Filed with the Securities and Exchange
Commission on February 12, 1999.
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 _____ / /
Post-Effective Amendment No. 26 / X /
And/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
Amendment No. 30 / X /
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, Massachusetts 02110-4103
--------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
/ / Immediately upon filing pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a) (1)
/ X / 75 days after filing pursuant to paragraph (a) (2)
/ / On __________________ pursuant to paragraph (b)
/ / On __________________ pursuant to paragraph (a) (1)
/ / On __________________ pursuant to paragraph (a) (2) 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
Part C - Page 1
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
Scudder Variable Life Investment Fund offers a choice of nine portfolios to
investors applying for variable life insurance and variable annuity contracts
offered by Participating Insurance Companies. The Portfolios are:
MONEY MARKET PORTFOLIO
BOND PORTFOLIO
BALANCED PORTFOLIO
GROWTH AND INCOME PORTFOLIO
CAPITAL GROWTH PORTFOLIO
LARGE COMPANY GROWTH PORTFOLIO
SMALL COMPANY GROWTH PORTFOLIO
GLOBAL DISCOVERY PORTFOLIO
INTERNATIONAL PORTFOLIO
PROSPECTUS
MAY 1, 1999
Shares of the Portfolios are not FDIC-insured, have no bank guarantees and may
lose value.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
Shares of Scudder Variable Life Investment Fund are available and are being
marketed exclusively as a pooled funding vehicle for life insurance companies
writing all types of variable annuity contracts and variable life insurance
policies.
CLASS A SHARES OF BENEFICIAL INTEREST
CLASS B SHARES OF BENEFICIAL INTEREST
<PAGE>
CONTENTS
INVESTMENT CONCEPT OF THE FUND..............................................4
Money Market Portfolio......................................................5
Investment Objective.....................................................5
Investment Strategy......................................................5
Other Investments........................................................5
Risk Management Strategies...............................................5
Main Risks...............................................................6
Past Performance.........................................................7
Bond Portfolio..............................................................8
Investment Objective.....................................................8
Principal Strategies.....................................................8
Other Investments........................................................8
Risk Management Strategies...............................................8
Main Risks..................................................................9
Past Performance.........................................................9
Past Performance........................................................13
Growth and Income Portfolio................................................15
Investment Objective....................................................15
Investment Strategies...................................................15
Other Investments.......................................................15
Risk Management Strategies..............................................15
Main Risks..............................................................16
Past Performance........................................................17
Capital Growth Portfolio...................................................19
Investment Objective....................................................19
Main Risks..............................................................20
Past Performance........................................................21
Large Company Growth Portfolio.............................................22
Investment Objective....................................................22
Investment Strategies...................................................22
Other Investments.......................................................23
Risk Management Strategies..............................................23
Main Risks..............................................................23
Small Company Growth Portfolio.............................................24
Investment Objective....................................................24
Investment Strategies...................................................24
Other Investments.......................................................25
Risk Management Strategies..............................................25
Main Risks..............................................................25
Past Performance........................................................30
2
<PAGE>
INTERNATIONAL PORTFOLIO....................................................31
Investment Objective....................................................31
Principal Strategies....................................................31
Other Investments.......................................................31
Risk Management Strategies..............................................31
Main Risks..............................................................32
Past Performance........................................................32
Investment Adviser......................................................34
Purchases and Redemptions...............................................38
Distributions...........................................................39
3
<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:
Money Market Portfolio, Bond Portfolio, Balanced Portfolio, Growth and Income
Portfolio, Capital Growth Portfolio, Large Company Growth Portfolio, Small
Company Growth Portfolio, Global Discovery Portfolio and International
Portfolio. Additional portfolios may be created from time to time. Scudder
Variable Life Investment Fund is intended to be a funding vehicle for variable
annuity contracts and variable life insurance policies to be offered by the
separate accounts of certain Participating Insurance Companies.
This prospectus pertains to both Class A and Class B shares. Class A shares are
offered at net asset value. Class B shares are offered at net asset value and
are subject to a distribution plan. Participating Insurance Companies with
inquiries may call the Fund's underwriter, Scudder Investor Services, Inc., at
1-617-295-2000 or write to Scudder Investor Services, Inc., Two International
Place, Boston, MA 02110-4103.
The Fund currently does not foresee any disadvantages to the holders of variable
annuity contracts or variable life insurance 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 variable annuity
contracts and the variable life insurance policies are described in separate
prospectuses issued by the participating insurance companies. The Fund assumes
no responsibility for such prospectuses.
Individual variable annuity contract holders and variable life insurance
policyholders are not the "shareholders" of the Fund. Rather, the participating
insurance companies and their separate accounts are the shareholders or
investors, although such companies may pass through voting rights to their
variable annuity contract and variable life insurance policyholders.
4
<PAGE>
MONEY MARKET PORTFOLIO
INVESTMENT OBJECTIVE
The 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 net asset value of $1.00 per share.
INVESTMENT STRATEGY
The Portfolio pursues its objective by investing principally in short-term debt
securities issued by:
o U.S. corporations and financial institutions
o The U.S. government and its agencies
The Portfolio generally invests only in securities with credit ratings in the
two highest categories as determined by one or more nationally recognized rating
services. The Portfolio may also invest in unrated securities that the
investment adviser believes to be of comparable quality. The Portfolio maintains
an average dollar-weighted maturity of 90 days or less.
In selecting securities for the Portfolio, the investment adviser actively
manages the Portfolio's portfolio with respect to the short-term interest rate
outlook and by selecting securities for superior price or income performance. In
addition, the Portfolio limits its investments to securities that meet the
quality and diversification requirements of Rule 2a-7 under the Investment
Company Act of 1940.
OTHER INVESTMENTS
The Portfolio may invest in instruments bearing rates of interest that are
adjusted periodically or which "float" continuously according to formulae
intended to minimize fluctuations in values of the instruments ("Variable Rate
Securities"). Consistent with federal law, the Portfolio may consider certain of
such instruments as having maturities earlier than the maturity date on the face
of the instrument.
The Portfolio may use other investments and techniques that could affect
Portfolio performance. More information about these investments and techniques
is provided in the Statement of Additional Information. Of course, there can be
no guarantee that by following these strategies, the Portfolio will achieve its
objective.
RISK MANAGEMENT STRATEGIES
The Portfolio manages credit risk by investing only in high quality securities,
whose issuers are considered unlikely to default based on their credit rating.
The Portfolio also diversifies its portfolio across many industry sectors and
issuers.
5
<PAGE>
MAIN RISKS
As with most money market funds, the major factor affecting this Portfolio's
performance is short-term interest rates. If short-term interest rates fall, the
Portfolio's yield is also likely to fall. Moreover, the investment adviser's
strategy or choice of specific investments may not perform as expected. This
Portfolio may have lower returns than other mutual funds that invest in
lower-quality securities. It is also possible that securities in the Portfolio's
portfolio could be downgraded in credit rating or go into default.
To the extent that the Portfolio is invested in foreign securities such as
Eurodollar certificates, it may be subject to some foreign investment risk.
Eurodollar certificates of deposit may not be subject to the same regulatory
requirements as certificates issued by U.S. banks and associated income may be
subject to the imposition of foreign taxes.
An investment in the Portfolio is not insured or guaranteed by the FDIC or any
other government agency. Although the Portfolio strives to maintain a $1.00
share price, it is conceivable that an investor could lose money by investing in
the Portfolio.
6
<PAGE>
PAST PERFORMANCE
The chart and table below provide some indication of the risks of investing in
the Portfolio by illustrating how the Portfolio has performed from year to year,
and comparing this information to a broad measure of market performance. Of
course, past performance is not necessarily an indication of future performance.
Total returns for years ended December 31
- --------------------------------------------------------------------------------
BAR CHART
- --------------------------------------------------------------------------------
For the period included in the bar chart, the Portfolio's highest return for a
calendar quarter was ___% (the second quarter of 19__), and the Portfolio's
lowest return for a calendar quarter was ____% (the first quarter of 19__).
The Portfolio's year-to-date total return as of March 31, 1999 was ____%.
Average Annual Total Returns
For periods ended
December 31, 1998 Class A
----------------- -------
One Year %
Five Years %
Ten Years %
7 Day Annualized Yield
On ____________, 19__, the Portfolio's 7-day annualized yield was ________%.
7
<PAGE>
BOND PORTFOLIO
INVESTMENT OBJECTIVE
The Bond Portfolio pursues a policy of investing for a high level of income
consistent with a high quality portfolio of debt securities.
PRINCIPAL STRATEGIES
The Portfolio pursues its objective by investing, under normal circumstances, at
least 65% of its assets in bonds of any maturity, including those of the U.S.
Government and its agencies, corporate bonds of U.S. and foreign issuers, and
other notes and bonds paying high current income. In addition, the Portfolio may
also invest in mortgage and asset-backed securities and convertible securities.
The Portfolio is actively managed and proportions among maturities and types of
securities may vary depending on the prospects for income relative to the
outlook for the economy and the securities markets, the quality of available
investments, the level of interest rates and other factors.
