Filed with the Securities and Exchange Commission on March 3, 1998.
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. 24
-------
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 28
-------
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 Kemper Investments, Inc.
Two International Place, Boston, MA 02110-4103
----------------------------------------------
(Name Address of Agent for Service)
It is proposed that this filing will become effective
immediately upon filing pursuant to paragraph (b)
---
on ____________ pursuant to paragraph (b)
---
60 days after filing pursuant to paragraph (a)(i)
---
X on May 1, 1998 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.
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
MONEY MARKET 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 NOT APPLICABLE
Financial
Information
4. General INVESTMENT CONCEPT OF THE FUND;
Description of INVESTMENT OBJECTIVES AND POLICIES OF THE
Registrant PORTFOLIO; SPECIAL RISK CONSIDERATIONS;
POLICIES AND TECHNIQUES APPLICABLE TO THE
PORTFOLIO; INVESTMENT RESTRICTIONS
5. Management of the INVESTMENT ADVISER; PORTFOLIO MANAGEMENT;
Fund ADDITIONAL INFORMATION
5A. Management's NOT APPLICABLE
Discussion of Fund
Performance
6. Capital Stock and TAX STATUS, DIVIDENDS AND DISTRIBUTIONS;
Other Securities SHAREHOLDER COMMUNICATIONS; ADDITIONAL
INFORMATION
7. Purchase of DISTRIBUTOR; PURCHASES AND REDEMPTIONS;
Securities Being NET ASSET VALUE
Offered
8. Redemption or PURCHASES AND REDEMPTIONS;
Repurchase NET ASSET VALUE
9. Pending Legal NOT APPLICABLE
Proceedings
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 ORGANIZATION AND CAPITALIZATION
and History
13. Investment Objectives INVESTMENT OBJECTIVE AND POLICIES;
and Policies POLICIES AND TECHNIQUES APPLICABLE TO
THE PORTFOLIO; INVESTMENT RESTRICTIONS;
PORTFOLIO TURNOVER
14. Management of the Fund MANAGEMENT
15. Control Persons and TRUSTEES AND OFFICERS
Principal Holders of
Securities
16. Investment Advisory INVESTMENT ADVISER AND DISTRIBUTOR;
and Other Services EXPERTS
17. Brokerage Allocation ALLOCATION OF PORTFOLIO BROKERAGE
18. Capital Stock and ORGANIZATION AND CAPITALIZATION;
Other Securities ADDITIONAL INFORMATION
19. Purchase, Redemption PURCHASES AND REDEMPTIONS;
and Pricing of NET ASSET VALUE;
Securities Being DIVIDENDS AND DISTRIBUTIONS
Offered
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 NOT APPLICABLE
Financial
Information
4. General INVESTMENT CONCEPT OF THE FUND;
Description of INVESTMENT OBJECTIVES AND POLICIES OF THE
Registrant PORTFOLIO; SPECIAL RISK CONSIDERATIONS;
POLICIES AND TECHNIQUES APPLICABLE TO THE
PORTFOLIO; INVESTMENT RESTRICTIONS
5. Management of the INVESTMENT ADVISER; PORTFOLIO MANAGEMENT;
Fund ADDITIONAL INFORMATION
5A. Management's NOT APPLICABLE
Discussion of Fund
Performance
6. Capital Stock and TAX STATUS, DIVIDENDS AND DISTRIBUTIONS;
Other Securities SHAREHOLDER COMMUNICATIONS; ADDITIONAL
INFORMATION
7. Purchase of DISTRIBUTOR; PURCHASES AND REDEMPTIONS;
Securities Being NET ASSET VALUE
Offered
8. Redemption or PURCHASES AND REDEMPTIONS;
Repurchase NET ASSET VALUE
9. Pending Legal NOT APPLICABLE
Proceedings
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 ORGANIZATION AND CAPITALIZATION
and History
13. Investment Objectives INVESTMENT OBJECTIVE AND POLICIES;
and Policies POLICIES AND TECHNIQUES APPLICABLE TO
THE PORTFOLIO; INVESTMENT RESTRICTIONS;
PORTFOLIO TURNOVER
14. Management of the Fund MANAGEMENT
15. Control Persons and TRUSTEES AND OFFICERS
Principal Holders of
Securities
16. Investment Advisory INVESTMENT ADVISER AND DISTRIBUTOR;
and Other Services EXPERTS
17. Brokerage Allocation ALLOCATION OF PORTFOLIO BROKERAGE
18. Capital Stock and ORGANIZATION AND CAPITALIZATION;
Other Securities ADDITIONAL INFORMATION
19. Purchase, Redemption PURCHASES AND REDEMPTIONS;
and Pricing of NET ASSET VALUE;
Securities Being DIVIDENDS AND DISTRIBUTIONS
Offered
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 NOT APPLICABLE
Financial
Information
4. General INVESTMENT CONCEPT OF THE FUND;
Description of INVESTMENT OBJECTIVES AND POLICIES OF THE
Registrant PORTFOLIO; SPECIAL RISK CONSIDERATIONS;
POLICIES AND TECHNIQUES APPLICABLE TO THE
PORTFOLIO; INVESTMENT RESTRICTIONS
5. Management of the INVESTMENT ADVISER; PORTFOLIO MANAGEMENT;
Fund ADDITIONAL INFORMATION
5A. Management's NOT APPLICABLE
Discussion of Fund
Performance
6. Capital Stock and TAX STATUS, DIVIDENDS AND DISTRIBUTIONS;
Other Securities SHAREHOLDER COMMUNICATIONS; ADDITIONAL
INFORMATION
7. Purchase of DISTRIBUTOR; PURCHASES AND REDEMPTIONS;
Securities Being NET ASSET VALUE
Offered
8. Redemption or PURCHASES AND REDEMPTIONS;
Repurchase NET ASSET VALUE
9. Pending Legal NOT APPLICABLE
Proceedings
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 ORGANIZATION AND CAPITALIZATION
and History
13. Investment Objectives INVESTMENT OBJECTIVE AND POLICIES;
and Policies POLICIES AND TECHNIQUES APPLICABLE TO
THE PORTFOLIO; INVESTMENT RESTRICTIONS;
PORTFOLIO TURNOVER
14. Management of the Fund MANAGEMENT
15. Control Persons and TRUSTEES AND OFFICERS
Principal Holders of
Securities
16. Investment Advisory INVESTMENT ADVISER AND DISTRIBUTOR;
and Other Services EXPERTS
17. Brokerage Allocation ALLOCATION OF PORTFOLIO BROKERAGE
18. Capital Stock and ORGANIZATION AND CAPITALIZATION;
Other Securities ADDITIONAL INFORMATION
19. Purchase, Redemption PURCHASES AND REDEMPTIONS;
and Pricing of NET ASSET VALUE;
Securities Being DIVIDENDS AND DISTRIBUTIONS
Offered
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 NOT APPLICABLE
Financial
Information
4. General INVESTMENT CONCEPT OF THE FUND;
Description of INVESTMENT OBJECTIVES AND POLICIES OF THE
Registrant PORTFOLIO; SPECIAL RISK CONSIDERATIONS;
POLICIES AND TECHNIQUES APPLICABLE TO THE
PORTFOLIO; INVESTMENT RESTRICTIONS
5. Management of the INVESTMENT ADVISER; PORTFOLIO MANAGEMENT;
Fund ADDITIONAL INFORMATION
5A. Management's NOT APPLICABLE
Discussion of Fund
Performance
6. Capital Stock and TAX STATUS, DIVIDENDS AND DISTRIBUTIONS;
Other Securities SHAREHOLDER COMMUNICATIONS; ADDITIONAL
INFORMATION
7. Purchase of DISTRIBUTOR; PURCHASES AND REDEMPTIONS;
Securities Being NET ASSET VALUE
Offered
8. Redemption or PURCHASES AND REDEMPTIONS;
Repurchase NET ASSET VALUE
9. Pending Legal NOT APPLICABLE
Proceedings
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 ORGANIZATION AND CAPITALIZATION
and History
13. Investment Objectives INVESTMENT OBJECTIVE AND POLICIES;
and Policies POLICIES AND TECHNIQUES APPLICABLE TO
THE PORTFOLIO; INVESTMENT RESTRICTIONS;
PORTFOLIO TURNOVER
14. Management of the Fund MANAGEMENT
15. Control Persons and TRUSTEES AND OFFICERS
Principal Holders of
Securities
16. Investment Advisory INVESTMENT ADVISER AND DISTRIBUTOR;
and Other Services EXPERTS
17. Brokerage Allocation ALLOCATION OF PORTFOLIO BROKERAGE
18. Capital Stock and ORGANIZATION AND CAPITALIZATION;
Other Securities ADDITIONAL INFORMATION
19. Purchase, Redemption PURCHASES AND REDEMPTIONS;
and Pricing of NET ASSET VALUE;
Securities Being DIVIDENDS AND DISTRIBUTIONS
Offered
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 NOT APPLICABLE
Financial
Information
4. General INVESTMENT CONCEPT OF THE FUND;
Description of INVESTMENT OBJECTIVES AND POLICIES OF THE
Registrant PORTFOLIO; SPECIAL RISK CONSIDERATIONS;
POLICIES AND TECHNIQUES APPLICABLE TO THE
PORTFOLIO; INVESTMENT RESTRICTIONS
5. Management of the INVESTMENT ADVISER; PORTFOLIO MANAGEMENT;
Fund ADDITIONAL INFORMATION
5A. Management's NOT APPLICABLE
Discussion of Fund
Performance
6. Capital Stock and TAX STATUS, DIVIDENDS AND DISTRIBUTIONS;
Other Securities SHAREHOLDER COMMUNICATIONS; ADDITIONAL
INFORMATION
7. Purchase of DISTRIBUTOR; PURCHASES AND REDEMPTIONS;
Securities Being NET ASSET VALUE
Offered
8. Redemption or PURCHASES AND REDEMPTIONS;
Repurchase NET ASSET VALUE
9. Pending Legal NOT APPLICABLE
Proceedings
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 ORGANIZATION AND CAPITALIZATION
and History
13. Investment Objectives INVESTMENT OBJECTIVE AND POLICIES;
and Policies POLICIES AND TECHNIQUES APPLICABLE TO
THE PORTFOLIO; INVESTMENT RESTRICTIONS;
PORTFOLIO TURNOVER
14. Management of the Fund MANAGEMENT
15. Control Persons and TRUSTEES AND OFFICERS
Principal Holders of
Securities
16. Investment Advisory INVESTMENT ADVISER AND DISTRIBUTOR;
and Other Services EXPERTS
17. Brokerage Allocation ALLOCATION OF PORTFOLIO BROKERAGE
18. Capital Stock and ORGANIZATION AND CAPITALIZATION;
Other Securities ADDITIONAL INFORMATION
19. Purchase, Redemption PURCHASES AND REDEMPTIONS;
and Pricing of NET ASSET VALUE;
Securities Being DIVIDENDS AND DISTRIBUTIONS
Offered
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 NOT APPLICABLE
Financial
Information
4. General INVESTMENT CONCEPT OF THE FUND;
Description of INVESTMENT OBJECTIVES AND POLICIES OF THE
Registrant PORTFOLIO; SPECIAL RISK CONSIDERATIONS;
POLICIES AND TECHNIQUES APPLICABLE TO THE
PORTFOLIO; INVESTMENT RESTRICTIONS
5. Management of the INVESTMENT ADVISER; PORTFOLIO MANAGEMENT;
Fund ADDITIONAL INFORMATION
5A. Management's NOT APPLICABLE
Discussion of Fund
Performance
6. Capital Stock and TAX STATUS, DIVIDENDS AND DISTRIBUTIONS;
Other Securities SHAREHOLDER COMMUNICATIONS; ADDITIONAL
INFORMATION
7. Purchase of DISTRIBUTOR; PURCHASES AND REDEMPTIONS;
Securities Being NET ASSET VALUE
Offered
8. Redemption or PURCHASES AND REDEMPTIONS;
Repurchase NET ASSET VALUE
9. Pending Legal NOT APPLICABLE
Proceedings
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 ORGANIZATION AND CAPITALIZATION
and History
13. Investment Objectives INVESTMENT OBJECTIVE AND POLICIES;
and Policies POLICIES AND TECHNIQUES APPLICABLE TO
THE PORTFOLIO; INVESTMENT RESTRICTIONS;
PORTFOLIO TURNOVER
14. Management of the Fund MANAGEMENT
15. Control Persons and TRUSTEES AND OFFICERS
Principal Holders of
Securities
16. Investment Advisory INVESTMENT ADVISER AND DISTRIBUTOR;
and Other Services EXPERTS
17. Brokerage Allocation ALLOCATION OF PORTFOLIO BROKERAGE
18. Capital Stock and ORGANIZATION AND CAPITALIZATION;
Other Securities ADDITIONAL INFORMATION
19. Purchase, Redemption PURCHASES AND REDEMPTIONS;
and Pricing of NET ASSET VALUE;
Securities Being DIVIDENDS AND DISTRIBUTIONS
Offered
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 NOT APPLICABLE
Financial
Information
4. General INVESTMENT CONCEPT OF THE FUND;
Description of INVESTMENT OBJECTIVES AND POLICIES OF THE
Registrant PORTFOLIO; SPECIAL RISK CONSIDERATIONS;
POLICIES AND TECHNIQUES APPLICABLE TO THE
PORTFOLIO; INVESTMENT RESTRICTIONS
5. Management of the INVESTMENT ADVISER; PORTFOLIO MANAGEMENT;
Fund ADDITIONAL INFORMATION
5A. Management's NOT APPLICABLE
Discussion of Fund
Performance
6. Capital Stock and TAX STATUS, DIVIDENDS AND DISTRIBUTIONS;
Other Securities SHAREHOLDER COMMUNICATIONS; ADDITIONAL
INFORMATION
7. Purchase of DISTRIBUTOR; PURCHASES AND REDEMPTIONS;
Securities Being NET ASSET VALUE
Offered
8. Redemption or PURCHASES AND REDEMPTIONS;
Repurchase NET ASSET VALUE
9. Pending Legal NOT APPLICABLE
Proceedings
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 ORGANIZATION AND CAPITALIZATION
and History
13. Investment Objectives INVESTMENT OBJECTIVE AND POLICIES;
and Policies POLICIES AND TECHNIQUES APPLICABLE TO
THE PORTFOLIO; INVESTMENT RESTRICTIONS;
PORTFOLIO TURNOVER
14. Management of the Fund MANAGEMENT
15. Control Persons and TRUSTEES AND OFFICERS
Principal Holders of
Securities
16. Investment Advisory INVESTMENT ADVISER AND DISTRIBUTOR;
and Other Services EXPERTS
17. Brokerage Allocation ALLOCATION OF PORTFOLIO BROKERAGE
18. Capital Stock and ORGANIZATION AND CAPITALIZATION;
Other Securities ADDITIONAL INFORMATION
19. Purchase, Redemption PURCHASES AND REDEMPTIONS;
and Pricing of NET ASSET VALUE;
Securities Being DIVIDENDS AND DISTRIBUTIONS
Offered
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 14
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
Two International Place
Boston, Massachusetts 02110-4103
(A Mutual Fund)
Scudder Variable Life Investment Fund (the "Fund") is an open-end management
investment company which offers shares of beneficial interest of 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, 1998, 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, 1998
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 10
Balanced Portfolio 11
Growth and Income Portfolio 12
Capital Growth Portfolio 13
Global Discovery Portfolio 14
International Portfolio 15
POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS 15
Repurchase Agreements 16
Debt Securities 16
Illiquid Investments 16
Convertible Securities 17
Mortgage and Other Asset-Backed Securities 17
Foreign Securities 17
When-Issued Securities 18
Indexed Securities 18
Loans of Portfolio Securities 18
Zero Coupon Securities 19
Real Estate Investment Trusts 19
Derivatives 19
Options 19
Options on Securities Indexes 19
Futures Contracts 19
Forward Foreign Currency Exchange Contracts, Foreign Currency
Futures Contracts and Foreign Currency Options 20
Strategic Transactions and Derivatives Applicable to Global
Discovery Portfolio 20
Special Situation Securities 20
INVESTMENT RESTRICTIONS 22
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.
TO BE UPDATED
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.
TO BE UPDATED
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.
4
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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.
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.
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.
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.
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 Kemper
Investments, 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 Corporation
("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. Amendments
have been adopted to the federal rules regulating quality, maturity and
diversification requirements of money market funds. Money market funds must
comply with the revised rule by July 1, 1998. The Portfolio intends to be in
compliance with the amended requirements by that date.
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
9
<PAGE>
relative to the outlook for the economy and the securities markets, the quality
of available investments, the level of interest rates, and other factors. The
Portfolio may also invest in preferred stocks consistent with the Portfolio's
objectives.
The Bond Portfolio may purchase corporate notes and bonds including issues
convertible into common stock and obligations of municipalities. It may purchase
U.S. Government securities and obligations of federal agencies that are not
backed by the full faith and credit of the U.S. 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.
10
<PAGE>
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.
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
11
<PAGE>
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
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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<PAGE>
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 INVESTMENTS
The Portfolios may invest in securities for which there is not an active trading
market, or which have resale restrictions. These types of securities generally
offer a higher return than more readily marketable securities, but carry the
risk that the Portfolios may not be able to dispose of them at an advantageous
time or 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
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<PAGE>
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
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 to create leveraged exposure in the Fund.
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.
As a matter of fundamental policy, each Portfolio may not:
(1) borrow money, except as permitted under the Investment Company Act of
1940, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
(2) issue senior securities, except as permitted under the Investment
Company Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
(3) concentrate its investments in a particular industry, as that term is
used in the Investment Company Act of 1940, as amended, and as
interpreted or modified by regulatory authority having jurisdiction,
from time to time;
(4) purchase physical commodities or contracts relating to physical
commodities;
(5) engage in the business of underwriting securities issued by others,
except to the extent that the Fund may be deemed to be an underwriter
in connection with the disposition of portfolio securities;
(6) purchase or sell real estate, which term does not include securities
of companies which deal in real estate or mortgages or investments
secured by real estate or interests therein, except that the Fund
reserves freedom of action to hold and to sell real estate acquired as
a result of the Fund's ownership of securities;
(7 )make loans to other persons, except (i) loans of portfolio
securities, and (ii) to the extent that entry into repurchase
agreements and the purchase of debt instruments or interests in
indebtedness in accordance with the Fund's investment objective and
policies may be deemed to be loans.
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INVESTMENT ADVISER
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The Fund retains the investment advisory firm of Scudder Kemper Investments,
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.
Scudder, Stevens & Clark, Inc. ("Scudder"), and Zurich Insurance Company
("Zurich"), an international insurance and financial services organization, have
formed a new global investment organization by combining Scudder's business with
that of Zurich's subsidiary, Zurich Kemper Investments, Inc. and Scudder has
changed its name to Scudder Kemper Investments, Inc. As a result of the
transaction, Zurich owns approximately 70% of the Adviser, with the balance
owned by the Adviser's officers and employees.
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For its advisory services to the Portfolios, the Adviser receives compensation
monthly at the following annual rates for each Portfolio:
* 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
____% for the fiscal year ended December 31, 1997.
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 _____, 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 ____% of average net assets.
PORTFOLIO MANAGEMENT
Each Portfolio is managed by a team of 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 the Adviser's large staff of economists, research analysts,
traders, and other investment specialists who work in offices across the United
States and abroad. The Adviser believes its team approach benefits Fund
investors by bringing together many disciplines and leveraging its extensive
resources.
MONEY MARKET PORTFOLIO
Lead Portfolio Manager Frank J. Rachwalski, Jr. assumed responsibility for
setting the Fund's investment strategy and for overseeing the Fund's day-to-day
management in January, 1998. Frank joined Zurich Kemper's Fixed Income
Department in 1973 as its Money Market Specialist. He has been responsible for
the trading and portfolio management of Zurich Kemper's money market fund since
its initial offering in 1974. John W. Stuebe, Portfolio Manager, joined Zurich
Kemper in 1979 as a Fixed Income Trader for Money Market Securities. He is
currently a Specialist and Trader for the Fund Manager's taxable, non-government
money market funds.
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BOND PORTFOLIO
TO BE UPDATED
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
TO BE UPDATED
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.
GROWTH AND INCOME PORTFOLIO
Lead Portfolio Manager Robert T. Hoffman has had responsibility for setting
investment strategy and overseeing the Fund's day-to-day management since 1991.
Mr. Hoffman, who joined Scudder in 1990, has 12 years of experience in the
investment industry. Benjamin W. Thorndike, Portfolio Manager, is the Fund's
chief analyst and strategist for convertible securities. Mr. Thorndike, who has
more than 16 years of investment experience, joined the Fund Manager and the
Fund in 1986. Kathleen T. Millard, Portfolio Manager, focuses on stock investing
strategy and stock selection. Ms. Millard has worked in the investment industry
since 1983 as a portfolio manager of value portfolios and at Scudder since 1991.
Lori Ensinger, Portfolio Manager, joined the Fund in 1996 and focuses on stock
selection and investment strategy. Ms. Ensinger has worked in the investment
industry since 1983 as a portfolio manager focusing on mid-large cap stocks and
at Scudder since 1993.
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 the Adviser 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
TO BE UPDATED
Lead Portfol io 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.
23
<PAGE>
- --------------------------------------------------------------------------------
DISTRIBUTOR
- --------------------------------------------------------------------------------
The Fund has an underwriting agreement with Scudder Investor Services, Inc. (the
"Distributor"), a subsidiary of Scudder Kemper Investments, 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.
- --------------------------------------------------------------------------------
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)
at any time when the Fund may, under applicable laws and regulations, suspend
24
<PAGE>
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.
25
<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,
26
<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
27
<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, 1997,
Aetna Life Insurance and Annuity Company owned ____%, Banner Life Insurance
Company owned ____%, Charter National Life Insurance Company owned ____%,
Companion Life Insurance Company of New York owned ____%, Fortis Benefits Life
Insurance Company owned ____%, Intramerica Life Insurance Company owned ____%,
Lincoln Benefit Life Insurance Company owned ____%, Mutual of America Life
Insurance Company owned ____%, Paragon Life Insurance Company owned ____%,
Providentmutual Life and Annuity Company of America owned ____%, Safeco Life
Insurance Companies owned ____%, Security First Life Insurance Company owned
____%, Southwestern Life Insurance Company owned ____%, The Union Central Life
Insurance Company owned ____%, United Companies Life Insurance Company owned
____%, United of Omaha owned ____%, USAA Life Insurance Company owned ____% and
Washington National Life Insurance Company owned ____% 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.
28
<PAGE>
- --------------------------------------------------------------------------------
TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
David B. Watts*
President
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
William F. Gadsden*
Vice President
Jerard K. Hartman*
Vice President
Robert T. Hoffman*
Vice President
Richard A. Holt*
Vice President
Thomas W. Joseph*
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, Secretary and Treasurer
Kathryn L. Quirk*
Vice President and Assistant Secretary
Irene T. Cheng*
Vice President
Stephen A. Wohler*
Vice President
Frank J. Rachwalski, Jr.*
Vice President
John R. Hebble*
Assistant Treasurer
Caroline Pearson*
Assistant Secretary
*Scudder Kemper Investments, Inc.
29
<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
30
<PAGE>
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. 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.
31
<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, 1998
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, 1998, 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 OF CONTENTS
Page
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 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") 19
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 24
When-Issued Securities 24
Loans of Portfolio Securities 24
Borrowing 25
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 41
INVESTMENT ADVISER AND DISTRIBUTOR 42
Investment Adviser 42
Personal Investments by Employees of the Adviser 45
Distributor 45
MANAGEMENT OF THE FUND 47
Trustees and Officers 47
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TABLE OF CONTENTS
Page
REMUNERATION 48
Responsibilities of the Board_Board and Committee
Meetings 48
Compensation of Officers and Trustees 49
NET ASSET VALUE 49
TAX STATUS 51
DIVIDENDS AND DISTRIBUTIONS 54
Money Market Portfolio 54
Global Discovery Portfolio and International Portfolio 55
Other Portfolios 55
PERFORMANCE INFORMATION 55
Money Market Portfolio 55
Bond Portfolio 56
All Portfolios 56
Comparison of Fund Performance 58
SHAREHOLDER COMMUNICATIONS 62
ORGANIZATION AND CAPITALIZATION 63
General 63
Shareholder and Trustee Liability 64
ALLOCATION OF PORTFOLIO BROKERAGE 64
PORTFOLIO TURNOVER 66
EXPERTS 66
COUNSEL 66
ADDITIONAL INFORMATION 66
FINANCIAL STATEMENTS 67
APPENDIX 68
Description of Bond Ratings 68
Description of Commercial Paper Ratings 69
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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").
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 Kemper Investments, 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 Corporation
("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 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
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<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.
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<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. Therefore, in contrast
to the specialized investment policies of some capital appreciation funds, the
Portfolio is 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 both a
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<PAGE>
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 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, from time to time, 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
9
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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 "TAX STATUS.")
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 Securities
The Portfolios may occasionally purchase securities other than in the open
market. While such purchases may often offer attractive opportunities for
investment not otherwise available on the open market, the securities so
purchased are often "restricted securities," "not readily marketable," or
"illiquid" restricted securities, i.e., 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.
The absence of a trading market can make it difficult to ascertain a market
value for illiquid securities. Disposing of illiquid securities may involve
time-consuming negotiation and legal expenses, and it may be difficult or
impossible for the Fund to sell them promptly at an acceptable price. The
Portfolios may have to bear the extra expense of registering such securities for
resale and the risk of substantial delay in effecting such registration. Also
market quotations are less readily available. The judgment of the Adviser may at
times play a greater role in valuing these securities than in the case of
illiquid securities.
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Generally speaking, restricted securities may be sold in the U.S. only to
qualified institutional buyers, or in a privately negotiated transaction to a
limited number of purchasers, or in limited quantities after they have been held
for a specified period of time and other conditions are met pursuant to an
exemption from registration, or in a public offering for which a registration
statement is in effect under the 1933 Act. The Portfolios 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 Fund 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.
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Treasury securities has stated that for federal tax and securities purposes, in
their opinion purchasers of such certificates, such as the Portfolios, most
likely will be deemed the beneficial holders of the underlying U.S. government
securities.
The Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupons and corpus payments on Treasury securities through the Federal
Reserve book-entry record-keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program,
the Portfolio will be able to have its beneficial ownership of zero coupon
securities recorded directly in the book-entry record-keeping system in lieu of
having to hold certificates or other evidences of ownership of the underlying
U.S. Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold in such bundled form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells
itself.
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
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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 "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.
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Collateralized Mortgage Obligations ("CMOs")
A CMO is a hybrid between a mortgage-backed bond and a mortgage
pass-through security. Similar to a bond, interest and prepaid principal are
paid, in most cases, semiannually. CMOs may be collateralized by whole mortgage
loans but are more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, FHLMC, or FNMA, and their income
streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
In a typical CMO transaction, a corporation issues multiple series, (e.g.,
A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are used to
purchase mortgages or mortgage pass-through certificates ("Collateral"). The
Collateral is pledged to a third party trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on
the Bonds in the order A, B, C, Z. The Series A, B, and C bonds all bear current
interest. Interest on the Series Z Bond is accrued and added to principal and a
like amount is paid as principal on the Series A, B, or C Bond currently being
paid off. When the Series A, B, and C Bonds are paid in full, interest and
principal on the Series Z Bond begins to be paid currently. With some CMOs, the
issuer serves as a conduit to allow loan originators (primarily builders or
savings and loan associations) to borrow against their loan portfolios.
FHLMC Collateralized Mortgage Obligations
FHLMC CMOs are debt obligations of FHLMC issued in multiple classes having
different maturity dates which are secured by the pledge of a pool of
conventional mortgage loans purchased by FHLMC. Unlike FHLMC PCs, payments of
principal and interest on the CMOs are made semiannually, as opposed to monthly.
The amount of principal payable on each semiannual payment date is determined in
accordance with FHLMC's mandatory sinking fund schedule, which, in turn, is
equal to approximately 100% of FHA prepayment experience applied to the mortgage
collateral pool. All sinking fund payments in the CMOs are allocated to the
retirement of the individual classes of bonds in the order of their stated
maturities. Payment of principal on the mortgage loans in the collateral pool in
excess of the amount of FHLMC's minimum sinking fund obligation for any payment
date are paid to the holders of the CMOs as additional sinking fund payments.
Because of the "pass-through" nature of all principal payments received on the
collateral pool in excess of FHLMC's minimum sinking fund requirement, the rate
at which principal of the CMOs is actually repaid is likely to be such that each
class of bonds will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage loans
during any semiannual payment period is not sufficient to meet FHLMC's minimum
sinking fund obligation on the next sinking fund payment date, FHLMC agrees to
make up the deficiency from its general funds.
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
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Adviser will, consistent with the Portfolio's investment objectives, policies,
and quality standards, consider making investments in such new types of
mortgage-related securities.
Other Asset-Backed Securities
The securitization techniques used to develop mortgaged-backed securities
are now being applied to a broad range of assets. Through the use of trusts and
special purpose corporations, various types of assets, including automobile
loans, computer leases and credit card receivables, are being securitized in
pass-through structures similar to the mortgage pass-through structures
described above or in a structure similar to the CMO structure. Consistent with
the Bond Portfolio's 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
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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.
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.
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Convertible securities may be issued as fixed income obligations that pay
current income or as zero coupon notes and bonds, including Liquid Yield Option
Notes ("LYONs"). Zero coupon securities pay no cash income and are sold at
substantial discounts from their value at maturity. When held to maturity, their
entire income, which consists of accretion of discount, comes from the
difference between the purchase price and their value at maturity. Zero coupon
convertible securities offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follows the
movements in the market value of the underlying common stock. Zero coupon
convertible securities are generally expected to be less volatile than the
underlying common stocks as they are usually issued with short to medium length
maturities (15 years or less) and are issued with options and/or redemption
features exercisable by the holder of the obligation entitling the holder to
redeem the obligation and receive a defined cash payment.
Depositary Receipts
The 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
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when settlements have been unable to keep pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of the Portfolios are
uninvested and no return is earned thereon. The inability of the Portfolios to
make intended security purchases due to settlement problems could cause the
Portfolios to miss attractive investment opportunities. Inability to dispose of
portfolio securities due to settlement problems either could result in losses to
the Portfolios due to subsequent declines in value of the portfolio security or,
if the Portfolios have entered into a contract to sell the security, could
result in possible liability to the purchaser. Fixed commissions on some foreign
stock exchanges are generally higher than negotiated commissions on U.S.
exchanges, although the Portfolios will endeavor to achieve the most favorable
net results on its portfolio transactions. Further, the Portfolios may encounter
difficulties or be unable to pursue legal remedies and obtain judgments in
foreign courts. There is generally less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the U.S. It may be more difficult for the Portfolios' agents to keep
currently informed about corporate actions such as stock dividends or other
matters which may affect the prices of portfolio securities. Communications
between the U.S. and foreign countries may be less reliable than within the
U.S., thus increasing the risk of delayed settlements of portfolio transactions
or loss of certificates for portfolio securities. In addition, with respect to
certain foreign countries, there is the possibility of nationalization,
expropriation, the imposition of withholding or confiscatory taxes, political,
social, or economic instability, devaluations in the currencies in which a
Portfolio's securities are denominated, or diplomatic developments which could
affect U.S. investments in those countries. Investments in foreign securities
may also entail certain risks, such as possible currency blockages or transfer
restrictions, and the difficulty of enforcing rights in other countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
These considerations generally are more of a concern in developing
countries. For example, the possibility of revolution and the dependence on
foreign economic assistance generally is greater in these countries than in
developed countries. The management of the Non-Money Market Portfolios seeks to
mitigate the risks associated with these considerations through diversification
and active professional management. Although investments in companies domiciled
in developing countries may be subject to potentially greater risks than
investments in developed countries, the Portfolios will not invest in any
securities of issuers located in developing countries if the securities, in the
judgment of the Adviser, are speculative.
To the extent that the Non-Money Market Portfolios invest in foreign
securities, the Portfolios' share price could reflect the movements of both the
different stock and bond markets in which it is invested and the currencies in
which the investments are denominated; the strength or weakness of the U.S.
dollar against foreign currencies could account for part of the Portfolios'
investment performance.
Limitations on Holdings of Foreign Securities 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.
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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 currency exchange
rates between two currencies (neither of which need be the currency in which the
instrument is denominated). The reference instrument need not be related to the
terms of the indexed security. For example, the principal amount of a U.S.
dollar denominated indexed security may vary based on the exchange rate of two
foreign currencies. An indexed security may be positively or negatively indexed;
that is, its value may increase or decrease if the value of the reference
instrument increases. Further, the change in the principal amount payable or the
interest rate of an indexed security may be a multiple of the percentage change
(positive or negative) in the value of the underlying reference instrument(s).
Investment in indexed securities involves certain risks. In addition to
the credit risk of the security's issuer and the normal risks of price changes
in response to changes in interest rates, the principal amount of indexed
securities may decrease as a result of changes in the value of reference
instruments. Further, in the case of certain indexed securities in which the
interest rate is linked to a reference instrument, the interest rate may be
reduced to zero, and any further declines in the value of the security may then
reduce the principal amount payable on maturity. Finally, indexed securities may
be more volatile than the reference instruments underlying indexed securities.
When-Issued Securities
A Portfolio may from time to time purchase securities on a "when-issued"
or "forward delivery" basis. Debt securities are often issued on this basis. The
price of such securities, which may be expressed in yield terms, is fixed at the
time a commitment to purchase is made, but delivery and payment for the
when-issued or forward delivery securities take place at a later date. During
the period between purchase and settlement, no payment is made by the Portfolio
and no interest accrues to the Portfolio. To the extent that assets of a
Portfolio are held in cash pending the settlement of a purchase of securities,
that Portfolio would earn no income; however, it is the Fund's intention that
each Portfolio will be fully invested to the extent practicable and subject to
the policies stated above. While when-issued or forward delivery securities may
be sold prior to the settlement date, the Portfolio intends to purchase such
securities with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time the Fund makes the commitment on
behalf of a Portfolio to purchase a security on a when-issued or forward
delivery basis, it will record the transaction and reflect the amount due and
the value of the security in determining the Portfolio's net asset value. The
market value of the when-issued or forward delivery securities may be more or
less than the purchase price payable at settlement date. The Fund does not
believe that a Portfolio's net asset value or income will be adversely affected
by the purchase of securities on a when-issued or forward delivery basis. Each
Portfolio will establish a segregated account in which it will maintain cash,
U.S. Government securities and other high-grade debt obligations at least equal
in value to commitments for when-issued or forward delivery securities. Such
segregated securities either will mature or, if necessary, be sold on or before
the settlement date.
Loans of Portfolio Securities
The Fund may lend the portfolio securities of any Portfolio (other than
the Money Market Portfolio) provided: (1) the loan is secured continuously by
collateral consisting of U.S. Government securities, cash or cash equivalents
adjusted daily to have market value at least equal to the current market value
of the securities loaned; (2) the Fund may at any time call the loan and regain
the securities loaned; (3) the Portfolio will receive any interest or dividends
paid on the loaned securities; and (4) the aggregate market value of securities
loaned will not at any time exceed one-third of the total assets of the
Portfolio. In addition, it is anticipated that the Portfolio may share with the
borrower some of the income received on the collateral for the loan or that it
will be paid a premium for the loan. Before the Portfolio enters into a loan,
the Adviser considers all relevant facts and circumstances including the
creditworthiness of the borrower.
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Borrowing
The Board of Trustees has adopted a policy whereby each Portfolio of the
Fund may borrow up to 10% of its total assets; provided, however, that each
Portfolio may borrow up to 25% of its total assets for extraordinary or
emergency purposes, including the facilitation of redemptions. A Portfolio may
only borrow money from banks as a temporary measure for extraordinary or
emergency purposes (each Portfolio is required to maintain asset coverage
(including borrowings) of 300% for all borrowings) and no purchases of
securities for a Portfolio will be made while borrowings of that Portfolio
exceed 5% of the Portfolio's assets. Borrowings by the Fund increase exposure to
capital risk. In addition, borrowed funds are subject to interest costs that may
offset or exceed the return earned on investment of such funds.
Options 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
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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.
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
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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
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 six 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
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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 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.
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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.
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.
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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.
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
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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
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
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or foreign currency futures contracts when each determines that the best
interests of the Portfolio will be served.
Except when a Portfolio enters into a forward contract for the purpose of
the purchase or sale of a security denominated in a foreign currency, State
Street Bank and Trust Company (the "Custodian"), will place cash or liquid
securities into a segregated account of the Portfolio in an amount equal to the
value of the Portfolio's total assets committed to the consummation of forward
contracts (or the Portfolio's forward contracts will be otherwise covered
consistent with applicable regulatory policies) and foreign currency futures
contracts that require the Portfolio to purchase foreign currencies. If the
value of the securities placed in the segregated account declines, additional
cash or securities will be placed in the account on a daily basis so that the
value of the account will equal the amount of the Portfolio's commitments with
respect to such contracts.
The Non-Money Market Portfolios generally will not enter into a forward 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
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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
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 ofd 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 to create leveraged exposure in the Fund.
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
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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
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
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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.
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.
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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
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
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<PAGE>
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.
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
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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.
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
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<PAGE>
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
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.
An 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
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and may affect a Portfolio's net asset value. In addition, investments in high
yield zero coupon or pay-in-kind bonds, rather than income-bearing high yield
securities, may be more speculative and may be subject to greater fluctuations
in value due to changes in interest rates.
The trading market for high yield securities may be thin to the extent
that there is no established retail secondary market or because of a decline in
the value of such securities. A thin trading market may limit the ability of the
Trustees to value high yield securities accurately in a Portfolio and to dispose
of those securities. Adverse publicity and investor perceptions may decrease the
values and liquidity of high yield securities. These securities may also involve
special registration responsibilities, liabilities and costs.
Credit quality in the high yield securities market can change suddenly and
unexpectedly, and even recently-issued credit ratings may not fully reflect the
actual risks posed by a particular high yield security. For these reasons, it is
the policy of the Adviser not to rely exclusively on ratings issued by
established credit rating agencies, but to supplement such ratings with its own
independent and on-going review of credit quality. The achievement of the
Portfolios' investment objectives may be more dependent on the Adviser's credit
analysis than is the case for higher quality bonds. Should the rating of a
portfolio security be downgraded the Adviser will determine whether it is in the
best interest of that Portfolio to retain or dispose of the security.
Prices for below investment grade securities may be affected by
legislative and regulatory developments. For example, 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
than in the United States.
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) borrow money, except as permitted under the Investment Company Act of
1940, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
(2) issue senior securities, except as permitted under the Investment
Company Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
(3) concentrate its investments in a particular industry, as that term is
used in the Investment Company Act of 1940, as amended, and as
interpreted or modified by regulatory authority having jurisdiction,
from time to time;
(4) purchase physical commodities or contracts relating to physical
commodities; or
(5) engage in the business of underwriting securities issued by others,
except to the extent that the Fund may be deemed to be an underwriter
in connection with the disposition of portfolio securities;
(6) purchase or sell real estate, which term does not include securities
of companies which deal in real estate or mortgages or investments
secured by real estate or interests therein, except that the Fund
reserves freedom of action to hold and to sell real estate acquired as
a result of the Fund's ownership of securities;
(7) make loans to other persons, except (i) loans of portfolio securities,
and (ii) to the extent that entry into repurchase agreements and the
purchase of debt instruments or interests in indebtedness in
accordance with the Fund's investment objective and 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.")
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.
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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 Kemper Investments, Inc., a Delaware
corporation, doing business under the name Scudder Kemper Investments, Inc. 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 Kemper Investments, 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., Scudder Spain and
Portugal 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
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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:
% of the
average
daily net Dollar
Portfolio asset Amount 1996 1997
values of 1995
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 durin g which the average daily net assets of
International Portfolio excee d $500,000,000, the fee payable for that
month, with respect to the exc ess over $500,000,000, is calculated at an
annual rate of .775%. As a resu lt, the Adviser received compensation at an
annual rate of ____% for the fi scal year ended December 31, 1997.
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
43
<PAGE>
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, 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
$30,073 for the Money Market Portfolio, $37,590 for the Bond Portfolio, $39,830
for the Balanced Portfolio, $42,366 for the Growth and Income Portfolio, $70,071
for the Capital Growth Portfolio, $33,383 for the Global Discovery Portfolio and
$335,822 for the International Portfolio.
For the year ended December 31, 1997, such compensation amounted to
$_______.
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 __________________. The Agreement dated
May 1, 1996 (for the Global Discovery Portfolio) will remain in effect until
__________________. 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 __________________. 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 __________________. 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 __________________, 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 ____%.
44
<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
45
<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.
46
<PAGE>
MANAGEMENT OF THE FUND
Trustees and Officers
Position
with
Underwriter,
Name, Age and Position Principal Scudder
Address with Fund Occupation** Investor Services,Inc.
David B. Watts*@+ President Managing Director Assistant
(63) of Scudder Kemper Treasurer
Investments, Inc.
Daniel Pierce*@+ Vice Chairman of the Vice
(64) President Board and President,
and Trustee Managing Director Director and
of Scudder Kemper Assistant
Investments, Inc. Treasurer
Dr. Kenneth Black, Trustee Regents' __
Jr. (73) Professor
Educational Emeritus of
Foundation, Inc. Insurance,
35 Broad Street Georgia State
11th Floor, Room University
1144
Atlanta, GA 30303
Dr. Rosita P. Trustee Professor of _____
Chang (43) Finance,
PACAP Research University of
Center Rhode Island
College of
Business
Administration
University of
Rhode Island
7 Lippitt Road
Kingston, RI 02881-
0802
Peter B. Freeman@ Trustee Corporate __
(65) Director and
100 Alumni Avenue Trustee
Providence, RI
02906
Dr. J. D. Hammond Trustee Dean, Smeal __
(64) College of
801 Business Business
Administration Administration,
Bldg. Pennsylvania
Pennsylvania State State University
University
University Park,
PA 16802
William F. Vice Managing Director __
Gadsden*#(43) President of Scudder Kemper
Investments, Inc.
Jerard K. Vice Managing Director __
Hartman#(65) President of Scudder Kemper
Investments, Inc.
Robert T. Vice Managing Director __
Hoffman*#(39) President of Scudder Kemper
Investments, Inc.
Richard A. Holt*** Vice Managing Director __
(56) President of Scudder Kemper
Investments, Inc.
Thomas W. Joseph+ Vice Senior Vice Vice
(59) President President of President,
Scudder Kemper Director,
Investments, Inc. Treasurer
and
Assistant Clerk
47
<PAGE>
Position
with
Underwriter,
Name, Age and Position Principal Scudder
Address with Fund Occupation** Investor Services,Inc.
Valerie F. Vice Senior Vice __
Malter*#(39) President President of
Scudder Kemper
Investments, Inc.
Steven M. Meltzer+ Vice Managing Director __
(39) President of Scudder Kemper
Investments, Inc.
Gerald J. Vice Senior Vice __
Moran*#(58) President President of
Scudder Kemper
Investments, Inc.
Randall K. Zeller# Vice Managing Director __
(43) President of Scudder Kemper
Investments, Inc.
Thomas F. Vice Senior Vice Clerk
McDonough+ (51) President, President of
Treasurer Scudder Kemper
and Investments, Inc.
Secretary
Kathryn L. Quirk# Vice Managing Director Vice
(45) President of Scudder Kemper President
and Investments, Inc.
Assistant
Secretary
* 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
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 the
Adviser. 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
Portfolio's 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
48
<PAGE>
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.
The Independent Trustees met ______ times during 1997, including Board and
Committee meetings and meetings to review each Portfolio'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 $______; a fee of $___ 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; $___ 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 or
other activities.
One of the Independent Trustees also serves in the same capacity for other
funds managed by the Adviser. These funds differ broadly in type and complexity
and in some cases have substantially different Trustee fee schedules. The
following table shows the aggregate compensation received by each Independent
Trustee during 1997 from the Trust and from all of Scudder funds as a group.
Name Scudder Variable Life Investment Fund* All Scudder Funds
Dr. Kenneth Black, Jr., (7 funds)
Trustee
Dr. Rosita P.Chang, (7 funds)
Trustee
Peter B. Freeman, (33 funds)
Trustee
Dr. J.D. Hammond, (7 funds)
Trustee
* 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.
49
<PAGE>
The valuation of the Money Market Portfolio securities is based upon their
amortized cost, which does not take into account unrealized securities gains or
losses. This method involves initially valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Money Market Portfolio would receive if it
sold the instrument. During periods of declining interest rates, the quoted
yield on shares of the Money Market Portfolio may tend to be higher than a like
computation made by a fund with identical investments utilizing a method of
valuation based upon market prices and estimates of market prices for all of its
portfolio instruments. Thus, if the use of amortized cost by the Portfolio
resulted in a lower aggregate portfolio value on a particular day, a prospective
investor in the Money Market Portfolio would be able to obtain a somewhat higher
yield if he purchased shares of the Money Market Portfolio on that day, than
would result/from investment in a fund utilizing solely market values, and
existing investors in the Money Market Portfolio would receive less investment
income. The converse would apply in a period of rising interest rates.
An exchange-traded equity security (not subject to resale restrictions) is
valued at its most recent sale price as of the Value Time. Lacking any sales,
the security is valued at the calculated mean between the most recent bid
quotation and the most recent asked quotation (the "Calculated Mean"). If there
are no bid and asked quotations, the security is valued at the most recent bid
quotation. An unlisted equity security which is traded on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") system is
valued at the most recent sale price. If there are no such sales, the security
is valued at the high or "inside" bid quotation. The value of an equity security
not quoted on the NASDAQ System, but traded in another over-the-counter market,
is the most recent sale price. If there are no such sales, the security is
valued at the Calculated Mean. If there is no Calculated Mean, the security is
valued at the most recent bid quotation.
Debt securities, other than short-term securities, are valued at prices
supplied by the Fund's pricing agent which reflect broker/dealer supplied
valuations and electronic data processing techniques. Short-term securities with
remaining maturities of sixty days or less are valued by the amortized cost
method, which the Board believes approximates market value. If it is not
possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If no such bid quotation is available, the Adviser may
calculate the price of that debt security, subject to limitations established by
the Board.
Option contracts on securities, currencies, futures and other financial
instruments traded on an exchange are valued at their most recent sale price on
the exchange. If no sales are reported, the value is the Calculated Mean, or if
the Calculated Mean is not available, the most recent bid quotation in the case
of purchased options, or the most recent asked quotation in the case of written
options. Option contracts traded over-the-counter are valued at the most recent
bid quotation in the case of purchased options and at the most recent asked
quotation in the case of written options. Futures contracts are valued at the
most recent settlement price. Foreign currency forward contracts are valued at
the value of the underlying currency at the prevailing currency exchange rate.
If a security is traded on more than one exchange, or on one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
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.
50
<PAGE>
TAX STATUS
(See "TAX STATUS, DIVIDENDS AND DISTRIBUTIONS" in the
Fund's prospectus.)
Each Portfolio of the Fund has elected to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). Such qualification does not involve governmental
supervision or management of investment practices or policy.
Each Portfolio intends to comply with the provisions of Section 817(h) of
the Code relating to diversification requirements for variable annuity,
endowment and life insurance contracts. Specifically, each Portfolio intends to
comply with either (i) the requirement of Section 817(h)(1) of the Code that its
assets be adequately diversified, or (ii) the "Safe Harbor for Diversification"
specified in Section 817(h)(2) of the Code, or (iii) the diversification
requirement of Section 817(h)(1) of the Code by having all or part of its assets
invested in U.S. Treasury securities which qualify for the "Special Rule for
Investments in United States Obligations" specified in Section 817(h)(3) of the
Code.
A regulated investment company qualifying under Subchapter M of the Code
is required to distribute to its shareholders at least 90 percent of its
investment company taxable income and generally is not subject to federal income
tax to the extent that it distributes annually its investment company taxable
income and net realized capital gains in the manner required under the Code.
Investment company taxable income of a Portfolio generally is made up of
dividends, interest, certain currency gains and losses and net-short-term
capital gains in excess of net long-term capital losses, less expenses. Net
realized capital gains of a Portfolio for a fiscal year are computed by taking
into account any capital loss carryforward of the Portfolio.
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 that a Portfolio designates as capital gain dividends
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
51
<PAGE>
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
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%
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limitation. Accordingly, the amount of such transactions that a Portfolio may
undertake may be limited.
Positions of a Portfolio which consist of at least one stock and at least
one stock option or other position with respect to a related security which
substantially diminishes the Portfolio's risk of loss with respect to such stock
could be treated as a "straddle" which is governed by Section 1092 of the Code,
the operation of which may cause deferral of losses, adjustments in the holding
periods of stock or securities and conversion of short-term capital losses into
long-term capital losses. An exception to these straddle rules exists for any
"qualified covered call options" on stock written by a Portfolio.
Positions of a Portfolio which consist of at least one position not
governed by Section 1256 and at least one futures contract, foreign currency
forward contract or nonequity option governed by Section 1256 which
substantially diminishes the Portfolio's risk of loss with respect to such other
position will be treated as a "mixed straddle." Although mixed straddles are
subject to the straddle rules of Section 1092 of the Code, certain tax elections
exist for them which reduce or eliminate the operation of these rules. Each
Portfolio will monitor its transactions in options and futures and may make
certain tax elections in connection with these investments.
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a Portfolio accrues receivables or
liabilities denominated in a foreign currency and the time the Portfolio
actually collects such receivables or pays such liabilities generally are
treated as ordinary income or ordinary loss. Similarly, on disposition of debt
securities denominated in a foreign currency and on disposition of certain
futures contracts, forward contracts and options, gains or losses attributable
to fluctuations in the value of foreign currency between the date of acquisition
of the security or contract and the date of disposition are also treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"Section 988" gains or losses, may increase or decrease the amount of a
Portfolio's investment company taxable income to be distributed to its
shareholders as ordinary income.
If a Portfolio holds zero coupon securities or other securities which are
issued at a discount, a portion of the difference between the issue price of
zero coupon securities and the face value ("original issue discount") will be
treated as income to the Portfolio each year, even though the Portfolio will not
receive cash interest payments from these securities. This original issue
discount (imputed income) will comprise a part of the investment company taxable
income of the Portfolio which must be distributed to shareholders in order to
maintain the qualification of the Portfolio as a regulated investment company
and to avoid federal income tax at the Portfolio level. In addition, if a
Portfolio invests in certain high-yield original issue discount obligations
issued by corporations, a portion of the original issue discount accruing on the
obligation may be eligible for the deduction for dividends received by
corporations. In such event, dividends of investment company taxable income
received from the Portfolio by its corporate shareholders, to the extent
attributable to such portion of accrued original issue discount, may be eligible
for this deduction for dividends received by corporations if so designated by
the Portfolio in a written notice to shareholders. 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
53
<PAGE>
that are corporations should furnish their taxpayer identification numbers and
certify their status as corporations in order to avoid possible erroneous
application of backup withholding.
Shareholders of the Portfolios may be subject to state and local taxes on
distributions received from such Portfolios and on redemptions of their shares.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution.
The Fund is organized as a Massachusetts business trust, and neither the
Fund nor the Portfolios are liable for any income or franchise tax in the
Commonwealth of Massachusetts providing each Portfolio continues to qualify as a
regulated investment company under Subchapter M of the Code.
The foregoing discussion of U.S. federal income tax law relates solely to
the application of that law to U.S. persons. Each shareholder which is not a
U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the Portfolio, including the possibility that such a shareholder
may be subject to a U.S. withholding tax at a rate of 30% (or at a lower rate
under an applicable income tax treaty) on amounts constituting ordinary income
received by it, where such amounts are treated as income from U.S. sources under
the Code.
