who have delivered to such Shareholder Servicing Agent a request for repurchase
or redemption of their shares of beneficial interest in the Fund.
2.19. Proxies; Communications Relating to Portfolio
Securities. The Custodian shall, as promptly as is appropriate under the
circumstances, deliver or mail to the Fund all forms of proxies and all notices
of meetings and any other notices, announcements or information (including,
without limitation, information relating to pendency of calls and maturities of
securities and expirations of rights in connection therewith, notices of
exercise of call and put options written by the Fund, and notices of the
maturity of futures contracts (and options thereon) purchased or sold by the
Fund) affecting or relating to securities owned by the Fund that are received by
the Custodian. Upon receipt of Proper Instructions, the Custodian shall execute
and deliver or cause its nominee to execute and deliver such proxies or other
authorizations as may be required. Neither the Custodian nor its nominees shall
vote upon any of such securities or execute any proxy to vote thereon or give
any consent or take any other action with respect to securities or other assets
of the Fund (except as otherwise herein provided) unless ordered to do so by
Proper Instructions.
The Custodian shall notify the Fund on or before ex-date (or
if later within 24 hours after receipt by the Custodian of the notice of such
corporate action) of all corporate actions affecting portfolio securities of the
Fund received by the Custodian from the issuers of the securities involved, from
third parties proposing a corporate action, from subcustodians, or from commonly
utilized sources (including proprietary sources) providing corporate action
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information, a list of which will be provided by the Custodian to the Fund from
time to time upon request. Information as to corporate actions shall include
information as to dividends, distributions, stock splits, stock dividends,
rights offerings, conversions, exchanges, tender offers, recapitalizations,
mergers, redemptions, calls, maturity dates and similar transactions, including
ex-, record and pay dates and the amounts or other terms thereof. If the Fund
desires to take action with respect to any corporate action, the Fund shall
notify the Custodian within such period as will give the Custodian (including
any Subcustodian) a sufficient amount of time to take such action.
2.20. Bills. Upon receipt of Proper Instructions, the
Custodian shall pay or cause to be paid, insofar as funds are available for the
purpose, bills, statements, or other obligations of the Fund (including but not
limited to interest charges, taxes, advisory fees, compensation to Fund officers
and employees, and other operating expenses of the Fund).
2.21. Nondiscretionary Details. Without the necessity of
express authorization from the Fund, the Custodian shall (a) attend to all
nondiscretionary details in connection with the sale, exchange, substitution,
purchase, transfer or other dealings with securities, cash or other assets of
the Fund held by the Custodian except as otherwise directed from time to time by
the Board of Trustees of the Fund, and (b) make payments to itself or others for
minor expenses of handling securities or other assets and for other similar
items relating to the Custodian's duties under this Agreement, provided that all
such payments shall be accounted for to the Fund.
2.22. Deposit of Fund Assets in Securities Systems. The
Custodian may deposit and/or maintain securities owned by the Fund in (a) The
Depository Trust Company, (b) the Participants Trust Company, (c) any book-entry
system as provided in Subpart O of Treasury Circular No. 300, 31 CFR 306,
Subpart B of 31 CFR Part 350, or the book-entry regulations of federal agencies
substantially in the form of Subpart O, or (d) any other domestic clearing
agency registered with the Securities and Exchange Commission (the "SEC") under
Section 17A of the Securities Exchange Act of 1934, as amended, which acts as a
securities depository and whose use the Fund has previously approved by Special
Instructions (as that term is defined in section 3.1(b)) (each of the foregoing
being referred to in this Agreement as a "Securities System"). Utilization of a
Securities System shall be in accordance with applicable Federal Reserve Board
and SEC rules and regulations, if any, and subject to the following provisions:
(i) The Custodian may deposit and/or maintain securities held
hereunder in a Securities System, provided that such securities are
represented in an account ("Account") of the Custodian in the
Securities System which shall not include any assets of the Custodian
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other than assets held as a fiduciary, custodian, or otherwise for
customers;
(ii) The records of the Custodian with respect to securities
of the Fund which are maintained in a securities System shall identify
by book entry those securities belonging to the Fund;
(iii) The Custodian shall pay for securities purchased for the
account of the Fund only upon (A) receipt of advice from the Securities
System that such securities have been transferred to the Account, and
(B) the making of an entry on the records of the Custodian to reflect
such payment and transfer for the account of the Fund. The Custodian
shall transfer securities sold for the account of the Fund only upon
(1) receipt of advice from the Securities System that payment for such
securities has been transferred to the Account, and (2) the making of
an entry on the records of the Custodian to reflect such transfer and
payment for the account of the Fund. Copies of all advices from the
Securities System of transfers of securities for the account of the
Fund shall identify the Fund, be maintained for the Fund by the
Custodian and be provided to the Fund at its request. The Custodian
shall furnish the Fund confirmation of each transfer to or from the
account of the Fund in the form of a written advice or notice and shall
furnish to the Fund copies of daily transaction sheets reflecting each
day's transactions in the Securities System for the account of the Fund
on the next business day;
(iv) The Custodian shall provide the Fund with any report
obtained by the Custodian on the Securities System's accounting system,
internal accounting control and procedures for safeguarding securities
deposited in the Securities System; and the Custodian shall send to the
Fund such reports on its own systems of internal accounting control as
the Fund may reasonably request from time to time; and
(v) Upon receipt of Special Instructions, the Custodian shall
terminate the use of any such Securities System on behalf of the Fund
as promptly as practicable and shall take all actions reasonably
practicable to safeguard the securities of the Fund that had been
maintained with such Securities System.
2.23. Other Transfers. The Custodian shall deliver securities,
cash, and other assets of the Fund to a Subcustodian as necessary to effect
transactions authorized by Proper Instructions. Upon receipt of Proper
Instructions in writing in advance, the Custodian shall make such other
disposition of securities, cash or other assets of the Fund in a manner other
than or for purposes other than as enumerated in this Agreement, provided that
such written Proper Instructions relating to such disposition shall include a
statement of the purpose for which the delivery is to be made, the amount of
funds and/or securities to be delivered and the name of the person or persons to
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whom delivery is to be made.
2.24. Establishment of Segregated Accounts. Upon receipt of
Proper Instructions, the Custodian shall establish and maintain on its books a
segregated account or accounts for and on behalf of the Fund, into which account
or accounts may be transferred cash and/or securities or other assets of the
Fund, including securities maintained by the Custodian in a Securities System,
said account to be maintained (a) for the purposes set forth in sections 2.10,
2.11, 2.12 and 2.15; (b) for the purposes of compliance by the Fund with the
procedures required by Release No. 10666 under the Investment Company Act of
1940, as amended (the "1940 Act"), or any subsequent release or releases of the
SEC relating to the maintenance of segregated accounts by registered investment
companies; or (c) for such other purposes as set forth, from time to time, in
Special Instructions.
2.25. Custodian Advances. (a) In the event that the Custodian
is directed by Proper Instructions to make any payment or transfer of funds on
behalf of the Fund for which there would be, at the close of business on the
date of such payment or transfer, insufficient funds held by the Custodian on
behalf of the Fund, the Custodian may, in its discretion without further Proper
Instructions, provide an advance ("Advance") to the Fund in an amount sufficient
to allow the completion of the transaction by reason of which such payment or
transfer of funds is to be made. In addition, in the event the Custodian is
directed by Proper Instructions to make any payment or transfer of funds on
behalf of the Fund as to which it is subsequently determined that the Fund has
overdrawn its cash account with the Custodian as of the close of business on the
date of such payment or transfer, said overdraft shall constitute an Advance.
Any Advance shall be payable on demand by the Custodian, unless otherwise agreed
by the Fund and the Custodian, and shall accrue interest from the date of the
Advance to the date of payment by the Fund at a rate agreed upon in writing from
time to time by the Custodian and the Fund. It is understood that any
transaction in respect of which the Custodian shall have made an Advance,
including but not limited to a foreign exchange contract or other transaction in
respect of which the Custodian is not acting as a principal, is for the account
of and at the risk of the Fund, and not, by reason of such Advance, deemed to be
a transaction undertaken by the Custodian for its own account and risk. The
Custodian and the Fund acknowledge that the purpose of Advances is to finance
temporarily the purchase or sale of securities for prompt delivery or to meet
redemptions or emergency expenses or cash needs that are not reasonably
foreseeable by the Fund. The Custodian shall promptly notify the Fund in writing
(an "Notice of Advance") of any Advance by facsimile transmission or in such
other manner as the Fund and the Custodian may agree in writing. At the request
of the Custodian, the Fund shall pledge, assign and grant to the Custodian a
security interest in certain specified securities of the Fund, as security for
Advances provided to the Fund, under the terms and conditions set forth in
Appendix A attached hereto.
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ARTICLE III
PROPER INSTRUCTIONS, SPECIAL INSTRUCTIONS
AND RELATED MATTERS
3.1. Proper Instructions and Special Instructions.
(a) Proper Instructions. As used in this Agreement, the term
"Proper Instructions" shall mean: (i) a tested telex from the Fund or the Fund's
investment manager or adviser, or a written request, direction, instruction or
certification (which may be given by facsimile transmission) signed or initialed
on behalf of the Fund by, one or more Authorized Persons (as that term is
defined in section 3.2); (ii) a telephonic or other oral communication by one or
more Authorized Persons; or (iii) a communication (other than facsimile
transmission) effected directly between electro-mechanical or electronic devices
or systems (including, without limitation, computers) by the Fund or the Fund's
investment manager or adviser or by one or more Authorized Persons on behalf of
the Fund; provided that communications of the types described in clauses (ii)
and (iii) above purporting to be given by an Authorized Person shall be
considered Proper Instructions only if the Custodian reasonably believes such
communications to have been given by an Authorized Person with respect to the
transaction involved. Instructions given in the form of Proper Instructions
under clause (i) shall be deemed to be Proper Instructions if they are
reasonably believed by the Custodian to be genuine. Proper Instructions in the
form of oral communications shall be confirmed by the Fund in the manner set
forth in clauses (i) or (iii) above, but the lack of such confirmation shall in
no way affect any action taken by the Custodian in reliance upon such oral
instructions prior to the Custodian's receipt of such confirmation. The Fund,
the Custodian and any investment manager or adviser of the Fund each is hereby
authorized to record any telephonic or other oral communications between the
Custodian and any such person. Proper Instructions may relate to specific
transactions or to types or classes of transactions, provided that Proper
Instructions may take the form of standing instructions only if they are in
writing.
(b) Special Instructions. As used in this Agreement, the term
"Special Instructions" shall mean Proper Instructions countersigned or confirmed
in writing by the Treasurer or any Assistant Treasurer of the Fund or any other
person designated by the Treasurer of the Fund in writing, which
countersignature or confirmation shall be (i) included on the instrument
containing the Proper Instructions or on a separate instrument relating thereto,
and (ii) delivered by hand, facsimile transmission, mail or courier service or
in such other manner as the Fund and the Custodian agree in writing.
(c) Address for Proper Instructions and Special Instructions.
Proper Instructions and Special Instructions shall be delivered to the Custodian
at the address and/or telephone, telecopy or telex number agreed upon from time
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to time by the Custodian and the Fund.
3.2. Authorized Persons. Concurrently with the execution of
this Agreement and from time to time thereafter, as appropriate, the Fund shall
deliver to the Custodian a certificate, duly certified by the Treasurer or
Assistant Treasurer of the Fund, setting forth: (a) the names, titles,
signatures and scope of authority of all persons authorized to give Proper
Instructions or any other notice, request, direction, instruction, certificate
or instrument on behalf of the Fund (each an "Authorized Person"); and (b) the
names, titles and signatures of those persons authorized to issue Special
Instructions. Such certificate may be accepted and relied upon by the Custodian
as conclusive evidence of the facts set forth therein and shall be considered to
be in full force and effect until delivery to the Custodian of a similar
certificate to the contrary. Upon delivery of a certificate which deletes the
name(s) of a person previously auhorized to give Proper Instructions or to issue
Special Instructions, such persons shall no longer be considered an Authorized
Person or authorized to issue Special Instructions.
3.3. Persons Having Access to Assets of the Fund.
Notwithstanding anything to the contrary in this Agreement, the Custodian shall
not deliver any assets of the Fund held by the Custodian to or for the account
of any Authorized Person, Trustee, officer, employee or agent of the Fund,
provided that nothing in this section 3.3 shall prohibit (a) any Authorized
Person from giving Proper Instructions, or any person authorized to issue
Special Instructions from issuing Special Instructions, provided such action
does not result in delivery of or access to assets of the Fund prohibited by
this section 3.3; or (b) the Fund's independent certified public accountants
from examining or reviewing the assets of the Fund held by the Custodian. The
Fund shall provide a list of such persons to the Custodian, and the Custodian
shall be entitled to rely upon such list and any modifications thereto that are
provided to the Custodian from time to time by the Fund.
3.4. Actions of Custodian Based on Proper Instructions and
Special Instructions. So long as and to the extent that the Custodian acts in
accordance with Proper Instructions or Special Instructions, as the case may be,
and the terms of this Agreement, the Custodian shall not be responsible for the
title, validity or genuineness of any property, or evidence of title thereof,
received or delivered by it pursuant to this Agreement.
ARTICLE IV
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SUBCUSTODIANS
The Custodian may, from time to time, in accordance with the
relevant provisions of this Article IV, appoint one or more Domestic
Subcustodians, Foreign Subcustodians and Interim Subcustodians (as such terms
are defined below) to act on behalf of the Fund. For purposes of this Agreement,
all duly appointed Domestic Subcustodians, Foreign Subcustodians and Interim
Subcustodians are referred to collectively as "Subcustodians."
4.1. Domestic Subcustodians. The Custodian may, at any time
and from time to time, at its own expense, appoint any bank as defined in
section 2(a)(5) of the 1940 Act meeting the requirements of a custodian under
section 17(f) of the 1940 Act and the rules and regulations thereunder, to act
on behalf of the Fund as a subcustodian for purposes of holding cash, securities
and other assets of the Fund and performing other functions of the Custodian
within the United States (a "Domestic Subcustodian"), provided that the
Custodian shall notify the Fund in writing of the identity and qualifications of
any proposed Domestic Subcustodian at least 30 days prior to appointment of such
Domestic Subcustodian, and the Fund may, in its sole discretion, by written
notice to the Custodian executed by an Authorized Person disapprove of the
appointment of such Domestic Subcustodian. If following notice by the Custodian
to the Fund regarding appointment of a Domestic Subcustodian and the expiration
of 30 days after the date of such notice, the Fund shall have failed to notify
the Custodian of its disapproval thereof, the Custodian may, in its discretion,
appoint such proposed Domestic Subcustodian as its subcustodian.
4.2. Foreign Subcustodians and Interim Subcustodians.
(a) Foreign Subcustodians. The Custodian may, at any time and from time to time,
at its own expense, appoint: (i) any bank, trust company or other entity meeting
the requirements of an "eligible foreign custodian" under section 17(f) of the
1940 Act and the rules and regulations thereunder or exempted therefrom by order
of the SEC, or (ii) any bank as defined in section 2(a)(5) of the 1940 Act
meeting the requirements of a custodian under section 17(f) of the 1940 Act and
the rules and regulations thereunder to act on behalf of the Fund as a
subcustodian for purposes of holding cash, securities and other assets of the
Fund and performing other functions of the Custodian in countries other than the
United States of America (a "Foreign Subcustodian"); provided that prior to the
appointment of any Foreign Subcustodian, the Custodian shall have obtained
written confirmation of the approval of the Board of Trustees of the Fund (which
approval may be withheld in the sole discretion of such Board) with respect to
(A) the identity and qualifications of any proposed Foreign Subcustodian, (B)
the country or countries in which, and the securities depositories or clearing
agencies (meeting the requirements of an "eligible foreign custodian" under
section 17(f) of the 1940 Act and the rules and regulations thereunder or
exempted therefrom by order of the SEC) through which, any proposed Foreign
Subcustodian is authorized to hold Securities, cash and other assets of the Fund
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(each a "Foreign Depository") and (C) the form and terms of the subcustodian
agreement to be entered into between such proposed Foreign Subcustodian and the
Custodian. In addition, the Custodian may utilize directly any Foreign
Depository, provided the Board of Trustees shall have approved in writing the
use of such Foreign Depository by the Custodian. Each such duly approved Foreign
Subcustodian and the countries where and the Foreign Depositories through which
it may hold securities and other assets of the Fund and the Foreign Depositories
that the Custodian may utilize shall be listed in Appendix B, as it may be
amended from time to time in accordance with the provisions of section 9.3. The
Fund shall be responsible for informing the Custodian sufficiently in advance of
a proposed investment which is to be held in a country in which no Foreign
Subcustodian is authorized to act, in order that there shall be sufficient time
for the Custodian to effect the appropriate arrangements with a proposed Foreign
Subcustodian, including obtaining approval as provided in this section 4.2(a).
The Custodian shall not agree to any material amendment to any subcustodian
agreement entered into with a Foreign Subcustodian, or agree to permit any
material changes thereunder, or waive any material rights under such agreement,
except upon prior approval pursuant to Special Instructions. The Custodian shall
promptly provide the Fund with notice of any such amendment, change, or waiver,
whether or not material, including a copy of any such amendment. For purposes of
this subsection, a material amendment, change or waiver means an amendment,
change or waiver that may reasonably be expected to have an adverse effect on
the Fund in any material way, including but not limited to the Fund's or the
Board's obligations under the 1940 Act, including Rule 17f-5 thereunder.
(b) Interim Subcustodians. In the event that the Fund shall
invest in a security or other asset to be held in a country in which no Foreign
Subcustodian is authorized to act (whether because the Custodian has not
appointed a Foreign Subcustodian in such country and entered into a subcustodian
agreement with it or because the Board of Trustees of the Fund has not approved
the Foreign Subcustodian appointed by the Custodian in such country and the
related subcustodian agreement), the Custodian shall promptly notify the Fund in
writing by facsimile transmission or in such other manner as the Fund and
Custodian shall agree in writing that no Foreign Subcustodian is approved in
such country and the Custodian shall, upon receipt of Special Instructions,
appoint any person designated by the Fund in such Special Instructions to hold
such security or other asset. Any person appointed as a Subcustodian pursuant to
this section 4.2(b) is hereinafter referred to herein as an "Interim
Subcustodian." Each Interim Custodian and the securities or assets of the Fund
that it is authorized to hold shall be set forth in Appendix B.
In the absence of such Special Instructions, such security or
other asset shall be held by such agent as the Custodian may appoint unless and
until the Fund shall instruct the Custodian to move the security or other asset
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into the possession of the Custodian or a Subcustodian.
4.3. Termination of a Subcustodian. The Custodian shall (a)
cause each Domestic Subcustodian and Foreign Subcustodian to, and (b) use its
best efforts to cause each Interim Subcustodian to, perform all of its
obligations in accordance with the terms and conditions of the subcustodian
agreement between the Custodian and such Subcustodian. In the event that the
Custodian is unable to cause such Subcustodian to fully perform its obligations
thereunder, the Custodian shall forthwith, upon the receipt of Special
Instructions, exercise its best efforts to recover any Losses (as hereinafter
defined) incurred by the Fund because of such failure to perform from such
Subcustodian under the applicable subcustodian agreement and, if necessary or
desirable, terminate such subcustodian and appoint a replacement Subcustodian in
accordance with the provisions of this Agreement. In addition to the foregoing,
the Custodian (i) may, at any time in its discretion, upon written notification
to the Fund, terminate any Domestic Subcustodian, Foreign Subcustodian or
Interim Subcustodian, and (ii) shall, upon receipt of Special Instructions,
terminate any Subcustodian with respect to the Fund, in each case in accordance
with the termination provisions of the applicable subcustodian agreement.
4.4. Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank, trust company,
securities depository or clearing agency that is itself qualified to act as a
custodian under the 1940 Act and the rules and regulations thereunder, as its
agent (an "Agent") to carry out such of the provisions of this Agreement as the
Custodian may from time to time direct, provided that the appointment of one or
more Agents (other than an agent appointed to the second paragraph of section
4.2(b)) shall not relieve the Custodian of its responsibilities under this
Agreement. Without limiting the foregoing, the Custodian shall be responsible
for any notices, documents or other information, or any securities, cash or
other assets of the Fund, received by any Agent on behalf of the Custodian or
the Fund as if the Custodian had received such items itself.
ARTICLE V
STANDARD OF CARE; INDEMNIFICATION
5.1. Standard of Care.
(a) General Standard of Care. The Custodian shall exercise
reasonable care and diligence in carrying out all of its duties and obligations
under this Agreement, and shall be liable to the Fund for all Losses suffered or
incurred by the Fund resulting from the failure of the Custodian to exercise
such reasonable care and diligence. For purposes of this Agreement, "Losses"
means any losses, damages, and expenses.
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(b) Actions Prohibited by Applicable Law, Etc. In no event
shall the Custodian incur liability hereunder if the Custodian or any
Subcustodian or Securities System, or any subcustodian, securities depository or
securities system utilized by any such Subcustodian or the Custodian, or any
nominee of the Custodian or any Subcustodian, is prevented, forbidden or delayed
from performing, or omits to perform, any act or thing which this Agreement
provides shall be performed or omitted to be performed, by reason of: (i) any
provision of any present or future law or regulation or order of the United
States of America, or any state thereof, or of any foreign country, or political
subdivision thereof or of any court of competent jurisdiction; or (ii) any act
of God or war or action of any de facto or de jure government or other similar
circumstance beyond the control of the Custodian, unless, in each case, such
delay or nonperformance is caused by the negligence, misfeasance or misconduct
of such person.
(c) Mitigation by Custodian. Upon the occurrence of any event
which causes or may cause any Losses to the Fund (i) the Custodian shall, and
shall cause any applicable Domestic Subcustodian or Foreign Subcustodian to, and
(ii) the Custodian shall use its best efforts to cause any applicable Interim
Subcustodian to, use all commercially reasonable efforts and take all reasonable
steps under the circumstances to mitigate the effects of such event and to avoid
continuing harm to the Fund.
(d) Advice of Counsel. The Custodian shall be entitled to
receive and act upon advice of counsel on all matters. The Custodian shall be
without liability for any action reasonably taken or omitted in good faith
pursuant to the advice of (i) counsel for the Fund, or (ii) at the expense of
the Custodian, such other counsel as the Fund may agree to, such agreement not
to be unreasonably withheld or delayed; provided that with respect to the
performance of any action or omission of any action upon such advice, the
Custodian shall be required to conform to the standard of care set forth in
section 5.1(a).
(e) Expenses. In addition to the liability of the Custodian
under this Article V, the Custodian shall be liable to the Fund for all
reasonable costs and expenses incurred by the Fund in connection with any claim
by the Fund against the Custodian arising from the obligations of the Custodian
hereunder including, without limitation, all reasonable attorneys' fees and
expenses incurred by the Fund in asserting any such claim, and all reasonable
expenses incurred by the Fund in connection with any investigations, lawsuits or
proceedings relating to such claim, provided that the Fund has recovered from
the Custodian for such claim.
(f) Liability for Past Records. The Custodian shall have no
liability in respect of any Losses suffered by the Fund, insofar as such Losses
arise from the performance of the Custodian's duties hereunder by reason of the
Custodian's reliance upon records that were maintained for the Fund by entities
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other than the Custodian prior to the Custodian's employment hereunder.
(g) Reliance on Certifications. The Secretary or an Assistant
Secretary of the Fund shall certify to the Custodian the names and signatures of
the officers of the Fund, the name and address of the Shareholder Servicing
Agent, and any instructions or directions to the Custodian by the Fund's Board
of Trustees or shareholders. Any such certificate may be accepted and relied
upon by the Custodian as conclusive evidence of the facts set forth therein and
may be considered in full force and effect until receipt of a similar
certificate to the contrary.
5.2. Liability of Custodian for Actions of Other Persons.
(a) Domestic Subcustodians, Foreign Subcustodians and Agents.
The Custodian shall be liable for the actions or omissions of any Domestic
Subcustodian, Foreign Subcustodian or Agent (other than an agent appointed
pursuant to section 4.2(b)) to the same extent as if such action or omission
were performed by the Custodian itself pursuant to this Agreement. In the event
of any Losses suffered or incurred by the Fund caused by or resulting from the
actions or omissions of any Domestic Subcustodian, Foreign Subcustodian or Agent
(other than an agent appointed pursuant to section 4.2(b)) for which the
Custodian would be directly liable if such actions or omissions were those of
the Custodian, the Custodian shall promptly reimburse the Fund in the amount of
any such Losses.
(b) Interim Subcustodians. Notwithstanding the provisions of
section 5.1 to the contrary, the Custodian shall not be liable to the Fund for
any Losses suffered or incurred by the Fund resulting from the actions or
omissions of an Interim Subcustodian or an agent appointed pursuant to section
4.2(b) unless such Losses are caused by, or result from, the negligence,
misfeasance or misconduct of the Custodian; provided that in the event of any
Losses (whether or not caused by or resulting from the negligence, misfeasance
or misconduct of the Custodian), the Custodian shall take all reasonable steps
to enforce such rights as it may have against such Interim Subcustodian or agent
to protect the interests of the Fund.
(c) Securities Systems and Foreign Depositories.
Notwithstanding the provisions of section 5.1 to the contrary, the Custodian
shall not be liable to the Fund for any Losses suffered or incurred by the Fund
resulting from the use by the Custodian or any Subcustodian of a Securities
System or Foreign Depository, unless such Losses are caused by, or result from,
the negligence, misfeasance or misconduct of the Custodian; provided that in the
event of any such Losses, the Custodian shall take all reasonable steps to
enforce such rights as it may have against the Securities System or Foreign
Depository, as the case may be, to protect the interests of the Fund.
(d) Reimbursement of Expenses. The Fund agrees to reimburse
the Custodian for all reasonable out-of-pocket expenses incurred by the
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Custodian in connection with the fulfillment of its obligations under this
section 5.2, provided that such reimbursement shall not apply to expenses
occasioned by or resulting from the negligence, misfeasance or misconduct of the
Custodian.