The Portfolio invests primarily in high quality securities. Under normal market
conditions, the Portfolio invests at least 65% of its asset in securities rated
within the three highest rating categories (AAA/AA/A, Aaa/Aa/A) by an
independent rating agency or, if unrated, of comparable quality at the time of
purchase. The Portfolio may also invest up to 20% of its assets in lower-rated
high yield/high risk securities but will not invest insecurities rated below B3
by Moody's Investors Service or B- by Standard & Poor's Corporation or, if
unrated, of comparable quality.
OTHER INVESTMENTS
The Portfolio may invest in preferred stocks. The Portfolio may use other
investments and techniques that could affect Portfolio performance. More
information about these investments and techniques is provided in the Statement
of Additional Information Of course, there can be no guarantee that by following
these strategies, the Portfolio will achieve its objective.
RISK MANAGEMENT STRATEGIES
The Portfolio manages its exposure to interest rate risk by adjusting its
duration. The Portfolio also diversifies the non-governmental issuer portion of
its portfolio across sectors and issuers, The Portfolio may also make limited
use of certain derivatives (financial instruments that derive their value from
other securities, commodities or indices).
8
<PAGE>
MAIN RISKS
As with most bond mutual funds, the most significant factor affecting the
Portfolio's performance is interest rates. When interest rates rise, the prices
of bonds (and bond mutual funds) typically fall in proportion to their duration.
Moreover, if certain sectors or securities don't perform as the investment
adviser expects, the Portfolio could substantially underperform other bond
mutual funds or lose money. It is also possible that bonds in the Portfolio's
portfolio could be downgraded in credit rating or go into default.
Issuers whose bonds are below investment-grade may be in impaired financial
condition and may be affected by stock market shifts. The prices of their bonds,
therefore, tend to change based on stock market movements to a greater degree
than the prices of investment-grade bonds.
Foreign investments carry added risks due to the possibility of inadequate or
inaccurate financial information about companies, potential political
disturbances and fluctuations in currency exchange rates. Foreign securities are
often thinly traded and could be harder to sell at a fair price generally, or in
specific market situations.
PAST PERFORMANCE
The chart and table below provide some indication of the risks of investing in
the Portfolio by illustrating how the Portfolio has performed from year to year,
and comparing this information to a broad measure of market performance. Of
course, past performance is not necessarily an indication of future performance.
The information provided in the chart is for Class A shares.
Total returns for years ended December 31
- --------------------------------------------------------------------------------
BAR CHART
- --------------------------------------------------------------------------------
For the period included in the bar chart, the Portfolio's highest return for a
calendar quarter was ___% (the second quarter of 19__), and the Portfolio's
lowest return for a calendar quarter was ____% (the first quarter of 19__).
The Portfolio's year-to-date total return as of March 31, 1999 was ____%.
9
<PAGE>
Average Annual Total Returns
For periods ended Lehman Brothers Aggregate
December 31, 1998 Class A Class B Bond Index+
----------------- ------- ------- -----------
One Year % % %
Five Years % % %
Ten Years % - %
Since Class Inception** - %
- --------------------------------------------------------------------------------
** Inception date for Class B shares is_______________.
+The Lehman Brothers 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 Portfolio
returns, do not reflect any fees or expenses.
10
<PAGE>
BALANCED PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio pursues 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.
INVESTMENT STRATEGIES
The Portfolio normally invests between 50% and 75% of its net assets in common
stocks and other equity securities. Equity securities in which the Portfolio
invests include common stocks, preferred stocks, convertible securities and
warrants. The remainder of the Portfolio's assets will be invested in
investment-grade debt securities or cash. In managing its portfolio, the
Portfolio uses a quality-orientated investment approach that is designed to
reduce risk. The Portfolio does not attempt to time the market. When changes in
the overall financial climate - interest rates, capital flows, inflation, fiscal
controls warrant action, the investment adviser will generally make incremental
adjustments to the Portfolio's asset allocation.
In selecting equity securities, the Portfolio seeks out companies of
above-average financial quality with a history of paying regular dividends that
also appear to offer opportunities for growth in earnings, cash flow and assets
relative to the overall market as defined by the Standard & Poor's 500 Composite
Price Index. Typically, medium- to large-sized companies (those with annual
revenues or market capitalization of at least $600 million) will meet these
criteria. The Portfolio invests primarily in U.S. companies but may also invest
in the equity securities of foreign companies.
At least 65% of the value of the Portfolio's common stocks will be in issuers
which qualify, at the time of purchase, for one of the three highest equity
earnings and dividends ranking categories of Standard & Poor's Corporation or
are considered of comparable quality by the investment adviser.
To enhance income and stability, the Portfolio will normally invest 25% to 50%
of its assets in fixed income securities. At all times, the Portfolio will be
invested at least 25% in fixed income securities. Of these, 80% must be rated
within the three highest credit rating categories (AAA/AA/A or Aaa/Aa/A) or, if
unrated, of comparable quality. At least 50% of the Portfolio's fixed income
securities will be invested in debt obligations, including money market
instruments, that are issued or guaranteed by the U.S. Government, are rated at
the time of purchase within the two highest rating categories by an independent
rating agency or, if unrated, of comparable quality. The Portfolio may invest up
to 20% of its assets in bonds rated below A but
11
<PAGE>
no lower than B. The 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.
OTHER INVESTMENTS
The Portfolio may use other investments and techniques that could affect
Portfolio performance. More information about these investments and techniques
is provided in the Statement of Additional Information. Of course, there can be
no guarantee that by following these strategies, the Portfolio will achieve its
objective.
RISK MANAGEMENT STRATEGIES
The Portfolio manages risk in its stock allocation by diversifying widely among
industries and companies. Stocks that pay high dividends can often provide a
"cushion" of steady income during periods of high market volatility. The
Portfolio's bond investments are diversified by maturity, credit quality and
industry. The Portfolio may also make limited use of certain derivatives
(financial instruments that derive their value from other securities,
commodities or indices).
As a defensive measure, the Portfolio may invest without limit in cash and in
other money market and short-term instruments. In such a case, the Portfolio
would not be pursuing, and may not achieve, its objective.
MAIN RISKS
The primary factor affecting this Portfolio's performance is stock market
movements. If certain sectors or securities don't perform as the investment
adviser expects, the Portfolio could substantially underperform other balanced
mutual funds or lose money.
To the extent that the Portfolio invests in bonds, the most significant risk is
that interest rates will rise, and the prices of bonds held by the Portfolio
will fall in proportion to their duration. It is also possible that bonds in the
Portfolio's portfolio could be downgraded in credit rating or go into default.
To the extent that the Portfolio invests in high yield fixed income securities,
another significant risk is that interest rates will rise, and the price of
bonds held by the Portfolio will fall in proportion to their duration. It is
also possible that fixed income securities in the Portfolio's portfolio could be
downgraded in credit rating or go into default.
Foreign investments carry added risks due to the possibility of inadequate or
inaccurate financial information about companies, potential political
disturbances and fluctuations in currency exchange rates. Foreign securities are
often thinly traded and could be harder to sell at a fair price generally, or in
specific market situations.
12
<PAGE>
The Portfolio's asset allocation could prove to be less appropriate to market
conditions than other balanced mutual funds.
The use of certain derivatives could magnify losses.
PAST PERFORMANCE
The chart and table below provide some indication of the risks of investing in
the Portfolio by illustrating how the Portfolio has performed from year to year,
and comparing this information to a broad measure of market performance. Of
course, past performance is not necessarily an indication of future performance.
The information provided in the chart is for Class A shares.
Total returns for years ended December 31
- --------------------------------------------------------------------------------
BAR CHART
- --------------------------------------------------------------------------------
For the period included in the bar chart, the Portfolio's highest return for a
calendar quarter was ___% (the second quarter of 19__), and the Portfolio's
lowest return for a calendar quarter was ____% (the first quarter of 19__).
The Portfolio's year-to-date total return as of March 31, 1999 was ____%.
Average Annual Total Returns
<TABLE>
<CAPTION>
For periods ended S&P 500 Lehman Brothers Aggregate Bond
December 31, 1998 Class A Class B Index+ Index ++
----------------- ------- ------- ------ --------
<S> <C> <C> <C> <C>
One Year % % % %
Five Years % % % %
Ten Years % % % %
Since Class Inception** - % % %
</TABLE>
- --------------------------------------------------------------------------------
** Inception date for Class B shares is_______________.
13
<PAGE>
+The Standard and Poor's 500 Composite Stock Price Index (S&P 500) is an
unmanaged capitalization-weighted measure of 500 widely held common stocks
listed on the New York Stock Exchange and the American Stock Exchange, and
traded on the Nasdaq Stock Market, Inc.
++The Lehman Brothers 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 Portfolio returns, do
not reflect any fees or expenses.
14
<PAGE>
GROWTH AND INCOME PORTFOLIO
INVESTMENT OBJECTIVE
The Portfolio seeks long-term growth of capital, current income and growth of
income.