For further information concerning federal income tax consequences for
the holders of the VA contracts and VLI policies, shareholders should consult
the prospectus used in connection with the issuance of their particular
contracts or policies. Shareholders should consult their tax advisers about the
application of the provisions of tax law described in this statement of
additional information in light of their particular tax situations.
DIVIDENDS AND DISTRIBUTIONS
(See "TAX STATUS, DIVIDENDS AND DISTRIBUTIONS" in the
Fund's prospectus.)
Money Market Portfolio
The net investment income of the Money Market Portfolio is determined as
of the close of regular trading on the Exchange (normally 4 p.m. eastern time)
on each day on which the Exchange is open for business. All of the net income so
determined normally will be declared as a dividend to shareholders of record as
of the close of regular trading on such Exchange after the purchase and
redemption of shares. Unless the business day before a weekend or holiday is the
last day of an accounting period, the dividend declared on that day will include
an amount in respect of the Portfolio's income for the subsequent non-business
day or days. No daily dividend will include any amount of net income in respect
of a subsequent semi-annual accounting period. Dividends commence on the next
business day after the date of purchase. Dividends will be invested in
additional shares of the Portfolio at the net asset value per share, normally
$1.00, determined as of the first business day of each month unless payment of
the dividend in cash has been requested.
Net investment income of the Money Market Portfolio consists of all
interest income accrued on portfolio assets less all expenses of the Portfolio
and amortized market premium. Accreted market discount is included in interest
income. The Portfolio does not anticipate that it will normally realize any
long-term capital gains with respect to its portfolio.
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.
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Should the Money Market Portfolio incur or anticipate, with respect to its
portfolio, any unusual or unexpected significant expense or loss which would
affect disproportionately the Portfolio's income for a particular period, the
Trustees would at that time consider whether to adhere to the dividend policy
described above or to revise it in light of the then prevailing circumstances in
order to ameliorate to the extent possible the disproportionate effect of such
expense or loss on then existing shareholders. Such expenses or losses may
nevertheless result in a shareholder's receiving no dividends for the period
during which the shares are held and in receiving upon redemption a price per
share lower than that which was paid. Similarly, should the Money Market
Portfolio incur or anticipate any unusual or unexpected significant income,
appreciation or gain which would affect disproportionately the fund's income for
a particular period, the Trustees or the Executive Committee of the Trustees may
consider whether to adhere to the dividend policy described above or to revise
it in light of the then prevailing circumstances in order to ameliorate to the
extent possible the disproportionate effect of such income, appreciation or gain
on the dividend received by existing shareholders. Such actions may reduce the
amount of the daily dividend received by existing shareholders.
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, 1997, was
____%.
B. Effective yield is the net annualized yield for a specified seven
calendar days assuming a reinvestment of the income or compounding.
Effective yield is calculated by the same method as yield except the
yield figure is compounded by adding 1, raising the sum to a power
equal to 365 divided by 7, and subtracting one from the result,
according to the following formula:
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<PAGE>
Effective Yield = [(Base Period Return + 1)365/7] - 1.
The net annualized yield of the Portfolio for the seven-day
period ended December 31, 1997, was ____%.
As described above, yield and effective yield are based on historical
earnings and show the performance of a hypothetical investment and are not
intended to indicate future performance. Yield and effective yield will vary
based on changes in market conditions and the level of expenses.
In connection with communicating its yield or effective yield to current
or prospective shareholders, the Money Market Portfolio also may compare these
figures to the performance of other mutual funds tracked by mutual fund rating
services or to other unmanaged indexes which may assume reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs.
From time to time, in marketing pieces and other fund literature, the
Fund's yield and performance over time may be compared to the performance of
broad groups of comparable mutual funds, bank money market deposit accounts and
fixed-rate insured certificates of deposit (CDs), or unmanaged indexes of
securities that are comparable to money market funds in their terms and intent,
such as Treasury bills, bankers' acceptances, negotiable order of withdrawal
accounts, and money market certificates. Most bank CDs differ from money market
funds in several ways: the interest rate is fixed for the term of the CD, there
are interest penalties for early withdrawal of the deposit, and the deposit
principal is insured by the FDIC.
Bond Portfolio
Yield is the net annualized yield based on a specified 30-day (or one
month) period assuming a semiannual compounding of income. Yield is
calculated by dividing the net investment income per share earned during
the period by the maximum offering price per share on the last day of the
period, according to the following formula:
YIELD = 2[((a-b)/cd + 1)6 - 1] Where:
a = dividends and interest earned during the
period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on
the last day of the period.
Yield for the 30-day period ended December 31, 1997
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):
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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.
Average Annual Total Return for periods ended December 31, 1997
One Five Ten Life of
Year Years Years Fund
Money Market Portfolio
Bond Portfolio
Balanced Portfolio*
Growth and Income Portfolio
Capital Growth Portfolio
Global Discovery Portfolio
International Portfolio
(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.
- -------------------------------
* 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.
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<PAGE>
Average Annual Total Return for periods ended December 31, 1997
One Five Ten Life of
Year Years Years Fund
Money Market Portfolio
Bond Portfolio
Balanced Portfolio*
Growth and Income Portfolio
Capital Growth Portfolio
Global Discovery Portfolio
International Portfolio
(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)
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 Fund 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.
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
- -----------------------------
* 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.
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<PAGE>
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.
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.
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:
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<PAGE>
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.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
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<PAGE>
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.
SmartMoney, 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 issued 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
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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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ORGANIZATION AND CAPITALIZATION
(See "ADDITIONAL INFORMATION - Shareholder Indemnification"
in the Fund's prospectus.) General
TO BE UPDATED
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, 1997, AEtna Life Insurance and Annuity Company (151
Farmington Avenue TS41, Hartford, CT 06156), owned of record and beneficially
____% of the International Portfolio; they owned of record and beneficially
____% 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 ___% of the Money Market Portfolio, ___% of the Bond Portfolio,
___% of the Balanced Portfolio, ___% of the International Portfolio, ___% of the
Growth and Income Portfolio, ___% of the Global Discovery Portfolio and ____% of
the Capital Growth Portfolio; they owned of record and beneficially ___% 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 ____% of the Money Market Portfolio,
____% of the Bond Portfolio, ____% of the Balanced Portfolio, ____% of the
Capital Growth Portfolio, ____% of the Growth and Income Portfolio, ____% of the
Global Discovery Portfolio and ____% of the International Portfolio; they owned
of record and beneficially ____% 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 ____% of the International Portfolio;
they owned of record and beneficially ____% 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 ___% of the Bond
Portfolio and ___% of the Balanced Portfolio; they owned of record and
beneficially ____% 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 ____% of the
Bond Portfolio, ____% of the Capital Growth Portfolio and ____% of the
International Portfolio; they owned of record and beneficially _____% of the
Fund's total outstanding shares; and Paragon Life Insurance Company (100 South
Brentwood, St. Louis, MO 63105) owned of record and beneficially ___% of the
Bond Portfolio, ___% of the Capital Growth Portfolio, ___% of the Balanced
Portfolio, ___% of the Growth and Income Portfolio, and ___% of the
International Portfolio; they owned of record and beneficially ____% 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
___% of the Bond Portfolio, ___% of the Growth and Income Portfolio, and ___% of
the International Portfolio; they owned of record and beneficially ____% 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 ____% 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 ___% of the International Portfolio; and Southwestern
Life Insurance Company (500 North Akard, Dallas, TX 75201) owned of record and
beneficially ___% of the Capital Growth Portfolio; and The Union Central Life
Insurance Company (1876 Waycross Road, Cincinnati, OH 45240) owned of record and
beneficially ____% of the Money Market Portfolio, ___% of the Capital Growth
Portfolio and ___% of the International Portfolio; they owned of record and
beneficially ____% 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 ___% of the Money Market Portfolio and ___% 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 ___% of the Money Market Portfolio, ___% of the Bond Portfolio,
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and ___% of the International Portfolio; they owned of record and beneficially
____% 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 ___% 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 ___% of
the Money Market Portfolio, ___% of the Bond Portfolio, ___% of the Growth and
Income Portfolio and ___% 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
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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
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, 1995, 1996 and 1997, the Fund paid
brokerage commissions of $2,669,610, $2,106,414 and $_________, respectively. In
the years ended December 31, 1995, 1996, and 1997, the International Portfolio
paid brokerage commissions of $1,813,248, $1,403,778 and $_________,
respectively, the Capital Growth Portfolio paid brokerage commissions of
$788,596, $505,817 and $_________, respectively and the Balanced Portfolio paid
brokerage commissions of $67,758, $67,828 and $_________, respectively. The
Growth and Income Portfolio paid brokerage commissions of $54,235, $78,517 and
$_________, respectively. In the year ended December 31, 1997, $_____________ of
the total brokerage commissions paid by the International Portfolio,
$_____________ of the total brokerage commissions paid by the Capital Growth
Portfolio, $_____________ of the total brokerage commissions paid by the Growth
and Income Portfolio, $_____________ of the total brokerage commissions paid by
the Balanced Portfolio, and $_____________ 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 $_____________ for the
International Portfolio (__% of all brokerage transactions), $_____________ for
the Capital Growth Portfolio (__% of all brokerage transactions),
$_____________for the Growth and Income Portfolio (__% of all brokerage
transactions), $_____________ (__% of all brokerage transactions) for the
Balanced Portfolio and $_____________ (__% 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, 1996 and 1997, respectively, was:
December 31,
1996 1997
Bond Portfolio 85.11%
Balanced Portfolio 67.56
Growth and Income 32.18
Portfolio
Capital Growth Portfolio 65.56
Global Discovery Portfolio 50.31
International Portfolio 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
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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. 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
Global Discovery 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, 1997, and are hereby deemed to be
part of this Statement of Additional Information.
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APPENDIX
Description of Bond Ratings
Moody's Investors Service, Inc.
Aaa: Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds that are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa: Bonds that are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Standard & Poor's
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.
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SCUDDER
[Scudder Logo]
Scudder Variable Life
Investment Fund
Annual Report
December 31, 1997
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 Performance Update ...................................... 9
Growth and Income Portfolio Summary ....................................... 10
Capital Growth Portfolio Management Discussion ............................ 11
Capital Growth Performance Update ......................................... 12
Capital Growth Portfolio Summary .......................................... 13
Global Discovery Portfolio Management Discussion .......................... 14
Global Discovery Performance Update ....................................... 15
Global Discovery Portfolio Summary ........................................ 16
International Portfolio Management Discussion ............................. 17
International Performance Update ......................................... 18
International Portfolio Summary ........................................... 19
Investment Portfolios, Financial Statements, and Financial Highlights
Money Market Portfolio .............................................. 20
Bond Portfolio ...................................................... 26
Balanced Portfolio .................................................. 33
Growth and Income Portfolio ......................................... 42
Capital Growth Portfolio ............................................ 52
Global Discovery Portfolio .......................................... 60
International Portfolio ............................................. 70
Notes to Financial Statements ............................................. 80
Report of Independent Accounts ............................................ 84
Tax Information ........................................................... 85
Shareholder Meeting Results ............................................... 86
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
LETTER FROM THE FUND'S PRESIDENT
[PHOTO OMITTED]
David B. Watts, President,
Scudder Variable Life
Investment Fund
Dear Shareholders,
We are pleased to present the results of Scudder Variable Life Investment
Fund for the 12-month period ended December 31, 1997.
Investors should be pleased with the Portfolios' performance as each
delivered another year of positive, and in many cases, above-average returns. In
fact, five of the seven portfolios outperformed the median fund in their
respective category for the 12-month period. This performance is gratifying, and
is consistent with many of the Portfolios' longer term track records and
Scudder's history of below-average expenses.
As you review your Fund's performance, now may be a good time to check
your investment allocations. The bull market of U.S. stocks over the last seven
years has increased the weighting of U.S. equities in many shareholders'
portfolios. For others, investment goals may have changed, reflecting the
nearing of retirement or planned withdrawals. Whatever your situation, the Fund
provides the flexibility to invest or reallocate assets among seven distinct
portfolios that meet a variety of investment objectives. Reallocating your
portfolio is easy and can help keep your investment on track.
As you may know, the Fund's investment adviser has changed its name to
Scudder Kemper Investments, Inc. from Scudder, Stevens & Clark, Inc., reflecting
the acquisition of a majority interest in Scudder by Zurich Insurance Company,
and the combining of Scudder's business with that of Zurich Kemper Investments,
Inc. We think these changes are positive and will broaden our resources in
managing the Portfolios.
Thank you for your continued investment in Scudder Variable Life
Investment Fund. On the following pages you will find summaries of each
Portfolio's performance and investment strategy. We hope you find it informative
reading.
Sincerely,
/s/ David B. Watts
David B. Watts
President,
Scudder Variable Life Investment Fund
2
<PAGE>
MONEY MARKET PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
The Money Market Portfolio maintained its $1.00 share price throughout the
period and provided a positive total return of 5.25% for the 12 months ended
December 31, 1997. The Portfolio's 30-day net annualized yield at the end of
December was 5.27%. Among its peers, the Portfolio ranked in the top third
(31st) of 102 funds in the Variable Life Money Market category according to
Lipper Analytical Services.
In a volatile market, a
money market fund can
provide a haven.
During the course of the year, we kept a watchful eye on the Federal
Reserve Board in anticipation of further hikes in short-term interest rates. The
Fed raised the federal funds rate -- a key short-term interest rate -- in March,
but left rates untouched for the remainder of the year. As inflation fears
cooled, short-term rates drifted lower during the second half of the year and it
became apparent that the Fed would maintain its hands-off policy on rates. As a
result, we gradually extended the Portfolio's average maturity, before trimming
back at year end. On December 31, 1997, the Portfolio's average maturity stood
at 33 days.
The Portfolio was invested in a diversified mix of high-quality money
market instruments, including commercial paper, certificates of deposit issued
by major banks, U.S. government securities, and short-term obligations from
highly-rated companies. We continued to overweight commercial paper in the
Portfolio because it tends to offer some of the highest money market yields
available. Commercial paper also tends to boost stability by providing the
opportunity to lock-in relatively attractive rates over a period of one to three
months.
In a changing investment climate such as this, a money market fund can
provide a haven from the volatile price movements of the stock and bond markets,
and a parking place as you consider your next investment. While we expect the
market's recent volatility to continue in the near term, we believe that the
Money Market Portfolio will provide a valuable and flexible component to your
investment portfolio.
In the months ahead, we will continue to monitor the economic and interest
rate environment, as we position the Portfolio for high current income, price
stability, and liquidity.
Sincerely,
Your Portfolio Management Team
/s/ David Wines /s/ Debra A. Hanson
David Wines Debra A. Hanson
Lead Portfolio Manager
/s/ Nicca B. Alcantara
Nicca B. Alcantara
3
<PAGE>
BOND PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
Overall, 1997 was a good period for bond investors. Interest rates
generally declined from May through the end of the year, and (due to the inverse
relationship of interest rates to bond prices) bond prices rose. In this
environment, the Bond Portfolio provided a total return of 9.10% for the 12
months ended December 31, 1997, nearly matching the 9.67% return of the
unmanaged Lehman Aggregate Bond Index for the same period. Among its peers, the
Portfolio ranked 15th of 28 funds in the Variable Life Corporate Debt A-Rated
category according to Lipper Analytical Services.
Bond holders generally received dividends and price appreciation, a combination
investors should not expect every year.
Economic growth was robust especially during the first half of the year,
but inflation remained practically nonexistent. This environment caused the
benchmark U.S. Treasury bond yield, which began the year at 6.64%, to peak at
7.20% in April, and to decline to 5.92% by the end of the period. Bond holders
generally received dividends and price appreciation, a combination investors
should not expect every year.
Given uncertainties surrounding the level of economic growth and inflation
over the first half of the year, we maintained a neutral portfolio duration and
focused on sector allocations. We de-emphasized mortgage securities, and
increased our "barbelled" maturity strategy by adding to holdings at the short
and long ends of the maturity spectrum. As the Asian crisis deepened and
inflation showed few signs of accelerating, we lengthened the Portfolio's
duration slightly to take advantage of declining interest rates and rising bond
prices. At the end of the period, the Portfolio's duration stood at 5.3 years.
From a sector standpoint, we maintained a significant weighting in
corporate bonds throughout the year. Corporates performed well during the first
nine months of the year. However, they underperformed during the fourth quarter,
especially as rates continued to decline and Treasuries shot up. We also
continued to underweight mortgages as individuals stepped up refinancings.
We expect interest rates to trend downward in the months ahead. Inflation
remains low, and slowing corporate profit growth and uncertainty in Asia provide
few reasons to expect rising interest rates. In this environment, we plan to
continue with our diversified approach, while emphasizing securities that can
add incremental value to the Portfolio's long-term performance.
Sincerely,
Your Portfolio Management Team
/s/ William M. Hutchinson /s/ Kelly D. Babson
William M. Hutchinson Kelly D. Babson
Lead Portfolio Manager
4
<PAGE>
BOND PORTFOLIO
PORTFOLIO SUMMARY as of December 31, 1997
- -----------------------------------------
Bond Portfolio
- -----------------------------------------
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
1 Year $10,910 9.10% 9.10%
5 Year $14,183 41.83% 7.24%
10 Year $22,711 127.11% 8.55%
- -----------------------------------------
- -----------------------------------------
LB Aggregate Bond Index
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
1 Year $10,967 9.67% 9.67%
5 Year $14,345 43.45% 7.48%
10 Year $24,057 140.57% 9.17%
- -----------------------------------------
GROWTH OF A $10,000 INVESTMENT
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:
LB Aggregate Bond Index Bond Portfolio
----------------------- --------------
'87 100,000 '87 10,000
'88 10,789 '88 10,546
'89 12,357 '89 11,774
'90 13,461 '90 12,724
'91 15,614 '91 14,964
'92 16,771 '92 16,012
'93 18,406 '93 17,995
'94 17,869 '95 17,134
'95 21,170 '96 20,247
'96 21,935 '97 20,187
'97 24,057 '98 22,711
Yearly periods ended December 31
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
- -----------------------------------
- -----------------------------------
U.S. Gov't & Agencies 37%
AAA* 15%
AA 3%
A 13%
BBB 18%
BB 8%
B 6%
----
100%
====
Average Quality: AA
*Category includes cash equivalents
A graph in the form of a pie chart appears here, illustrating the exact data
points in the above table.
For most of the year the Portfolio's maturity distribution was "barbelled"
(emphasizing short and long maturities) until the fourth quarter, when duration
was lengthened to take advantage of declining interest rates and the
corresponding rise in bond prices
- -----------------------------------
EFFECTIVE MATURITY
- -----------------------------------
- -----------------------------------
Less than 1 year 14%
1 < 3 years 8%
3 < 7 years 30%
7 < 12 years 21%
12 years or greater 27%
----
100%
====
- -----------------------------------
Weighted average effective maturity: 10 years
- -----------------------------------------
DIVERSIFICATION
- -----------------------------------------
- -----------------------------------------
Corporate Bonds 38%
U.S. Government & Agencies 16%
U.S. Government Agency Pass-Thrus 13%
Repurchase Agreement 10%
Short Term Investments 9%
Foreign Bonds - U.S.$ Denominated 7%
Gov't National Mortgage Association 4%
Asset-Backed Securities 3%
----
100%
====
- -----------------------------------------
5
<PAGE>
BALANCED PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
The U.S. stock and bond markets provided another year of strong returns,
driven by a continuation of healthy economic growth and benign inflation. In
this environment, the Balanced Portfolio provided a total return of 24.21% for
the 12 months ended December 31, 1997. The Portfolio also performed well
relative to its peers, ranking 3rd (in the top 8%) of 38 funds in the Variable
Life Balanced category according to Lipper Analytical Services. At the end of
the period, the Portfolio's assets were allocated 58% in equities and 42% in
fixed income securities (including cash), essentially unchanged from a year ago.
The Portfolio's balanced
approach is especially
well suited to weather
periods of volatility.
While the 12-month period was generally favorable for stocks and bonds, a
strong dollar and the currency crisis in Asia put pressure on earnings of large
multinational companies, particularly those in the consumer staples and
pharmaceutical areas. The Portfolio's equity holdings are heavily weighted in
these major global companies, and they were negatively affected by these
factors. In addition, profit warnings from Coca Cola, Gillette, and Avon
Products, and fears of slowing exports, exacerbated the decline. However, many
of the Portfolio's stocks which had been negatively impacted in the third
quarter recovered in the fourth quarter.
In managing the equity portion of the Portfolio, we pursue a
stock-by-stock selection approach. The Portfolio's sector weights typically are
in line with the Russell 1000 Growth Index. In keeping with the index, the
Portfolio's largest equity weightings were in the health care, consumer staples,
and technology sectors. Toward the end of the year, we made a decision to trim
exposure to semiconductor capital equipment stocks and swap other technology
holdings into computer services, reflecting our declining confidence in expected
growth rates as the crisis in Asia expanded.
Fixed-income investors benefited from declining interest rates and a
corresponding rise in bond prices from May through the end of the year. In
managing the Portfolio's fixed-income holdings, we maintained a neutral
portfolio duration and focused on sector allocations. We de-emphasized mortgage
securities, and increased our "barbelled" maturity strategy by adding to
holdings at the short and long ends of the maturity spectrum. As the Asian
crisis deepened and reports of accelerating inflation remained nonexistent, we
lengthened the portfolio's duration slightly to take advantage of declining
interest rates and rising bond prices.
We will continue to monitor developments in Asia closely, but we believe
the Portfolio is especially well suited to weather periods of uncertainty, given
its balanced approach to investing in quality growth companies and
investment-grade fixed-income securities.
Sincerely,
Your Portfolio Management Team
/s/ Valerie F. Malter /s/ William M. Hutchinson
Valerie F. Malter William M. Hutchinson
Lead Portfolio Manager
/s/ Kelly D. Babson
Kelly D. Babson
6
<PAGE>
BALANCED PORTFOLIO
PORTFOLIO SUMMARY as of December 31, 1997
- -----------------------------------------
Balanced Portfolio
- -----------------------------------------
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
1 Year $12,421 24.21% 24.21%
5 Year $18,527 85.27% 13.13%
10 Year $33,669 236.69% 12.91%
- -----------------------------------------
- -----------------------------------------
S&P 500 Index (60%)
and LBAB Index (40%)
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
1 Year $12,363 23.63% 23.63%
5 Year $20,202 102.02% 15.09%
10 Year $38,957 289.57% 14.55%
- -----------------------------------------
------------------------------
GROWTH OF A $10,000 INVESTMENT
------------------------------
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:
LBAB Index S&P 500 Index Balanced Portfolio
------------- ------------- ------------------
'87 10,000 '87 10,000 '87 10,000
'88 10,789 '88 11,659 '88 11,421
'89 12,357 '89 15,352 '89 13,647
'90 13,461 '90 14,876 '90 13,385
'91 15,614 '91 19,407 '91 16,990
'92 16,771 '92 20,893 '92 18,173
'93 18,406 '93 22,996 '93 19,527
'94 17,869 '94 23,299 '94 19,126
'95 21,170 '95 32,054 '95 24,227
'96 21,935 '96 39,412 '96 27,761
'97 24,057 '97 52,566 '97 33,669
Yearly periods ended December 31
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
84.77% and 14.05%, respectively.
- -----------------------------
EQUITY HOLDINGS
- -----------------------------
- -----------------------------
Sector breakdown of the
Portfolio's equity holdings
- -----------------------------
Health 22%
Consumer Staples 22%
Technology 15%
Consumer Discretionary 11%
Manufacturing 8%
Media 7%
Financial 6%
Durables 4%
Service Industries 4%
Energy 1%
----
100%
====
- -----------------------------
Five Largest Equity Holdings
1. General Electric Co. Leading producer of electrical equipment
2. Proctor & Gamble Co. Diversified manufacturer of consumer products
3. Pfizer, Inc. Leading international pharmaceutical company
4. Coca-Cola Co., Inc. International soft drink company
5. Microsoft Corp. Computer operating systems software
- -----------------------------------------------------
FIXED INCOME HOLDINGS
- -----------------------------------------------------
By Asset Type
- -----------------------------------------------------
U.S. Government Agencies 34%
Corporate Bonds 32%
U.S. Gov't Agency Pass-Thrus 19%
GNMA 6%
Foreign Bonds - U.S. $ Denominated 5%
Asset-Backed Securities 4%
----
100%
====
- -----------------------------------------------------
By Quality
- ---------------------------------
U.S. Government & Agencies 54%
AAA* 12%
AA 5%
A 11%
BBB 18%
----
100%
====
- ---------------------------------
*Category includes cash equivalents
7
<PAGE>
GROWTH AND INCOME PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
While volatility increased in the second half of 1997, equity investors
witnessed generous, above-average returns for the year. The Growth and Income
Portfolio directly benefited from this favorable environment and from the
defensive nature of our relative dividend yield strategy as stocks gyrated in
the second half. For the 12 months ended December 31, 1997, the Portfolio's
Class A shares returned 30.47%, modestly trailing the 33.38% return of the S&P
500 Index, a significant achievement considering the Portfolio's defensive
characteristics. Among it peers, the Portfolio ranked 25th (in the top 26%) of
96 Variable Life Growth and Income funds as tracked by Lipper Analytical
Services.
Our strategy of investing
in companies with low
expectations provides a
degree of downside protection.
The first half of the year was essentially a continuation of 1996 --
investors enjoyed the bull market ride, but kept looking tentatively over their
shoulders for signs of inflation. These worries were replaced by concerns of a
global economic slowdown in the second half, as an economic collapse and ensuing
liquidity crunch threw the Asian markets into a tailspin. U.S. investors
overreacted to the news, resulting in market rotations in both directions on an
almost daily basis.
The majority of the Portfolio's largest holdings significantly
outperformed the S&P 500 for the year. Near the close of the period, three of
our top performers gave back some of their gains, most notably Philips
Electronics and Xerox. Although we had been taking profits in both names to
reduce our exposure, these holdings held back performance. We would stress,
however, that despite the recent weakness, both stocks still dramatically
outperformed the market for the 12-month period.
A lack of technology holdings (due to their characteristically low
dividend yields) cushioned the Portfolio from many of the profit warnings
stemming from the crisis in Asia. An increased weighting in the electric utility
sector proved timely as these companies, with largely domestically-generated
earnings, were less affected by the lower overseas growth forecasts.
While the near term may provide some challenges, we continue to believe
investment conditions remain healthy. In this environment, we think our strategy
of investing in companies with low expectations should provide a degree of
protection as well as the potential for opportunity.
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
/s/ Deborah Chaplin
Deborah Chaplin
8
<PAGE>
GROWTH AND INCOME PORTFOLIO
PERFORMANCE UPDATE as of December 31, 1997
- --------------------
CLASS A
- --------------------
- -----------------------------------------
Growth and Income Portfolio
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
1 Year $13,047 30.47% 30.47%
3 Year $20,998 109.98% 28.05%
Life of
Fund* $22,028 120.28% 24.02%
- -----------------------------------------
- -----------------------------------------
S&P 500 Index
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
1 Year $13,338 33.38% 33.38%
3 Year $22,562 125.62% 31.12%
Life of
Fund* $23,458 134.58% 26.12%
- -----------------------------------------
* The Fund commenced operations on May 2, 1994. On May 1, 1997, existing shares
were designated as Class A shares.
------------------------------
GROWTH OF A $10,000 INVESTMENT
------------------------------
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:
S&P 500 Index+ Growth and Income Portfolio
---------------- ---------------------------
5/94* 10,000 5/94* 10,000
6/94 9,915 6/94 10,100
12/94 10,397 12/94 10,491
6/95 12,498 6/95 12,113
12/95 14,304 12/95 13,820
6/96 15,747 6/96 15,011
12/96 17,588 12/96 16,834
6/97 21,214 6/97 20,016
12/97 23,458 12/97 22,028
- --------------------
CLASS B
- --------------------
- -----------------------------------------
Growth and Income Portfolio
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
Life of
Fund* $12,289 22.89% --
- -----------------------------------------
- -----------------------------------------
S&P 500 Index
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
Life of
Fund** $12,258 22.58% --
- -----------------------------------------
** The Fund commenced selling Class B shares on May 1, 1997.
------------------------------
GROWTH OF A $10,000 INVESTMENT
------------------------------
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:
S&P 500 Index+ Growth and Income Portfolio
------------------ ---------------------------
5/1/97** 10,000 5/1/97** 10,000
5/97 10,609 5/97 10,593
6/97 11,085 6/97 11,165
7/97 11,967 7/97 11,903
8/97 11,296 8/97 11,466
9/97 11,916 9/97 12,180
10/97 11,518 10/97 11,796
11/97 12,051 11/97 12,139
12/97 12,258 12/97 12,289
+ 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 Growth and Income Portfolio.
9
<PAGE>
GROWTH AND INCOME PORTFOLIO
PORTFOLIO SUMMARY as of December 31, 1997
- ---------------------------------
DIVERSIFICATION
- ---------------------------------
- ---------------------------------
Equity Securities 97%
Cash Equivalents 3%
----
100%
====
- ---------------------------------
A graph in the form of a pie chart appears here, illustrating the exact data
points in the following table.
- ------------------------------
Sector breakdown of the
Portfolio's equity holdings
- ------------------------------
Financial 21%
Manufacturing 17%
Consumer Staples 12%
Communications 9%
Utilities 8%
Energy 8%
Durables 7%
Health 7%
Consumer Discretionary 5%
Other 6%
----
100%
====
- ------------------------------
The Portfolio's approach to selecting stocks with
above-average dividend yields provided downside
protection as volatility increased during
the second half of the year.
- --------------------------------------------------------------------------------
TEN LARGEST EQUITY HOLDINGS (22% of Portfolio)
- --------------------------------------------------------------------------------
1. Bell Atlantic Corp. Telecommunication services
2. Xerox Corp. Leading manufacturer of copiers and duplicators
3. Unilever NV Diversified conglomerate
4. Philip Morris Companies Inc. Tobacco, food products, and brewing
5. H.J. Heinz Co. Major manufacturer of processed foods
6. TRW Inc. Defense electronics, automotive parts and systems
7. Imperial Chemical Industries PLC Leading international chemical company
8. Ford Motor Co. Leading automobile manufacturer
9. GTE Corp. Nationwide telecommunications company
10. Chase Manhattan Corp. Commercial bank
10
<PAGE>
CAPITAL GROWTH PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
U.S. stocks were propelled higher by robust economic growth, solid
corporate earnings, and relatively benign inflation, despite increased
volatility in the second half of the year. In this environment the Capital
Growth Portfolio - Class A returned 35.76%, exceeding the 33.38% return of the
unmanaged S&P 500 for the 12-month period ended December 31, 1997. The Portfolio
also performed well relative to its peers, ranking 4th (in the top 3%) of 121
funds in the Variable Life Growth category according to Lipper Analytical
Services.
While those portfolio
holdings with perceived
Asian exposure suffered,
those deemed relatively
immune to global
goings-on surged ahead.
The dominant investment variable affecting equities can be summed up in
one word: Asia. What began as a small ripple in the world's financial markets in
early summer with devaluation of Thailand's currency roared into a truly global
financial event in October. The currency crisis was no longer an isolated
incident involving several smaller economies of Southeast Asia with little
implication for U. S. companies. It became a full-blown crisis in South Korea,
the world's 11th largest economy, and threatened to derail any potential
recovery in Japan.
Although we focus on seasoned companies with strong competitive positions,
many holdings were still affected by the Asian crisis. The stocks of those
companies and industries perceived to have significant Asian exposure suffered
the most. Many of the Portfolio's holdings that exhibited strong price
appreciation over the first nine months of the year declined sharply in the
fourth quarter, including Compaq and Applied Materials, which each declined in
excess of 20% in the fourth quarter alone.
The Portfolio's significant commitment to the energy sector in the form of
large multinational oil companies and oil field service providers, also crimped
performance, as oil prices weakened and investors worried about the
sustainability of strong global oil demand in light of a marked slowdown in
Asia.
Conversely, while those portfolio holdings with perceived Asian exposure
suffered, those deemed relatively immune to global goings-on surged ahead.
Walgreen, Fannie Mae, and Pfizer were significant positive contributors to
performance.
Our cautious outlook for U.S. profits in 1998 predated the unfolding Asian
crisis, so the crisis itself has not caused us to dramatically alter our
investment outlook. On the margin, however, our expectations for earnings growth
must necessarily trend somewhat lower. With current stock market valuations rich
and prospects for earnings slowing in 1998, we believe investors should expect
stocks to provide returns that are closer to their long-running average of about
10%.
Sincerely,
Your Portfolio Management Team
/s/ William F. Gadsden /s/ Bruce F. Beaty
William F. Gadsden Bruce F. Beaty
Lead Portfolio Manager
11
<PAGE>
CAPITAL GROWTH PORTFOLIO
PERFORMANCE UPDATE as of December 31, 1997
- --------------------
CLASS A
- --------------------
- -----------------------------------------
Capital Growth Portfolio
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
1 Year $13,576 35.76% 35.76%
5 Year $22,909 129.09% 18.03%
10 Year $47,169 371.69% 16.78%
- -----------------------------------------
- -----------------------------------------
S&P 500 Index
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
1 Year $13,338 33.38% 33.38%
5 Year $25,160 151.60% 20.25%
10 Year $52,566 425.66% 18.04%
- -----------------------------------------
* On May 12, 1997, existing shares were designated as Class A shares.
------------------------------
GROWTH OF A $10,000 INVESTMENT
------------------------------
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:
S&P 500 Index+ Capital Growth Portfolio
------------------ ------------------------
'87 10,000 '87 10,000
'88 11,659 '88 12,206
'89 15,352 '89 14,983
'90 14,876 '90 13,863
'91 19,407 '91 19,347
'92 20,893 '92 20,589
'93 22,996 '93 24,889
'94 23,299 '94 22,482
'95 32,054 '95 28,923
'96 31,412 '96 34,745
'97* 52,566 '97* 47,169
Yearly periods ended December 31
- --------------------
CLASS B
- --------------------
- -----------------------------------------
Capital Growth Portfolio
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
Life of
Fund** $11,800 18.00% --
- -----------------------------------------
- -----------------------------------------
S&P 500 Index
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
Life of
Fund** $11,554 15.54% --
- -----------------------------------------
** The Fund commenced selling Class B shares on May 12, 1997. Index comparisons
began on May 31, 1997.
------------------------------
GROWTH OF A $10,000 INVESTMENT
------------------------------
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:
S&P 500 Index+ Capital Growth Portfolio
--------------------- ------------------------
5/97** 10,000 5/97** 10,000
6/97 10,449 6/97 10,581
7/97 11,280 7/97 11,549
8/97 10,648 8/97 11,112
9/97 11,232 9/97 11,739
10/97 10,856 10/97 11,199
11/97 11,359 11/97 11,401
12/97 11,554 12/97 11,569
+ 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.
12
<PAGE>
CAPITAL GROWTH PORTFOLIO
PORTFOLIO SUMMARY as of December 31, 1997
- ---------------------------------
DIVERSIFICATION
- ---------------------------------
- ---------------------------------
Equity Securities 95%
Cash Equivalents 5%
----
100%
====
- ---------------------------------
A graph in the form of a pie chart appears here, illustrating the exact data
points in the following table.
- ------------------------------
Sector breakdown of the
Portfolio's equity holdings
- ------------------------------
Financial 21%
Energy 13%
Manufacturing 12%
Health 11%
Technology 10%
Consumer Discretionary 9%
Consumer Staples 7%
Service Industries 5%
Durables 5%
Other 7%
----
100%
====
- ------------------------------
The Portfolio's continuing emphasis on
selecting individual growth stocks with
good quality characteristics contributed
to its solid outperformance during the 12 months.
- --------------------------------------------------------------------------------
TEN LARGEST EQUITY HOLDINGS (24% of Portfolio)
- --------------------------------------------------------------------------------
1. American Express Credit Corp. Travel and investment services, insurance, and
banking
2. EXEL, Ltd. Provider of liability insurance
3. American International Group, Inc. Major international insurance holding
company
4. Home Depot, Inc. Building supply/home improvement stores
5. Procter & Gamble Co. Diversified manufacturer of consumer products
6. Intel Corp. Semiconductor memory circuits
7. Parker-Hannifin Group Fluid control components
8. Compaq Computer Corp. Leading manufacturer of personal computers
9. Royal Dutch Petroleum Co. International energy company
10. BankAmerica Corp. Commercial banking in California
13
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
U.S. small-cap stocks provided some of the best performance in the global
small company arena, as the negative sentiment surrounding the currency and
financial market crisis in Southeast Asia sapped the returns of many foreign
markets toward the end of the year. For the 12-month period ended December 31,
1997, the Global Discovery Portfolio -- Class A provided a total return of
12.38%, surpassing the 8.39% return of the unmanaged Salomon Brothers World
Extended Market Index.
While the Portfolio outperformed
its small-cap benchmark, large-cap
stocks dominated global stock
market performance.
The Portfolio's favorable performance was due primarily to an
insignificant exposure in Southeast Asia and careful stock selection. Although
the Portfolio invests principally in small-cap stocks, it is one of 38 funds
ranked in the Variable Life Global category, according to Lipper Analytical
Services. With large-cap stocks outperforming dramatically in 1997, the
Portfolio ranked 20th of 38 funds in this category as tracked by Lipper
Analytical Services for the 12 month period.
The collapse of the Southeast Asian markets affected almost every global
investor in some way in 1997. Stocks of large U.S. corporations, which derive
almost one-third of their profits from foreign sales, were not insulated from
the Asian contagion.
In the United States, a strong dollar, healthy economy, and relatively low
interest rates provided a favorable investment environment for most of the year.
In the Portfolio, we continued to increase our weighting of U.S. and Canadian
small-caps, which stood at the highest level since the Portfolio's inception
(48% of assets as of the end of the period).
Among our European holdings, we held major positions in the United Kingdom
and Ireland (the fastest growing country over the past 15 years). Both countries
have very competitive wage rates, and the United Kingdom is a particularly
fertile field for entrepreneurial service companies.
As for Japan, the well publicized banking and real estate problems have
been overhanging the market for years. However, we have begun to see some signs
of change that could lead to a more open market system. While our weighting in
Japan is relatively small, our holdings in specialty finance companies Nichei
and Shohkoh Fund were strong performers.
Overall, we focused the Portfolio on a limited number of holdings with
attractive fundamentals. This strategy yielded excellent returns from holdings
such as Marschollek Lautenschlaeger und Partner (Germany), Billing Concepts
(U.S.), Bank of Ireland (Ireland), Network Appliance (U.S.), and Provident
Financial (U.K.). Hedging selected currencies in the first half of the year
provided additional positive performance.
Clearly, policy makers' response to the Asian crisis will dictate the
world global stock market outlook for the immediate future. During this period
of re-evaluation we will attempt to focus the Portfolio on holdings that have
limited exposure to the events in Asia and on those companies that dominate
niche markets.
Sincerely,
Your Portfolio Management Team
/s/ Gerald J. Moran /s/ Sewall F. Hodges
Gerald J. Moran Sewall F. Hodges
Lead Portfolio Manager
14
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
PERFORMANCE UPDATE as of December 31, 1997
- --------------------
CLASS A
- --------------------
- -----------------------------------------
Global Discovery Portfolio
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
1 Year $11,238 12.38% 12.38%
Life of
Fund* $11,857 18.57% 10.75%
- -----------------------------------------
- -----------------------------------------
Salomon Brothers World Equity EMI Index
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
1 Year $10,839 8.39% 8.39%
Life of
Fund* $11,052 10.52% 6.17%
- -----------------------------------------
* The Fund commenced operations on May 1, 1996. On May 2, 1997, existing shares
were designated as Class A shares.
------------------------------
GROWTH OF A $10,000 INVESTMENT
------------------------------
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:
Salomon Brothers World Equity EMI Index+ Global Discovery Portfolio
---------------------------------------- --------------------------
5/96* 10,000 5/96* 10,000
6/96 9,946 6/96 9,967
9/96 9,945 9/96 10,180
12/96 10,197 12/96 10,343
3/97 9,895 3/97 10,015
6/97 11,010 6/97 11,377
9/97 11,701 9/97 12,002
12/97 11,052 12/97 11,624
- --------------------
CLASS B
- --------------------
- -----------------------------------------
Global Discovery Portfolio
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
Life of
Fund** $11,403 14.03% --
- -----------------------------------------
- -----------------------------------------
Salomon Brothers World Equity EMI Index
- -----------------------------------------
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
Life of
Fund** $11,196 11.96% --
- -----------------------------------------
** The Fund commenced selling Class B shares on May 2, 1997.
------------------------------
GROWTH OF A $10,000 INVESTMENT
------------------------------
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:
Salomon Brothers World Equity EMI Index+ Global Discovery Portfolio
---------------------------------------- --------------------------
5/2/97* 10,000 5/2/97* 10,000
5/97 10,797 5/97 10,694
6/97 11,153 6/97 11,177
7/97 11,469 7/97 11,387
8/97 11,342 8/97 11,258
9/97 11,853 9/97 11,790
10/97 11,368 10/97 11,258
11/97 11,177 11/97 11,113
12/97 11,196 12/97 11,403
+ The Salomon Brothers World Equity Extended Market Index is an unmanaged small
capitalization stock 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 were higher due to
maintenance of the Fund's expenses. See Financial Highlights for the Global
Discovery Portfolio.
15
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
PORTFOLIO SUMMARY as of December 31, 1997
- -------------------------
DIVERSIFICATION
- -------------------------
A chart in the form of a pie chart appears here, illustrating the exact data
points in the following table.
By Region
(Excluding 10% Cash Equivalents)
- --------------------------------
U.S. & Canada 48%
Europe 45%
Japan 5%
Latin America 2%
----
100%
====
- --------------------------------
The Portfolio's high U.S. weighting limited
its exposure to the volatility of the
Southeast Asian markets.
A chart in the form of a pie chart appears here, illustrating the exact data
points in the following table.
By Sector
(Equity Holdings)
- -------------------------------
Service Industries 17%
Financial 16%
Technology 16%
Health 10%
Consumer Staples 8%
Consumer Discretionary 7%
Communications 6%
Energy 5%
Media 5%
Other 2%
----
100%
====
- --------------------------------
- --------------------------------------------------
TEN LARGEST EQUITY HOLDINGS (29% of Portfolio)
- --------------------------------------------------
1. Network Appliance, Inc. Designer and manufacturer of network data storage
devices in the United States
2. Bank of Ireland PLC Bank in Ireland
3. Sterling Commerce, Inc. Producer of electronic data interchange products and
services in the United States
4. Billing Concepts Billing and information management services in the United
States
5. Serco Group PLC Facilities management company in the United Kingdom
6. Millicom International Cellular S.A. Developer and operator of cellular
telephone networks in Luxembourg
7. Shohkoh Fund & Co., Ltd. Finance company for small and medium-sized firms in
Japan
8. Sola International, Inc. Manufacturer of plastic eyeglass lenses in the
United States
9. Richter Gedeon Rt Pharmaceutical company in Hungary
10. Provident Financial PLC Personal finance group in the United Kingdom
16
<PAGE>
INTERNATIONAL PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
While international equity markets experienced increased volatility during
the latter half of 1997, the Portfolio's performance over the year benefited
primarily from generally favorable conditions in Europe. For the 12 months ended
December 31, 1997, the International Portfolio - Class A returned 9.07%,
exceeding the 2.26% performance of the unmanaged MSCI Europe, Australia, Far
East and Canada Index for the same period. Among its peers, the Portfolio ranked
in the top third (27th) of 81 funds in the Variable Life International category
as tracked by Lipper Analytical Services.
In the second half of 1997,
weightings in global
companies vulnerable
to the difficulties in the
emerging markets were
reduced.
The Portfolio was heavily weighted in Europe, where the investment climate
has been benefiting from ongoing economic deregulation, industry consolidation,
and corporate restructuring. During the 12 months, the best performing European
markets were the smaller ones, such as Italy, Spain, and Finland. We have been
focusing on companies which are restructuring and increasingly oriented toward
building value for shareholders, such as Elf Aquitaine in France or Bayerische
Vereinsbank in Germany. Because governments can no longer afford to coddle
inefficient businesses, many European companies are making the necessary changes
to compete globally. It is on these companies that we have been focusing our
investment efforts, as we believe these companies are most likely to succeed in
the wake of European Monetary Union ("EMU"), however it evolves.
The Portfolio remained underweighted in Japan, where the long-awaited
economic rebound is still in question. Further complicating matters, Japan has
deep economic ties to Southeast Asia. Japan has, however, begun to show signs of
reforming its own economy, and we have been selectively increasing exposure to
holdings that we believe will benefit from corporate restructurings, which will
be required to meet the challenges of a more deregulated environment.
We are maintaining a cautious stance toward most emerging markets. Nearly
all were impacted severely during the second half of 1997, as the spate of
Southeast Asian currency devaluations had a ripple effect on worldwide investor
sentiment. Structural difficulties in Asia remain, and there is a high
likelihood that a period of difficult economic retrenchment is in store for the
region before growth reaccelerates. Valuations in Latin America are not
compelling on a risk-adjusted basis, leading us to maintain a modest exposure to
that less-established investment venue.
Sincerely,
Your Portfolio Management Team
/s/ Irene T. Cheng /s/ Carol L. Franklin
Irene T. Cheng Carol L. Franklin
Lead Portfolio Manager
/s/ Nicholas Bratt /s/ Joan R. Gregory
Nicholas Bratt Joan R. Gregory
/s/ Marc Joseph /s/ Sheridan Reilly
Marc Joseph Sheridan Reilly
17
<PAGE>
INTERNATIONAL PORTFOLIO
PERFORMANCE UPDATE as of December 31, 1997
- ------------------
CLASS A
- ------------------
- ------------------------------------------
International Portfolio
- ------------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- ------------------------------------------
1 Year $10,907 9.07% 9.07%
5 Year $19,008 90.08% 13.71%
10 Year $30,494 204.94% 11.79%
- ------------------------------------------
- ------------------------------------------
MSCI EAFE & Canada Index
- ------------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- ------------------------------------------
1 Year $10,226 2.26% 2.26%
5 Year $17,249 72.49% 11.51%
10 Year $18,542 85.42% 6.36%
- ------------------------------------------
* On May 8, 1997, existing shares were designated as Class A shares.
-----------------------------------------
GROWTH OF A $10,000 INVESTMENT
-----------------------------------------
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:
MSCI EAFE & Canada Index+ International Portfolio
------------------------- -----------------------
'87 10,000 '87 10,000
'88 12,785 '88 11,673
'89 14,191 '89 16,084
'90 10,921 '90 14,853
'91 12,240 '91 16,553
'92 10,749 '92 16,043
'93 14,182 '93 22,110
'94 15,224 '94 21,922
'95 16,968 '95 24,359
'96 18,132 '96 27,960
'97 18,542 '97 30,494
Yearly periods ended December 31
- ------------------
CLASS B
- ------------------
- ------------------------------------------
International Portfolio
- ------------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- ------------------------------------------
Life of
Fund** $10,233 2.33% --
- ------------------------------------------
- ------------------------------------------
MSCI EAFE & Canada Index
- ------------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- ------------------------------------------
Life of
Fund** $ 9,686 -3.14% --
- ------------------------------------------
** The Fund commenced selling Class B shares on May 8, 1997. Index
comparisons began on May 31, 1997.
GROWTH OF A $10,000 INVESTMENT
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:
MSCI EAFE & Canada Index+ International Portfolio
------------------------- -----------------------
5/97** 10,000 5/97** 10,000
6/97 10,534 6/97 10,513
7/97 10,728 7/97 10,919
8/97 9,937 8/97 9,979
9/97 10,495 9/97 10,649
10/97 9,703 10/97 9,914
11/97 9,595 11/97 9,950
12/97 9,686 12/97 10,036
+ 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 reinvestment of dividends net of withholding tax and, unlike
Fund returns, do not reflect any fees or expenses.
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return
and principal value will fluctuate, so an investor's shares, when redeemed,
may be worth more or less than when purchased. Total returns in some periods
were higher due to maintenance of the Fund's expenses. See Financial
Highlights for the International Portfolio.
18
<PAGE>
INTERNATIONAL PORTFOLIO
PORTFOLIO SUMMARY as of December 31, 1997
- -------------------------
DIVERSIFICATION
- -------------------------
A graph in the form of a pie chart appears here, illustrating the exact data
points in the following table.
By Region
(Excluding 3% Cash Equivalents)
- -------------------------------
Europe 74%
Japan 16%
Pacific Basin 6%
Latin America 2%
U.S. & Canada 2%
----
100%
====
- -------------------------------
The Portfolio's significant emphasis in Europe and
underweighting in Japan and the emerging markets
limited its exposure to weak performance in Asia.
By Sector
(Equity Holdings)
- -------------------------------
Financial 26%
Manufacturing 20%
Health 8%
Durables 7%
Communications 5%
Energy 5%
Utilities 5%
Technology 4%
Service Industries 4%
Other 16%
----
100%
====
- -------------------------------
- ------------------------------------------------
TEN LARGEST EQUITY HOLDINGS (18% of Portfolio)
- ------------------------------------------------
1. Novartis AG Pharmaceutical company in Switzerland
2. Bayerische Vereinsbank AG Commercial bank in Germany
3. Skandia Foersaekrings AB Financial conglomerate in Sweden
4. Commerzbank AG Worldwide multi-service bank in Germany
5. Telecom Italia Mobile SPA Cellular telecommunication services in Italy
6. Portugal Telecom SA Telecommunication services
7. SmithKline Beecham PLC Manufacturer of drugs and healthcare products in the
United Kingdom
8. Credit Suisse Group Provider of bank services, management services and life
insurance in Switzerland
9. Muenchener Rueckversicherungs-Gesellschaft AG Insurance company in Germany
10. Societe Nationale Elf Aquitaine Pertroleum company in France
19
<PAGE>
MONEY MARKET PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1997
<TABLE>
<CAPTION>
% of Principal
Portfolio Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------
7.3% REPURCHASE AGREEMENT
---------------------------------------------------------------------------------
7,412,000 Repurchase Agreement with Donaldson, Lufkin &
Jenrette dated 12/31/97 at 6.5% to be repurchased at
$7,414,677 on 1/2/98, collateralized by a $7,163,000
U.S. Treasury Note, 6.5%, 8/31/01 (Cost $7,412,000).. 7,412,000
-----------
---------------------------------------------------------------------------------
75.0% COMMERCIAL PAPER
---------------------------------------------------------------------------------
Communications 9.8%
Telephone/
Communications 5,000,000 Ameritech Capital Funding Corp., 5.57%, 1/27/98* ..... 4,979,886
5,000,000 Bell South Telecommunications Corp., 5.63%, 1/27/98* . 4,979,669
-----------
9,959,555
-----------
Financial 65.2%
Banks 3.3% 3,400,000 Chase Manhattan Bank, 5.51%, 2/24/98* ................ 3,371,899
-----------
Business Finance 6.9%
4,000,000 New Center Asset Trust, 5.52%, 1/30/98* .............. 3,982,213
3,000,000 Prudential Funding Corp., 5.53%, 1/15/98* ............ 2,993,548
-----------
6,975,761
-----------
Consumer Finance 26.9%
5,000,000 A.I. Credit Corp., 5.98%, 1/6/98* .................... 4,995,847
4,500,000 American Express Credit Corp., 5.85%, 1/16/98* ....... 4,489,031
4,000,000 Ford Motor Credit Co., 5.70%, 1/6/98* ................ 3,996,922
4,000,000 Ford Motor Credit Co., 5.65%, 3/10/98* ............... 3,958,596
5,000,000 General Electric Capital Corp. 5.68%, 3/5/98* ........ 4,950,300
5,000,000 Household Finance Corp., 5.63%, 2/24/98* ............. 4,957,778
-----------
27,348,474
-----------
Other Financial
Companies 28.1%
4,000,000 Associates Corp. of North America, 5.57%, 1/5/98* .... 3,997,524
4,000,000 Ciesco L.P. 5.57%, 1/27/98* .......................... 3,983,909
4,000,000 CSW Credit Corp., 5.90%, 1/23/98* .................... 3,985,578
500,000 CSW Credit Corp., 5.70%, 2/24/98* .................... 495,725
4,000,000 Dresdner US Finance, 5.54%, 2/18/98* ................. 3,970,453
4,000,000 JP Morgan, 5.80%, 1/8/98* ............................ 3,995,489
3,000,000 John Deere Capital Corp., 5.52%, 2/11/98* ............ 2,981,140
5,000,000 Matterhorn Capital Corp., 5.73%, 1/15/98* ............ 4,988,858
-----------
28,398,676
-----------
Total Commercial Paper (Cost $76,054,365) ............ 76,054,365
-----------
---------------------------------------------------------------------------------
17.7% SHORT-TERM NOTES
---------------------------------------------------------------------------------
Financial
Banks 13.8% 3,000,000 Bank One, Columbus, N.A., Floating Rate Note,
5.51%, 6/10/98** .................................... 2,999,363
4,000,000 Bank of America NT&SA, 5.87%, 1/05/98 ................ 4,000,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Value ($)
Portfolio Amount ($) (Note A)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------
4,000,000 Canadian Imperial Bank, 5.685%, 3/2/98 ............... 3,999,001
3,000,000 Huntington National Bank, 5.8%, 9/22/98 .............. 2,998,363
-----------
13,996,727
-----------
Consumer Finance 3.9% 4,000,000 Abbey National North America, 5.65%, 4/15/98 ......... 3,999,448
-----------
Total Short Term Notes (Cost $17,996,175) ............ 17,996,175
-----------
- ------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $101,462,540) (a) ...... 101,462,540
===========
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Cost for federal income tax purposes is $101,462,540.