5.3. Indemnification.
(a) Indemnification Obligations. Subject to the limitations
set forth in this Agreement, the Fund agrees to indemnify and hold harmless the
Custodian and its nominees for all Losses suffered or incurred by the Custodian
or its nominee (including Losses suffered under the Custodian's indemnity
obligations to Subcustodians) caused by or arising from actions taken by the
Custodian in the performance of its duties and obligations under this Agreement,
provided that such indemnity shall not apply to Losses occasioned by or
resulting from the negligence, misfeasance or misconduct of the Custodian or any
Subcustodian, Securities System, Foreign Depository or their respective
nominees. In addition, the Fund agrees to indemnify the Custodian against any
liability incurred by reason of taxes assessed to the Custodian, any
Subcustodian, any Securities System, any Foreign Depository, and their
respective nominees, or other Losses incurred by such persons, resulting from
the fact that securities and other property of the Fund are registered in the
name of such persons, provided that in no event shall such indemnification be
applicable to income, franchise or similar taxes which may be imposed or
assessed against such persons.
(b) Notice of Litigation, Right to Prosecute, etc. The Fund
shall not be liable for indemnification under this section 5.3 unless the person
seeking indemnification shall have notified the Fund in writing (i) within such
time after the assertion of any claim as is sufficient for such person to
determine that it will seek indemnification from the Fund in respect of such
claim or (ii) promptly after the commencement of any litigation or proceeding
brought against such person, in respect of which indemnity may be sought;
provided that in the case of clause (i) of this section 5.3(b) the Fund shall
not be liable for such indemnification to the extent the Fund is disadvantaged
by any such delay in notification. With respect to claims in such litigation or
proceedings for which indemnity by the Fund may be sought and subject to
applicable law and the ruling of any court of competent jurisdiction, the Fund
shall be entitled to participate in any such litigation or proceeding and, after
written notice from the Fund to the person seeking indemnification, the Fund may
assume the defense of such litigation or proceeding with counsel of its choice
at its own expense in respect of that portion of the litigation for which the
Fund may be subject to an indemnification obligation, provided that such person
shall be entitled to participate in (but not control) at its own cost and
expense, the defense of any such litigation or proceeding if the Fund has not
acknowledged in writing its obligation to indemnify such person with respect to
such litigation or proceeding. If the Fund is not permitted to participate in or
control such litigation or proceeding under applicable law or by a ruling of a
court of competent jurisdiction, such person shall reasonably prosecute such
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<PAGE>
litigation or proceeding. A person seeking indemnification hereunder shall not
consent to the entry of any judgment or enter into any settlement of any such
litigation or proceeding without providing the Fund with adequate notice of any
such settlement or judgment and without the Fund's prior written consent, which
consent shall not be unreasonably withheld or delayed. All persons seeking
indemnification hereunder shall submit written evidence to the Fund with respect
to any cost or expense for which they are seeking indemnification in such form
and detail as the Fund may reasonably request.
5.4. Investment Limitations. If the Custodian has otherwise
complied with the terms and conditions of this Agreement in performing its
duties generally, and more particularly in connection with the purchase, sale or
exchange of securities made by or for the Fund, the Custodian shall not be
liable to the Fund, and the Fund agrees to indemnify the Custodian and its
nominees, for any Losses suffered or incurred by the Custodian and its nominees
arising out of any violation of any investment or other limitation to which the
Fund is subject.
5.5. Fund's Right to Proceed. Notwithstanding anything to the
contrary contained herein, the Fund shall have, at its election upon reasonable
notice to the Custodian, the right to enforce, to the extent permitted by any
applicable agreement and applicable law, the Custodian's rights against any
Subcustodian, Securities System, Foreign Depository or other person for Losses
caused the Fund by such Subcustodian, Securities System, Foreign Depository or
other person, and shall be entitled to enforce the rights of the Custodian with
respect to any claim against such Subcustodian, Securities System, Foreign
Depository or other person which the Custodian may have as a consequence of any
such Losses, if and to the extent that the Fund has not been made whole for such
Losses. If the Custodian makes the Fund whole for such Losses, the Custodian
shall retain the ability to enforce its rights directly against such
Subcustodian, Securities System, Foreign Depository or other person. Upon the
Fund's election to enforce any rights of the Custodian under this section 5.5,
the Fund shall reasonably prosecute all actions and proceedings directly
relating to the rights of the Custodian in respect of the Losses incurred by the
Fund; provided that, so long as the Fund has acknowledged in writing its
obligation to indemnify the Custodian under section 5.3 hereof with respect to
such claim, the Fund shall retain the right to settle, compromise and/or
terminate any action or proceeding in respect of the Losses incurred by the Fund
without the Custodian's consent; and provided further that if the Fund has not
made an acknowledgement of its obligation to indemnify the Custodian, the Fund
shall not settle, compromise or terminate any such action or proceeding without
the written consent of the Custodian, which consent shall not be unreasonably
withheld or delayed. The Custodian agrees to cooperate with the Fund and take
all actions reasonably requested by the Fund in connection with the Fund's
enforcement of any rights of the Custodian. The Fund agrees to reimburse the
Custodian for all reasonable out-of-pocket expenses incurred by the Custodian in
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<PAGE>
connection with the fulfillment of its obligations under this section 5.5,
provided that such reimbursement shall not apply to expenses occasioned by or
resulting from the negligence, misfeasance or misconduct of the Custodian.
ARTICLE VI
RECORDS
6.1. Preparation of Reports. The Custodian shall, as
reasonably requested by the Fund, assist generally in the preparation of reports
to Fund shareholders, regulatory authorities and others, audits of accounts, and
other ministerial matters of like nature. The Custodian shall render statements,
including interim monthly and complete quarterly financial statements, or copies
thereof, from time to time as reasonably requested by Proper Instructions.
6.2. Custodian's Books and Records. The Custodian shall
maintain complete and accurate records with respect to securities and other
assets held for the account of the Fund as required by the rules and regulations
of the SEC applicable to investment companies registered under the 1940 Act,
including: (a) journals or other records of original entry containing a detailed
and itemized daily record of all receipts and deliveries of securities
(including certificate and transaction identification numbers, if any), and all
receipts and disbursements of cash; (b) ledgers or other records reflecting (i)
securities in physical possession, (ii) securities in transfer, (iii) securities
borrowed, loaned or collateralizing obligations of the Fund, (iv) monies
borrowed and monies loaned (together with a record of the collateral therefor
and substitutions of collateral), and (v) dividends and interest received; and
(c) cancelled checks and bank records related thereto. The Custodian shall keep
such other books and records of the Fund as the Fund shall reasonably request.
All such books and records maintained by the Custodian shall be maintained in a
form acceptable to the Fund and in compliance with the rules and regulations of
the SEC (including, but not limited to, books and records required to be
maintained under Section 31(a) of the 1940 Act and the rules and regulations
from time to time adopted thereunder), and any other applicable Federal, State
and foreign tax laws and administrative regulations. All such records will be
the property of the Fund and in the event of termination of this Agreement shall
be delivered to the successor custodian.
All books and records maintained by the Custodian pursuant to
this Agreement and any insurance policies and fidelity or similar bonds
maintained by the Custodian shall be made available for inspection and audit at
reasonable times by officers of, attorneys for, and auditors employed by, the
Fund and the Custodian shall promptly provide the Fund with copies of all
reports of its independent auditors regarding the Custodian's controls and
procedures.
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6.3. Opinion of Fund's Independent Certified Public
Accountants. The Custodian shall take all reasonable action as the Fund may
request to obtain from year to year favorable opinions from the Fund's
independent certified public accountants with respect to the Custodian's
activities hereunder in connection with the preparation of any periodic reports
to or filings with the SEC and with respect to any other requirements of the
SEC.
6.4. Reports of Custodian's Independent Certified Public
Accountants. At the request of the Fund, the Custodian shall deliver to the Fund
a written report prepared by the Custodian's independent certified public
accountants with respect to the services provided by the Custodian under this
Agreement, including, without limitation, the Custodian's accounting system,
internal accounting control and procedures for safeguarding cash, securities and
other assets, including cash, securities and other assets deposited and/or
maintained in a Securities System or with a Subcustodian. Such report shall be
of sufficient scope and in sufficient detail as may reasonably be required by
the Fund and as may reasonably be obtained by the Custodian.
6.5. Calculation of Net Asset Value. The Custodian shall
compute and determine the net asset value per share of capital stock of the Fund
as of the close of regular business on the New York Stock Exchange on each day
on which such Exchange is open, unless otherwise directed by Proper
Instructions. Such computation and determination shall be made in accordance
with (a) the provisions of the By-Laws of the Fund and [Articles of
Incorporation/ Declaration of Trust], as they may from time to time be amended
and delivered to the Custodian, (b) the votes of the Board of Trustees of the
Fund at the time in force and applicable, as they may from time to time be
delivered to the Custodian, and (c) Proper Instructions. On each day that the
Custodian shall compute the net asset value per share of the Fund, the Custodian
shall provide the Fund with written reports which permit the Fund to verify that
portfolio transactions have been recorded in accordance with the Fund's
instructions.
In computing the net asset value, the Custodian may rely upon
any information furnished by Proper Instructions, including without limitation
any information (i) as to accrual of liabilities of the Fund and as to
liabilities of the Fund not appearing on the books of account kept by the
Custodian, (ii) as to the existence, status and proper treatment of reserves, if
any, authorized by the Fund, (iii) as to the sources of quotations to be used in
computing the net asset value, including those listed in Appendix C hereto, (iv)
as to the fair value to be assigned to any securities or other assets for which
price quotations are not readily available, and (v) as to the sources of
information with respect to "corporate actions" affecting portfolio securities
of the Fund, including those listed in Appendix C. (Information as to "corporate
actions" shall include information as to dividends, distributions, stock splits,
stock dividends, rights offerings, conversions, exchanges, recapitalizations,
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<PAGE>
mergers, redemptions, calls, maturity dates and similar transactions, including
the ex- and record dates and the amounts or other terms thereof.)
In like manner, the Custodian shall compute and determine the
net asset value as of such other times as the Board of Trustees of the Fund, or
any valuation committee thereof, from time to time may reasonably request.
The Custodian shall be held to the standard of care set forth
in Article V with respect to the performance of its responsibilities under this
Article VI. The parties hereto acknowledge, however, that the Custodian's
causing an error or delay in the determination of net asset value may, but does
not in and of itself, constitute negligence, gross negligence or reckless or
willful misconduct. The Custodian's liability for any such negligence, gross
negligence or reckless or willful misconduct which results in an error in
determination of such net asset value shall be limited to the direct,
out-of-pocket loss the Fund, shareholder or former shareholder shall actually
incur, measured by the difference between the actual and the erroneously
computed net asset value, and any expenses incurred by the Fund in connection
with correcting the records of the Fund affected by such error (including
charges made by the Fund's registrar and transfer agent for making such
corrections), communicating with shareholders or former shareholders of the Fund
affected by such error or responding to or defending against any inquiry or
proceeding with respect to such error made or initiated by the SEC or other
regulatory or self-regulatory body.
Without limiting the foregoing, the Custodian shall not be
held accountable or liable to the Fund, any shareholder or former shareholder
thereof or any other person for any delays or Losses any of them may suffer or
incur resulting from (A) the Custodian's failure to receive timely and suitable
notification concerning quotations or corporate actions relating to or affecting
securities of the Fund or (B) any errors in the computation of the net asset
value based upon or arising out of quotations or information as to corporate
actions if received by the Custodian either (1) from a source which the
Custodian was authorized pursuant to the second paragraph of this section 6.5 to
rely upon, or (2) from a source which in the Custodian's reasonable judgment was
as reliable a source for such quotations or information as the sources
authorized pursuant to that paragraph. Nevertheless, the Custodian will use its
best judgment in determining whether to verify through other sources any
information it has received as to quotations or corporate actions if the
Custodian has reason to believe that any such information might be incorrect.
In the event of any error or delay in the determination of
such net asset value for which the Custodian may be liable, the Fund and the
Custodian will consult and make good faith efforts to reach agreement on what
actions should be taken in order to mitigate any Losses suffered by the Fund or
its present or former shareholders, in order that the Custodian's exposure to
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liability shall be reduced to the extent possible after taking into account all
relevant factors and alternatives. Such actions might include the Fund or the
Custodian taking reasonable steps to collect from any shareholder or former
shareholder who has received any overpayment upon redemption of shares such
overpaid amount or to collect from any shareholder who has underpaid upon a
purchase of shares the amount of such underpayment or to reduce the number of
shares issued to such shareholder. It is understood that in attempting to reach
agreement on the actions to be taken or the amount of the loss which should
appropriately be borne by the Custodian, the Fund and the Custodian will
consider such relevant factors as the amount of the loss involved, the Fund's
desire to avoid loss of shareholder good will, the fact that other persons or
entities could have reasonably expected to have detected the error sooner than
the time it was actually discovered, the appropriateness of limiting or
eliminating the benefit which shareholders or former shareholders might have
obtained by reason of the error, and the possibility that other parties
providing services to the Fund might be induced to absorb a portion of the loss
incurred.
Upon written notice from the Fund to the Custodian, the
Custodian's responsibilities under this Section 6.5 shall terminate, but this
Agreement shall otherwise continue in full force and effect. Upon such
termination, the fee schedule provided for under Article VII hereof shall be
adjusted by the parties in such manner as they may agree, and the Custodian will
transfer such of the Fund's books and records, and provide such other reasonable
cooperation, as the Fund may request in connection with the transfer of such
responsibilities.
6.6. Information Regarding Foreign Subcustodians and Foreign
Depositories. (a) The Custodian shall use reasonable efforts to assist the Fund
in obtaining the following with respect to any country in which any assets of
the Fund are held or proposed to be held:
(1) information concerning whether, and to what extent,
applicable foreign law would restrict the access afforded the Fund's
independent public accountants to books and records kept by a foreign
custodian or foreign securities depository used, or proposed to be
used, in that country;
(2) information concerning whether, and to what extent,
applicable foreign law would restrict the Fund's ability to recover its
assets in the event of the bankruptcy of a foreign custodian or foreign
securities depository used, or proposed to be used, in that country;
(3) information concerning whether, and to what extent,
applicable foreign law would restrict the Fund's ability to recover
assets that are lost while under the control of a foreign custodian or
foreign securities depository used, or proposed to be used, in that
country;
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(4) information concerning the likelihood of expropriation,
nationalization, freezes or confiscation of the Fund's assets in that
country;
(5) information concerning whether difficulties in converting
the Fund's cash and cash equivalents held in that country into U.S.
Dollars are reasonably foreseeable, including without limitation as a
result of applicable foreign currency exchange regulations;
(6) information concerning the financial strength, general
reputation and standing and ability to perform custodial services of
each foreign custodian or foreign securities depository used, or
proposed to be used, in that country;
(7) information concerning whether each foreign custodian or
foreign securities depository used, or proposed to be used, in that
country would provide a level of safeguards for maintaining the Fund's
assets not materially different from that provided by the Custodian in
maintaining the Fund's securities in the United States;
(8) information concerning whether each foreign custodian or
foreign securities depository used, or proposed to be used, in that
country has offices in the United States in order to facilitate the
assertion of jurisdiction over and enforcement of judgments against
such custodian or depository;
(9) as to each foreign securities depository used, or proposed
to be used, in that country information concerning the number of
participants in, and operating history of, such depository; and
(10) such other information as may be requested by the Fund to
ensure compliance with Rule 17f-5 under the 1940 Act.
(b) During the term of this Agreement, the Custodian shall use
reasonable efforts to provide the Fund with prompt notice of any material
changes in the facts or circumstances upon which any of the foregoing
information or statements were based.
(c) Upon request of the Fund, the Custodian shall deliver to
the Fund a certificate stating: (i) the identity of each Foreign Subcustodian
then acting on behalf of the Custodian; and (ii) the countries in which and the
Foreign Depositories through which each such Foreign Subcustodian or the
Custodian is then holding cash, securities and other assets of the Fund.
ARTICLE VII
CUSTODIAN FEES
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The Fund shall pay the Custodian a custody fee based on such
fee schedule as may from time to time be agreed upon in writing by the Custodian
and the Fund. Such fee, together with all amounts for which the Custodian is to
be reimbursed in accordance with the following sentence, shall be billed to the
Fund in such a manner as to permit payment either by a direct cash payment to
the Custodian or by placing Fund portfolio transactions with the Custodian
resulting in an agreed-upon amount of commissions being paid to the Custodian
within an agreed-upon period of time. The Custodian shall be entitled to receive
reimbursement from the Fund on demand for its cash disbursements and expenses
(including cash disbursements and expenses of any Subcustodian or Agent for
which the Custodian has reimbursed such Subcustodian or Agent) permitted by this
Agreement, but excluding salaries and usual overhead expenses, upon receipt by
the Fund of reasonable evidence thereof.
ARTICLE VIII
TERMINATION
This Agreement shall continue in full force and effect until
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid, to the other party, such termination to take effect not sooner
than sixty (60) days after the date of such delivery or mailing. In the event of
termination, the Custodian shall be entitled to receive prior to delivery of the
securities, cash and other assets held by it all accrued fees and unreimbursed
expenses the payment of which is contemplated by Article VII, upon receipt by
the Fund of a statement setting forth such fees and expenses.
In the event of the appointment of a successor custodian, it
is agreed that the cash, securities and other assets owned by the Fund and held
by the Custodian or any Subcustodian or Agent shall be delivered to the
successor custodian, and the Custodian agrees to cooperate with the Fund in
execution of documents and performance of other actions necessary or desirable
in order to substitute the successor custodian for the Custodian under this
Agreement.
ARTICLE IX
MISCELLANEOUS
9.1. Execution of Documents. Upon request, the Fund shall deliver to
the Custodian such proxies, powers of attorney or other instruments as may be
reasonable and necessary or desirable in connection with the performance by the
Custodian or any Subcustodian of their respective obligations under this
Agreement or any applicable subcustodian agreement.
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9.2 Entire Agreement. This Agreement constitutes the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof.
Waivers and Amendments. No provision of this Agreement may be
amended or terminated except by a statement in writing signed by the party
against which enforcement of the amendment or termination is sought, provided
that Appendix B listing the Foreign Subcustodians and Foreign Depositories
approved by the Fund may be amended from time to time to add or delete one or
more of such entities [or sources] by delivery to the Custodian of a revised
Appendix B executed by an Authorized Person, such amendment to take effect
immediately upon execution of the revised Appendix B by the Custodian.
In connection with the operation of this Agreement, the
Custodian and the Fund may agree in writing from time to time on such provisions
interpretative of or in addition to the provisions of this Agreement as may in
their joint opinion be consistent with the general tenor of this Agreement. No
interpretative or additional provisions made as provided in the preceding
sentence shall be deemed to be an amendment of this Agreement.
9.4. Captions. The section headings in this Agreement are for the
convenience of the parties and in no way alter, amend, limit or restrict the
contractual obligations of the parties set forth in this Agreement.
9.5. Governing Law. This instrument shall be governed by and construed
in accordance with the laws of the State of New York.
9.6. Notices. Notices and other writings delivered or mailed postage
prepaid to the Fund addressed to the Fund at Two International Place, Boston,
Massachusetts 02110 or to such other address as the Fund may have designated to
the Custodian in writing, or to the Custodian at 40 Water Street, Boston,
Massachusetts 02109, Attention: Manager, Securities Department, or to such other
address as the Custodian may have designated to the Fund in writing, shall be
deemed to have been properly delivered or given hereunder to the respective
addressee.
9.7. Successors and Assigns. This Agreement shall be binding on and
shall inure to the benefit of the Fund and the Custodian and their respective
successors and assigns, provided that neither party hereto may assign this
Agreement or any of its rights hereunder without the prior written consent of
the other party.
9.8. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original. This Agreement shall
become effective when one or more counterparts have been signed and delivered by
each of the parties.
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9.9. Representative Capacity; Nonrecourse Obligations. The Custodian
agrees that any claims by it against the Fund under this Agreement may be
satisfied only from the assets of the Fund; that the person executing this
Agreement has executed it on behalf of the Fund and not individually, and that
the obligations of the Fund arising out of this Agreement are not binding upon
such person or the Fund's shareholders individually but are binding only upon
the assets and property of the Fund; and that no shareholders, trustees or
officers of the Fund may be held personally liable or responsible for any
obligations of the Fund arising out of this Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed in its name and behalf on the day and year first above written.
BROWN BROTHERS HARRIMAN & CO.
per pro_____________________________________
Name:
Title:
SCUDDER VARIABLE LIFE INVESTMENT FUND
By:_____________________________________
Name:
Title:
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APPENDIX A TO THE
CUSTODIAN AGREEMENT BETWEEN
SCUDDER VARIABLE LIFE INVESTMENT FUND AND
BROWN BROTHERS HARRIMAN & CO.
DATED AS OF April 15, 1996
PROCEDURES RELATING TO CUSTODIAN'S SECURITY INTEREST
----------------------------------------------------
As security for any Advances (as defined in the Custodian
Agreement) of the Fund, the Fund shall pledge, assign and grant to the Custodian
a security interest in Collateral (as hereinafter defined), under the terms,
circumstances and conditions set forth in this Appendix A.
Section 1. Defined Terms. As used in this Appendix A the following
terms shall have the following respective meanings:
(a) "Business Day" shall mean any day that is not a Saturday, a Sunday
or a day on which the Custodian is closed for business.
(b) "Collateral" shall mean those securities having a fair market value
(as determined in accordance with the procedures set forth in the prospectus for
the Fund) equal to the aggregate of all Advance Obligations of the Fund that are
(i) identified in any Pledge Certificate executed on behalf of the Fund or (ii)
designated by the Custodian for the Fund pursuant to Section 3 of this Appendix
A. Such securities shall consist of marketable securities held by the Custodian
on behalf of the Fund or, if no such marketable securities are held by the
Custodian on behalf of the Fund, such other securities designated by the Fund in
the applicable Pledge Certificate or by the Custodian pursuant to Section 3 of
this Appendix A.
(c) "Advance Obligations" shall mean the amount of any outstanding
Advance(s) provided by the Custodian to the Fund together with all accrued
interest thereon.
(d) "Pledge Certificate" shall mean a Pledge Certificate in the form
attached as Exhibit 1 to this Appendix A, executed by a duly authorized officer
of the Fund and delivered by the Fund to the Custodian by facsimile transmission
or in such other manner as the Fund and the Custodian may agree in writing.
(e) "Release Certificate" shall mean a Release Certificate in the form
attached as Exhibit 2 to this Appendix A, executed by a duly authorized officer
of the Custodian and delivered by the Custodian to the Fund by facsimile
transmission or in such other manner as the Fund and the Custodian may agree in
writing.
31
<PAGE>
(f) "Written Notice" shall mean a written notice executed by a duly
authorized officer of the party delivering the notice and delivered by facsimile
transmission or in such other manner as the Fund and the Custodian shall agree
in writing.
Section 2. Pledge of Collateral. To the extent that any Advance
Obligations of the Fund are not satisfied by the close of business on the first
Business Day following the Business Day on which the Fund receives a Written
Notice requesting security for such Advance Obligation and stating the amount of
such Advance Obligation, the Fund shall pledge, assign and grant to the
Custodian a first priority security interest in Collateral specified by the Fund
by delivering to the Custodian a Pledge Certificate executed by the Fund
describing such Collateral. Such Written Notice may, in the discretion of the
Custodian, be included within or accompany the Notice of Advance (as defined in
the Custodian Agreement) relating to the applicable Advance Obligation.
Section 3. Failure to Pledge Collateral. In the event that the Fund
shall fail (a) to pay the Advance Obligation described in such Written Notice,
(b) to deliver to the Custodian a Pledge Certificate pursuant to Section 2, or
(c) to identify substitute securities pursuant to Section 6 upon the sale or
maturity of any securities identified as Collateral, the Custodian may, by
Written Notice to the Fund, specify Collateral which shall secure the applicable
Advance Obligation. The Fund hereby pledges, assigns and grants to the Custodian
a first priority security interest in any and all Collateral specified in such
Written Notice; provided that such pledge, assignment and grant of security
shall be deemed to be effective only upon receipt by the Fund of such Written
Notice, and provided further that if the Custodian specifies Collateral in which
a first priority security interest has already been granted, the security
interest pledged, assigned and granted hereunder shall be a security interest
that is not a first priority security interest.
Section 4. Delivery of Additional Collateral. If at any time the
Custodian shall notify the Fund by Written Notice that the fair market value of
the Collateral securing any Advance Obligation is less than the amount of such
Advance Obligation, the Fund shall deliver to the Custodian, within one Business
Day following the Fund's receipt of such Written Notice, an additional Pledge
Certificate describing additional Collateral. If the Fund shall fail to deliver
such additional Pledge Certificate, the Custodian may specify Collateral which
shall secure the unsecured amount of the applicable Advance Obligation in
accordance with Section 3 of this Appendix A.
Section 5. Release of Collateral. Upon payment by the Fund of any
Advance Obligation secured by the pledge of Collateral, the Custodian shall
promptly deliver to the Fund a Release Certificate pursuant to which the
32
<PAGE>
Custodian shall release Collateral from the lien under the applicable Pledge
Certificate or Written Notice pursuant to Section 3 having a fair market value
equal to the amount paid by the Fund on account of such Advance Obligation. In
addition, if at any time the Fund shall notify the Custodian by Written Notice
that the Fund desires that specified Collateral be released and (a) that the
fair market value of the Collateral securing any Advance Obligation exceeds the
amount of such Advance Obligation, or (b) that the Fund has delivered a Pledge
Certificate pursuant to Section 6 substituting Collateral in respect of such
Advance Obligation, the Custodian shall deliver to the Fund, within one Business
Day following the Custodian's receipt of such Written Notice, a Release
Certificate relating to the Collateral specified in such Written Notice.
Section 6. Substitution of Collateral. The Fund may substitute
securities for any securities identified as Collateral by delivery to the
Custodian of a Pledge Certificate executed by the Fund, indicating the
securities pledged as Collateral.