INVESTMENT STRATEGIES
The Portfolio pursues its goal by investing 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. The Portfolio may also purchase such securities which don't
pay current dividends but which offer prospects for growth of capital and future
income.
In managing its portfolio, the Portfolio employs a "relative yield" discipline,
meaning that it focuses its investments on companies whose dividend yields are
20% higher than the average derived from a benchmark index such as the Standard
& Poor's 500 Composite Stock Index ("S&P 500"). The Portfolio will sell
securities if their dividend yields fall below 80% of the benchmark average. In
addition to above-average yield, companies must appear to offer opportunities
for growth in capital and earnings. Typically, companies that meet these
criteria are large. The Portfolio invests primarily in U.S. companies, but may
also invest in the equity securities of foreign companies.
The Portfolio may invest up to 25% of its assets in foreign securities.
OTHER INVESTMENTS
The Portfolio may use other investments and techniques that could affect
Portfolio performance. More information about these investments and techniques
is provided in the Statement of Additional Information. Of course, there can be
no guarantee that by following these strategies, the Portfolio will achieve its
objective.
RISK MANAGEMENT STRATEGIES
The Portfolio manages risk by diversifying widely among industries and
companies. It also invests in high dividend-paying stocks, whose prices have
historically tended to fall less in down markets. Derivatives (financial
instruments that derive their value from other securities, commodities or
indices) may be used to a limited extent as well.
As an extreme defensive measure, the Portfolio may temporarily invest up to 100%
of assets in cash or cash equivalents. In such a case, the Portfolio would not
be pursuing, and may not achieve, its objective.
15
<PAGE>
MAIN RISKS
The primary factor affecting the Portfolio's performance is stock market
movements. If any of the securities held by the Portfolio decrease or stop their
dividend payments, the Portfolio will generate less income, and overall
performance is likely to suffer.
If the relative yield strategy used by the Portfolio or specific securities
don't perform as well as expected, the Portfolio could underperform other growth
and income mutual funds or lose money.
Foreign investments carry added risks due to the possibility of inadequate or
inaccurate financial information about companies, potential political
disturbances and fluctuations in currency exchange rates. Foreign securities are
often thinly traded and could be harder to sell at a fair price generally, or in
specific market situations.
The use of certain derivatives could magnify losses.
16
<PAGE>
PAST PERFORMANCE
The chart and table below provide some indication of the risks of investing in
the Portfolio by illustrating how the Portfolio has performed from year to year,
and comparing this information to a broad measure of market performance. Of
course, past performance is not necessarily an indication of future performance.
The information provided in the chart is for Class A shares.
Total returns for years ended December 31
- --------------------------------------------------------------------------------
BAR CHART
- --------------------------------------------------------------------------------
For the period included in the bar chart, the Portfolio's highest return for a
calendar quarter was ___% (the second quarter of 19__), and the Portfolio's
lowest return for a calendar quarter was ____% (the first quarter of 19__).
The Portfolio's year-to-date total return as of March 31, 1999 was ____%.
17
<PAGE>
Average Annual Total Returns
For periods ended
December 31, 1998 Class A Class B S&P 500 Index+
----------------- ------- ------ --------------
One Year % % %
Five Years % % %
Since Class Inception** % % *
- --------------------------------------------------------------------------------
*Index comparisons begin ___________________.
**Inception date for Class A and B shares is _______________.
+ The Standard and Poor's 500 Composite Stock Price Index (S&P 500) is an
unmanaged capitalization-weighted measure of 500 widely held common stocks
listed on the New York Stock Exchange and the American Stock Exchange, and
traded on the Nasdaq Stock Market, Inc. Index returns assume reinvestment of
dividends and, unlike Portfolio returns, do not reflect any fees or expenses.
18
<PAGE>
CAPITAL GROWTH PORTFOLIO
INVESTMENT OBJECTIVE
Capital Growth Portfolio seeks to maximize long-term capital growth through a
broad and flexible investment program.
INVESTMENT STRATEGIES
The Portfolio invests in marketable securities, principally common stocks and
preferred stocks. In selecting stocks for the Portfolio, the investment adviser
considers a number of factors, including the issuer's financial strength,
management reputation, absolute size and overall industry position.
In addition, the Portfolio's flexible investment strategy enables it to invest
in a broadly diversified portfolio of stocks in all sectors of the market,
including companies that generate or apply new technologies, companies that own
or develop natural resources, companies that may benefit from changing consumer
demands and lifestyles and foreign companies.
While emphasizing companies with above-average growth prospects, the Portfolio
may also invest in equity securities of companies that may have only average
growth prospects, but seem to be undervalued. Securities may be undervalued as a
result of overreaction by investors to unfavorable news about a company,
industry or the stock markets in general or as a result of a market decline,
poor economic conditions or actual or anticipated unfavorable developments
affecting the company.
The Portfolio may invest up to 25% of its assets in foreign securities.
OTHER INVESTMENTS
The Portfolio may invest up to 20% of its net assets in intermediate to
longer-term debt securities when the investment adviser believes 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. Generally these debt securities
will be rated investment-grade by an independent rating agency or, if unrated,
considered of comparable quality, although the Portfolio may invest up to 5% of
its assets in lower-rated high yield/high risk securities.
The Portfolio may use other investments and techniques that could affect
Portfolio performance. More information about these investments and techniques
is provided in the Statement of Additional Information. Of course, there can be
no guarantee that by following these strategies, the Portfolio will achieve its
objective.
RISK MANAGEMENT STRATEGIES
The Portfolio manages risk by diversifying widely among market sectors and
companies. The Portfolio may also use certain derivatives (financial instruments
that derive their value from other securities, commodities or indices).
19
<PAGE>
In order to reduce risk, as market or economic conditions warrant, the Portfolio
may invest up to 25% of its assets in short-term debt instruments. In such a
case, the Portfolio would not be pursuing, and may not achieve, its objective.
MAIN RISKS
The primary factor affecting this Portfolio's performance is stock market
movements. If certain sectors or investments don't perform as the investment
adviser expects, the Portfolio could substantially underperform other growth
mutual funds or lose money.
The determination that a stock is undervalued is subjective; the market may not
agree, and the stock's price may not rise to what the investment adviser
believes is its full value. It may even decrease in value. However, because of
the Portfolio's focus on undervalued stocks, the Portfolio's downside risk may
be less than with other small company stocks since value stocks are in theory
already underpriced.
[To the extent that the Portfolio focuses its investments in a market sector,
financial, economic, business and other developments affecting issuers in that
sector may have a greater effect on the Portfolio than if it had not focused its
assets in that sector.]
Foreign investments carry added risks due to the possibility of inadequate or
inaccurate financial information about companies, potential political
disturbances and fluctuations in currency exchange rates. Foreign securities are
often thinly traded and could be harder to sell at a fair price generally, or in
specific market situations.
The use of certain derivatives could magnify losses.
20
<PAGE>
PAST PERFORMANCE
The chart and table below provide some indication of the risks of investing in
the Portfolio by illustrating how the Portfolio has performed from year to year,
and comparing this information to a broad measure of market performance. Of
course, past performance is not necessarily an indication of future performance.
The information provided in the chart is for Class A shares.
Total returns for years ended December 31
- --------------------------------------------------------------------------------
BAR CHART
- --------------------------------------------------------------------------------
For the period included in the bar chart, the Portfolio's highest return for a
calendar quarter was ___% (the second quarter of 19__), and the Portfolio's
lowest return for a calendar quarter was ____% (the first quarter of 19__).
The Portfolio's year-to-date total return as of March 31, 1999 was ____%.
Average Annual Total Returns
For periods ended
December 31, 1998 Class A Class B S&P 500 Index+
----------------- ------- ------- --------------
One Year % % %
Five Years % % %
Ten Years % % %
Since Class Inception** - % %
- --------------------------------------------------------------------------------
**Inception date for Class B shares is _____________.
+ The Standard and Poor's 500 Composite Stock Price Index (S&P 500) is an
unmanaged capitalization-weighted measure of 500 widely held common stocks
listed on the New York Stock Exchange and the American Stock Exchange, and
traded on the Nasdaq Stock Market, Inc. Index returns assume reinvestment of
dividends and, unlike Portfolio returns, do not reflect any fees or expenses.
21
<PAGE>
LARGE COMPANY GROWTH PORTFOLIO
INVESTMENT OBJECTIVE
Large Company Growth Portfolio seeks long-term growth of capital through
investment primarily in the equity securities of seasoned, financially strong
U.S. growth companies. The portfolio's investment objective and policies may be
changed without a vote of shareholders.
INVESTMENT STRATEGIES
The Portfolio pursues its investment objective by investing at least 65% of its
assets in the equity securities issued by large-sized domestic companies that
offer above-average appreciation potential. These companies typically have
market capitalization in excess of $1 billion, 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 & Poor's 500
Composite Price Index.