* Annualized yield at time of purchase; not a coupon rate. (Unaudited)
** Floating rate notes are securities whose interest rates vary with a
designated market index or market rate, such as the coupon-equivalent of
the U.S. Treasury Bill rate. These securities are shown at their rate as of
December 31, 1997.
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
MONEY MARKET PORTFOLIO
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments securities (cost $101,462,540) ........................ $101,462,540
Cash .............................................................. 175
Receivables:
Interest ....................................................... 440,287
Portfolio shares sold .......................................... 1,963,554
Other assets ...................................................... 35,159
------------
Total assets ................................................ 103,901,715
Liabilities
Payable for Portfolio shares redeemed ............................. $ 1,245,841
Accrued management fee ............................................ 32,495
Other payables and accrued expenses ............................... 47,002
------------
Total liabilities .............................................. 1,325,338
------------
Net assets, at value .............................................. $102,576,377
============
Net Assets
Net assets consist of:
Accumulated net realized loss .................................. (4,318)
Paid-in capital ................................................ 102,580,695
------------
Net assets, at value .............................................. $102,576,377
============
Net asset value, offering and redemption price per share
($102,576,377 / 102,576,377 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.
22
<PAGE>
MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Investment income
Interest ....................................................... $ 5,830,510
Expenses:
Management fee .............................................. $ 384,554
Custodian and accounting fees ............................... 47,313
Trustees' fees and expenses ................................. 17,024
Reports to shareholders ..................................... 2,699
Legal ....................................................... 7,320
Auditing .................................................... 6,488
Other ....................................................... 13,828 479,226
---------- -----------
Net investment income .......................................... 5,351,284
-----------
Net realized and unrealized gain (loss) on investment transactions
Net realized loss from investments ............................. (1,835)
-----------
Net increase in net assets resulting from operations .............. $ 5,349,449
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
23
<PAGE>
MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
Increase (Decrease) in Net Assets 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ............................................. $ 5,351,284 $ 4,385,955
Net realized gain (loss) from investment transactions ............. (1,835) (917)
------------- -------------
Net increase in net assets resulting from operations .............. 5,349,449 4,385,038
------------- -------------
Distributions to shareholders from net investment income .......... (5,351,284) (4,385,955)
------------- -------------
Portfolio share transactions at net asset value of $1.00 per share:
Proceeds from shares sold ...................................... 258,430,588 201,403,309
Net asset value of shares issued to shareholders in
reinvestment of distributions ............................... 5,348,533 4,385,955
Cost of shares redeemed ........................................ (258,986,535) (187,750,612)
------------- -------------
Net increase (decrease) in net assets from Portfolio share
transactions ................................................ 4,792,586 18,038,652
------------- -------------
Increase (decrease) in net assets ................................. 4,790,751 18,037,735
Net assets at beginning of period ................................. 97,785,626 79,747,891
------------- -------------
Net assets at end of period ....................................... $ 102,576,377 $ 97,785,626
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
24
<PAGE>
MONEY MARKET 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,
---------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---------------------------------------------------------------------------------------------------
<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 ...... .051 .050 .055 .037 .025 .033 .057 .076 .088 .068
Less distributions from
net investment income .... (.051) (.050) (.055) (.037) (.025) (.033) (.057) (.076) (.088) (.068)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period ................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Total Return (%) ........... 5.25 5.09 5.65 3.72 2.54 3.33 5.81 7.83 8.84 7.08
Ratios and
Supplemental Data
Net assets, end of period
($ millions) ............. 103 98 80 90 49 34 28 32 15 11
Ratio of operating expenses,
net to average daily net
assets (%) ............... .46 .46 .50 .56 .66 .64 .67 .69 .72 .75
Ratio of operating expenses
before expense reductions,
to average daily net
assets (%) ............... .46 .46 .50 .56 .66 .64 .67 .69 .81 1.04
Ratio of net investment
income to average daily
net assets (%) ........... 5.15 4.98 5.51 3.80 2.55 3.26 5.67 7.57 8.53 6.99
</TABLE>
25
<PAGE>
BOND PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1997
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
------------------------------------------------------------------------------------
9.8% REPURCHASE AGREEMENT
------------------------------------------------------------------------------------
7,892,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 12/31/97 at 6.5% to be repurchased at $7,894,850
on 1/2/98 collateralized by a $7,413,000 U.S. Treasury
Note, 6.88%, 5/15/06 (Cost $7,892,000) ................. 7,892,000
-----------
------------------------------------------------------------------------------------
8.7% SHORT TERM INVESTMENTS
------------------------------------------------------------------------------------
7,000,000 Federal Home Loan Mortgage Corp. Discount
Note, 1/2/98 (Cost $6,999,076) ......................... 6,999,076
-----------
------------------------------------------------------------------------------------
16.0% U. S. GOVERNMENT & AGENCIES
------------------------------------------------------------------------------------
2,000,000 U.S. Treasury Bond, 6.25%, 8/15/23 ....................... 2,060,000
1,000,000 U.S. Treasury Note, 6.125%, 7/31/00 ...................... 1,010,310
3,000,000 U.S. Treasury Note, 5.625%, 11/30/00 ..................... 2,994,360
5,000,000 U.S. Treasury Note, 6.25%, 1/31/02 ....................... 5,089,050
500,000 U.S. Treasury Note, 6.25%, 2/15/07 ....................... 515,935
4,000,000 U.S. Treasury STRIP, Principal Only, 11/15/98 ............ 1,140,400
-----------
Total U.S. Government & Agencies
(Cost $12,634,950) ..................................... 12,810,055
-----------
------------------------------------------------------------------------------------
4.7% GOV'T NATIONAL MORTGAGE ASSOCIATION
------------------------------------------------------------------------------------
1,115,540 Government National Mortgage Association Pass-thru
10%, 8/15/20 (a) ....................................... 1,242,678
2,461,871 Government National Mortgage Association Pass-thru
7.5%, 7/15/26 (a) ...................................... 2,522,630
-----------
Total Gov't National Mortgage Association
(Cost $3,714,016) ...................................... 3,765,308
-----------
------------------------------------------------------------------------------------
13.0% U. S. GOVERNMENT AGENCY PASS-THRUS
------------------------------------------------------------------------------------
527,129 Federal Home Loan Mortgage Corp., 8%, 4/1/08 (a) ......... 540,212
1,778,235 Federal Home Loan Mortgage Corp., 7.78%, 9/1/24 (a) ...... 1,858,807
1,367,417 Federal National Mortgage Association, 8%, 12/1/09 (a) ... 1,407,140
6,550,865 Federal National Mortgage Association, 7%, with various
maturities to 7/1/26 (a) ............................... 6,612,247
-----------
Total U.S. Government Agency Pass-thrus
(Cost $10,141,231) ..................................... 10,418,406
-----------
------------------------------------------------------------------------------------
7.3% FOREIGN BONDS - U. S. $ DENOMINATED
------------------------------------------------------------------------------------
1,625,000 Fage Dairy Industry SA, 9%, 2/1/07 ....................... 1,580,313
1,000,000 Hutchison Whampoa, Ltd., 7.5%, 8/1/27 .................... 957,030
200,000 ITT Publimedia BV, 9.375%, 8/15/07 ....................... 210,000
750,000 Rogers Cantel Inc., 8.8%, 10/1/07 ........................ 746,250
500,000 Petroleos Mexicanos S.A., 8.85%, 8/15/07 ................. 493,750
1,000,000 Korea Development Bank, 9.6%, 12/1/00 .................... 893,430
1,000,000 Nippon Telegraph & Telephone Corp., 9.5%, 7/27/98 ........ 1,019,930
-----------
Total Foreign Bonds - U.S.$ Denominated
(Cost $6,152,737) ...................................... 5,900,703
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
26
<PAGE>
BOND PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C>
------------------------------------------------------------------------------------
2.9% ASSET BACKED
------------------------------------------------------------------------------------
Automobile Receivables 1.3% 1,000,000 Premier Auto Trust Asset Backed Certificate, Series
1996-3 A4, 6.75%, 11/6/00 .............................. 1,010,620
-----------
Home Equity Loans 0.8% 443,497 Contimortgage Home Equity Loan Trust, Series 1996-1 A2,
5.58%, 1/15/11 ......................................... 442,109
200,267 United Companies Financial Corp., Home Equity Loan
Series 1993-B1, 6.075%, 7/25/14 ........................ 197,889
-----------
639,998
-----------
Manufactured Housing
Receivables 0.8% 650,000 Green Tree Financial Corp. Series 1997-1 B2, 7.76%,
3/15/28 ................................................ 657,008
-----------
Total Asset Backed (Cost $2,284,082) ..................... 2,307,626
-----------
------------------------------------------------------------------------------------
37.6% CORPORATE BONDS
------------------------------------------------------------------------------------
Consumer Staples 2.0% 1,000,000 J. Seagram & Sons Inc., 9%, 8/15/21 ...................... 1,219,100
400,000 Polymer Group, Inc., 9%, 7/1/07 .......................... 400,000
-----------
1,619,100
-----------
Financial 17.5% 2,000,000 Associates Corp. of North America, 6.625%, 5/15/01 ....... 2,024,436
1,000,000 BankAmerica Corp., 7.125%, 5/1/06 ........................ 1,039,970
1,000,000 First Industrial LP, 7.6%, 5/15/07 ....................... 1,044,500
1,750,000 First Union Institutional Capital II, 7.85%, 1/1/27 ...... 1,810,113
1,500,000 Highwoods/Forsyth L.P., 7%, 12/1/06 ...................... 1,510,350
750,000 People's Heritage Bank, 9.06%, 2/1/27 .................... 827,813
500,000 Security Capital Industrial Trust, 7.81%, 2/1/15 ......... 522,700
750,000 Spieker Properties, Inc., 7.875%, 12/1/16 ................ 806,033
200,000 Spieker Properties, Inc., 7.5%, 10/1/27 .................. 202,450
1,000,000 Susa Partnership L.P., 7.125%, 11/1/03 ................... 1,018,060
1,000,000 Susa Partnership L.P., 8.2%, 06/01/17 .................... 1,089,210
500,000 Taubman Realty Group LP Medium Term Note, 8%,
7/30/01 ................................................ 522,550
1,500,000 US West Capital Funding Inc., 7.9%, 2/1/27 ............... 1,641,510
-----------
14,059,695
-----------
Media 4.5% 250,000 Lamar Advertising Co., 8.625%, 9/15/07 ................... 255,938
1,000,000 Outdoor Systems, Inc., 8.875%, 6/15/07 ................... 1,045,000
1,000,000 Tele-Communications, Inc., 8.65%, 9/15/04 ................ 1,095,550
1,000,000 Time Warner Inc., 9.125%, 1/15/13 ........................ 1,190,770
-----------
3,587,258
-----------
Service Industries 1.3% 500,000 SC International Services, Inc., 9.25%, 9/1/07 ........... 515,000
500,000 ServiceMaster L.P., 7.45%, 8/15/27 ....................... 519,565
-----------
1,034,565
-----------
Durables 1.5% 1,000,000 Lockheed Corp., 9%, 1/15/22 .............................. 1,241,070
-----------
Manufacturing 1.0% 500,000 Argo-Tech Corp., 8.625%, 10/1/07 ......................... 500,000
300,000 GFSI Inc., 9.625%, 3/1/07 ................................ 309,000
-----------
809,000
-----------
Technology 3.4% 500,000 Amphenol Corp., 9.875%, 5/15/07 .......................... 525,000
1,000,000 International Business Machines Corp., 7%, 10/30/45 ...... 1,024,310
</TABLE>
The accompanying notes are an integral part of the financial statements.
27
<PAGE>
BOND PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C>
1,000,000 Loral Corp., 8.375%, 6/15/24 ............................. 1,174,560
-----------
2,723,870
-----------
Energy 2.6% 750,000 Barrett Resources Corp., 7.55%, 2/1/07 ................... 775,973
1,000,000 Chesapeake Energy Corp., 8.5%, 3/15/12 ................... 997,500
300,000 Dawson Production Services, Inc., 9.375%, 2/1/07 ......... 316,125
-----------
2,089,598
-----------
Construction 0.6% 500,000 Nortek, Inc., 9.125%, 9/1/07 ............................. 507,500
-----------
Transportation 2.5% 700,000 Allied Holdings Inc., 8.625%, 10/1/07 .................... 710,500
675,000 Atlantic Express, Inc., 10.75%, 2/1/04 ................... 717,188
500,000 Newport News Shipbuilding Co., 8.625%, 12/1/06 ........... 526,250
-----------
1,953,938
-----------
Utilities 0.7% 500,000 Houston Light & Power Capital Corp., 8.257%, 2/1/37 ...... 525,860
-----------
Total Corporate Bonds (Cost $28,176,416) ................. 30,151,454
- --------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0%
(Cost $77,994,508) (b) ................................. 80,244,628
===========
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Effective maturities will be shorter due to prepayments.
(b) At December 31, 1997, the net unrealized appreciation
on investments based on cost for federal income tax
purposes of $77,994,508 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of market value
over tax cost ............................................. $ 2,568,310
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over market value ....................................... 318,190
------------
Net unrealized appreciation ............................... $ 2,250,120
============
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments and U.S. Government and Government Agency securities), for the
year ended December 31, 1997, aggregated $23,601,711 and $16,205,618,
respectively. Purchases and sales of U.S. Government and Government Agency
securities for the year ended December 31, 1997, aggregated $13,261,511 and
$15,908,907, respectively.
- --------------------------------------------------------------------------------
The aggregate face value of futures contracts opened and closed during the
year ended December 31, 1997 was $231,817,897.
The accompanying notes are an integral part of the financial statements.
28
<PAGE>
BOND PORTFOLIO
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments, at market (cost $77,994,508) .......................... $ 80,244,628
Cash ............................................................... 1,354
Receivables:
Investments sold ................................................ 46,086
Interest ........................................................ 1,144,288
Portfolio shares sold ........................................... 10,902
Other assets ....................................................... 1,118
------------
Total assets ................................................. 81,448,376
Liabilities
Payables:
Accrued management fee .......................................... $ 31,170
Other payables and accrued expenses ............................. 30,174
----------
Total liabilities ............................................ 61,344
------------
Net assets, at market value ........................................ $ 81,387,032
============
Net Assets
Net assets consist of:
Undistributed net investment income ............................. 1,252,060
Net unrealized appreciation (depreciation) on investments ....... 2,250,120
Accumulated net realized gain (loss) ............................ 145,455
Paid-in capital ................................................. 77,739,397
------------
Net assets, at market value ........................................ $ 81,387,032
============
Net asset value, offering and redemption price per share
($81,387,032 / 11,852,430 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized)... $6.87
=====
</TABLE>
The accompanying notes are an integral part of the financial statements.
29
<PAGE>
BOND PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Investment income
Interest ........................................................ $ 4,859,346
Expenses:
Management fee ............................................... $ 321,323
Custodian fees ............................................... 17,460
Accounting fees .............................................. 38,269
Reports to shareholders ...................................... 2,066
Trustees' fees and expenses ................................. 17,168
Auditing ..................................................... 4,300
Legal ........................................................ 3,181
Other ........................................................ 13,999 417,766
--------- -----------
Net investment income ........................................... 4,441,580
-----------
Net realized and unrealized gain (loss) on investment transactions
Net realized gain (loss) from:
Investments .................................................. 215,300
Futures ...................................................... (21,111) 194,189
---------
Net unrealized appreciation (depreciation) during the period on:
Investments .................................................. 1,334,379
-----------
Net gain (loss) on investment transactions ...................... 1,528,568
-----------
Net increase (decrease) in net assets resulting from operations .... $ 5,970,148
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
30
<PAGE>
BOND PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
Increase (Decrease) in Net Assets 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income .......................................... $ 4,441,580 $ 3,806,734
Net realized gain (loss) from investment transactions .......... 194,189 598,986
Net unrealized appreciation (depreciation) on investment
transactions during the period .............................. 1,334,379 (2,514,348)
------------ ------------
Net increase (decrease) in net assets resulting from operations ... 5,970,148 1,891,372
------------ ------------
Distributions to shareholders from:
Net investment income .......................................... (4,208,036) (5,405,378)
------------ ------------
Net realized gains from investment transactions ................ (189,814) --
------------ ------------
Portfolio share transactions:
Proceeds from shares sold ...................................... 27,517,062 27,555,910
Net asset value of shares issued to shareholders in
reinvestment of distributions ............................... 4,397,850 5,405,378
Cost of shares redeemed ........................................ (17,869,599) (36,192,318)
------------ ------------
Net increase (decrease) in net assets from Portfolio share
transactions ................................................... 14,045,313 (3,231,030)
------------ ------------
Increase (decrease) in net assets ................................. 15,617,611 (6,745,036)
Net assets at beginning of period ................................. 65,769,421 72,514,457
------------ ------------
Net assets at end of period (including undistributed net investment
income of $1,252,060 and $1,075,196, respectively) ............. $ 81,387,032 $ 65,769,421
============ ============
Other Information
Increase (decrease) in Portfolio shares
Shares outstanding at beginning of period ......................... 9,775,320 10,126,562
------------ ------------
Shares sold .................................................... 4,073,136 4,122,227
Shares issued to shareholders in reinvestment of distributions . 661,744 806,843
Shares redeemed ................................................ (2,657,770) (5,280,312)
------------ ------------
Net increase (decrease) in Portfolio shares .................... 2,077,110 (351,242)
------------ ------------
Shares outstanding at end of period ............................... 11,852,430 9,775,320
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
31
<PAGE>
BOND PORTFOLIO
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding (a)
throughout each period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ....... $ 6.73 $ 7.16 $ 6.48 $ 7.42 $ 7.19 $ 7.37 $ 6.73 $ 6.72 $ 6.39 $ 6.47
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from investment
operations:
Net investment income ..... .44 .41 .44 .43 .48 .49 .52 .53 .54 .54
Net realized and
unrealized gain (loss) on
investment transactions... .15 (.22) .69 (.77) .38 (.02) .61 (.02) .18 (.19)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations ................ .59 .19 1.13 (.34) .86 .47 1.13 .51 .72 .35
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less distributions from:
Net investment income ..... (.43) (.62) (.45) (.43) (.48) (.46) (.47) (.50) (.39) (.43)
Net realized gains on
investment transactions... (.02) -- -- (.17) (.15) (.19) (.02) -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions ......... (.45) (.62) (.45) (.60) (.63) (.65) (.49) (.50) (.39) (.43)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value,
end of period ............... $ 6.87 $ 6.73 $ 7.16 $ 6.48 $ 7.42 $ 7.19 $ 7.37 $ 6.73 $ 6.72 $ 6.39
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total Return (%) ............ 9.10 2.82 18.17 (4.79) 12.38 7.01 17.61 8.06 11.65 5.46
Ratios and
Supplemental Data
Net assets, end of
period ($ millions) ....... 81 66 73 142 129 113 74 42 22 3
Ratio of operating expenses,
net to average daily net
assets (%) ................ .62 .61 .56 .58 .61 .63 .69 .73 .75 .75
Ratio of operating expenses
before expense reductions,
to average daily net
assets (%) ................ .62 .61 .56 .58 .61 .63 .69 .73 .84 1.40
Ratio of net investment
income to average
daily net assets (%) ...... 6.55 6.20 6.29 6.43 6.59 6.89 7.51 8.05 8.04 7.86
Portfolio turnover rate (%).. 56.07 85.11 177.21 96.55 125.15 87.00 115.86 71.02 103.41 245.23
</TABLE>
(a) Based on monthly average shares outstanding during the period.
32
<PAGE>
BALANCED PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1997
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
------------------------------------------------------------------------------------
7.3% REPURCHASE AGREEMENT
------------------------------------------------------------------------------------
8,648,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 12/31/97 at 6.5% to be repurchased at $8,651,123
on 1/2/98, collateralized by a $5,417,000 U.S. Treasury
Bond, 13.25%, 5/15/14 (Cost $8,648,000) ............... 8,648,000
-----------
------------------------------------------------------------------------------------
11.7% U.S. GOVERNMENT & AGENCIES
------------------------------------------------------------------------------------
1,200,000 U.S. Treasury Bond, 7.25%, 5/15/16 ...................... 1,366,872
1,300,000 U.S. Treasury Bond, 6.25%, 8/15/23 ...................... 1,339,000
1,000,000 U.S. Treasury Note, 5.25%, 7/31/98 ...................... 998,280
2,000,000 U.S. Treasury Note, 5.75%, 12/31/98 ..................... 2,002,820
3,000,000 U.S. Treasury Note, 5.625%, 12/31/99 .................... 2,998,590
500,000 U.S. Treasury Note, 6.125%, 7/31/00 ..................... 505,155
1,150,000 U.S. Treasury Note, 5.625%, 11/30/00 .................... 1,147,838
1,000,000 U.S. Treasury Note, 6.25%, 1/31/02 ...................... 1,017,810
2,000,000 U.S. Treasury Note, 5.625%, 2/15/06 ..................... 1,977,500
1,500,000 U.S. Treasury STRIP, Principal only, 11/15/18 ........... 427,650
-----------
Total U.S. Government & Agencies (Cost $13,559,104) ..... 13,781,515
-----------
------------------------------------------------------------------------------------
2.0% GOVERNMENT NATIONAL MORTGAGE ASSOC.
------------------------------------------------------------------------------------
413,339 Government National Mortgage Association Pass-thru,
10%, 8/15/20 (a) ...................................... 460,447
523,852 Government National Mortgage Association Pass-thru,
8.75%, 12/15/24 (a) ................................... 547,588
1,270,400 Government National Mortgage Association Pass-thru,
8.5% with various maturities to 9/15/26 (a) ........... 1,334,969
-----------
Total Government National Mortgage Assoc.
(Cost $2,245,125) ..................................... 2,343,004
-----------
------------------------------------------------------------------------------------
6.7% U. S. GOVERNMENT AGENCY PASS-THRUS
------------------------------------------------------------------------------------
878,548 Federal Home Loan Mortgage Corp., 8%, 4/1/08 (a) ........ 900,353
2,426,276 Federal National Mortgage Association, 6.5% with various
maturities to 2/1/26 (a) .............................. 2,405,046
4,468,968 Federal National Mortgage Association, 7% with various
maturities to 9/1/26 (a) .............................. 4,510,842
-----------
Total U.S. Government Agency Pass-thrus
(Cost $7,557,953) ..................................... 7,816,241
-----------
------------------------------------------------------------------------------------
1.8% FOREIGN BONDS - U.S. $ DENOMINATED
------------------------------------------------------------------------------------
250,000 ABN-AMRO Bank NV, 7.75%, 5/15/23 ........................ 276,020
1,000,000 Deutsche Bank, 7.5%, 4/25/09 ............................ 1,077,080
500,000 Midland Bank PLC, 6.95%, 3/15/11 ........................ 506,675
250,000 Seagram Co., Ltd., 6.875%, 9/1/23 ....................... 246,678
-----------
Total Foreign Bonds - U.S. $ Denominated Total
(Cost $1,942,394) ..................................... 2,106,453
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
33
<PAGE>
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------
1.4% ASSET BACKED
------------------------------------------------------------------------------------
Automobile Receivables 0.5%
44,001 Premier Auto Trust Asset Backed Certificate,
Series 1994-3, 6.8%, 12/2/99 ........................... 44,042
500,000 Premier Auto Trust Asset Backed Certificate,
Series 1996-3, 6.5%, 3/6/00 ............................ 501,405
-----------
545,447
-----------
Credit Card Receivables 0.7%
850,000 Sears Credit Account Master Trust, Series 1995-A4,
6.25%, 1/15/03 ......................................... 850,791
-----------
Home Equity Loans 0.2%
147,832 Contimortgage Home Equity Loan Trust, Series 1996-1 A2,
5.58%, 1/15/11 ......................................... 147,370
50,067 United Companies Financial Corp., Home Equity Loan,
Series 1993-B1, 6.075%, 7/25/14 ........................ 49,472
-----------
196,842
-----------
Total Asset Backed (Cost $1,588,986) .................... 1,593,080
-----------
------------------------------------------------------------------------------------
10.9% CORPORATE BONDS
------------------------------------------------------------------------------------
Consumer Discretionary 0.2%
250,000 Price/Costco Inc., 7.125%, 6/15/05 ...................... 257,700
-----------
Consumer Staples 0.2%
270,000 J. Seagram & Sons Inc., 7%, 4/15/08 ..................... 278,465
-----------
Financial 4.9%
750,000 Associates Corp. of North America, 6.625%, 5/15/01 ...... 759,165
1,000,000 Highwoods/Forsyth L.P., 7%, 12/1/06 ..................... 1,006,900
250,000 NationsBank Corp., 7.25%, 10/15/25 ...................... 263,083
1,000,000 Southern National Corp., 7.05%, 5/23/03 ................. 1,029,630
750,000 Spieker Properties, Inc., 7.875%, 12/1/16 ............... 806,033
500,000 Susa Partnership L.P., 8.2%, 6/1/17 ..................... 544,605
800,000 US West Capital Funding Inc., 7.9%, 2/1/27 .............. 875,472
500,000 Wells Fargo & Co., 6.875%, 4/1/06 ....................... 510,675
-----------
5,795,563
-----------
Media 1.5%
500,000 TCI Communications, Inc., 8.65%, 9/15/04 ................ 547,775
1,000,000 Time Warner Inc., 9.125%, 1/15/13 ....................... 1,190,770
-----------
1,738,545
-----------
Service Industries 0.9%
1,000,000 ServiceMaster L.P., 7.45%, 8/15/27 ...................... 1,039,130
-----------
Durables 0.7%
250,000 Lockheed Corp., 9%, 1/15/22 ............................. 310,268
500,000 Northrop Grumman Corp., 7.875%, 3/1/26 .................. 556,345
-----------
866,613
-----------
Manufacturing 0.2%
250,000 Corning Inc., 8.75%, 7/15/99 ............................ 259,050
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
34
<PAGE>
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Technology 0.5%
500,000 Loral Corp., 8.375%, 6/15/24 ............................ 587,280
-----------
Energy 0.7%
500,000 Atlantic Richfield Co., 8.25%, 2/1/22 ................... 588,850
250,000 Enron Corp., 10%, 6/1/98 ................................ 253,960
-----------
842,810
-----------
Metals & Minerals 0.9%
1,000,000 Potash Corp., 7.125%, 6/15/07 ........................... 1,022,760
-----------
Utilities 0.2%
250,000 Commonwealth Edison Co., 9.05%, 10/15/99 ................ 260,875
-----------
Total Corporate Bonds (Cost $12,079,227) ................ 12,948,791
-----------
------------------------------------------------------------------------------------
58.2% COMMON STOCKS
------------------------------------------------------------------------------------
Shares
------------------------------------------------------------------------------------
Consumer Discretionary 6.3%
Department &
Chain Stores 4.5% 21,600 Costco Companies Inc.* .................................. 963,900
33,600 Home Depot, Inc. ........................................ 1,978,200
12,700 Nordstrom, Inc. ......................................... 766,763
39,700 Wal-Mart Stores Inc. .................................... 1,565,669
-----------
5,274,532
-----------
Hotels & Casinos 0.7% 41,400 Host Marriott Corp.* .................................... 812,475
-----------
Specialty Retail 1.1% 38,500 Corporate Express, Inc.* ................................ 495,688
36,700 Pier 1 Imports, Inc. .................................... 830,338
-----------
1,326,026
-----------
Consumer Staples 12.6%
Alcohol & Tobacco 1.6% 42,800 Philip Morris Companies Inc. ............................ 1,939,375
-----------
Consumer Specialties 0.5% 18,100 Samsonite Corp.* ........................................ 572,413
-----------
Food & Beverage 4.9% 36,700 Coca-Cola Co., Inc. ..................................... 2,445,138
30,300 H.J. Heinz Co. .......................................... 1,539,619
28,400 Interstate Bakers Corp. ................................. 1,061,450
13,100 Suiza Foods Corp.* ...................................... 780,269
-----------
5,826,476
-----------
Package Goods/
Cosmetics 5.6% 24,500 Colgate-Palmolive Co. ................................... 1,800,750
17,945 Gillette Co. ............................................ 1,802,351
38,000 Procter & Gamble Co. .................................... 3,032,864
-----------
6,635,965
-----------
Health 12.9%
Biotechnology 1.1% 20,200 Guidant Corp. ........................................... 1,257,450
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
35
<PAGE>
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Health Industry
Services 1.3% 17,000 HBO & Company, Inc. ..................................... 816,000
25,500 Total Renal Care Holdings, Inc.* ........................ 701,250
-----------
1,517,250
-----------
Hospital Management 0.6% 21,100 Tenet Healthcare Corp. .................................. 698,938
-----------
Pharmaceuticals 9.9% 14,600 Bristol-Myers Squibb Co. ................................ 1,381,525
30,116 Eli Lilly & Co. ......................................... 2,096,827
24,000 Johnson & Johnson ....................................... 1,581,000
14,700 Merck & Co. Inc. ........................................ 1,561,875
39,500 Pfizer, Inc. ............................................ 2,945,219
26,400 SmithKline Beecham PLC (ADR) ............................ 1,357,950
6,500 Warner-Lambert Co. ...................................... 806,000
-----------
11,730,396
-----------
Financial 3.6%
Banks 1.2% 13,200 First Union Corp. ....................................... 676,500
11,900 NationsBank Corp. ....................................... 723,669
-----------
1,400,169
-----------
Insurance 2.4% 18,375 American International Group, Inc. ...................... 1,998,281
18,300 Conseco Inc. ............................................ 831,506
-----------
2,829,787
-----------
Media 3.8%
Advertising 1.8% 21,450 Interpublic Group of Companies Inc. ..................... 1,068,478
29,100 Outdoor Systems, Inc.* .................................. 1,116,713
-----------
2,185,191
-----------
Broadcasting &
Entertainment 2.0% 19,000 Clear Channel Communications, Inc.* ..................... 1,509,313
8,000 Walt Disney Co. ......................................... 792,500
-----------
2,301,813
-----------
Service Industries 2.2%
Miscellaneous Consumer
Services 1.5% 24,100 Cendant Corporation* .................................... 828,438
25,600 Service Corp. International ............................. 945,600
-----------
1,774,038
-----------
Printing / Publishing 0.7% 11,800 Reuters Holdings PLC "B" (ADR) .......................... 781,750
-----------
Durables 2.4%
Aerospace 0.9% 26,000 AlliedSignal Inc. ....................................... 1,012,375
-----------
Telecommunications
Equipment 1.5% 13,800 CIENA Corp.* ............................................ 843,525
13,700 Nokia AB Oy "A" (ADR) ................................... 959,000
-----------
1,802,525
-----------
Manufacturing 4.9%
Chemicals 0.6% 17,700 Monsanto Co. ............................................ 743,400
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
36
<PAGE>
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Diversified
Manufacturing 4.3% 50,500 General Electric Co. .................................... 3,705,438
21,600 Textron, Inc. ........................................... 1,350,000
-----------
5,055,438
-----------
Technology 8.9%
Computer Software 3.7% 19,425 Computer Associates International, Inc. ................. 1,027,097
17,600 Microsoft Corp.* ........................................ 2,274,800
27,000 PeopleSoft Inc.* ........................................ 1,053,000
-----------
4,354,897
-----------
Diverse Electronic
Products 0.5% 19,600 Teradyne Inc.* .......................................... 627,200
-----------
Electronic Data
Processing 0.9% 19,300 Compaq Computer Corp. ................................... 1,089,244
-----------
Office / Plant
Automation 1.0% 12,600 3Com Corp.* ............................................. 440,213
12,900 Cisco Systems, Inc.* .................................... 719,175
-----------
1,159,388
-----------
Semiconductors 2.8% 21,600 Intel Corp. ............................................. 1,517,400
10,100 Linear Technology Corp. ................................. 582,013
28,800 National Semiconductor Corp. ............................ 747,000
25,100 Taiwan Semiconductor Manufacturing Co.* ................. 456,506
-----------
3,302,919
-----------
Energy 0.6%
Oilfield Services/
Equipment 8,100 Schlumberger Ltd. ....................................... 652,051
-----------
Total Common Stocks (Cost $46,660,771) .................. 68,663,481
-----------
- --------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0%
(Cost $94,281,560) (b) ................................. 117,900,565
===========
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non-income producing security.
(a) Effective maturities will be shorter due to prepayments.
(b) At December 31, 1997, the net unrealized appreciation
on investments based on cost for federal income tax
purposes of $94,304,684 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of market value
over tax cost ............................................ $ 24,563,231
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over market value ........................................ 967,350
------------
Net unrealized appreciation .............................. $ 23,595,881
============
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments and U.S. Government and Government Agency securities), for the
year ended December 31, 1997, aggregated $39,670,908 and $37,660,447,
respectively. Purchases and sales of U.S. Government and Government Agency
securities for the year ended December 31, 1997, aggregated $6,371,788 and
$3,062,630, respectively.
The accompanying notes are an integral part of the financial statements.
37
<PAGE>
BALANCED PORTFOLIO
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments, at market (identified cost $94,281,560) ............... $ 117,900,565
Cash ............................................................... 215
Receivables:
Dividends and interest .......................................... 543,376
Other assets ....................................................... 1,510
-------------
Total assets ................................................. 118,445,666
Liabilities
Payables:
Accrued management fee .......................................... $ 46,027
Other payables and accrued expenses ............................. 26,424
--------
Total liabilities ............................................ 72,451
-------------
Net assets, at market value ........................................ $ 118,373,215
=============
Net Assets Net assets consist of:
Undistributed net investment income ............................. 811,442
Net unrealized appreciation (depreciation) on:
Investments .................................................. 23,619,005
Foreign currency related transactions ........................ (9)
Accumulated net realized gain ................................... 5,933,762
Paid-in capital ................................................. 88,009,015
-------------
Net assets, at market value ........................................ $ 118,373,215
=============
Net asset value, offering and redemption price per share
($118,373,215 / 8,902,042 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) .. $13.30
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
38
<PAGE>
BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment income
Income:
Dividends (net of foreign taxes withheld of $5,631) .............. $ 584,111
Interest ......................................................... 2,818,363
-----------
3,402,474
Expenses:
Management fee ................................................... $ 488,616
Custodian fees ................................................... 20,879
Accounting fees .................................................. 39,456
Trustees' fees and expenses ...................................... 17,294
Auditing ......................................................... 9,448
Legal ............................................................ 7,090
Reports to shareholders .......................................... 2,247
Other ............................................................ 134 585,164
----------- -----------
Net investment income ............................................... 2,817,310
-----------
Net realized and unrealized gain (loss) on investment transactions
Net realized gain (loss) from:
Investments ...................................................... 6,087,508
Net unrealized appreciation (depreciation) during the period on:
Investments ...................................................... 13,062,153
Foreign currency related transactions ............................ (9) 13,062,144
----------- -----------
Net gain (loss) on investment transactions .......................... 19,149,652
-----------
Net increase (decrease) in net assets resulting from operations ........ $21,966,962
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
39
<PAGE>
BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
Increase (Decrease) in Net Assets 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ................................................ $ 2,817,310 $ 2,208,747
Net realized gain (loss) from investment transactions ................ 6,087,508 4,899,761
Net unrealized appreciation (depreciation) on investment
transactions during the period .................................... 13,062,144 1,635,671
------------- -------------
Net increase in net assets resulting from operations .................... 21,966,962 8,744,179
------------- -------------
Distributions to shareholders from:
Net investment income ................................................ (2,678,045) (2,028,500)
------------- -------------
Net realized gains from investment transactions ...................... (4,951,322) (1,925,657)
------------- -------------
Portfolio share transactions:
Proceeds from shares sold ............................................ 24,546,671 25,991,787
Net asset value of shares issued to shareholders in
reinvestment of distributions ..................................... 7,629,367 3,954,157
Cost of shares redeemed .............................................. (16,483,255) (14,318,918)
------------- -------------
Net increase (decrease) in net assets from Portfolio share transactions . 15,692,783 15,627,026
------------- -------------
Increase (decrease) in net assets ....................................... 30,030,378 20,417,048
Net assets at beginning of period ....................................... 88,342,837 67,925,789
------------- -------------
Net assets at end of period (including undistributed net
investment income of $811,442 and $672,177, respectively) ............ $ 118,373,215 $ 88,342,837
============= =============
Other Information
Increase (decrease) in Portfolio shares
Shares outstanding at beginning of period ............................... 7,608,722 6,206,064
------------- -------------
Shares sold .......................................................... 2,001,001 2,336,334
Shares issued to shareholders in reinvestment of distributions ....... 651,149 360,527
Shares redeemed ...................................................... (1,358,830) (1,294,203)
------------- -------------
Net increase (decrease) in Portfolio shares .......................... 1,293,320 1,402,658
------------- -------------
Shares outstanding at end of period ..................................... 8,902,042 7,608,722
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
40
<PAGE>
BALANCED PORTFOLIO
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding (a)
throughout each period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ....... $ 11.61 $ 10.95 $ 8.97 $ 10.23 $ 10.02 $ 9.85 $ 8.10 $ 8.75 $ 7.62 $ 6.88
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from
investment operations:
Net investment income ..... .34 .31 .30 .29 .30 .29 .35 .42 .40 .33
Net realized and unrealized
gain (loss) on investment
transactions ............ 2.32 .95 2.04 (.48) .42 .36 1.77 (.59) 1.06 .64
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations ................ 2.66 1.26 2.34 (.19) .72 .65 2.12 (.17) 1.46 .97
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less distributions from:
Net investment income ..... (.33) (.30) (.30) (.30) (.28) (.29) (.37) (.43) (.33) (.23)
Net realized gains on
investment transactions . (.64) (.30) (.06) (.77) (.23) (.19) -- (.05) -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions ......... (.97) (.60) (.36) (1.07) (.51) (.48) (.37) (.48) (.33) (.23)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value,
end of period ............. $ 13.30 $ 11.61 $ 10.95 $ 8.97 $ 10.23 $ 10.02 $ 9.85 $ 8.10 $ 8.75 $ 7.62
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total Return (%) ............ 24.21 11.89 26.67 (2.05) 7.45 6.96 26.93 (1.91) 19.50 14.21
Ratios and
Supplemental Data
Net assets, end of
period ($ millions) ....... 118 88 68 46 45 37 25 16 18 11
Ratio of operating
expenses, net to average
daily net assets (%) ...... .57 .60 .65 .75 .75 .75 .75 .75 .75 .75
Ratio of operating
expenses before expense
reductions, to average
daily net assets .......... .57 .60 .65 .75 .75 .75 .81 .75 .89 1.14
Ratio of net investment
income to average daily
net assets (%) ............ 2.73 2.82 3.01 3.19 3.01 3.01 4.00 5.15 4.74 4.48
Portfolio turnover rate (%) . 43.10 67.56 87.98 101.64 133.95(c) 51.66 62.03 49.03 77.98 109.95
Average commission
rate paid (b) ............. $ .0555 $ .0535 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
</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 December 31, 1995.
(c) 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 six periods
ended December 31, 1993 should not be considered representative of the
present Portfolio.
41
<PAGE>
GROWTH AND INCOME PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1997
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------
2.9% REPURCHASE AGREEMENT
------------------------------------------------------------------------------------
4,728,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 12/31/97 at 6.5% to be repurchased at $4,729,707
on 1/2/98, collateralized by a $4,495,000 U.S. Treasury
Bond, 8.25%, 5/15/05 (Cost $4,728,000) ................ 4,728,000
---------
------------------------------------------------------------------------------------
1.0% CONVERTIBLE BONDS
------------------------------------------------------------------------------------
Health 0.1%
Pharmaceuticals 140,000 Sandoz Capital BVI Ltd., 2%, 10/6/02 .................... 213,850
---------
Manufacturing 0.9%
Diversified
Manufacturing 1,375,000 Loews Corp., 3.125%, 9/15/07 ............................ 1,385,296
---------
Total Convertible Bonds (Cost $1,497,844) ............... 1,599,146
---------
------------------------------------------------------------------------------------
0.7% CONVERTIBLE PREFERRED STOCKS
------------------------------------------------------------------------------------
Shares
------------------------------------------------------------------------------------
Consumer Discretionary 0.3%
Department &
Chain Stores 8,900 Kmart, 7.75% ............................................ 459,463
---------
Financial 0.3%
Consumer Finance 0.2% 10,400 Advanta Corp., 6.75% .................................... 279,500
---------
Real Estate 0.1% 6,300 Security Capital Industrial Trust "B", 7% ............... 200,813
---------
Manufacturing 0.1%
Industrial Specialty 10,000 Cooper Industries, Inc., 6% ............................. 182,500
---------
Total Convertible Preferred Stocks (Cost $1,157,069) .... 1,122,276
---------
------------------------------------------------------------------------------------
95.4% COMMON STOCKS
------------------------------------------------------------------------------------
Consumer Discretionary 4.6%
Department &
Chain Stores 4.6% 29,800 J.C. Penney Co., Inc. ................................... 1,797,313
21,800 May Department Stores ................................... 1,148,588
27,200 Mercantile Stores, Inc. ................................. 1,655,800
22,800 Rite Aid Corp. .......................................... 1,338,075
34,200 Sears, Roebuck & Co. .................................... 1,547,550
---------
7,487,326
---------
Hotels & Casinos 0.0% 3,562 Homestead Village, Inc. ................................. 53,653
3,562 Homestead Village, Inc. Rights (expire 1/15/98)* ........ 334
---------
53,987
---------
Consumer Staples 11.6%
Alcohol & Tobacco 2.8% 79,300 Philip Morris Companies, Inc. ........................... 3,593,281
24,780 RJR Nabisco Holdings Corp. .............................. 929,250
---------
4,522,531
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
42
<PAGE>
GROWTH AND INCOME PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consumer Electronic &
Photographic Products 0.9% 26,800 Whirlpool Corp. ......................................... 1,474,000
----------
Food & Beverage 5.4% 23,200 General Mills, Inc. ..................................... 1,661,700
68,900 H.J. Heinz Co. .......................................... 3,500,981
58,900 Unilever NV (New York shares) ........................... 3,677,569
----------
8,840,250
----------
Package Goods/
Cosmetics 2.5% 24,700 Avon Products Inc. ...................................... 1,515,963
52,800 Kimberly-Clark Corp. .................................... 2,603,700
----------
4,119,663
----------
Health 6.6%
Pharmaceuticals 24,300 American Home Products Corp. ............................ 1,858,950
30,000 Baxter International Inc. ............................... 1,513,125
28,900 Bristol-Myers Squibb Co. ................................ 2,734,663
23,700 Schering-Plough Corp. ................................... 1,472,363
30,200 SmithKline Beecham PLC (ADR) ............................ 1,553,413
18,200 Zeneca Group PLC ........................................ 644,609
9,500 Zeneca Group PLC (ADR) .................................. 1,026,000
----------
10,803,123
----------
Communications 8.9%
Telephone/
Communications 43,200 Alltel Corp. ............................................ 1,773,900
45,775 Bell Atlantic Corp. ..................................... 4,165,525
38,500 BellSouth Corp. ......................................... 2,168,031
49,200 Frontier Corp. .......................................... 1,183,875
59,400 GTE Corp. ............................................... 3,103,650
33,300 Sprint Corp. ............................................ 1,952,213
33,000 Telecom Corp. of New Zealand ............................ 159,998
----------
14,507,192
----------
Financial 20.3%
Banks 8.7% 30,000 Banc One Corp. .......................................... 1,629,375
13,400 Bankers Trust New York Corp. ............................ 1,506,663
27,900 Chase Manhattan Corp. ................................... 3,055,050
28,400 CoreStates Financial Corp. .............................. 2,273,775
31,400 First Union Corp. ....................................... 1,609,250
28,700 KeyCorp ................................................. 2,032,319
18,800 US Bancorp .............................................. 2,104,425
----------
14,210,857
----------
Insurance 4.8% 34,300 EXEL, Ltd. (ADR) ........................................ 2,173,763
32,500 Lincoln National Corp. .................................. 2,539,063
20,600 Mid Ocean Limited ....................................... 1,117,550
43,000 Safeco Corp. ............................................ 2,096,250
----------
7,926,626
----------
Other Financial
Companies 2.2% 14,500 Federal National Mortgage Association ................... 827,406
10,900 Fleet Financial Group, Inc. ............................. 816,819
18,300 J.P. Morgan & Co., Inc. ................................. 2,065,613
----------
3,709,838
----------
Real Estate 4.6% 10,200 General Growth Properties, Inc. (REIT) .................. 368,475
27,100 Health Care Property Investment Inc. (REIT) ............. 1,024,719
34,140 Meditrust Corp. (REIT) .................................. 1,250,378
</TABLE>
The accompanying notes are an integral part of the financial statements.
43
<PAGE>
GROWTH AND INCOME PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
50,900 Nationwide Health Properties Inc. (REIT) ................ 1,297,950
91,887 Security Capital Atlantic, Inc. ......................... 1,941,113
62,244 Security Capital Industrial Trust (REIT) ................ 1,548,320
8,307 Security Capital Industrial Trust Warrants
(expire 9/1/98)* ...................................... 43,612
----------
7,474,567
----------
Miscellaneous 0.0% 17,695 Jardine Strategic Holdings Ltd. ......................... 46,007
----------
Service Industries 0.2%
EDP Services 0.0% 1,838 First Data Corp. ........................................ 53,762
----------
Environmental Services 0.2% 8,600 Browning Ferris Industries .............................. 318,200
----------
Durables 7.2%
Aerospace 1.5% 9,788 Lockheed Corp. .......................................... 964,118
30,400 Rockwell International Corp. (New) ...................... 1,588,400
----------
2,552,518
----------
Automobiles 4.7% 42,900 Dana Corp. .............................................. 2,037,750
33,200 Echlin, Inc. ............................................ 1,201,425
68,200 Ford Motor Co. .......................................... 3,320,488
52,133 Meritor Automotive, Inc. ................................ 1,098,051
----------
7,657,714
----------
Construction/Agricultural
Equipment 1.0% 31,300 PACCAR, Inc.* ........................................... 1,643,250
----------
Manufacturing 15.7%
Chemicals 4.7% 17,700 Akzo-Nobel N.V. (ADR) ................................... 1,537,688
12,400 Dow Chemical Co. ........................................ 1,258,600
26,200 Eastman Chemical Co. .................................... 1,560,538
51,800 Imperial Chemical Industries PLC (ADR) (New) ............ 3,363,763
----------
7,720,589
----------
Containers & Paper 1.2% 27,731 Boise Cascade Corp. ..................................... 838,863
34,300 Westvaco Corp. .......................................... 1,078,306
----------
1,917,169
----------
Diversified
Manufacturing 3.1% 34,800 Olin Corp. .............................................. 1,631,250
65,300 TRW Inc. ................................................ 3,485,388
----------
5,116,638
----------
Electrical Products 2.5% 45,400 Philips Electronics NV (New York shares) ................ 2,746,700
27,500 Thomas & Betts Corp. .................................... 1,299,375
----------
4,046,075
----------
Office Equipment/
Supplies 2.4% 53,000 Xerox Corp. ............................................. 3,912,063
----------
Specialty Chemicals 1.8% 26,700 BetzDearborn, Inc. ...................................... 1,630,369
33,000 Witco Corp. ............................................. 1,346,813
----------
2,977,182
----------
Technology 0.4%
Electronic Components/
Distributors 15,700 AMP, Inc. ............................................... 659,400
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
44
<PAGE>
GROWTH AND INCOME PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Energy 7.4%
Oil Companies 6.7% 58,368 Lyondell Petrochemical Co. .............................. 1,546,752
21,000 Royal Dutch Petroleum Co. (New York shares) ............. 1,137,938
38,556 Societe Nationale Elf Aquitaine (ADR) ................... 2,260,346
40,200 Texaco Inc. ............................................. 2,185,875
31,966 Total SA (ADR) .......................................... 1,774,113
62,400 YPF S.A. "D" (ADR) ...................................... 2,133,300
-----------
11,038,324
-----------
Oil/Gas Transmission 0.7% 39,000 Williams Cos., Inc. ..................................... 1,106,625
-----------
Metals & Minerals 1.8%
Steel & Metals 58,252 Allegheny Teledyne, Inc. ................................ 1,507,271
37,100 Freeport McMoRan Copper & Gold, Inc. "A" ................ 568,094
13,500 Oregon Steel Mills, Inc. ................................ 287,719
8,200 Phelps Dodge Corp. ...................................... 510,450
-----------
2,873,534
-----------
Construction 2.3%
Forest Products 26,600 Georgia Pacific Timber Corp. ............................ 603,488
28,000 Georgia Pacific Corp. ................................... 1,701,000
28,400 Weyerhaeuser Co. ........................................ 1,393,375
-----------
3,697,863
-----------
Transportation 0.9%
Railroads 27,700 CSX Corp. ............................................... 1,495,800
-----------
Utilities 7.5%
Electric Utilities 6.9% 54,300 CINergy Corp. ........................................... 2,080,369
48,936 Duke Energy Corp. ....................................... 2,709,831
19,000 Entergy Corp. ........................................... 568,813
50,800 P G & E Corp. ........................................... 1,546,225
47,900 PacifiCorp .............................................. 1,308,269
11,000 PowerGen PLC (ADR) ...................................... 584,375
13,100 Southern Company ........................................ 338,963
43,000 Unicom Corp. ............................................ 1,322,250
27,900 Wisconsin Energy Corp. .................................. 802,125
-----------
11,261,220
-----------
Natural Gas
Distribution 0.6% 23,900 MCN Energy Group, Inc. 964,963
-----------
Total Common Stocks (Cost $123,687,457) ................. 156,188,856
-----------
- --------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0%
(Cost $131,070,370) (a) ................................ 163,638,278
===========
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
45
<PAGE>
GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
* Non-income producing security.
(a) At December 31, 1997, the net unrealized appreciation
on investments based on cost for federal income tax
purposes of $131,049,938 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of market value
over tax cost ........................................... $ 33,559,752
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over market value ....................................... 971,412
------------
Net unrealized appreciation ............................... $ 32,588,340
============
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding
short-term investments), for the year ended December 31, 1997,
aggregated $78,679,957 and $34,396,486, respectively.