Section 7. Security for Fund Advance Obligations. The pledge of
Collateral by the Fund shall secure only Advance Obligations of the Fund. In no
event shall the pledge of Collateral by the Fund be deemed or considered to be
security for any other types of obligations of the Fund to the Custodian or for
the Advance Obligations or other types of obligations of any other fund.
Section 8. Custodian's Remedies. Upon (a) the Fund's failure to pay any
Advance Obligation of the Fund within thirty days after receipt by the Fund of a
Written Notice demanding security therefor, and (b) one Business Day's prior
Written Notice to the Fund, the Custodian may elect to enforce its security
interest in the Collateral securing such Advance Obligation, by taking title to
(at the then prevailing fair market value), or selling in a commercially
reasonable manner, so much of the Collateral as shall be required to pay such
Advance Obligation in full. Notwithstanding the provisions of any applicable
law, including, without limitation, the Uniform Commercial Code, the remedy set
forth in the preceding sentence shall be the only right or remedy to which the
Custodian is entitled with respect to the pledge and security interest granted
pursuant to any Pledge Certificate or Section 3. Without limiting the foregoing,
the Custodian hereby waives and relinquishes all contractual and common law
rights of set-off to which it may now or hereafter be or become entitled with
respect to any obligations of the Fund to the Custodian arising under this
Appendix A to the Custodian Agreement.
33
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Appendix A to
be executed in its name and behalf on the day and year first above written.
BROWN BROTHERS HARRIMAN & CO.
By: _____________________
Name: _____________________
Title: _____________________
SCUDDER VARIABLE LIFE INVESTMENT
FUND
By: _____________________
Name: _____________________
Title: _____________________
34
<PAGE>
EXHIBIT 1
TO
Appendix A
PLEDGE CERTIFICATE
------------------
This Pledge Certificate is delivered pursuant to the Custodian
Agreement dated as of ______________, 1996 (the "Agreement"), between Scudder
Variable Life Investment Fund (the "Fund") and Brown Brothers Harriman & Co.
(the "Custodian"). Capitalized terms used herein without definition shall have
the respective meanings ascribed to them in the Agreement. Pursuant to [Section
2 or Section 4] of Appendix A attached to the Agreement, the Fund hereby
pledges, assigns and grants to the Custodian a first priority security interest
in the securities listed on Schedule A attached to this Pledge Certificate
(collectively, the "Pledged Securities"). Upon delivery of this Pledge
Certificate, the Pledged Securities shall constitute Collateral, and shall
secure all Advance Obligations of the Fund described in that certain Written
Notice dated , 19 , delivered by the Custodian to the Fund. The pledge,
assignment and grant of security in the Pledged Securities hereunder shall be
subject in all respects to the terms and conditions of the Agreement, including,
without limitation, Sections 7 and 8 of Appendix A attached hereto.
IN WITNESS WHEREOF, the Fund has caused this Pledge
Certificate to be executed in its name, on behalf of the Fund this ____ day
of ___, 1996.
By: _____________________
Name: _____________________
Title: _____________________
35
<PAGE>
SCHEDULE A
TO
PLEDGE CERTIFICATE
Type of Certificate/CUSIP Number of
Issuer Security Numbers Shares
- ------ -------- ------- ------
36
<PAGE>
EXHIBIT 2
TO
Appendix A
RELEASE CERTIFICATE
-------------------
This Release Certificate is delivered pursuant to the Custodian
Agreement dated as of _________, 1996 (the "Agreement"), between Scudder
Variable Life Investment Fund (the "Fund") and Brown Brothers Harriman & Co.
(the "Custodian"). Capitalized terms used herein without definition shall have
the respective meanings ascribed to them in the Agreement. Pursuant to Section 5
of Appendix A attached to the Agreement, the Custodian hereby releases the
securities listed on Schedule A attached to this Release Certificate from the
lien under the [Pledge Certificate dated __________, 19 or the Written Notice
delivered pursuant to Section 3 of Appendix A dated ___________, 19__.]
IN WITNESS WHEREOF, the Custodian has caused this Release Certificate
to be executed in its name and on its behalf this ____ day of 19__.
Brown Brothers Harriman & Co.
By: _____________________
Name: _____________________
Title: _____________________
37
<PAGE>
SCHEDULE A
TO
RELEASE CERTIFICATE
Type of Certificate/CUSIP Number of
Issuer Security Numbers Shares
- ------ -------- ------- ------
38
9
<PAGE>
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 INVESTOR SERVICES, INC.
By: _______________________
President
10
Exhibit 8(a)(2)
CUSTODIAN AGREEMENT
Dated as of April 29, 1996
Between
SCUDDER VARIABLE LIFE INVESTMENT FUND
and
BROWN BROTHERS HARRIMAN & CO.
<PAGE>
TABLE OF CONTENTS
-----------------
ARTICLE I
APPOINTMENT OF CUSTODIAN
ARTICLE II
POWERS AND DUTIES OF CUSTODIAN
2.1. Safekeeping.................................................... 2
2.2. Manner of Holding Securities................................... 2
2.3. Registered Name; Nominee....................................... 2
2.4. Purchases by the Fund.......................................... 3
2.5. Exchanges of Securities........................................ 4
2.6. Sales of Securities............................................ 4
2.7. Depositary Receipts............................................ 5
2.8. Exercise of Rights; Tender Offers.............................. 5
2.9. Stock Dividends, Rights, Etc................................... 5
2.10. Options........................................................ 6
2.11. Futures and Forward Contracts.................................. 6
2.12. Borrowings..................................................... 7
2.13. Bank Accounts.................................................. 7
2.14. Interest-Bearing Deposits...................................... 8
2.15. Foreign Exchange Transactions................................... 8
2.16. Securities Loans................................................ 9
2.17. Collections..................................................... 9
2.18. Dividends, Distributions and
Redemptions................................................. 10
2.19. Proxies; Communications Relating to
Portfolio Securities........................................ 10
2.20. Bills.......................................................... 11
2.21. Nondiscretionary Details....................................... 11
2.22. Deposit of Fund Assets in Securities
Systems..................................................... 11
2.23. Other Transfers................................................ 12
2.24. Establishment of Segregated Accounts........................... 13
2.25. Custodian Advances............................................. 13
i
<PAGE>
TABLE OF CONTENTS
-----------------
ARTICLE III
PROPER INSTRUCTIONS, SPECIAL INSTRUCTIONS
AND RELATED MATTERS
3.1. Proper Instructions and Special
Instructions..................................................14
3.2. Authorized Persons...............................................15
3.3 Persons Having Access to Assets of the Fund .....................15
3.4. Actions of Custodian Based on Proper
Instructions and Special Instructions.........................15
ARTICLE IV
SUBCUSTODIANS
4.1. Domestic Subcustodians...........................................16
4.2. Foreign Subcustodians and Interim
Subcustodians.................................................16
4.3. Termination of a Subcustodian....................................18
4.4. Agents...........................................................18
ARTICLE V
STANDARD OF CARE; INDEMNIFICATION
5.1. Standard of Care.................................................19
5.2. Liability of Custodian for Actions of
Other Persons.................................................20
5.3. Indemnification..................................................21
5.4. Investment Limitations...........................................22
5.5. Fund's Right to Proceed..........................................22
ARTICLE VI
RECORDS
6.1. Preparation of Reports...........................................23
6.2. Custodian's Books and Records....................................23
6.3. Opinion of Fund's Independent Certified
Public Accountants............................................24
6.4. Reports of Custodian's Independent
Certified Public Accountants..................................24
6.5. Calculation of Net Asset Value...................................24
6.6. Information Regarding Foreign
Subcustodians and Foreign Depositories........................26
ii
<PAGE>
TABLE OF CONTENTS
-----------------
ARTICLE VII
CUSTODIAN FEES
ARTICLE VIII
TERMINATION
ARTICLE IX
MISCELLANEOUS
9.1. Execution of Documents...........................................29
9.2. Entire Agreement.................................................29
9.3. Waivers and Amendments...........................................29
9.4. Captions.........................................................29
9.5. Governing Law....................................................29
9.6. Notices..........................................................29
9.7. Successors and Assigns...........................................30
9.8. Counterparts.....................................................30
9.9. Representative Capacity; Nonrecourse
Obligations...................................................30
Appendix A Procedures Relating to Custodian's Security Interest
Appendix B Subcustodians, Foreign Countries, and Foreign Depositories
iii
<PAGE>
Form of Custodian Agreement
---------------------------
CUSTODIAN AGREEMENT dated as of April 29, 1996, between Scudder
Variable Life Investment Fund (the "Fund"), a Massachusetts business trust, and
Brown Brothers Harriman & Co. (the "Custodian"), a New York limited partnership.
The Fund is entering into this Agreement on behalf of the International
Portfolio. The Custodian shall treat the assets of each series as a separate
Fund hereunder, and any reference to "Fund" shall refer to a series of the Fund
as the context shall require. In the event the Fund establishes one or more
additional series after the date hereof, with respect to which the Fund desires
to have the Custodian render services as Custodian hereunder, the Fund shall so
notify the Custodian in writing, and if the Custodian agrees in writing to
provide such services, such series shall become a Fund or Funds hereunder.
In consideration of the mutual covenants and agreements herein
contained, the parties hereto agree as follows:
ARTICLE I
APPOINTMENT OF CUSTODIAN
The Fund hereby employs and appoints the Custodian as a
custodian for the term of and subject to the provisions of this Agreement. The
Fund agrees to deliver to the Custodian all securities, cash and other assets
owned by it, and all payments of income, payments of principal or capital
distributions received by it with respect to all securities owned by the Fund
from time to time, and the cash consideration received by it for such new or
treasury shares of beneficial interest of the Fund as may be issued or sold from
time to time.
The Custodian shall not be under any duty or obligation to
require the Fund to deliver to it any securities, cash or other assets owned by
the Fund and shall have no responsibility or liability for or on account of
securities, cash or other assets not so delivered. The Fund will deposit with
the Custodian copies of the Declaration of Trust and By-Laws (or comparable
documents) of the Fund and all amendments thereto, and copies of such votes and
other proceedings of the Fund as may be necessary for or convenient to the
Custodian in the performance of its duties.
<PAGE>
ARTICLE II
POWERS AND DUTIES OF CUSTODIAN
The Custodian shall have and perform, or cause to be performed
in accordance with this Agreement, the powers and duties set forth in this
Article II. Pursuant to and in accordance with Article IV, the Custodian may
appoint one or more Subcustodians (as that term is defined in Article IV) to
exercise the powers and perform the duties of the Custodian set forth in this
Article II and, except as the context shall otherwise require, references to the
Custodian in this Article II shall include any Subcustodian so appointed.
2.1. Safekeeping. The Custodian shall keep safely the cash,
securities and other assets of the Fund that have been delivered to the
Custodian and from time to time shall accept delivery of cash, securities and
other assets for safekeeping.
2.2. Manner of Holding Securities. (a) The Custodian shall
hold securities of the Fund (i) by physical possession of the share certificates
or other instruments representing such securities in registered or bearer form,
or the broker's receipts or confirmations for forward contracts, futures
contracts, options and similar contracts and securities, or (ii) in book-entry
form by a Securities System (as that term is defined in section 2.22) or (iii)
by a Foreign Depository (as that term is defined in section 4.2(a)).
(b) The Custodian shall identify securities and other assets
held by it hereunder as being held for the account of the Fund and shall require
each Subcustodian to identify securities and other assets held by such
Subcustodian as being held for the account of the Custodian for the Fund (or, if
authorized by Special Instructions, for customers of the Custodian) or for the
account of another Subcustodian for the Fund (or, if authorized by Special
Instructions, for customers of such Subcustodian); provided that if assets are
held for the account of the Custodian or a Subcustodian for customers of the
Custodian or such Subcustodian, the records of the Custodian shall at all times
indicate the Fund and other customers of the Custodian for which such assets are
held in such account and their respective interests therein.
2.3. Registered Name; Nominee. (a) The Custodian shall hold
registered securities and other assets of the Fund (i) in the name of the
Custodian (including any Subcustodian), the Fund, a Securities System, a Foreign
Depository or any nominee of any such person or (ii) in street certificate form,
so-called, and in any case with or without any indication of fiduciary capacity,
provided that such securities and other assets of the Fund are held in an
account of the Custodian containing only assets of the Fund or only assets held
as fiduciary or custodian for customers.
2
<PAGE>
(b) Except with respect to securities or other assets which
under local custom and practice generally accepted by Institutional Clients are
held in the investor's name, the Custodian shall not hold registered securities
or other assets in the name of the Fund, and shall require each Subcustodian not
to hold registered securities or other assets in the name of the Fund, unless
the Custodian or such Subcustodian promptly notifies the Fund that such
registered securities are being held in the Fund's name and causes the
Securities System, Foreign Depository, issuer or other relevant person to direct
all correspondence and payments to the address of the Custodian or such
Subcustodian, as the case may be.
2.4. Purchases by the Fund. Upon receipt of Proper
Instructions (as that term is defined in section 3.1(a)) and insofar as funds
are available for the purpose (or as funds are otherwise provided by the
Custodian at its discretion pursuant to section 2.25), the Custodian shall pay
for and receive securities or other assets purchased for the account of the
Fund, payment being made only upon receipt of the securities or other assets (a)
by the Custodian, or (b) by credit to an account which the Custodian may have
with a Securities System, clearing corporation of a national securities
exchange, Foreign Depository or other financial institution approved by the
Fund. Notwithstanding the foregoing, upon receipt of Proper Instructions: (i) in
the case of repurchase agreements entered into by the Fund in a transaction
involving a Securities System or a Foreign Depository, the Custodian may release
funds to the Securities System or Foreign Depository prior to the receipt of
advice from the Securities System or Foreign Depository that the securities
underlying such repurchase agreement have been transferred by book entry into
the Account (as defined in section 2.22) of the Custodian maintained with such
Securities System or similar account with a Foreign Depository, provided that
the instructions of the Custodian to the Securities System or Foreign Depository
require that the Securities System or Foreign Depository, as the case may be,
may make payment of such funds to the other party to the repurchase agreement
only upon transfer by book-entry of the securities underlying the repurchase
agreement into the Account, (ii) in the case of futures and forward contracts,
options and similar securities, foreign currency purchased from third parties,
time deposits, foreign currency call account deposits, and other bank deposits,
and transactions pursuant to sections 2.10, 2.11, 2.13, 2.14 and 2.15, the
Custodian may make payment therefor prior to delivery of the contract, currency,
option or security without receiving an instrument evidencing said contract,
currency, option, security or deposit, and (iii) in the case of the purchase of
securities or other assets the settlement of which occurs outside the United
States of America, the Custodian may make payment therefor and receive delivery
thereof in accordance with local custom and practice generally accepted by
Institutional Clients (as defined below) in the country in which settlement
occurs, provided that in every case the Custodian shall be subject to the
standard of care set forth in Article V and to any Special Instructions given in
accordance with section 3.1(b). Except in the cases provided for in the
immediately preceding sentence, in any case where payment for purchase of
3
<PAGE>
securities or other assets for the account of the Fund is made by the Custodian
in advance of receipt of the securities or other assets so purchased in the
absence of Proper Instructions to so pay in advance, the Custodian shall be
absolutely liable to the Fund for such securities or other assets to the same
extent as if the securities or other assets had been received by the Custodian.
For purposes of this Agreement, "Institutional Clients" means U.S. registered
investment companies, or major, U.S.-based commercial banks, insurance
companies, pension funds or substantially similar financial institutions which,
as a substantial part of their business operations, purchase or sell securities
and make use of custodial services.
2.5. Exchanges of Securities. Upon receipt of Proper
Instructions, the Custodian shall exchange securities held by it for the account
of the Fund for other securities in connection with any reorganization,
recapitalization, split-up of shares, change of par value, conversion or other
event, and to deposit any such securities in accordance with the terms of any
reorganization or protective plan. Without Proper Instructions, the Custodian
may surrender securities in temporary form for definitive securities, may
surrender securities for transfer into a name or nominee name as permitted in
section 2.3, and may surrender securities for a different number of certificates
or instruments representing the same number of shares or same principal amount
of indebtedness, provided that the securities to be issued are to be delivered
to the Custodian.
2.6. Sales of Securities. Upon receipt of Proper Instructions,
the Custodian shall make delivery of securities or other assets which have been
sold for the account of the Fund, but only against payment therefor (a) in cash,
by a certified check, bank cashier's check, bank credit, or bank wire transfer,
or (b) by credit to the account of the Custodian with a Securities System,
clearing corporation of a national securities exchange, Foreign Depository or
other financial institution approved by the Fund by Proper Instructions.
However, (i) in the case of delivery of physical certificates or instruments
representing securities, the Custodian may make delivery to the broker acting as
agent for the buyer of the securities, against receipt therefor, for examination
in accordance with "street delivery" custom, provided that the Custodian shall
have taken reasonable steps to ensure prompt collection of the payment for, or
the return of, such securities by the broker or its clearing agent and (ii) in
the case of the sale of securities or other assets the settlement of which
occurs outside the United States of America, such securities shall be delivered
and paid for in accordance with local custom and practice generally accepted by
Institutional Clients in the country in which settlement occurs, provided that
in every case the Custodian shall be subject to the standard of care set forth
in Article V and to any Special Instructions given in accordance with section
3.1(b). Except in the cases provided for in the immediately preceding sentence,
in any case where delivery of securities or other assets for the account of the
Fund is made by the Custodian in advance of receipt of payment for the
4
<PAGE>
securities or other assets so sold in the absence of Proper Instructions to so
deliver in advance, the Custodian shall be absolutely liable to the Fund for
such payment to the same extent as if such payment had been received by the
Custodian.
2.7. Depositary Receipts. Upon receipt of Proper Instructions,
the Custodian shall surrender securities to the depositary used by an issuer of
American Depositary Receipts, European Depositary Receipts, Global Depositary
Receipts, International Depositary Receipts and other types of Depositary
Receipts (hereinafter collectively referred to as "ADRs") for such securities
against a written receipt therefor adequately describing such securities and
written evidence satisfactory to the Custodian that the depositary has
acknowledged receipt of instructions to issue ADRs with respect to such
securities in the name of the Custodian, or a nominee of the Custodian, for
delivery to the Custodian in Boston, Massachusetts, or at such other place as
the Custodian may from time to time designate.
Upon receipt of Proper Instructions, the Custodian shall
surrender ADRs to the issuer thereof against a written receipt therefor
adequately describing the ADRs surrendered and written evidence satisfactory to
the Custodian that the issuer of the ADRs has acknowledged receipt of
instructions to cause its depositary to deliver the securities underlying such
ADRs to the Custodian.
2.8. Exercise of Rights; Tender Offers. Upon receipt of Proper
Instructions, the Custodian shall (a) deliver to the issuer or trustee thereof,
or to the agent of either, warrants, puts, calls, futures contracts, options,
rights or similar securities for the purpose of being exercised or sold,
provided that the new securities and cash, if any, acquired by such action are
to be delivered to the Custodian, and (b) deposit securities upon invitations
for tenders of securities, provided that the consideration is to be paid or
delivered or the tendered securities are to be returned to the Custodian.
Notwithstanding any provision of this Agreement to the contrary, the Custodian
shall take all necessary action, unless otherwise directed to the contrary by
Proper Instructions, to comply with the terms of all mandatory or compulsory
exchanges, calls, tenders, redemptions or similar rights of security ownership
of which the Custodian receives notice or otherwise becomes aware, and shall
promptly notify the Fund of any such action in writing by facsimile transmission
or in such other manner as the Fund and the Custodian may agree in writing.
2.9. Stock Dividends, Rights, Etc. The Custodian shall receive
and collect all stock dividends, rights and other items of like nature and shall
deal with the same as it would other deposited assets or as directed in Proper
Instructions.
2.10. Options and Swaps. Upon receipt of Proper Instructions
or instructions from a third party properly given under any Procedural
Agreement, the Custodian shall (a) receive and retain confirmations or other
5
<PAGE>
documents (to the extent confirmations or other documents are provided to the
Custodian) evidencing the purchase, sale or writing of an option or swap of any
type on or in respect of a security, securities index, currency or similar form
of property by the Fund; (b) deposit and maintain in a segregated account,
either physically or by book-entry in a Securities System or Foreign Depository
or with a broker, dealer or other party designated by the Fund, securities, cash
or other assets in connection with options transactions or swap agreements
entered into by the Fund; (c) transfer securities, cash or other assets to a
Securities System, Foreign Depository, broker, dealer or other party or
organization, as margin (including variation margin) or other security for the
Fund's obligations in respect of an option or swap; and (d) pay, release and/or
transfer such securities, cash or other assets only in accordance with a notice
or other communication evidencing the expiration, termination, exercise of any
such option or default under any such option or swap furnished by The Options
Clearing Corporation, the securities or options exchange on which such option is
traded, or such other organization, party, broker or dealer as may be
responsible for handling such options or swap transactions or have authority to
give such notice or communication under a Procedural Agreement. Subject to the
standard of care set forth in Article V (and to its safekeeping duties set forth
in section 2.1), the Custodian shall not be responsible for the sufficiency of
assets held in any segregated account established and maintained in accordance
with Proper Instructions or instructions from a third party properly given under
any Procedural Agreement or for the performance by the Fund or any third party
of its obligations under any Procedural Agreement. For purposes of this
Agreement, a "Procedural Agreement" is a procedural agreement relating to
options, swaps (including caps, floors and similar arrangements), futures
contracts, forward contracts or borrowings by the Fund to which the Fund, the
Custodian and a third party are parties.
2.11. Futures and Forward Contracts. Upon receipt of Proper
Instructions or instructions from a third party properly given under any
Procedural Agreement, the Custodian shall (a) receive and retain confirmations
or other documents (to the extent confirmations or other documents are provided
to the Custodian) evidencing the purchase or sale of a futures contract or an
option on a futures contract by the Fund or the entry into a forward contract by
the Fund; (b) deposit and maintain in a segregated account, either physically or
by book entry in a Securities System or Foreign Depository, for the benefit of
any futures commission merchant, or pay to such futures commission merchant,
securities, cash or other assets designated by the Fund as initial, maintenance
or variation "margin" deposits intended to secure the Fund's performance of its
obligations under any futures contracts purchased or sold or any options on
futures contracts written, purchased or sold by the Fund or any forward
contracts entered into, in accordance with the provisions of any Procedural
Agreement designed to comply with the rules of the Commodity Futures Trading
Commission and/or any contract market, or any similar organization or
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organizations on which such contracts or options are traded; and (c) pay,
release and/or transfer securities, cash or other assets into or out of such
margin accounts only in accordance with any such agreements or rules. Subject to
the standard of care set forth in Article V, the Custodian shall not be
responsible for the sufficiency of assets held in any such margin account
established and maintained in accordance with Proper Instructions or
instructions from a third party properly given under any Procedural Agreement or
for the performance by the Fund or any third party of its obligations under any
Procedural Agreement.
2.12. Borrowings. Upon receipt of Proper Instructions or
instructions from a third party properly given under any Procedural Agreement,
the Custodian shall deliver securities of the Fund to lenders or their agents,
or otherwise establish a segregated account as agreed to by the Fund and the
Custodian, as collateral for borrowings effected by the Fund, but only against
receipt of the amounts borrowed (or to adjust the amount of such collateral in
accordance with the Procedural Agreement), provided that if such collateral is
held in book-entry form by a Securities System or Foreign Depository, such
collateral may be transferred by book-entry to such lender or its agent against
receipt by the Custodian of an undertaking by such lender to pay such borrowed
money to or upon the order of the Fund on the next business day following such
transfer of collateral.
2.13. Bank Accounts. The Custodian shall open and operate one
or more accounts in the name of the Fund on the Custodian's books subject only
to draft or order by the Custodian. All funds received by the Custodian from or
for the account of the Fund shall be deposited in said account(s). The
responsibilities of the Custodian to the Fund for deposits accepted on the
Custodian's books shall be that of a U.S. bank for a similar deposit.
Upon receipt of Proper Instructions, the Custodian may open
and operate additional accounts in such other banks or trust companies,
including any Subcustodian, as may be designated by the Fund in such
instructions (any such bank or trust company other than the Custodian so
designated by the Fund being referred to hereafter as a "Banking Institution"),
provided that any such account shall be in the name of the Custodian for the
account of the Fund (or, if authorized by Special Instructions, for the account
of the Custodian's customers generally) and subject only to the Custodian's
draft or order; provided that if assets are held in such an account for the
account of the Custodian's customers generally, the records of the Custodian
shall at all times indicate the Fund and other customers for which such assets
are held in such account and their respective interests therein. Such accounts
may be opened with Banking Institutions in the United States and in other
countries and may be denominated in U.S. Dollars or such other currencies as the
Fund may determine. So long as the Custodian exercises reasonable care and
diligence in executing Proper Instructions, the Custodian shall have no
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responsibility for the failure of any Banking Institution to make payment from
such an account upon demand.
2.14. Interest-Bearing Deposits. The Custodian shall place
interest-bearing fixed term and call deposits with such banks and in such
amounts as the Fund may authorize pursuant to Proper Instructions. Such deposits
may be placed with the Custodian or with Subcustodians or other Banking
Institutions as the Fund may determine. Deposits may be denominated in U.S.
Dollars or other currencies, as the Fund may determine, and need not be
evidenced by the issuance or delivery of a certificate to the Custodian,
provided that the Custodian shall include in its records with respect to the
assets of the Fund, appropriate notation as to the amount and currency of each
such deposit, the accepting Banking Institution and all other appropriate
details, and shall retain such forms of advice or receipt evidencing such
deposits as may be forwarded to the Custodian by the Banking Institution in
question. The responsibility of the Custodian for such deposits accepted on the
Custodian's books shall be that of a U.S. bank for a similar deposit. With
respect to interest-bearing deposits other than those accepted on the
Custodian's books, (a) the Custodian shall be responsible for the collection of
income as set forth in section 2.17, and (b) so long as the Custodian exercises
reasonable care and diligence in executing Proper Instructions, the Custodian
shall have no responsibility for the failure of any Banking Institution to make
payment in accordance with the terms of such an account. Upon receipt of Proper
Instructions, the Custodian shall take such reasonable steps as the Fund deems
necessary or appropriate to cause such deposits to be insured to the maximum
extent possible by the Federal Deposit Insurance Corporation and any other
applicable deposit insurers.