The Portfolio allocates its investments among different industries and
companies, and adjusts its portfolio securities based on long-term investment
considerations as opposed to short-term trading considerations. In choosing the
Portfolio's investments, the investment adviser uses a combination of
qualitative and quantitative research techniques to identify companies that have
above-average quality and growth characteristics and that it believes are
selling at attractive market valuations. The investment adviser uses in-depth
fundamental research to evaluate various aspects of corporate performance, with
a particular focus on consistency of results, long-term growth prospects and
financial strength. Quantitative valuation models are designed to help determine
which growth companies offer the best values at a given point in time.
When assessing financial quality of a company, the investment adviser weighs
four elements of business risk. These factors are the investment adviser's
assessment of the strength of a company's balance sheet, the accounting
practices a company follows, the volatility of a company's earnings over time
and the vulnerability of earnings to changes in external factors, such as the
general economy, the competitive environment, governmental action and
technological change.
The Portfolio typically sells a stock when the stock's earnings growth potential
becomes less favorable, the capitalization of the issuer ceases to qualify the
issuer's securities as an investment for the Portfolio, if the stock fails to
meet the portfolio management team's expectations, or due to changes in the
market and investment environment.
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OTHER INVESTMENTS
The Portfolio may invest in preferred stocks, securities convertible into common
stocks, rights and warrants. The Portfolio may use other investments and
techniques that could affect Portfolio performance. More information about these
investments and techniques is provided in the Statement of Additional
Information. Of course, there can be no guarantee that by following these
strategies, the Portfolio will achieve its objective.
RISK MANAGEMENT STRATEGIES
The Portfolio manages risk by diversifying widely among industries and
companies, and using disciplined security selection. The Portfolio may also use
derivatives (financial instruments that derive their value from other
securities, commodities or indices).
As an extreme defensive measure, the Portfolio may temporarily invest up to 100%
of its assets in cash and cash equivalents. In such a case, the Portfolio would
not be pursuing, and may not achieve, its objective.
MAIN RISKS
The primary factor affecting the Portfolio's performance is stock market
movements. If certain sectors or investments do not perform as the portfolio
management team expects, the portfolio could substantially underperform other
growth mutual funds or lose money.
Foreign investments carry added risks due to the possibility of inadequate or
inaccurate financial information about companies, potential political
disturbances and fluctuations in currency exchange rates. Foreign securities are
often thinly traded and could be harder to sell at a fair price generally, or in
specific market situations.
The use of certain derivatives could magnify losses.
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<PAGE>
SMALL COMPANY GROWTH PORTFOLIO
INVESTMENT OBJECTIVE
Small Company Growth Portfolio pursues long-term growth of capital by investing
primarily in the common stocks of emerging growth companies that are poised to
be leaders in the next century. The Portfolio's investment objective and
policies may be changed without a vote of shareholders.
INVESTMENT STRATEGIES
The Portfolio pursues its investment objective by investing primarily in the
equity securities issued by emerging growth companies. Emerging growth companies
tend to be small or little-known companies that have strong prospects for growth
because they may offer such things as cutting edge products, unique services,
innovative distribution channels or technological advances.
In managing its Portfolio, the portfolio management team identifies promising
small companies through extensive fundamental and field research. Using a
"bottom-up" approach, the Portfolio focuses on companies that, in portfolio
management's view, have the following characteristics:
o low debt positions;
o clean balance sheets;
o conservative accounting methods;
o excellent management who own a significant stake in the company;
o projected annual earnings growth rates of at least 15%; and
o either, a commanding position in a growing market or the ability to build
such a position in the future.
In addition, the Portfolio favors companies that are in an "emerging growth"
phase of development. At this stage, a young company may enjoy certain
advantages, such as niche products and lean organizations, and thus be
well-positioned for significant growth and greater market recognition.
In order to locate tomorrow's leaders before they are widely known, the
portfolio management team searches for companies developing new, innovative
products and services that it believes have the potential to substantially
impact their particular industries or dramatically change consumer behavior in
the next century. The portfolio management team expects to find these companies
in many rapidly changing sectors of the economy. Examples of these sectors
include innovative retailing concepts, the transition in the U.S. to a
service-based economy, advances occurring in health care and biotechnology, as
well as the rapidly developing areas of communications, computing, software and
technology generally.
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<PAGE>
The Portfolio normally invests at least 80% of its assets in common stocks.
Companies in which the portfolio invests generally are similar in size to those
included in the Russell 2000 Index - a widely used benchmark of small stock
performance. As companies in the Portfolio's portfolio exceed the maximum market
value of the companies in the Russell 2000 Index, the portfolio may continue to
hold these securities, but will generally not add to these holdings. A stock is
typically sold when, in the opinion of the portfolio management team, (i) the
stock has reached its fair market value and its appreciation potential is
limited, (ii) a company's fundamentals have deteriorated or (iii) the
Portfolio's portfolio is too heavily weighted in a particular stock or industry
sector.
OTHER INVESTMENTS
The Portfolio may invest in preferred stocks and securities convertible into
common stocks. Although the portfolio invests predominantly in U.S. companies,
it may also invest in the equity securities of foreign companies The Portfolio
may use other investments and techniques that could affect Portfolio
performance. More information about these investments and techniques is provided
in the Statement of Additional Information. Of course, there can be no guarantee
that by following these strategies, the Portfolio will achieve its objective.
RISK MANAGEMENT STRATEGIES
The Portfolio manages risk by diversifying widely among industries and
companies, and using disciplined security selection. The Portfolio may also use
certain derivatives (financial instruments that derive their value from other
securities, commodities or indices).
As an extreme defensive measure, the portfolio may temporarily invest up to 100%
of its assets in cash and cash equivalents. In such a case, the Portfolio would
not be pursuing, and may not achieve, its objective.
MAIN RISKS
The primary factor affecting the Portfolio's performance is stock market
movements. Small companies can be especially sensitive to market shifts and
isolated business difficulties. This is because small companies often serve
niche markets and have limited product lines. They also generally lack the cash
reserves and access to capital that allow larger companies to weather difficult
financial times.
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<PAGE>
Small companies as a group, or individual small companies, may not perform as
well as expected. Securities of small companies are often thinly traded and
could be harder to value or sell at a fair price. If certain sectors or
investments do not perform as the portfolio manager expects, the Portfolio could
underperform its peers or lose money. Because the Portfolio may engage in active
and frequent trading of portfolio securities, the Portfolio may have higher
transaction costs that would affect the Portfolio's performance over time. In
addition, holders may incur taxes on any realized capital gains.
Foreign investments carry added risks due to the possibility of inadequate or
inaccurate financial information about companies, potential political
disturbances and fluctuations in currency exchange rates. Foreign securities are
often thinly traded and could be harder to sell at a fair price generally, or in
specific market situations.
The use of certain derivatives could magnify losses.
26
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
INVESTMENT OBJECTIVE
Global Discovery Portfolio pursues above-average capital appreciation over the
long term by investing primarily in the equity securities of small companies
throughout the world.
INVESTMENT STRATEGIES
The Portfolio invests primarily in a diversified portfolio of equity securities
of small rapidly growing companies that the Portfolio's management believes
offer the potential for above-average returns relative to larger companies, yet
are frequently overlooked and thus undervalued by the market. These companies
are similar in size to the smallest 20% of the companies represented by the
Salomon Brothers Broad Market Index -- typically these companies have a market
value of between approximately $50 million and $2 billion. However, the median
market capitalization (total value of outstanding shares) of companies in which
the Portfolio invests generally will not exceed $750 million at the time the
security is purchased.
Equity securities in which the Portfolio invests include common stocks,
preferred stocks (convertible or non-convertible), rights and warrants.
The Portfolio has the flexibility to invest in any region of the world and may
invest without limit in foreign equity securities. 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 some of those of the United States, Japan and Western Europe.
The Portfolio's portfolio management team determines what securities to invest
in by evaluating potential investments from both a macroeconomic and
microeconomic perspective, using fundamental analysis, including field research.
In evaluating the growth potential and relative value of a possible investment,
the portfolio management team takes into consideration numerous factors,
including:
o the depth and quality of management
o a company's product line, business strategy and competitive position
o research and development efforts
o financial strength, including degree of leverage
o cost structure
o revenue and earnings growth potential
o price-earnings ratios and other stock valuation measures
o the attractiveness of the country and region in which a company is located
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<PAGE>
OTHER INVESTMENTS
The Portfolio may invest up to 35% of its total assets in equity securities of
larger companies located throughout the world and in debt securities if the
Portfolio's investment 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,
Baa/AAA, AA, A, BBB. The Portfolio may also invest up to 5% of its net assets in
lower-rated high yield/high risk bonds.
The Portfolio may use other investments and techniques that could affect
Portfolio performance. More information about these investments and techniques
is provided in the Statement of Additional Information. Of course, there can be
no guarantee that by following these strategies, the Portfolio will achieve its
objective.
RISK MANAGEMENT STRATEGIES
The Portfolio attempts to manage risk by diversifying widely among regions,
market sectors and individual companies.
As an extreme defensive measure, the Portfolio may invest up to 100% of its
assets in cash and cash equivalents. In such a case, the Portfolio would not be
pursuing, and may not achieve, its objective.
MAIN RISKS
The principal risks of investing in the Portfolio are stock market risk and,
more specifically, the risks associated with global small company stocks.