The accompanying notes are an integral part of the financial statements.
46
<PAGE>
GROWTH AND INCOME PORTFOLIO
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments, at market (identified cost $131,070,370) ............ $ 163,638,278
Foreign currency, at market (cost $6,189) ........................ 6,792
Receivables:
Investments sold .............................................. 123,904
Dividends and interest ........................................ 393,048
Foreign taxes recoverable ..................................... 26,978
Other assets ..................................................... 1,172
-------------
Total assets ............................................... 164,190,172
Liabilities
Payables:
Investments purchased ......................................... $ 480,328
Accrued management fee ........................................ 62,393
Other payables and accrued expenses ........................... 43,845
----------
Total liabilities .......................................... 586,566
-------------
Net assets, at market value ...................................... $ 163,603,606
=============
Net Assets Net assets consist of:
Undistributed net investment income ........................... 927,946
Net unrealized appreciation (depreciation) on:
Investments ................................................ 32,567,908
Foreign currency ........................................... (147)
Accumulated net realized gain ................................. 11,421,161
Paid-in capital ............................................... 118,686,738
-------------
Net assets, at market value ...................................... $ 163,603,606
=============
Class A
Net asset value, offering and redemption price per share
($156,799,187 / 13,656,612 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized).. $11.48
======
Class B
Net asset value, offering and redemption price per share
($6,804,419 / 593,475 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized).. $11.47
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
47
<PAGE>
GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment income
Income:
Dividends (net of foreign taxes withheld of $68,520) ............ $ 3,642,623
Interest ........................................................ 257,197
------------
3,899,820
Expenses:
Management fee .................................................. $ 592,383
Accounting fees ................................................. 62,698
Trustees' fees and expenses ..................................... 17,206
Distribution fees (Class B) ..................................... 5,163
Custodian fees .................................................. 31,916
Reports to shareholders ......................................... 2,474
Auditing ........................................................ 9,560
Legal ........................................................... 7,803
Other ........................................................... 1,892 731,095
----------- ------------
Net investment income .............................................. 3,168,725
------------
Net realized and unrealized gain (loss) on investment transactions
Net realized gain (loss) from:
Investments ..................................................... 11,498,829
Foreign currency related transactions ........................... 324 11,499,153
-----------
Net unrealized appreciation (depreciation) during the period on:
Investments ..................................................... 16,941,579
Foreign currency related transactions ........................... (158) 16,941,421
----------- ------------
Net gain (loss) on investment transactions ......................... 28,440,574
------------
Net increase (decrease) in net assets resulting from operations ....... $ 31,609,299
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
48
<PAGE>
GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
Increase (Decrease) in Net Assets 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ............................................ $ 3,168,725 $ 2,155,282
Net realized gain (loss) from investment transactions ............ 11,499,153 3,798,567
Net unrealized appreciation (depreciation) on investment
transactions during the period ................................ 16,941,421 7,841,874
------------- -------------
Net increase (decrease) in net assets resulting from operations ..... 31,609,299 13,795,723
------------- -------------
Distributions to shareholders from:
Net investment income (Class A) .................................. (2,910,650) (1,781,057)
------------- -------------
Net investment income (Class B) .................................. (36,879) --
------------- -------------
Net realized gains from investment transactions (Class A) ........ (3,884,391) (729,093)
------------- -------------
Portfolio share transactions:
Class A
Proceeds from shares sold ........................................ 62,828,541 48,549,524
Net asset value of shares issued to shareholders
in reinvestment of distributions .............................. 6,795,041 2,510,150
Cost of shares redeemed .......................................... (28,405,112) (23,216,134)
------------- -------------
Net increase (decrease) in net assets from Class A share transactions 41,218,470 27,843,540
------------- -------------
Class B*
Proceeds from shares sold ........................................ 6,839,326 --
Net asset value of shares issued to shareholders
in reinvestment of distributions .............................. 36,879 --
------------- -------------
Cost of shares redeemed .......................................... (359,995) --
Net increase (decrease) in net assets from Class B share transactions 6,516,210 --
------------- -------------
Increase (decrease) in net assets ................................... 72,512,059 39,129,113
Net assets at beginning of period ................................... 91,091,547 51,962,434
------------- -------------
Net assets at end of period (including undistributed net
investment income of $927,946 and $713,479, respectively) ........ $ 163,603,606 $ 91,091,547
============= =============
Other Information
Increase (decrease) in Portfolio shares
Class A
Shares outstanding at beginning of period ........................... 9,724,734 6,510,714
------------- -------------
Shares sold ...................................................... 6,010,142 5,669,994
Shares issued to shareholders in reinvestment of distributions ... 689,859 301,924
Shares redeemed .................................................. (2,768,123) (2,757,898)
------------- -------------
Net increase (decrease) in Portfolio shares ...................... 3,931,878 3,214,020
------------- -------------
Shares outstanding at end of period ................................. 13,656,612 9,724,734
============= =============
Class B*
Shares outstanding at beginning of period ........................... -- --
------------- -------------
Shares sold ...................................................... 622,208 --
Shares issued to shareholders in reinvestment of distributions ... 3,342 --
Shares redeemed .................................................. (32,075) --
------------- -------------
Net increase (decrease) in Portfolio shares ...................... 593,475 --
------------- -------------
Shares outstanding at end of period ................................. 593,475 --
============= =============
</TABLE>
* For the period May 1, 1997 (commencement of sale of Class B shares) to
December 31, 1997.
The accompanying notes are an integral part of the financial statements.
49
<PAGE>
GROWTH AND INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding (a)
throughout each period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
For the Period
May 2, 1994
CLASS A (d) (commencement
- --------------------- Years Ended December 31, of operations)
------------------------------ to December 31,
1997 1996 1995 1994
------------------------------ ---------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ..................... $ 9.37 $ 7.98 $ 6.26 $ 6.00(b)
------- ------- ------- -------
Income from investment operations:
Net investment income .................................. .27 .27 .23 .13
Net realized and unrealized gain (loss) on investment
transactions .......................................... 2.47 1.46 1.72 .17
------- ------- ------- -------
Total from investment operations ......................... 2.74 1.73 1.95 .30
------- ------- ------- -------
Less distributions from:
Net investment income .................................. (.26) (.23) (.19) (.04)
Net realized gains on investment transactions .......... (.37) (.11) (.04) --
------- ------- ------- -------
Total distributions ...................................... (.63) (.34) (.23) (.04)
------- ------- ------- -------
Net asset value, end of period ........................... $ 11.48 $ 9.37 $ 7.98 $ 6.26
======= ======= ======= =======
Total Return (%) ......................................... 30.47 22.17 31.74 4.91**
Ratios and Supplemental Data
Net assets, end of period ($ millions) ................... 157 91 52 20
Ratio of operating expenses, net to average
daily net assets (%) ................................... .58 .66 .75 .75*
Ratio of operating expenses, before reductions, to average
daily net assets (%) ................................... .58 .66 .75 1.62*
Ratio of net investment income to average
daily net assets (%) ................................... 2.54 3.14 3.18 3.63*
Portfolio turnover rate (%) .............................. 28.41 32.18 24.33 28.41*
Average commission rate paid (c) ......................... $ .0481 $ .0502 $ -- $ --
</TABLE>
(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 after December 31, 1995.
(d) On May 1, 1997 existing shares were designated as Class A shares.
* Annualized
** Not annualized
50
<PAGE>
GROWTH AND INCOME PORTFOLIO
The following table includes selected data for a share outstanding (a)
throughout the period and other performance information derived from the
financial statements.
For the Period
May 1, 1997
CLASS B (commencement of
- --------------------- sale of Class B
shares) to
December 31,
1997
---------------
Net asset value, beginning of period ............................ $ 9.44
------
Income from investment operations:
Net investment income ......................................... .14
Net realized and unrealized gain (loss) on investment
transactions ................................................ 2.02
------
Total from investment operations ................................ 2.16
------
Less distributions from net investment income ................... (.13)
------
Net asset value, end of period .................................. $11.47
======
Total Return (%) ................................................ 22.89**
Ratios and Supplemental Data
Net assets, end of period ($ millions) .......................... 7
Ratio of operating expenses to average daily net assets (%) ..... .80*
Ratio of net investment income to average daily net assets (%) .. 2.13*
Portfolio turnover rate (%) ..................................... 28.41
Average commission rate paid (b) ................................ $.0481
(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred securities.
* Annualized
** Not annualized
51
<PAGE>
CAPITAL GROWTH PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1997
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------
4.8% REPURCHASE AGREEMENT
------------------------------------------------------------------------------------
32,640,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 12/31/97 at 6.5% to be repurchased at
$32,651,787 on 1/2/98, collateralized by a
$31,837,000 U.S. Treasury Note, 6.375%,
9/30/01 (Cost $32,640,000) 32,640,000
-----------
------------------------------------------------------------------------------------
95.2% COMMON STOCKS
------------------------------------------------------------------------------------
Shares
------------------------------------------------------------------------------------
Consumer Discretionary 8.6%
Department &
Chain Stores 6.8% 236,000 Costco Companies, Inc.* ................................. 10,531,500
151,000 Dayton Hudson Corp. ..................................... 10,192,500
294,700 Home Depot, Inc. ........................................ 17,350,463
260,000 Walgreen Co. ............................................ 8,157,500
-----------
46,231,963
-----------
Hotels & Casinos 0.9% 255,000 Mirage Resorts Inc.* .................................... 5,801,250
-----------
Specialty Retail 0.9% 176,700 Tiffany & Co. ........................................... 6,372,244
-----------
Consumer Staples 6.5%
Food & Beverage 4.0% 159,000 H.J. Heinz Co. .......................................... 8,079,188
135,500 Sara Lee Corp. .......................................... 7,630,344
196,300 Suiza Foods Corp.* ...................................... 11,692,119
-----------
27,401,651
-----------
Package Goods /
Cosmetics 2.5% 212,600 Procter & Gamble Co. .................................... 16,968,138
-----------
Health 10.5%
Health Industry
Services 0.2% 41,600 Total Renal Care Holdings, Inc.* ........................ 1,144,000
-----------
Medical Supply &
Specialty 1.2% 165,000 Becton, Dickinson & Co. ................................. 8,250,000
-----------
Pharmaceuticals 9.1% 72,500 American Home Products Corp. ............................ 5,546,250
101,500 Bristol-Myers Squibb Co. ................................ 9,604,438
95,000 Johnson & Johnson ....................................... 6,258,125
56,600 Merck & Co. Inc. ........................................ 6,013,750
104,900 Novartis AG (ADR) ....................................... 8,496,900
147,200 Pfizer, Inc. ............................................ 10,975,600
134,000 Schering-Plough Corp. ................................... 8,324,750
58,200 Warner-Lambert Co. ...................................... 7,216,800
-----------
62,436,613
-----------
Financial 20.7%
Banks 3.6% 189,300 BankAmerica Corp. ....................................... 13,818,900
83,000 Citicorp ................................................ 10,494,313
-----------
24,313,213
-----------
Insurance 8.7% 80,000 Allstate Corp. .......................................... 7,270,000
160,450 American International Group, Inc. ...................... 17,448,938
206,400 Conseco Inc. ............................................ 9,378,300
</TABLE>
The accompanying notes are an integral part of the financial statements.
52
<PAGE>
CAPITAL GROWTH PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
283,700 EXEL, Ltd. (ADR) ........................................ 17,979,488
111,600 MBIA Inc. ............................................... 7,456,275
----------
59,533,001
----------
Consumer Finance 1.7% 160,000 Associates First Capital Corp. .......................... 11,380,000
----------
Other Financial
Companies 6.7% 218,500 American Express Credit Corp. ........................... 19,501,120
215,500 Federal National Mortgage Association ................... 12,296,969
252,750 Travelers Group, Inc. ................................... 13,616,906
----------
45,414,995
----------
Media 3.1%
Advertising 1.8% 294,200 Omnicom Group, Inc. ..................................... 12,466,725
----------
Cable Television 1.3% 236,300 Tele-Comm Liberty Media Group "A" * ..................... 8,565,875
----------
Service Industries 4.7%
Investment 3.5% 152,650 Franklin Resources Inc. ................................. 13,271,009
144,900 Merrill Lynch & Co., Inc. ............................... 10,568,644
----------
23,839,653
----------
Miscellaneous
Commercial Services 1.2% 346,300 AccuStaff, Inc.* ........................................ 7,964,900
----------
Durables 4.7%
Aerospace 3.7% 100,000 Lockheed Corp. .......................................... 9,850,000
124,000 Rockwell International Corp. (New) ...................... 6,479,000
124,000 United Technologies Corp. ............................... 9,028,750
----------
25,357,750
----------
Telecommunications
Equipment 1.0% 94,700 Nokia AB Oy "A" (ADR) ................................... 6,629,000
----------
Manufacturing 11.5%
Chemicals 3.2% 148,500 E.I. du Pont de Nemours & Co. ........................... 8,919,281
111,900 Praxair Inc. ............................................ 5,035,500
192,900 Sigma-Aldrich Corp. ..................................... 7,667,775
----------
21,622,556
----------
Diversified
Manufacturing 4.4% 187,500 Dresser Industries Inc. ................................. 7,863,281
97,000 General Electric Co. .................................... 7,117,375
125,500 TRW Inc. ................................................ 6,698,563
130,000 Textron, Inc. ........................................... 8,125,000
----------
29,804,219
----------
Electrical Products 0.7% 90,000 Emerson Electric Co. .................................... 5,079,375
----------
Machinery/Components/
Controls 3.2% 173,600 Ingersoll-Rand Co. ...................................... 7,030,800
329,050 Parker-Hannifin Group ................................... 15,095,169
----------
22,125,969
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
53
<PAGE>
CAPITAL GROWTH PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Technology 10.3%
Diverse Electronic
Products 1.3% 297,600 Applied Materials, Inc.* ................................ 8,965,200
-----------
Electronic Data
Processing 6.7% 262,050 Compaq Computer Corp. ................................... 14,789,447
150,500 Hewlett-Packard Co. ..................................... 9,406,250
109,100 International Business Machines Corp. ................... 11,407,769
259,200 Sun Microsystems, Inc.* ................................. 10,335,600
----------
45,939,066
-----------
Semiconductors 2.3% 222,200 Intel Corp. ............................................. 15,609,550
-----------
Energy 13.0%
Oil Companies 7.9% 74,600 Amoco Corp. ............................................. 6,350,325
109,300 Atlantic Richfield Co. .................................. 8,757,663
190,700 Exxon Corp. ............................................. 11,668,456
96,000 Mobil Corp. ............................................. 6,930,000
134,500 Repsol SA (ADR) ......................................... 5,724,656
272,500 Royal Dutch Petroleum Co. (New York shares) ............. 14,766,094
-----------
54,197,194
-----------
Oil / Gas Transmission 1.4% 326,000 Williams Cos., Inc. ..................................... 9,250,250
-----------
Oilfield Services/
Equipment 3.7% 125,000 Diamond Offshore Drilling, Inc. ......................... 6,015,625
153,900 Santa Fe International Corp. ............................ 6,261,806
165,000 Schlumberger Ltd. ....................................... 13,282,500
-----------
25,559,931
-----------
Transportation 1.6%
Airlines 1.0% 54,700 AMR Corp.* .............................................. 7,028,950
-----------
Railroads 0.6% 186,300 Wisconsin Central Transportation Co.* ................... 4,354,763
-----------
Total Common Stocks (Cost $458,850,377) ................. 649,607,994
-----------
- --------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0%
(Cost $491,490,377) (a) ................................ 682,247,994
===========
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non-income producing security.
(a) At December 31, 1997, the net unrealized appreciation on
investments based on cost for federal income tax
purposes of $491,518,304 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of market value
over tax cost ............................................ $194,611,508
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost over
market value ............................................. 3,881,818
------------
Net unrealized appreciation ................................ $190,729,690
============
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments), for the year ended December 31, 1997, aggregated $294,968,837
and $228,082,075, respectively.
The accompanying notes are an integral part of the financial statements.
54
<PAGE>
CAPITAL GROWTH PORTFOLIO
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments, at market (identified cost $491,490,377) .............. $ 682,247,994
Cash ............................................................... 429
Receivables:
Investments sold ................................................ 8,710,044
Dividends and interest .......................................... 558,430
Other assets ....................................................... 6,128
-------------
Total assets ................................................. 691,523,025
Liabilities
Payables:
Investments purchased ........................................... $ 14,862,981
Accrued management fee .......................................... 259,828
Other payables and accrued expenses ............................. 82,634
------------
Total liabilities ............................................ 15,205,443
-------------
Net assets, at market value ........................................ $ 676,317,582
=============
Net Assets
Net assets consist of:
Undistributed net investment income 1,414,095
Net unrealized appreciation (depreciation) on:
Investments .................................................. 190,757,617
Foreign currency related transactions ........................ (26)
Accumulated net realized gain ................................... 37,349,214
Paid-in capital ................................................. 446,796,682
-------------
Net assets, at market value ........................................ $ 676,317,582
=============
Class A
Net asset value, offering and redemption price per share
($675,770,416 / 32,750,652 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) .. $20.63
======
Class B
Net asset value, offering and redemption price per share
($547,166 / 26,545 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) .. $20.61
======
</TABLE>
The accompanying notes are an integral part of 9the financial statements.
55
<PAGE>
CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment income
Income:
Dividends (net of foreign taxes withheld of $105,670) ........ $ 7,312,793
Interest ..................................................... 1,114,169
-------------
8,426,962
Expenses:
Management fee ............................................... $ 2,691,980
Custodian fees ............................................... 57,898
Accounting fees .............................................. 96,410
Trustees' fees and expenses .................................. 17,392
Reports to shareholders ...................................... 10,147
Distribution fees (Class B) ................................. 526
Auditing ..................................................... 34,954
Legal ........................................................ 18,222
Other ........................................................ 8,273 2,935,802
----------- -------------
Net investment income ........................................... 5,491,160
-------------
Net realized and unrealized gain (loss) on investment transactions
Net realized gain (loss) from:
Investments .................................................. 37,541,221
Foreign currency related transactions ........................ (2,209) 37,539,012
-----------
Net unrealized appreciation (depreciation) during the period on:
Investments .................................................. 119,146,330
Foreign currency related transactions ........................... (73) 119,146,257
----------- -------------
Net gain (loss) on investment transactions ...................... 156,685,269
-------------
Net increase (decrease) in net assets resulting from operations .... $ 162,176,429
=============
</TABLE>
The accompanying notes are an integral part of the financial statements.
56
<PAGE>
CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
Increase (Decrease) in Net Assets 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ............................................ $ 5,491,160 $ 4,993,004
Net realized gain (loss) from investment transactions ............ 37,539,012 33,857,212
Net unrealized appreciation (depreciation) on investment
transactions during the period ................................ 119,146,257 33,028,817
------------- -------------
Net increase (decrease) in net assets resulting from operations ..... 162,176,429 71,879,033
------------- -------------
Distributions to shareholders from:
Net investment income (Class A) .................................. (5,641,454) (4,669,020)
------------- -------------
Net investment income (Class B) .................................. (1,600) --
------------- -------------
Net realized gain from investment transactions (Class A) ......... (33,950,004) (28,547,850)
------------- -------------
Portfolio share transactions:
Class A
Proceeds from shares sold ........................................ 214,983,317 176,019,020
Net asset value of shares issued to shareholders in
reinvestment of distributions ................................. 39,591,458 33,216,870
Cost of shares redeemed .......................................... (141,850,976) (145,085,225)
------------- -------------
Net increase (decrease) in net assets from Class A share transactions 112,723,799 64,150,665
------------- -------------
Class B*
Proceeds from shares sold ........................................ 530,116 --
Net asset value of shares issued to shareholders in
reinvestment of distributions ................................. 1,600
Cost of shares redeemed .......................................... (2,612) --
------------- -------------
Net increase (decrease) in net assets from Class B share transactions 529,104 --
------------- -------------
Increase (decrease) in net assets ................................... 235,836,274 102,812,828
Net assets at beginning of period ................................... 440,481,308 337,668,480
------------- -------------
Net assets at end of period (including undistributed net
investment income of $1,414,095 and $1,565,989, respectively) .... $ 676,317,582 $ 440,481,308
============= =============
Other Information
Increase (decrease) in Portfolio shares
Class A
Shares outstanding at beginning of period ........................... 26,691,077 22,392,030
------------- -------------
Shares sold ...................................................... 11,288,114 11,627,337
Shares issued to shareholders in reinvestment of distributions ... 2,340,808 2,233,815
Shares redeemed .................................................. (7,569,347) (9,562,105)
------------- -------------
Net increase (decrease) in Portfolio shares ...................... 6,059,575 4,299,047
------------- -------------
Shares outstanding at end of period ................................. 32,750,652 26,691,077
------------- -------------
Class B*
Shares outstanding at beginning of period ........................... -- --
------------- -------------
Shares sold ...................................................... 26,593 --
Shares issued to shareholders in reinvestment of distributions ... 80
Shares redeemed .................................................. (128) --
------------- -------------
Net increase (decrease) in Portfolio shares ...................... 26,545 --
------------- -------------
Shares outstanding at end of period ................................. 26,545 --
============= =============
</TABLE>
* For the period May 12, 1997 (commencement of sale of Class B shares) to
December 31, 1997.
The accompanying notes are an integral part of the financial statements.
57
<PAGE>
CAPITAL GROWTH PORTFOLIO
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding (a)
throughout each period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
Class A (c)
- ---------------------
Years Ended December 31,
-----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------ ------- ------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ............ $ 16.50 $ 15.08 $ 12.23 $14.95 $ 12.71 $ 12.28 $ 8.99 $10.21 $ 8.53 $ 7.06
------- ------- ------- ------ ------- ------- ------- ------ ------- -------
Income from investment operations:
Net investment income .......... .18 .19 .14 .06 .06 .11 .16 .25 .35 .16
Net realized and unrealized
gain (loss) on investment
transactions .................. 5.39 2.68 3.25 (1.42) 2.52 .66 3.35 (1.00) 1.58 1.40
------- ------- ------- ------ ------- ------- ------- ------ ------- -------
Total from investment
operations .................... 5.57 2.87 3.39 (1.36) 2.58 .77 3.51 (.75) 1.93 1.56
------- ------- ------- ------ ------- ------- ------- ------ ------- -------
Less distributions from:
Net investment income .......... (.19) (.19) (.11) (.05) (.07) (.11) (.22) (.24) (.25) (.09)
Net realized gains on
investment transactions ....... (1.25) (1.26) (.43) (1.31) (.27) (.23) -- (.23) -- --
------- ------- ------- ------ ------- ------- ------- ------ ------- -------
Total distributions .............. (1.44) (1.45) (.54) (1.36) (.34) (.34) (.22) (.47) (.25) (.09)
------- ------- ------- ------ ------- ------- ------- ------ ------- -------
Net asset value,
end of period .................. $ 20.63 $ 16.50 $ 15.08 $12.23 $ 14.95 $ 12.71 $ 12.28 $ 8.99 $ 10.21 $ 8.53
======= ======= ======= ====== ======= ======= ======= ====== ======= =======
Total Return (%) ................. 35.76 20.13 28.65 (9.67) 20.88 6.42 39.56 (7.45) 22.75 22.07
Ratios and
Supplemental Data
Net assets, end of
period ($ millions) ............ 676 440 338 257 257 167 108 45 45 17
Ratio of operating expenses,
net to average daily net
assets (%) ..................... .51 .53 .57 .58 .60 .63 .71 .72 .75 .75
Ratio of operating expenses
before expense reductions,
to average daily net
assets (%) ..................... .51 .53 .57 .58 .60 .63 .71 .72 .85 1.11
Ratio of net investment income
to average daily net assets (%). .96 1.27 1.06 .47 .46 .95 1.49 2.71 3.51 2.17
Portfolio turnover rate (%) ...... 41.77 65.56 119.41 66.44 95.31 56.29 58.88 61.39 63.96 129.75
Average commission
rate paid (b) .................. $ .0562 $ .0585 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
</TABLE>
(a) Based on average monthly 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 December 31, 1995.
(c) On May 12, 1997 existing shares were designated as Class A shares.
58
<PAGE>
CAPITAL GROWTH PORTFOLIO
The following table includes selected data for a share outstanding (a)
throughout the period and other performance information derived from the
financial statements.
For the Period
May 12, 1997
CLASS B (commencement of
- -------------------- sale of Class B shares)
to December 31,
1997
-----------------------
Net asset value, beginning of period .......................... $17.54
------
Income from investment operations:
Net investment income ....................................... .08
Net realized and unrealized gain
(loss) on investment transactions ......................... 3.08
------
Total from investment operations .............................. 3.16
------
Less distributions from net investment income ................. (.09)
------
Net asset value, end of period ................................ $20.61
======
Total Return (%) .............................................. 18.00**
Ratios and Supplemental Data
Net assets, end of period ($ millions) ........................ .55
Ratio of operating expenses to average daily net assets (%) ... .75*
Ratio of net investment income to average daily net assets (%). .64*
Portfolio turnover rate (%) ................................... 41.77
Average commission rate paid (b) .............................. $.0562
(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred securities.
* Annualized
** Not annualized
59
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1997
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------
10.0% REPURCHASE AGREEMENT
------------------------------------------------------------------------------------
2,050,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 12/31/97 at 6.5% to be repurchased at $2,050,740
on 1/2/98 collateralized by a $2,060,000 U.S. Treasury
Note, 5.5%, 11/15/98 (Cost $2,050,000) ................ 2,050,000
-----------
------------------------------------------------------------------------------------
90.0% COMMON STOCKS
------------------------------------------------------------------------------------
Shares
------------------------------------------------------------------------------------
Argentina 1.4%
6,000 Banco Rio de la Plata S.A.* (Private bank) .............. 84,000
69,522 Dalmine Siderca (Steel producer) ........................ 193,305
-----------
277,305
-----------
Austria 1.4%
1,800 Schoeller Bleckmann Oilfield Equipment AG (Manufacturer
of components for oil and gas drilling equipment) ..... 188,101
1,000 VAE Eisenbahnsysteme AG (Manufacturer of electronic
railroad control systems) ............................. 87,876
-----------
275,977
-----------
Bermuda 1.2%
6,200 Axogen Ltd. Units* (Future development of therapeutic
products for treatment of neurological disorders) ..... 246,450
-----------
Canada 0.4%
20,500 Canadian 88 Energy Corp.* (Oil and natural gas
exploration and production) ........................... 60,967
11,000 StressGen Biotechnologies Corp. "A" (Developer of
products for treatment of cancer and certain
infectious diseases) .................................. 23,862
-----------
84,829
-----------
Chile 0.4%
6,600 Linea Aerea Nacional de Chile-SP ADR* (Provider of
domestic and international passenger and cargo air
services) ............................................. 89,925
-----------
Croatia 0.1%
1,400 Pliva D.D. (GDR) (Pharmaceutical company) ............... 24,710
-----------
France 1.1%
101 Altran Technologies, S.A. (Engineering and consulting
services for aerospace, telecommunications and
electronics fields) ................................... 30,870
6,554 Dassault Systemes S.A. (Computer aided design,
manufacturing and engineering software products) ...... 199,777
-----------
230,647
-----------
Germany 1.7%
1,029 Beta Systems Software AG (Developer of processing
automation software) .................................. 82,652
810 Marschollek Lautenschlaeger und Partner AG (pfd)
(Leading independent life insurance company) .......... 204,864
2,400 Pfeifer Vacuum Technology AG* (Manufacturer of various
pumps and vacuum systems) ............................. 67,350
-----------
354,866
-----------
Hungary 2.2%
2,000 Richter Gedeon Rt (GDR) (Pharmaceutical company) ....... 232,500
2,000 Richter Gedeon Rt ....................................... 227,441
-----------
459,941
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
60
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ireland 8.0%
53,400 Bank of Ireland PLC (Bank) .............................. 822,365
6,500 ESAT Telecom Group PLC* (ADR) (Provider of
telecommunication services in the Republic of Ireland). 87,344
10,500 Irish Continental Group PLC (Transport of passengers,
freight and containers between Ireland, the U.K. and
the continent) ........................................ 128,524
46,800 Irish Life PLC (Provider of life and disability
insurance and pensions) ............................... 268,440
10,387 Irish Permanent PLC (Retail financial services group) ... 110,139
29,100 Jury's Hotel Group PLC (Hotel operator) (a) ............. 170,642
69,200 Ryan Hotels PLC (Owner and operator of hotel chain) ..... 58,603
-----------
1,646,057
-----------
Italy 3.1%
12,100 Aeroporti di Roma SpA* (Management of Fiumicino and
Ciampino airports) .................................... 125,514
30,000 Bulgari SpA (Manufacturer and retailer of fine jewelry,
luxury watches and perfumes) .......................... 152,629
11,900 Saes Getters SpA di Risparmio (Manufacturer of getters,
refined chemicals used in cathode ray tubes and other
monitors) ............................................. 113,349
44,500 Saipem SpA (International contractor in oil and gas
exploration and drilling, construction of refineries
and pipelines) ........................................ 233,946
-----------
625,438
-----------
Japan 4.2%
2,100 Nichiei Co., Ltd. (Finance company for small- and
medium-sized firms) ................................... 223,592
2,700 Riso Kagaku Corp. (Manufacturer of copying machines) .... 154,493
1,600 Shohkoh Fund & Co., Ltd. (Finance company for small- and
medium-sized firms) ................................... 487,782
-----------
865,867
-----------
Luxembourg 2.6%
14,000 Millicom International Cellular S.A.* (Developer and
operator of cellular telephone networks) .............. 526,750
-----------
Mexico 0.6%
5,300 TV Azteca, S.A. de C.V.* (ADR) (Owner and operator of
national television networks) ......................... 119,581
-----------
Netherlands 3.1%
4,000 De Telegraaf Holding NV (Leading publisher of
newspapers, magazines and books) ...................... 75,356
7,400 IHC Caland NV (Dredging and offshore services) .......... 383,923
7,800 Koninklijke Nedlloyd Groep NV (Container shipping and
transportation) ....................................... 176,949
-----------
636,228
-----------
Poland 0.5%
4,400 Debica S.A. "A" (Tire manufacturer) ..................... 109,844
-----------
Portugal 3.8%
9,673 Jeromino Martins S.A. (New) (Food producer and
retailer)(a) .......................................... 297,721
6,649 Jeronimo Martins S.A. ................................... 210,976
2,600 Telecel-Comunicacoes Pessoais, S.A. (Cellular
communication services) ............................... 277,023
-----------
785,720
-----------
Spain 0.7%
3,000 Aldeasa S.A.* (Operator of airport duty-free shops) ..... 63,604
1,100 Tele Pizza, S.A. (Operator of fast-food pizza
restaurants in Spain, Portugal, Poland, Mexico and
Chile) ................................................ 88,809
-----------
152,413
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
61
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sweden 1.1%
3,300 OM Gruppen AB (Free) (Operator of financial exchanges
and clearing organizations) ........................... 120,135
5,400 TV 4 AB (Broadcaster of news, sports, documentaries,
entertainment; program producer) ...................... 99,312
-----------
219,447
-----------
Switzerland 0.5%
206 Phoenix Mecano AG (Bearer) (Manufacturer of housings and
components for computers) ............................. 105,009
-----------
United Kingdom 10.5%
14,500 Avis Europe PLC (Car rental services) ................... 41,436
15,100 Central European Media Enterprises Ltd. "A" (Owner and
operator of national and regional private commercial
television stations in central Europe and Germany) .... 381,275
80,500 Corporate Services Group PLC (Employment services and
training) ............................................. 281,605
25,400 Expro International Group PLC (Provider of oilfield
services) ............................................. 224,847
9,400 Games Workshop Group PLC (Manufacturer of table top war
game systems and miniatures) .......................... 90,313
33,400 Provident Financial PLC (Personal finance group) ........ 438,836
7,800 RM PLC (Information technology solutions for educational
markets) .............................................. 102,162
40,600 Serco Group PLC (Facilities management company) ......... 580,111
-----------
2,140,585
-----------
United States 41.4%
3,600 Aptargroup, Inc. (Manufacturer of packaging equipment
components) ........................................... 199,800
4,800 BE Aerospace* (Airline audio/video control systems) ..... 128,400
4,300 Barrett Resources Corp.* (Oil and gas exploration and
production) ........................................... 130,075
11,300 Benton Oil & Gas Co.* (Oil and gas exploration,
development and production) ........................... 146,194
13,900 Billing Concepts* (Billing and information management
services) ............................................. 667,200
5,400 CapMAC Holdings Inc. (Provider of financial guaranty
insurance) ............................................ 187,650
3,600 Cintas Corp. (Uniform rentals) .......................... 140,400
7,900 Cognex Corp.* (Manufacturer of machine vision systems) .. 215,275
8,500 Concentra Managed Care, Inc. (Provider of integrated
nonrisk-bearing workers' compensation managed care) ... 286,875
13,500 Consolidated Freightways Corp. (Less-than-truckload
shipping services) .................................... 183,938
31,700 Corporate Express, Inc.* (Retailer of office supply
products through telephone ordering system, fax and
electronic data interchange) .......................... 408,138
200 CytoTherapeutics, Inc.* (Developer of therapeutic
products for treatment of certain chronic and
disabling diseases) ................................... 800
3,200 DuPont Photomasks, Inc.* (Manufacturer of photomasks
used in semiconductor production) ..................... 111,600
2,500 ESC Medical Systems Ltd.* (Producer of devices for
non-invasive treatment of benign vascular lesions) .... 96,875
6,900 Fiserv Inc.* (Data processing services) ................. 338,963
3,000 G & K Services Inc. "A" (Uniform rentals) ............... 126,000
19,100 General Communication, Inc. "A" * (Telecommunication
services) ............................................. 126,538
6,200 Hain Food Group, Inc.* (Provider of specialty food
products) ............................................. 56,963
500 Healthcare Recoveries, Inc. (Provider of recovery
services for private healthcare payors) ............... 11,125
</TABLE>
The accompanying notes are an integral part of the financial statements.
62
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
6,366 IDX Systems Corp.* (Provider of health care information
systems to physician groups and academic medical
centers) .............................................. 235,542
1,400 JLK Direct Distribution Inc. "A" (Manufacturer of
metalworking tools) ................................... 39,200
4,500 La Quinta Inns, Inc. (Owner and operator of motel chain). 86,906
24,200 Network Appliance, Inc. (Designer and manufacturer of
network data storage devices) ......................... 859,100
4,900 Samsonite Corp.* (Luggage manufacturer) ................. 154,963
1,400 Security Dynamics Technologies, Inc.* (Designer,
developer and supporter of a family of security
products used to manage access to computer-based
information resources) ................................ 50,050
3,700 Sepracor, Inc.* (Developer of enhanced forms of existing
pharmaceuticals) ...................................... 148,231
22,900 Sitel Corp.* (Nebraska based telemarketing company for
major credit card and insurance companies) ............ 208,963
14,500 Sola International, Inc.* (Manufacturer of plastic
eyeglass lenses) ...................................... 471,250
17,825 Sterling Commerce, Inc.* (Producer of electronic data
interchange products and services) .................... 685,148
4,100 Suiza Foods Corp. (Food distributor) .................... 244,206
2,600 Symbol Technologies Inc. (Manufacturer of bar code laser
scanners) ............................................. 98,150
32,800 TCI Satellite Entertainment, Inc. (Television
programming via digital satellite) .................... 225,500
5,700 Tech Data Corp.* (Distributor of microcomputers,
hardware and software) ................................ 221,588
7,300 Tiffany & Co. (Retailer of jewelry and gift items) ...... 263,256
7,466 Total Renal Care Holdings, Inc.* (Dialysis services for
treatment of chronic kidney failure) .................. 205,315
3,200 Tower Realty Trust, Inc. (REIT) (Developer and manager
of office properties) ................................. 78,800
1,650 Vincam Group Inc.* (Provider of solutions to
complexities and costs of employment and personnel) ... 43,931
9,250 Vitesse Semiconductor Corp.* (Manufacturer of digital
integrated circuits) .................................. 349,188
5,000 Wackenhut Corrections Corp.* (Manager of privatized
correctional and detention facilities) ................ 134,375
3,700 Wesley Jessen VisionCare, Inc.* (Manufacturer of soft
contact lenses) ....................................... 144,300
-----------
8,510,771
-----------
Total Common Stocks (Cost $16,023,416) .................. 18,488,360
-----------
- --------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0%
(Cost $18,073,416) (b) ................................ 20,538,360
===========
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non-income producing security.
(a) Security valued in good faith by the Valuation Committee of the Board of
Trustees at fair value amounted to $468,363 (2.33% of net assets). The value
has been estimated by the Board of Trustees in the absence of readily
ascertainable market values. However, because of the inherent uncertainty of
valuation, the 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, 1997 aggregated $319,091. The security may also have certain
restrictions as to resale.
The accompanying notes are an integral part of the financial statements.
63
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
- --------------------------------------------------------------------------------
(b) At December 31, 1997, the net unrealized appreciation on
investments based on cost for federal income tax
purposes of $18,381,163 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of market value
over tax cost ............................................. $ 3,139,334
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost over
market value .............................................. 982,137
------------
Net unrealized appreciation ................................. $ 2,157,197
============
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments), for the year ended December 31, 1997, aggregated $14,948,190
and $14,200,205, respectively.
- --------------------------------------------------------------------------------
From November 1, 1997 through December 31, 1997, the Global Discovery
Portfolio incurred approximately $110,514 of net realized capital losses
which the Portfolio intends to elect to defer and treat as arising in the
fiscal year ended December 31, 1998.
Forward Currency Exchange Contracts:
At December 31, 1997, the Global Discovery Portfolio had the following
forward foreign currency exchange contract outstanding, resulting in net
unrealized appreciation of $1,760.
<TABLE>
<CAPTION>
Net Unrealized
Appreciation/
Settlement (Depreciation)
Contracts to Deliver In Exchange For Date (U.S.$)
---------------------------- ------------------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
Japanese Yen 36,000,000 U.S. Dollars 284,248 6/15/98 1,760
=====
</TABLE>
The accompanying notes are an integral part of the financial statements.
64
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments, at market (including repurchase agreements of $2,050,000)
(identified cost $18,073,416) ..................................... $ 20,538,360
Foreign currency, at market (cost $98,122) ........................... 97,465
Unrealized appreciation on forward currency exchange contracts ....... 1,760
Receivables:
Investments sold .................................................. 15,476
Foreign taxes recoverable ......................................... 1,439
Dividends and interest ............................................ 9,471
Other assets ......................................................... 235
------------
Total assets ................................................... 20,664,206
Liabilities
Payables:
Accrued Management Fee ............................................ $ 11,636
Investments purchased ............................................. 504,281
Other payables and accrued expenses ............................... 33,148
---------
Total liabilities .............................................. 549,065
------------
Net assets, at market value .......................................... $ 20,115,141
============
Net Assets Net assets consist of:
Undistributed net investment income ............................... 348,103
Net unrealized appreciation (depreciation) on:
Investments .................................................... 2,464,944
Foreign currency related transactions .......................... 1,304
Accumulated net realized gain (loss) .............................. (235,671)
Paid-in capital ................................................... 17,536,461
------------
Net assets, at market value .......................................... $ 20,115,141
============
Class A
Netasset value, offering and redemption price per share
($17,892,612 / 2,526,754 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) .... $ 7.08
======
Class B
Netasset value, offering and redemption price per share
($2,222,529 / 314,140 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) .... $ 7.07
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
65
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Investment income
Income:
Dividends (net of foreign taxes withheld of $12,473) ........... $ 117,334
Interest ....................................................... 78,926
-----------
196,260
Expenses:
Management fee ................................................. $ 179,723
Trustees' fees and expenses .................................... 18,063
Accounting fees ................................................ 61,692
Distribution fees (Class B) ................................... 2,202
Custodian fees ................................................. 58,614
Reports to shareholders ........................................ 406
Auditing ....................................................... 5,106
Legal .......................................................... 5,329
Other .......................................................... 3,330
-----------
Total expenses before reductions ............................... 334,465
Expense reductions ............................................. (53,711)
-----------
Expenses, net ..................................................... 280,754
-----------
Net investment loss ............................................... (84,494)
-----------
Net realized and unrealized gain (loss) on investment transactions
Net realized gain (loss) from:
Investments .................................................... 62,305
Foreign currency related transactions .......................... 193,091 255,396
-----------
Net unrealized appreciation (depreciation) during the period on:
Investments .................................................... 1,804,823
Foreign currency related transactions .......................... (15,363) 1,789,460
----------- -----------
Net gain (loss) on investment transactions ........................ 2,044,856
-----------
Net increase (decrease) in net assets resulting from operations ...... $ 1,960,362
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
66
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
May 1, 1996
Year (commencement
Ended of operations)
December 31, to December 31,
Increase (Decrease) in Net Assets 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment loss .............................................. $ (84,494) $ (11,146)
Net realized gain (loss) from investment transactions ............ 255,396 36,987
Net unrealized appreciation (depreciation) on investment
transactions during the period ................................ 1,789,460 676,788
------------ ------------
Net increase (decrease) in net assets resulting from operations ..... 1,960,362 702,629
------------ ------------
Distributions to shareholders from:
Net investment income (Class A) .................................. (56,210) --
------------ ------------
Net realized gains from investment transactions (Class A) ........ (28,105) --
------------ ------------
Portfolio share transactions:
Class A
Proceeds from shares sold ........................................ 8,909,818 18,871,561
Net asset value of shares issued to shareholders
in reinvestment of distributions .............................. 84,315 --
Cost of shares redeemed .......................................... (9,691,134) (2,817,526)
------------ ------------
Net increase (decrease) in net assets from Class A share transactions (697,001) 16,054,035
------------ ------------
Class B*
Proceeds from shares sold ........................................ 2,500,974 --
Cost of shares redeemed .......................................... (322,143) --
------------ ------------
Net increase (decrease) in net assets from Class B share transactions 2,178,831 --
------------ ------------
Increase (decrease) in net assets ................................... 3,357,877 16,756,664
Net assets at beginning of period ................................... 16,757,264 600
------------ ------------
Net assets at end of period (including undistributed net investment
income of $348,103 and $44,728, respectively) .................... $ 20,115,141 $ 16,757,264
============ ============
Other Information
Increase (decrease) in Portfolio shares
Class A
Shares outstanding at beginning of period ........................ 2,647,089 100
------------ ------------
Shares sold ...................................................... 1,316,648 3,107,414
Shares issued to shareholders in reinvestment of distributions ... 13,469 --
Shares redeemed .................................................. (1,450,452) (460,425)
------------ ------------
Net increase (decrease) in Portfolio shares ...................... (120,335) 2,646,989
------------ ------------
Shares outstanding at end of period ................................. 2,526,754 2,647,089
============ ============
Class B*
Shares outstanding at beginning of period ........................ -- --
------------ ------------
Shares sold ...................................................... 358,842 --
Shares redeemed .................................................. (44,702) --
------------ ------------
Net increase (decrease) in Portfolio shares ...................... 314,140 --
------------ ------------
Shares outstanding at end of period ................................. 314,140 --
============ ============
</TABLE>
* For the period May 2, 1997 (commencement of sale of Class B shares) to
December 31, 1997.
The accompanying notes are an integral part of the financial statements.
67
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding (a)
throughout each period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
For the Period
May 1, 1996
CLASS A (c) Year (commencement of
- ----------------- Ended operations) to
December 31, December 31,
1997 1996
----------- ----------------
<S> <C> <C>
Net asset value, beginning of period ............................... $ 6.33 $ 6.00(b)
-------- --------
Income from investment operations:
Net investment loss .............................................. (.03) (.01)
Net realized and unrealized gain (loss) on investment transactions .81 .34
-------- --------
Total from investment operations ................................... .78 .33
-------- --------
Less distributions from:
Net investment income ............................................ (.02) --
Net realized gains on investment transactions .................... (.01) --
-------- --------
Total distributions ................................................ (.03) --
-------- --------
Net asset value, end of period ..................................... $ 7.08 $ 6.33
======== ========
Total Return (%) (d) ............................................... 12.38 5.50**
Ratios and Supplemental Data
Net assets, end of period ($ millions) ............................. 18 17
Ratio of operating expenses, net to average daily net assets (%) ... 1.50 1.50*
Ratio of operating expenses before expense reductions, to average
daily net assets (%) ............................................. 1.79 2.32*
Ratio of net investment loss to average daily net assets (%) ....... (.44) (.13)*
Portfolio turnover rate (%) ........................................ 83.16 50.31*
Average commission rate paid (e) ................................... $ .0032 $ .0029
</TABLE>
(a) Based on average shares outstanding during the period.
(b) Original capital
(c) On May 2, 1997 existing shares were designated as Class A shares.
(d) Total returns would have been lower had certain expenses not been reduced.
(e) Average commission rate paid per share of common and preferred securities.
* Annualized
** Not annualized
68
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
The following table includes selected data for a share outstanding (a)
throughout the period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
For the Period
May 2, 1997
CLASS B (commencement of
- -------------- sale of Class B shares)
to December 31,
1996
----------------------
<S> <C>
Net asset value, beginning of period ............................................. $ 6.20
------
Income from investment operations:
Net investment loss ............................................................ (.04)
Net realized and unrealized gain (loss) on investment transactions ............. .91
------
Total from investment operations ................................................. .87
------
Net asset value, end of period ................................................... $ 7.07
======
Total Return (%) (b) ............................................................. 14.03**
Ratios and Supplemental Data
Net assets, end of period ($ millions) ........................................... 2
Ratio of operating expenses, net to average daily net assets (%) ................. 1.75*
Ratio of operating expenses, before reductions, to average daily net assets (%) .. 2.00*
Ratio of net investment loss to average daily net assets (%) ..................... (.89)*
Portfolio turnover rate (%) ...................................................... 83.16
Average commission rate paid (c) ................................................. $.0032
</TABLE>
(a) Based on average shares outstanding during the period.
(b) Total return would have been lower had certain expenses not been reduced.
(c) Average commission rate paid per share of common and preferred securities.
* Annualized
** Not annualized
69
<PAGE>
INTERNATIONAL PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1997
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------
3.2% REPURCHASE AGREEMENT
------------------------------------------------------------------------------------
U.S.$13,500,000 Repurchase Agreement with Donaldson, Lufkin &
Jenrette dated 12/31/97 at 6.5%, to be repurchased
at $13,504,875 on 1/2/98, collateralized by a
$10,276,000 U.S. Treasury Bond, 8.5%, 2/15/20
(Cost $13,500,000) .................................... 13,500,000
-----------
------------------------------------------------------------------------------------
0.3% CONVERTIBLE BONDS
------------------------------------------------------------------------------------
Japan
JPY 212,000,000 Softbank Corp., 0.5%, 03/29/02 (Cost $2,136,453) ........ 1,266,641
-----------
------------------------------------------------------------------------------------
96.5% COMMON STOCKS
------------------------------------------------------------------------------------
Shares
------------------------------------------------------------------------------------
Argentina 0.7%
90,100 YPF S.A. "D" (ADR) (Petroleum company) .................. 3,080,294
-----------
Brazil 1.0%
140,180 Companhia Vale do Rio Doce (pfd.) (Diverse mining and
industrial complex) ................................... 2,782,122
252,474 Usinas Siderurgicas de Minas Gerais S.A. (pfd.) (Steel
manufacturer) ......................................... 1,493,059
-----------
4,275,181
-----------
Canada 1.2%
109,500 Canadian National Railway Co. (Major railroad operator).. 5,156,817
-----------
China 0.8%
3,340,900 Anhui Expressway Co., Ltd. "H" (Developer and manager of
toll highways in Anhui province) ...................... 577,727
124,500 China Telecommunications (Telecommunication services) ... 213,686
281,400 GZI Transport Ltd. (Developer and operator of toll
highways in Guangdong Province) ....................... 94,417
101,674 Guangshen Railway Co. Ltd. (ADR) (Operator of only
railroad in the Pearl River delta) .................... 1,366,244
2,452,300 Jiangsu Expressway Co., Ltd. "H" (Builder and manager of
the Shanghai-Nanjing expressway) ...................... 506,347
2,486,400 Shenzhen Expressway Co. "H" (Highway developer) ......... 481,301
-----------
3,239,722
-----------
Finland 1.9%
61,000 Nokia AB Oy "A" (Leading manufacturer of
telecommunications equipment and cellular telephones).. 4,332,196
102,000 Pohjola Insurance Co., Ltd. "B" (Insurance company) ..... 3,781,105
-----------
8,113,301
-----------
France 14.7%
41,794 AXA-UAP S.A. (Insurance group providing insurance,
finance and real estate services) ..................... 3,233,134
23,098 Accor S.A.* (Catering, hotels, travel services) ......... 4,293,465
44,733 Alcatel Alsthom (Manufacturer of transportation,
telecommunication and energy equipment) ............... 5,684,509
113,991 Assurances Generales de France* (Markets health, life,
and liability insurance) .............................. 6,038,493
7,393 Carrefour (Hypermarket operator and food retailer) ...... 3,856,150
14,151 Christian Dior (Leading fashion house) .................. 1,450,360
25,977 Compagnie Financiere de Paribas (Finance and investment
company) .............................................. 2,256,806
</TABLE>
The accompanying notes are an integral part of the financial statements.
70
<PAGE>
INTERNATIONAL PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
35,926 Credit Commercial de France (Bank) ...................... 2,461,707
85,966 France Telecom S.A.* (Telecommunication services) ....... 3,117,339
40,018 Lagardere S.C.A. (Holding company with interests in
publishing, defense, audiovisual production and
services, telecommunications and media) ............... 1,322,854
12,923 Renault S.A. (Manufacturer of automobiles, buses,
industrial and agricultural vehicles) ................. 3,842,553
102,212 Rhone-Poulenc S.A. "A" (Medical, agricultural and
consumer chemicals) ................................... 4,577,468
62,716 Schneider S.A. (Manufacturer of electronic components
and automated manufacturing systems) .................. 3,404,583
44,135 Societe Lyonnaise des Eaux SA (Water utility) ........... 4,882,709
53,869 Societe Nationale Elf Aquitaine (Petroleum company) ..... 6,263,837
101,824 Thomson CSF (Manufacturer of aerospace systems and
industrial electronics products) ...................... 3,208,640
24,496 Total S.A. "B" (International oil and gas exploration,
development and production) ........................... 2,665,262
-----------
62,559,869
-----------
Germany 17.6%
22,591 Allianz AG (Multi-line insurance company) ............... 5,851,810
96,488 BASF AG (Leading international chemical producer) ....... 3,419,183
147,800 Bayerische Vereinsbank AG (Commercial bank) ............. 9,669,850
208,500 Commerzbank AG (Worldwide multi-service bank) ........... 8,205,559
104,437 Dresdner Bank AG (Universal bank) ....................... 4,818,383
16,771 Heidelberger Druckmaschinen (Manufacturer of printing
machinery) ............................................ 922,918
81,450 Hoechst AG (Chemical producer) .......................... 2,852,335
10,760 Mannesmann AG (Bearer) (Diversified construction and
technology company) ................................... 5,436,820
16,740 Muenchener Rueckversicherungs-Gesellschaft AG
(Registered) (Insurance company) ...................... 6,308,905
146,700 RWE AG (pfd.) (Producer and marketer of petroleum and
chemical products) .................................... 6,197,443
11,900 SAP AG (pfd.) (Computer software manufacturer) .......... 3,892,802
36,600 Schering AG (Pharmaceutical and chemical producer) ...... 3,529,794
36,275 Siemens AG (Leading electrical engineering and
electronics company) .................................. 2,147,464
14,823 Thyssen AG (Manufacturer of capital goods and steel
products) ............................................. 3,172,237
90,700 VEBA AG (Electric utility, distributor of oil and
chemicals) ............................................ 6,176,070
4,175 VIAG AG (Provider of electrical power and natural gas
services, aluminum products, chemicals, ceramics and
glass) ................................................ 2,248,791
-----------
74,850,364
-----------
Hong Kong 3.7%
268,700 Cheung Kong Holdings Ltd. (Real estate company) ......... 1,759,779
162,200 Citic Pacific Ltd. (Diversified holding company) ........ 646,791
1,214,400 Cosco Pacific Ltd. (Investment holding company) ......... 987,317
634,400 Great Eagle Holdings Ltd. (Property development) ........ 888,275
126,900 Great Eagle Holdings Ltd. Warrants* (expire 11/30/98) ... 16,376
149,690 HSBC Holdings Ltd. (Bank) ............................... 3,689,610
538 Hong Kong & China Gas Co., Ltd. (Gas utility) ........... 1,045
313,200 Hutchison Whampoa, Ltd. (Container terminal and real
estate company) ....................................... 1,960,279
1,066,900 Kerry Properties, Ltd. (Real estate company) ............ 1,762,333
451,000 New World Development Co., Ltd. (Property investment and
development, construction and engineering, hotels and
restaurants, telecommunications) ...................... 1,559,788
113,200 New World Infrastructure Ltd.* (Investment and operation
of infrastructure projects) ........................... 256,376
</TABLE>
The accompanying notes are an integral part of the financial statements.