2.15. Foreign Exchange Transactions. (a) Upon receipt of
Proper Instructions, the Custodian shall settle foreign exchange contracts or
options to purchase and sell foreign currencies for spot and future delivery on
behalf and for the account of the Fund with such currency brokers or Banking
Institutions as the Fund may direct pursuant to Proper Instructions. The
Custodian shall be responsible for the transmission of cash and instructions to
and from the currency broker or Banking Institution with which the contract or
option is made, the safekeeping of all certificates and other documents and
agreements received by the Custodian evidencing or relating to such foreign
exchange transactions and the maintenance of proper records as set forth in
section 6.2. In connection with such transactions, upon receipt of Proper
Instructions, the Custodian shall be authorized to make free outgoing payments
of cash in the form of U.S. Dollars or foreign currency without receiving
confirmation of a foreign exchange contract or option or confirmation that the
countervalue currency completing the foreign exchange contract has been
delivered or that the option has been delivered or received. The Custodian shall
have no authority to select third party foreign exchange dealers and, so long as
the Custodian exercises reasonable care and diligence in executing Proper
Instructions, shall have no responsibility for the failure of any such dealer to
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settle any such contract or option in accordance with its terms. The Fund shall
reimburse the Custodian for any interest charges or reasonable out-of-pocket
expenses incurred by the Custodian resulting from the failure or delay of third
party foreign exchange dealers to deliver foreign exchange, other than interest
charges and expenses occasioned by or resulting from the negligence, misfeasance
or misconduct of the Custodian.
(b)The Custodian shall not be obligated to enter into foreign
exchange transactions as principal. However, if the Custodian has made available
to the Fund its services as principal in foreign exchange transactions, upon
receipt of Proper Instructions, the Custodian shall enter into foreign exchange
contracts or options to purchase and sell foreign currencies for spot and future
delivery on behalf of and for the account of the Fund with the Custodian as
principal. The responsibility of the Custodian with respect to foreign exchange
contracts and options executed with the Custodian as principal shall be that of
a U.S. bank with respect to a similar contract or option.
2.16. Securities Loans. Upon receipt of Proper Instructions,
the Custodian shall deliver securities of the Fund, in connection with loans of
securities by the Fund, to the borrower thereof in accordance with the terms of
a written securities lending agreement to which the Fund is a party or which is
otherwise approved by the Fund.
2.17. Collections. The Custodian shall promptly collect,
receive and deposit in the account or accounts referred to in section 2.13 all
income, payments of principal and other payments with respect to the securities
and other assets held hereunder, promptly endorse and deliver any instruments
required to effect such collections and in connection therewith deliver the
certificates or other instruments representing securities to the issuer thereof
or its agent when securities are called, redeemed, retired or otherwise become
payable; provided that the payment is to be made in such form and manner and at
such time, which may be after delivery by the Custodian of the instrument
representing the security, as is in accordance with the terms of the instrument
representing the security, such Proper Instructions as the Custodian may
receive, governmental regulations, the rules of the Securities System or Foreign
Depository in which such security is held or, with respect to securities
referred to in clause (iii) of the second sentence of section 2.4, in accordance
with local custom and practice generally accepted by Institutional Clients in
the market where payment or delivery occurs, but in all events subject to the
standard of care set forth in Article V. The Custodian shall promptly execute
ownership and other certificates and affidavits for all federal, state and
foreign tax purposes in connection with receipt of income or other payments with
respect to securities or other assets of the Fund or in connection with transfer
of securities or other assets. Pursuant to Proper Instructions, the Custodian
shall take such other actions, which may involve an investment decision, as the
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Fund may request with respect to the collection or receipt of funds or the
transfer of securities. Except in the cases provided for in the first sentence
of this section, in any case where delivery of securities for the account of the
Fund is made by the Custodian in advance of receipt of payment with respect to
such securities in the absence of Proper Instructions to so deliver in advance,
the Custodian shall be absolutely liable to the Fund for such payment to the
same extent as if such payment had been received by the Custodian. The Custodian
shall promptly notify the Fund in writing by facsimile transmission or in such
other manner as the Fund and the Custodian may agree in writing if any amount
payable with respect to securities or other assets of the Fund is not received
by the Custodian when due.
2.18. Dividends, Distributions and Redemptions. Upon receipt
of Proper Instructions, or upon receipt of instructions from the Fund's
shareholder servicing agent or agent with comparable duties (the "Shareholder
Servicing Agent") (given by such person or persons and in such manner on behalf
of the Shareholder Servicing Agent as the Fund shall have authorized by Proper
Instructions), the Custodian shall release funds or securities, insofar as
available, to the Shareholder Servicing Agent or as such Shareholder Servicing
Agent shall otherwise instruct (a) for the payment of dividends or other
distributions to Fund shareholders or (b) for payment to the Fund shareholders
who have delivered to such Shareholder Servicing Agent a request for repurchase
or redemption of their shares of beneficial interest in the Fund.
2.19. Proxies; Communications Relating to Portfolio
Securities. The Custodian shall, as promptly as is appropriate under the
circumstances, deliver or mail to the Fund all forms of proxies and all notices
of meetings and any other notices, announcements or information (including,
without limitation, information relating to pendency of calls and maturities of
securities and expirations of rights in connection therewith, notices of
exercise of call and put options written by the Fund, and notices of the
maturity of futures contracts (and options thereon) purchased or sold by the
Fund) affecting or relating to securities owned by the Fund that are received by
the Custodian. Upon receipt of Proper Instructions, the Custodian shall execute
and deliver or cause its nominee to execute and deliver such proxies or other
authorizations as may be required. Neither the Custodian nor its nominees shall
vote upon any of such securities or execute any proxy to vote thereon or give
any consent or take any other action with respect to securities or other assets
of the Fund (except as otherwise herein provided) unless ordered to do so by
Proper Instructions.
The Custodian shall notify the Fund on or before ex-date (or
if later within 24 hours after receipt by the Custodian of the notice of such
corporate action) of all corporate actions affecting portfolio securities of the
Fund received by the Custodian from the issuers of the securities involved, from
third parties proposing a corporate action, from subcustodians, or from commonly
utilized sources (including proprietary sources) providing corporate action
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information, a list of which will be provided by the Custodian to the Fund from
time to time upon request. Information as to corporate actions shall include
information as to dividends, distributions, stock splits, stock dividends,
rights offerings, conversions, exchanges, tender offers, recapitalizations,
mergers, redemptions, calls, maturity dates and similar transactions, including
ex-, record and pay dates and the amounts or other terms thereof. If the Fund
desires to take action with respect to any corporate action, the Fund shall
notify the Custodian within such period as will give the Custodian (including
any Subcustodian) a sufficient amount of time to take such action.
2.20. Bills. Upon receipt of Proper Instructions, the
Custodian shall pay or cause to be paid, insofar as funds are available for the
purpose, bills, statements, or other obligations of the Fund (including but not
limited to interest charges, taxes, advisory fees, compensation to Fund officers
and employees, and other operating expenses of the Fund).
2.21. Nondiscretionary Details. Without the necessity of
express authorization from the Fund, the Custodian shall (a) attend to all
nondiscretionary details in connection with the sale, exchange, substitution,
purchase, transfer or other dealings with securities, cash or other assets of
the Fund held by the Custodian except as otherwise directed from time to time by
the Board of Trustees of the Fund, and (b) make payments to itself or others for
minor expenses of handling securities or other assets and for other similar
items relating to the Custodian's duties under this Agreement, provided that all
such payments shall be accounted for to the Fund.
2.22. Deposit of Fund Assets in Securities Systems. The
Custodian may deposit and/or maintain securities owned by the Fund in (a) The
Depository Trust Company, (b) the Participants Trust Company, (c) any book-entry
system as provided in Subpart O of Treasury Circular No. 300, 31 CFR 306,
Subpart B of 31 CFR Part 350, or the book-entry regulations of federal agencies
substantially in the form of Subpart O, or (d) any other domestic clearing
agency registered with the Securities and Exchange Commission (the "SEC") under
Section 17A of the Securities Exchange Act of 1934, as amended, which acts as a
securities depository and whose use the Fund has previously approved by Special
Instructions (as that term is defined in section 3.1(b)) (each of the foregoing
being referred to in this Agreement as a "Securities System"). Utilization of a
Securities System shall be in accordance with applicable Federal Reserve Board
and SEC rules and regulations, if any, and subject to the following provisions:
(i) The Custodian may deposit and/or maintain securities held
hereunder in a Securities System, provided that such securities are
represented in an account ("Account") of the Custodian in the
Securities System which shall not include any assets of the Custodian
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other than assets held as a fiduciary, custodian, or otherwise for
customers;
(ii) The records of the Custodian with respect to securities
of the Fund which are maintained in a securities System shall identify
by book entry those securities belonging to the Fund;
(iii) The Custodian shall pay for securities purchased for the
account of the Fund only upon (A) receipt of advice from the Securities
System that such securities have been transferred to the Account, and
(B) the making of an entry on the records of the Custodian to reflect
such payment and transfer for the account of the Fund. The Custodian
shall transfer securities sold for the account of the Fund only upon
(1) receipt of advice from the Securities System that payment for such
securities has been transferred to the Account, and (2) the making of
an entry on the records of the Custodian to reflect such transfer and
payment for the account of the Fund. Copies of all advices from the
Securities System of transfers of securities for the account of the
Fund shall identify the Fund, be maintained for the Fund by the
Custodian and be provided to the Fund at its request. The Custodian
shall furnish the Fund confirmation of each transfer to or from the
account of the Fund in the form of a written advice or notice and shall
furnish to the Fund copies of daily transaction sheets reflecting each
day's transactions in the Securities System for the account of the Fund
on the next business day;
(iv) The Custodian shall provide the Fund with any report
obtained by the Custodian on the Securities System's accounting system,
internal accounting control and procedures for safeguarding securities
deposited in the Securities System; and the Custodian shall send to the
Fund such reports on its own systems of internal accounting control as
the Fund may reasonably request from time to time; and
(v) Upon receipt of Special Instructions, the Custodian shall
terminate the use of any such Securities System on behalf of the Fund
as promptly as practicable and shall take all actions reasonably
practicable to safeguard the securities of the Fund that had been
maintained with such Securities System.
2.23. Other Transfers. The Custodian shall deliver securities,
cash, and other assets of the Fund to a Subcustodian as necessary to effect
transactions authorized by Proper Instructions. Upon receipt of Proper
Instructions in writing in advance, the Custodian shall make such other
disposition of securities, cash or other assets of the Fund in a manner other
than or for purposes other than as enumerated in this Agreement, provided that
such written Proper Instructions relating to such disposition shall include a
statement of the purpose for which the delivery is to be made, the amount of
funds and/or securities to be delivered and the name of the person or persons to
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whom delivery is to be made.
2.24. Establishment of Segregated Accounts. Upon receipt of
Proper Instructions, the Custodian shall establish and maintain on its books a
segregated account or accounts for and on behalf of the Fund, into which account
or accounts may be transferred cash and/or securities or other assets of the
Fund, including securities maintained by the Custodian in a Securities System,
said account to be maintained (a) for the purposes set forth in sections 2.10,
2.11, 2.12 and 2.15; (b) for the purposes of compliance by the Fund with the
procedures required by Release No. 10666 under the Investment Company Act of
1940, as amended (the "1940 Act"), or any subsequent release or releases of the
SEC relating to the maintenance of segregated accounts by registered investment
companies; or (c) for such other purposes as set forth, from time to time, in
Special Instructions.
2.25. Custodian Advances. (a) In the event that the Custodian
is directed by Proper Instructions to make any payment or transfer of funds on
behalf of the Fund for which there would be, at the close of business on the
date of such payment or transfer, insufficient funds held by the Custodian on
behalf of the Fund, the Custodian may, in its discretion without further Proper
Instructions, provide an advance ("Advance") to the Fund in an amount sufficient
to allow the completion of the transaction by reason of which such payment or
transfer of funds is to be made. In addition, in the event the Custodian is
directed by Proper Instructions to make any payment or transfer of funds on
behalf of the Fund as to which it is subsequently determined that the Fund has
overdrawn its cash account with the Custodian as of the close of business on the
date of such payment or transfer, said overdraft shall constitute an Advance.
Any Advance shall be payable on demand by the Custodian, unless otherwise agreed
by the Fund and the Custodian, and shall accrue interest from the date of the
Advance to the date of payment by the Fund at a rate agreed upon in writing from
time to time by the Custodian and the Fund. It is understood that any
transaction in respect of which the Custodian shall have made an Advance,
including but not limited to a foreign exchange contract or other transaction in
respect of which the Custodian is not acting as a principal, is for the account
of and at the risk of the Fund, and not, by reason of such Advance, deemed to be
a transaction undertaken by the Custodian for its own account and risk. The
Custodian and the Fund acknowledge that the purpose of Advances is to finance
temporarily the purchase or sale of securities for prompt delivery or to meet
redemptions or emergency expenses or cash needs that are not reasonably
foreseeable by the Fund. The Custodian shall promptly notify the Fund in writing
(an "Notice of Advance") of any Advance by facsimile transmission or in such
other manner as the Fund and the Custodian may agree in writing. At the request
of the Custodian, the Fund shall pledge, assign and grant to the Custodian a
security interest in certain specified securities of the Fund, as security for
Advances provided to the Fund, under the terms and conditions set forth in
Appendix A attached hereto.
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ARTICLE III
PROPER INSTRUCTIONS, SPECIAL INSTRUCTIONS
AND RELATED MATTERS
3.1. Proper Instructions and Special Instructions.
(a) Proper Instructions. As used in this Agreement, the term
"Proper Instructions" shall mean: (i) a tested telex from the Fund or the Fund's
investment manager or adviser, or a written request, direction, instruction or
certification (which may be given by facsimile transmission) signed or initialed
on behalf of the Fund by, one or more Authorized Persons (as that term is
defined in section 3.2); (ii) a telephonic or other oral communication by one or
more Authorized Persons; or (iii) a communication (other than facsimile
transmission) effected directly between electro-mechanical or electronic devices
or systems (including, without limitation, computers) by the Fund or the Fund's
investment manager or adviser or by one or more Authorized Persons on behalf of
the Fund; provided that communications of the types described in clauses (ii)
and (iii) above purporting to be given by an Authorized Person shall be
considered Proper Instructions only if the Custodian reasonably believes such
communications to have been given by an Authorized Person with respect to the
transaction involved. Instructions given in the form of Proper Instructions
under clause (i) shall be deemed to be Proper Instructions if they are
reasonably believed by the Custodian to be genuine. Proper Instructions in the
form of oral communications shall be confirmed by the Fund in the manner set
forth in clauses (i) or (iii) above, but the lack of such confirmation shall in
no way affect any action taken by the Custodian in reliance upon such oral
instructions prior to the Custodian's receipt of such confirmation. The Fund,
the Custodian and any investment manager or adviser of the Fund each is hereby
authorized to record any telephonic or other oral communications between the
Custodian and any such person. Proper Instructions may relate to specific
transactions or to types or classes of transactions, provided that Proper
Instructions may take the form of standing instructions only if they are in
writing.
(b) Special Instructions. As used in this Agreement, the term
"Special Instructions" shall mean Proper Instructions countersigned or confirmed
in writing by the Treasurer or any Assistant Treasurer of the Fund or any other
person designated by the Treasurer of the Fund in writing, which
countersignature or confirmation shall be (i) included on the instrument
containing the Proper Instructions or on a separate instrument relating thereto,
and (ii) delivered by hand, facsimile transmission, mail or courier service or
in such other manner as the Fund and the Custodian agree in writing.
(c) Address for Proper Instructions and Special Instructions.
Proper Instructions and Special Instructions shall be delivered to the Custodian
at the address and/or telephone, telecopy or telex number agreed upon from time
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to time by the Custodian and the Fund.
3.2. Authorized Persons. Concurrently with the execution of
this Agreement and from time to time thereafter, as appropriate, the Fund shall
deliver to the Custodian a certificate, duly certified by the Treasurer or
Assistant Treasurer of the Fund, setting forth: (a) the names, titles,
signatures and scope of authority of all persons authorized to give Proper
Instructions or any other notice, request, direction, instruction, certificate
or instrument on behalf of the Fund (each an "Authorized Person"); and (b) the
names, titles and signatures of those persons authorized to issue Special
Instructions. Such certificate may be accepted and relied upon by the Custodian
as conclusive evidence of the facts set forth therein and shall be considered to
be in full force and effect until delivery to the Custodian of a similar
certificate to the contrary. Upon delivery of a certificate which deletes the
name(s) of a person previously auhorized to give Proper Instructions or to issue
Special Instructions, such persons shall no longer be considered an Authorized
Person or authorized to issue Special Instructions.
3.3. Persons Having Access to Assets of the Fund.
Notwithstanding anything to the contrary in this Agreement, the Custodian shall
not deliver any assets of the Fund held by the Custodian to or for the account
of any Authorized Person, Trustee, officer, employee or agent of the Fund,
provided that nothing in this section 3.3 shall prohibit (a) any Authorized
Person from giving Proper Instructions, or any person authorized to issue
Special Instructions from issuing Special Instructions, provided such action
does not result in delivery of or access to assets of the Fund prohibited by
this section 3.3; or (b) the Fund's independent certified public accountants
from examining or reviewing the assets of the Fund held by the Custodian. The
Fund shall provide a list of such persons to the Custodian, and the Custodian
shall be entitled to rely upon such list and any modifications thereto that are
provided to the Custodian from time to time by the Fund.
3.4. Actions of Custodian Based on Proper Instructions and
Special Instructions. So long as and to the extent that the Custodian acts in
accordance with Proper Instructions or Special Instructions, as the case may be,
and the terms of this Agreement, the Custodian shall not be responsible for the
title, validity or genuineness of any property, or evidence of title thereof,
received or delivered by it pursuant to this Agreement.
ARTICLE IV
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SUBCUSTODIANS
The Custodian may, from time to time, in accordance with the
relevant provisions of this Article IV, appoint one or more Domestic
Subcustodians, Foreign Subcustodians and Interim Subcustodians (as such terms
are defined below) to act on behalf of the Fund. For purposes of this Agreement,
all duly appointed Domestic Subcustodians, Foreign Subcustodians and Interim
Subcustodians are referred to collectively as "Subcustodians."
4.1. Domestic Subcustodians. The Custodian may, at any time
and from time to time, at its own expense, appoint any bank as defined in
section 2(a)(5) of the 1940 Act meeting the requirements of a custodian under
section 17(f) of the 1940 Act and the rules and regulations thereunder, to act
on behalf of the Fund as a subcustodian for purposes of holding cash, securities
and other assets of the Fund and performing other functions of the Custodian
within the United States (a "Domestic Subcustodian"), provided that the
Custodian shall notify the Fund in writing of the identity and qualifications of
any proposed Domestic Subcustodian at least 30 days prior to appointment of such
Domestic Subcustodian, and the Fund may, in its sole discretion, by written
notice to the Custodian executed by an Authorized Person disapprove of the
appointment of such Domestic Subcustodian. If following notice by the Custodian
to the Fund regarding appointment of a Domestic Subcustodian and the expiration
of 30 days after the date of such notice, the Fund shall have failed to notify
the Custodian of its disapproval thereof, the Custodian may, in its discretion,
appoint such proposed Domestic Subcustodian as its subcustodian.
4.2. Foreign Subcustodians and Interim Subcustodians.
(a) Foreign Subcustodians. The Custodian may, at any time and
from time to time, at its own expense, appoint: (i) any bank, trust company or
other entity meeting the requirements of an "eligible foreign custodian" under
section 17(f) of the 1940 Act and the rules and regulations thereunder or
exempted therefrom by order of the SEC, or (ii) any bank as defined in section
2(a)(5) of the 1940 Act meeting the requirements of a custodian under section
17(f) of the 1940 Act and the rules and regulations thereunder to act on behalf
of the Fund as a subcustodian for purposes of holding cash, securities and other
assets of the Fund and performing other functions of the Custodian in countries
other than the United States of America (a "Foreign Subcustodian"); provided
that prior to the appointment of any Foreign Subcustodian, the Custodian shall
have obtained written confirmation of the approval of the Board of Trustees of
the Fund (which approval may be withheld in the sole discretion of such Board)
with respect to (A) the identity and qualifications of any proposed Foreign
Subcustodian, (B) the country or countries in which, and the securities
depositories or clearing agencies (meeting the requirements of an "eligible
foreign custodian" under section 17(f) of the 1940 Act and the rules and
regulations thereunder or exempted therefrom by order of the SEC) through which,
any proposed Foreign Subcustodian is authorized to hold Securities, cash and
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other assets of the Fund (each a "Foreign Depository") and (C) the form and
terms of the subcustodian agreement to be entered into between such proposed
Foreign Subcustodian and the Custodian. In addition, the Custodian may utilize
directly any Foreign Depository, provided the Board of Trustees shall have
approved in writing the use of such Foreign Depository by the Custodian. Each
such duly approved Foreign Subcustodian and the countries where and the Foreign
Depositories through which it may hold securities and other assets of the Fund
and the Foreign Depositories that the Custodian may utilize shall be listed in
Appendix B, as it may be amended from time to time in accordance with the
provisions of section 9.3. The Fund shall be responsible for informing the
Custodian sufficiently in advance of a proposed investment which is to be held
in a country in which no Foreign Subcustodian is authorized to act, in order
that there shall be sufficient time for the Custodian to effect the appropriate
arrangements with a proposed Foreign Subcustodian, including obtaining approval
as provided in this section 4.2(a). The Custodian shall not agree to any
material amendment to any subcustodian agreement entered into with a Foreign
Subcustodian, or agree to permit any material changes thereunder, or waive any
material rights under such agreement, except upon prior approval pursuant to
Special Instructions. The Custodian shall promptly provide the Fund with notice
of any such amendment, change, or waiver, whether or not material, including a
copy of any such amendment. For purposes of this subsection, a material
amendment, change or waiver means an amendment, change or waiver that may
reasonably be expected to have an adverse effect on the Fund in any material
way, including but not limited to the Fund's or the Board's obligations under
the 1940 Act, including Rule 17f-5 thereunder.
(b) Interim Subcustodians. In the event that the Fund shall
invest in a security or other asset to be held in a country in which no Foreign
Subcustodian is authorized to act (whether because the Custodian has not
appointed a Foreign Subcustodian in such country and entered into a subcustodian
agreement with it or because the Board of Trustees of the Fund has not approved
the Foreign Subcustodian appointed by the Custodian in such country and the
related subcustodian agreement), the Custodian shall promptly notify the Fund in
writing by facsimile transmission or in such other manner as the Fund and
Custodian shall agree in writing that no Foreign Subcustodian is approved in
such country and the Custodian shall, upon receipt of Special Instructions,
appoint any person designated by the Fund in such Special Instructions to hold
such security or other asset. Any person appointed as a Subcustodian pursuant to
this section 4.2(b) is hereinafter referred to herein as an "Interim
Subcustodian." Each Interim Custodian and the securities or assets of the Fund
that it is authorized to hold shall be set forth in Appendix B.
In the absence of such Special Instructions, such security or
other asset shall be held by such agent as the Custodian may appoint unless and
until the Fund shall instruct the Custodian to move the security or other asset
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into the possession of the Custodian or a Subcustodian.
4.3. Termination of a Subcustodian. The Custodian shall (a)
cause each Domestic Subcustodian and Foreign Subcustodian to, and (b) use its
best efforts to cause each Interim Subcustodian to, perform all of its
obligations in accordance with the terms and conditions of the subcustodian
agreement between the Custodian and such Subcustodian. In the event that the
Custodian is unable to cause such Subcustodian to fully perform its obligations
thereunder, the Custodian shall forthwith, upon the receipt of Special
Instructions, exercise its best efforts to recover any Losses (as hereinafter
defined) incurred by the Fund because of such failure to perform from such
Subcustodian under the applicable subcustodian agreement and, if necessary or
desirable, terminate such subcustodian and appoint a replacement Subcustodian in
accordance with the provisions of this Agreement. In addition to the foregoing,
the Custodian (i) may, at any time in its discretion, upon written notification
to the Fund, terminate any Domestic Subcustodian, Foreign Subcustodian or
Interim Subcustodian, and (ii) shall, upon receipt of Special Instructions,
terminate any Subcustodian with respect to the Fund, in each case in accordance
with the termination provisions of the applicable subcustodian agreement.
4.4. Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank, trust company,
securities depository or clearing agency that is itself qualified to act as a
custodian under the 1940 Act and the rules and regulations thereunder, as its
agent (an "Agent") to carry out such of the provisions of this Agreement as the
Custodian may from time to time direct, provided that the appointment of one or
more Agents (other than an agent appointed to the second paragraph of section
4.2(b)) shall not relieve the Custodian of its responsibilities under this
Agreement. Without limiting the foregoing, the Custodian shall be responsible
for any notices, documents or other information, or any securities, cash or
other assets of the Fund, received by any Agent on behalf of the Custodian or
the Fund as if the Custodian had received such items itself.
ARTICLE V
STANDARD OF CARE; INDEMNIFICATION
5.1. Standard of Care.
(a) General Standard of Care. The Custodian shall exercise
reasonable care and diligence in carrying out all of its duties and obligations
under this Agreement, and shall be liable to the Fund for all Losses suffered or
incurred by the Fund resulting from the failure of the Custodian to exercise
such reasonable care and diligence. For purposes of this Agreement, "Losses"
means any losses, damages, and expenses.