Foreign investments, particularly investments in emerging markets, carry added
risks due to inadequate or inaccurate financial information about companies,
potential political disturbances and fluctuations in currency exchange rates.
The investment adviser's choice of countries, market sectors or specific
investments may not perform as well as expected, and the Portfolio could
underperform its peers or lose money. Foreign securities are often thinly traded
and could be harder to sell at a fair price generally, or in specific market
situations.
As with all investments in the stock market, the Portfolio's returns and net
asset value will go up and down, and it is possible to lose money invested in
the Portfolio. Stock market movements will affect the Portfolio's share price on
a daily basis. Declines are possible both in the overall stock market and the
value of the types of securities held by the Portfolio. In addition, the
portfolio management team's strategy and skill in choosing securities for the
Portfolio will determine in large part the Portfolio's ability to achieve its
objective.
In pursuit of higher investment returns, this Portfolio may incur greater risks
and more dramatic fluctuations in value than a Portfolio that invests in stocks
of larger companies. The inherent business characteristics and risks of small
companies
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<PAGE>
include such things as untested management, less diversified product lines and
weaker financial positions. Also, small companies tend to have less predictable
earnings and less liquid securities than more established companies. Therefore,
this Portfolio is suitable for long-term investors that have a high degree of
risk tolerance. The use of certain derivatives could magnify losses.
29
<PAGE>
PAST PERFORMANCE
The chart and table below provide some indication of the risks of investing in
the Portfolio by illustrating how the Portfolio has performed from year to year,
and comparing this information to a broad measure of market performance. Of
course, past performance is not necessarily an indication of future performance.
The information provided in the chart is for Class A shares.
Total returns for years ended December 31
- --------------------------------------------------------------------------------
BAR CHART
- --------------------------------------------------------------------------------
For the period included in the bar chart, the Portfolio's highest return for a
calendar quarter was ___% (the second quarter of 19__), and the Portfolio's
lowest return for a calendar quarter was ____% (the first quarter of 19__).
The Portfolio's year-to-date total return as of March 31, 1999 was ____%.
Average Annual Total Returns
For periods ended Salomon Brothers World Equity
December 31, 1998 Class A Class B Extended Market Index+
----------------- ------- ------- ----------------------
One Year % % %
Five Years % % %
Since Class Inception** % % *
- --------------------------------------------------------------------------------
* Index comparisons begin ______________________.
** Inception date for Class A and B shares is ________________.
+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 Portfolio returns, do not reflect any fees or expenses.
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<PAGE>
INTERNATIONAL PORTFOLIO
INVESTMENT OBJECTIVE
The International Portfolio seeks long-term growth of capital primarily through
diversified holdings of marketable foreign equity investments.
PRINCIPAL STRATEGIES
The Portfolio pursues its objective by investing primarily in common stocks of
established companies, listed on foreign exchanges, which the investment adviser
believes have favorable characteristics. The companies in which the Portfolio
invests do business primarily outside the United States. The Portfolio intends
to diversify its investments among several countries and its holdings will
include business activities in at least three different countries, excluding the
U.S.
In determining the appropriate distribution of investments among various
countries and geographic regions, the investment manager ordinarily considers
the following factors:
o prospects for relative economic growth among foreign countries;
o expected levels of inflation;
o relative price levels of the various capital markets;
o government policies influencing business conditions;
o the outlook for currency relationships; and
o the range of individual investment opportunities available to the
international investor.
OTHER INVESTMENTS
The Portfolio may also invest in fixed income securities of foreign governments
and companies, although the Portfolio invests primarily in equity securities.
The Portfolio may use other investments and techniques that could affect
Portfolio performance. More information about these investments and techniques
is provided in the Statement of Additional Information. Of course, there can be
no guarantee that by following these strategies, the Portfolio will achieve its
objective.
RISK MANAGEMENT STRATEGIES
The Portfolio may also use certain derivatives (financial instruments that
derive their value from other securities, commodities or indices).
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<PAGE>
As an extreme defensive measure, the Portfolio may temporarily invest up to 100%
of assets in Canadian or U.S. Government obligations or currencies, or
securities of U.S. or Canadian companies. In such a case, the Portfolio would
not be pursuing, and may not achieve, its objective.
MAIN RISKS
The primary factor affecting this Portfolio's performance is stock market
movements in the countries in which the Portfolio is invested. Foreign
investments, particularly investments in emerging markets, carry added risks due
to inadequate or inaccurate financial information about companies, potential
political disturbances and fluctuations in currency exchange rates. Foreign
securities are often thinly traded and could be harder to sell at a fair price
generally, or in specific market situations.
In addition, the investment manager's choice of countries, market sectors or
specific investments may not perform as well as expected, and the Portfolio
could underperform its peers or lose money.
The use of certain derivatives could magnify losses.
PAST PERFORMANCE
The chart and table below provide some indication of the risks of investing in
the Portfolio by illustrating how the Portfolio has performed from year to year,
and comparing this information to a broad measure of market performance. Of
course, past performance is not necessarily an indication of future performance.
The information provided in the chart is for Class A shares
Total returns for years ended December 31
- --------------------------------------------------------------------------------
BAR CHART
- --------------------------------------------------------------------------------
For the period included in the bar chart, the Portfolio's highest return for a
calendar quarter was ___% (the second quarter of 19__), and the Portfolio's
lowest return for a calendar quarter was ____% (the first quarter of 19__).
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<PAGE>
The Portfolio's year-to-date total return as of March 31, 1999 was ____%.
Average Annual Total Returns
For periods ended
December 31, 1998 Class A Class B MSCI EAFE and Canada Index+
----------------- ------- ------- ---------------------------
One Year % % %
Five Years % % %
Ten Years % % %
Since Class Inception** - % %
- --------------------------------------------------------------------------------
**Inception date for Class B shares is _________________.
+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 Portfolio returns,
do not reflect any fees or expenses.
33
<PAGE>
INVESTMENT ADVISER
The Fund retains the investment management firm of Scudder Kemper Investments,
Inc., Two International Place, Boston, MA, to manage the Portfolios' daily
investment and business affairs subject to the policies established by the
Fund's Board. Scudder Kemper Investments, Inc. actively manages Portfolios'
investments. Professional management can be an important advantage for investors
who do not have the time or expertise to invest directly in individual
securities.
For the fiscal year ended December 31, 1998, Scudder Kemper Investments, Inc.
received the following investment management fee from each Portfolio on an
annual basis:
- --------------------------------------------------------------------------------
Portfolio % of average daily net assets
- --------------------------------------------------------------------------------
Money Market Portfolio
- --------------------------------------------------------------------------------
Bond Portfolio
- --------------------------------------------------------------------------------
Balanced Portfolio
- --------------------------------------------------------------------------------
Growth and Income Portfolio
- --------------------------------------------------------------------------------
Capital Growth Portfolio
- --------------------------------------------------------------------------------
Global Discovery Portfolio
- --------------------------------------------------------------------------------
International Portfolio
- --------------------------------------------------------------------------------
The investment adviser receives an annual fee payable monthly from each of the
Large Company Growth Portfolio and Small Company Growth Portfolio of ___% and
___%, respectively, of average daily net assets.
PORTFOLIO MANAGEMENT
Each Portfolio is managed by a team of investment professionals, who each plays
an important role in the Portfolio's management process. Team members work
together to develop investment strategies and select securities for the
Portfolio's portfolio. They are supported by the portfolio's investment
adviser's large staff of economists, research analysts, traders and other
investment specialists who work in Scudder Kemper Investments, Inc.'s offices
across the United States and abroad. The investment adviser believes its team
approach benefits portfolio investors by bringing together many disciplines and
leveraging its extensive resources.
The following investment professionals are associated with each Portfolio as
indicated:
Money Market Portfolio
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<PAGE>
Frank J. Rachwalski, lead portfolio manager, joined the adviser in ______ and
began his investment career in _______.
John W. Stuebe, portfolio manager, joined the adviser in ______ and began his
investment career in _______.
Bond Portfolio
Stephen A. Wohler, lead portfolio manager, joined the adviser in ______ and
began his investment career in _______.
Kelly D. Babson, portfolio manager, joined the adviser in ______ and began her
investment career in _______.
Balanced Portfolio
George Fraise, lead portfolio manager, joined the adviser in ______ and began
his investment career in _______.
Stephen A. Wohler, portfolio manager, joined the adviser in ______ and began his
investment career in _______.
Kelly D. Babson, portfolio manager, joined the adviser in ______ and began her
investment career in _______.
Growth and Income Portfolio
Robert T. Hoffman, lead portfolio manager, joined the adviser in ______ and
began his investment career in _______.
Benjamin W. Thorndike, portfolio manager, joined the adviser in ______ and began
his investment career in _______.
Kathleen Millard, portfolio manager, joined the adviser in ______ and began her
investment career in _______.
Lori Ensinger, portfolio manager, joined the adviser in ______ and began her
investment career in _______.
Capital Growth Portfolio
William F. Gadsden, lead portfolio manager, joined the adviser in ______ and
began his investment career in _______.