71
<PAGE>
INTERNATIONAL PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
584,600 Television Broadcasts, Ltd. (Television broadcasting) ... 1,667,268
2,668,700 Zhejiang Expressway Co., Ltd. (Road construction and
management) ........................................... 540,697
-----------
15,735,934
-----------
Indonesia 0.2%
19,570 Asia Pacific Resources International Holdings Ltd.
(Manufacturer of rayon fiber for Asian textile
markets, owner of world's leading paper pulp mill) .... 36,694
1,708,800 Indah Kiat Pulp & Paper (Foreign registered) (Producer
of pulp and paper) .................................... 302,924
400,000 Indocement Tunggal Prakarsa (Foreign Registered)
(Multi-business group with 3 major divisions namely
cement, food, and property) ........................... 130,909
924,570 Pabrik Kertas Tjiwi Kimia (Operator of a pulp and paper
factory) .............................................. 226,940
-----------
697,467
-----------
Italy 3.1%
2,506,600 Istituto Nazionale delle Assicurazione (Insurance
company) .............................................. 5,079,797
1,754,000 Telecom Italia Mobile SpA (Cellular telecommunication
services) ............................................. 8,095,766
-----------
13,175,563
-----------
Japan 15.4%
59,000 Advantest Corp. (Producer of measuring instruments and
semiconductor testing devices) ........................ 3,344,313
149,000 Bridgestone Corp. (Leading automobile tire manufacturer). 3,229,950
212,000 Canon Inc. (Leading producer of visual image and
information equipment) ................................ 4,936,653
537,000 Daiwa Securities Co., Ltd. (Brokerage and other
financial services) ................................... 1,851,015
392,000 Fujitsu Ltd. (Leading manufacturer of computers) ........ 4,203,753
101,000 Hitachi Construction Machinery Co., Ltd. (Leading maker
of hydraulic shovels) ................................. 317,970
30,500 Keyence Corp. (Specialized manufacturer of sensors) ..... 4,509,000
148,000 Matsushita Electric Works, Inc. (Leading maker of
building materials and lighting equipment) ............ 1,281,042
213,000 Minebea Co., Ltd. (Manufacturer of bearings, electronic
equipment, machinery parts) ........................... 2,284,182
48,200 Nichiei Co., Ltd. (Finance company for small and
medium-sized firms) ................................... 5,131,980
47,900 Nintendo Co., Ltd. (Game equipment manufacturer) ........ 4,696,438
327 Nippon Telegraph & Telephone Corp. (Leading
telecommunications company) ........................... 2,805,362
237,000 Nomura Securities Co., Ltd. (Financial advisor,
securities broker and underwriter) .................... 3,158,790
46,800 Orix Corp. (Major leasing company) ...................... 3,262,198
207,000 Ricoh Co., Ltd. (Leading maker of copiers and
information equipment) ................................ 2,568,671
46,500 SMC Corp. (Leading maker of pneumatic equipment) ........ 4,096,132
38,000 Secom Co., Ltd. (Electronic security system operator) ... 2,427,576
9,800 Shohkoh Fund & Co., Ltd. (Finance company for small and
medium-sized firms) ................................... 2,987,668
49,300 Sony Corp. (Consumer electronic products manufacturer) .. 4,380,544
906,000 Sumitomo Metal Industries, Ltd. (Leading integrated
crude steel producer) ................................. 1,158,958
87,000 Tokyo Electron Ltd. (Leading semiconductor production
equipment manufacturer) ............................... 2,785,599
-----------
65,417,794
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
72
<PAGE>
INTERNATIONAL PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Malaysia 0.4%
842,700 Arab Malaysian Finance Berhad (Foreign registered)
(Licensed finance company) ............................ 168,995
570,800 Arab-Malaysian Corp. (Investment holding company with
interests in financial services, infrastructure and
property) ............................................. 168,767
145,700 Malayan Banking Berhad (Leading banking and financial
services group) ....................................... 423,296
905,933 Malaysian Resources Corp. (Property development and
investment) ........................................... 209,626
1,045,700 Multi-Purpose Holdings Berhad (Investment holding
company) .............................................. 268,852
411,300 United Engineers (Malaysia) Berhad (Leading
comprehensive contractor) (a) ......................... 342,618
-----------
1,582,154
-----------
Netherlands 4.5%
64,100 AEGON Insurance Group NV (Insurance company) ............ 5,705,997
12,700 Akzo-Nobel NV (Chemical producer) ....................... 2,189,634
108,570 Elsevier NV (International publisher of scientific,
professional, business, and consumer information
books) ................................................ 1,756,224
23,150 Heineken Holdings NV "A" (Brewery) ...................... 3,562,065
60,700 Philips Electronics NV (Leading manufacturer of
electrical equipment) ................................. 3,640,144
41,500 Royal Dutch Petroleum Co. (Owner of 60% of Royal
Dutch/Shell Group) .................................... 2,277,926
-----------
19,131,990
-----------
Philippines 0.7%
358,000 Ayala Land, Inc. "B" (Real estate and land developer) ... 141,432
4,935,000 C & P Homes, Inc. (Home construction company) ........... 287,570
492,483 Manila Electric Co. "B" (Electric utility) .............. 1,629,450
154,856 Metropolitan Bank and Trust Company (Commercial bank and
trust company) ........................................ 1,041,932
-----------
3,100,384
-----------
Portugal 2.6%
90,576 Jeromino Martins S.A. (New) (Food producer and
retailer) (a) ......................................... 2,787,802
31,984 Jeronimo Martins S.A. ................................... 1,014,869
160,000 Portugal Telecom S.A. (Telecommunication services) ...... 7,424,070
-----------
11,226,741
-----------
Sweden 3.7%
135,000 AGA AB "B" (Free) (Producer and distributor of
industrial and medical gases) ......................... 1,785,579
135,892 L.M. Ericsson Telephone Co. "B" (ADR) (Leading
manufacturer of cellular telephone equipment) ......... 5,070,470
186,200 Skandia Foersaekrings AB (Free) (Financial conglomerate). 8,783,904
-----------
15,639,953
-----------
Switzerland 9.0%
41,999 Ciba Specialty Chemical (Registered) (Manufacturer of
chemical products for plastics, coatings, fibers and
fabrics) .............................................. 5,000,223
6,716 Clariant AG (Registered) (Manufacturer of color
chemicals) ............................................ 5,606,240
42,222 Credit Suisse Group (Registered) (Provider of bank
services, management services and life insurance) ..... 6,529,026
2,602 Nestle S.A. (Registered) (Food manufacturer) ............ 3,897,214
2,657 Novartis AG (Bearer) (Pharmaceutical company) ........... 4,317,739
3,339 Novartis AG (Registered) ................................ 5,414,595
</TABLE>
The accompanying notes are an integral part of the financial statements.
73
<PAGE>
INTERNATIONAL PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
462 Roche Holdings AG (PC) (Producer of drugs and medicines) 4,585,228
2,086 Union Bank of Switzerland (Bearer) (Bank) ............... 3,014,459
-----------
38,364,724
-----------
United Kingdom 14.5%
190,850 Avis Europe PLC (Car rental services) ................... 545,390
270,448 BOC Group PLC (Producer of industrial gases) ............ 4,446,139
338,668 British Petroleum PLC (Major integrated world oil
company) .............................................. 4,479,668
471,700 Carlton Communications PLC (Television post production
products and services) ................................ 3,641,071
714,599 General Electric Co., PLC (Manufacturer of power,
communications and defense equipment and other various
electrical components) ................................ 4,629,935
199,088 Glaxo Wellcome PLC (Pharmaceutical company) ............. 4,745,933
246,450 Imperial Chemical Industries PLC (Leading international
chemical producer) .................................... 3,849,238
304,750 Pearson PLC (Diversified media and entertainment holding
company) .............................................. 3,959,001
1,003,979 Pilkington PLC (Manufacturer of glass for building and
transport markets) .................................... 2,102,327
460,297 PowerGen PLC (Electric utility) ......................... 5,987,269
166,557 Rio Tinto, PLC (Mining and finance company) ............. 2,052,953
341,002 Reuters Holdings PLC (International news agency) ........ 3,724,294
659,873 SmithKline Beecham PLC (Manufacturer of ethical drugs
and healthcare products) .............................. 6,800,479
1,165,205 WPP Group PLC (Advertising agency) ...................... 5,186,054
159,000 Zeneca Group PLC (Holding company: manufacturing and
marketing of pharmaceutical and agrochemical products
and specialty chemicals) .............................. 5,631,475
-----------
61,781,226
-----------
United States 0.8%
107,060 Autoliv Inc. (Manufacturer of automobile safety
components and systems) ............................... 3,506,215
-----------
Total Common Stocks (Cost $345,334,530) ................. 410,635,693
-----------
- --------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0%
(Cost $360,970,983) (b) ............................... 425,402,334
===========
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non-income producing security.
(a) Security valued in good faith by the Valuation Committee
of the Board of Trustees at fair value amounted to
$3,130,420 (.73% of net assets). The value has been
estimated by the Board of Trustees in the absence of
readily ascertainable market values. However, because of
the inherent uncertainty of valuation, the 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,
1997 aggregated $2,950,931. The security may also have
certain restrictions as to resale.
(b) At December 31, 1997, the net unrealized appreciation on
investments based on cost for federal income tax
purposes of $361,635,038 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of market value
over tax cost ............................................. $ 95,710,112
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost over
market value .............................................. 31,942,816
------------
Net unrealized appreciation ................................. $ 63,767,296
============
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments), for the year ended December 31, 1997, aggregated $431,563,484
and $738,283,182, respectively. The sales of investment securities includes
the market value of securities relating to redemptions-in-kind during the
period, upon which the Portfolio recognized a net realized gain of
$75,442,315.
- --------------------------------------------------------------------------------
Currency Abbreviations
- ----------------------
JPY Japanese Yen
The accompanying notes are an integral part of the financial statements.
74
<PAGE>
INTERNATIONAL PORTFOLIO
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments, at market (identified cost $360,970,983) .............. $ 425,402,334
Cash ............................................................... 734
Receivables:
Investments sold ................................................ 2,826,190
Foreign taxes recoverable ....................................... 576,512
Dividends and interest .......................................... 1,229,667
Other assets ....................................................... 10,157
-------------
Total assets ................................................. 430,045,594
Liabilities
Payables:
Investments purchased ........................................... $ 2,265,345
Accrued management fee .......................................... 313,735
Other payables and accrued expenses ............................. 228,634
-----------
Total liabilities ............................................ 2,807,714
-------------
Net assets, at market value ........................................ $ 427,237,880
=============
Net Assets
Net assets consist of:
Undistributed net investment income ............................. 7,228,444
Net unrealized appreciation (depreciation) on:
Investments .................................................. 64,431,351
Foreign currency related transactions ........................ (23,243)
Accumulated net realized gain ................................... 49,739,061
Paid-in capital ................................................. 305,862,267
-------------
Net assets, at market value ........................................ $ 427,237,880
=============
Class A
Net asset value, offering and redemption price per share
($426,890,461 / 30,264,570 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) .. $14.11
======
Class B
Net asset value, offering and redemption price per share
($347,419 / 24,670 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) .. $14.08
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
75
<PAGE>
INTERNATIONAL PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment income
Income:
Dividends (net of foreign taxes withheld of $1,619,366) ....... $ 12,564,600
Interest (net of foreign taxes withheld of $5,841) ............ 2,685,205
------------
15,249,805
Expenses:
Management fee ................................................ $ 6,520,030
Services to shareholders ...................................... 9,365
Custodian fees ................................................ 718,509
Accounting fees ............................................... 466,669
Distribution fees (Class B) ................................... 327
Trustees' fees and expenses ................................... 16,531
Reports to shareholders ....................................... 14,417
Auditing ...................................................... 45,595
Legal ......................................................... 33,283
Other ......................................................... 64,499 7,889,225
------------ ------------
Net investment income ............................................ 7,360,580
------------
Net realized and unrealized gain (loss) on investment transactions
Net realized gain (loss) from:
Investments ................................................... 127,011,469
Foreign currency related transactions ......................... (1,396,204) 125,615,265
------------
Net unrealized appreciation (depreciation) during the period on:
Investments ................................................... (70,354,325)
Foreign currency related transactions ......................... (31,647) (70,385,972)
------------ ------------
Net gain on investment transactions .............................. 55,229,293
------------
Net increase (decrease) in net assets resulting from operations ..... $ 62,589,873
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
76
<PAGE>
INTERNATIONAL PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
Increase (Decrease) in Net Assets 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ............................................ $ 7,360,580 $ 6,138,762
Net realized gain (loss) from investment transactions ............ 125,615,265 28,242,210
Net unrealized appreciation (depreciation) on investment
transactions during the period ................................ (70,385,972) 55,234,650
------------- -------------
Net increase in net assets resulting from operations ................ 62,589,873 89,615,622
------------- -------------
Distributions to shareholders from:
Net investment income (Class A) .................................. (11,550,387) (13,901,339)
------------- -------------
Net realized gain from investment transactions (Class A) ......... (6,050,202) --
------------- -------------
Portfolio share transactions:
Class A
Proceeds from shares sold ........................................ 326,908,941 250,971,681
Net asset value of shares issued to shareholders in
reinvestment of distributions ................................. 17,600,589 13,901,339
Cost of shares redeemed .......................................... (688,657,725) (162,751,269)
------------- -------------
Net increase (decrease) in net assets from Class A share transactions (344,148,195) 102,121,751
------------- -------------
Class B*
Proceeds from shares sold ........................................ 365,304 --
Cost of shares redeemed .......................................... (7,040) --
------------- -------------
Net increase (decrease) in net assets from Class B share transactions 358,264 --
------------- -------------
Increase (decrease) in net assets ................................... (298,800,647) 177,836,034
Net assets at beginning of period ................................... 726,038,527 548,202,493
------------- -------------
Net assets at end of period (including undistributed net
investment income of $7,228,444 and $10,702,948, respectively) ... $ 427,237,880 $ 726,038,527
============= =============
Other Information
Increase (decrease) in Portfolio shares
Class A
Shares outstanding at beginning of period ........................... 54,809,210 46,398,169
------------- -------------
Shares sold ...................................................... 23,224,538 20,288,490
Shares issued to shareholders in reinvestment of distributions ... 1,330,354 1,166,953
Shares redeemed .................................................. (49,099,532) (13,044,402)
------------- -------------
Net increase (decrease) in Portfolio shares ...................... (24,544,640) 8,411,041
------------- -------------
Shares outstanding at end of period ................................. 30,264,570 54,809,210
============= =============
Class B*
Shares outstanding at beginning of period ........................... -- --
------------- -------------
Shares sold ...................................................... 25,146 --
Shares redeemed .................................................. (476) --
------------- -------------
Net increase (decrease) in Portfolio shares ...................... 24,670 --
------------- -------------
Shares outstanding at end of period ................................. 24,670 --
============= =============
</TABLE>
* For the period May 8, 1997 (commencement of sale of Class B shares) to
December 31, 1997.
The accompanying notes are an integral part of the financial statements.
77
<PAGE>
INTERNATIONAL PORTFOLIO
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding (a)
throughout each period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
Class A (d) Years Ended December 31,
- -------------------- ----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period ........................... $ 13.25 $ 11.82 $ 10.69 $ 10.85 $ 8.12 $ 8.47 $ 7.78 $ 8.46 $ 6.14 $ 5.26
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from investment operations:
Net investment income ............ .14 .12 .11 .06 .09 .10 .12 .25 .10 .09
Net realized and unrealized
gain (loss) on investment
transactions .................... 1.04 1.60 1.07 (.15) 2.90 (.36) .77 (.89) 2.22(c) .79
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations ....................... 1.18 1.72 1.18 (.09) 2.99 (.26) .89 (.64) 2.32 .88
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less distributions:
From net investment income ....... (.21) (.29) (.01) (.07) (.14) (.09) (.20) (.04) -- --
In excess of net investment income -- -- -- -- (.12) -- -- -- -- --
From net realized gains on
investment transactions ......... (.11) -- (.04) -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions .............. (.32) (.29) (.05) (.07) (.26) (.09) (.20) (.04) -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end
of period ........................ $ 14.11 $ 13.25 $ 11.82 $ 10.69 $ 10.85 $ 8.12 $ 8.47 $ 7.78 $ 8.46 $ 6.14
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total Return (%) ................... 9.07 14.78 11.11 (.85) 37.82 (3.08) 11.45 (7.65) 37.79 16.73
Ratios and
Supplemental Data
Net assets, end of period
($ millions) ....................... 427 726 548 472 238 65 41 35 17 3
Ratio of operating expenses,
net to average daily net
assets (%) ....................... 1.00 1.05 1.08 1.08 1.20 1.31 1.39 1.38 1.50 1.50
Ratio of operating expenses before
expense reductions, to average
daily net assets (%) ............ 1.00 1.05 1.08 1.08 1.20 1.31 1.39 1.38 1.80 4.15
Ratio of net investment income to
average daily net assets (%) ..... .94 .95 .95 .57 .91 1.23 1.43 2.89 1.30 1.59
Portfolio turnover rate (%) ........ 61.35 32.63 45.76 33.52 20.36 34.42 45.01 26.67 57.69 110.42
Average commission rate paid (b) ... $ .0013 $ .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 December 31, 1995.
(c) Includes provision for federal income tax of $.03 per share.
(d) On May 8, 1997, existing shares were designated as Class A shares.
78
<PAGE>
INTERNATIONAL PORTFOLIO
The following table includes selected data for a share outstanding (a)
throughout the period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
For the Period
May 8, 1997
Class B (commencement of
- --------------- sale of Class B shares)
to December 31,
1997
-----------------------
<S> <C>
Net asset value, beginning of period ....................................... $13.76
------
Income from investment operations:
Net investment income (loss) ............................................. (.00)
Net realized and unrealized gain (loss) on investment transactions ....... .32
------
Total from investment operations ........................................... .32
------
Net asset value, end of period ............................................. $14.08
======
Total Return (%) ........................................................... 2.33**
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................................... .35
Ratio of operating expenses, net to average daily net assets (%) ........... 1.24*
Ratio of net investment income to average daily net assets (%) ............. (.00)*(c)
Portfolio turnover rate (%) ................................................ 61.35
Average commission rate paid (b) ........................................... $.0013
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred securities.
(c) Amount shown is less than one half of .01%.
* Annualized
** Not annualized
79
<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, and International Portfolio. The Fund is
intended to be the funding vehicle for variable annuity contracts and variable
life insurance policies to be offered by the separate accounts of certain life
insurance companies ("Participating Insurance Companies").
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.
Multiple Classes Of Shares Of Beneficial Interest. 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 on the basis of relative net assets by the holders of all classes
of shares except that each class bears expenses unique to that class (including
the applicable 12b-1 fee). In accordance with the Master Distribution Plan, the
12b-1 fees are remitted to the Participating Insurance Companies for various
costs incurred or paid by the Participating Insurance Companies in connection
with the distribution of Class B shares.
Security Valuation. The Money Market Portfolio values all securities utilizing
the amortized cost method permitted in accordance with Rule 2a-7 under the
Investment Company Act of 1940, as amended, and pursuant to which the Portfolio
must adhere to certain conditions. Under this method, which does not take into
account unrealized gains or losses on securities, an instrument is initially
valued at its cost and thereafter assumes a constant accretion/amortization to
maturity of any discount/premium.
Securities in each of the remaining Portfolios are valued in the following
manner:
Portfolio securities which are traded on U.S. or foreign stock exchanges are
valued at the most recent sale price reported on the exchange on which the
security is traded most extensively. If no sale occurred, the security is then
valued at the calculated mean between the most recent bid and asked quotations.
If there are no such bid and asked quotations, the most recent bid quotation is
used. Securities quoted on the 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 most recent 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 purchased with original 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. Money market instruments with an original 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 Board of 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
80
<PAGE>
NOTES TO FINANCIAL STATEMENTS
interest rate futures to hedge against declines in the value of portfolio
securities. Also, during the period, the Bond Portfolio purchased interest rate
futures to manage the duration of the Portfolio.
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.
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
Capital Growth Portfolio, the Growth and Income Portfolio, the Global Discovery
Portfolio and the International Portfolio utilized forward contracts as a hedge
in connection with portfolio purchases and sales of securities denominated in
foreign currencies and the Global Discovery 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 may enter into repurchase agreements with
certain 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, is equal to at least 100.5% of the repurchase price.
81
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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.
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. Ownership of the Portfolios
- --------------------------------------------------------------------------------
At the end of the period, the beneficial ownership in the Portfolios was as
follows:
Money Market Portfolio: Two Participating Insurance Companies were owners of
record of 10% or more of the total outstanding shares of the Portfolio, each
owning 51% and 40%, respectively.
Bond Portfolio: Three Participating Insurance Companies were owners of record of
10% or more of the total outstanding shares of the Portfolio, each owning 39%,
32%, and 11%, respectively.
Balanced Portfolio: Two Participating Insurance Companies were owners of record
of 10% or more of the total outstanding shares of the Portfolio, each owning 49%
and 27%, respectively.
Growth & Income Portfolio: Two Participating Insurance Companies were owners of
record of 10% or more of the total outstanding Class A shares of the Portfolio,
each owning 81% and 11%, respectively. One Participating Insurance Company was
owner of record of 100% of the total outstanding Class B shares of the
Portfolio.
Capital Growth Portfolio: Two Participating Insurance Companies were owners of
record of 10% or more of the total outstanding Class A shares of the Portfolio,
each owning 58% and 21%, respectively. One Participating Insurance Company was
owner of record of 100% of the total outstanding Class B shares of the
Portfolio.
Global Discovery Portfolio: Two Participating Insurance Companies were owners of
record of 10% or more of the total outstanding Class A shares of the Portfolio,
each owning 81% and 11%, respectively.
82
<PAGE>
NOTES TO FINANCIAL STATEMENTS
One Participating Insurance Company was owner of record of 100% of the total
outstanding Class B shares of the Portfolio.
International Portfolio: Three Participating Insurance Companies were owners of
record of 10% or more of the total outstanding Class A shares of the Portfolio,
each owning 40%, 20%, and 16%, respectively. One Participating Insurance Company
was owner of record of 100% of the total outstanding Class B shares of the
Portfolio. One Participating Insurance Company was owner of record of 100% of
the total outstanding Class B shares of the Portfolio.
C. Related Parties
- --------------------------------------------------------------------------------
Effective December 31, 1997, Scudder, Stevens & Clark, Inc. ("Scudder") and The
Zurich Insurance Company ("Zurich"), an international insurance and financial
services organization, formed a new global investment organization by combining
Scudder's business with that of Zurich's subsidiary, Zurich Kemper Investments,
Inc. As a result of the transaction, Scudder changed its name to Scudder Kemper
Investments, Inc. ("Scudder Kemper" or the "Adviser"). The transaction between
Scudder and Zurich resulted in the termination of the Fund's Investment
Management Agreement with Scudder. However, a new Investment Management
Agreement (the "Management Agreement") between the Fund and Scudder Kemper was
approved by the Fund's Board of Trustees and by the Fund's Shareholders. The
Management Agreement, which became effective December 31, 1997, is the same in
all material respects as the corresponding previous Investment Management
Agreement, except that Scudder Kemper is the new investment adviser to the Fund.
Under the Management Agreement with Scudder Kemper, the Fund agrees to pay the
Adviser a fee, based on average daily net assets, equal to an annual rate of
.370% for the Money Market Portfolio, .475% for the Bond Portfolio, .475% for
the Balanced Portfolio, .475% for the Growth and Income Portfolio, .975% for the
Global Discovery Portfolio, .475% for the first $500,000,000, .450% over
$500,000,000 for the Capital Growth Portfolio, and .875% for the first
$500,000,000, .725% over $500,000,000 for the International Portfolio, computed
and accrued daily and payable monthly. Until August 7, 1997, this fee was
calculated, based on average daily net assets, equal to an annual rate of .475%
for the Capital Growth Portfolio; and .875% for the first $500,000,000, .775%
over $500,000,000 for the International Portfolio. As manager of the assets of
each Portfolio, the Adviser directs the investments of the Portfolios in
accordance with their investment objectives, policies, and restrictions. The
Adviser determines the securities, instruments, and other contracts relating to
investments to be purchased, sold or entered into by the Portfolios. In addition
to portfolio management services, the Adviser provides certain administrative
services in accordance with the Management Agreement.
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 April 30, 1998, the Adviser has agreed to waive all or part of its fees
for the Global Discovery Portfolio, excluding 12b-1 fees, 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 an annual retainer
plus specified amounts for attended board and committee meetings. Allocated
Trustees' fees and expenses for each Portfolio for the year ended December 31,
1997 are detailed in each Portfolio's statement of operations.
D. Lines of Credit
- --------------------------------------------------------------------------------
The International Portfolio and several other Scudder 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.
83
<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, 1997, 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, 1997 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Scudder Variable Life Investment Fund (comprised of the seven Portfolios
identified in Note A) as of December 31, 1997, 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.
January 30, 1998
84
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
TAX INFORMATION
The Balanced Portfolio, Bond Portfolio, Capital Growth Portfolio, Growth and
Income Portfolio, and International Portfolio paid distributions of $.64, $.02,
$.74, $.35, and $.11 per share, respectively, from net long-term capital gains
during the year ended December 31, 1997.
Pursuant to section 852 of the Internal Revenue Code, the Balanced Portfolio,
Bond Portfolio, Capital Growth Portfolio, Growth and Income Portfolio, Global
Discovery, and International Portfolio designate $4,312,490, $193,958,
$31,520,629, $10,295,304, $166,032, and $42,459,797, respectively, as capital
gain dividends for the year ended December 31, 1997, of which 40%, 21%, 43%,
72%, 69%, and 100% represent 20% rate gains, respectively.
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 20%, Capital
Growth Portfolio 71%, and Growth and Income Portfolio 100%.
85
<PAGE>
MONEY MARKET PORTFOLIO
SHAREHOLDER MEETING RESULTS
A Special Meeting of Shareholders of Scudder Variable Life Investment Fund,
Money Market Portfolio, was held on October 24, 1997, at the offices of Scudder
Kemper Investments, Inc. (formerly Scudder, Stevens & Clark, Inc.), Two
International Place, Boston, Massachusetts 02110. The following matters were
voted upon by the shareholders and the resulting votes for each matter are
presented below.
1. To approve the new Investment Management Agreement between the Fund and
Scudder Kemper Investments, Inc.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
101,166,979 4,357,475 2,978,403 0
2. To elect Trustees.
Number of Votes:
Trustee For Withheld
------- --- --------
Dr. Kenneth Black, Jr. 105,734,949 2,767,908
Dr. Rosita P. Chang 105,945,445 2,557,412
Peter B. Freeman 106,034,417 2,468,440
Dr. J.D. Hammond 106,060,458 2,442,399
Daniel Pierce 106,060,458 2,442,399
3. To approve the Board's discretionary authority to convert the Fund to a
master/feeder fund structure through a sale or transfer of assets or
otherwise.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
97,002,639 7,020,135 4,480,083 0
4(A). To approve certain provisions of the Amended and Restated Declaration of
Trust.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
97,136,098 7,172,039 4,194,720 0
4(B). To approve certain other provisions of the Amended and Restated
Declaration of Trust.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
97,519,113 6,849,785 4,133,959 0
86
<PAGE>
MONEY MARKET PORTFOLIO
5. To approve the revision of certain fundamental investment policies.
<TABLE>
<CAPTION>
Number of Votes:
Broker
Fundamental Policies For Against Abstain Non-Votes*
-------------------- --- ------- ------- ----------
<C> <S> <C> <C> <C> <C>
5.1 Diversification 91,608,962 10,593,134 6,300,761 0
5.2 Borrowing 95,923,036 6,279,060 6,300,761 0
5.3 Senior securities 95,926,291 6,275,805 6,300,761 0
5.4 Concentration 95,926,291 6,275,805 6,300,761 0
5.5 Purchase of physical commodities 95,926,291 6,275,805 6,300,761 0
5.6 Underwriting of securities 95,926,291 6,275,805 6,300,761 0
5.7 Investment in real estate 95,926,291 6,275,805 6,300,761 0
5.8 Lending 95,926,291 6,275,805 6,300,761 0
5.9 Margin purchases and short sales 91,608,962 10,593,134 6,300,761 0
5.10 Joint trading accounts 95,926,291 6,275,805 6,300,761 0
5.11 Purchases of securities of related 91,607,877 10,594,219 6,300,761 0
issuers
5.12 Pledging of assets 91,595,942 10,606,154 6,300,761 0
5.13 Restricted and illiquid securities 91,595,942 10,606,154 6,300,761 0
5.14 Voting securities 91,607,877 10,594,219 6,300,761 0
5.15 Options 91,605,707 10,596,389 6,300,761 0
</TABLE>
6. To ratify the selection of Coopers & Lybrand L.L.P. as the Fund's
independent accountants.
Number of Votes:
For Against Abstain
--- ------- -------
103,867,615 1,916,160 2,719,082
* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary power
to vote on a particular matter.
87
<PAGE>
BOND PORTFOLIO
SHAREHOLDER MEETING RESULTS
A Special Meeting of Shareholders of Scudder Variable Life Investment Fund, Bond
Portfolio, was held on October 24, 1997, at the offices of Scudder Kemper
Investments, Inc. (formerly Scudder, Stevens & Clark, Inc.), Two International
Place, Boston, Massachusetts 02110. The following matters were voted upon by the
shareholders and the resulting votes for each matter are presented below.
1. To approve the new Investment Management Agreement between the Fund and
Scudder Kemper Investments, Inc.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
9,632,275 325,149 235,351 0
2. To elect Trustees.
Number of Votes:
Trustee For Withheld
------- --- --------
Dr. Kenneth Black, Jr. 9,982,091 210,684
Dr. Rosita P. Chang 9,997,074 195,701
Peter B. Freeman 10,010,019 182,756
Dr. J.D. Hammond 10,011,038 181,737
Daniel Pierce 10,006,146 186,629
3. To approve the Board's discretionary authority to convert the Fund to a
master/feeder fund structure through a sale or transfer of assets or
otherwise.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
9,095,218 600,660 496,897 0
4(A). To approve certain provisions of the Amended and Restated Declaration of
Trust.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
9,194,903 537,057 460,815 0
4(B). To approve certain other provisions of the Amended and Restated
Declaration of Trust.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
9,203,974 535,324 453,477 0
88
<PAGE>
BOND PORTFOLIO
5. To approve the revision of certain fundamental investment policies.
<TABLE>
<CAPTION>
Number of Votes:
Broker
Fundamental Policies For Against Abstain Non-Votes*
-------------------- --- ------- ------- ----------
<C> <S> <C> <C> <C> <C>
5.1 Diversification 9,118,457 575,382 498,936 0
5.2 Borrowing 9,108,264 585,575 498,936 0
5.3 Senior securities 9,122,228 571,611 498,936 0
5.4 Concentration 9,116,623 577,216 498,936 0
5.5 Purchase of physical commodities 9,118,253 575,586 498,936 0
5.6 Underwriting of securities 9,118,457 575,382 498,936 0
5.7 Investment in real estate 9,122,025 571,814 498,936 0
5.8 Lending 9,122,228 571,611 498,936 0
5.9 Margin purchases and short sales 9,113,972 579,867 498,936 0
5.10 Joint trading accounts 9,122,228 571,611 498,936 0
5.11 Purchases of securities of related 9,122,228 571,611 498,936 0
issuers
5.12 Pledging of assets 9,117,540 576,299 498,936 0
5.13 Restricted and illiquid securities 9,118,559 575,280 498,936 0
5.14 Voting securities 9,121,311 572,528 498,936 0
5.15 Options 9,102,658 591,181 498,936 0
</TABLE>
6. To ratify the selection of Coopers & Lybrand L.L.P. as the Fund's
independent accountants.
Number of Votes:
For Against Abstain
--- ------- -------
9,949,780 57,997 184,998
* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary
power to vote on a particular matter.
89
<PAGE>
BALANCED PORTFOLIO
SHAREHOLDER MEETING RESULTS
A Special Meeting of Shareholders of Scudder Variable Life Investment Fund,
Balanced Portfolio, was held on October 24, 1997, at the offices of Scudder
Kemper Investments, Inc. (formerly Scudder, Stevens & Clark, Inc.), Two
International Place, Boston, Massachusetts 02110. The following matters were
voted upon by the shareholders and the resulting votes for each matter are
presented below.
1. To approve the new Investment Management Agreement between the Fund and
Scudder Kemper Investments, Inc.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
7,970,417 339,973 188,940 0
2. To elect Trustees.
Number of Votes:
Trustee For Withheld
------- --- --------
Dr. Kenneth Black, Jr. 8,247,410 251,920
Dr. Rosita P. Chang 8,248,175 251,155
Peter B. Freeman 8,248,345 250,985
Dr. J.D. Hammond 8,251,745 247,585
Daniel Pierce 8,249,960 249,370
3. To approve the Board's discretionary authority to convert the Fund to a
master/feeder fund structure through a sale or transfer of assets or
otherwise.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
7,476,096 711,734 311,500 0
4(A) To approve certain provisions of the Amended and Restated Declaration of
Trust.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
7,553,100 515,994 430,236 0
4(B) To approve certain other provisions of the Amended and Restated
Declaration of Trust.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
7,563,044 502,140 434,146 0
90
<PAGE>
BALANCED PORTFOLIO
5. To approve the revision of certain fundamental investment policies.
<TABLE>
<CAPTION>
Number of Votes:
Broker
Fundamental Policies For Against Abstain Non-Votes*
-------------------- --- ------- ------- ----------
<C> <S> <C> <C> <C> <C>
5.1 Diversification 7,707,363 446,045 345,922 0
5.2 Borrowing 7,680,250 473,158 345,922 0
5.3 Senior securities 7,707,108 446,300 345,922 0
5.4 Concentration 7,704,049 449,359 345,922 0
5.5 Purchase of physical commodities 7,699,034 454,374 345,922 0
5.6 Underwriting of securities 7,704,473 448,935 345,922 0
5.7 Investment in real estate 7,708,468 444,940 345,922 0
5.8 Lending 7,705,493 447,915 345,922 0
5.9 Margin purchases and short sales 7,648,803 504,605 345,922 0
5.10 Joint trading accounts 7,706,853 446,555 345,922 0
5.11 Purchases of securities of related 7,704,304 449,104 345,922 0
issuers
5.12 Pledging of assets 7,696,144 457,264 345,922 0
5.13 Restricted and illiquid securities 7,699,119 454,289 345,922 0
5.14 Voting securities 7,703,624 449,784 345,922 0
5.15 Options 7,643,788 509,620 345,922 0
</TABLE>
6. To ratify the selection of Coopers & Lybrand L.L.P. as the Fund's
independent accountants.
Number of Votes:
For Against Abstain
--- ------- -------
8,208,144 69,779 221,407
* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary
power to vote on a particular matter.
91
<PAGE>
GROWTH AND INCOME PORTFOLIO
SHAREHOLDER MEETING RESULTS
A Special Meeting of Shareholders of Scudder Variable Life Investment Fund,
Growth and Income Portfolio, was held on October 24, 1997, at the offices of
Scudder Kemper Investments, Inc. (formerly Scudder, Stevens & Clark, Inc.), Two
International Place, Boston, Massachusetts 02110. The following matters were
voted upon by the shareholders and the resulting votes for each matter are
presented below.
1. To approve the new Investment Management Agreement between the Fund and
Scudder Kemper Investments, Inc.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
11,621,811 453,371 328,958 0
2. To elect Trustees.
Number of Votes:
Trustee For Withheld
------- --- --------
Dr. Kenneth Black, Jr. 11,878,205 525,935
Dr. Rosita P. Chang 11,926,953 477,187
Peter B. Freeman 11,871,135 533,005
Dr. J.D. Hammond 11,906,238 497,902
Daniel Pierce 11,916,286 487,854
3. To approve the Board's discretionary authority to convert the Fund to a
master/feeder fund structure through a sale or transfer of assets or
otherwise.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
11,052,834 879,825 471,481 0
4(A) To approve certain provisions of the Amended and Restated Declaration of
Trust.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
11,057,175 738,542 608,423 0
4(B) To approve certain other provisions of the Amended and Restated
Declaration of Trust.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
11,124,778 735,069 544,293 0
92
<PAGE>
GROWTH AND INCOME PORTFOLIO
5. To approve the revision of certain fundamental investment policies.
<TABLE>
<CAPTION>
Number of Votes:
Broker
Fundamental Policies For Against Abstain Non-Votes*
-------------------- --- ------- ------- ----------
<C> <S> <C> <C> <C> <C>
5.1 Diversification 10,996,271 800,067 607,802 0
5.2 Borrowing 10,924,327 872,011 607,802 0
5.3 Senior securities 10,958,190 838,148 607,802 0
5.4 Concentration 10,983,743 812,595 607,802 0
5.5 Purchase of physical commodities 10,960,671 835,667 607,802 0
5.6 Underwriting of securities 10,985,231 811,107 607,802 0
5.7 Investment in real estate 10,985,231 811,107 607,802 0
5.8 Lending 10,968,486 827,852 607,802 0
5.9 Margin purchases and short sales 10,954,593 841,745 607,802 0
5.10 Joint trading accounts 10,999,620 796,718 607,802 0
5.11 Purchases of securities of related 10,988,580 807,758 607,802 0
issuers
5.12 Pledging of assets 10,974,068 822,270 607,802 0
5.13 Restricted and illiquid securities 10,954,221 842,117 607,802 0
5.14 Voting securities 10,979,401 816,937 607,802 0
5.15 Options 10,931,645 864,693 607,802 0
</TABLE>
6. To ratify the selection of Coopers & Lybrand L.L.P. as the Fund's
independent accountants.
Number of Votes:
For Against Abstain
--- ------- -------
11,898,672 244,733 260,735
* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary
power to vote on a particular matter.
93
<PAGE>
CAPITAL GROWTH PORTFOLIO
SHAREHOLDER MEETING RESULTS
A Special Meeting of Shareholders of Scudder Variable Life Investment Fund,
Capital Growth Portfolio, was held on October 24, 1997, at the offices of
Scudder Kemper Investments, Inc. (formerly Scudder, Stevens & Clark, Inc.), Two
International Place, Boston, Massachusetts 02110. The following matters were
voted upon by the shareholders and the resulting votes for each matter are
presented below.
1. To approve the new Investment Management Agreement between the Fund and
Scudder Kemper Investments, Inc.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
29,595,099 854,059 1,007,883 0
2. To elect Trustees.
Number of Votes:
Trustee For Withheld
------- --- --------
Dr. Kenneth Black, Jr. 30,726,924 730,117
Dr. Rosita P. Chang 30,819,407 637,634
Peter B. Freeman 30,769,705 687,336
Dr. J.D. Hammond 30,824,126 632,915
Daniel Pierce 30,825,069 631,972
3. To approve the Board's discretionary authority to convert the Fund to a
master/feeder fund structure through a sale or transfer of assets or
otherwise.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
27,647,594 2,218,979 1,590,468 0
4(A) To approve certain provisions of the Amended and Restated Declaration of
Trust.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
28,130,774 1,667,223 1,659,044 0
4(B) To approve certain other provisions of the Amended and Restated
Declaration of Trust.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
28,084,847 1,744,293 1,627,901 0
94
<PAGE>
CAPITAL GROWTH PORTFOLIO
5. To approve the revision of certain fundamental investment policies.
<TABLE>
<CAPTION>
Number of Votes:
Broker
Fundamental Policies For Against Abstain Non-Votes*
-------------------- --- ------- ------- ----------
<C> <S> <C> <C> <C> <C>
5.1 Diversification 27,919,068 1,669,111 1,868,862 0
5.2 Borrowing 27,788,522 1,799,657 1,868,862 0
5.3 Senior securities 27,904,913 1,683,266 1,868,862 0
5.4 Concentration 27,902,081 1,686,098 1,868,862 0
5.5 Purchase of physical commodities 27,836,336 1,751,843 1,868,862 0
5.6 Underwriting of securities 27,918,439 1,669,740 1,868,862 0
5.7 Investment in real estate 27,829,416 1,758,763 1,868,862 0
5.8 Lending 27,894,846 1,693,333 1,868,862 0
5.9 Margin purchases and short sales 27,787,892 1,800,287 1,868,862 0
5.10 Joint trading accounts 27,904,598 1,683,581 1,868,862 0
5.11 Purchases of securities of related 27,873,141 1,715,038 1,868,862 0
issuers
5.12 Pledging of assets 27,866,220 1,721,959 1,868,862 0
5.13 Restricted and illiquid securities 27,857,413 1,730,766 1,868,862 0
5.14 Voting securities 27,899,565 1,688,614 1,868,862 0
5.15 Options 27,805,508 1,782,671 1,868,862 0
</TABLE>
6. To ratify the selection of Coopers & Lybrand L.L.P. as the Fund's
independent accountants.
Number of Votes:
For Against Abstain
--- ------- -------
29,953,395 549,869 953,777
* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary
power to vote on a particular matter.
95
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
SHAREHOLDER MEETING RESULTS
A Special Meeting of Shareholders of Scudder Variable Life Investment Fund,
Global Discovery Portfolio, was held on October 24, 1997, at the offices of
Scudder Kemper Investment, Inc. (formerly Scudder, Stevens & Clark, Inc.), Two
International Place, Boston, Massachusetts 02110. The following matters were
voted upon by the shareholders and the resulting votes for each matter are
presented below.
1. To approve the new Investment Management Agreement between the Fund and
Scudder Kemper Investments, Inc.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
2,589,185 108,595 87,427 0
2. To elect Trustees.
Number of Votes:
Trustee For Withheld
------- --- --------
Dr. Kenneth Black, Jr. 2,645,139 140,068
Dr. Rosita P. Chang 2,648,231 136,976
Peter B. Freeman 2,646,114 139,093
Dr. J.D. Hammond 2,648,593 136,614
Daniel Pierce 2,648,704 136,503
3. To approve the Board's discretionary authority to convert the Fund to a
master/feeder fund structure through a sale or transfer of assets or
otherwise.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
2,455,717 197,415 132,075 0
4(A) To approve certain provisions of the Amended and Restated Declaration of
Trust.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
2,445,691 185,383 154,133 0
4(B) To approve certain other provisions of the Amended and Restated
Declaration of Trust.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
2,471,676 159,704 153,827 0
96
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
5. To approve the revision of certain fundamental investment policies.
<TABLE>
<CAPTION>
Number of Votes:
Broker
Fundamental Policies For Against Abstain Non-Votes*
-------------------- --- ------- ------- ----------
<C> <S> <C> <C> <C> <C>
5.1 Diversification 2,471,844 186,636 126,727 0
5.2 Borrowing N/A N/A N/A N/A
5.3 Senior securities 2,471,844 186,636 126,727 0
5.4 Concentration 2,459,533 198,948 126,727 0
5.5 Purchase of physical 2,470,646 187,834 126,727 0
commodities
5.6 Underwriting of securities 2,471,844 186,636 126,727 0
5.7 Investment in real estate 2,471,844 186,636 126,727 0
5.8 Lending 2,446,833 211,647 126,727 0
5.9 Margin purchases and short sales 2,448,281 210,199 126,727 0
5.10 Joint trading accounts 2,471,844 186,636 126,727 0
5.11 Purchases of securities of related 2,459,533 198,947 126,727 0
issuers
5.12 Pledging of assets N/A N/A N/A N/A
5.13 Restricted and illiquid securities N/A N/A N/A N/A
5.14 Voting securities N/A N/A N/A N/A
5.15 Options N/A N/A N/A N/A
</TABLE>
6. To ratify the selection of Coopers & Lybrand L.L.P. as the Fund's
independent accountants.
Number of Votes:
For Against Abstain
--- ------- -------
2,602,804 108,706 73,697
* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary
power to vote on a particular matter.
97
<PAGE>
INTERNATIONAL PORTFOLIO
SHAREHOLDER MEETING RESULTS
A Special Meeting of Shareholders of Scudder Variable Life Investment Fund,
International Portfolio, was held on October 24, 1997, at the offices of Scudder
Kemper Investments, Inc. (formerly Scudder, Stevens & Clark, Inc.), Two
International Place, Boston, Massachusetts 02110. The following matters were
voted upon by the shareholders and the resulting votes for each matter are
presented below.
1. To approve the new Investment Management Agreement between the Fund and
Scudder Kemper Investments, Inc.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
47,344,481 977,687 1,659,504 0
2. To elect Trustees.
Number of Votes:
Trustee For Withheld
------- --- --------
Dr. Kenneth Black, Jr. 48,459,502 1,522,170
Dr. Rosita P. Chang 48,532,618 1,449,054
Peter B. Freeman 48,494,550 1,487,122
Dr. J.D. Hammond 48,569,527 1,412,145
Daniel Pierce 48,556,613 1,425,059
3. To approve the Board's discretionary authority to convert the Fund to a
master/feeder fund structure through a sale or transfer of assets or
otherwise.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
45,860,939 1,841,230 2,279,503 0
4(A) To approve certain provisions of the Amended and Restated Declaration of
Trust.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
45,894,453 1,626,675 2,460,544 0
4(B) To approve certain other provisions of the Amended and Restated
Declaration of Trust.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
45,930,280 1,594,367 2,457,025 0
98
<PAGE>
INTERNATIONAL PORTFOLIO
5. To approve the revision of certain fundamental investment policies.
<TABLE>
<CAPTION>
Number of Votes:
Broker
Fundamental Policies For Against Abstain Non-Votes*
-------------------- --- ------- ------- ----------
<C> <S> <C> <C> <C> <C>
5.1 Diversification 45,922,172 1,473,017 2,586,483 0
5.2 Borrowing 45,642,615 1,752,574 2,586,483 0
5.3 Senior securities 45,913,844 1,481,345 2,586,483 0
5.4 Concentration 45,897,828 1,497,361 2,586,483 0
5.5 Purchase of physical commodities 45,886,673 1,508,516 2,586,483 0
5.6 Underwriting of securities 45,917,367 1,477,822 2,586,483 0
5.7 Investment in real estate 45,887,899 1,507,290 2,586,483 0
5.8 Lending 45,908,078 1,487,111 2,586,483 0
5.9 Margin purchases and short sales 45,845,938 1,549,251 2,586,483 0
5.10 Joint trading accounts 45,913,844 1,481,345 2,586,483 0
5.11 Purchases of securities of related 45,887,578 1,507,611 2,586,483 0
issuers
5.12 Pledging of assets 45,867,078 1,528,111 2,586,483 0
5.13 Restricted and illiquid securities 45,816,149 1,579,040 2,586,483 0
5.14 Voting securities 45,902,633 1,492,556 2,586,483 0
5.15 Options 45,860,031 1,535,158 2,586,483 0
</TABLE>
6. To ratify the selection of Coopers & Lybrand L.L.P. as the Fund's
independent accountants.
Number of Votes:
For Against Abstain
--- ------- -------
47,901,561 754,149 1,325,962
* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary
power to vote on a particular matter.
99
<PAGE>
(This page intentionally left blank.)
100
<PAGE>
About the Fund's Adviser
- --------------------------------------------------------------------------------
Scudder Kemper Investments, Inc., is one of the
largest and most experienced investment management
organizations worldwide, managing more than $200 billion
in assets globally for mutual fund investors, retirement
and pension plans, institutional and corporate clients,
insurance companies, and private family and individual
accounts. It is one of the ten largest mutual fund
companies in the U.S.
Scudder Kemper Investments has a rich heritage of
innovation, integrity, and client-focused service. In
1997, Scudder, Stevens & Clark, Inc., founded 79 years
ago as one of the nation's first investment counsel
organizations, joined the Zurich Group. As a result,
Zurich's subsidiary, Zurich Kemper Investments, Inc.,
with 50 years of mutual fund and investment management
experience, was combined with Scudder. Headquartered in
New York, Scudder Kemper Investments offers a full range
of investment counsel and asset management capabilities,
based on a combination of proprietary research and
disciplined, long-term investment strategies. With its
global investment resources and perspective, the firm
seeks opportunities in markets throughout the world to
meet the needs of investors.
Scudder Kemper Investments, Inc., the global asset
management firm, is a member of the Zurich Group. The
Zurich Group is an internationally recognized leader in
financial services, including property/casualty and life
insurance, reinsurance, and asset management.
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
[Logo]
[LOGO] Printed with SOY INK
[LOGO] Printed on recycled paper
QR-28
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
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.
(Incorporated by reference to Post-Effective
Amendment No. 22 to this Registration Statement.)
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.
(Incorporated by reference to Post-Effective
Amendment No. 22 to this Registration Statement.)
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 1(a) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
(b) Amendment to the Declaration of Trust dated
March 10, 1988.
(Previously filed as Exhibit 1(b) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
(c) Establishment and Designation of Series of
Shares of Beneficial Interest, without Par Value.
(Previously filed as Exhibit 1(c) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
Part C - Page 1
<PAGE>
(e)(1) Establishment and Designation of Series of
Beneficial Interest, without Par Value dated
February 9, 1996.
(Previously filed as Exhibit 1(e)(1) to
Post-Effective Amendment No. 22 to this
Registration Statement.)
(f) Amended Establishment and Designation of
Series of Shares of Beneficial Interest,
without Par Value dated April 15, 1988.
(Previously filed as Exhibit 1(f) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
(g) Redesignation of Series.
(Previously filed as Exhibit 1(g) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
(h) Abolition of Series.
(Previously filed as Exhibit 1(h) to
Post-Effective Amendment No. 23 to the
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. 23 to the
Registration Statement.)
2. (a) By-Laws of the Registrant dated March 15, 1985.
(Previously filed as Exhibit 2(a) to
Post-Effective Amendment No. 23 to the
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. 23 to the
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. 23 to the
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. 23 to the
Registration Statement.)
(c) Investment Advisory Agreement between the
Registrant and Scudder, Stevens & Clark, Inc.
with respect to the Managed Natural Resources
Portfolio dated May 2, 1988.
(Previously filed as Exhibit 5(c) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
(c)(1) 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)(1) to
Post-Effective Amendment No. 23 to the
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.
(Previously filed as 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.
(Previously filed as Exhibit 5(e) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
(e)(1) Investment Advisory Agreement between the
Registrant and Scudder, Stevens & Clark, Inc. with
respect to the International Portfolio dated
August 7, 1997 is filed herein.
(f) Form of an Investment Management Agreement
between the Registrant and Scudder Kemper
Investments, Inc. with respect to the Money
Market Portfolio dated December 31, 1997 is
filed herein.