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(b) Actions Prohibited by Applicable Law, Etc. In no event
shall the Custodian incur liability hereunder if the Custodian or any
Subcustodian or Securities System, or any subcustodian, securities depository or
securities system utilized by any such Subcustodian or the Custodian, or any
nominee of the Custodian or any Subcustodian, is prevented, forbidden or delayed
from performing, or omits to perform, any act or thing which this Agreement
provides shall be performed or omitted to be performed, by reason of: (i) any
provision of any present or future law or regulation or order of the United
States of America, or any state thereof, or of any foreign country, or political
subdivision thereof or of any court of competent jurisdiction; or (ii) any act
of God or war or action of any de facto or de jure government or other similar
circumstance beyond the control of the Custodian, unless, in each case, such
delay or nonperformance is caused by the negligence, misfeasance or misconduct
of such person.
(c) Mitigation by Custodian. Upon the occurrence of any event
which causes or may cause any Losses to the Fund (i) the Custodian shall, and
shall cause any applicable Domestic Subcustodian or Foreign Subcustodian to, and
(ii) the Custodian shall use its best efforts to cause any applicable Interim
Subcustodian to, use all commercially reasonable efforts and take all reasonable
steps under the circumstances to mitigate the effects of such event and to avoid
continuing harm to the Fund.
(d) Advice of Counsel. The Custodian shall be entitled to
receive and act upon advice of counsel on all matters. The Custodian shall be
without liability for any action reasonably taken or omitted in good faith
pursuant to the advice of (i) counsel for the Fund, or (ii) at the expense of
the Custodian, such other counsel as the Fund may agree to, such agreement not
to be unreasonably withheld or delayed; provided that with respect to the
performance of any action or omission of any action upon such advice, the
Custodian shall be required to conform to the standard of care set forth in
section 5.1(a).
(e) Expenses. In addition to the liability of the Custodian
under this Article V, the Custodian shall be liable to the Fund for all
reasonable costs and expenses incurred by the Fund in connection with any claim
by the Fund against the Custodian arising from the obligations of the Custodian
hereunder including, without limitation, all reasonable attorneys' fees and
expenses incurred by the Fund in asserting any such claim, and all reasonable
expenses incurred by the Fund in connection with any investigations, lawsuits or
proceedings relating to such claim, provided that the Fund has recovered from
the Custodian for such claim.
(f) Liability for Past Records. The Custodian shall have no
liability in respect of any Losses suffered by the Fund, insofar as such Losses
arise from the performance of the Custodian's duties hereunder by reason of the
Custodian's reliance upon records that were maintained for the Fund by entities
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other than the Custodian prior to the Custodian's employment hereunder.
(g) Reliance on Certifications. The Secretary or an Assistant
Secretary of the Fund shall certify to the Custodian the names and signatures of
the officers of the Fund, the name and address of the Shareholder Servicing
Agent, and any instructions or directions to the Custodian by the Fund's Board
of Trustees or shareholders. Any such certificate may be accepted and relied
upon by the Custodian as conclusive evidence of the facts set forth therein and
may be considered in full force and effect until receipt of a similar
certificate to the contrary.
5.2. Liability of Custodian for Actions of Other Persons.
(a) Domestic Subcustodians, Foreign Subcustodians and Agents.
The Custodian shall be liable for the actions or omissions of any Domestic
Subcustodian, Foreign Subcustodian or Agent (other than an agent appointed
pursuant to section 4.2(b)) to the same extent as if such action or omission
were performed by the Custodian itself pursuant to this Agreement. In the event
of any Losses suffered or incurred by the Fund caused by or resulting from the
actions or omissions of any Domestic Subcustodian, Foreign Subcustodian or Agent
(other than an agent appointed pursuant to section 4.2(b)) for which the
Custodian would be directly liable if such actions or omissions were those of
the Custodian, the Custodian shall promptly reimburse the Fund in the amount of
any such Losses.
(b) Interim Subcustodians. Notwithstanding the provisions of
section 5.1 to the contrary, the Custodian shall not be liable to the Fund for
any Losses suffered or incurred by the Fund resulting from the actions or
omissions of an Interim Subcustodian or an agent appointed pursuant to section
4.2(b) unless such Losses are caused by, or result from, the negligence,
misfeasance or misconduct of the Custodian; provided that in the event of any
Losses (whether or not caused by or resulting from the negligence, misfeasance
or misconduct of the Custodian), the Custodian shall take all reasonable steps
to enforce such rights as it may have against such Interim Subcustodian or agent
to protect the interests of the Fund.
(c) Securities Systems and Foreign Depositories.
Notwithstanding the provisions of section 5.1 to the contrary, the Custodian
shall not be liable to the Fund for any Losses suffered or incurred by the Fund
resulting from the use by the Custodian or any Subcustodian of a Securities
System or Foreign Depository, unless such Losses are caused by, or result from,
the negligence, misfeasance or misconduct of the Custodian; provided that in the
event of any such Losses, the Custodian shall take all reasonable steps to
enforce such rights as it may have against the Securities System or Foreign
Depository, as the case may be, to protect the interests of the Fund.
(d) Reimbursement of Expenses. The Fund agrees to reimburse
the Custodian for all reasonable out-of-pocket expenses incurred by the
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Custodian in connection with the fulfillment of its obligations under this
section 5.2, provided that such reimbursement shall not apply to expenses
occasioned by or resulting from the negligence, misfeasance or misconduct of the
Custodian.
5.3. Indemnification.
(a) Indemnification Obligations. Subject to the limitations
set forth in this Agreement, the Fund agrees to indemnify and hold harmless the
Custodian and its nominees for all Losses suffered or incurred by the Custodian
or its nominee (including Losses suffered under the Custodian's indemnity
obligations to Subcustodians) caused by or arising from actions taken by the
Custodian in the performance of its duties and obligations under this Agreement,
provided that such indemnity shall not apply to Losses occasioned by or
resulting from the negligence, misfeasance or misconduct of the Custodian or any
Subcustodian, Securities System, Foreign Depository or their respective
nominees. In addition, the Fund agrees to indemnify the Custodian against any
liability incurred by reason of taxes assessed to the Custodian, any
Subcustodian, any Securities System, any Foreign Depository, and their
respective nominees, or other Losses incurred by such persons, resulting from
the fact that securities and other property of the Fund are registered in the
name of such persons, provided that in no event shall such indemnification be
applicable to income, franchise or similar taxes which may be imposed or
assessed against such persons.
(b) Notice of Litigation, Right to Prosecute, etc. The Fund
shall not be liable for indemnification under this section 5.3 unless the person
seeking indemnification shall have notified the Fund in writing (i) within such
time after the assertion of any claim as is sufficient for such person to
determine that it will seek indemnification from the Fund in respect of such
claim or (ii) promptly after the commencement of any litigation or proceeding
brought against such person, in respect of which indemnity may be sought;
provided that in the case of clause (i) of this section 5.3(b) the Fund shall
not be liable for such indemnification to the extent the Fund is disadvantaged
by any such delay in notification. With respect to claims in such litigation or
proceedings for which indemnity by the Fund may be sought and subject to
applicable law and the ruling of any court of competent jurisdiction, the Fund
shall be entitled to participate in any such litigation or proceeding and, after
written notice from the Fund to the person seeking indemnification, the Fund may
assume the defense of such litigation or proceeding with counsel of its choice
at its own expense in respect of that portion of the litigation for which the
Fund may be subject to an indemnification obligation, provided that such person
shall be entitled to participate in (but not control) at its own cost and
expense, the defense of any such litigation or proceeding if the Fund has not
acknowledged in writing its obligation to indemnify such person with respect to
such litigation or proceeding. If the Fund is not permitted to participate in or
control such litigation or proceeding under applicable law or by a ruling of a
court of competent jurisdiction, such person shall reasonably prosecute such
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litigation or proceeding. A person seeking indemnification hereunder shall not
consent to the entry of any judgment or enter into any settlement of any such
litigation or proceeding without providing the Fund with adequate notice of any
such settlement or judgment and without the Fund's prior written consent, which
consent shall not be unreasonably withheld or delayed. All persons seeking
indemnification hereunder shall submit written evidence to the Fund with respect
to any cost or expense for which they are seeking indemnification in such form
and detail as the Fund may reasonably request.
5.4. Investment Limitations. If the Custodian has otherwise
complied with the terms and conditions of this Agreement in performing its
duties generally, and more particularly in connection with the purchase, sale or
exchange of securities made by or for the Fund, the Custodian shall not be
liable to the Fund, and the Fund agrees to indemnify the Custodian and its
nominees, for any Losses suffered or incurred by the Custodian and its nominees
arising out of any violation of any investment or other limitation to which the
Fund is subject.
5.5. Fund's Right to Proceed. Notwithstanding anything to the
contrary contained herein, the Fund shall have, at its election upon reasonable
notice to the Custodian, the right to enforce, to the extent permitted by any
applicable agreement and applicable law, the Custodian's rights against any
Subcustodian, Securities System, Foreign Depository or other person for Losses
caused the Fund by such Subcustodian, Securities System, Foreign Depository or
other person, and shall be entitled to enforce the rights of the Custodian with
respect to any claim against such Subcustodian, Securities System, Foreign
Depository or other person which the Custodian may have as a consequence of any
such Losses, if and to the extent that the Fund has not been made whole for such
Losses. If the Custodian makes the Fund whole for such Losses, the Custodian
shall retain the ability to enforce its rights directly against such
Subcustodian, Securities System, Foreign Depository or other person. Upon the
Fund's election to enforce any rights of the Custodian under this section 5.5,
the Fund shall reasonably prosecute all actions and proceedings directly
relating to the rights of the Custodian in respect of the Losses incurred by the
Fund; provided that, so long as the Fund has acknowledged in writing its
obligation to indemnify the Custodian under section 5.3 hereof with respect to
such claim, the Fund shall retain the right to settle, compromise and/or
terminate any action or proceeding in respect of the Losses incurred by the Fund
without the Custodian's consent; and provided further that if the Fund has not
made an acknowledgement of its obligation to indemnify the Custodian, the Fund
shall not settle, compromise or terminate any such action or proceeding without
the written consent of the Custodian, which consent shall not be unreasonably
withheld or delayed. The Custodian agrees to cooperate with the Fund and take
all actions reasonably requested by the Fund in connection with the Fund's
enforcement of any rights of the Custodian. The Fund agrees to reimburse the
Custodian for all reasonable out-of-pocket expenses incurred by the Custodian in
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connection with the fulfillment of its obligations under this section 5.5,
provided that such reimbursement shall not apply to expenses occasioned by or
resulting from the negligence, misfeasance or misconduct of the Custodian.
ARTICLE VI
RECORDS
6.1. Preparation of Reports. The Custodian shall, as
reasonably requested by the Fund, assist generally in the preparation of reports
to Fund shareholders, regulatory authorities and others, audits of accounts, and
other ministerial matters of like nature. The Custodian shall render statements,
including interim monthly and complete quarterly financial statements, or copies
thereof, from time to time as reasonably requested by Proper Instructions.
6.2. Custodian's Books and Records. The Custodian shall
maintain complete and accurate records with respect to securities and other
assets held for the account of the Fund as required by the rules and regulations
of the SEC applicable to investment companies registered under the 1940 Act,
including: (a) journals or other records of original entry containing a detailed
and itemized daily record of all receipts and deliveries of securities
(including certificate and transaction identification numbers, if any), and all
receipts and disbursements of cash; (b) ledgers or other records reflecting (i)
securities in physical possession, (ii) securities in transfer, (iii) securities
borrowed, loaned or collateralizing obligations of the Fund, (iv) monies
borrowed and monies loaned (together with a record of the collateral therefor
and substitutions of collateral), and (v) dividends and interest received; and
(c) cancelled checks and bank records related thereto. The Custodian shall keep
such other books and records of the Fund as the Fund shall reasonably request.
All such books and records maintained by the Custodian shall be maintained in a
form acceptable to the Fund and in compliance with the rules and regulations of
the SEC (including, but not limited to, books and records required to be
maintained under Section 31(a) of the 1940 Act and the rules and regulations
from time to time adopted thereunder), and any other applicable Federal, State
and foreign tax laws and administrative regulations. All such records will be
the property of the Fund and in the event of termination of this Agreement shall
be delivered to the successor custodian.
All books and records maintained by the Custodian pursuant to
this Agreement and any insurance policies and fidelity or similar bonds
maintained by the Custodian shall be made available for inspection and audit at
reasonable times by officers of, attorneys for, and auditors employed by, the
Fund and the Custodian shall promptly provide the Fund with copies of all
reports of its independent auditors regarding the Custodian's controls and
procedures.
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6.3. Opinion of Fund's Independent Certified Public
Accountants. The Custodian shall take all reasonable action as the Fund may
request to obtain from year to year favorable opinions from the Fund's
independent certified public accountants with respect to the Custodian's
activities hereunder in connection with the preparation of any periodic reports
to or filings with the SEC and with respect to any other requirements of the
SEC.
6.4. Reports of Custodian's Independent Certified Public
Accountants. At the request of the Fund, the Custodian shall deliver to the Fund
a written report prepared by the Custodian's independent certified public
accountants with respect to the services provided by the Custodian under this
Agreement, including, without limitation, the Custodian's accounting system,
internal accounting control and procedures for safeguarding cash, securities and
other assets, including cash, securities and other assets deposited and/or
maintained in a Securities System or with a Subcustodian. Such report shall be
of sufficient scope and in sufficient detail as may reasonably be required by
the Fund and as may reasonably be obtained by the Custodian.
6.5. Calculation of Net Asset Value. The Custodian shall
compute and determine the net asset value per share of capital stock of the Fund
as of the close of regular business on the New York Stock Exchange on each day
on which such Exchange is open, unless otherwise directed by Proper
Instructions. Such computation and determination shall be made in accordance
with (a) the provisions of the By-Laws of the Fund and [Articles of
Incorporation/ Declaration of Trust], as they may from time to time be amended
and delivered to the Custodian, (b) the votes of the Board of Trustees of the
Fund at the time in force and applicable, as they may from time to time be
delivered to the Custodian, and (c) Proper Instructions. On each day that the
Custodian shall compute the net asset value per share of the Fund, the Custodian
shall provide the Fund with written reports which permit the Fund to verify that
portfolio transactions have been recorded in accordance with the Fund's
instructions.
In computing the net asset value, the Custodian may rely upon
any information furnished by Proper Instructions, including without limitation
any information (i) as to accrual of liabilities of the Fund and as to
liabilities of the Fund not appearing on the books of account kept by the
Custodian, (ii) as to the existence, status and proper treatment of reserves, if
any, authorized by the Fund, (iii) as to the sources of quotations to be used in
computing the net asset value, including those listed in Appendix C hereto, (iv)
as to the fair value to be assigned to any securities or other assets for which
price quotations are not readily available, and (v) as to the sources of
information with respect to "corporate actions" affecting portfolio securities
of the Fund, including those listed in Appendix C. (Information as to "corporate
actions" shall include information as to dividends, distributions, stock splits,
stock dividends, rights offerings, conversions, exchanges, recapitalizations,
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mergers, redemptions, calls, maturity dates and similar transactions, including
the ex- and record dates and the amounts or other terms thereof.)
In like manner, the Custodian shall compute and determine the
net asset value as of such other times as the Board of Trustees of the Fund, or
any valuation committee thereof, from time to time may reasonably request.
The Custodian shall be held to the standard of care set forth
in Article V with respect to the performance of its responsibilities under this
Article VI. The parties hereto acknowledge, however, that the Custodian's
causing an error or delay in the determination of net asset value may, but does
not in and of itself, constitute negligence, gross negligence or reckless or
willful misconduct. The Custodian's liability for any such negligence, gross
negligence or reckless or willful misconduct which results in an error in
determination of such net asset value shall be limited to the direct,
out-of-pocket loss the Fund, shareholder or former shareholder shall actually
incur, measured by the difference between the actual and the erroneously
computed net asset value, and any expenses incurred by the Fund in connection
with correcting the records of the Fund affected by such error (including
charges made by the Fund's registrar and transfer agent for making such
corrections), communicating with shareholders or former shareholders of the Fund
affected by such error or responding to or defending against any inquiry or
proceeding with respect to such error made or initiated by the SEC or other
regulatory or self-regulatory body.
Without limiting the foregoing, the Custodian shall not be
held accountable or liable to the Fund, any shareholder or former shareholder
thereof or any other person for any delays or Losses any of them may suffer or
incur resulting from (A) the Custodian's failure to receive timely and suitable
notification concerning quotations or corporate actions relating to or affecting
securities of the Fund or (B) any errors in the computation of the net asset
value based upon or arising out of quotations or information as to corporate
actions if received by the Custodian either (1) from a source which the
Custodian was authorized pursuant to the second paragraph of this section 6.5 to
rely upon, or (2) from a source which in the Custodian's reasonable judgment was
as reliable a source for such quotations or information as the sources
authorized pursuant to that paragraph. Nevertheless, the Custodian will use its
best judgment in determining whether to verify through other sources any
information it has received as to quotations or corporate actions if the
Custodian has reason to believe that any such information might be incorrect.
In the event of any error or delay in the determination of
such net asset value for which the Custodian may be liable, the Fund and the
Custodian will consult and make good faith efforts to reach agreement on what
actions should be taken in order to mitigate any Losses suffered by the Fund or
its present or former shareholders, in order that the Custodian's exposure to
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liability shall be reduced to the extent possible after taking into account all
relevant factors and alternatives. Such actions might include the Fund or the
Custodian taking reasonable steps to collect from any shareholder or former
shareholder who has received any overpayment upon redemption of shares such
overpaid amount or to collect from any shareholder who has underpaid upon a
purchase of shares the amount of such underpayment or to reduce the number of
shares issued to such shareholder. It is understood that in attempting to reach
agreement on the actions to be taken or the amount of the loss which should
appropriately be borne by the Custodian, the Fund and the Custodian will
consider such relevant factors as the amount of the loss involved, the Fund's
desire to avoid loss of shareholder good will, the fact that other persons or
entities could have reasonably expected to have detected the error sooner than
the time it was actually discovered, the appropriateness of limiting or
eliminating the benefit which shareholders or former shareholders might have
obtained by reason of the error, and the possibility that other parties
providing services to the Fund might be induced to absorb a portion of the loss
incurred.
Upon written notice from the Fund to the Custodian, the
Custodian's responsibilities under this Section 6.5 shall terminate, but this
Agreement shall otherwise continue in full force and effect. Upon such
termination, the fee schedule provided for under Article VII hereof shall be
adjusted by the parties in such manner as they may agree, and the Custodian will
transfer such of the Fund's books and records, and provide such other reasonable
cooperation, as the Fund may request in connection with the transfer of such
responsibilities.
6.6. Information Regarding Foreign Subcustodians and Foreign
Depositories. (a) The Custodian shall use reasonable efforts to assist the Fund
in obtaining the following with respect to any country in which any assets of
the Fund are held or proposed to be held:
(1) information concerning whether, and to what extent,
applicable foreign law would restrict the access afforded the Fund's
independent public accountants to books and records kept by a foreign
custodian or foreign securities depository used, or proposed to be
used, in that country;
(2) information concerning whether, and to what extent,
applicable foreign law would restrict the Fund's ability to recover its
assets in the event of the bankruptcy of a foreign custodian or foreign
securities depository used, or proposed to be used, in that country;
(3) information concerning whether, and to what extent,
applicable foreign law would restrict the Fund's ability to recover
assets that are lost while under the control of a foreign custodian or
foreign securities depository used, or proposed to be used, in that
country;
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(4) information concerning the likelihood of expropriation,
nationalization, freezes or confiscation of the Fund's assets in that
country;
(5) information concerning whether difficulties in converting
the Fund's cash and cash equivalents held in that country into U.S.
Dollars are reasonably foreseeable, including without limitation as a
result of applicable foreign currency exchange regulations;
(6) information concerning the financial strength, general
reputation and standing and ability to perform custodial services of
each foreign custodian or foreign securities depository used, or
proposed to be used, in that country;
(7) information concerning whether each foreign custodian or
foreign securities depository used, or proposed to be used, in that
country would provide a level of safeguards for maintaining the Fund's
assets not materially different from that provided by the Custodian in
maintaining the Fund's securities in the United States;
(8) information concerning whether each foreign custodian or
foreign securities depository used, or proposed to be used, in that
country has offices in the United States in order to facilitate the
assertion of jurisdiction over and enforcement of judgments against
such custodian or depository;
(9) as to each foreign securities depository used, or proposed
to be used, in that country information concerning the number of
participants in, and operating history of, such depository; and
(10) such other information as may be requested by the Fund to
ensure compliance with Rule 17f-5 under the 1940 Act.
(b) During the term of this Agreement, the Custodian shall use
reasonable efforts to provide the Fund with prompt notice of any material
changes in the facts or circumstances upon which any of the foregoing
information or statements were based.
(c) Upon request of the Fund, the Custodian shall deliver to
the Fund a certificate stating: (i) the identity of each Foreign Subcustodian
then acting on behalf of the Custodian; and (ii) the countries in which and the
Foreign Depositories through which each such Foreign Subcustodian or the
Custodian is then holding cash, securities and other assets of the Fund.
ARTICLE VII
CUSTODIAN FEES
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The Fund shall pay the Custodian a custody fee based on such
fee schedule as may from time to time be agreed upon in writing by the Custodian
and the Fund. Such fee, together with all amounts for which the Custodian is to
be reimbursed in accordance with the following sentence, shall be billed to the
Fund in such a manner as to permit payment either by a direct cash payment to
the Custodian or by placing Fund portfolio transactions with the Custodian
resulting in an agreed-upon amount of commissions being paid to the Custodian
within an agreed-upon period of time. The Custodian shall be entitled to receive
reimbursement from the Fund on demand for its cash disbursements and expenses
(including cash disbursements and expenses of any Subcustodian or Agent for
which the Custodian has reimbursed such Subcustodian or Agent) permitted by this
Agreement, but excluding salaries and usual overhead expenses, upon receipt by
the Fund of reasonable evidence thereof.
ARTICLE VIII
TERMINATION
This Agreement shall continue in full force and effect until
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid, to the other party, such termination to take effect not sooner
than sixty (60) days after the date of such delivery or mailing. In the event of
termination, the Custodian shall be entitled to receive prior to delivery of the
securities, cash and other assets held by it all accrued fees and unreimbursed
expenses the payment of which is contemplated by Article VII, upon receipt by
the Fund of a statement setting forth such fees and expenses.
In the event of the appointment of a successor custodian, it
is agreed that the cash, securities and other assets owned by the Fund and held
by the Custodian or any Subcustodian or Agent shall be delivered to the
successor custodian, and the Custodian agrees to cooperate with the Fund in
execution of documents and performance of other actions necessary or desirable
in order to substitute the successor custodian for the Custodian under this
Agreement.
ARTICLE IX
MISCELLANEOUS
9.1. Execution of Documents. Upon request, the Fund shall
deliver to the Custodian such proxies, powers of attorney or other instruments
as may be reasonable and necessary or desirable in connection with the
performance by the Custodian or any Subcustodian of their respective obligations
under this Agreement or any applicable subcustodian agreement.
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9.2. Entire Agreement. This Agreement constitutes the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof.
9.3. Waivers and Amendments. No provision of this Agreement
may be amended or terminated except by a statement in writing signed by the
party against which enforcement of the amendment or termination is sought,
provided that Appendix B listing the Foreign Subcustodians and Foreign
Depositories approved by the Fund may be amended from time to time to add or
delete one or more of such entities [or sources] by delivery to the Custodian of
a revised Appendix B executed by an Authorized Person, such amendment to take
effect immediately upon execution of the revised Appendix B by the Custodian.
In connection with the operation of this Agreement, the
Custodian and the Fund may agree in writing from time to time on such provisions
interpretative of or in addition to the provisions of this Agreement as may in
their joint opinion be consistent with the general tenor of this Agreement. No
interpretative or additional provisions made as provided in the preceding
sentence shall be deemed to be an amendment of this Agreement.
9.4. Captions. The section headings in this Agreement are for
the convenience of the parties and in no way alter, amend, limit or restrict the
contractual obligations of the parties set forth in this Agreement.
9.5. Governing Law. This instrument shall be governed by and
construed in accordance with the laws of the State of New York.
9.6. Notices. Notices and other writings delivered or mailed
postage prepaid to the Fund addressed to the Fund at Two International Place,
Boston, Massachusetts 02110 or to such other address as the Fund may have
designated to the Custodian in writing, or to the Custodian at 40 Water Street,
Boston, Massachusetts 02109, Attention: Manager, Securities Department, or to
such other address as the Custodian may have designated to the Fund in writing,
shall be deemed to have been properly delivered or given hereunder to the
respective addressee.
9.7. Successors and Assigns. This Agreement shall be binding
on and shall inure to the benefit of the Fund and the Custodian and their
respective successors and assigns, provided that neither party hereto may assign
this Agreement or any of its rights hereunder without the prior written consent
of the other party.
9.8. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original. This
Agreement shall become effective when one or more counterparts have been signed
and delivered by each of the parties.
29
<PAGE>
9.9. Representative Capacity; Nonrecourse Obligations. The
Custodian agrees that any claims by it against the Fund under this Agreement may
be satisfied only from the assets of the Fund; that the person executing this
Agreement has executed it on behalf of the Fund and not individually, and that
the obligations of the Fund arising out of this Agreement are not binding upon
such person or the Fund's shareholders individually but are binding only upon
the assets and property of the Fund; and that no shareholders, trustees or
officers of the Fund may be held personally liable or responsible for any
obligations of the Fund arising out of this Agreement.
IN WITNESS WHEREOF, each of the parties has caused this
Agreement to be executed in its name and behalf on the day and year first above
written.
BROWN BROTHERS HARRIMAN & CO.
per pro_________________
Name:
Title:
SCUDDER VARIABLE LIFE INVESTMENT FUND
By:_____________________
Name:
Title:
30
<PAGE>
APPENDIX A TO THE
CUSTODIAN AGREEMENT BETWEEN
SCUDDER VARIABLE LIFE INVESTMENT FUND AND
BROWN BROTHERS HARRIMAN & CO.