Bruce F. Beaty, portfolio manager, joined the adviser in ______ and began his
investment career in _______.
Large Company Growth Portfolio
______________, portfolio manager, joined the adviser in ______ and began his
investment career in _______.
Small Company Growth Portfolio
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<PAGE>
______________, portfolio manager, joined the adviser in ______ and began his
investment career in _______.
Global Discovery Portfolio
Gerald J. Moran, lead portfolio manager, joined the adviser in ______ and began
his investment career in _______.
Sewall Hodges, portfolio manager, joined the adviser in ______ and began his
investment career in _______.
International Portfolio
Irene T. Cheng, lead portfolio manager portfolio manager, joined the adviser in
______ and began her investment career in _______.
Nicholas Bratt, portfolio manager, joined the adviser in ______ and began his
investment career in _______.
Joan Gregory, portfolio manager, joined the adviser in ______ and began her
investment career in _______.
Deborah A. Chaplin,. portfolio manager, portfolio manager, joined the adviser in
______ and began her investment career in _______.
Sheridan Reilly, portfolio manager, joined the adviser in ______ and began his
investment career in _______.
Carol L. Franklin, portfolio manager, portfolio manager, joined the adviser in
______ and began her investment career in _______.
YEAR 2000 READINESS
Like other mutual funds and financial and business organizations worldwide, the
portfolio could be adversely affected if computer systems on which the portfolio
relies, which primarily include those used by the portfolio's investment
adviser, its affiliates or other service providers, are unable to correctly
process date-related information on and after January 1, 2000. The risk is
commonly called the Year 2000 issue. Failure to successfully address the Year
2000 issue could result in interruptions to and other material adverse effects
on the portfolio's business and operations, such as problems with calculating
net asset value and difficulties in implementing the portfolio's purchase and
redemption procedures. The portfolio's investment adviser has commenced a review
of the Year 2000 issue as it may affect the portfolio and is taking steps it
believes are reasonably designed to address the Year 2000 issue, although there
can be no assurances that these steps will be sufficient. In addition, there can
be no assurances that the Year 2000 issue will not have an adverse effect on the
issuers whose securities are held by the portfolio or on global markets or
economies generally.
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<PAGE>
EURO CONVERSION
The introduction of a new European currency, the Euro, on January 1, 1999 may
result in uncertainties for European securities in the markets in which they
trade and with respect to the operation of the portfolio's portfolio. The Euro,
introduced by eleven European countries that are members of the European
Economic and Monetary Union (EMU), has required the redenomination of European
debt and equity securities which will be taking place over a period of time and
may result in various accounting differences and/or tax treatments that
otherwise would not likely occur. Additional questions are raised by the fact
that certain other EMU members, including the United Kingdom, did not implement
the Euro on January 1, 1999.
The Adviser is actively working to address Euro-related issues as they occur and
understands that other key service providers are taking similar steps. At this
time, however, no one knows precisely what the overall degree of impact will be.
To the extent that the market impact or effect on the portfolio's portfolio
holdings is negative, it could hurt the portfolio's performance.
DISTRIBUTOR
Scudder Investor Services, Inc. is the Fund's distributor.
The Fund has adopted a plan pursuant to Rule 12b-1 under the Investment Company
Act of 1940 for the Class B shares of the Fund. Under the Rule 12b-1 plan, each
Portfolio participating in the plan may pay the distributor (for remittance to a
Participating Insurance Company) for various costs incurred or paid by such
company in connection with the distribution of the Class B shares of that
Portfolio. Depending on the Participating Insurance Company's corporate
structure and applicable state law, the distributor may remit payments to the
Participating Insurance Company's affiliated broker-dealers or other affiliated
company rather than the Participating Insurance Company itself.
The plan provides that the Fund, on behalf of each Portfolio, shall pay Scudder
Investor Services, Inc. as distributor a fee of up to 0.25% of the average daily
net assets of a Portfolio attributable to the Class B shares. Under the plan,
the Fund may make quarterly payments to the distributor for remittance to a
Participating Insurance Company for distribution and shareholder servicing
related expenses incurred or paid by the Participating Insurance Company. No
such payment shall be made with respect to any quarterly period in excess of an
amount determined for such period at the annual rate of 0.25% of the average
daily net assets of Class B shares of the Portfolios attributable to that
Participating Insurance Company's variable annuity contracts and variable life
insurance policies during that quarterly period.
Expenses payable pursuant to the Plan may include but are not necessarily
limited to: printing and mailing of Fund prospectuses, statements of additional
information, any supplements thereto and shareholder reports for existing and
prospective variable annuity contracts and variable life insurance policy
owners; those relating to the
37
<PAGE>
development, preparation, printing and mailing of Fund advertisements, sales
literature and other promotional materials describing or relating to the Fund
and including materials intended for use within the Participating Insurance
Company, or for broker-dea;er only use or retail use; holding seminars and sales
meetings designed to promote the distribution of Fund shares; obtaining
information and providing explanations to variable annuity contract and variable
life insurance policy owners regarding Fund investment objectives and policies
and other information about the Fund and its Portfolios, including the
performance of the Portfolios; training sales personnel regarding the Fund;
compensating sales personnel in connection with the allocation of cash values
and premiums of variable annuity contract and variable life insurance policy
owner accounts with respect to Fund shares attributable to such accounts; and
financing any other activity that the Fund's Board of Trustees determines is
primarily intended to result in the sale of Fund shares.
PURCHASES AND REDEMPTIONS
Except for the Money Market Portfolio, 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 the Rule 12b-1 plan. Class B shares are
offered at net asset value and are subject to fees imposed pursuant to the Rule
12b-1 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 variable annuity contracts and variable life
insurance policies. Orders received by the Fund or its agent are effected on
days on with the New York Stock Exchange is open for trading. For orders
received before the close of regular trading on the New York Stock 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 New York Stock 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.
Should any conflict between variable annuity contract and variable life
insurance policy holders arise which would require a substantial amount of net
assets be withdrawn from a Portfolio, orderly portfolio management could be
disrupted to the potential detriment of such contract and policy holders.
NET ASSET VALUE
Scudder Fund Accounting Corporation determines the net asset value per share of
each Portfolio as of the close of regular trading on the New York Stock
Exchange, normally 4 p.m. eastern time, on each day the New York Stock Exchange
is open for trading.
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<PAGE>
Net asset value per share is calculated by dividing the value of total Portfolio
assets, less all liabilities, by the total number of shares outstanding. Current
market quotations are used to determine the value of each Portfolio's assets
other than the Money Market Portfolio which uses amortized cost value. When
market quotations are not available or the adviser believes they are unreliable,
a Portfolio may use valuation procedures established by its Board.
To the extent that a Portfolio invests in foreign securities, these securities
may be listed on foreign exchanges that trade on days when the Portfolio does
not price its shares. As a result, the net asset value of a Portfolio may change
at a time when shareholders are not able to purchase or redeem their shares.
The net asset value per share of the Money Market Portfolio is normally $1.00
calculated at amortized cost in accordance with a rule of the Securities and
Exchange Commission (Rule 2a-7).
The Money Market Portfolio purchases only securities with a maturity of one year
or less and maintains a dollar-weighted average portfolio maturity of 90 days or
less. In addition, the Money Market Portfolio limits its portfolio investments
to securities that meet the quality and diversification requirements of Rule
2a-7 under the Investment Company Act of 1940.
DISTRIBUTIONS
Dividends and capital gains distributions
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, Capital Growth, Large Company
Growth and Small Company Growth Portfolios will declare and distribute dividends
from their net investment income, if any, quarterly, in January, April, July and
October. The Global Discovery and International Portfolios each intend to
distribute their net investment income annually within three months of the
Fund's fiscal year-end of December 31, although an additional distribution may
be made if necessary. Dividends declared in October, November or December with a
record date in such month and paid during the following January will be treated
by shareholders for federal income tax purposes as if received on December 31 of
the calendar year declared.
All distributions will be reinvested in shares of the 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.
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<PAGE>
TAXES
The Internal Revenue Code of 1986 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 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 variable annuity contracts and
variable life insurance 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 variable annuity contracts
and variable life insurance 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 Internal Revenue Code of 1986 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 taxable to individual shareholders. 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.
40
<PAGE>
FINANCIAL HIGHLIGHTS
The tables below are intended to help you understand the Portfolios'
financial performance for the period reflected below. Certain information
reflects the financial results for a single Portfolio share. The total return
figures show what an investor in a Portfolio would have earned (or lost)
assuming reinvestment of all distributions. This information had been audited by
PricewaterhouseCoopers LLP whose report, along with the Portfolios' financial
statements, are included in the Portfolios' annual reports, which are available
upon request by calling Scudder at 1-800-____________.