(f)(1) Form of an Investment Management Agreement
between the Registrant and Scudder Kemper
Investments, Inc. with respect to the Bond
Portfolio dated December 31, 1997 is filed herein.
(f)(2) Form of an Investment Management Agreement
between the Registrant and Scudder Kemper
Investments, Inc. with respect to the Balanced
Portfolio dated December 31, 1997 is filed herein.
(f)(3) Form of an Investment Management Agreement
between the Registrant and Scudder Kemper
Investments, Inc. with respect to the Growth
and Income Portfolio dated December 31, 1997
is filed herein.
(f)(4) Form of an Investment Management Agreement
between the Registrant and Scudder Kemper
Investments, Inc. with respect to the Capital
Growth Portfolio dated December 31, 1997 is
filed herein.
(f)(5) Form of an Investment Management Agreement
between the Registrant and Scudder Kemper
Investments, Inc. with respect to the Global
Discovery Portfolio dated December 31, 1997 is
filed herein.
(f)(6) Form of an Investment Management Agreement
between the Registrant and Scudder Kemper
Investments, Inc. with respect to the
International Portfolio dated December 31,
1997 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. 23 to the
Registration Statement.)
Part C - Page 3
<PAGE>
(a)(1) Underwriting Agreement between the Registrant
and Scudder Investor Services, Inc., dated
October 5, 1995.
(Previously filed as Exhibit 6(a)(1) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
(b) Participating Contract and Policy Agreement
between Scudder Investor Services, Inc. and
Participating Insurance Companies.
(Previously filed as Exhibit 6(b) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
(b)(1) Form of a Selected Dealer Agreement between
Scudder Fund Distributors, Inc. and
Participating Insurance Companies.
(Previously filed as Exhibit 6(b)(1) to
Post-Effective Amendment No. 23 to the
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. 23 to the
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. 23 to the
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. 23 to the
Registration Statement.)
(f) Prototype Participating Contract and Policy
Agreement.
(Previously filed as Exhibit 6(f) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
(f)(1) Prototype Participating Contract and Policy
Agreement.
(Previously filed as Exhibit 6(f)(1) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
7. Inapplicable.
8. (a) Form of a Custodian Contract between the
Registrant and State Street Bank and Trust
Company.
(Previously filed as Exhibit 8(a) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
(a)(1) Custodian Agreement between the Registrant and
Brown Brothers Harriman & Co. dated April 15,
1996.
(Previously filed as Exhibit 8(a)(1) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
(a)(2) Custodian Agreement between the Registrant and
Brown Brothers Harriman & Co. dated April 29, 1996.
(Previously filed as Exhibit 8(a)(2) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
Part C - Page 4
<PAGE>
(b) Fee schedule for Exhibit 8(a).
(Previously filed as Exhibit 8(b) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
(b)(1) Fee schedule for Exhibit 8(a).
(Previously filed as Exhibit 8(b)(1) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
(c) Amendment to the Custodian Contract dated
February 17, 1987.
(Previously filed as Exhibit 8(c) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
(d) Amendment to the Custodian Contract dated
February 17, 1987.
(Previously filed as Exhibit 8(d) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
(e) Amendment to the Custodian Contract dated
August 13, 1987.
(Previously filed as Exhibit 8(e) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
(f) Amendment to the Custodian Contract dated
August 12, 1988.
(Previously filed as Exhibit 8(f) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
(g) Amendment to the Custodian Contract dated
August 9, 1991.
(Previously filed as Exhibit 8(g) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
(h) Fee Schedule for Exhibit 8(a).
(Previously filed as Exhibit 8(h) to
Post-Effective Amendment No. 23 to the
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. 23 to the
Registration Statement.)
(a)(2) Fee schedule for Exhibit 9(a)(1).
(Previously filed as Exhibit 9(a)(2) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
(a)(2)(i) Fee schedule for Exhibit 9(a)(1).
(Previously filed as Exhibit 9(a)(2)(i) to
Post-Effective Amendment No. 23 to the
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. 23 to the
Registration Statement.)
(b)(1) Form of a Participation Agreement.
(Previously filed as Exhibit 9(b)(1) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
Part C - Page 5
<PAGE>
(b)(2) Form of a Participation Agreement.
(Previously filed as Exhibit 9(b)(2) to
Post-Effective Amendment No. 23 to the
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. 23 to the
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. 23 to the
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. 23 to the
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. 23 to the
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. 23 to the
Registration Statement.)
(c)(8) Prototype Participation Agreement - Form A.
(Previously filed as Exhibit 9(c)(8) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
(c)(9) Prototype Participation Agreement - Form B.
(Previously filed as Exhibit 9(c)(9) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
(c)(9)(1) Prototype Participation Agreement.
(Previously filed as Exhibit 9(c)(9)(1) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
(c)(10) First Amendment to the Fund Participation
Agreement between AEtna Life Insurance and
Annuity Company and the Fund dated February
19, 1993.
(Previously filed as Exhibit 9(c)(10) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
(c)(11) Second Amendment to the Fund Participation
Agreement between AEtna Life Insurance and
Annuity Company and the Fund dated August 13,
1993.
(Previously filed as Exhibit 9(c)(11) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
Part C - Page 6
<PAGE>
(c)(12) First Amendment to the Participation Agreement
between Mutual of America Life Insurance
Company, The American Life Insurance Company
of New York and the Fund dated August 13, 1993.
(Previously filed as Exhibit 9(c)(12) to
Post-Effective Amendment No. 23 to the
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. 23 to the
Registration Statement.)
(c)(14) Participation Agreement between the Registrant
and American Life Assurance Corporation dated
May 3, 1993.
(Previously filed as Exhibit 9(c)(14) to
Post-Effective Amendment No. 16 to this
Registration Statement.)
(c)(15) Participation Agreement between the Registrant
and AUSA Life Insurance Company, Inc. dated
October 21, 1993.
(Previously filed as Exhibit 9(c)(15) to
Post-Effective Amendment No. 16 to this
Registration Statement.)
(c)(16) Participation Agreement between the Registrant
and Banner Life Insurance Company dated
January 18, 1990.
(Previously filed as Exhibit 9(c)(16) to
Post-Effective Amendment No. 16 to this
Registration Statement.)
(c)(17) Participation Agreement between the Registrant
and Banner Life Insurance Company dated
January 18, 1995.
(Previously filed as Exhibit 9(c)(17) to
Post-Effective Amendment No. 16 to this
Registration Statement.)
(c)(18) Participation Agreement between the Registrant
and Fortis Benefits Insurance Company dated
June 1, 1994.
(Previously filed as Exhibit 9(c)(18) to
Post-Effective Amendment No. 16 to this
Registration Statement.)
(c)(19) Participation Agreement between the Registrant
and Lincoln Benefit Life Company dated
December 30, 1993.
(Previously filed as Exhibit 9(c)(19) to
Post-Effective Amendment No. 16 to this
Registration Statement.)
(c)(20) Participation Agreement between the Registrant
and Charter National Life Insurance Company
dated September 3, 1993.
(Previously filed as Exhibit 9(c)(20)to
Post-Effective Amendment No. 16 to this
Registration Statement.)
(c)(21) Participation Agreement between the Registrant
and Mutual of America Life Insurance Company
dated December 30, 1988.
(Previously filed as Exhibit 9(c)(21) to
Post-Effective Amendment No. 16 to this
Registration Statement.)
(c)(22) First Amendment to Participation Agreement
between the Registrant and Mutual of America
Life Insurance Company dated August 13, 1993.
(Previously filed as Exhibit 9(c)(22) to
Post-Effective Amendment No. 16 to this
Registration Statement.)
Part C - Page 7
<PAGE>
(c)(23) Participation Agreement between the Registrant
and Mutual of America Life Insurance Company
dated December 30, 1988.
(Previously filed as Exhibit 9(c)(23) to
Post-Effective Amendment No. 16 to this
Registration Statement.)
(c)(24) First Amendment to Participation Agreement
between the Registrant and Mutual of America
Life Insurance Company dated August 13, 1993.
(Previously filed as Exhibit 9(c)(24) to
Post-Effective Amendment No. 16 to this
Registration Statement.)
(c)(25) Participation Agreement between the Registrant
and Mutual of America Life Insurance Company
dated December 30, 1993.
(Previously filed as Exhibit 9(c)(25) to
Post-Effective Amendment No. 16 to this
Registration Statement.)
(c)(26) Participation Agreement between the Registrant
and Paragon Life Insurance Company dated April
30, 1993.
(Previously filed as Exhibit 9(c)(26) to
Post-Effective Amendment No. 16 to this
Registration Statement.)
(c)(27) Participation Agreement between the Registrant
and Provident Mutual Life Insurance Company of
Philadelphia dated July 21, 1993.
(Previously filed as Exhibit 9(c)(27) to
Post-Effective Amendment No. 16 to this
Registration Statement.)
(c)(28) Participation Agreement between the Registrant
and United of Omaha Life Insurance Company
dated May 15, 1994.
(Previously filed as Exhibit 9(c)(28) to
Post-Effective Amendment No. 16 to this
Registration Statement.)
(c)(29) First Amendment to the Participation Agreement
between the Registrant and United of Omaha
Life Insurance Company dated January 23, 1995.
(Previously filed as Exhibit 9(c)(29) to
Post-Effective Amendment No. 16 to this
Registration Statement.)
(c)(30) Participation Agreement between the Registrant
and USAA Life Insurance Company dated February
3, 1995.
(Previously filed as Exhibit 9(c)(30) to
Post-Effective Amendment No. 16 to this
Registration Statement.)
(c)(31) Amendment to the Participation Agreement, the
Reimbursement Agreement and the Participating
Contract and Policy Agreement dated February
3, 1995.
(Previously filed as Exhibit 9(c)(31) to
Post-Effective Amendment No. 16 to this
Registration Statement.)
(d) Form of an 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. 23 to the
Registration Statement.)
(d)(1) Accounting Services Agreement between the
Registrant and Scudder Fund Distributors, Inc.
dated August 1, 1989.
(Previously filed as Exhibit 9(d)(1) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
Part C - Page 8
<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. 23 to the
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. 23 to the
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. 23 to the
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. 23 to the
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. 23 to the
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. 23 to the
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.
(Previously filed as Exhibit 9(e)(7) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
10. Inapplicable.
11. Inapplicable.
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 9
<PAGE>
(a) Master Distribution Plan for Class B shares
pursuant to Rule 12b-1 dated February 9, 1996.
(Previously filed as Exhibit 15(a) to
Post-Effective Amendment No. 23 to the
Registration Statement.)
16. Schedule of Computation of Performance Calculation.
(Previously filed as Exhibit 16 to Post-Effective
Amendment No. 23 to the Registration Statement.)
17. Inapplicable.
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, 1997)
(1) (2)
Title of Class Number of Shareholders
Shares of beneficial
interest,
of no par value
Money Market Portfolio (6)
Shares of beneficial
interest,
of no par value
Bond Portfolio (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 (9)
Portfolio
Shares of beneficial
interest,
of no par value
Global Discovery (3)
Portfolio
Shares of beneficial
interest,
of no par value
International Portfolio (13)
Item 27. Indemnification.
A policy of insurance covering Scudder Kemper Investments, Inc., its
subsidiaries including Scudder Investor Services, Inc., and all of
the registered investment companies advised by Scudder Kemper
Investments, Inc. insures the Registrant's Trustees and officers and
others against liability arising by
Part C - Page 10
<PAGE>
reason of an alleged breach of duty caused by any negligent act,
error or accidental omission in the scope of their duties.
Article IV, Sections 4.1 - 4.3 of Registrant's Declaration of
Trust provide as follows:
Section 4.1. No Personal Liability of Shareholders, Trustees,
etc. No Shareholder shall be subject to any personal liability
whatsoever to any Person in connection with Fund Property or
the acts, obligations or affairs of the Fund. No Trustee,
officer, employee or agent of the Fund shall be subject to any
personal liability whatsoever to any Person, other than to the
Fund or its Shareholders, in connection with Fund Property or
the affairs of the Fund, save only that arising from bad
faith, willful misfeasance, gross negligence or reckless
disregard of his duties with respect to such Person; and all
such Persons shall look solely to the Fund Property for
satisfaction of claims of any nature arising in connection
with the affairs of the Fund. If any Shareholder, Trustee,
officer, employee, or agent, as such, of the Fund, is made a
party to any suit or proceeding to enforce any such liability
of the Fund, he shall not, on account thereof, be held to any
personal liability. The Fund shall indemnify and hold each
Shareholder harmless from and against all claims and
liabilities, to which such Shareholder may become subject by
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;
Part C - Page 11
<PAGE>
(ii) with respect to any matter as to which he shall
have been finally adjudicated not to have acted in
good faith in the reasonable belief that his
action was in the best interest of the Fund;
(iii) in the event of a settlement or other disposition
not involving a final adjudication as provided in
paragraph (b)(i) resulting in a payment by a
Trustee or officer, unless there has been a
determination that such Trustee or officer did not
engage in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties
involved in the conduct of his office;
(A) by the court or other body approving the
settlement or other disposition; or
(B) based upon a review of readily available
facts (as opposed to a full trial-type
inquiry) by (x) vote of a majority of the
Disinterested Trustees acting on the matter
(provided that a majority of the
Disinterested Trustees then in office act on
the matter) or (y) written opinion of
independent legal counsel.
(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
Scudder Kemper Investments, Inc. 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 12
<PAGE>
Business and Other Connections of Board
Name of Directors of Registrant's Adviser
---- ------------------------------------
Stephen R. Treasurer and Chief Financial Officer, Scudder Kemper
Beckwith Investments, Inc.**
Vice President and Treasurer, Scudder Fund Accounting
Corporation*
Director, Scudder Stevens & Clark Corporation**
Director and Chairman, Scudder Defined Contribution
Services, Inc.
Director and President, Scudder Capital Asset Corporation
Director and President, Scudder Capital Stock Corporation
Director and President, Scudder Capital Planning Corporation
Director and President, SS&C Investment Corporation
Director and President, SIS Investment Corporation
Director and President, SRV Investment Corporation
Lynn S. Birdsong Director and Vice President, Scudder Kemper Investments,
Inc.**
Director, Scudder, Stevens & Clark (Luxembourg) S.A.#
Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zunica Insurance Company
of Switzerland
Director, ZKI Holding Corporation
Steven Gluckstern Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company
of Switzerland
Director, Zurich Holding Company of America
Rolf Huppi Director, Chairman of the Board, Scudder Kemper
Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company
of Switzerland
Director, Chairman of the Board, Zurich Holding Company of
America
Director, ZKI Holding Corporation
Kathryn L. Quirk Director, Chief Legal Officer, Chief Compliance Officer and
Secretary, Scudder Kemper Investments, Inc.**
Director, Senior Vice President & Assistant Clerk, Scudder
Investor Services, Inc.*
Director, Vice President & Secretary, Scudder Fund
Accounting Corporation*
Director, Vice President & Secretary, Scudder Realty
Holdings Corporation*
Director & Assistant Clerk, Scudder Service Corporation*
Director, SFA, Inc.*
Vice President, Director & Assistant Secretary, Scudder
Precious Metals, Inc.***
Director, Scudder, Stevens & Clark Japan, Inc.***
Director, Vice President and Secretary, Scudder, Stevens &
Clark of Canada, Ltd.***
Director, Vice President and Secretary, Scudder Canada
Investor Services Limited***
Director, Vice President and Secretary, Scudder Realty
Advisers, Inc. x
Director and Secretary, Scudder, Stevens & Clark
Corporation**
Director and Secretary, Scudder, Stevens & Clark Overseas
Corporation(oo)
Director and Secretary, SFA, Inc.
Director, Vice President and Secretary, Scudder Defined
Contribution Services, Inc.
Director, Vice President and Secretary, Scudder Capital
Asset Corporation
Director, Vice President and Secretary, Scudder Capital
Stock Corporation
Director, Vice President and Secretary, Scudder Capital
Planning Corporation
Director, Vice President and Secretary, SS&C Investment
Corporation
Director, Vice President and Secretary, SIS Investment
Corporation
Director, Vice President and Secretary, SRV Investment
Corporation
Director, Vice President and Secretary, Scudder Brokerage
Services, Inc.
Director, Korea Bond Fund Management Co., Ltd.
Markus Rohrbasser Director, Scudder Kemper Investments, Inc.**
Member Corporate Executive Board, Zurich Insurance Company
of Switzerland
Part C - Page 13
<PAGE>
President, Director, Chairman of the Board, ZKI Holding
Corporation
Cornelia M. Small Vice President, Scudder Kemper Investments, Inc.**
Edmond D. Villani Director, President and Chief Executive Officer, Scudder
Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc.###
President and Director, Scudder, Stevens & Clark Overseas
Corporationoo
President and Director, Scudder, Stevens & Clark
Corporation**
Director, Scudder Realty Advisors, Inc.x
Director, IBJ Global Investment Management S.A. Luxembourg,
Grand-Duchy of Luxembourg
* Two International Place, Boston, MA
x 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C.
Luxembourg B 34.564
*** Toronto, Ontario, Canada
xxx Grand Cayman, Cayman Islands, British West Indies
oo 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
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
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.
Part C - Page 14
<PAGE>
(b)
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.
<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>
William S. Baughman Vice President None
Lynn S. Birdsong Senior Vice President None
345 Park Avenue
New York, NY 10154
Mary Elizabeth Beams Vice President None
Mark S. Casady Director, President and None
Two International Place Assistant Treasurer
Boston, MA 02110
Linda Coughlin Director and Senior Vice None
Two International Place President
Boston, MA 02110
Richard W. Desmond Vice President None
345 Park Avenue
New York, NY 10154
Paul J. Elmlinger Senior Vice President and None
345 Park Avenue Assistant Clerk
New York, NY 10154
Philip S. Fortuna Vice President None
William F. Glavin Vice President None
Margaret D. Hadzima Assistant Treasurer None
Two International Place
Boston, MA 02110
Thomas W. Joseph Director, Vice President, Vice President
Two International Place Treasurer
Boston, MA 02110 and Assistant Clerk
Thomas F. McDonough Clerk Vice President and
Two International Place Secretary
Boston, MA 02110
Daniel Pierce Director, Vice President Vice President and
Two International Place and Assistant Treasurer Trustee
Boston, MA 02110
Kathryn L. Quirk Director, Senior Vice President Vice President and
345 Park Avenue and Assistant Clerk Assistant Secretary
New York, NY 10154
</TABLE>
Part C - Page 15
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
<S> <C> <C>
Robert A. Rudell Vice President None
Two International Place
Boston, MA 02110
William M. Thomas Vice President None
Benjamin Thorndike Vice President None
Two International Place
Boston, MA 02110
Sydney S. Tucker Vice President None
Two International Place
Boston, MA 02110
Linda J. Wondrack Vice President None
Two International Place
Boston, MA 02110
</TABLE>
(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>
Scudder Investor None None None None
Services, Inc.
</TABLE>
Item 30. Location of Accounts and Records.
Certain accounts, bookds and other documents required to be
maintained by Section 31(a) of the 1940 Act and the Rules
promulgated thereunder are maintained by Scudder, Stevens & Clark,
Inc., Two International Place, Boston, MA 02110-4103. Records
relating to the duties of the Registrant's custodian are maintained
by State Street Bank and Trust Company, Heritage Drive, North
Quincy, Massachusetts. Records relating to the duties of the
Registrant's transfer agent are maintained by Scudder Service
Corporation, Two International Place, Boston, Massachusetts
02110-4103.
Item 31. Management Services.
Inapplicable.
Item 32. Undertakings.
Inapplicable.
Part C - Page 16
<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(a) under the Securities Act of 1933 and has duly
caused this amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of Boston and the
Commonwealth of Massachusetts on the 27th day of February, 1998.
SCUDDER VARIABLE LIFE INVESTMENT FUND
By /s/Thomas F. McDonough
-------------------------------------------
Thomas F. McDonough, Vice President, Secretary and
Treasurer
(Principal Financial and Accounting Officer)
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>
<S> <C> <C>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
/s/David B. Watts
- --------------------------------------
David B. Watts* President (Principal Executive February 27, 1998
Officer)
/s/Daniel Pierce
- --------------------------------------
Daniel Pierce* Vice President and Trustee February 27, 1998
/s/Dr. Kenneth Black, Jr.
- --------------------------------------
Dr. Kenneth Black, Jr.* Trustee February 27, 1998
/s/Dr. Rosita P. Chang
- --------------------------------------
Dr. Rosita P. Chang* Trustee February 27, 1998
/s/Peter B. Freeman
- --------------------------------------
Peter B. Freeman* Trustee February 27, 1998
/s/Dr. J. D. Hammond
- --------------------------------------
Dr. J. D. Hammond* Trustee February 27, 1998
*By: /s/Thomas F. McDonough
----------------------------------
Thomas F. McDonough**
</TABLE>
** 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. 24
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 28
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
SCUDDER VARIABLE LIFE INVESTMENT FUND
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
EXHIBIT INDEX
Exhibit 5(e)(1)
Exhibit 5(f)
Exhibit 5(f)(1)
Exhibit 5(f)(2)
Exhibit 5(f)(3)
Exhibit 5(f)(4)
Exhibit 5(f)(5)
Exhibit 5(f)(6)
Exhibit 5(e)(1)
SCUDDER VARIABLE LIFE INVESTMENT FUND
Two International Place
Boston, Massachusetts 02110
August 7, 1997
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.
The Fund will furnish you from time to time with copies, properly certified or
authenticated, of all amendments of or supplements to the foregoing, if any.
<PAGE>
2. 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
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
2
<PAGE>
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 .850% 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 .750%
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
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
3
<PAGE>
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
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, 1998, 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
4
<PAGE>
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
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.
5
<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 /s/David B. Watts
President
The foregoing Agreement is hereby accepted as of the date thereof.
SCUDDER, STEVENS & CLARK, INC.
By /s/Daniel Pierce
Managing Director
6
Exhibit 5(f)
Scudder Variable Life Investment Fund
Two International Place
Boston, Massachusetts 02110
December 31, 1997
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
Investment Management Agreement
Money Market Portfolio
Ladies and Gentlemen:
Scudder Variable Life Investment Fund (the "Fund") has been established as
a Massachusetts business trust to engage in the business of an investment
company. Pursuant to the Fund's Declaration of Trust, as amended from
time-to-time (the "Declaration"), the Board of Trustees has divided the Fund's
shares of beneficial interest, without par value, (the "Shares") into separate
series, or funds, including Money Market Portfolio (the "Portfolio"). Series may
be abolished and dissolved, and additional series 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 manager of the Portfolio and to provide certain other services, as
more fully set forth below, and you have indicated that you are willing to act
as such investment manager and to perform such services under the terms and
conditions hereinafter set forth. Accordingly, the Fund on behalf of the
Portfolio agrees with you as follows:
1. Delivery of Documents. The Fund engages in the business of investing and
reinvesting the assets of the Portfolio in the manner and in accordance with the
investment objectives, policies and restrictions specified in the currently
effective Prospectus (the "Prospectus") and Statement of Additional Information
(the "SAI") relating to the Portfolio included in the Fund's Registration
Statement on Form N- 1A, as amended from time to time, (the "Registration
Statement") filed by the Fund under the Investment Company Act of 1940, as
amended, (the "1940 Act") and the Securities Act of 1933, as amended. Copies of
the documents referred to in the preceding sentence have been furnished to you
by the Fund. The Fund has also furnished you with copies properly certified or
authenticated of each of the following additional documents related to the Fund
and the Portfolio:
(a) The Declaration dated December 11, 1997 as amended to date.
(b) By-Laws of the Fund as in effect on the date hereof (the "By-Laws").
(c) Resolutions of the Trustees of the Fund and the shareholders of the
Portfolio selecting you as investment manager and approving the form of
this Agreement.
<PAGE>
(d) Establishment and Designation of Series of Shares of Beneficial Interest
dated February 9, 1996 relating to the Portfolio.
The Fund will furnish you from time to time with copies, properly certified
or authenticated, of all amendments of or supplements, if any, to the foregoing,
including the Prospectus, the SAI and the Registration Statement.
2. Sublicense to Use the Scudder Trademarks. As exclusive licensee of the
rights to use and sublicense the use of the "Scudder," "Scudder Kemper
Investments, Inc." and "Scudder, Stevens & Clark, Inc." trademarks (together,
the "Scudder Marks"), you hereby grant the Fund a nonexclusive right and
sublicense to use (i) the "Scudder" name and mark as part of the Fund's name
(the "Portfolio Name"), and (ii) the Scudder Marks in connection with the Fund's
investment products and services, in each case only for so long as this
Agreement, any other investment management agreement between you and the Fund,
or any extension, renewal or amendment hereof or thereof remains in effect, and
only for so long as you are a licensee of the Scudder Marks, provided however,
that you agree to use your best efforts to maintain your license to use and
sublicense the Scudder Marks. The Fund agrees that it shall have no right to
sublicense or assign rights to use the Scudder Marks, shall acquire no interest
in the Scudder Marks other than the rights granted herein, that all of the
Fund's uses of the Scudder Marks shall inure to the benefit of Scudder Trust
Company as owner and licensor of the Scudder Marks (the "Trademark Owner"), and
that the Fund shall not challenge the validity of the Scudder Marks or the
Trademark Owner's ownership thereof. The Fund further agrees that all services
and products it offers in connection with the Scudder Marks shall meet
commercially reasonable standards of quality, as may be determined by you or the
Trademark Owner from time to time, provided that you acknowledge that the
services and products the Fund rendered during the one-year period preceding the
date of this Agreement are acceptable. At your reasonable request, the Fund
shall cooperate with you and the Trademark Owner and shall execute and deliver
any and all documents necessary to maintain and protect (including but not
limited to in connection with any trademark infringement action) the Scudder
Marks and/or enter the Fund as a registered user thereof. At such time as this
Agreement or any other investment management agreement shall no longer be in
effect between you (or your successor) and the Fund, or you no longer are a
licensee of the Scudder Marks, the Fund shall (to the extent that, and as soon
as, it lawfully can) cease to use the Portfolio Name or any other name
indicating that it is advised by, managed by or otherwise connected with you (or
any organization which shall have succeeded to your business as investment
manager) or the Trademark Owner. In no event shall the Fund use the Scudder
Marks or any other name or mark confusingly similar thereto (including, but not
limited to, any name or mark that includes the name "Scudder") if this Agreement
or any other investment advisory agreement between you (or your successor) and
the Portfolio is terminated.
3. Portfolio Management Services. As manager of the assets of the
Portfolio, you shall provide continuing investment management of the assets of
the Portfolio in accordance with the investment objectives, policies and
restrictions set forth in the Prospectus and SAI; the applicable provisions of
the 1940 Act and the Internal Revenue Code of 1986, as amended, (the "Code")
relating to regulated investment companies and all rules and regulations
thereunder; and all other applicable federal and state laws and regulations of
which you have knowledge; subject always to policies and instructions adopted by
the Fund's Board of Trustees. In connection therewith, you shall use reasonable
efforts to manage the Portfolio so that it will qualify as a regulated
investment company under Subchapter M of the Code and regulations issued
thereunder. The Portfolio shall have the benefit of the investment analysis and
research, the review of current economic conditions and trends and the
consideration of long-range investment policy generally available to your
investment advisory clients. In managing the Portfolio in accordance with the
requirements set forth in this section 3, you shall be entitled to receive and
act upon advice of counsel to the
2
<PAGE>
Fund or counsel to you. You shall also make available to the Fund promptly upon
request all of the Portfolio's investment records and ledgers as are necessary
to assist the Fund in complying with the requirements of the 1940 Act and other
applicable laws. To the extent required by law, you shall furnish to regulatory
authorities having the requisite authority any information or reports in
connection with the services provided pursuant to this Agreement which may be
requested in order to ascertain whether the operations of the Fund are being
conducted in a manner consistent with applicable laws and regulations.
You shall determine the securities, instruments, investments, currencies,
repurchase agreements, futures, options and other contracts relating to
investments to be purchased, sold or entered into by the Portfolio and place
orders with broker-dealers, foreign currency dealers, futures commission
merchants or others pursuant to your determinations and all in accordance with
Portfolio policies as expressed in the Registration Statement. You shall
determine what portion of the Portfolio's portfolio shall be invested in
securities and other assets and what portion, if any, should be held uninvested.
You shall furnish to the Fund's Board of Trustees periodic reports on the
investment performance of the Portfolio and on the performance of your
obligations pursuant to this Agreement, and you shall supply such additional
reports and information as the Fund's officers or Board of Trustees shall
reasonably request.
4. Administrative Services. In addition to the portfolio management
services specified above in section 3, you shall furnish at your expense for the
use of the Portfolio such office space and facilities in the United States as
the Portfolio may require for its reasonable needs, and you (or one or more of
your affiliates designated by you) shall render to the Fund administrative
services on behalf of the Portfolio necessary for operating as an open-end
investment company and not provided by persons not parties to this Agreement
including, but not limited to, preparing reports to and meeting materials for
the Fund's Board of Trustees and reports and notices to Portfolio shareholders;
supervising, negotiating contractual arrangements with, to the extent
appropriate, and monitoring the performance of, accounting agents, custodians,
depositories, transfer agents and pricing agents, accountants, attorneys,
printers, underwriters, brokers and dealers, insurers and other persons in any
capacity deemed to be necessary or desirable to Portfolio operations; preparing
and making filings with the Securities and Exchange Commission (the "SEC") and
other regulatory and self-regulatory organizations, including, but not limited
to, preliminary and definitive proxy materials, post-effective amendments to the
Registration Statement, semi-annual reports on Form N-SAR and notices pursuant
to Rule 24f-2 under the 1940 Act; overseeing the tabulation of proxies by the
Portfolio's transfer agent; assisting in the preparation and filing of the
Portfolio's federal, state and local tax returns; preparing and filing the
Portfolio's federal excise tax return pursuant to Section 4982 of the Code;
providing assistance with investor and public relations matters; monitoring the
valuation of portfolio securities and the calculation of net asset value;
monitoring the registration of Shares of the Portfolio under applicable federal
and state securities laws; maintaining or causing to be maintained for the
Portfolio all books, records and reports and any other information required
under the 1940 Act, to the extent that such books, records and reports and other
information are not maintained by the Portfolio's custodian or other agents of
the Portfolio; assisting in establishing the accounting policies of the
Portfolio; assisting in the resolution of accounting issues that may arise with
respect to the Portfolio's operations and consulting with the Portfolio's
independent accountants, legal counsel and the Portfolio's other agents as
necessary in connection therewith; establishing and monitoring the Portfolio's
operating expense budgets; reviewing the Portfolio's bills; processing the
payment of bills that have been approved by an authorized person; assisting the
Portfolio in determining the amount of dividends and distributions available to
be paid by the Portfolio to its shareholders, preparing and arranging for the
printing of dividend notices to shareholders, and providing the transfer and
dividend paying agent, the custodian, and the accounting agent with such
information as is required for such parties to effect the payment of dividends
and distributions;
3
<PAGE>
and otherwise assisting the Fund as it may reasonably request in the conduct of
the Portfolio's business, subject to the direction and control of the Fund's
Board of Trustees. Nothing in this Agreement shall be deemed to shift to you or
to diminish the obligations of any agent of the Portfolio or any other person
not a party to this Agreement which is obligated to provide services to the
Portfolio.
5. Allocation of Charges and Expenses. Except as otherwise specifically
provided in this section 5, you shall pay the compensation and expenses of all
Trustees, officers and executive employees of the Fund (including the
Portfolio's share of payroll taxes) who are affiliated persons of you, and you
shall make available, without expense to the Portfolio, the services of such of
your directors, officers and employees as may duly be elected officers of the
Fund, subject to their individual consent to serve and to any limitations
imposed by law. You shall provide at your expense the portfolio management
services described in section 3 hereof and the administrative services described
in section 4 hereof.
You shall not be required to pay any expenses of the Portfolio other than
those specifically allocated to you in this section 5. In particular, but
without limiting the generality of the foregoing, you shall not be responsible,
except to the extent of the reasonable compensation of such of the Portfolio's
Trustees and officers as are directors, officers or employees of you whose
services may be involved, for the following expenses of the Portfolio:
organization expenses of the Portfolio (including out-of-pocket expenses, but
not including your overhead or employee costs); fees payable to you and to any
other Portfolio advisors or consultants; legal expenses; auditing and accounting
expenses; maintenance of books and records which are required to be maintained
by the Portfolio's custodian or other agents of the Fund; telephone, telex,
facsimile, postage and other communications expenses; taxes and governmental
fees; fees, dues and expenses incurred by the Portfolio in connection with
membership in investment company trade organizations; fees and expenses of the
Portfolio's accounting agent, custodians, subcustodians, transfer agents,
dividend disbursing agents and registrars; payment for portfolio pricing or
valuation services to pricing agents, accountants, bankers and other
specialists, if any; expenses of preparing share certificates and, except as
provided below in this section 5, other expenses in connection with the
issuance, offering, distribution, sale, redemption or repurchase of securities
issued by the Portfolio; expenses relating to investor and public relations;
expenses and fees of registering or qualifying Shares of the Portfolio for sale;
interest charges, bond premiums and other insurance expense; freight, insurance
and other charges in connection with the shipment of the Portfolio's portfolio
securities; the compensation and all expenses (specifically including travel
expenses relating to Fund business) of Trustees, officers and employees of the
Fund who are not affiliated persons of you; brokerage commissions or other costs
of acquiring or disposing of any portfolio securities of the Portfolio; expenses
of printing and distributing reports, notices and dividends to shareholders;
expenses of printing and mailing Prospectuses and SAIs of the Portfolio and
supplements thereto; costs of stationery; any litigation expenses;
indemnification of Trustees and officers of the Fund; costs of shareholders' and
other meetings; and travel expenses (or an appropriate portion thereof) of
Trustees and officers of the Fund who are directors, officers or employees of
you to the extent that such expenses relate to attendance at meetings of the
Board of Trustees of the Fund or any committees thereof or advisors thereto held
outside of Boston, Massachusetts or New York, New York.
You shall not be required to pay expenses of any activity which is
primarily intended to result in sales of Shares of the Portfolio if and to the
extent that (i) such expenses are required to be borne by a principal
underwriter which acts as the distributor of the Portfolio's Shares pursuant to
an underwriting agreement which provides that the underwriter shall assume some
or all of such expenses, or (ii) the Fund on behalf of the Portfolio shall have
adopted a plan in conformity with Rule 12b-1 under the 1940 Act providing that
the Portfolio (or some other party) shall assume some or all of such expenses.
You shall be required to pay such of the foregoing sales expenses as are not
required to be paid by the principal
4
<PAGE>
underwriter pursuant to the underwriting agreement or are not permitted to be
paid by the Portfolio (or some other party) pursuant to such a plan.
6. Management Fee. For all services to be rendered, payments to be made and
costs to be assumed by you as provided in sections 3, 4 and 5 hereof, the Fund
on behalf of the Portfolio shall pay you in United States Dollars on the last
day of each month the unpaid balance of a fee equal to the excess of 1/12 of
0.37 of 1 percent of the average daily net assets as defined below of the
Portfolio for such month over any compensation waived by you from time to time
(as more fully described below). You shall be entitled to receive during any
month such interim payments of your fee hereunder as you shall request, provided
that no such payment shall exceed 75 percent of the amount of your fee then
accrued on the books of the Portfolio and unpaid.
The "average daily net assets" of the Portfolio shall mean the average of
the values placed on the Portfolio's net assets as of 4:00 p.m. (New York time)
on each day on which the net asset value of the Portfolio is determined
consistent with the provisions of Rule 22c-1 under the 1940 Act or, if the
Portfolio lawfully determines the value of its net assets as of some other time
on each business day, as of such time. The value of the net assets of the
Portfolio shall always be determined pursuant to the applicable provisions of
the Declaration and the Registration Statement. If the determination of net
asset value does not take place for any particular day, then for the purposes of
this section 6, the value of the net assets of the Portfolio as last determined
shall be deemed to be the value of its net assets as of 4:00 p.m. (New York
time), or as of such other time as the value of the net assets of the
Portfolio's portfolio may be lawfully determined on that day. If the Portfolio
determines the value of the net assets of its portfolio more than once on any
day, then 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 section 6.
You may waive all or a portion of your fees provided for hereunder and such
waiver shall be treated as a reduction in purchase price of your services. You
shall be contractually bound hereunder by the terms of any publicly announced
waiver of your fee, or any limitation of the Portfolio's expenses, as if such
waiver or limitation were fully set forth herein.
7. Avoidance of Inconsistent Position; Services Not Exclusive. In
connection with purchases or sales of portfolio securities and other investments
for the account of the Portfolio, neither you nor any of your directors,
officers or employees shall 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 and other investments for the
Portfolio's account with brokers or dealers selected by you in accordance with
Portfolio policies as expressed in the Registration Statement. If any occasion
should arise in which you give any advice to clients of yours concerning the
Shares of the Portfolio, you shall 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 services to others. In acting under this Agreement, you
shall be an independent contractor and not an agent of the Fund. Whenever the
Portfolio and one or more other accounts or investment companies advised by the
Manager have available funds for investment, investments suitable and
appropriate for each shall be allocated in accordance with procedures believed
by the Manager to be equitable to each entity. Similarly, opportunities to sell
securities shall be allocated in a manner believed by the Manager to be
equitable. The Portfolio recognizes that in
5
<PAGE>
some cases this procedure may adversely affect the size of the position that may
be acquired or disposed of for the Portfolio.
8. Limitation of Liability of Manager. As an inducement to your undertaking
to render services pursuant to this Agreement, the Fund agrees that you shall
not be liable under this Agreement 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, provided that nothing in this Agreement shall be
deemed to protect or purport to protect you against any liability to the Fund,
the Portfolio or its shareholders to which you would otherwise be subject by
reason of willful misfeasance, bad faith or gross negligence in the performance
of your duties, or by reason of your reckless disregard of your obligations and
duties hereunder. Any person, even though also employed by you, who may be or
become an employee of and paid by the Portfolio shall be deemed, when acting
within the scope of his or her employment by the Portfolio, to be acting in such
employment solely for the Portfolio and not as your employee or agent.
9. Duration and Termination of This Agreement. This Agreement shall remain
in force until September 30, 1998, and continue in force from year to year
thereafter, but only so long as such continuance is specifically approved at
least annually (a) by the vote of a majority of the Trustees who are not parties
to this Agreement or interested persons of any party to this Agreement, cast in
person at a meeting called for the purpose of voting on such approval, and (b)
by the Trustees of the Fund, or by the vote of a majority of the outstanding
voting securities of the Portfolio. The aforesaid requirement that continuance
of this Agreement be "specifically approved at least annually" shall be
construed in a manner consistent with the 1940 Act and the rules and regulations
thereunder and any applicable SEC exemptive order therefrom.
This Agreement may be terminated with respect to the Portfolio at any time,
without the payment of any penalty, by the vote of a majority of the outstanding
voting securities of the Portfolio or by the Fund's Board of Trustees on 60
days' written notice to you, or by you on 60 days' written notice to the Fund.
This Agreement shall terminate automatically in the event of its assignment.
10. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against whom enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this Agreement shall be
effective until approved in a manner consistent with the 1940 Act and rules and
regulations thereunder and any applicable SEC exemptive order therefrom.
11. Limitation of Liability for Claims. The Declaration, a copy of which,
together with all amendments thereto, is on file in the Office of the Secretary
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
Portfolio, or Trustee, officer, employee or agent of the Fund, shall be subject
to claims against or obligations of the Fund or of the Portfolio to any extent
whatsoever, but that the Fund estate only shall be liable.
You are hereby expressly put on notice of the limitation of liability as
set forth in the Declaration and you agree that the obligations assumed by the
Fund on behalf of the Portfolio pursuant to this Agreement shall be limited in
all cases to the Portfolio and its assets, and you shall not seek satisfaction
of
6
<PAGE>
any such obligation from the shareholders or any shareholder of the Portfolio or
any other series of the Fund, or from any Trustee, officer, employee or agent of
the Fund. You understand that the rights and obligations of each Portfolio, or
series, under the Declaration are separate and distinct from those of any and
all other series.
12. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or limit 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.
In interpreting the provisions of this Agreement, the definitions contained
in Section 2(a) of the 1940 Act (particularly the definitions of "affiliated
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 SEC by any rule, regulation or order.
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Massachusetts, provided that nothing herein shall be construed
in a manner inconsistent with the 1940 Act, or in a manner which would cause the
Portfolio to fail to comply with the requirements of Subchapter M of the Code.
This Agreement shall supersede all prior investment advisory or management
agreements entered into between you and the Fund on behalf of the Portfolio.
If you are in agreement with the foregoing, please execute 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
effective as of the date of this Agreement.
Yours very truly,
SCUDDER VARIABLE LIFE INVESTMENT
FUND, on behalf of
Money Market Portfolio
By: ______________________________
President
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By: ______________________________
Managing Director
7
Exhibit 5(f)(1)
Scudder Variable Life Investment Fund
Two International Place
Boston, Massachusetts 02110
December 31, 1997
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
Investment Management Agreement
Bond Portfolio
Ladies and Gentlemen:
Scudder Variable Life Investment Fund (the "Fund") has been established as
a Massachusetts business trust to engage in the business of an investment
company. Pursuant to the Fund's Declaration of Trust, as amended from
time-to-time (the "Declaration"), the Board of Trustees has divided the Fund's
shares of beneficial interest, without par value, (the "Shares") into separate
series, or funds, including Bond Portfolio (the "Portfolio"). Series may be
abolished and dissolved, and additional series 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 manager of the Portfolio and to provide certain other services, as
more fully set forth below, and you have indicated that you are willing to act
as such investment manager and to perform such services under the terms and
conditions hereinafter set forth. Accordingly, the Fund on behalf of the
Portfolio agrees with you as follows:
1. Delivery of Documents. The Fund engages in the business of investing and
reinvesting the assets of the Portfolio in the manner and in accordance with the
investment objectives, policies and restrictions specified in the currently
effective Prospectus (the "Prospectus") and Statement of Additional Information
(the "SAI") relating to the Portfolio included in the Fund's Registration
Statement on Form N-1A, as amended from time to time, (the "Registration
Statement") filed by the Fund under the Investment Company Act of 1940, as
amended, (the "1940 Act") and the Securities Act of 1933, as amended. Copies of
the documents referred to in the preceding sentence have been furnished to you
by the Fund. The Fund has also furnished you with copies properly certified or
authenticated of each of the following additional documents related to the Fund
and the Portfolio:
(a) The Declaration dated December 11, 1997 as amended to date.
(b) By-Laws of the Fund as in effect on the date hereof (the "By-Laws").
(c) Resolutions of the Trustees of the Fund and the shareholders of the
Portfolio selecting you as investment manager and approving the form of
this Agreement.
<PAGE>
(d) Establishment and Designation of Series of Shares of Beneficial Interest
dated February 9, 1996 relating to the Portfolio.
The Fund will furnish you from time to time with copies, properly certified
or authenticated, of all amendments of or supplements, if any, to the foregoing,
including the Prospectus, the SAI and the Registration Statement.
2. Sublicense to Use the Scudder Trademarks. As exclusive licensee of the
rights to use and sublicense the use of the "Scudder," "Scudder Kemper
Investments, Inc." and "Scudder, Stevens & Clark, Inc." trademarks (together,
the "Scudder Marks"), you hereby grant the Fund a nonexclusive right and
sublicense to use (i) the "Scudder" name and mark as part of the Fund's name
(the "Portfolio Name"), and (ii) the Scudder Marks in connection with the Fund's
investment products and services, in each case only for so long as this
Agreement, any other investment management agreement between you and the Fund,
or any extension, renewal or amendment hereof or thereof remains in effect, and
only for so long as you are a licensee of the Scudder Marks, provided however,
that you agree to use your best efforts to maintain your license to use and
sublicense the Scudder Marks. The Fund agrees that it shall have no right to
sublicense or assign rights to use the Scudder Marks, shall acquire no interest
in the Scudder Marks other than the rights granted herein, that all of the
Fund's uses of the Scudder Marks shall inure to the benefit of Scudder Trust
Company as owner and licensor of the Scudder Marks (the "Trademark Owner"), and
that the Fund shall not challenge the validity of the Scudder Marks or the
Trademark Owner's ownership thereof. The Fund further agrees that all services
and products it offers in connection with the Scudder Marks shall meet
commercially reasonable standards of quality, as may be determined by you or the
Trademark Owner from time to time, provided that you acknowledge that the
services and products the Fund rendered during the one-year period preceding the
date of this Agreement are acceptable. At your reasonable request, the Fund
shall cooperate with you and the Trademark Owner and shall execute and deliver
any and all documents necessary to maintain and protect (including but not
limited to in connection with any trademark infringement action) the Scudder
Marks and/or enter the Fund as a registered user thereof. At such time as this
Agreement or any other investment management agreement shall no longer be in
effect between you (or your successor) and the Fund, or you no longer are a
licensee of the Scudder Marks, the Fund shall (to the extent that, and as soon
as, it lawfully can) cease to use the Portfolio Name or any other name
indicating that it is advised by, managed by or otherwise connected with you (or
any organization which shall have succeeded to your business as investment
manager) or the Trademark Owner. In no event shall the Fund use the Scudder
Marks or any other name or mark confusingly similar thereto (including, but not
limited to, any name or mark that includes the name "Scudder") if this Agreement
or any other investment advisory agreement between you (or your successor) and
the Portfolio is terminated.
3. Portfolio Management Services. As manager of the assets of the
Portfolio, you shall provide continuing investment management of the assets of
the Portfolio in accordance with the investment objectives, policies and
restrictions set forth in the Prospectus and SAI; the applicable provisions of
the 1940 Act and the Internal Revenue Code of 1986, as amended, (the "Code")
relating to regulated investment companies and all rules and regulations
thereunder; and all other applicable federal and state laws and regulations of
which you have knowledge; subject always to policies and instructions adopted by
the Fund's Board of Trustees. In connection therewith, you shall use reasonable
efforts to manage the Portfolio so that it will qualify as a regulated
investment company under Subchapter M of the Code and regulations issued
thereunder. The Portfolio shall have the benefit of the investment analysis and
research, the review of current economic conditions and trends and the
consideration of long-range investment policy generally available to your
investment advisory clients. In managing
2
<PAGE>
the Portfolio in accordance with the requirements set forth in this section 3,
you shall be entitled to receive and act upon advice of counsel to the Fund or
counsel to you. You shall also make available to the Fund promptly upon request
all of the Portfolio's investment records and ledgers as are necessary to assist
the Fund in complying with the requirements of the 1940 Act and other applicable
laws. To the extent required by law, you shall furnish to regulatory authorities
having the requisite authority any information or reports in connection with the
services provided pursuant to this Agreement which may be requested in order to
ascertain whether the operations of the Fund are being conducted in a manner
consistent with applicable laws and regulations.
You shall determine the securities, instruments, investments, currencies,
repurchase agreements, futures, options and other contracts relating to
investments to be purchased, sold or entered into by the Portfolio and place
orders with broker-dealers, foreign currency dealers, futures commission
merchants or others pursuant to your determinations and all in accordance with
Portfolio policies as expressed in the Registration Statement. You shall
determine what portion of the Portfolio's portfolio shall be invested in
securities and other assets and what portion, if any, should be held uninvested.
You shall furnish to the Fund's Board of Trustees periodic reports on the
investment performance of the Portfolio and on the performance of your
obligations pursuant to this Agreement, and you shall supply such additional
reports and information as the Fund's officers or Board of Trustees shall
reasonably request.
4. Administrative Services. In addition to the portfolio management
services specified above in section 3, you shall furnish at your expense for the
use of the Portfolio such office space and facilities in the United States as
the Portfolio may require for its reasonable needs, and you (or one or more of
your affiliates designated by you) shall render to the Fund administrative
services on behalf of the Portfolio necessary for operating as an open-end
investment company and not provided by persons not parties to this Agreement
including, but not limited to, preparing reports to and meeting materials for
the Fund's Board of Trustees and reports and notices to Portfolio shareholders;
supervising, negotiating contractual arrangements with, to the extent
appropriate, and monitoring the performance of, accounting agents, custodians,
depositories, transfer agents and pricing agents, accountants, attorneys,
printers, underwriters, brokers and dealers, insurers and other persons in any
capacity deemed to be necessary or desirable to Portfolio operations; preparing
and making filings with the Securities and Exchange Commission (the "SEC") and
other regulatory and self-regulatory organizations, including, but not limited
to, preliminary and definitive proxy materials, post-effective amendments to the
Registration Statement, semi-annual reports on Form N-SAR and notices pursuant
to Rule 24f-2 under the 1940 Act; overseeing the tabulation of proxies by the
Portfolio's transfer agent; assisting in the preparation and filing of the
Portfolio's federal, state and local tax returns; preparing and filing the
Portfolio's federal excise tax return pursuant to Section 4982 of the Code;
providing assistance with investor and public relations matters; monitoring the
valuation of portfolio securities and the calculation of net asset value;
monitoring the registration of Shares of the Portfolio under applicable federal
and state securities laws; maintaining or causing to be maintained for the
Portfolio all books, records and reports and any other information required
under the 1940 Act, to the extent that such books, records and reports and other
information are not maintained by the Portfolio's custodian or other agents of
the Portfolio; assisting in establishing the accounting policies of the
Portfolio; assisting in the resolution of accounting issues that may arise with
respect to the Portfolio's operations and consulting with the Portfolio's
independent accountants, legal counsel and the Portfolio's other agents as
necessary in connection therewith; establishing and monitoring the Portfolio's
operating expense budgets; reviewing the Portfolio's bills; processing the
payment of bills that have been approved by an authorized person; assisting the
Portfolio in determining the amount of dividends and distributions available to
be paid by the Portfolio to its
3
<PAGE>
shareholders, preparing and arranging for the printing of dividend notices to
shareholders, and providing the transfer and dividend paying agent, the
custodian, and the accounting agent with such information as is required for
such parties to effect the payment of dividends and distributions; and otherwise
assisting the Fund as it may reasonably request in the conduct of the
Portfolio's business, subject to the direction and control of the Fund's Board
of Trustees. Nothing in this Agreement shall be deemed to shift to you or to
diminish the obligations of any agent of the Portfolio or any other person not a
party to this Agreement which is obligated to provide services to the Portfolio.
5. Allocation of Charges and Expenses. Except as otherwise specifically
provided in this section 5, you shall pay the compensation and expenses of all
Trustees, officers and executive employees of the Fund (including the
Portfolio's share of payroll taxes) who are affiliated persons of you, and you
shall make available, without expense to the Portfolio, the services of such of
your directors, officers and employees as may duly be elected officers of the
Fund, subject to their individual consent to serve and to any limitations
imposed by law. You shall provide at your expense the portfolio management
services described in section 3 hereof and the administrative services described
in section 4 hereof.
You shall not be required to pay any expenses of the Portfolio other than
those specifically allocated to you in this section 5. In particular, but
without limiting the generality of the foregoing, you shall not be responsible,
except to the extent of the reasonable compensation of such of the Portfolio's
Trustees and officers as are directors, officers or employees of you whose
services may be involved, for the following expenses of the Portfolio:
organization expenses of the Portfolio (including out-of-pocket expenses, but
not including your overhead or employee costs); fees payable to you and to any
other Portfolio advisors or consultants; legal expenses; auditing and accounting
expenses; maintenance of books and records which are required to be maintained
by the Portfolio's custodian or other agents of the Fund; telephone, telex,
facsimile, postage and other communications expenses; taxes and governmental
fees; fees, dues and expenses incurred by the Portfolio in connection with
membership in investment company trade organizations; fees and expenses of the
Portfolio's accounting agent, custodians, subcustodians, transfer agents,
dividend disbursing agents and registrars; payment for portfolio pricing or
valuation services to pricing agents, accountants, bankers and other
specialists, if any; expenses of preparing share certificates and, except as
provided below in this section 5, other expenses in connection with the
issuance, offering, distribution, sale, redemption or repurchase of securities
issued by the Portfolio; expenses relating to investor and public relations;
expenses and fees of registering or qualifying Shares of the Portfolio for sale;
interest charges, bond premiums and other insurance expense; freight, insurance
and other charges in connection with the shipment of the Portfolio's portfolio
securities; the compensation and all expenses (specifically including travel
expenses relating to Fund business) of Trustees, officers and employees of the
Fund who are not affiliated persons of you; brokerage commissions or other costs
of acquiring or disposing of any portfolio securities of the Portfolio; expenses
of printing and distributing reports, notices and dividends to shareholders;
expenses of printing and mailing Prospectuses and SAIs of the Portfolio and
supplements thereto; costs of stationery; any litigation expenses;
indemnification of Trustees and officers of the Fund; costs of shareholders' and
other meetings; and travel expenses (or an appropriate portion thereof) of
Trustees and officers of the Fund who are directors, officers or employees of
you to the extent that such expenses relate to attendance at meetings of the
Board of Trustees of the Fund or any committees thereof or advisors thereto held
outside of Boston, Massachusetts or New York, New York.