DATED AS OF April 29, 1996
PROCEDURES RELATING TO CUSTODIAN'S SECURITY INTEREST
----------------------------------------------------
As security for any Advances (as defined in the Custodian
Agreement) of the Fund, the Fund shall pledge, assign and grant to the Custodian
a security interest in Collateral (as hereinafter defined), under the terms,
circumstances and conditions set forth in this Appendix A.
Section 1. Defined Terms. As used in this Appendix A the following terms
shall have the following respective meanings:
(a) "Business Day" shall mean any day that is not a Saturday, a Sunday
or a day on which the Custodian is closed for business.
(b) "Collateral" shall mean those securities having a fair market value
(as determined in accordance with the procedures set forth in the prospectus for
the Fund) equal to the aggregate of all Advance Obligations of the Fund that are
(i) identified in any Pledge Certificate executed on behalf of the Fund or (ii)
designated by the Custodian for the Fund pursuant to Section 3 of this Appendix
A. Such securities shall consist of marketable securities held by the Custodian
on behalf of the Fund or, if no such marketable securities are held by the
Custodian on behalf of the Fund, such other securities designated by the Fund in
the applicable Pledge Certificate or by the Custodian pursuant to Section 3 of
this Appendix A.
(c) "Advance Obligations" shall mean the amount of any outstanding
Advance(s) provided by the Custodian to the Fund together with all accrued
interest thereon.
(d) "Pledge Certificate" shall mean a Pledge Certificate in the form
attached as Exhibit 1 to this Appendix A, executed by a duly authorized officer
of the Fund and delivered by the Fund to the Custodian by facsimile transmission
or in such other manner as the Fund and the Custodian may agree in writing.
(e) "Release Certificate" shall mean a Release Certificate in the form
attached as Exhibit 2 to this Appendix A, executed by a duly authorized officer
of the Custodian and delivered by the Custodian to the Fund by facsimile
transmission or in such other manner as the Fund and the Custodian may agree in
writing.
31
<PAGE>
(f) "Written Notice" shall mean a written notice executed by a duly
authorized officer of the party delivering the notice and delivered by facsimile
transmission or in such other manner as the Fund and the Custodian shall agree
in writing.
Section 2. Pledge of Collateral. To the extent that any Advance
Obligations of the Fund are not satisfied by the close of business on the first
Business Day following the Business Day on which the Fund receives a Written
Notice requesting security for such Advance Obligation and stating the amount of
such Advance Obligation, the Fund shall pledge, assign and grant to the
Custodian a first priority security interest in Collateral specified by the Fund
by delivering to the Custodian a Pledge Certificate executed by the Fund
describing such Collateral. Such Written Notice may, in the discretion of the
Custodian, be included within or accompany the Notice of Advance (as defined in
the Custodian Agreement) relating to the applicable Advance Obligation.
Section 3. Failure to Pledge Collateral. In the event that the Fund
shall fail (a) to pay the Advance Obligation described in such Written Notice,
(b) to deliver to the Custodian a Pledge Certificate pursuant to Section 2, or
(c) to identify substitute securities pursuant to Section 6 upon the sale or
maturity of any securities identified as Collateral, the Custodian may, by
Written Notice to the Fund, specify Collateral which shall secure the applicable
Advance Obligation. The Fund hereby pledges, assigns and grants to the Custodian
a first priority security interest in any and all Collateral specified in such
Written Notice; provided that such pledge, assignment and grant of security
shall be deemed to be effective only upon receipt by the Fund of such Written
Notice, and provided further that if the Custodian specifies Collateral in which
a first priority security interest has already been granted, the security
interest pledged, assigned and granted hereunder shall be a security interest
that is not a first priority security interest.
Section 4. Delivery of Additional Collateral. If at any time the
Custodian shall notify the Fund by Written Notice that the fair market value of
the Collateral securing any Advance Obligation is less than the amount of such
Advance Obligation, the Fund shall deliver to the Custodian, within one Business
Day following the Fund's receipt of such Written Notice, an additional Pledge
Certificate describing additional Collateral. If the Fund shall fail to deliver
such additional Pledge Certificate, the Custodian may specify Collateral which
shall secure the unsecured amount of the applicable Advance Obligation in
accordance with Section 3 of this Appendix A.
Section 5. Release of Collateral. Upon payment by the Fund of any
Advance Obligation secured by the pledge of Collateral, the Custodian shall
promptly deliver to the Fund a Release Certificate pursuant to which the
32
<PAGE>
Custodian shall release Collateral from the lien under the applicable Pledge
Certificate or Written Notice pursuant to Section 3 having a fair market value
equal to the amount paid by the Fund on account of such Advance Obligation. In
addition, if at any time the Fund shall notify the Custodian by Written Notice
that the Fund desires that specified Collateral be released and (a) that the
fair market value of the Collateral securing any Advance Obligation exceeds the
amount of such Advance Obligation, or (b) that the Fund has delivered a Pledge
Certificate pursuant to Section 6 substituting Collateral in respect of such
Advance Obligation, the Custodian shall deliver to the Fund, within one Business
Day following the Custodian's receipt of such Written Notice, a Release
Certificate relating to the Collateral specified in such Written Notice.
Section 6. Substitution of Collateral. The Fund may substitute
securities for any securities identified as Collateral by delivery to the
Custodian of a Pledge Certificate executed by the Fund, indicating the
securities pledged as Collateral.
Section 7. Security for Fund Advance Obligations. The pledge of
Collateral by the Fund shall secure only Advance Obligations of the Fund. In no
event shall the pledge of Collateral by the Fund be deemed or considered to be
security for any other types of obligations of the Fund to the Custodian or for
the Advance Obligations or other types of obligations of any other fund.
Section 8. Custodian's Remedies. Upon (a) the Fund's failure to pay any
Advance Obligation of the Fund within thirty days after receipt by the Fund of a
Written Notice demanding security therefor, and (b) one Business Day's prior
Written Notice to the Fund, the Custodian may elect to enforce its security
interest in the Collateral securing such Advance Obligation, by taking title to
(at the then prevailing fair market value), or selling in a commercially
reasonable manner, so much of the Collateral as shall be required to pay such
Advance Obligation in full. Notwithstanding the provisions of any applicable
law, including, without limitation, the Uniform Commercial Code, the remedy set
forth in the preceding sentence shall be the only right or remedy to which the
Custodian is entitled with respect to the pledge and security interest granted
pursuant to any Pledge Certificate or Section 3. Without limiting the foregoing,
the Custodian hereby waives and relinquishes all contractual and common law
rights of set-off to which it may now or hereafter be or become entitled with
respect to any obligations of the Fund to the Custodian arising under this
Appendix A to the Custodian Agreement.
33
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Appendix A to
be executed in its name and behalf on the day and year first above written.
BROWN BROTHERS HARRIMAN & CO.
By: _____________________
Name: _____________________
Title: _____________________
SCUDDER VARIABLE LIFE INVESTMENT
FUND
By: _____________________
Name: _____________________
Title: _____________________
34
<PAGE>
EXHIBIT 1
TO
Appendix A
PLEDGE CERTIFICATE
------------------
This Pledge Certificate is delivered pursuant to the Custodian
Agreement dated as of ______________, 1996 (the "Agreement"), between Scudder
Variable Life Investment Fund (the "Fund") and Brown Brothers Harriman & Co.
(the "Custodian"). Capitalized terms used herein without definition shall have
the respective meanings ascribed to them in the Agreement. Pursuant to [Section
2 or Section 4] of Appendix A attached to the Agreement, the Fund hereby
pledges, assigns and grants to the Custodian a first priority security interest
in the securities listed on Schedule A attached to this Pledge Certificate
(collectively, the "Pledged Securities"). Upon delivery of this Pledge
Certificate, the Pledged Securities shall constitute Collateral, and shall
secure all Advance Obligations of the Fund described in that certain Written
Notice dated ___, 19__ , delivered by the Custodian to the Fund. The pledge,
assignment and grant of security in the Pledged Securities hereunder shall be
subject in all respects to the terms and conditions of the Agreement, including,
without limitation, Sections 7 and 8 of Appendix A attached hereto.
IN WITNESS WHEREOF, the Fund has caused this Pledge
Certificate to be executed in its name, on behalf of the Fund this ____ day of
_______, 1996.
By: _____________________
Name: _____________________
Title: _____________________
35
<PAGE>
SCHEDULE A
TO
PLEDGE CERTIFICATE
Type of Certificate/CUSIP Number of
Issuer Security Numbers Shares
- ------ -------- ------- ------
36
<PAGE>
EXHIBIT 2
TO
Appendix A
RELEASE CERTIFICATE
-------------------
This Release Certificate is delivered pursuant to the Custodian
Agreement dated as of _________, 1996 (the "Agreement"), between Scudder
Variable Life Investment Fund (the "Fund") and Brown Brothers Harriman & Co.
(the "Custodian"). Capitalized terms used herein without definition shall have
the respective meanings ascribed to them in the Agreement. Pursuant to Section 5
of Appendix A attached to the Agreement, the Custodian hereby releases the
securities listed on Schedule A attached to this Release Certificate from the
lien under the [Pledge Certificate dated __________, 19__ or the Written Notice
delivered pursuant to Section 3 of Appendix A dated ___________, 19__.
IN WITNESS WHEREOF, the Custodian has caused this Release Certificate
to be executed in its name and on its behalf this ____ day of 19__.
Brown Brothers Harriman & Co.
By: _____________________
Name: _____________________
Title: _____________________
37
<PAGE>
SCHEDULE A
TO
RELEASE CERTIFICATE
Type of Certificate/CUSIP Number of
Issuer Security Numbers Shares
- ------ -------- ------- ------
38
Exhibit 8(f)(1)
Scudder Investor Services, Inc.
Two International Place
Boston, Massachusetts 02110
PARTICIPATING CONTRACT AND POLICY AGREEMENT
-------------------------------------------
Ladies and Gentlemen:
We (sometimes hereinafter referred to as "Investor Services") are the
Principal Underwriter of shares of Scudder Variable Life Investment Fund (the
"Fund"), a no-load, open-end, diversified registered management investment
company established in 1985 as a Massachusetts business trust. The Fund is a
series fund consisting of the Balanced Portfolio, Bond Portfolio, Capital Growth
Portfolio, Global Discovery Portfolio, International Portfolio, Money Market
Portfolio, and Growth and Income Portfolio (individually or collectively
hereinafter referred to as the "Portfolio" or the "Portfolios"). In addition,
each Portfolio, except the Money Market Portfolio, is divided into two classes
of shares of beneficial interest ("Shares"). Additional Portfolios and classes
may be created from time to time. The Fund is the funding vehicle for variable
annuity contracts and variable life insurance policies ("Participating Contracts
and Policies") to be offered to the separate accounts (the "Accounts") of
certain life insurance companies ("Participating Insurance Companies"). Owners
of Participating Contracts and Policies will designate a portion of their
premium to be invested in insurance company separate accounts or sub-accounts
which invest in, or represent an investment in, directly or indirectly, Shares
the Portfolios of the Fund. You are a registered broker-dealer which intends to
offer and sell Participating Contracts and Policies. In connection with such
offer and sale you will be obligated to deliver the prospectuses of such
Participating Contracts and Policies and, contemporaneously therewith, the
prospectus of the Fund. Sales of Shares to Participating Insurance Companies or
their affiliates or the separate accounts of either shall be effected solely by
us as principal underwriter of the Fund, and not by you; provided, however, that
you shall be our agent in connection with the receipt of purchase orders for
Fund Shares and not in connection with their offer and sale. The relationship
between us shall be further governed by the following terms and conditions:
1. To the extent, if any, that your activities or the activities of
the Participating Insurance Companies in connection with the sale
of Participating Contracts and Policies may constitute the sale
<PAGE>
of Shares, you and we agree that (i) we are the sole "principal
underwriter" of the Fund and the sole "underwriter" of the Shares
as those terms are defined in the Investment Company Act of 1940
(the "1940 Act") and the Securities Act of 1933 (the "1933 Act"),
respectively, and (ii) neither you nor the Participating
Insurance Companies or the Accounts shall be deemed to be
"principal underwriters" of the Fund or "underwriters" of the
Fund within the meaning of the 1940 Act and the 1933 Act,
respectively.
2. You hereby represent and warrant to us as follows:
(a) You are a corporation duly organized and validly existing in
good standing under the laws of the [STATE OF INCORPORATION]
and have full power and authority to enter into this
Agreement.
(b) This Agreement has been duly authorized, executed and
delivered by you and is a valid and binding obligation
enforceable against you in accordance with its terms.
(c) Your compliance with the provisions of this Agreement will
not conflict with or result in a violation of the provisions
of your charter or by-laws, or any statute or any judgment,
decree, order, rule or regulation of any court or
governmental agency or body having jurisdiction.
3. We hereby represent and warrant to you as follows:
(a) A registration statement (File No. 2-96461) on Form N-1A
with respect to the Shares (x) has been prepared by the Fund
in conformity with the requirements of the 1940 Act and the
1933 Act and all applicable published instructions, rules
and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission"), (y)
has been filed with the Commission, and (z) is currently
effective. The registration statement, including financial
statements and exhibits, and the final prospectus, including
the statement of additional information, as subsequently
amended and supplemented, are herein respectively referred
to as the "Registration Statement" and the "Prospectus".
(b) The Registration Statement and the Prospectus and any
amendment or supplement thereto will contain all statements
required to be stated therein and will comply in all
material respects with the requirements of the 1940 Act, the
1933 Act and the Rules and Regulations, and the Registration
Statement and any post-effective amendment thereto will not
contain or incorporate by reference any untrue statement of
a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were
made, not misleading, and the Prospectus and any amendment
or supplement thereto will not contain or incorporate by
reference any untrue statement of a material fact or omit to
state a material fact required to be stated therein or
necessary in order to make the statements therein, in light
2
<PAGE>
of the circumstances under which they were made, not
misleading.
(c) We are a corporation duly organized and validly existing in
good standing under the laws of The Commonwealth of
Massachusetts and have full power and authority to enter
into this Agreement.
(d) This Agreement has been duly authorized, executed and
delivered by us and is a valid and binding obligation
enforceable against us in accordance with its terms.
(e) Our compliance with all of the provisions of this Agreement
will not conflict with or result in a violation of the
provisions of our charter or by-laws, or any statute or any
judgment, decree, order, rule or regulation of any court or
governmental agency or body having jurisdiction over us.
4. You hereby covenant and agree with us as follows:
(a) You shall be an independent contractor and neither you nor any of
your directors, partners, officers or employees as such, is or
shall be an employee of us or of the Fund. You are responsible
for your own conduct and the employment, control and conduct of
your agents and employees and for injury to such agents or
employees or to others through your agents or employees.
(b) You or one or more Participating Insurance Companies will be
responsible for insuring compliance with all applicable laws and
regulations of any regulatory body having jurisdiction over you
or Participating Contracts and Policies.
(c) No person is authorized to make any representations concerning
Shares except those contained in the Prospectus relating thereto
and in such printed information as issued by us for use as
information supplemental to the prospectus. In offering
Participating Contracts and Policies you shall, with respect to
the Fund and the Shares, rely solely on the representations
contained in the Prospectus and in the above-mentioned
supplemental information.
(d) You are not entitled to any compensation whatsoever from us or
the Fund with respect to offers of Participating Contracts and
Policies.
(e) With respect to payments to be made to us pursuant to a Rule
12b-1 Plan for the Fund, you will not seek reimbursement for
administrative and recordkeeping services under the Fund's Rule
12b-1 Plan that have been or will be paid for by any fees or
charges imposed on owners of Participating Contracts and Policies
by a Participating Insurance Company for such services. This
limitation does not, however, apply to profits that you earn from
fees and charges under Participating Contracts and Policies for
your nondistribution-related costs and expenses, such as
mortality and expense risk charges under Participating Contracts
and Policies, which profits may be available for your use to pay
distribution and other expense incurred by you. Further, this
3
<PAGE>
provision does not restrict you from receiving sales charges on
purchases and redemptions, consistent with applicable law, made
under or redemption proceeds from a Participating Contract or
Policy at the same time that you are seeking reimbursement for
expenses under the Fund's Rule 12b-1 Plan.
5. We hereby covenant and agree with you as follows:
(a) If, at any time when a Prospectus relating to the Shares is
required to be delivered under the 1940 Act, the 1933 Act or
the Rules and Regulations, we become aware of the occurrence
of any event as a result of which the Prospectus as then
amended or supplemented would include any untrue statement
of a material fact, or omit to state a material fact
necessary to make the statements therein, in light of the
circumstances under which made, not misleading, or if we
become aware that it has become necessary at any time to
amend or supplement the Prospectus to comply with the 1940
Act, the 1933 Act or the Rules and Regulations, we will
promptly notify you and promptly request the Fund to prepare
and to file with the Commission an amendment to the
Registration Statement or supplement to the Prospectus which
will correct such statement or omission or an amendment or
supplement which will effect such compliance, and deliver to
you copies of any such amendment or supplement.
(b) We will cooperate with you in taking such action as may be
necessary to qualify the Shares for offering and sale under
the securities or Blue Sky laws of any state or jurisdiction
as you may request and will continue such qualification in
effect so long as is required by applicable law in
connection with the distribution of Shares.
(c) We shall reimburse you, subject to the minimum amounts set
forth in the attached schedule, for those distribution and
shareholder servicing-related expenses that are permitted to
be paid for by the Fund under the Fund's Rule 12b-1 Plan and
for which (i) you submit documentation, as may be requested
by us or by the Fund's Board of Trustees, and (ii) we
receive payment for such expenses from the Fund under the
Fund's Rule 12b-1 Plan. We shall remit to you as promptly as
reasonably practicable all payments received by us from the
Fund for remittance to you pursuant to the Fund's Rule 12b-1
Plan.
6. We reserve the right in our discretion, with 30 days' written
notice, to suspend sales or withdraw the offering of Shares
entirely, as to any person or generally, except that sales of
Shares may be suspended or the offering of Shares withdrawn
without notice (i) if the continued offering or sale of Shares
would violate any applicable statute or regulation, order or
decree of any court, governmental agency or self-regulatory
organization having jurisdiction, or (ii) if in the sole
discretion of the Trustees of the Fund, including a majority of
those Trustees who are not "interested persons" (as defined in
the 1940 Act) of the Fund or of its investment adviser, such
action is determined to be necessary in the best interests of the
Shareholders of any Portfolio. We reserve the right to amend this
Agreement at any time, and you agree that the sale of
Participating Contracts and Policies, after notice of any such
amendment has been sent to you, including a written notice from
4
<PAGE>
Investor Services stating that the amendment is necessary to
prevent the continued offering or sale of Shares from violating
any applicable statute or regulation, order or decree of any
court, governmental agency or self-regulatory organization having
jurisdiction, shall constitute your agreement to any such
amendment.
7. If we elect to provide to you for the purpose of your offering
Participating Contracts and Policies copies of any Prospectus
relating to the Shares and printed information supplemental
thereto, we shall furnish you with such copies as you reasonably
request upon the payment of reasonable charges therefor by you or
one or more Participating Insurance Companies. If we elect not to
provide such copies of such documents, you or one or more
Participating Insurance Companies shall bear the entire cost of
printing copies for your use. You shall not use such copies of
such documents printed by you or one or more Participating
Insurance Companies until you shall have furnished us with a copy
thereof and we either have given you written approval for use or
twenty days shall have elapsed following our receipt thereof and
we have not objected thereto in writing.
8. (a) You will indemnify and hold harmless Investor Services and
each of its directors and officers and each person, if any,
who controls Investor Services within the meaning of Section
15 of the 1933 Act, against any loss, liability, damages,
claim or expense (including the reasonable cost of
investigating or defending any alleged loss, liability,
damages, claim or expense and reasonable counsel fees
incurred in connection therewith), arising by reason of any
person's acquiring any Shares, which may be based upon the
1933 Act or any other statute or common law, and which (i)
may be based upon any wrongful act by you, any of your
employees or representatives, any affiliate of or any person
acting on behalf of you, or (ii) may be based upon any
untrue statement or alleged untrue statement of a material
fact contained in a registration statement or prospectus
covering Shares or any amendment thereof or supplement
thereto or the omission or alleged omission to state therein
a material fact required to be stated therein or necessary
to make the statements therein not misleading if such a
statement or omission was made in reliance upon information
furnished to us or the Fund by you, or (iii) may be based on
any untrue statement or alleged untrue statement of a
material fact contained in a registration statement or
prospectus covering insurance products sold by you, or any
amendments or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statement or
statements therein not misleading, unless such statement or
omission was made in reliance upon information furnished to
you or a Participating Insurance Company by or on behalf of
Investor Services or the Fund; provided, however, that in no
case (i) is the indemnity by you in favor of any person
indemnified to be deemed to protect Investor Services or any
such person against any liability to which Investor Services
or any such person would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the
performance of its or his duties or by reason of its or his
reckless disregard of its obligations and duties under this
Agreement, or (ii) are you to be liable under your indemnity
agreement contained in this paragraph with respect to any
5
<PAGE>
claim made against Investor Services or any person
indemnified unless Investor Services or such person, as the
case may be, shall have notified you in writing within a
reasonable time after the summons or other first legal
process giving information of the nature of the claim shall
have been served upon Investor Services or upon such person
(or after Investor Services or such person shall have
received notice of such service on any designated agent),
but failure to notify you of any such claim shall not
relieve you from any liability which you may have to
Investor Services or any person against whom such action is
brought otherwise than on account of your indemnity
agreement contained in this paragraph. You shall be entitled
to participate, at your own expense, in the defense, or, if
you so elect, to assume the defense of any suit brought to
enforce any such liability, but, if you elect to assume the
defense, such defense shall be conducted by counsel chosen
by you and satisfactory to Investor Services, or to its
officers or directors, or to any controlling person or
persons, defendant or defendants in the suit. In the event
that you assume the defense of any such suit and retain such
counsel, Investor Services or such officers or directors or
controlling person or persons, defendant or defendants in
the suit, shall bear the fees and expenses of any additional
counsel retained by them, but, in case you do not elect to
assume the defense or any such suit, you shall reimburse
Investor Services and such officers, directors or
controlling person or persons, defendant of defendants in
such suit, for the reasonable fees and expenses of any
counsel retained by them. You agree promptly to notify
Investor Services of the commencement of any litigation or
proceedings against it in connection with the offer, issue
and sale of any shares.
(b) Investor Services will indemnify and hold harmless you and
each of your directors and officers and each person, if any,
who controls you within the meaning of Section 15 of the
1933 Act, against any loss, liability, damages, claim or
expense (including the reasonable cost of investigating or
defending any alleged loss, liability, damages, claim or
expense and reasonable counsel fees incurred in connection
therewith), arising by reason of any person's acquiring any
Shares, which may be based upon the 1933 Act or any other
statute or common law, and which (i) may be based upon any
wrongful act by Investor Services, any of its employees or
representatives, or (ii) may be based upon any untrue
statement or alleged untrue statement of a material fact
contained in a registration statement or prospectus covering
Shares or any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statements therein not misleading unless such statement or
omission was made in reliance upon information furnished to
Investor Services or the Fund by you or (iii) may be based
on any untrue statement or alleged untrue statement of a
material fact contained in a registration statement or
prospectus covering insurance products sold by you, or any
amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statement or
statements therein not misleading, if such statement or
omission was made in reliance upon information furnished to
you by or on behalf of Investor Services or the Fund;
6
<PAGE>
provided, however, that in no case (i) is the indemnity by
Investor Services in favor of any person indemnified to be
deemed to protect you or any such person against any
liability to which you or any such person would otherwise be
subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of your or his duties by
reason of your or his reckless disregard of your or his
obligations and duties under this Agreement, or (ii) is
Investor Services to be liable under its indemnity agreement
contained in this paragraph with respect to any claim made
against you or any person indemnified unless you or such
person, as the case may be, shall have notified Investor
Services in writing within a reasonable time after the
summons or other first legal process giving information of
the nature of the claim shall have been served upon you or
upon such person (or after you or such person shall have
received notice of such service on any designated agent),
but failure to notify Investor Services of any such claim
shall not relieve Investor Services from any liability to
which Investor Services may have to you or any person
against whom such action is brought otherwise than on
account of its indemnity agreement contained in this
paragraph. Investor Services shall be entitled to
participate, at its own expense, in the defense, or, if it
so elects, to assume the defense of any suit brought to
enforce any such liability, but, if it elects to assume the
defense, such defense shall be conducted by counsel chosen
by Investor Services and satisfactory to you, or to your
officers or directors, or to any controlling person or
persons, defendant or defendants in the suit. In the event
that Investor Services assumes the defense of any such suit
and retains such counsel, you or such officers or directors
or controlling person or persons, defendant or defendants in
the suit, shall bear the fees and expenses of any additional
counsel retained by you, but, in case Investor Services does
not elect to assume the defense of any such suit, Investor
Services shall reimburse you and such officers, directors or
controlling person or persons, defendant or defendants in
such suit, for the reasonable fees and expenses of any
counsel retained by you. Investor Services agrees promptly
to notify you of the commencement of any litigation or
proceedings against it in connection with the offer, issue
and sale of any Shares.
9. The indemnities, representations, warranties, covenants and
agreements of each party to this Agreement as set forth in this
Agreement will remain in full force and effect regardless of any
investigation made by or on behalf of either of such parties or
any of their respective officers, directors, partners or any
controlling person, and will survive delivery of and payment for
the Shares.
10. Any provision of this Agreement which may be determined by
competent authority to be prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to
the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such
prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other
jurisdiction. To the extent permitted by applicable law, each
party hereto waives any provision of law which renders any
provision hereof prohibited or unenforceable in any respect.
7
<PAGE>
11. This Agreement constitutes the entire agreement among the parties
concerning the subject matter hereof, and supersedes any and all
prior understandings.