[TO BE COMPLETED]
41
<PAGE>
Additional information about the Portfolios may be found in the Fund's Statement
of Additional Information and in shareholder reports. Shareholder inquiries may
be made by calling the toll-free telephone number listed below. The Statement of
Additional Information contains information on Portfolio investments and
operations. The semiannual and annual shareholder reports contain a discussion
of the market conditions and the investment strategies that significantly
affected the Portfolios' performance during the last fiscal year, as well as a
listing of portfolio holdings and financial statements. These and other Fund
documents may be obtained without charge from the following sources:
--------------------------------------------------------------------------
By Phone: In Person:
--------------------------------------------------------------------------
Call Scudder at: Public Reference Room
Securities and Exchange Commission,
1-800-_________ Washington, D.C.
(Call 1-800-SEC-0330 for more
information).
--------------------------------------------------------------------------
By Mail: By Internet:
--------------------------------------------------------------------------
http://www.sec.gov
http://www.scudder.com
Or
Public Reference Section,
Securities and Exchange
Commission, Washington, D.C.
20549-6009
(a duplication fee is charged)
--------------------------------------------------------------------------
The Statement of Additional Information is incorporated by reference into
this prospectus (is legally a part of this prospectus).
Investment Company Act file numbers:
Scudder Variable Life Investment Fund 811-_________.
Printed with SOYINK Printed on recycled paper
xx-xx-xx
(codes)
<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) long-term growth of capital through
investment primarily in equity securities of seasoned,
financially strong U.S. growth companies, (vii) long-term
capital appreciation through investment primarily in
securities of emerging growth companies poised to be leaders
in the 21st century, (viii) above-average capital
appreciation over the long term by investing primarily in
the equity securities of small companies located throughout
the world, and (ix) 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
Large Company Growth Portfolio...........................................6
Small Company Growth Portfolio...........................................7
Global Discovery Portfolio...............................................9
Risk Factors Regarding Global Discovery Portfolio.......................10
International Portfolio.................................................15
POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS..........................17
Repurchase Agreements...................................................17
Debt Securities.........................................................18
Illiquid Securities.....................................................18
Trust Preferred Securities..............................................18
Zero Coupon Securities..................................................19
Real Estate Investment Trusts...........................................19
Mortgage-Backed Securities and Mortgage Pass-Through Securities.........20
Collateralized Mortgage Obligations ("CMOs")............................21
FHLMC Collateralized Mortgage Obligations...............................21
Other Mortgage-Backed Securities........................................22
Other Asset-Backed Securities...........................................22
Municipal Obligations...................................................23
Convertible Securities..................................................23
Depositary Receipts.....................................................24
Foreign Securities......................................................24
Limitations on Holdings of Foreign Securities for the Bond, Balanced,
Growth and Income, and International Portfolios.........................25
Indexed Securities......................................................26
When-Issued Securities..................................................26
Loans of Portfolio Securities...........................................27
Borrowing...............................................................27
Options for the Bond, Balanced, Growth and Income, Capital Growth and
International Portfolios................................................27
Securities Index Options................................................29
Futures Contracts.......................................................29
Futures on Debt Securities..............................................30
Limitations on the Use of Futures Contracts and Options on Futures......31
Foreign Currency Transactions...........................................32
Strategic Transactions and Derivatives Applicable to the Global
Discovery Portfolio.....................................................34
Debt Securities.........................................................41
High Yield, High Risk Securities........................................41
Combined Transactions...................................................42
Risks of Specialized Investment Techniques Abroad.......................42
INVESTMENT RESTRICTIONS.......................................................42
PURCHASES AND REDEMPTIONS.....................................................43
INVESTMENT ADVISER AND DISTRIBUTOR............................................44
Investment Adviser......................................................44
Personal Investments by Employees of the Adviser........................48
Distributor.............................................................48
TRUSTEES AND OFFICERS.........................................................50
REMUNERATION..................................................................52
Responsibilities of the Board--Board and Committee Meetings.............52
i
<PAGE>
TABLE OF CONTENTS (continued)
Page
Compensation of Officers and Trustees...................................52
NET ASSET VALUE...............................................................53
TAX STATUS....................................................................54
DIVIDENDS AND DISTRIBUTIONS...................................................58
Money Market Portfolio..................................................58
Global Discovery Portfolio and International Portfolio..................59
Other Portfolios........................................................59
PERFORMANCE INFORMATION.......................................................59
Money Market Portfolio..................................................59
Bond Portfolio..........................................................60
All Portfolios..........................................................60
Comparison of Portfolio Performance.....................................62
SHAREHOLDER COMMUNICATIONS....................................................65
ORGANIZATION AND CAPITALIZATION...............................................66
General.................................................................66
Shareholder and Trustee Liability.......................................67
ALLOCATION OF PORTFOLIO BROKERAGE.............................................67
PORTFOLIO TURNOVER............................................................69
EXPERTS.......................................................................69
COUNSEL.......................................................................69
ADDITIONAL INFORMATION........................................................69
FINANCIAL STATEMENTS..........................................................70
APPENDIX......................................................................71
Description of Bond Ratings.............................................71
Description of Commercial Paper Ratings.................................72
ii
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
(See "INVESTMENT CONCEPT OF THE FUND" and
"INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS"
in the Fund's prospectus.)
Scudder Variable Life Investment Fund (the "Fund") is an open-end,
diversified registered management investment company established as a
Massachusetts business trust. The Fund is a series fund consisting of the Money
Market Portfolio, Bond Portfolio, Balanced Portfolio, Growth and Income
Portfolio, Capital Growth Portfolio, Large Company Growth Portfolio, Small
Company 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 U.S. 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 short-term rating categories) by any two
nationally-recognized statistical 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
short-term rating 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 eligible for
investment by the Money Market Portfolio 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 statistical
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
<PAGE>
those associated with investments in certificates of deposit and bankers'
acceptances issued by domestic banks. (See "Foreign Securities" in this
Statement of Additional Information for further risks of foreign investment.)
The Money Market Portfolio may also invest in certificates of deposit
issued by banks and savings and loan institutions which had at the time of their
most recent annual financial statements total assets of less than $1 billion,
provided that (i) the principal amounts of such certificates of deposit are
insured by an agency of the U.S. Government, (ii) at no time will the Portfolio
hold more than $100,000 principal amount of certificates of deposit of any one
such bank, and (iii) at the time of acquisition, no more than 10% of the
Portfolio's assets (taken at current value) are invested in certificates of
deposit of such banks having total assets not in excess of $1 billion.
The assets of the Money Market Portfolio consist entirely of cash items
and investments having a remaining maturity date of 397 calendar days or less
from date of purchase. The Portfolio will be managed so that the average
maturity of all instruments in the portfolio (on a dollar-weighted basis) will
be 90 days or less. The average maturity of the Portfolio's investments varies
according to the Adviser's appraisal of money market conditions.
The Portfolio may invest more than 5% but not more than 25% 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 debt 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
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. During the fiscal year ended December 31, 1997, the average monthly
dollar-
2
<PAGE>
weighted market value of the bonds in the Portfolio's portfolio was rated as
follows: 53% Aaa, 4% Aa, 15% A, 18% Baa, 6% Ba and 4% B.
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 Corporation 500 Composite Stock Price Index ("S&P 500").
The Portfolio will invest primarily in securities issued by medium-to-large
sized domestic companies with annual revenues or market capitalization of at
least $600 million, and which, in the opinion of the Adviser, offer
above-average potential for price appreciation. The Portfolio seeks to invest in
companies that have relatively consistent and above-average rates of growth;
companies that are in a strong financial position with high credit standings and
profitability; firms with important business franchises, leading products, or
dominant marketing and distribution systems; companies guided by experienced and
motivated managements; and companies selling at attractive market valuations.
The Adviser believes that companies with these characteristics will be rewarded
by the market with higher stock prices over time and provide investment returns,
on average, in excess of the S&P 500.
At least 65% of the value of the Portfolio's common stocks will be of
issuers which qualify, at the time of purchase, for one of the three highest
equity earnings and dividends ranking categories (A+, A, or A-) of S&P, or if
not ranked by S&P, are judged to be of comparable quality by the Adviser. S&P
assigns earnings and dividends rankings to corporations based on a number of
factors, including stability and growth of earnings and dividends. Rankings by
S&P are not an appraisal of a company's creditworthiness, as is true for S&P's
debt security ratings, nor are these rankings intended as a forecast of future
stock market performance. In addition to using S&P rankings of earnings and
dividends of common stocks, the Adviser conducts its own analysis of a company's
history, current financial position, and earnings prospects.
3
<PAGE>
To enhance income and stability, the Portfolio's remaining assets are
allocated to bonds and other fixed income securities, including cash reserves.
The Portfolio will normally invest 25% to 50% of its net assets in fixed income
securities. However, at least 25% of the Portfolio's net assets will always be
invested in fixed income securities. The Portfolio can invest in a broad range
of corporate bonds and notes, convertible bonds, and preferred and convertible
preferred securities. It may also purchase U.S. Government securities and
obligations of federal agencies and instrumentalities that are not backed by the
full faith and credit of the U.S. Government, such as obligations of the Federal
Home Loan Banks, Farm Credit Banks, and the Federal Home Loan Mortgage
Corporation. The Portfolio may also invest in obligations of international
agencies, foreign debt securities (both U.S. and non-U.S. dollar-denominated),
mortgage-backed and other asset-backed securities, municipal obligations,
restricted securities issued in private placements and zero coupon securities.