You shall not be required to pay expenses of any activity which is
primarily intended to result in sales of Shares of the Portfolio if and to the
extent that (i) such expenses are required to be borne by a principal
underwriter which acts as the distributor of the Portfolio's Shares pursuant to
an underwriting agreement which provides that the underwriter shall assume some
or all of such expenses, or (ii) the
4
<PAGE>
Fund on behalf of the Portfolio shall have adopted a plan in conformity with
Rule 12b-1 under the 1940 Act providing that the Portfolio (or some other party)
shall assume some or all of such expenses. You shall be required to pay such of
the foregoing sales 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 Portfolio (or some other party) pursuant to such a plan.
6. Management Fee. For all services to be rendered, payments to be made and
costs to be assumed by you as provided in sections 3, 4 and 5 hereof, the Fund
on behalf of the Portfolio shall pay you in United States Dollars on the last
day of each month the unpaid balance of a fee equal to the excess of 1/12 of
0.475 of 1 percent of the average daily net assets as defined below of the
Portfolio for such month over any compensation waived by you from time to time
(as more fully described below). You shall be entitled to receive during any
month such interim payments of your fee hereunder as you shall request, provided
that no such payment shall exceed 75 percent of the amount of your fee then
accrued on the books of the Portfolio and unpaid.
The "average daily net assets" of the Portfolio shall mean the average of
the values placed on the Portfolio's net assets as of 4:00 p.m. (New York time)
on each day on which the net asset value of the Portfolio is determined
consistent with the provisions of Rule 22c-1 under the 1940 Act or, if the
Portfolio lawfully determines the value of its net assets as of some other time
on each business day, as of such time. The value of the net assets of the
Portfolio shall always be determined pursuant to the applicable provisions of
the Declaration and the Registration Statement. If the determination of net
asset value does not take place for any particular day, then for the purposes of
this section 6, the value of the net assets of the Portfolio as last determined
shall be deemed to be the value of its net assets as of 4:00 p.m. (New York
time), or as of such other time as the value of the net assets of the
Portfolio's portfolio may be lawfully determined on that day. If the Portfolio
determines the value of the net assets of its portfolio more than once on any
day, then 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 section 6.
You may waive all or a portion of your fees provided for hereunder and such
waiver shall be treated as a reduction in purchase price of your services. You
shall be contractually bound hereunder by the terms of any publicly announced
waiver of your fee, or any limitation of the Portfolio's expenses, as if such
waiver or limitation were fully set forth herein.
7. Avoidance of Inconsistent Position; Services Not Exclusive. In
connection with purchases or sales of portfolio securities and other investments
for the account of the Portfolio, neither you nor any of your directors,
officers or employees shall 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 and other investments for the
Portfolio's account with brokers or dealers selected by you in accordance with
Portfolio policies as expressed in the Registration Statement. If any occasion
should arise in which you give any advice to clients of yours concerning the
Shares of the Portfolio, you shall 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 services to others. In acting under this Agreement, you
shall be an independent contractor and not an agent of the Fund. Whenever the
Portfolio and one or more other accounts or investment companies advised by the
Manager have available funds for investment, investments suitable and
appropriate for each shall be allocated in
5
<PAGE>
accordance with procedures believed by the Manager to be equitable to each
entity. Similarly, opportunities to sell securities shall be allocated in a
manner believed by the Manager to be equitable. The Portfolio recognizes that in
some cases this procedure may adversely affect the size of the position that may
be acquired or disposed of for the Portfolio.
8. Limitation of Liability of Manager. As an inducement to your undertaking
to render services pursuant to this Agreement, the Fund agrees that you shall
not be liable under this Agreement 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, provided that nothing in this Agreement shall be
deemed to protect or purport to protect you against any liability to the Fund,
the Portfolio or its shareholders to which you would otherwise be subject by
reason of willful misfeasance, bad faith or gross negligence in the performance
of your duties, or by reason of your reckless disregard of your obligations and
duties hereunder. Any person, even though also employed by you, who may be or
become an employee of and paid by the Portfolio shall be deemed, when acting
within the scope of his or her employment by the Portfolio, to be acting in such
employment solely for the Portfolio and not as your employee or agent.
9. Duration and Termination of This Agreement. This Agreement shall remain
in force until September 30, 1998, and continue in force from year to year
thereafter, but only so long as such continuance is specifically approved at
least annually (a) by the vote of a majority of the Trustees who are not parties
to this Agreement or interested persons of any party to this Agreement, cast in
person at a meeting called for the purpose of voting on such approval, and (b)
by the Trustees of the Fund, or by the vote of a majority of the outstanding
voting securities of the Portfolio. The aforesaid requirement that continuance
of this Agreement be "specifically approved at least annually" shall be
construed in a manner consistent with the 1940 Act and the rules and regulations
thereunder and any applicable SEC exemptive order therefrom.
This Agreement may be terminated with respect to the Portfolio at any time,
without the payment of any penalty, by the vote of a majority of the outstanding
voting securities of the Portfolio or by the Fund's Board of Trustees on 60
days' written notice to you, or by you on 60 days' written notice to the Fund.
This Agreement shall terminate automatically in the event of its assignment.
10. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against whom enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this Agreement shall be
effective until approved in a manner consistent with the 1940 Act and rules and
regulations thereunder and any applicable SEC exemptive order therefrom.
11. Limitation of Liability for Claims. The Declaration, a copy of which,
together with all amendments thereto, is on file in the Office of the Secretary
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
Portfolio, or Trustee, officer, employee or agent of the Fund, shall be subject
to claims against or obligations of the Fund or of the Portfolio to any extent
whatsoever, but that the Fund estate only shall be liable.
6
<PAGE>
You are hereby expressly put on notice of the limitation of liability as
set forth in the Declaration and you agree that the obligations assumed by the
Fund on behalf of the Portfolio pursuant to this Agreement shall be limited in
all cases to the Portfolio and its assets, and you shall not seek satisfaction
of any such obligation from the shareholders or any shareholder of the Portfolio
or any other series of the Fund, or from any Trustee, officer, employee or agent
of the Fund. You understand that the rights and obligations of each Portfolio,
or series, under the Declaration are separate and distinct from those of any and
all other series.
12. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or limit 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.
In interpreting the provisions of this Agreement, the definitions contained
in Section 2(a) of the 1940 Act (particularly the definitions of "affiliated
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 SEC by any rule, regulation or order.
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Massachusetts, provided that nothing herein shall be construed
in a manner inconsistent with the 1940 Act, or in a manner which would cause the
Portfolio to fail to comply with the requirements of Subchapter M of the Code.
This Agreement shall supersede all prior investment advisory or management
agreements entered into between you and the Fund on behalf of the Portfolio.
If you are in agreement with the foregoing, please execute 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
effective as of the date of this Agreement.
Yours very truly,
SCUDDER VARIABLE LIFE INVESTMENT
FUND, on behalf of
Bond Portfolio
By: ______________________________
Vice President
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<PAGE>
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By: ______________________________
Managing Director
8
Exhibit 5(f)(2)
Scudder Variable Life Investment Fund
Two International Place
Boston, Massachusetts 02110
December 31, 1997
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
Investment Management Agreement
Balanced Portfolio
Ladies and Gentlemen:
Scudder Variable Life Investment Fund (the "Fund") has been established as
a Massachusetts business trust to engage in the business of an investment
company. Pursuant to the Fund's Declaration of Trust, as amended from
time-to-time (the "Declaration"), the Board of Trustees has divided the Fund's
shares of beneficial interest, without par value, (the "Shares") into separate
series, or funds, including Balanced Portfolio (the "Portfolio"). Series may be
abolished and dissolved, and additional series 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 manager of the Portfolio and to provide certain other services, as
more fully set forth below, and you have indicated that you are willing to act
as such investment manager and to perform such services under the terms and
conditions hereinafter set forth. Accordingly, the Fund on behalf of the
Portfolio agrees with you as follows:
1. Delivery of Documents. The Fund engages in the business of investing and
reinvesting the assets of the Portfolio in the manner and in accordance with the
investment objectives, policies and restrictions specified in the currently
effective Prospectus (the "Prospectus") and Statement of Additional Information
(the "SAI") relating to the Portfolio included in the Fund's Registration
Statement on Form N-1A, as amended from time to time, (the "Registration
Statement") filed by the Fund under the Investment Company Act of 1940, as
amended, (the "1940 Act") and the Securities Act of 1933, as amended. Copies of
the documents referred to in the preceding sentence have been furnished to you
by the Fund. The Fund has also furnished you with copies properly certified or
authenticated of each of the following additional documents related to the Fund
and the Portfolio:
(a) The Declaration dated December 11, 1997, as amended to date.
(b) By-Laws of the Fund as in effect on the date hereof (the "By-Laws").
(c) Resolutions of the Trustees of the Fund and the shareholders of the
Portfolio selecting you as investment manager and approving the form of
this Agreement.
<PAGE>
(d) Establishment and Designation of Series of Shares of Beneficial Interest
dated February 9, 1996 relating to the Portfolio.
The Fund will furnish you from time to time with copies, properly certified
or authenticated, of all amendments of or supplements, if any, to the foregoing,
including the Prospectus, the SAI and the Registration Statement.
2. Sublicense to Use the Scudder Trademarks. As exclusive licensee of the
rights to use and sublicense the use of the "Scudder," "Scudder Kemper
Investments, Inc." and "Scudder, Stevens & Clark, Inc." trademarks (together,
the "Scudder Marks"), you hereby grant the Fund a nonexclusive right and
sublicense to use (i) the "Scudder" name and mark as part of the Fund's name
(the "Portfolio Name"), and (ii) the Scudder Marks in connection with the Fund's
investment products and services, in each case only for so long as this
Agreement, any other investment management agreement between you and the Fund,
or any extension, renewal or amendment hereof or thereof remains in effect, and
only for so long as you are a licensee of the Scudder Marks, provided however,
that you agree to use your best efforts to maintain your license to use and
sublicense the Scudder Marks. The Fund agrees that it shall have no right to
sublicense or assign rights to use the Scudder Marks, shall acquire no interest
in the Scudder Marks other than the rights granted herein, that all of the
Fund's uses of the Scudder Marks shall inure to the benefit of Scudder Trust
Company as owner and licensor of the Scudder Marks (the "Trademark Owner"), and
that the Fund shall not challenge the validity of the Scudder Marks or the
Trademark Owner's ownership thereof. The Fund further agrees that all services
and products it offers in connection with the Scudder Marks shall meet
commercially reasonable standards of quality, as may be determined by you or the
Trademark Owner from time to time, provided that you acknowledge that the
services and products the Fund rendered during the one-year period preceding the
date of this Agreement are acceptable. At your reasonable request, the Fund
shall cooperate with you and the Trademark Owner and shall execute and deliver
any and all documents necessary to maintain and protect (including but not
limited to in connection with any trademark infringement action) the Scudder
Marks and/or enter the Fund as a registered user thereof. At such time as this
Agreement or any other investment management agreement shall no longer be in
effect between you (or your successor) and the Fund, or you no longer are a
licensee of the Scudder Marks, the Fund shall (to the extent that, and as soon
as, it lawfully can) cease to use the Portfolio Name or any other name
indicating that it is advised by, managed by or otherwise connected with you (or
any organization which shall have succeeded to your business as investment
manager) or the Trademark Owner. In no event shall the Fund use the Scudder
Marks or any other name or mark confusingly similar thereto (including, but not
limited to, any name or mark that includes the name "Scudder") if this Agreement
or any other investment advisory agreement between you (or your successor) and
the Portfolio is terminated.
3. Portfolio Management Services. As manager of the assets of the
Portfolio, you shall provide continuing investment management of the assets of
the Portfolio in accordance with the investment objectives, policies and
restrictions set forth in the Prospectus and SAI; the applicable provisions of
the 1940 Act and the Internal Revenue Code of 1986, as amended, (the "Code")
relating to regulated investment companies and all rules and regulations
thereunder; and all other applicable federal and state laws and regulations of
which you have knowledge; subject always to policies and instructions adopted by
the Fund's Board of Trustees. In connection therewith, you shall use reasonable
efforts to manage the Portfolio so that it will qualify as a regulated
investment company under Subchapter M of the Code and regulations issued
thereunder. The Portfolio shall have the benefit of the investment analysis and
research, the review of current economic conditions and trends and the
consideration of long-range investment policy generally available to your
investment advisory clients. In managing the Portfolio in accordance with the
requirements set forth in this section 3, you shall be entitled to receive and
2
<PAGE>
act upon advice of counsel to the Fund or counsel to you. You shall also make
available to the Fund promptly upon request all of the Portfolio's investment
records and ledgers as are necessary to assist the Fund in complying with the
requirements of the 1940 Act and other applicable laws. To the extent required
by law, you shall furnish to regulatory authorities having the requisite
authority any information or reports in connection with the services provided
pursuant to this Agreement which may be requested in order to ascertain whether
the operations of the Fund are being conducted in a manner consistent with
applicable laws and regulations.
You shall determine the securities, instruments, investments, currencies,
repurchase agreements, futures, options and other contracts relating to
investments to be purchased, sold or entered into by the Portfolio and place
orders with broker-dealers, foreign currency dealers, futures commission
merchants or others pursuant to your determinations and all in accordance with
Portfolio policies as expressed in the Registration Statement. You shall
determine what portion of the Portfolio's portfolio shall be invested in
securities and other assets and what portion, if any, should be held uninvested.
You shall furnish to the Fund's Board of Trustees periodic reports on the
investment performance of the Portfolio and on the performance of your
obligations pursuant to this Agreement, and you shall supply such additional
reports and information as the Fund's officers or Board of Trustees shall
reasonably request.
4. Administrative Services. In addition to the portfolio management
services specified above in section 3, you shall furnish at your expense for the
use of the Portfolio such office space and facilities in the United States as
the Portfolio may require for its reasonable needs, and you (or one or more of
your affiliates designated by you) shall render to the Fund administrative
services on behalf of the Portfolio necessary for operating as an open-end
investment company and not provided by persons not parties to this Agreement
including, but not limited to, preparing reports to and meeting materials for
the Fund's Board of Trustees and reports and notices to Portfolio shareholders;
supervising, negotiating contractual arrangements with, to the extent
appropriate, and monitoring the performance of, accounting agents, custodians,
depositories, transfer agents and pricing agents, accountants, attorneys,
printers, underwriters, brokers and dealers, insurers and other persons in any
capacity deemed to be necessary or desirable to Portfolio operations; preparing
and making filings with the Securities and Exchange Commission (the "SEC") and
other regulatory and self-regulatory organizations, including, but not limited
to, preliminary and definitive proxy materials, post-effective amendments to the
Registration Statement, semi-annual reports on Form N-SAR and notices pursuant
to Rule 24f-2 under the 1940 Act; overseeing the tabulation of proxies by the
Portfolio's transfer agent; assisting in the preparation and filing of the
Portfolio's federal, state and local tax returns; preparing and filing the
Portfolio's federal excise tax return pursuant to Section 4982 of the Code;
providing assistance with investor and public relations matters; monitoring the
valuation of portfolio securities and the calculation of net asset value;
monitoring the registration of Shares of the Portfolio under applicable federal
and state securities laws; maintaining or causing to be maintained for the
Portfolio all books, records and reports and any other information required
under the 1940 Act, to the extent that such books, records and reports and other
information are not maintained by the Portfolio's custodian or other agents of
the Portfolio; assisting in establishing the accounting policies of the
Portfolio; assisting in the resolution of accounting issues that may arise with
respect to the Portfolio's operations and consulting with the Portfolio's
independent accountants, legal counsel and the Portfolio's other agents as
necessary in connection therewith; establishing and monitoring the Portfolio's
operating expense budgets; reviewing the Portfolio's bills; processing the
payment of bills that have been approved by an authorized person; assisting the
Portfolio in determining the amount of dividends and distributions available to
be paid by the Portfolio to its shareholders, preparing and arranging for the
printing of dividend notices to shareholders, and providing the transfer and
dividend paying agent, the custodian, and the accounting agent with such
information as is required for such parties to effect the payment of dividends
3
<PAGE>
and distributions; and otherwise assisting the Fund as it may reasonably request
in the conduct of the Portfolio's business, subject to the direction and control
of the Fund's Board of Trustees. Nothing in this Agreement shall be deemed to
shift to you or to diminish the obligations of any agent of the Portfolio or any
other person not a party to this Agreement which is obligated to provide
services to the Portfolio.
5. Allocation of Charges and Expenses. Except as otherwise specifically
provided in this section 5, you shall pay the compensation and expenses of all
Trustees, officers and executive employees of the Fund (including the
Portfolio's share of payroll taxes) who are affiliated persons of you, and you
shall make available, without expense to the Portfolio, the services of such of
your directors, officers and employees as may duly be elected officers of the
Fund, subject to their individual consent to serve and to any limitations
imposed by law. You shall provide at your expense the portfolio management
services described in section 3 hereof and the administrative services described
in section 4 hereof.
You shall not be required to pay any expenses of the Portfolio other than
those specifically allocated to you in this section 5. In particular, but
without limiting the generality of the foregoing, you shall not be responsible,
except to the extent of the reasonable compensation of such of the Portfolio's
Trustees and officers as are directors, officers or employees of you whose
services may be involved, for the following expenses of the Portfolio:
organization expenses of the Portfolio (including out-of-pocket expenses, but
not including your overhead or employee costs); fees payable to you and to any
other Portfolio advisors or consultants; legal expenses; auditing and accounting
expenses; maintenance of books and records which are required to be maintained
by the Portfolio's custodian or other agents of the Fund; telephone, telex,
facsimile, postage and other communications expenses; taxes and governmental
fees; fees, dues and expenses incurred by the Portfolio in connection with
membership in investment company trade organizations; fees and expenses of the
Portfolio's accounting agent, custodians, subcustodians, transfer agents,
dividend disbursing agents and registrars; payment for portfolio pricing or
valuation services to pricing agents, accountants, bankers and other
specialists, if any; expenses of preparing share certificates and, except as
provided below in this section 5, other expenses in connection with the
issuance, offering, distribution, sale, redemption or repurchase of securities
issued by the Portfolio; expenses relating to investor and public relations;
expenses and fees of registering or qualifying Shares of the Portfolio for sale;
interest charges, bond premiums and other insurance expense; freight, insurance
and other charges in connection with the shipment of the Portfolio's portfolio
securities; the compensation and all expenses (specifically including travel
expenses relating to Fund business) of Trustees, officers and employees of the
Fund who are not affiliated persons of you; brokerage commissions or other costs
of acquiring or disposing of any portfolio securities of the Portfolio; expenses
of printing and distributing reports, notices and dividends to shareholders;
expenses of printing and mailing Prospectuses and SAIs of the Portfolio and
supplements thereto; costs of stationery; any litigation expenses;
indemnification of Trustees and officers of the Fund; costs of shareholders' and
other meetings; and travel expenses (or an appropriate portion thereof) of
Trustees and officers of the Fund who are directors, officers or employees of
you to the extent that such expenses relate to attendance at meetings of the
Board of Trustees of the Fund or any committees thereof or advisors thereto held
outside of Boston, Massachusetts or New York, New York.
You shall not be required to pay expenses of any activity which is
primarily intended to result in sales of Shares of the Portfolio if and to the
extent that (i) such expenses are required to be borne by a principal
underwriter which acts as the distributor of the Portfolio's Shares pursuant to
an underwriting agreement which provides that the underwriter shall assume some
or all of such expenses, or (ii) the Fund on behalf of the Portfolio shall have
adopted a plan in conformity with Rule 12b-1 under the 1940 Act providing that
the Portfolio (or some other party) shall assume some or all of such expenses.
You shall be required to pay such of the foregoing sales expenses as are not
4
<PAGE>
required to be paid by the principal underwriter pursuant to the underwriting
agreement or are not permitted to be paid by the Portfolio (or some other party)
pursuant to such a plan.
6. Management Fee. For all services to be rendered, payments to be made and
costs to be assumed by you as provided in sections 3, 4 and 5 hereof, the Fund
on behalf of the Portfolio shall pay you in United States Dollars on the last
day of each month the unpaid balance of a fee equal to the excess of 1/12 of
0.475 of 1 percent of the average daily net assets as defined below of the
Portfolio for such month over any compensation waived by you from time to time
(as more fully described below). You shall be entitled to receive during any
month such interim payments of your fee hereunder as you shall request, provided
that no such payment shall exceed 75 percent of the amount of your fee then
accrued on the books of the Portfolio and unpaid.
The "average daily net assets" of the Portfolio shall mean the average of
the values placed on the Portfolio's net assets as of 4:00 p.m. (New York time)
on each day on which the net asset value of the Portfolio is determined
consistent with the provisions of Rule 22c-1 under the 1940 Act or, if the
Portfolio lawfully determines the value of its net assets as of some other time
on each business day, as of such time. The value of the net assets of the
Portfolio shall always be determined pursuant to the applicable provisions of
the Declaration and the Registration Statement. If the determination of net
asset value does not take place for any particular day, then for the purposes of
this section 6, the value of the net assets of the Portfolio as last determined
shall be deemed to be the value of its net assets as of 4:00 p.m. (New York
time), or as of such other time as the value of the net assets of the
Portfolio's portfolio may be lawfully determined on that day. If the Portfolio
determines the value of the net assets of its portfolio more than once on any
day, then 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 section 6.
You may waive all or a portion of your fees provided for hereunder and such
waiver shall be treated as a reduction in purchase price of your services. You
shall be contractually bound hereunder by the terms of any publicly announced
waiver of your fee, or any limitation of the Portfolio's expenses, as if such
waiver or limitation were fully set forth herein.
7. Avoidance of Inconsistent Position; Services Not Exclusive. In
connection with purchases or sales of portfolio securities and other investments
for the account of the Portfolio, neither you nor any of your directors,
officers or employees shall 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 and other investments for the
Portfolio's account with brokers or dealers selected by you in accordance with
Portfolio policies as expressed in the Registration Statement. If any occasion
should arise in which you give any advice to clients of yours concerning the
Shares of the Portfolio, you shall 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 services to others. In acting under this Agreement, you
shall be an independent contractor and not an agent of the Fund. Whenever the
Portfolio and one or more other accounts or investment companies advised by the
Manager have available funds for investment, investments suitable and
appropriate for each shall be allocated in accordance with procedures believed
by the Manager to be equitable to each entity. Similarly, opportunities to sell
securities shall be allocated in a manner believed by the Manager to be
5
<PAGE>
equitable. The Portfolio recognizes that in some cases this procedure may
adversely affect the size of the position that may be acquired or disposed of
for the Portfolio.
8. Limitation of Liability of Manager. As an inducement to your undertaking
to render services pursuant to this Agreement, the Fund agrees that you shall
not be liable under this Agreement 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, provided that nothing in this Agreement shall be
deemed to protect or purport to protect you against any liability to the Fund,
the Portfolio or its shareholders to which you would otherwise be subject by
reason of willful misfeasance, bad faith or gross negligence in the performance
of your duties, or by reason of your reckless disregard of your obligations and
duties hereunder. Any person, even though also employed by you, who may be or
become an employee of and paid by the Portfolio shall be deemed, when acting
within the scope of his or her employment by the Portfolio, to be acting in such
employment solely for the Portfolio and not as your employee or agent.
9. Duration and Termination of This Agreement. This Agreement shall remain
in force until September 30, 1998, and continue in force from year to year
thereafter, but only so long as such continuance is specifically approved at
least annually (a) by the vote of a majority of the Trustees who are not parties
to this Agreement or interested persons of any party to this Agreement, cast in
person at a meeting called for the purpose of voting on such approval, and (b)
by the Trustees of the Fund, or by the vote of a majority of the outstanding
voting securities of the Portfolio. The aforesaid requirement that continuance
of this Agreement be "specifically approved at least annually" shall be
construed in a manner consistent with the 1940 Act and the rules and regulations
thereunder and any applicable SEC exemptive order therefrom.
This Agreement may be terminated with respect to the Portfolio at any time,
without the payment of any penalty, by the vote of a majority of the outstanding
voting securities of the Portfolio or by the Fund's Board of Trustees on 60
days' written notice to you, or by you on 60 days' written notice to the Fund.
This Agreement shall terminate automatically in the event of its assignment.
10. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against whom enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this Agreement shall be
effective until approved in a manner consistent with the 1940 Act and rules and
regulations thereunder and any applicable SEC exemptive order therefrom.
11. Limitation of Liability for Claims. The Declaration, a copy of which,
together with all amendments thereto, is on file in the Office of the Secretary
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
Portfolio, or Trustee, officer, employee or agent of the Fund, shall be subject
to claims against or obligations of the Fund or of the Portfolio to any extent
whatsoever, but that the Fund estate only shall be liable.
You are hereby expressly put on notice of the limitation of liability as
set forth in the Declaration and you agree that the obligations assumed by the
Fund on behalf of the Portfolio pursuant to this Agreement shall be limited in
all cases to the Portfolio and its assets, and you shall not seek satisfaction
6
<PAGE>
of any such obligation from the shareholders or any shareholder of the Portfolio
or any other series of the Fund, or from any Trustee, officer, employee or agent
of the Fund. You understand that the rights and obligations of each Portfolio,
or series, under the Declaration are separate and distinct from those of any and
all other series.
12. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or limit 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.
In interpreting the provisions of this Agreement, the definitions contained
in Section 2(a) of the 1940 Act (particularly the definitions of "affiliated
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 SEC by any rule, regulation or order.
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Massachusetts, provided that nothing herein shall be construed
in a manner inconsistent with the 1940 Act, or in a manner which would cause the
Portfolio to fail to comply with the requirements of Subchapter M of the Code.
This Agreement shall supersede all prior investment advisory or management
agreements entered into between you and the Fund on behalf of the Portfolio.
If you are in agreement with the foregoing, please execute 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
effective as of the date of this Agreement.
Yours very truly,
SCUDDER VARIABLE LIFE INVESTMENT
FUND, on behalf of
Balanced Portfolio
By:
------------------------------
President
7
<PAGE>
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By:
------------------------------
Managing Director
8
Exhibit 5(f)(3)
Scudder Variable Life Investment Fund
Two International Place
Boston, Massachusetts 02110
December 31, 1997
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
Investment Management Agreement
Growth and Income Portfolio
Ladies and Gentlemen:
Scudder Variable Life Investment Fund (the "Fund") has been established as
a Massachusetts business trust to engage in the business of an investment
company. Pursuant to the Fund's Declaration of Trust, as amended from
time-to-time (the "Declaration"), the Board of Trustees has divided the Fund's
shares of beneficial interest, without par value, (the "Shares") into separate
series, or funds, including Growth and Income Portfolio (the "Portfolio").
Series may be abolished and dissolved, and additional series 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 manager of the Portfolio and to provide certain other services, as
more fully set forth below, and you have indicated that you are willing to act
as such investment manager and to perform such services under the terms and
conditions hereinafter set forth. Accordingly, the Fund on behalf of the
Portfolio agrees with you as follows:
1. Delivery of Documents. The Fund engages in the business of investing and
reinvesting the assets of the Portfolio in the manner and in accordance with the
investment objectives, policies and restrictions specified in the currently
effective Prospectus (the "Prospectus") and Statement of Additional Information
(the "SAI") relating to the Portfolio included in the Fund's Registration
Statement on Form N-1A, as amended from time to time, (the "Registration
Statement") filed by the Fund under the Investment Company Act of 1940, as
amended, (the "1940 Act") and the Securities Act of 1933, as amended. Copies of
the documents referred to in the preceding sentence have been furnished to you
by the Fund. The Fund has also furnished you with copies properly certified or
authenticated of each of the following additional documents related to the Fund
and the Portfolio:
(a) The Declaration dated December 11, 1997 as amended to date.
(b) By-Laws of the Fund as in effect on the date hereof (the "By-Laws").
(c) Resolutions of the Trustees of the Fund and the shareholders of the
Portfolio selecting you as investment manager and approving the form of
this Agreement.
<PAGE>
d) Establishment and Designation of Series of Shares of Beneficial Interest
dated February 9, 1996 relating to the Portfolio.
The Fund will furnish you from time to time with copies, properly certified
or authenticated, of all amendments of or supplements, if any, to the foregoing,
including the Prospectus, the SAI and the Registration Statement.
2. Sublicense to Use the Scudder Trademarks. As exclusive licensee of the
rights to use and sublicense the use of the "Scudder," "Scudder Kemper
Investments, Inc." and "Scudder, Stevens & Clark, Inc." trademarks (together,
the "Scudder Marks"), you hereby grant the Fund a nonexclusive right and
sublicense to use (i) the "Scudder" name and mark as part of the Fund's name
(the "Portfolio Name"), and (ii) the Scudder Marks in connection with the Fund's
investment products and services, in each case only for so long as this
Agreement, any other investment management agreement between you and the Fund,
or any extension, renewal or amendment hereof or thereof remains in effect, and
only for so long as you are a licensee of the Scudder Marks, provided however,
that you agree to use your best efforts to maintain your license to use and
sublicense the Scudder Marks. The Fund agrees that it shall have no right to
sublicense or assign rights to use the Scudder Marks, shall acquire no interest
in the Scudder Marks other than the rights granted herein, that all of the
Fund's uses of the Scudder Marks shall inure to the benefit of Scudder Trust
Company as owner and licensor of the Scudder Marks (the "Trademark Owner"), and
that the Fund shall not challenge the validity of the Scudder Marks or the
Trademark Owner's ownership thereof. The Fund further agrees that all services
and products it offers in connection with the Scudder Marks shall meet
commercially reasonable standards of quality, as may be determined by you or the
Trademark Owner from time to time, provided that you acknowledge that the
services and products the Fund rendered during the one-year period preceding the
date of this Agreement are acceptable. At your reasonable request, the Fund
shall cooperate with you and the Trademark Owner and shall execute and deliver
any and all documents necessary to maintain and protect (including but not
limited to in connection with any trademark infringement action) the Scudder
Marks and/or enter the Fund as a registered user thereof. At such time as this
Agreement or any other investment management agreement shall no longer be in
effect between you (or your successor) and the Fund, or you no longer are a
licensee of the Scudder Marks, the Fund shall (to the extent that, and as soon
as, it lawfully can) cease to use the Portfolio Name or any other name
indicating that it is advised by, managed by or otherwise connected with you (or
any organization which shall have succeeded to your business as investment
manager) or the Trademark Owner. In no event shall the Fund use the Scudder
Marks or any other name or mark confusingly similar thereto (including, but not
limited to, any name or mark that includes the name "Scudder") if this Agreement
or any other investment advisory agreement between you (or your successor) and
the Portfolio is terminated.
3. Portfolio Management Services. As manager of the assets of the
Portfolio, you shall provide continuing investment management of the assets of
the Portfolio in accordance with the investment objectives, policies and
restrictions set forth in the Prospectus and SAI; the applicable provisions of
the 1940 Act and the Internal Revenue Code of 1986, as amended, (the "Code")
relating to regulated investment companies and all rules and regulations
thereunder; and all other applicable federal and state laws and regulations of
which you have knowledge; subject always to policies and instructions adopted by
the Fund's Board of Trustees. In connection therewith, you shall use reasonable
efforts to manage the Portfolio so that it will qualify as a regulated
investment company under Subchapter M of the Code and regulations issued
thereunder. The Portfolio shall have the benefit of the investment analysis and
research, the review of current economic conditions and trends and the
consideration of long-range investment policy generally available to your
investment advisory clients. In managing the Portfolio in accordance with the
requirements set forth in this section 3, you shall be entitled to receive and
act upon advice of counsel to the
2
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Fund or counsel to you. You shall also make available to the Fund promptly upon
request all of the Portfolio's investment records and ledgers as are necessary
to assist the Fund in complying with the requirements of the 1940 Act and other
applicable laws. To the extent required by law, you shall furnish to regulatory
authorities having the requisite authority any information or reports in
connection with the services provided pursuant to this Agreement which may be
requested in order to ascertain whether the operations of the Fund are being
conducted in a manner consistent with applicable laws and regulations.
You shall determine the securities, instruments, investments, currencies,
repurchase agreements, futures, options and other contracts relating to
investments to be purchased, sold or entered into by the Portfolio and place
orders with broker-dealers, foreign currency dealers, futures commission
merchants or others pursuant to your determinations and all in accordance with
Portfolio policies as expressed in the Registration Statement. You shall
determine what portion of the Portfolio's portfolio shall be invested in
securities and other assets and what portion, if any, should be held uninvested.
You shall furnish to the Fund's Board of Trustees periodic reports on the
investment performance of the Portfolio and on the performance of your
obligations pursuant to this Agreement, and you shall supply such additional
reports and information as the Fund's officers or Board of Trustees shall
reasonably request.
4. Administrative Services. In addition to the portfolio management
services specified above in section 3, you shall furnish at your expense for the
use of the Portfolio such office space and facilities in the United States as
the Portfolio may require for its reasonable needs, and you (or one or more of
your affiliates designated by you) shall render to the Fund administrative
services on behalf of the Portfolio necessary for operating as an open-end
investment company and not provided by persons not parties to this Agreement
including, but not limited to, preparing reports to and meeting materials for
the Fund's Board of Trustees and reports and notices to Portfolio shareholders;
supervising, negotiating contractual arrangements with, to the extent
appropriate, and monitoring the performance of, accounting agents, custodians,
depositories, transfer agents and pricing agents, accountants, attorneys,
printers, underwriters, brokers and dealers, insurers and other persons in any
capacity deemed to be necessary or desirable to Portfolio operations; preparing
and making filings with the Securities and Exchange Commission (the "SEC") and
other regulatory and self-regulatory organizations, including, but not limited
to, preliminary and definitive proxy materials, post-effective amendments to the
Registration Statement, semi-annual reports on Form N-SAR and notices pursuant
to Rule 24f-2 under the 1940 Act; overseeing the tabulation of proxies by the
Portfolio's transfer agent; assisting in the preparation and filing of the
Portfolio's federal, state and local tax returns; preparing and filing the
Portfolio's federal excise tax return pursuant to Section 4982 of the Code;
providing assistance with investor and public relations matters; monitoring the
valuation of portfolio securities and the calculation of net asset value;
monitoring the registration of Shares of the Portfolio under applicable federal
and state securities laws; maintaining or causing to be maintained for the
Portfolio all books, records and reports and any other information required
under the 1940 Act, to the extent that such books, records and reports and other
information are not maintained by the Portfolio's custodian or other agents of
the Portfolio; assisting in establishing the accounting policies of the
Portfolio; assisting in the resolution of accounting issues that may arise with
respect to the Portfolio's operations and consulting with the Portfolio's
independent accountants, legal counsel and the Portfolio's other agents as
necessary in connection therewith; establishing and monitoring the Portfolio's
operating expense budgets; reviewing the Portfolio's bills; processing the
payment of bills that have been approved by an authorized person; assisting the
Portfolio in determining the amount of dividends and distributions available to
be paid by the Portfolio to its shareholders, preparing and arranging for the
printing of dividend notices to shareholders, and providing the transfer and
dividend paying agent, the custodian, and the accounting agent with such
information as is required for such parties to effect the payment of dividends
and distributions;
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and otherwise assisting the Fund as it may reasonably request in the conduct of
the Portfolio's business, subject to the direction and control of the Fund's
Board of Trustees. Nothing in this Agreement shall be deemed to shift to you or
to diminish the obligations of any agent of the Portfolio or any other person
not a party to this Agreement which is obligated to provide services to the
Portfolio.
5. Allocation of Charges and Expenses. Except as otherwise specifically
provided in this section 5, you shall pay the compensation and expenses of all
Trustees, officers and executive employees of the Fund (including the
Portfolio's share of payroll taxes) who are affiliated persons of you, and you
shall make available, without expense to the Portfolio, the services of such of
your directors, officers and employees as may duly be elected officers of the
Fund, subject to their individual consent to serve and to any limitations
imposed by law. You shall provide at your expense the portfolio management
services described in section 3 hereof and the administrative services described
in section 4 hereof.
You shall not be required to pay any expenses of the Portfolio other than
those specifically allocated to you in this section 5. In particular, but
without limiting the generality of the foregoing, you shall not be responsible,
except to the extent of the reasonable compensation of such of the Portfolio's
Trustees and officers as are directors, officers or employees of you whose
services may be involved, for the following expenses of the Portfolio:
organization expenses of the Portfolio (including out-of-pocket expenses, but
not including your overhead or employee costs); fees payable to you and to any
other Portfolio advisors or consultants; legal expenses; auditing and accounting
expenses; maintenance of books and records which are required to be maintained
by the Portfolio's custodian or other agents of the Fund; telephone, telex,
facsimile, postage and other communications expenses; taxes and governmental
fees; fees, dues and expenses incurred by the Portfolio in connection with
membership in investment company trade organizations; fees and expenses of the
Portfolio's accounting agent, custodians, subcustodians, transfer agents,
dividend disbursing agents and registrars; payment for portfolio pricing or
valuation services to pricing agents, accountants, bankers and other
specialists, if any; expenses of preparing share certificates and, except as
provided below in this section 5, other expenses in connection with the
issuance, offering, distribution, sale, redemption or repurchase of securities
issued by the Portfolio; expenses relating to investor and public relations;
expenses and fees of registering or qualifying Shares of the Portfolio for sale;
interest charges, bond premiums and other insurance expense; freight, insurance
and other charges in connection with the shipment of the Portfolio's portfolio
securities; the compensation and all expenses (specifically including travel
expenses relating to Fund business) of Trustees, officers and employees of the
Fund who are not affiliated persons of you; brokerage commissions or other costs
of acquiring or disposing of any portfolio securities of the Portfolio; expenses
of printing and distributing reports, notices and dividends to shareholders;
expenses of printing and mailing Prospectuses and SAIs of the Portfolio and
supplements thereto; costs of stationery; any litigation expenses;
indemnification of Trustees and officers of the Fund; costs of shareholders' and
other meetings; and travel expenses (or an appropriate portion thereof) of
Trustees and officers of the Fund who are directors, officers or employees of
you to the extent that such expenses relate to attendance at meetings of the
Board of Trustees of the Fund or any committees thereof or advisors thereto held
outside of Boston, Massachusetts or New York, New York.
You shall not be required to pay expenses of any activity which is
primarily intended to result in sales of Shares of the Portfolio if and to the
extent that (i) such expenses are required to be borne by a principal
underwriter which acts as the distributor of the Portfolio's Shares pursuant to
an underwriting agreement which provides that the underwriter shall assume some
or all of such expenses, or (ii) the Fund on behalf of the Portfolio shall have
adopted a plan in conformity with Rule 12b-1 under the 1940 Act providing that
the Portfolio (or some other party) shall assume some or all of such expenses.
You shall be required to pay such of the foregoing sales expenses as are not
required to be paid by the principal
4
<PAGE>
underwriter pursuant to the underwriting agreement or are not permitted to be
paid by the Portfolio (or some other party) pursuant to such a plan.
6. Management Fee. For all services to be rendered, payments to be made and
costs to be assumed by you as provided in sections 3, 4 and 5 hereof, the Fund
on behalf of the Portfolio shall pay you in United States Dollars on the last
day of each month the unpaid balance of a fee equal to the excess of 1/12 of
0.475 of 1 percent of the average daily net assets as defined below of the
Portfolio for such month over any compensation waived by you from time to time
(as more fully described below). You shall be entitled to receive during any
month such interim payments of your fee hereunder as you shall request, provided
that no such payment shall exceed 75 percent of the amount of your fee then
accrued on the books of the Portfolio and unpaid.
The "average daily net assets" of the Portfolio shall mean the average of
the values placed on the Portfolio's net assets as of 4:00 p.m. (New York time)
on each day on which the net asset value of the Portfolio is determined
consistent with the provisions of Rule 22c-1 under the 1940 Act or, if the
Portfolio lawfully determines the value of its net assets as of some other time
on each business day, as of such time. The value of the net assets of the
Portfolio shall always be determined pursuant to the applicable provisions of
the Declaration and the Registration Statement. If the determination of net
asset value does not take place for any particular day, then for the purposes of
this section 6, the value of the net assets of the Portfolio as last determined
shall be deemed to be the value of its net assets as of 4:00 p.m. (New York
time), or as of such other time as the value of the net assets of the
Portfolio's portfolio may be lawfully determined on that day. If the Portfolio
determines the value of the net assets of its portfolio more than once on any
day, then 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 section 6.
You may waive all or a portion of your fees provided for hereunder and such
waiver shall be treated as a reduction in purchase price of your services. You
shall be contractually bound hereunder by the terms of any publicly announced
waiver of your fee, or any limitation of the Portfolio's expenses, as if such
waiver or limitation were fully set forth herein.
7. Avoidance of Inconsistent Position; Services Not Exclusive. In
connection with purchases or sales of portfolio securities and other investments
for the account of the Portfolio, neither you nor any of your directors,
officers or employees shall 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 and other investments for the
Portfolio's account with brokers or dealers selected by you in accordance with
Portfolio policies as expressed in the Registration Statement. If any occasion
should arise in which you give any advice to clients of yours concerning the
Shares of the Portfolio, you shall 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 services to others. In acting under this Agreement, you
shall be an independent contractor and not an agent of the Fund. Whenever the
Portfolio and one or more other accounts or investment companies advised by the
Manager have available funds for investment, investments suitable and
appropriate for each shall be allocated in accordance with procedures believed
by the Manager to be equitable to each entity. Similarly, opportunities to sell
securities shall be allocated in a manner believed by the Manager to be
equitable. The Portfolio recognizes that in
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<PAGE>
some cases this procedure may adversely affect the size of the position that may
be acquired or disposed of for the Portfolio.
8. Limitation of Liability of Manager. As an inducement to your undertaking
to render services pursuant to this Agreement, the Fund agrees that you shall
not be liable under this Agreement 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, provided that nothing in this Agreement shall be
deemed to protect or purport to protect you against any liability to the Fund,
the Portfolio or its shareholders to which you would otherwise be subject by
reason of willful misfeasance, bad faith or gross negligence in the performance
of your duties, or by reason of your reckless disregard of your obligations and
duties hereunder. Any person, even though also employed by you, who may be or
become an employee of and paid by the Portfolio shall be deemed, when acting
within the scope of his or her employment by the Portfolio, to be acting in such
employment solely for the Portfolio and not as your employee or agent.
9. Duration and Termination of This Agreement. This Agreement shall remain
in force until September 30, 1998, and continue in force from year to year
thereafter, but only so long as such continuance is specifically approved at
least annually (a) by the vote of a majority of the Trustees who are not parties
to this Agreement or interested persons of any party to this Agreement, cast in
person at a meeting called for the purpose of voting on such approval, and (b)
by the Trustees of the Fund, or by the vote of a majority of the outstanding
voting securities of the Portfolio. The aforesaid requirement that continuance
of this Agreement be "specifically approved at least annually" shall be
construed in a manner consistent with the 1940 Act and the rules and regulations
thereunder and any applicable SEC exemptive order therefrom.
This Agreement may be terminated with respect to the Portfolio at any time,
without the payment of any penalty, by the vote of a majority of the outstanding
voting securities of the Portfolio or by the Fund's Board of Trustees on 60
days' written notice to you, or by you on 60 days' written notice to the Fund.
This Agreement shall terminate automatically in the event of its assignment.
10. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against whom enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this Agreement shall be
effective until approved in a manner consistent with the 1940 Act and rules and
regulations thereunder and any applicable SEC exemptive order therefrom.
11. Limitation of Liability for Claims. The Declaration, a copy of which,
together with all amendments thereto, is on file in the Office of the Secretary
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
Portfolio, or Trustee, officer, employee or agent of the Fund, shall be subject
to claims against or obligations of the Fund or of the Portfolio to any extent
whatsoever, but that the Fund estate only shall be liable.
You are hereby expressly put on notice of the limitation of liability as
set forth in the Declaration and you agree that the obligations assumed by the
Fund on behalf of the Portfolio pursuant to this Agreement shall be limited in
all cases to the Portfolio and its assets, and you shall not seek satisfaction
of
6
<PAGE>
any such obligation from the shareholders or any shareholder of the Portfolio or
any other series of the Fund, or from any Trustee, officer, employee or agent of
the Fund. You understand that the rights and obligations of each Portfolio, or
series, under the Declaration are separate and distinct from those of any and
all other series.
12. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or limit 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.
In interpreting the provisions of this Agreement, the definitions contained
in Section 2(a) of the 1940 Act (particularly the definitions of "affiliated
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 SEC by any rule, regulation or order.
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Massachusetts, provided that nothing herein shall be construed
in a manner inconsistent with the 1940 Act, or in a manner which would cause the
Portfolio to fail to comply with the requirements of Subchapter M of the Code.
This Agreement shall supersede all prior investment advisory or management
agreements entered into between you and the Fund on behalf of the Portfolio.
If you are in agreement with the foregoing, please execute 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
effective as of the date of this Agreement.
Yours very truly,
SCUDDER VARIABLE LIFE INVESTMENT
FUND, on behalf of
Growth and Income Portfolio
By: ______________________________
President
7
<PAGE>
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By: ______________________________
Managing Director
8
Exhibit 5(f)(4)
Scudder Variable Life Investment Fund
Two International Place
Boston, Massachusetts 02110
December 31, 1997
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
Investment Management Agreement
Capital Growth Portfolio
Ladies and Gentlemen:
Scudder Variable Life Investment Fund (the "Fund") has been established as
a Massachusetts business trust to engage in the business of an investment
company. Pursuant to the Fund's Declaration of Trust, as amended from
time-to-time (the "Declaration"), the Board of Trustees has divided the Fund's
shares of beneficial interest, without par value, (the "Shares") into separate
series, or funds, including Capital Growth Portfolio (the "Portfolio"). Series
may be abolished and dissolved, and additional series 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 manager of the Portfolio and to provide certain other services, as
more fully set forth below, and you have indicated that you are willing to act
as such investment manager and to perform such services under the terms and
conditions hereinafter set forth. Accordingly, the Fund on behalf of the
Portfolio agrees with you as follows:
1. Delivery of Documents. The Fund engages in the business of investing and
reinvesting the assets of the Portfolio in the manner and in accordance with the
investment objectives, policies and restrictions specified in the currently
effective Prospectus (the "Prospectus") and Statement of Additional Information
(the "SAI") relating to the Portfolio included in the Fund's Registration
Statement on Form N-1A, as amended from time to time, (the "Registration
Statement") filed by the Fund under the Investment Company Act of 1940, as
amended, (the "1940 Act") and the Securities Act of 1933, as amended. Copies of
the documents referred to in the preceding sentence have been furnished to you
by the Fund. The Fund has also furnished you with copies properly certified or
authenticated of each of the following additional documents related to the Fund
and the Portfolio:
(a) The Declaration dated December 11, 1997 as amended to date.
(b) By-Laws of the Fund as in effect on the date hereof (the "By-Laws").
(c) Resolutions of the Trustees of the Fund and the shareholders of the
Portfolio selecting you as investment manager and approving the form of
this Agreement.
<PAGE>
(d) Establishment and Designation of Series of Shares of Beneficial Interest
dated February 9, 1996 relating to the Portfolio.
The Fund will furnish you from time to time with copies, properly certified
or authenticated, of all amendments of or supplements, if any, to the foregoing,
including the Prospectus, the SAI and the Registration Statement.
2. Sublicense to Use the Scudder Trademarks. As exclusive licensee of the
rights to use and sublicense the use of the "Scudder," "Scudder Kemper
Investments, Inc." and "Scudder, Stevens & Clark, Inc." trademarks (together,
the "Scudder Marks"), you hereby grant the Fund a nonexclusive right and
sublicense to use (i) the "Scudder" name and mark as part of the Fund's name
(the "Portfolio Name"), and (ii) the Scudder Marks in connection with the Fund's
investment products and services, in each case only for so long as this
Agreement, any other investment management agreement between you and the Fund,
or any extension, renewal or amendment hereof or thereof remains in effect, and
only for so long as you are a licensee of the Scudder Marks, provided however,
that you agree to use your best efforts to maintain your license to use and
sublicense the Scudder Marks. The Fund agrees that it shall have no right to
sublicense or assign rights to use the Scudder Marks, shall acquire no interest
in the Scudder Marks other than the rights granted herein, that all of the
Fund's uses of the Scudder Marks shall inure to the benefit of Scudder Trust
Company as owner and licensor of the Scudder Marks (the "Trademark Owner"), and
that the Fund shall not challenge the validity of the Scudder Marks or the
Trademark Owner's ownership thereof. The Fund further agrees that all services
and products it offers in connection with the Scudder Marks shall meet
commercially reasonable standards of quality, as may be determined by you or the
Trademark Owner from time to time, provided that you acknowledge that the
services and products the Fund rendered during the one-year period preceding the
date of this Agreement are acceptable. At your reasonable request, the Fund
shall cooperate with you and the Trademark Owner and shall execute and deliver
any and all documents necessary to maintain and protect (including but not
limited to in connection with any trademark infringement action) the Scudder
Marks and/or enter the Fund as a registered user thereof. At such time as this
Agreement or any other investment management agreement shall no longer be in
effect between you (or your successor) and the Fund, or you no longer are a
licensee of the Scudder Marks, the Fund shall (to the extent that, and as soon
as, it lawfully can) cease to use the Portfolio Name or any other name
indicating that it is advised by, managed by or otherwise connected with you (or
any organization which shall have succeeded to your business as investment
manager) or the Trademark Owner. In no event shall the Fund use the Scudder
Marks or any other name or mark confusingly similar thereto (including, but not
limited to, any name or mark that includes the name "Scudder") if this Agreement
or any other investment advisory agreement between you (or your successor) and
the Portfolio is terminated.
3. Portfolio Management Services. As manager of the assets of the
Portfolio, you shall provide continuing investment management of the assets of
the Portfolio in accordance with the investment objectives, policies and
restrictions set forth in the Prospectus and SAI; the applicable provisions of
the 1940 Act and the Internal Revenue Code of 1986, as amended, (the "Code")
relating to regulated investment companies and all rules and regulations
thereunder; and all other applicable federal and state laws and regulations of
which you have knowledge; subject always to policies and instructions adopted by
the Fund's Board of Trustees. In connection therewith, you shall use reasonable
efforts to manage the Portfolio so that it will qualify as a regulated
investment company under Subchapter M of the Code and regulations issued
thereunder. The Portfolio shall have the benefit of the investment analysis and
research, the review of current economic conditions and trends and the
consideration of long-range investment policy generally available to your
investment advisory clients. In managing the Portfolio in accordance with the
requirements set forth in this section 3, you shall be entitled to receive and
act upon advice of counsel to the
2
<PAGE>
Fund or counsel to you. You shall also make available to the Fund promptly upon
request all of the Portfolio's investment records and ledgers as are necessary
to assist the Fund in complying with the requirements of the 1940 Act and other
applicable laws. To the extent required by law, you shall furnish to regulatory
authorities having the requisite authority any information or reports in
connection with the services provided pursuant to this Agreement which may be
requested in order to ascertain whether the operations of the Fund are being
conducted in a manner consistent with applicable laws and regulations.