12. This Agreement shall automatically terminate in the event of its
assignment. This Agreement may be terminated at any time by
either party by 30 days' written notice given to the other party,
except that the Agreement may be terminated by Investor Services
without notice (i) if the continued offering or sale of Shares
would violate any applicable statute or regulation, order or
decree of any court, governmental agency or self-regulatory
organization having jurisdiction, or (ii) if in the sole
discretion of the Trustees of the Fund, including a majority of
those Trustees who are not "interested persons" (as defined in
the 1940 Act) of the Fund or of its investment adviser, such
action is determined to be necessary in the best interests of the
Shareholders of any Portfolio. The obligation of each party to
indemnify the other party pursuant to paragraph 8 hereof shall
apply with respect to any Shares sold before or after such
termination. To the extent we receive payments under any
provision of this Agreement pursuant to a Rule 12b-1 Plan for the
Fund, both you and we understand and agree that this Agreement
will be subject to the applicable approval, reporting and
termination requirements as set forth in Rule 12b-1.
13. Any notice hereunder shall be duly given if mailed or telegraphed
to the other party hereto at the address specified below. This
Agreement shall be governed by and construed in accordance with
the laws of The Commonwealth of Massachusetts.
14. This Agreement may be executed in any number of counterparts
which, taken together shall constitute one and the same
instrument. This Agreement shall become effective upon receipt by
us of your acceptance hereof.
15. This Agreement may not be modified or amended except by a written
instrument duly executed by the parties hereto.
SCUDDER INVESTOR SERVICES, INC.
By:
____________________________
David S. Lee
President
Two International Place
Boston, Massachusetts 02110
The undersigned hereby accepts
the offer set forth in the above
letter.
[REGISTERED BROKER-DEALER]
8
<PAGE>
Dated:_______ By:________________________
Authorized Representative
Address:
9
Exhibit 9(c)(9)(1)
PARTICIPATION AGREEMENT
PARTICIPATION AGREEMENT (the "Agreement") made by and between SCUDDER
VARIABLE LIFE INVESTMENT FUND (the "Fund"), a Massachusetts business trust
created under a Declaration of Trust dated March 15, 1985, as amended, with a
principal place of business in Boston, Massachusetts and [PARTICIPATING
INSURANCE COMPANY], a [STATE OF INCORPORATION] corporation (the "Company"), with
a principal place of business in [PRINCIPAL PLACE OF BUSINESS, CITY, STATE] on
behalf of [SEPARATE ACCOUNT NAME] , a separate account of the Company, and any
other separate account of the Company as designated by the Company from time to
time, upon written notice to the Fund in accordance with Section 9 herein (each,
an "Account").
WHEREAS, the Fund acts as the investment vehicle for the separate
accounts established for variable life insurance policies and variable annuity
contracts (collectively referred to herein as "Variable Insurance Products") to
be offered by insurance companies which have entered into participation
agreements substantially identical to this Agreement ("Participating Insurance
Companies") and their affiliated insurance companies; and
WHEREAS, the beneficial interest in the Fund is divided into several
series of shares of beneficial interest without par value ("Shares"), and
additional series of Shares may be established, each designated a "Portfolio"
and representing the interest in a particular managed portfolio of securities;
and
WHEREAS, each Portfolio of the Fund, except the Money Market Portfolio,
is divided into two classes of Shares, and additional classes of Shares may be
established; and
WHEREAS, the Parties desire to evidence their agreement as to certain
other matters,
NOW THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements hereinafter contained, the parties hereto agree as
follows:
1. Duty of Fund to Sell.
---------------------
The Fund shall make its Shares available for purchase at the applicable
net asset value per Share by Participating Insurance Companies and their
affiliates and separate accounts on those days on which the Fund calculates its
<PAGE>
net asset value pursuant to rules of the Securities and Exchange Commission;
provided, however, that the Trustees of the Fund may refuse to sell Shares of
any Portfolio to any person, or suspend or terminate the offering of Shares of
any Portfolio, if such action is required by law or by regulatory authorities
having jurisdiction or is, in the sole discretion of the Trustees, necessary in
the best interest of the shareholders of any Portfolio.
2. Fund Materials.
---------------
The Fund, at its expense, shall provide the Company or its designee
with camera-ready copy or computer diskette versions of all prospectuses,
statements of additional information, annual and semi-annual reports and proxy
materials (collectively, "Fund Materials") to be printed and distributed by the
Company or its broker/dealer to the Company's existing or prospective contract
owners, as appropriate. The Company agrees to bear the cost of printing and
distributing such Fund Materials.
3. Requirement to Execute Participation Agreement; Requests.
---------------------------------------------------------
Each Participating Insurance Company shall, prior to purchasing Shares
in the Fund, execute and deliver a participation agreement in a form
substantially identical to this Agreement.
The Fund shall make available, upon written request from the
Participating Insurance Company given in accordance with Paragraph 9, to each
Participating Insurance Company which has executed an Agreement and which
Agreement has not been terminated pursuant to Paragraph 7 (i) a list of all
other Participating Insurance Companies, and (ii) a copy of the Agreement as
executed by any other Participating Insurance Company.
The Fund shall also make available upon request to each Participating
Insurance Company which has executed an Agreement and which Agreement has not
been terminated pursuant to Paragraph 7, the net asset value of any Portfolio of
the Fund as of any date upon which the Fund calculates the net asset value of
its Portfolios for the purpose of purchase and redemption of Shares.
4. Indemnification.
----------------
(a) The Company agrees to indemnify and hold harmless the Fund and each
of its Trustees and officers and each person, if any, who controls the Fund
within the meaning of Section 15 of the Securities Act of 1933 (the "Act")
against any and all losses, claims, damages, liabilities or litigation
2
<PAGE>
(including legal and other expenses), arising out of the acquisition of any
Shares by any person, to which the Fund or such Trustees, officers or
controlling person may become subject under the Act, under any other statute, at
common law or otherwise, which (i) may be based upon any wrongful act by the
Company, any of its employees or representatives, any affiliate of or any person
acting on behalf of the Company or a principal underwriter of its insurance
products, or (ii) may be based upon any untrue statement or alleged untrue
statement of a material fact contained in a registration statement or prospectus
covering Shares or any amendment thereof or supplement thereto or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading if such a
statement or omission was made in reliance upon information furnished to the
Fund by the Company, or (iii) may be based on any untrue statement or alleged
untrue statement of a material fact contained in a registration statement or
prospectus covering insurance products sold by the Company or any insurance
company which is an affiliate thereof, or any amendments or supplement thereto,
or the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statement or statements therein not
misleading, unless such statement or omission was made in reliance upon
information furnished to the Company or such affiliate by or on behalf of the
Fund; provided, however, that in no case (i) is the Company's indemnity in favor
of a Trustee or officer or any other person deemed to protect such Trustee or
officer or other person against any liability to which any such person would
otherwise be subject by reason of willful misfeasance, bad faith, or gross
negligence in the performance of his duties or by reason of his reckless
disregard of obligations and duties under this Agreement or (ii) is the Company
to be liable under its indemnity agreement contained in this Paragraph 4 with
respect to any claim made against the Fund or any person indemnified unless the
Fund or such person, as the case may be, shall have notified the Company in
writing pursuant to Paragraph 9 within a reasonable time after the summons or
other first legal process giving information of the nature of the claims shall
have been served upon the Fund or upon such person (or after the Fund or such
person shall have received notice of such service on any designated agent), but
failure to notify the Company of any such claim shall not relieve the Company
from any liability which it has to the Fund or any person against whom such
action is brought otherwise than on account of its indemnity agreement contained
3
<PAGE>
in this Paragraph 4. The Company shall be entitled to participate, at its own
expense, in the defense, or, if it so elects, to assume the defense of any suit
brought to enforce any such liability, but, if it elects to assume the defense,
such defense shall be conducted by counsel chosen by it and satisfactory to the
Fund, to its officers and Trustees, or to any controlling person or persons,
defendant or defendants in the suit. In the event that the Company elects to
assume the defense of any such suit and retain such counsel, the Fund, such
officers and Trustees or controlling person or persons, defendant or defendants
in the suit, shall bear the fees and expenses of any additional counsel retained
by them, but, in case the Company does not elect to assume the defense of any
such suit, the Company will reimburse the Fund, such officers and Trustees or
controlling person or persons, defendant or defendants in such suit, for the
reasonable fees and expenses of any counsel retained by them. The Company agrees
promptly to notify the Fund pursuant to Paragraph 9 of the commencement of any
litigation or proceedings against it in connection with the issue and sale of
any Shares.
(b) The Fund agrees to indemnify and hold harmless the Company and each
of its directors and officers and each person, if any, who controls the Company
within the meaning of Section 15 of the Act against any and all losses, claims,
damages, liabilities or litigation (including legal and other expenses) to which
it or such directors, officers or controlling person may become subject under
the Act, under any other statute, at common law or otherwise, arising out of the
acquisition of any Shares by any person which (i) may be based upon any wrongful
act by the Fund, any of its employees or representatives or a principal
underwriter of the Fund, or (ii) may be based upon any untrue statement or
alleged untrue statement of a material fact contained in a registration
statement or prospectus covering Shares or any amendment thereof or supplement
thereto or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading unless such statement or omission was made in reliance upon
information furnished to the Fund by the Company or (iii) may be based on any
untrue statement or alleged untrue statement of a material fact contained in a
registration statement or prospectus covering insurance products sold by the
Company, or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statement or statements therein not misleading, if such
4
<PAGE>
statement or omission was made in reliance upon information furnished to the
Company by or on behalf of the Fund; provided, however, that in no case (i) is
the Fund's indemnity in favor of a director or officer or any other person
deemed to protect such director or officer or other person against any liability
to which any such person would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence in the performance of his duties or
by reason of his reckless disregard of obligations and duties under this
Agreement or (ii) is the Fund to be liable under its indemnity agreement
contained in this Paragraph 4 with respect to any claims made against the
Company or any such director, officer or controlling person unless it or such
director, officer or controlling person, as the case may be, shall have notified
the Fund in writing pursuant to Paragraph 9 within a reasonable time after the
summons or other first legal process giving information of the nature of the
claim shall have been served upon it or upon such director, officer or
controlling person (or after the Company or such director, officer or
controlling person shall have received notice of such service on any designated
agent), but failure to notify the Fund of any claim shall not relieve it from
any liability which it may have to the person against whom such action is
brought otherwise than on account of its indemnity agreement contained in this
Paragraph. The Fund will be entitled to participate at its own expense in the
defense, or, if it so elects, to assume the defense of any suit brought to
enforce any such liability, but if the Fund elects to assume the defense, such
defense shall be conducted by counsel chosen by it and satisfactory to the
Company, its directors, officers or controlling person or persons, defendant or
defendants, in the suit. In the event the Fund elects to assume the defense of
any such suit and retain such counsel, the Company, its directors, officers or
controlling person or persons, defendant or defendants in the suit, shall bear
the fees and expenses of any additional counsel retained by them, but, in case
the Fund does not elect to assume the defense of any such suit, it will
reimburse the Company or such directors, officers or controlling person or
persons, defendant or defendants in the suit, for the reasonable fees and
expenses of any counsel retained by them. The Fund agrees promptly to notify the
Company pursuant to Paragraph 9 of the commencement of any litigation or
proceedings against it or any of its officers or Trustees in connection with the
issuance or sale of any Shares.
5
<PAGE>
The provisions of this Section 4 shall survive the termination of the
Agreement.
5. Procedure for Resolving Irreconcilable Conflicts.
-------------------------------------------------
(a) The Trustees of the Fund will monitor the operations of the Fund
for the existence of any material irreconcilable conflict among the interests of
all the contract holders and policy owners of Variable Insurance Products (the
"Participants") of all separate accounts investing in the Fund. An
irreconcilable material conflict may arise, among other things, from: (a) an
action by any state insurance regulatory authority; (b) a change in applicable
insurance laws or regulations; (c) a tax ruling or provision of the Internal
Revenue Code or the regulations thereunder; (d) any other development relating
to the tax treatment of insurers, contract holders or policy owners or
beneficiaries of Variable Insurance Products; (e) the manner in which the
investments of any Portfolio are being managed; (f) a difference in voting
instructions given by variable annuity contract holders, on the one hand, and
variable life insurance policy owners, on the other hand, or by the contract
holders or policy owners of different participating insurance companies; or (g)
a decision by an insurer to override the voting instructions of Participants.
(b) The Company will be responsible for reporting any potential or
existing conflicts to the Trustees of the Fund. The Company will be responsible
for assisting the Trustees in carrying out their responsibilities under this
Paragraph 5(b) and Paragraph 5(a), by providing the Trustees with all
information reasonably necessary for the Trustees to consider the issues raised.
The Fund will also request its investment adviser to report to the Trustees any
such conflict which comes to the attention of the adviser.
(c) If it is determined by a majority of the Trustees of the Fund, or a
majority of its disinterested Trustees, that a material irreconcilable conflict
exists involving the Company, the Company shall, at its expense, and to the
extent reasonably practicable (as determined by a majority of the disinterested
Trustees), take whatever steps are necessary to eliminate the irreconcilable
material conflict, including withdrawing the assets allocable to some or all of
the separate accounts from the Fund or any Portfolio or class thereof and
reinvesting such assets in a different investment medium, including another
Portfolio of the Fund or class thereof, offering to the affected Participants
6
<PAGE>
the option of making such a change or establishing a new funding medium
including a registered investment company.
For purposes of this Paragraph 5(c), the Trustees, or the disinterested
Trustees, shall determine whether or not any proposed action adequately remedies
any irreconcilable material conflict. In the event of a determination of the
existence of an irreconcilable material conflict, the Trustees shall cause the
Fund to take such action, such as the establishment of one or more additional
Portfolios or classes, as they in their sole discretion determine to be in the
interest of all shareholders and Participants in view of all applicable factors,
such as cost, feasibility, tax, regulatory and other considerations. In no event
will the Fund be required by this Paragraph 5(c) to establish a new funding
medium for any variable contract or policy.
The Company shall not be required by this Paragraph 5(c) to establish a
new funding medium for any variable contract or policy if an offer to do so has
been declined by a vote of a majority of the Participants materially adversely
affected by the material irreconcilable conflict. The Company will recommend to
its Participants that they decline an offer to establish a new funding medium
only if the Company believes it is in the best interest of the Participants.
(d) The Trustees' determination of the existence of an irreconcilable
material conflict and its implications promptly shall be communicated to all
Participating Insurance Companies by written notice thereof delivered or mailed,
first class postage prepaid.
6. Voting Privileges.
------------------
The Company shall be responsible for assuring that its separate account
or accounts participating in the Fund shall use a calculation method of voting
procedures substantially the same as the following: those Participants permitted
to give instructions and the number of Shares for which instructions may be
given will be determined as of the record date for the Fund shareholders'
meeting, which shall not be more than 60 days before the date of the meeting.
Whether or not voting instructions are actually given by a particular
Participant, all Fund shares held in any separate account or sub-account thereof
and attributable to policies will be voted for, against, or withheld from voting
on any proposition in the same proportion as (i) the aggregate record date cash
value held in such sub-account for policies giving instructions, respectively,
to vote for, against, or withhold votes on such proposition, bears to (ii) the
7
<PAGE>
aggregate record date cash value held in the sub-account for all policies for
which voting instructions are received. Participants continued in effect under
lapse options will not be permitted to give voting instructions. Shares held in
any other insurance company general or separate account or sub-account thereof
will be voted in the proportion specified in the second preceding sentence for
shares attributable to policies.
7. Duration and Termination.
-------------------------
This Agreement shall continue in effect for five (5) years from the
date of its execution. This Agreement may be terminated at any time, at the
option of either of the Company or the Fund, when neither the Company, any
insurance company nor the separate account or accounts of such insurance company
which is an affiliate thereof which is not a Participating Insurance Company own
any Shares of the Fund or may be terminated by either party to the Agreement
upon a determination by a majority of the Trustees of the Fund, or a majority of
its disinterested Trustees, following certification thereof by a Participating
Insurance Company given in accordance with Paragraph 9 that an irreconcilable
conflict exists among the interests of (i) all contract holders and policy
holders of Variable Insurance Products of all separate accounts or (ii) the
interests of the Participating Insurance Companies investing in the Fund. If
this Agreement is so terminated, the Fund may, at any time thereafter,
automatically redeem the Shares of any Portfolio held by a Participating
Shareholder.
8. Compliance.
-----------
The Fund will comply with the provisions of Section 4240(a) of the New
York Insurance Law.
Each Portfolio of the Fund will use its best efforts to comply with the
provisions of Section 817(h) of the Internal Revenue Code of 1986, as amended
(the "Code"), relating to diversification requirements for variable annuity,
endowment and life insurance contracts. Specifically, each Portfolio will 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) in the case of variable
life insurance contracts only, the diversification requirement of Section
817(h)(1) of the Code by having all or part of its assets invested in U.S.
8
<PAGE>
Treasury securities which qualify for the "Special Rule for Investments in
United States Obligations" specified in Section 817(h)(3) of the Code. The Fund
will notify the Company immediately upon having a reasonable basis for believing
that a Portfolio has ceased to comply with the requirements of Section 817(h) of
the Code or that the Portfolio might not so comply in the future.
The provisions of Paragraphs 5 and 6 of this Agreement shall be
interpreted in a manner consistent with any Rule or order of the Securities and
Exchange Commission under the Investment Company Act of 1940, as amended,
applicable to the parties hereto.
No Shares of any Portfolio of the Fund may be sold to the general
public.
9. Notices.
--------
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
Scudder Variable Life Investment Fund
Two International Place
Boston, Massachusetts 02110
(617) 295-2275
Attn: David B. Watts
If to the Company:
10. Massachusetts Law to Apply.
---------------------------
This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of The Commonwealth of Massachusetts.
11. Miscellaneous.
--------------
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, 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. No Portfolio shall
9
<PAGE>
be liable for any obligations properly attributable to any other Portfolio.
The captions in this Agreement are included for convenience of
reference only and in no way define or delineate 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 taken together shall
constitute one and the same instrument.
12. Entire Agreement.
-----------------
This Agreement incorporates the entire understanding and agreement
among the parties hereto, and supersedes any and all prior understandings and
agreements between the parties hereto with respect to the subject matter hereof.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the ____ day of
__________, 1996.
SEAL SCUDDER VARIABLE LIFE
INVESTMENT FUND
By:________________________________
David B. Watts
President
SEAL [PARTICIPATING INSURANCE
COMPANY]
By:________________________________
Its:_______________________________
10
Exhibit 9(e)(7)
FUND ACCOUNTING SERVICES AGREEMENT
THIS AGREEMENT is made on the 1st day of May, 1996 between Scudder Variable Life
Investment Fund (the "Fund"), on behalf of Global Discovery Portfolio
(hereinafter called the "Portfolio"), a registered open-end management
investment company with its principal place of business in Boston, Massachusetts
and Scudder Fund Accounting Corporation, with its principal place of business in
Boston, Massachusetts (hereinafter called "FUND ACCOUNTING").
WHEREAS, the Portfolio has need for certain accounting services which FUND
ACCOUNTING is willing and able to provide;
NOW THEREFORE in consideration of the mutual promises herein made, the Fund and
FUND ACCOUNTING agree as follows:
Section 1. Duties of FUND ACCOUNTING - General
FUND ACCOUNTING is authorized to act under the terms of this Agreement
as the Portfolio's fund accounting agent, and as such FUND ACCOUNTING
shall:
a. Maintain and preserve all accounts, books, financial records and
other documents as are required of the Fund under Section 31 of
the Investment Company Act of 1940 (the "1940 Act") and Rules
31a-1, 31a-2 and 31a-3 thereunder, applicable federal and state
laws and any other law or administrative rules or procedures
which may be applicable to the Fund on behalf of the Portfolio,
other than those accounts, books and financial records required
to be maintained by the Fund's custodian or transfer agent and/or
books and records maintained by all other service providers
necessary for the Fund to conduct its business as a registered
[open/closed] -end management investment company. All such books
and records shall be the property of the Fund and shall at all
times during regular business hours be open for inspection by,
and shall be surrendered promptly upon request of, duly
authorized officers of the Fund. All such books and records shall
at all times during regular business hours be open for
inspection, upon request of duly authorized officers of the Fund,
by employees or agents of the Fund and employees and agents of
the Securities and Exchange Commission.
b. Record the current day's trading activity and such other proper
bookkeeping entries as are necessary for determining that day's
net asset value and net income.
c. Render statements or copies of records as from time to time are
reasonably requested by the Fund.
d. Facilitate audits of accounts by the Fund's independent public
accountants or by any other auditors employed or engaged by the
Fund or by any regulatory body with jurisdiction over the Fund.
e. Compute the Portfolio's net asset value per share, and, if
applicable, its public offering price and/or its daily dividend
rates and money market yields, in accordance with Section 3 of
the Agreement and notify the Fund and such other persons as the
Fund may reasonably request of the net asset value per share, the
public offering price and/or its daily dividend rates and money
market yields.
Section 2. Valuation of Securities
Securities shall be valued in accordance with (a) the Fund's
Registration Statement, as amended or supplemented from time to time
(hereinafter referred to as the "Registration Statement"); (b) the
resolutions of the Board of Trustees of the Fund at the time in force
and applicable, as they may from time to time be delivered to FUND
ACCOUNTING, and (c) Proper Instructions from such officers of the Fund
or other persons as are from time to time authorized by the Board of
Trustees of the Fund to give instructions with respect to computation
and determination of the net asset value. FUND ACCOUNTING may use one
or more external pricing services, including broker-dealers, provided
that an appropriate officer of the Fund shall have approved such use in
advance.
<PAGE>
Section 3. Computation of Net Asset Value, Public Offering Price, Daily
Dividend Rates and Yields
FUND ACCOUNTING shall compute the Portfolio's net asset value,
including net income, in a manner consistent with the specific
provisions of the Registration Statement. Such computation shall be
made as of the time or times specified in the Registration Statement.
FUND ACCOUNTING shall compute the daily dividend rates and money market
yields, if applicable, in accordance with the methodology set forth in
the Registration Statement.
Section 4. FUND ACCOUNTING's Reliance on Instructions and Advice
In maintaining the Portfolio's books of account and making the
necessary computations FUND ACCOUNTING shall be entitled to receive,
and may rely upon, information furnished it by means of Proper
Instructions, including but not limited to:
a. The manner and amount of accrual of expenses to be recorded on
the books of the Portfolio;
b. The source of quotations to be used for such securities as
may not be available through FUND ACCOUNTING's normal pricing
services;
c. The value to be assigned to any asset for which no price
quotations are readily available;
d. If applicable, the manner of computation of the public
offering price and such other computations as may be
necessary;
e. Transactions in portfolio securities;
f. Transactions in shares of beneficial interest.
FUND ACCOUNTING shall be entitled to receive, and shall be entitled to
rely upon, as conclusive proof of any fact or matter required to be
ascertained by it hereunder, a certificate, letter or other instrument
signed by an authorized officer of the Fund or any other person
authorized by the Fund's Board of Trustees.
FUND ACCOUNTING shall be entitled to receive and act upon advice of
Counsel (which may be Counsel for the Fund) at the reasonable expense
of the Portfolio and shall be without liability for any action taken or
thing done in good faith in reliance upon such advice.
FUND ACCOUNTING shall be entitled to receive, and may rely upon,
information received from the Transfer Agent.
Section 5. Proper Instructions
"Proper Instructions" as used herein means any certificate, letter or
other instrument or telephone call reasonably believed by FUND
ACCOUNTING to be genuine and to have been properly made or signed by
any authorized officer of the Fund or person certified to FUND
ACCOUNTING as being authorized by the Board of Trustees. The Fund, on
behalf of the Portfolio, shall cause oral instructions to be confirmed
in writing. Proper Instructions may include communications effected
directly between electro-mechanical or electronic devices as from time
to time agreed to by an authorized officer of the Fund and FUND
ACCOUNTING.
The Fund, on behalf of the Portfolio, agrees to furnish to the
appropriate person(s) within FUND ACCOUNTING a copy of the Registration
Statement as in effect from time to time. FUND ACCOUNTING may
conclusively rely on the Fund's most recently delivered Registration
Statement for all purposes under this Agreement and shall not be liable
to the Portfolio or the Fund in acting in reliance thereon.
2
<PAGE>
Section 6. Standard of Care and Indemnification
FUND ACCOUNTING shall exercise reasonable care and diligence in the
performance of its duties hereunder. The Fund agrees that FUND
ACCOUNTING shall not be liable under this Agreement for any error of
judgment or mistake of law made in good faith and consistent with the
foregoing standard of care, provided that nothing in this Agreement
shall be deemed to protect or purport to protect FUND ACCOUNTING
against any liability to the Fund, the Portfolio or its shareholders to
which FUND ACCOUNTING would otherwise be subject by reason of willful
misfeasance, bad faith or negligence in the performance of its duties,
or by reason of its reckless disregard of its obligations and duties
hereunder.
The Fund agrees, on behalf of the Portfolio, to indemnify and hold
harmless FUND ACCOUNTING and its employees, agents and nominees from
all taxes, charges, expenses, assessments, claims and liabilities
(including reasonable attorneys' fees) incurred or assessed against
them in connection with the performance of this Agreement, except such
as may arise from their own negligent action, negligent failure to act
or willful misconduct. The foregoing notwithstanding, FUND ACCOUNTING
will in no event be liable for any loss resulting from the acts,
omissions, lack of financial responsibility, or failure to perform the
obligations of any person or organization designated by the Fund to be
the authorized agent of the Portfolio as a party to any transactions.
FUND ACCOUNTING's responsibility for damage or loss with respect to the
Portfolio's records arising from fire, flood, Acts of God, military
power, war, insurrection or nuclear fission, fusion or radioactivity
shall be limited to the use of FUND ACCOUNTING's best efforts to
recover the Portfolio's records determined to be lost, missing or
destroyed.
Section 7. Compensation and FUND ACCOUNTING Expenses
FUND ACCOUNTING shall be paid as compensation for its services pursuant
to this Agreement such compensation as may from time to time be agreed
upon in writing by the two parties. FUND ACCOUNTING shall be entitled
to recover its reasonable telephone, courier or delivery service, and
all other reasonable out-of-pocket, expenses as incurred, including,
without limitation, reasonable attorneys' fees and reasonable fees for
pricing services.
Section 8. Amendment and Termination
This Agreement shall continue in full force and effect until terminated
as hereinafter provided, may be amended at any time by mutual agreement
of the parties hereto and may be terminated by an instrument in writing
delivered or mailed to the other party. Such termination shall take
effect not sooner than ninety (90) days after the date of delivery or
mailing of such notice of termination. Any termination date is to be no
earlier than four months from the effective date hereof. Upon
termination, FUND ACCOUNTING will turn over to the Fund or its designee
and cease to retain in FUND ACCOUNTING files, records of the
calculations of net asset value and all other records pertaining to its
services hereunder; provided, however, FUND ACCOUNTING in its
discretion may make and retain copies of any and all such records and
documents which it determines appropriate or for its protection.
Section 9. Services Not Exclusive
FUND ACCOUNTING's services pursuant to this Agreement are not to be
deemed to be exclusive, and it is understood that FUND ACCOUNTING may
perform fund accounting services for others. In acting under this
Agreement, FUND ACCOUNTING shall be an independent contractor and not
an agent of the Fund or the Portfolio.
3
<PAGE>
Section 10. Limitation of Liability for Claims
The Fund's Declaration of Trust, dated March 15, 1985, as amended to
date (the "Declaration"), a copy of which, together with all amendments
thereto, is on file in the Office of the Secretary of State of the
Commonwealth of Massachusetts, provides that the name "Scudder Variable
Life Investment Fund" refers to the Trustees under the Declaration
collectively as trustees and not as individuals or personally, and that
no shareholder of the Fund or the Portfolio, or Trustee/Director,
officer, employee or agent of the Fund shall be subject to claims
against or obligations of the Trust or of the Portfolio to any extent
whatsoever, but that the Trust estate only shall be liable.
FUND ACCOUNTING is expressly put on notice of the limitation of
liability as set forth in the Declaration and FUND ACCOUNTING agrees
that the obligations assumed by the Fund and/or the Portfolio under
this Agreement shall be limited in all cases to the Portfolio and its
assets, and FUND ACCOUNTING shall not seek satisfaction of any such
obligation from the shareholders or any shareholder of the Fund or the
Portfolio or any other series of the Fund, or from any
Trustee/Director, officer, employee or agent of the Fund. FUND
ACCOUNTING understands that the rights and obligations of the Portfolio
under the Declaration are separate and distinct from those of any and
all other series of the Fund.
Section 11. Notices
Any notice shall be sufficiently given when delivered or mailed to the
other party at the address of such party set forth below or to such
other person or at such other address as such party may from time to
time specify in writing to the other party.
If to FUND ACCOUNTING: Scudder Fund Accounting Corporation
Two International Place
Boston, Massachusetts 02110
Attn: Vice President
If to the Fund - Portfolio: Scudder Variable Life Investment Fund
Two International Place
Boston, Massachusetts 02110
Attn: President, Secretary or Treasurer
Section 12. Miscellaneous
This Agreement may not be assigned by FUND ACCOUNTING without the
consent of the Fund as authorized or approved by resolution of its
Board of Trustees.
In connection with the operation of this Agreement, the Fund and FUND
ACCOUNTING may agree from time to time on such provisions interpretive
of or in addition to the provisions of this Agreement as in their joint
opinions may be consistent with this Agreement. Any such interpretive
or additional provisions shall be in writing, signed by both parties
and annexed hereto, but no such provisions shall be deemed to be an
amendment of this Agreement.
This Agreement shall be governed and construed in accordance with the
laws of the Commonwealth of Massachusetts.
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.
4
<PAGE>
This Agreement constitutes the entire agreement between the parties
concerning the subject matter hereof, and supersedes any and all prior
understandings.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their respective officers thereunto duly authorized and its seal to be
hereunder affixed as of the date first written above.
SCUDDER VARIABLE LIFE INVESTMENT FUND,
on behalf of Global Discovery Portfolio
By:
---------------------------------
President
SCUDDER FUND ACCOUNTING CORPORATION
By:
---------------------------------
Vice President
5
Exhibit 11
Coopers & Lybrand
Consent of Independent Accountants
To the Trustees of Scudder Variable Life Investment Portfolio:
We consent to the incorporation by reference in Post-Effective Amendment No. 22
to the Registration Statement of Scudder Variable Life Investment Portfolio on
Form N-1A, of our report dated February 7, 1997 on our audit of the financial
statements and financial highlights of Scudder Variable Life Investment Fund,
which report is included in the Annual Report to Shareholders for the period
ended December 31, 1996 which is incorporated by reference in the Post-Effective
Amendment to the Registration Statement.
We also consent to the reference to our Firm under the caption, "Experts."
/s/Coopers & Lybrand L.L.P.
---------------------------
Boston, Massachusetts Coopers & Lybrand L.L.P.
April 25, 1997
Exhibit 15(a)
SCUDDER VARIABLE LIFE INVESTMENT FUND
MASTER DISTRIBUTION PLAN
FOR CLASS B SHARES
Section 1. Scudder Variable Life Investment Fund (the "Fund") is an open-end
management investment company formed under the laws of the Commonwealth of
Massachusetts, the shares of beneficial interest ("Shares") of the portfolios of
which (each, a "Portfolio") may from time to time be offered to life insurance
companies (each, a "Life Company") for allocation to certain of their separate
accounts established for the purpose of funding variable annuity contracts and
variable life policies (collectively referred to herein as "Variable
Contracts"). The shares of each Portfolio may be issued in multiple classes, and
as used in this Plan, the term "Shares" pertains only to Class B shares of a
Portfolio.
Section 2. This Plan will pertain to Shares of each of the following Portfolios
of the Fund: International Portfolio, Bond Portfolio, Capital Growth Portfolio,
Growth and Income Portfolio, Balanced Portfolio and Global Discovery Portfolio.
This Plan shall also apply to the Class B Shares of any other Portfolio of the
Fund as shall be designated from time to time by the Board of Trustees of the
Fund in any supplement to the Plan ("Supplement").
Section 3. In order to provide for the implementation of the payments provided
for pursuant to this Distribution Plan (the "Plan"), the Fund may enter into an
Underwriting Agreement (the "Agreement") with Scudder Investor Services, Inc.
("SIS"), pursuant to which SIS will serve as the distributor of the Fund's
Shares, and pursuant to which each Portfolio participating in this Plan may pay
SIS for remittance to a Life Company for various costs incurred or paid by the
Life Company in connection with the distribution of Shares of that Portfolio.
Such Agreement, or any modification thereof, shall become effective with respect
to Class B Shares of any Portfolio in compliance with Section 12(b) of the
Investment Company Act of 1940, as amended (the "Act"), and Rule 12b-1
thereunder as the same may be amended from time to time.
Section 4. Upon effectiveness of this Plan with respect to Shares of a
Portfolio, the Fund, on behalf of such class, may make payments quarterly to SIS
for remittance to a Life Company, in order to pay or reimburse such Life Company
for Distribution Expenses (as defined below) incurred or paid (as the case may
be) by such Life Company and approved by the Fund's Board of Trustees in the
manner provided under Section 8 hereof, provided that no such payment shall be
made with respect to any quarterly period in excess of an amount determined for
such period at the annual rate of .25% of the average daily net asset value of
the Shares of such Portfolio attributable to that Life Company's Variable
Contract owners during that quarterly period. The value of the net assets of
Class B Shares of a Portfolio shall be determined in accordance with the
Declaration of Trust of the Fund, as the same may be amended from time to time.
<PAGE>
Section 5. Expenses payable pursuant to this Plan ("Distribution Expenses") may
include, but not necessarily be limited to, the following costs:
(a) of the printing and mailing of Fund prospectuses, statements of
additional information, any supplements thereto and shareholder reports for
existing and prospective Variable Contract owners;
(b) 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
Life Company, or for broker-dealer only use or retail use;
(c) of holding seminars and sales meetings designed to promote the
distribution of Fund Shares;
(d) of obtaining information and providing explanations to Variable
Contract owners regarding Fund investment objectives and policies and other
information about the Fund and its Portfolios, including the performance of the
Portfolios;
(e) of training sales personnel regarding the Fund;
(f) of compensating sales personnel in connection with the allocation of
cash values and premiums of the Variable Contracts to the Fund;
(g) of personal service and/or maintenance of Variable Contract owner
accounts with respect to Fund Shares attributable to such accounts ; and
(h) of financing any other activity that the Fund's Board of Trustees
determines is primarily intended to result in the sale of Shares.
Section 6. This Plan shall not take effect with respect to Class B Shares of a
Portfolio until it has been approved by a vote of at least a majority of the
outstanding Class B Shares of that Portfolio. For purposes of this Section 6, as
well as Section 9 and Section 10, of the Plan, the phrase "majority of the
outstanding Class B Shares" shall have the same meaning as the phrase "majority
of the outstanding voting securities" as defined in the Act.
Section 7. This Plan, together with the Agreement, shall not take effect until
they have been approved by a vote of the majority of trustees of the Fund and of
those trustees of the Fund who are not "interested persons" of the Fund (as
defined in the Act), and who have no direct or indirect financial interest in
the operation of this Plan or in the Agreement (the "Independent Trustees"),
cast in person at a meeting called for the purpose of voting on this Plan and
such Agreement.
2
<PAGE>
Section 8. This Plan shall continue in effect for as long as such continuance is
specifically approved by the trustees of the Fund and the Independent Trustees
at least annually in the manner provided in Section 7. In connection with the
annual review and approval of such continuance, SIS shall furnish the Board with
such information as the Board may reasonably request in order to enable the
Board to make an informed determination of whether the Plan should be continued.
Section 8(a) SIS shall, with respect to each Class B of each Portfolio for which
payments of Distribution Expenses are proposed to be made, submit at least
quarterly, reports (A) describing the Distribution Expenses with respect to such
class of the Portfolio incurred or paid by each Life Company since the later of
the effective date of this Plan or the previous period for which payments
hereunder have been made by that class of the Portfolio and (B) requesting
payment or reimbursement therefor (as the case may be).
In the event that amounts of Distribution Expenses are not specifically
attributable to the distribution of Shares of any particular Portfolio, SIS may
allocate Distribution Expenses to Class B of each Portfolio deemed by the Board
to be reasonably likely to benefit therefrom based upon the ratio of the average
daily net assets of each such class during the previous period to the aggregate
average daily net assets of all such classes for such period, provided, however
that any such allocation may be subject to such adjustments as SIS shall deem
appropriate to render the allocation fair and equitable under the circumstances,
which adjustments shall be approved by the Board of Trustees.
8(b) The Board of Trustees will review each quarterly report of, and
request for, payment of Distribution Expenses at its regular meeting held after
the making of such request, and SIS shall receive from the Fund, on behalf of
Class B of any Portfolio, only an amount for such Distribution Expenses as is
approved by the Board of Trustees, including a majority of the Independent
Trustees. The Fund will make payment of the amount of Distribution Expenses so
approved as soon as reasonably practicable after such approval.
Section 9. This Plan may be terminated as to Class B of a Portfolio at any time
by vote of a majority of the Independent Trustees, or by vote of a majority of
the outstanding Class B Shares of that Portfolio.
Section 10. Any Agreement related to this Plan shall be in writing and shall
provide in substance:
(a) That any such Agreement, with respect to Class B of a Portfolio, may be
terminated at any time, without payment of any penalty, by vote of a majority of
the Independent Trustees or by vote of a majority of the outstanding Class B
Shares of that Portfolio, on not more than 60 days' written notice to SIS.
(b) That such Agreement shall terminate automatically in the event of its
assignment.
3
<PAGE>
Section 11. This Plan may not be amended to increase materially the amount that
may be spent for distribution by Class B of a Portfolio without the approval of
Class B shareholders of that Portfolio, and any material amendment to the Plan
must be approved by the Board of Trustees of the Fund, including the Independent
Trustees, in the manner provided in Section 7.
Amendments to this Plan other than material amendments of the kind referred to
above may be adopted by a vote of the Board of Trustees of the Fund, including
the vote of a majority of Independent Trustees. The Board of Trustees of the
Fund, by such a vote, also may interpret this Plan and make all determinations
necessary or advisable for its administration.
Section 12. So long as this Plan is in effect, the selection and nomination of
persons to be trustees of the Fund who are not interested persons (as defined in
the Act) of the Fund shall be committed to the discretion of such disinterested
trustees then in office.
Section 13. Neither this Plan nor any other transaction between the parties
hereto pursuant to this Plan shall be invalidated or in any way affected by the
fact that any or all of the trustees, officers, stockholders, or other
representatives of the Fund are or may be "interested persons" of SIS, or any
successor or assignee thereof, or that any or all of the trustees, officers,
partners, or other representatives of SIS are or may be "interested persons" of
the Fund, except as otherwise may be provided in the Act.
IN WITNESS WHEREOF, Scudder Variable Life Investment Fund has adopted this
Master Distribution Plan as of the effective date of the post-effective
amendment of the Fund's registration statement containing disclosure concerning
the multi-class distribution system.
SCUDDER VARIABLE LIFE INVESTMENT FUND
By: _____________________________
Title:
4
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information
extracted from the Scudder Variable Life Investment
Fund Money Market Portfolio Annual Report for the
fiscal year ended December 31, 1996 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME> SCUDDER VARIABLE LIFE INVESTMENT FUND
MONEY MARKET PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 94,073,346
<INVESTMENTS-AT-VALUE> 94,073,346
<RECEIVABLES> 4,166,208
<ASSETS-OTHER> 658
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 98,240,212
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 454,586
<TOTAL-LIABILITIES> 454,586
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 97,788,109
<SHARES-COMMON-STOCK> 97,786,551
<SHARES-COMMON-PRIOR> 79,747,891
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,483)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 97,785,626
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,794,163
<OTHER-INCOME> 0
<EXPENSES-NET> 408,208
<NET-INVESTMENT-INCOME> 4,385,955
<REALIZED-GAINS-CURRENT> (917)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 4,385,038
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4,385,955)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 201,403,317
<NUMBER-OF-SHARES-REDEEMED> (187,750,612)
<SHARES-REINVESTED> 4,385,955
<NET-CHANGE-IN-ASSETS> 18,037,735
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 325,791
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 408,208
<AVERAGE-NET-ASSETS> 88,024,247
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0.05
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.46
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information
extracted from the Scudder Variable Life Investment
Fund Bond Portfolio Annual Report for the fiscal year
ended December 31, 1996 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 2
<NAME> SCUDDER VARIABLE LIFE INVESTMENT FUND
BOND PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 65,964,792
<INVESTMENTS-AT-VALUE> 66,880,533
<RECEIVABLES> 709,248
<ASSETS-OTHER> 822
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 67,590,603
<PAYABLE-FOR-SECURITIES> 1,753,343
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 67,839
<TOTAL-LIABILITIES> 1,821,182
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 63,688,867
<SHARES-COMMON-STOCK> 9,775,320
<SHARES-COMMON-PRIOR> 10,126,562
<ACCUMULATED-NII-CURRENT> 1,075,196
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 89,617
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 915,741
<NET-ASSETS> 65,769,421
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,183,772
<OTHER-INCOME> 0
<EXPENSES-NET> 377,038
<NET-INVESTMENT-INCOME> 3,806,734
<REALIZED-GAINS-CURRENT> 598,986
<APPREC-INCREASE-CURRENT> (2,514,348)
<NET-CHANGE-FROM-OPS> 1,891,372
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,405,378)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,122,227
<NUMBER-OF-SHARES-REDEEMED> (5,280,312)
<SHARES-REINVESTED> 806,843
<NET-CHANGE-IN-ASSETS> (6,745,036)
<ACCUMULATED-NII-PRIOR> 2,587,204
<ACCUMULATED-GAINS-PRIOR> (422,732)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,914,740
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 186,486
<AVERAGE-NET-ASSETS> 61,401,529
<PER-SHARE-NAV-BEGIN> 7.16
<PER-SHARE-NII> (0.41)
<PER-SHARE-GAIN-APPREC> 0.21
<PER-SHARE-DIVIDEND> 0.62
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 6.73
<EXPENSE-RATIO> 0.61
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information
extracted from the Scudder Variable Life Investment
Fund Balanced Portfolio Annual Report for the fiscal
year ended December 31, 1996 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 4
<NAME> SCUDDER VARIABLE LIFE INVESTMENT FUND
BALANCED PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 78,217,037
<INVESTMENTS-AT-VALUE> 88,773,889
<RECEIVABLES> 778,106
<ASSETS-OTHER> 1,492
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 89,553,487
<PAYABLE-FOR-SECURITIES> 1,150,199
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 60,451
<TOTAL-LIABILITIES> 1,210,650
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 72,316,232
<SHARES-COMMON-STOCK> 7,608,722
<SHARES-COMMON-PRIOR> 6,206,064
<ACCUMULATED-NII-CURRENT> 672,177
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 4,797,576
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,556,852
<NET-ASSETS> 88,342,837
<DIVIDEND-INCOME> 580,951
<INTEREST-INCOME> 2,099,138
<OTHER-INCOME> 0
<EXPENSES-NET> 471,342
<NET-INVESTMENT-INCOME> 2,208,747
<REALIZED-GAINS-CURRENT> 4,899,761
<APPREC-INCREASE-CURRENT> 1,635,671
<NET-CHANGE-FROM-OPS> 8,744,179
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,028,500)
<DISTRIBUTIONS-OF-GAINS> (1,925,657)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,336,335
<NUMBER-OF-SHARES-REDEEMED> (1,294,203)
<SHARES-REINVESTED> 360,527
<NET-CHANGE-IN-ASSETS> 20,417,048
<ACCUMULATED-NII-PRIOR> 483,837
<ACCUMULATED-GAINS-PRIOR> 1,831,568
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 372,176
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 471,342
<AVERAGE-NET-ASSETS> 78,257,738
<PER-SHARE-NAV-BEGIN> 10.95
<PER-SHARE-NII> 0.31
<PER-SHARE-GAIN-APPREC> 0.93
<PER-SHARE-DIVIDEND> 0.30
<PER-SHARE-DISTRIBUTIONS> 0.30
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.61
<EXPENSE-RATIO> 0.60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information
extracted from the Scudder Variable Life Investment
Fund Growth and Income Portfolio Annual Report for the
fiscal year ended December 31, 1996 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 8
<NAME> SCUDDER VARIABLE LIFE INVESTMENT FUND
GROWTH AND INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 74,730,607
<INVESTMENTS-AT-VALUE> 90,356,936
<RECEIVABLES> 879,519
<ASSETS-OTHER> 3,066
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 91,239,521
<PAYABLE-FOR-SECURITIES> 76,620
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 71,354
<TOTAL-LIABILITIES> 147,974
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 70,952,059
<SHARES-COMMON-STOCK> 9,724,734
<SHARES-COMMON-PRIOR> 6,510,714
<ACCUMULATED-NII-CURRENT> 716,479
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,799,669
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 15,626,340
<NET-ASSETS> 91,091,547
<DIVIDEND-INCOME> 2,451,899
<INTEREST-INCOME> 154,234
<OTHER-INCOME> 0
<EXPENSES-NET> 450,851
<NET-INVESTMENT-INCOME> 2,155,282
<REALIZED-GAINS-CURRENT> 3,798,567
<APPREC-INCREASE-CURRENT> 7,841,874
<NET-CHANGE-FROM-OPS> 13,795,723
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,781,057)
<DISTRIBUTIONS-OF-GAINS> (729,093)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,669,995
<NUMBER-OF-SHARES-REDEEMED> (2,757,898)
<SHARES-REINVESTED> 301,924
<NET-CHANGE-IN-ASSETS> 39,129,113
<ACCUMULATED-NII-PRIOR> 403,970
<ACCUMULATED-GAINS-PRIOR> 665,292
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 326,033
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 450,851
<AVERAGE-NET-ASSETS> 68,564,087
<PER-SHARE-NAV-BEGIN> 7.98
<PER-SHARE-NII> 0.27
<PER-SHARE-GAIN-APPREC> 1.46
<PER-SHARE-DIVIDEND> 0.23
<PER-SHARE-DISTRIBUTIONS> 0.11
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.37
<EXPENSE-RATIO> 0.66
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information
extracted from the Scudder Variable Life Investment
Fund Capital Growth Portfolio Annual Report for the
fiscal year ended December 31, 1996 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 3
<NAME> SCUDDER VARIABLE LIFE INVESTMENT FUND
CAPITAL GROWTH PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 368,576,394
<INVESTMENTS-AT-VALUE> 440,187,681
<RECEIVABLES> 2,723,246
<ASSETS-OTHER> 21,823
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 442,932,750
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,451,442
<TOTAL-LIABILITIES> 2,451,442
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 333,543,779
<SHARES-COMMON-STOCK> 26,691,077
<SHARES-COMMON-PRIOR> 22,392,030
<ACCUMULATED-NII-CURRENT> 1,565,989
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 33,760,206
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 71,611,334
<NET-ASSETS> 440,481,308
<DIVIDEND-INCOME> 6,354,599
<INTEREST-INCOME> 723,916
<OTHER-INCOME> 0
<EXPENSES-NET> 2,085,511
<NET-INVESTMENT-INCOME> 4,993,004
<REALIZED-GAINS-CURRENT> 33,854,212
<APPREC-INCREASE-CURRENT> 33,028,817
<NET-CHANGE-FROM-OPS> 71,879,033
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4,669,020)
<DISTRIBUTIONS-OF-GAINS> (28,547,850)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 11,627,336
<NUMBER-OF-SHARES-REDEEMED> (9,562,105)
<SHARES-REINVESTED> 2,233,815
<NET-CHANGE-IN-ASSETS> 102,812,828
<ACCUMULATED-NII-PRIOR> 1,250,850
<ACCUMULATED-GAINS-PRIOR> 28,441,999
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,870,361
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,085,511
<AVERAGE-NET-ASSETS> 393,929,723
<PER-SHARE-NAV-BEGIN> 15.08
<PER-SHARE-NII> 0.19
<PER-SHARE-GAIN-APPREC> 2.60
<PER-SHARE-DIVIDEND> 0.19
<PER-SHARE-DISTRIBUTIONS> 1.26
<RETURNS-OF-CAPITAL> 00.00
<PER-SHARE-NAV-END> 16.50
<EXPENSE-RATIO> .53
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information
extracted from the Scudder Variable Life Investment
Fund Global Discovery Portfolio Annual Report for the
fiscal year ended December 31, 1996 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 5
<NAME> SCUDDER VARIABLE LIFE INVESTMENT FUND
GLOBAL DISCOVERY PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 16,244,126
<INVESTMENTS-AT-VALUE> 16,904,247
<RECEIVABLES> 273,377
<ASSETS-OTHER> 371
<OTHER-ITEMS-ASSETS> 28,401
<TOTAL-ASSETS> 17,206,396
<PAYABLE-FOR-SECURITIES> 363,526
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 85,606
<TOTAL-LIABILITIES> 449,132
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 16,054,634
<SHARES-COMMON-STOCK> 2,647,089
<SHARES-COMMON-PRIOR> 100
<ACCUMULATED-NII-CURRENT> 44,728
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (18,886)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 676,788
<NET-ASSETS> 16,757,264
<DIVIDEND-INCOME> 39,856
<INTEREST-INCOME> 73,358
<OTHER-INCOME> 0
<EXPENSES-NET> 124,360
<NET-INVESTMENT-INCOME> (11,146)
<REALIZED-GAINS-CURRENT> 36,987
<APPREC-INCREASE-CURRENT> 676,788
<NET-CHANGE-FROM-OPS> 108,629
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,107,414
<NUMBER-OF-SHARES-REDEEMED> (460,425)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 16,756,664
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 81,029
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 124,360
<AVERAGE-NET-ASSETS> 12,382,531
<PER-SHARE-NAV-BEGIN> 6.00
<PER-SHARE-NII> 0.01
<PER-SHARE-GAIN-APPREC> 0.33
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 6.33
<EXPENSE-RATIO> 1.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information
extracted from the Scudder Variable Life Investment
Fund International Portfolio Annual Report for the
fiscal year ended December 31, 1996 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 6
<NAME> SCUDDER VARIABLE LIFE INVESTMENT FUND
INTERNATIONAL PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 587,666,211
<INVESTMENTS-AT-VALUE> 722,451,887
<RECEIVABLES> 2,355,899
<ASSETS-OTHER> 4,606,493
<OTHER-ITEMS-ASSETS> 642,355
<TOTAL-ASSETS> 730,056,634
<PAYABLE-FOR-SECURITIES> 1,838,662
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,179,445
<TOTAL-LIABILITIES> 4,018,107
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 573,908,066
<SHARES-COMMON-STOCK> 54,809,210
<SHARES-COMMON-PRIOR> 46,398,169
<ACCUMULATED-NII-CURRENT> 10,702,948
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,633,433
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 134,794,080
<NET-ASSETS> 726,038,527
<DIVIDEND-INCOME> 10,364,446
<INTEREST-INCOME> 2,548,158
<OTHER-INCOME> 0
<EXPENSES-NET> 6,773,842
<NET-INVESTMENT-INCOME> 6,138,762
<REALIZED-GAINS-CURRENT> 28,242,210
<APPREC-INCREASE-CURRENT> 55,234,650
<NET-CHANGE-FROM-OPS> 89,615,622
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (13,901,339)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 20,288,490
<NUMBER-OF-SHARES-REDEEMED> (13,044,402)
<SHARES-REINVESTED> 1,166,953
<NET-CHANGE-IN-ASSETS> 177,836,034
<ACCUMULATED-NII-PRIOR> 5,598,231
<ACCUMULATED-GAINS-PRIOR> (8,741,483)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,590,601
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,773,842
<AVERAGE-NET-ASSETS> 647,450,696
<PER-SHARE-NAV-BEGIN> 11.82
<PER-SHARE-NII> 0.12
<PER-SHARE-GAIN-APPREC> 1.60
<PER-SHARE-DIVIDEND> 0.29
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.25
<EXPENSE-RATIO> 1.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