You shall determine the securities, instruments, investments, currencies,
repurchase agreements, futures, options and other contracts relating to
investments to be purchased, sold or entered into by the Portfolio and place
orders with broker-dealers, foreign currency dealers, futures commission
merchants or others pursuant to your determinations and all in accordance with
Portfolio policies as expressed in the Registration Statement. You shall
determine what portion of the Portfolio's portfolio shall be invested in
securities and other assets and what portion, if any, should be held uninvested.
You shall furnish to the Fund's Board of Trustees periodic reports on the
investment performance of the Portfolio and on the performance of your
obligations pursuant to this Agreement, and you shall supply such additional
reports and information as the Fund's officers or Board of Trustees shall
reasonably request.
4. Administrative Services. In addition to the portfolio management
services specified above in section 3, you shall furnish at your expense for the
use of the Portfolio such office space and facilities in the United States as
the Portfolio may require for its reasonable needs, and you (or one or more of
your affiliates designated by you) shall render to the Fund administrative
services on behalf of the Portfolio necessary for operating as an open-end
investment company and not provided by persons not parties to this Agreement
including, but not limited to, preparing reports to and meeting materials for
the Fund's Board of Trustees and reports and notices to Portfolio shareholders;
supervising, negotiating contractual arrangements with, to the extent
appropriate, and monitoring the performance of, accounting agents, custodians,
depositories, transfer agents and pricing agents, accountants, attorneys,
printers, underwriters, brokers and dealers, insurers and other persons in any
capacity deemed to be necessary or desirable to Portfolio operations; preparing
and making filings with the Securities and Exchange Commission (the "SEC") and
other regulatory and self-regulatory organizations, including, but not limited
to, preliminary and definitive proxy materials, post-effective amendments to the
Registration Statement, semi-annual reports on Form N-SAR and notices pursuant
to Rule 24f-2 under the 1940 Act; overseeing the tabulation of proxies by the
Portfolio's transfer agent; assisting in the preparation and filing of the
Portfolio's federal, state and local tax returns; preparing and filing the
Portfolio's federal excise tax return pursuant to Section 4982 of the Code;
providing assistance with investor and public relations matters; monitoring the
valuation of portfolio securities and the calculation of net asset value;
monitoring the registration of Shares of the Portfolio under applicable federal
and state securities laws; maintaining or causing to be maintained for the
Portfolio all books, records and reports and any other information required
under the 1940 Act, to the extent that such books, records and reports and other
information are not maintained by the Portfolio's custodian or other agents of
the Portfolio; assisting in establishing the accounting policies of the
Portfolio; assisting in the resolution of accounting issues that may arise with
respect to the Portfolio's operations and consulting with the Portfolio's
independent accountants, legal counsel and the Portfolio's other agents as
necessary in connection therewith; establishing and monitoring the Portfolio's
operating expense budgets; reviewing the Portfolio's bills; processing the
payment of bills that have been approved by an authorized person; assisting the
Portfolio in determining the amount of dividends and distributions available to
be paid by the Portfolio to its shareholders, preparing and arranging for the
printing of dividend notices to shareholders, and providing the transfer and
dividend paying agent, the custodian, and the accounting agent with such
information as is required for such parties to effect the payment of dividends
and distributions;
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<PAGE>
and otherwise assisting the Fund as it may reasonably request in the conduct of
the Portfolio's business, subject to the direction and control of the Fund's
Board of Trustees. Nothing in this Agreement shall be deemed to shift to you or
to diminish the obligations of any agent of the Portfolio or any other person
not a party to this Agreement which is obligated to provide services to the
Portfolio.
5. Allocation of Charges and Expenses. Except as otherwise specifically
provided in this section 5, you shall pay the compensation and expenses of all
Trustees, officers and executive employees of the Fund (including the
Portfolio's share of payroll taxes) who are affiliated persons of you, and you
shall make available, without expense to the Portfolio, the services of such of
your directors, officers and employees as may duly be elected officers of the
Fund, subject to their individual consent to serve and to any limitations
imposed by law. You shall provide at your expense the portfolio management
services described in section 3 hereof and the administrative services described
in section 4 hereof.
You shall not be required to pay any expenses of the Portfolio other than
those specifically allocated to you in this section 5. In particular, but
without limiting the generality of the foregoing, you shall not be responsible,
except to the extent of the reasonable compensation of such of the Portfolio's
Trustees and officers as are directors, officers or employees of you whose
services may be involved, for the following expenses of the Portfolio:
organization expenses of the Portfolio (including out-of-pocket expenses, but
not including your overhead or employee costs); fees payable to you and to any
other Portfolio advisors or consultants; legal expenses; auditing and accounting
expenses; maintenance of books and records which are required to be maintained
by the Portfolio's custodian or other agents of the Fund; telephone, telex,
facsimile, postage and other communications expenses; taxes and governmental
fees; fees, dues and expenses incurred by the Portfolio in connection with
membership in investment company trade organizations; fees and expenses of the
Portfolio's accounting agent, custodians, subcustodians, transfer agents,
dividend disbursing agents and registrars; payment for portfolio pricing or
valuation services to pricing agents, accountants, bankers and other
specialists, if any; expenses of preparing share certificates and, except as
provided below in this section 5, other expenses in connection with the
issuance, offering, distribution, sale, redemption or repurchase of securities
issued by the Portfolio; expenses relating to investor and public relations;
expenses and fees of registering or qualifying Shares of the Portfolio for sale;
interest charges, bond premiums and other insurance expense; freight, insurance
and other charges in connection with the shipment of the Portfolio's portfolio
securities; the compensation and all expenses (specifically including travel
expenses relating to Fund business) of Trustees, officers and employees of the
Fund who are not affiliated persons of you; brokerage commissions or other costs
of acquiring or disposing of any portfolio securities of the Portfolio; expenses
of printing and distributing reports, notices and dividends to shareholders;
expenses of printing and mailing Prospectuses and SAIs of the Portfolio and
supplements thereto; costs of stationery; any litigation expenses;
indemnification of Trustees and officers of the Fund; costs of shareholders' and
other meetings; and travel expenses (or an appropriate portion thereof) of
Trustees and officers of the Fund who are directors, officers or employees of
you to the extent that such expenses relate to attendance at meetings of the
Board of Trustees of the Fund or any committees thereof or advisors thereto held
outside of Boston, Massachusetts or New York, New York.
You shall not be required to pay expenses of any activity which is
primarily intended to result in sales of Shares of the Portfolio if and to the
extent that (i) such expenses are required to be borne by a principal
underwriter which acts as the distributor of the Portfolio's Shares pursuant to
an underwriting agreement which provides that the underwriter shall assume some
or all of such expenses, or (ii) the Fund on behalf of the Portfolio shall have
adopted a plan in conformity with Rule 12b-1 under the 1940 Act providing that
the Portfolio (or some other party) shall assume some or all of such expenses.
You shall be required to pay such of the foregoing sales expenses as are not
required to be paid by the principal
4
<PAGE>
underwriter pursuant to the underwriting agreement or are not permitted to be
paid by the Portfolio (or some other party) pursuant to such a plan.
6. Management Fee. For all services to be rendered, payments to be made and
costs to be assumed by you as provided in sections 3, 4 and 5 hereof, the Fund
on behalf of the Portfolio shall pay you in United States Dollars on the last
day of each month the unpaid balance of a fee equal to the excess of 1/12 of
.475 of 1 percent of the average daily net assets as defined below of the
Portfolio for such month; provided that, for any calendar month during which the
average of such values exceeds $500 million the fee payable for that month based
on the portion of the average of such values in excess of $500 million shall be
1/12 of 0.45 of 1 percent of such portion over any compensation waived by you
from time to time (as more fully described below). You shall be entitled to
receive during any month such interim payments of your fee hereunder as you
shall request, provided that no such payment shall exceed 75 percent of the
amount of your fee then accrued on the books of the Portfolio and unpaid.
The "average daily net assets" of the Portfolio shall mean the average of
the values placed on the Portfolio's net assets as of 4:00 p.m. (New York time)
on each day on which the net asset value of the Portfolio is determined
consistent with the provisions of Rule 22c-1 under the 1940 Act or, if the
Portfolio lawfully determines the value of its net assets as of some other time
on each business day, as of such time. The value of the net assets of the
Portfolio shall always be determined pursuant to the applicable provisions of
the Declaration and the Registration Statement. If the determination of net
asset value does not take place for any particular day, then for the purposes of
this section 6, the value of the net assets of the Portfolio as last determined
shall be deemed to be the value of its net assets as of 4:00 p.m. (New York
time), or as of such other time as the value of the net assets of the
Portfolio's portfolio may be lawfully determined on that day. If the Portfolio
determines the value of the net assets of its portfolio more than once on any
day, then 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 section 6.
You may waive all or a portion of your fees provided for hereunder and such
waiver shall be treated as a reduction in purchase price of your services. You
shall be contractually bound hereunder by the terms of any publicly announced
waiver of your fee, or any limitation of the Portfolio's expenses, as if such
waiver or limitation were fully set forth herein.
7. Avoidance of Inconsistent Position; Services Not Exclusive. In
connection with purchases or sales of portfolio securities and other investments
for the account of the Portfolio, neither you nor any of your directors,
officers or employees shall 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 and other investments for the
Portfolio's account with brokers or dealers selected by you in accordance with
Portfolio policies as expressed in the Registration Statement. If any occasion
should arise in which you give any advice to clients of yours concerning the
Shares of the Portfolio, you shall 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 services to others. In acting under this Agreement, you
shall be an independent contractor and not an agent of the Fund. Whenever the
Portfolio and one or more other accounts or investment companies advised by the
Manager have available funds for investment, investments suitable and
appropriate for each shall be allocated in accordance with
5
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procedures believed by the Manager to be equitable to each entity. Similarly,
opportunities to sell securities shall be allocated in a manner believed by the
Manager to be equitable. The Portfolio recognizes that in some cases this
procedure may adversely affect the size of the position that may be acquired or
disposed of for the Portfolio.
8. Limitation of Liability of Manager. As an inducement to your undertaking
to render services pursuant to this Agreement, the Fund agrees that you shall
not be liable under this Agreement 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, provided that nothing in this Agreement shall be
deemed to protect or purport to protect you against any liability to the Fund,
the Portfolio or its shareholders to which you would otherwise be subject by
reason of willful misfeasance, bad faith or gross negligence in the performance
of your duties, or by reason of your reckless disregard of your obligations and
duties hereunder. Any person, even though also employed by you, who may be or
become an employee of and paid by the Portfolio shall be deemed, when acting
within the scope of his or her employment by the Portfolio, to be acting in such
employment solely for the Portfolio and not as your employee or agent.
9. Duration and Termination of This Agreement. This Agreement shall remain
in force until September 30, 1998, and continue in force from year to year
thereafter, but only so long as such continuance is specifically approved at
least annually (a) by the vote of a majority of the Trustees who are not parties
to this Agreement or interested persons of any party to this Agreement, cast in
person at a meeting called for the purpose of voting on such approval, and (b)
by the Trustees of the Fund, or by the vote of a majority of the outstanding
voting securities of the Portfolio. The aforesaid requirement that continuance
of this Agreement be "specifically approved at least annually" shall be
construed in a manner consistent with the 1940 Act and the rules and regulations
thereunder and any applicable SEC exemptive order therefrom.
This Agreement may be terminated with respect to the Portfolio at any time,
without the payment of any penalty, by the vote of a majority of the outstanding
voting securities of the Portfolio or by the Fund's Board of Trustees on 60
days' written notice to you, or by you on 60 days' written notice to the Fund.
This Agreement shall terminate automatically in the event of its assignment.
10. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against whom enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this Agreement shall be
effective until approved in a manner consistent with the 1940 Act and rules and
regulations thereunder and any applicable SEC exemptive order therefrom.
11. Limitation of Liability for Claims. The Declaration, a copy of which,
together with all amendments thereto, is on file in the Office of the Secretary
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
Portfolio, or Trustee, officer, employee or agent of the Fund, shall be subject
to claims against or obligations of the Fund or of the Portfolio to any extent
whatsoever, but that the Fund estate only shall be liable.
6
<PAGE>
You are hereby expressly put on notice of the limitation of liability as
set forth in the Declaration and you agree that the obligations assumed by the
Fund on behalf of the Portfolio pursuant to this Agreement shall be limited in
all cases to the Portfolio and its assets, and you shall not seek satisfaction
of any such obligation from the shareholders or any shareholder of the Portfolio
or any other series of the Fund, or from any Trustee, officer, employee or agent
of the Fund. You understand that the rights and obligations of each Portfolio,
or series, under the Declaration are separate and distinct from those of any and
all other series.
12. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or limit 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.
In interpreting the provisions of this Agreement, the definitions contained
in Section 2(a) of the 1940 Act (particularly the definitions of "affiliated
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 SEC by any rule, regulation or order.
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Massachusetts, provided that nothing herein shall be construed
in a manner inconsistent with the 1940 Act, or in a manner which would cause the
Portfolio to fail to comply with the requirements of Subchapter M of the Code.
This Agreement shall supersede all prior investment advisory or management
agreements entered into between you and the Fund on behalf of the Portfolio.
If you are in agreement with the foregoing, please execute 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
effective as of the date of this Agreement.
Yours very truly,
SCUDDER VARIABLE LIFE INVESTMENT
FUND, on behalf of
Capital Growth Portfolio
By: ______________________________
President
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The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By: ______________________________
Managing Director
8
Exhibit 5(f)(5)
Scudder Variable Life Investment Fund
Two International Place
Boston, Massachusetts 02110
December 31, 1997
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
Investment Management Agreement
Global Discovery Portfolio
Ladies and Gentlemen:
Scudder Variable Life Investment Fund (the "Fund") has been established as
a Massachusetts business trust to engage in the business of an investment
company. Pursuant to the Fund's Declaration of Trust, as amended from
time-to-time (the "Declaration"), the Board of Trustees has divided the Fund's
shares of beneficial interest, without par value, (the "Shares") into separate
series, or funds, including Global Discovery Portfolio (the "Portfolio"). Series
may be abolished and dissolved, and additional series 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 manager of the Portfolio and to provide certain other services, as
more fully set forth below, and you have indicated that you are willing to act
as such investment manager and to perform such services under the terms and
conditions hereinafter set forth. Accordingly, the Fund on behalf of the
Portfolio agrees with you as follows:
1. Delivery of Documents. The Fund engages in the business of investing and
reinvesting the assets of the Portfolio in the manner and in accordance with the
investment objectives, policies and restrictions specified in the currently
effective Prospectus (the "Prospectus") and Statement of Additional Information
(the "SAI") relating to the Portfolio included in the Fund's Registration
Statement on Form N-1A, as amended from time to time, (the "Registration
Statement") filed by the Fund under the Investment Company Act of 1940, as
amended, (the "1940 Act") and the Securities Act of 1933, as amended. Copies of
the documents referred to in the preceding sentence have been furnished to you
by the Fund. The Fund has also furnished you with copies properly certified or
authenticated of each of the following additional documents related to the Fund
and the Portfolio:
(a) The Declaration dated December 11, 1997, as amended to date.
(b) By-Laws of the Fund as in effect on the date hereof (the "By-Laws").
(c) Resolutions of the Trustees of the Fund and the shareholders of the
Portfolio selecting you as investment manager and approving the form of
this Agreement.
<PAGE>
(d) Establishment and Designation of Series of Shares of Beneficial Interest
dated __________, 19__ relating to the Portfolio.
The Fund will furnish you from time to time with copies, properly certified
or authenticated, of all amendments of or supplements, if any, to the foregoing,
including the Prospectus, the SAI and the Registration Statement.
2. Sublicense to Use the Scudder Trademarks. As exclusive licensee of the
rights to use and sublicense the use of the "Scudder," "Scudder Kemper
Investments, Inc." and "Scudder, Stevens & Clark, Inc." trademarks (together,
the "Scudder Marks"), you hereby grant the Fund a nonexclusive right and
sublicense to use (i) the "Scudder" name and mark as part of the Fund's name
(the "Portfolio Name"), and (ii) the Scudder Marks in connection with the Fund's
investment products and services, in each case only for so long as this
Agreement, any other investment management agreement between you and the Fund,
or any extension, renewal or amendment hereof or thereof remains in effect, and
only for so long as you are a licensee of the Scudder Marks, provided however,
that you agree to use your best efforts to maintain your license to use and
sublicense the Scudder Marks. The Fund agrees that it shall have no right to
sublicense or assign rights to use the Scudder Marks, shall acquire no interest
in the Scudder Marks other than the rights granted herein, that all of the
Fund's uses of the Scudder Marks shall inure to the benefit of Scudder Trust
Company as owner and licensor of the Scudder Marks (the "Trademark Owner"), and
that the Fund shall not challenge the validity of the Scudder Marks or the
Trademark Owner's ownership thereof. The Fund further agrees that all services
and products it offers in connection with the Scudder Marks shall meet
commercially reasonable standards of quality, as may be determined by you or the
Trademark Owner from time to time, provided that you acknowledge that the
services and products the Fund rendered during the one-year period preceding the
date of this Agreement are acceptable. At your reasonable request, the Fund
shall cooperate with you and the Trademark Owner and shall execute and deliver
any and all documents necessary to maintain and protect (including but not
limited to in connection with any trademark infringement action) the Scudder
Marks and/or enter the Fund as a registered user thereof. At such time as this
Agreement or any other investment management agreement shall no longer be in
effect between you (or your successor) and the Fund, or you no longer are a
licensee of the Scudder Marks, the Fund shall (to the extent that, and as soon
as, it lawfully can) cease to use the Portfolio Name or any other name
indicating that it is advised by, managed by or otherwise connected with you (or
any organization which shall have succeeded to your business as investment
manager) or the Trademark Owner. In no event shall the Fund use the Scudder
Marks or any other name or mark confusingly similar thereto (including, but not
limited to, any name or mark that includes the name "Scudder") if this Agreement
or any other investment advisory agreement between you (or your successor) and
the Portfolio is terminated.
3. Portfolio Management Services. As manager of the assets of the
Portfolio, you shall provide continuing investment management of the assets of
the Portfolio in accordance with the investment objectives, policies and
restrictions set forth in the Prospectus and SAI; the applicable provisions of
the 1940 Act and the Internal Revenue Code of 1986, as amended, (the "Code")
relating to regulated investment companies and all rules and regulations
thereunder; and all other applicable federal and state laws and regulations of
which you have knowledge; subject always to policies and instructions adopted by
the Fund's Board of Trustees. In connection therewith, you shall use reasonable
efforts to manage the Portfolio so that it will qualify as a regulated
investment company under Subchapter M of the Code and regulations issued
thereunder. The Portfolio shall have the benefit of the investment analysis and
research, the review of current economic conditions and trends and the
consideration of long-range investment policy generally available to your
investment advisory clients. In managing the Portfolio in accordance with the
requirements set forth in this section 3, you shall be entitled to receive and
act upon advice of counsel to the
2
<PAGE>
Fund or counsel to you. You shall also make available to the Fund promptly
upon request all of the Portfolio's investment records and ledgers as are
necessary to assist the Fund in complying with the requirements of the 1940 Act
and other applicable laws. To the extent required by law, you shall furnish to
regulatory authorities having the requisite authority any information or reports
in connection with the services provided pursuant to this Agreement which may be
requested in order to ascertain whether the operations of the Fund are being
conducted in a manner consistent with applicable laws and regulations.
You shall determine the securities, instruments, investments, currencies,
repurchase agreements, futures, options and other contracts relating to
investments to be purchased, sold or entered into by the Portfolio and place
orders with broker-dealers, foreign currency dealers, futures commission
merchants or others pursuant to your determinations and all in accordance with
Portfolio policies as expressed in the Registration Statement. You shall
determine what portion of the Portfolio's portfolio shall be invested in
securities and other assets and what portion, if any, should be held uninvested.
You shall furnish to the Fund's Board of Trustees periodic reports on the
investment performance of the Portfolio and on the performance of your
obligations pursuant to this Agreement, and you shall supply such additional
reports and information as the Fund's officers or Board of Trustees shall
reasonably request.
4. Administrative Services. In addition to the portfolio management
services specified above in section 3, you shall furnish at your expense for the
use of the Portfolio such office space and facilities in the United States as
the Portfolio may require for its reasonable needs, and you (or one or more of
your affiliates designated by you) shall render to the Fund administrative
services on behalf of the Portfolio necessary for operating as an open-end
investment company and not provided by persons not parties to this Agreement
including, but not limited to, preparing reports to and meeting materials for
the Fund's Board of Trustees and reports and notices to Portfolio shareholders;
supervising, negotiating contractual arrangements with, to the extent
appropriate, and monitoring the performance of, accounting agents, custodians,
depositories, transfer agents and pricing agents, accountants, attorneys,
printers, underwriters, brokers and dealers, insurers and other persons in any
capacity deemed to be necessary or desirable to Portfolio operations; preparing
and making filings with the Securities and Exchange Commission (the "SEC") and
other regulatory and self-regulatory organizations, including, but not limited
to, preliminary and definitive proxy materials, post-effective amendments to the
Registration Statement, semi-annual reports on Form N-SAR and notices pursuant
to Rule 24f-2 under the 1940 Act; overseeing the tabulation of proxies by the
Portfolio's transfer agent; assisting in the preparation and filing of the
Portfolio's federal, state and local tax returns; preparing and filing the
Portfolio's federal excise tax return pursuant to Section 4982 of the Code;
providing assistance with investor and public relations matters; monitoring the
valuation of portfolio securities and the calculation of net asset value;
monitoring the registration of Shares of the Portfolio under applicable federal
and state securities laws; maintaining or causing to be maintained for the
Portfolio all books, records and reports and any other information required
under the 1940 Act, to the extent that such books, records and reports and other
information are not maintained by the Portfolio's custodian or other agents of
the Portfolio; assisting in establishing the accounting policies of the
Portfolio; assisting in the resolution of accounting issues that may arise with
respect to the Portfolio's operations and consulting with the Portfolio's
independent accountants, legal counsel and the Portfolio's other agents as
necessary in connection therewith; establishing and monitoring the Portfolio's
operating expense budgets; reviewing the Portfolio's bills; processing the
payment of bills that have been approved by an authorized person; assisting the
Portfolio in determining the amount of dividends and distributions available to
be paid by the Portfolio to its shareholders, preparing and arranging for the
printing of dividend notices to shareholders, and providing the transfer and
dividend paying agent, the custodian, and the accounting agent with such
information as is required for such parties to effect the payment of dividends
and distributions;
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<PAGE>
and otherwise assisting the Fund as it may reasonably request in the
conduct of the Portfolio's business, subject to the direction and control of the
Fund's Board of Trustees. Nothing in this Agreement shall be deemed to shift to
you or to diminish the obligations of any agent of the Portfolio or any other
person not a party to this Agreement which is obligated to provide services to
the Portfolio.
5. Allocation of Charges and Expenses. Except as otherwise specifically
provided in this section 5, you shall pay the compensation and expenses of all
Trustees, officers and executive employees of the Fund (including the
Portfolio's share of payroll taxes) who are affiliated persons of you, and you
shall make available, without expense to the Portfolio, the services of such of
your directors, officers and employees as may duly be elected officers of the
Fund, subject to their individual consent to serve and to any limitations
imposed by law. You shall provide at your expense the portfolio management
services described in section 3 hereof and the administrative services described
in section 4 hereof.
You shall not be required to pay any expenses of the Portfolio other than
those specifically allocated to you in this section 5. In particular, but
without limiting the generality of the foregoing, you shall not be responsible,
except to the extent of the reasonable compensation of such of the Portfolio's
Trustees and officers as are directors, officers or employees of you whose
services may be involved, for the following expenses of the Portfolio:
organization expenses of the Portfolio (including out-of-pocket expenses, but
not including your overhead or employee costs); fees payable to you and to any
other Portfolio advisors or consultants; legal expenses; auditing and accounting
expenses; maintenance of books and records which are required to be maintained
by the Portfolio's custodian or other agents of the Fund; telephone, telex,
facsimile, postage and other communications expenses; taxes and governmental
fees; fees, dues and expenses incurred by the Portfolio in connection with
membership in investment company trade organizations; fees and expenses of the
Portfolio's accounting agent, custodians, subcustodians, transfer agents,
dividend disbursing agents and registrars; payment for portfolio pricing or
valuation services to pricing agents, accountants, bankers and other
specialists, if any; expenses of preparing share certificates and, except as
provided below in this section 5, other expenses in connection with the
issuance, offering, distribution, sale, redemption or repurchase of securities
issued by the Portfolio; expenses relating to investor and public relations;
expenses and fees of registering or qualifying Shares of the Portfolio for sale;
interest charges, bond premiums and other insurance expense; freight, insurance
and other charges in connection with the shipment of the Portfolio's portfolio
securities; the compensation and all expenses (specifically including travel
expenses relating to Fund business) of Trustees, officers and employees of the
Fund who are not affiliated persons of you; brokerage commissions or other costs
of acquiring or disposing of any portfolio securities of the Portfolio; expenses
of printing and distributing reports, notices and dividends to shareholders;
expenses of printing and mailing Prospectuses and SAIs of the Portfolio and
supplements thereto; costs of stationery; any litigation expenses;
indemnification of Trustees and officers of the Fund; costs of shareholders' and
other meetings; and travel expenses (or an appropriate portion thereof) of
Trustees and officers of the Fund who are directors, officers or employees of
you to the extent that such expenses relate to attendance at meetings of the
Board of Trustees of the Fund or any committees thereof or advisors thereto held
outside of Boston, Massachusetts or New York, New York.
You shall not be required to pay expenses of any activity which is
primarily intended to result in sales of Shares of the Portfolio if and to the
extent that (i) such expenses are required to be borne by a principal
underwriter which acts as the distributor of the Portfolio's Shares pursuant to
an underwriting agreement which provides that the underwriter shall assume some
or all of such expenses, or (ii) the Fund on behalf of the Portfolio shall have
adopted a plan in conformity with Rule 12b-1 under the 1940 Act providing that
the Portfolio (or some other party) shall assume some or all of such expenses.
You shall be required to pay such of the foregoing sales expenses as are not
4
<PAGE>
required to be paid by the principal underwriter pursuant to the underwriting
agreement or are not permitted to be paid by the Portfolio (or some other party)
pursuant to such a plan.
6. Management Fee. For all services to be rendered, payments to be made and
costs to be assumed by you as provided in sections 3, 4 and 5 hereof, the Fund
on behalf of the Portfolio shall pay you in United States Dollars on the last
day of each month the unpaid balance of a fee equal to the excess of 1/12 of
0.975 of 1 percent of the average daily net assets as defined below of the
Portfolio for such month over any compensation waived by you from time to time.
You shall be entitled to receive during any month such interim payments of your
fee hereunder as you shall request, provided that no such payment shall exceed
75 percent of the amount of your fee then accrued on the books of the Portfolio
and unpaid.
The "average daily net assets" of the Portfolio shall mean the average of
the values placed on the Portfolio's net assets as of 4:00 p.m. (New York time)
on each day on which the net asset value of the Portfolio is determined
consistent with the provisions of Rule 22c-1 under the 1940 Act or, if the
Portfolio lawfully determines the value of its net assets as of some other time
on each business day, as of such time. The value of the net assets of the
Portfolio shall always be determined pursuant to the applicable provisions of
the Declaration and the Registration Statement. If the determination of net
asset value does not take place for any particular day, then for the purposes of
this section 6, the value of the net assets of the Portfolio as last determined
shall be deemed to be the value of its net assets as of 4:00 p.m. (New York
time), or as of such other time as the value of the net assets of the
Portfolio's portfolio may be lawfully determined on that day. If the Portfolio
determines the value of the net assets of its portfolio more than once on any
day, then 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 section 6.
You may waive all or a portion of your fees provided for hereunder and such
waiver shall be treated as a reduction in purchase price of your services. You
shall be contractually bound hereunder by the terms of any publicly announced
waiver of your fee, or any limitation of the Portfolio's expenses, as if such
waiver or limitation were fully set forth herein.
7. Avoidance of Inconsistent Position; Services Not Exclusive. In
connection with purchases or sales of portfolio securities and other investments
for the account of the Portfolio, neither you nor any of your directors,
officers or employees shall 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 and other investments for the
Portfolio's account with brokers or dealers selected by you in accordance with
Portfolio policies as expressed in the Registration Statement. If any occasion
should arise in which you give any advice to clients of yours concerning the
Shares of the Portfolio, you shall 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 services to others. In acting under this Agreement, you
shall be an independent contractor and not an agent of the Fund. Whenever the
Portfolio and one or more other accounts or investment companies advised by the
Manager have available funds for investment, investments suitable and
appropriate for each shall be allocated in accordance with procedures believed
by the Manager to be equitable to each entity. Similarly, opportunities to sell
securities shall be allocated in a manner believed by the Manager to be
equitable. The Portfolio recognizes that in some cases this procedure may
adversely affect the size of the position that may be acquired or disposed of
for the Portfolio.
5
<PAGE>
8. Limitation of Liability of Manager. As an inducement to your undertaking
to render services pursuant to this Agreement, the Fund agrees that you shall
not be liable under this Agreement 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, provided that nothing in this Agreement shall be
deemed to protect or purport to protect you against any liability to the Fund,
the Portfolio or its shareholders to which you would otherwise be subject by
reason of willful misfeasance, bad faith or gross negligence in the performance
of your duties, or by reason of your reckless disregard of your obligations and
duties hereunder. Any person, even though also employed by you, who may be or
become an employee of and paid by the Portfolio shall be deemed, when acting
within the scope of his or her employment by the Portfolio, to be acting in such
employment solely for the Portfolio and not as your employee or agent.
9. Duration and Termination of This Agreement. This Agreement shall remain
in force until September 30, 19__, and continue in force from year to year
thereafter, but only so long as such continuance is specifically approved at
least annually (a) by the vote of a majority of the Trustees who are not parties
to this Agreement or interested persons of any party to this Agreement, cast in
person at a meeting called for the purpose of voting on such approval, and (b)
by the Trustees of the Fund, or by the vote of a majority of the outstanding
voting securities of the Portfolio. The aforesaid requirement that continuance
of this Agreement be "specifically approved at least annually" shall be
construed in a manner consistent with the 1940 Act and the rules and regulations
thereunder and any applicable SEC exemptive order therefrom.
This Agreement may be terminated with respect to the Portfolio at any time,
without the payment of any penalty, by the vote of a majority of the outstanding
voting securities of the Portfolio or by the Fund's Board of Trustees on 60
days' written notice to you, or by you on 60 days' written notice to the Fund.
This Agreement shall terminate automatically in the event of its assignment.
10. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against whom enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this Agreement shall be
effective until approved in a manner consistent with the 1940 Act and rules and
regulations thereunder and any applicable SEC exemptive order therefrom.
11. Limitation of Liability for Claims. The Declaration, a copy of which,
together with all amendments thereto, is on file in the Office of the Secretary
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
Portfolio, or Trustee, officer, employee or agent of the Fund, shall be subject
to claims against or obligations of the Fund or of the Portfolio to any extent
whatsoever, but that the Fund estate only shall be liable.
You are hereby expressly put on notice of the limitation of liability as
set forth in the Declaration and you agree that the obligations assumed by the
Fund on behalf of the Portfolio pursuant to this Agreement shall be limited in
all cases to the Portfolio and its assets, and you shall not seek satisfaction
of any such obligation from the shareholders or any shareholder of the Portfolio
or any other series of the Fund, or from any Trustee, officer, employee or agent
of the Fund. You understand that the rights and
6
<PAGE>
obligations of each Portfolio, or series, under the Declaration are
separate and distinct from those of any and all other series.
12. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or limit 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.
In interpreting the provisions of this Agreement, the definitions contained
in Section 2(a) of the 1940 Act (particularly the definitions of "affiliated
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 SEC by any rule, regulation or order.
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Massachusetts, provided that nothing herein shall be construed
in a manner inconsistent with the 1940 Act, or in a manner which would cause the
Portfolio to fail to comply with the requirements of Subchapter M of the Code.
This Agreement shall supersede all prior investment advisory or management
agreements entered into between you and the Fund on behalf of the Portfolio.
If you are in agreement with the foregoing, please execute 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
effective as of the date of this Agreement.
Yours very truly,
SCUDDER VARIABLE LIFE INVESTMENT
FUND, on behalf of
Global Discovery Portfolio
By:
------------------------------
President
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By:
------------------------------
Managing Director
7
Exhibit 5(f)(6)
Scudder Variable Life Investment Fund
Two International Place
Boston, Massachusetts 02110
December 31, 1997
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
Investment Management Agreement
International Portfolio
Ladies and Gentlemen:
Scudder Variable Life Investment Fund (the "Fund") has been established as
a Massachusetts business trust to engage in the business of an investment
company. Pursuant to the Fund's Declaration of Trust, as amended from
time-to-time (the "Declaration"), the Board of Trustees has divided the Fund's
shares of beneficial interest, without par value, (the "Shares") into separate
series, or funds, including International Portfolio (the "Portfolio"). Series
may be abolished and dissolved, and additional series 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 manager of the Portfolio and to provide certain other services, as
more fully set forth below, and you have indicated that you are willing to act
as such investment manager and to perform such services under the terms and
conditions hereinafter set forth. Accordingly, the Fund on behalf of the
Portfolio agrees with you as follows:
1. Delivery of Documents. The Fund engages in the business of investing and
reinvesting the assets of the Portfolio in the manner and in accordance with the
investment objectives, policies and restrictions specified in the currently
effective Prospectus (the "Prospectus") and Statement of Additional Information
(the "SAI") relating to the Portfolio included in the Fund's Registration
Statement on Form N-1A, as amended from time to time, (the "Registration
Statement") filed by the Fund under the Investment Company Act of 1940, as
amended, (the "1940 Act") and the Securities Act of 1933, as amended. Copies of
the documents referred to in the preceding sentence have been furnished to you
by the Fund. The Fund has also furnished you with copies properly certified or
authenticated of each of the following additional documents related to the Fund
and the Portfolio:
(a) The Declaration dated December 11, 1997 as amended to date.
(b) By-Laws of the Fund as in effect on the date hereof (the "By-Laws").
(c) Resolutions of the Trustees of the Fund and the shareholders of the
Portfolio selecting you as investment manager and approving the form of
this Agreement.
<PAGE>
(d) Establishment and Designation of Series of Shares of Beneficial Interest
dated February 9, 1996 relating to the Portfolio.
The Fund will furnish you from time to time with copies, properly certified
or authenticated, of all amendments of or supplements, if any, to the foregoing,
including the Prospectus, the SAI and the Registration Statement.
2. Sublicense to Use the Scudder Trademarks. As exclusive licensee of the
rights to use and sublicense the use of the "Scudder," "Scudder Kemper
Investments, Inc." and "Scudder, Stevens & Clark, Inc." trademarks (together,
the "Scudder Marks"), you hereby grant the Fund a nonexclusive right and
sublicense to use (i) the "Scudder" name and mark as part of the Fund's name
(the "Portfolio Name"), and (ii) the Scudder Marks in connection with the Fund's
investment products and services, in each case only for so long as this
Agreement, any other investment management agreement between you and the Fund,
or any extension, renewal or amendment hereof or thereof remains in effect, and
only for so long as you are a licensee of the Scudder Marks, provided however,
that you agree to use your best efforts to maintain your license to use and
sublicense the Scudder Marks. The Fund agrees that it shall have no right to
sublicense or assign rights to use the Scudder Marks, shall acquire no interest
in the Scudder Marks other than the rights granted herein, that all of the
Fund's uses of the Scudder Marks shall inure to the benefit of Scudder Trust
Company as owner and licensor of the Scudder Marks (the "Trademark Owner"), and
that the Fund shall not challenge the validity of the Scudder Marks or the
Trademark Owner's ownership thereof. The Fund further agrees that all services
and products it offers in connection with the Scudder Marks shall meet
commercially reasonable standards of quality, as may be determined by you or the
Trademark Owner from time to time, provided that you acknowledge that the
services and products the Fund rendered during the one-year period preceding the
date of this Agreement are acceptable. At your reasonable request, the Fund
shall cooperate with you and the Trademark Owner and shall execute and deliver
any and all documents necessary to maintain and protect (including but not
limited to in connection with any trademark infringement action) the Scudder
Marks and/or enter the Fund as a registered user thereof. At such time as this
Agreement or any other investment management agreement shall no longer be in
effect between you (or your successor) and the Fund, or you no longer are a
licensee of the Scudder Marks, the Fund shall (to the extent that, and as soon
as, it lawfully can) cease to use the Portfolio Name or any other name
indicating that it is advised by, managed by or otherwise connected with you (or
any organization which shall have succeeded to your business as investment
manager) or the Trademark Owner. In no event shall the Fund use the Scudder
Marks or any other name or mark confusingly similar thereto (including, but not
limited to, any name or mark that includes the name "Scudder") if this Agreement
or any other investment advisory agreement between you (or your successor) and
the Portfolio is terminated.
3. Portfolio Management Services. As manager of the assets of the
Portfolio, you shall provide continuing investment management of the assets of
the Portfolio in accordance with the investment objectives, policies and
restrictions set forth in the Prospectus and SAI; the applicable provisions of
the 1940 Act and the Internal Revenue Code of 1986, as amended, (the "Code")
relating to regulated investment companies and all rules and regulations
thereunder; and all other applicable federal and state laws and regulations of
which you have knowledge; subject always to policies and instructions adopted by
the Fund's Board of Trustees. In connection therewith, you shall use reasonable
efforts to manage the Portfolio so that it will qualify as a regulated
investment company under Subchapter M of the Code and regulations issued
thereunder. The Portfolio shall have the benefit of the investment analysis and
research, the review of current economic conditions and trends and the
consideration of long-range investment policy generally available to your
investment advisory clients. In managing the Portfolio in accordance with the
requirements set forth in this section 3, you shall be entitled to receive and
act upon advice of counsel to the
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<PAGE>
Fund or counsel to you. You shall also make available to the Fund promptly upon
request all of the Portfolio's investment records and ledgers as are necessary
to assist the Fund in complying with the requirements of the 1940 Act and other
applicable laws. To the extent required by law, you shall furnish to regulatory
authorities having the requisite authority any information or reports in
connection with the services provided pursuant to this Agreement which may be
requested in order to ascertain whether the operations of the Fund are being
conducted in a manner consistent with applicable laws and regulations.
You shall determine the securities, instruments, investments, currencies,
repurchase agreements, futures, options and other contracts relating to
investments to be purchased, sold or entered into by the Portfolio and place
orders with broker-dealers, foreign currency dealers, futures commission
merchants or others pursuant to your determinations and all in accordance with
Portfolio policies as expressed in the Registration Statement. You shall
determine what portion of the Portfolio's portfolio shall be invested in
securities and other assets and what portion, if any, should be held uninvested.
You shall furnish to the Fund's Board of Trustees periodic reports on the
investment performance of the Portfolio and on the performance of your
obligations pursuant to this Agreement, and you shall supply such additional
reports and information as the Fund's officers or Board of Trustees shall
reasonably request.
4. Administrative Services. In addition to the portfolio management
services specified above in section 3, you shall furnish at your expense for the
use of the Portfolio such office space and facilities in the United States as
the Portfolio may require for its reasonable needs, and you (or one or more of
your affiliates designated by you) shall render to the Fund administrative
services on behalf of the Portfolio necessary for operating as an open-end
investment company and not provided by persons not parties to this Agreement
including, but not limited to, preparing reports to and meeting materials for
the Fund's Board of Trustees and reports and notices to Portfolio shareholders;
supervising, negotiating contractual arrangements with, to the extent
appropriate, and monitoring the performance of, accounting agents, custodians,
depositories, transfer agents and pricing agents, accountants, attorneys,
printers, underwriters, brokers and dealers, insurers and other persons in any
capacity deemed to be necessary or desirable to Portfolio operations; preparing
and making filings with the Securities and Exchange Commission (the "SEC") and
other regulatory and self-regulatory organizations, including, but not limited
to, preliminary and definitive proxy materials, post-effective amendments to the
Registration Statement, semi-annual reports on Form N-SAR and notices pursuant
to Rule 24f-2 under the 1940 Act; overseeing the tabulation of proxies by the
Portfolio's transfer agent; assisting in the preparation and filing of the
Portfolio's federal, state and local tax returns; preparing and filing the
Portfolio's federal excise tax return pursuant to Section 4982 of the Code;
providing assistance with investor and public relations matters; monitoring the
valuation of portfolio securities and the calculation of net asset value;
monitoring the registration of Shares of the Portfolio under applicable federal
and state securities laws; maintaining or causing to be maintained for the
Portfolio all books, records and reports and any other information required
under the 1940 Act, to the extent that such books, records and reports and other
information are not maintained by the Portfolio's custodian or other agents of
the Portfolio; assisting in establishing the accounting policies of the
Portfolio; assisting in the resolution of accounting issues that may arise with
respect to the Portfolio's operations and consulting with the Portfolio's
independent accountants, legal counsel and the Portfolio's other agents as
necessary in connection therewith; establishing and monitoring the Portfolio's
operating expense budgets; reviewing the Portfolio's bills; processing the
payment of bills that have been approved by an authorized person; assisting the
Portfolio in determining the amount of dividends and distributions available to
be paid by the Portfolio to its shareholders, preparing and arranging for the
printing of dividend notices to shareholders, and providing the transfer and
dividend paying agent, the custodian, and the accounting agent with such
information as is required for such parties to effect the payment of dividends
and distributions;
3
<PAGE>
and otherwise assisting the Fund as it may reasonably request in the conduct of
the Portfolio's business, subject to the direction and control of the Fund's
Board of Trustees. Nothing in this Agreement shall be deemed to shift to you or
to diminish the obligations of any agent of the Portfolio or any other person
not a party to this Agreement which is obligated to provide services to the
Portfolio.
5. Allocation of Charges and Expenses. Except as otherwise specifically
provided in this section 5, you shall pay the compensation and expenses of all
Trustees, officers and executive employees of the Fund (including the
Portfolio's share of payroll taxes) who are affiliated persons of you, and you
shall make available, without expense to the Portfolio, the services of such of
your directors, officers and employees as may duly be elected officers of the
Fund, subject to their individual consent to serve and to any limitations
imposed by law. You shall provide at your expense the portfolio management
services described in section 3 hereof and the administrative services described
in section 4 hereof.
You shall not be required to pay any expenses of the Portfolio other than
those specifically allocated to you in this section 5. In particular, but
without limiting the generality of the foregoing, you shall not be responsible,
except to the extent of the reasonable compensation of such of the Portfolio's
Trustees and officers as are directors, officers or employees of you whose
services may be involved, for the following expenses of the Portfolio:
organization expenses of the Portfolio (including out-of-pocket expenses, but
not including your overhead or employee costs); fees payable to you and to any
other Portfolio advisors or consultants; legal expenses; auditing and accounting
expenses; maintenance of books and records which are required to be maintained
by the Portfolio's custodian or other agents of the Fund; telephone, telex,
facsimile, postage and other communications expenses; taxes and governmental
fees; fees, dues and expenses incurred by the Portfolio in connection with
membership in investment company trade organizations; fees and expenses of the
Portfolio's accounting agent, custodians, subcustodians, transfer agents,
dividend disbursing agents and registrars; payment for portfolio pricing or
valuation services to pricing agents, accountants, bankers and other
specialists, if any; expenses of preparing share certificates and, except as
provided below in this section 5, other expenses in connection with the
issuance, offering, distribution, sale, redemption or repurchase of securities
issued by the Portfolio; expenses relating to investor and public relations;
expenses and fees of registering or qualifying Shares of the Portfolio for sale;
interest charges, bond premiums and other insurance expense; freight, insurance
and other charges in connection with the shipment of the Portfolio's portfolio
securities; the compensation and all expenses (specifically including travel
expenses relating to Fund business) of Trustees, officers and employees of the
Fund who are not affiliated persons of you; brokerage commissions or other costs
of acquiring or disposing of any portfolio securities of the Portfolio; expenses
of printing and distributing reports, notices and dividends to shareholders;
expenses of printing and mailing Prospectuses and SAIs of the Portfolio and
supplements thereto; costs of stationery; any litigation expenses;
indemnification of Trustees and officers of the Fund; costs of shareholders' and
other meetings; and travel expenses (or an appropriate portion thereof) of
Trustees and officers of the Fund who are directors, officers or employees of
you to the extent that such expenses relate to attendance at meetings of the
Board of Trustees of the Fund or any committees thereof or advisors thereto held
outside of Boston, Massachusetts or New York, New York.
You shall not be required to pay expenses of any activity which is
primarily intended to result in sales of Shares of the Portfolio if and to the
extent that (i) such expenses are required to be borne by a principal
underwriter which acts as the distributor of the Portfolio's Shares pursuant to
an underwriting agreement which provides that the underwriter shall assume some
or all of such expenses, or (ii) the Fund on behalf of the Portfolio shall have
adopted a plan in conformity with Rule 12b-1 under the 1940 Act providing that
the Portfolio (or some other party) shall assume some or all of such expenses.
You shall be required to pay such of the foregoing sales expenses as are not
required to be paid by the principal
4
<PAGE>
underwriter pursuant to the underwriting agreement or are not permitted to be
paid by the Portfolio (or some other party) pursuant to such a plan.
6. Management Fee. For all services to be rendered, payments to be made and
costs to be assumed by you as provided in sections 3, 4 and 5 hereof, the Fund
on behalf of the Portfolio shall pay you in United States Dollars on the last
day of each month the unpaid balance of a fee equal to the excess of 1/12 of
0.875 of 1 percent of the average daily net assets as defined below of the
Portfolio for such month; provided that, for any calendar month during which the
average of such values exceeds $500 million the fee payable for that month based
on the portion of the average of such values in excess of $500 million shall be
1/12 of 0.775 of 1 percent of such portion over any compensation waived by you
from time to time (as more fully described below). You shall be entitled to
receive during any month such interim payments of your fee hereunder as you
shall request, provided that no such payment shall exceed 75 percent of the
amount of your fee then accrued on the books of the Portfolio and unpaid.
The "average daily net assets" of the Portfolio shall mean the average of
the values placed on the Portfolio's net assets as of 4:00 p.m. (New York time)
on each day on which the net asset value of the Portfolio is determined
consistent with the provisions of Rule 22c-1 under the 1940 Act or, if the
Portfolio lawfully determines the value of its net assets as of some other time
on each business day, as of such time. The value of the net assets of the
Portfolio shall always be determined pursuant to the applicable provisions of
the Declaration and the Registration Statement. If the determination of net
asset value does not take place for any particular day, then for the purposes of
this section 6, the value of the net assets of the Portfolio as last determined
shall be deemed to be the value of its net assets as of 4:00 p.m. (New York
time), or as of such other time as the value of the net assets of the
Portfolio's portfolio may be lawfully determined on that day. If the Portfolio
determines the value of the net assets of its portfolio more than once on any
day, then 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 section 6.
You may waive all or a portion of your fees provided for hereunder and such
waiver shall be treated as a reduction in purchase price of your services. You
shall be contractually bound hereunder by the terms of any publicly announced
waiver of your fee, or any limitation of the Portfolio's expenses, as if such
waiver or limitation were fully set forth herein.
7. Avoidance of Inconsistent Position; Services Not Exclusive. In
connection with purchases or sales of portfolio securities and other investments
for the account of the Portfolio, neither you nor any of your directors,
officers or employees shall 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 and other investments for the
Portfolio's account with brokers or dealers selected by you in accordance with
Portfolio policies as expressed in the Registration Statement. If any occasion
should arise in which you give any advice to clients of yours concerning the
Shares of the Portfolio, you shall 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 services to others. In acting under this Agreement, you
shall be an independent contractor and not an agent of the Fund. Whenever the
Portfolio and one or more other accounts or investment companies advised by the
Manager have available funds for investment, investments suitable and
appropriate for each shall be allocated in accordance with procedures believed
by the Manager to be equitable to each entity. Similarly, opportunities to sell
securities
5
<PAGE>
shall be allocated in a manner believed by the Manager to be equitable. The
Portfolio recognizes that in some cases this procedure may adversely affect the
size of the position that may be acquired or disposed of for the Portfolio.
8. Limitation of Liability of Manager. As an inducement to your undertaking
to render services pursuant to this Agreement, the Fund agrees that you shall
not be liable under this Agreement 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, provided that nothing in this Agreement shall be
deemed to protect or purport to protect you against any liability to the Fund,
the Portfolio or its shareholders to which you would otherwise be subject by
reason of willful misfeasance, bad faith or gross negligence in the performance
of your duties, or by reason of your reckless disregard of your obligations and
duties hereunder. Any person, even though also employed by you, who may be or
become an employee of and paid by the Portfolio shall be deemed, when acting
within the scope of his or her employment by the Portfolio, to be acting in such
employment solely for the Portfolio and not as your employee or agent.
9. Duration and Termination of This Agreement. This Agreement shall remain
in force until September 30, 1998, and continue in force from year to year
thereafter, but only so long as such continuance is specifically approved at
least annually (a) by the vote of a majority of the Trustees who are not parties
to this Agreement or interested persons of any party to this Agreement, cast in
person at a meeting called for the purpose of voting on such approval, and (b)
by the Trustees of the Fund, or by the vote of a majority of the outstanding
voting securities of the Portfolio. The aforesaid requirement that continuance
of this Agreement be "specifically approved at least annually" shall be
construed in a manner consistent with the 1940 Act and the rules and regulations
thereunder and any applicable SEC exemptive order therefrom.
This Agreement may be terminated with respect to the Portfolio at any time,
without the payment of any penalty, by the vote of a majority of the outstanding
voting securities of the Portfolio or by the Fund's Board of Trustees on 60
days' written notice to you, or by you on 60 days' written notice to the Fund.
This Agreement shall terminate automatically in the event of its assignment.
10. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against whom enforcement of the change, waiver,
discharge or termination is sought, and no amendment of this Agreement shall be
effective until approved in a manner consistent with the 1940 Act and rules and
regulations thereunder and any applicable SEC exemptive order therefrom.
11. Limitation of Liability for Claims. The Declaration, a copy of which,
together with all amendments thereto, is on file in the Office of the Secretary
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
Portfolio, or Trustee, officer, employee or agent of the Fund, shall be subject
to claims against or obligations of the Fund or of the Portfolio to any extent
whatsoever, but that the Fund estate only shall be liable.
You are hereby expressly put on notice of the limitation of liability as
set forth in the Declaration and you agree that the obligations assumed by the
Fund on behalf of the Portfolio pursuant to this
6
<PAGE>
Agreement shall be limited in all cases to the Portfolio and its assets, and you
shall not seek satisfaction of any such obligation from the shareholders or any
shareholder of the Portfolio or any other series of the Fund, or from any
Trustee, officer, employee or agent of the Fund. You understand that the rights
and obligations of each Portfolio, or series, under the Declaration are separate
and distinct from those of any and all other series.
12. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or limit 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.
In interpreting the provisions of this Agreement, the definitions contained
in Section 2(a) of the 1940 Act (particularly the definitions of "affiliated
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 SEC by any rule, regulation or order.
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Massachusetts, provided that nothing herein shall be construed
in a manner inconsistent with the 1940 Act, or in a manner which would cause the
Portfolio to fail to comply with the requirements of Subchapter M of the Code.
This Agreement shall supersede all prior investment advisory or management
agreements entered into between you and the Fund on behalf of the Portfolio.
If you are in agreement with the foregoing, please execute 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
effective as of the date of this Agreement.
Yours very truly,
SCUDDER VARIABLE LIFE INVESTMENT
FUND, on behalf of
International Portfolio
By: ______________________________
Vice President
7
<PAGE>
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By: ______________________________
Managing Director
8