Zero coupon securities are subject to greater market value fluctuations from
changing interest rates than debt obligations of comparable maturities that make
current cash distributions of interest. The Portfolio may invest in special
purpose trust securities ("Trust Preferred Securities").
For liquidity and defensive purposes, the Portfolio may invest without
limit in cash and in money market securities such as commercial paper, bankers'
acceptances, and certificates of deposit issued by domestic and foreign branches
of U.S. banks. The Portfolio may also enter into repurchase agreements with
respect to U.S. Government securities.
Not less than 50% of the Portfolio's debt securities will be invested in
debt obligations, including money market instruments, that (a) are issued or
guaranteed by the U.S. Government, (b) are rated at the time of purchase within
the two highest ratings categories by any nationally-recognized rating service
or (c) if not rated, are judged at the time of purchase, by the Adviser to be of
a quality comparable to obligations rated as described in (b) above. Not less
than 80% of the debt obligations in which the Portfolio invests will, at the
time of purchase, be rated within the three highest ratings categories of any
such service or, if not rated, will be judged to be of comparable quality by the
Adviser. Up to 20% of the Portfolio's debt securities may be invested in bonds
rated below A but no lower than B by Moody's or S&P, or unrated securities
judged by the Adviser to be of comparable quality. Debt securities which are
rated below investment-grade (that is, rated below Baa by Moody's or below BBB
by S&P and commonly referred to as "junk bonds") and unrated securities of
comparable quality, which usually entail greater risk (including the possibility
of default or bankruptcy of the issuers of such securities), generally involve
greater volatility of price and risk of principal and income, and may be less
liquid than securities in the higher rating categories. Securities rated B
involve a high degree of speculation with respect to the payment of principal
and interest. Should the rating of any security held by the Portfolio be
downgraded after the time of purchase, the Adviser will determine whether it is
in the best interest of the Portfolio to retain or dispose of the security.
See the Appendix to this Statement of Additional Information for a more
complete description of the ratings assigned by ratings organizations and their
respective characteristics.
The Portfolio will, on occasion, adjust its mix of investments among
equity securities, bonds, and cash reserves. In reallocating investments, the
Adviser weighs the relative values of different asset classes and expectations
for future returns. In doing so, the Adviser analyzes, on a global basis, the
level and direction of interest rates, capital flows, inflation expectations,
anticipated growth of corporate profits, monetary and fiscal policies around the
world, and other related factors. The Portfolio does not take extreme investment
positions as part of an effort to "time the market." Shifts between stocks and
fixed income investments are expected to occur in generally small increments
within the guidelines adopted in this Statement of Additional Information. The
Portfolio is designed as a conservative, long-term investment program.
While the Portfolio emphasizes U.S. equity and debt securities, it may
invest a portion of its assets in foreign securities, including depositary
receipts. The Portfolio's foreign holdings will meet the criteria applicable to
its domestic investments. The international component of the Portfolio's
investment program is intended to increase diversification, thus reducing risk,
while providing the opportunity for higher returns.
In addition, the Portfolio may invest in securities on a when-issued or
forward delivery basis. The Portfolio may, for hedging purposes, purchase
forward foreign currency exchange contracts and foreign currencies in the form
of bank deposits. The Portfolio may also purchase other foreign money market
instruments including, but not limited to, bankers' acceptances, certificates of
deposit, commercial paper, short-term government obligations and repurchase
agreements.
4
<PAGE>
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.
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:
5
<PAGE>
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.
Large Company Growth Portfolio
Large Company Growth Portfolio seeks to provide long-term growth of
capital through investment primarily in the equity securities of seasoned,
financially strong U.S. growth companies. Although current income is an
incidental consideration, many of the Portfolio's securities should provide
regular dividends which are expected to grow over time.
The Portfolio's equity investments consist of common stocks, preferred
stocks and securities convertible into common stocks of companies which offer
the prospect for above-average growth in earnings, cash flow or assets relative
to the overall market as defined by the S&P 500. The prospect for above-average
growth in assets is evaluated in terms of the potential future earnings such
growth in assets can produce.
The Portfolio allocates its investments among different industries and
companies, and adjusts its portfolio securities based on long-term investment
considerations as opposed to short-term trading. While the Portfolio emphasizes
U.S. investments, it can commit a portion of assets to the equity securities of
foreign growth companies which meet the criteria applicable to domestic
investments.
Except as otherwise indicated, the Portfolio's investment objective and
policies are not fundamental and may be changed without a vote of shareholders.
If there is a change in investment objective, shareholders should consider
whether the Portfolio remains an appropriate investment in light of their then
current financial position and needs. The net asset value of the Portfolio's
shares will increase or decrease with changes in the market price of the
Portfolio's investments, and there can be no assurance that the Portfolio's
objective will be met.
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The Portfolio invests primarily in the equity securities issued by
large-sized domestic companies that offer above-average appreciation potential.
In seeking such investments, the Portfolio invests in companies with the
following characteristics:
o companies that have exhibited above-average growth rates over an
extended period with prospects for maintaining greater than average
rates of growth in earnings, cash flow or assets in the future;
o companies that are in a strong financial position with high credit
standings and profitability;
o companies with important business franchises, leading products or
dominant marketing and distribution systems;
o companies guided by experienced, motivated management;
o companies selling at attractive prices relative to potential growth
in earnings, cash flow or assets.
The Adviser utilizes a combination of qualitative and quantitative
research techniques to identify companies that have above-average quality and
growth characteristics and that are deemed to be selling at attractive market
valuations. In-depth fundamental research is used to evaluate various aspects of
corporate performance, with a particular focus on consistency of results,
long-term growth prospects and financial strength. Quantitative valuation models
are designed to help determine which growth companies offer the best values at a
given point in time. From time to time, for temporary defensive or emergency
purposes, the Portfolio may invest a portion of its assets in cash and cash
equivalents when the Adviser deems such a position advisable in light of
economic or market conditions. It is impossible to predict for how long such
alternate strategies may be utilized. The Portfolio also may invest in foreign
securities, repurchase agreements, and may engage in strategic transactions.
The Portfolio invests at least 65% of its total assets in the equity
securities of large U.S. growth companies, i.e., those with total market
capitalization of $1 billion or more. The Portfolio looks for companies with
above-average financial quality. When assessing financial quality, the Adviser
weighs four elements of business risk. These factors are the Adviser's
assessment of the strength of a company's balance sheet, the accounting
practices a company follows, the volatility of a company's earnings over time
and the vulnerability of earnings to changes in external factors, such as the
general economy, the competitive environment, governmental action and
technological change.
The Large Company 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.
Small Company Growth Portfolio
The Small Company Growth Portfolio pursues long-term growth of capital by
investing in emerging growth companies that are poised to be leaders in the next
century. The Portfolio is designed for investors in search of substantial
long-term growth who can accept above-average stock market risk and little or no
current income.
Due to the business characteristics and risks of emerging growth
companies, the Portfolio's share price can experience periods of volatility. As
a result, the Portfolio should be considered a long-term investment and only one
part of a well-diversified personal investment portfolio. Except as otherwise
indicated, the Portfolio's investment objective and policies are not fundamental
and may be changed without a vote of shareholders. If there is a change in
investment objective, shareholders should consider whether the Portfolio remains
an appropriate investment in light of their then current financial position and
needs. There can be no assurance that the Portfolio's objective will be met.
The Portfolio normally invests at least 80% of its assets in common
stocks. Companies in which the Portfolio invests generally are similar in size
to those included in the Russell 2000(R) Index --a widely used benchmark of
small stock performance. The Portfolio's Adviser believes these companies are
well-positioned for above-average earnings growth and/or greater market
recognition. Such favorable prospects may be a result of new or innovative
products or services a given company is developing or provides, products or
services that have the potential to impact significantly the industry in which
the company competes or to change dramatically customer behavior into the 21st
century. The above-average earnings growth potential and/or greater market
recognition expected are factors believed to offer significant opportunity for
capital appreciation, and the Adviser will attempt to identify these
opportunities before their potential is recognized by investors in general.
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To help reduce risk in its search for high quality, emerging growth
companies, the Adviser allocates the Portfolio's investments among many
companies and different industries in the U. S. and, where opportunity warrants,
abroad as well. The Adviser seeks companies that, in the Adviser's opinion, have
excellent management which own a significant stake in the company, clean balance
sheets, conservative accounting, and either a commanding position in a growing
market or the real possibility of building a commanding position as the 21st
century approaches. Emerging growth companies are those with the ability, in the
Adviser's opinion, to expand earnings per share by at least 15% per annum over
the next three to five years at a minimum. In selecting specific industries and
companies for investment, the Adviser will make full use of its extensive
fundamental and field research capabilities in taking into account such other
factors as overall growth prospects and financial condition, competitive
situation, technology, research and development activities, productivity, labor
costs, raw material costs and sources, profit margins, return on investment,
structural changes in local economies, capital resources, the degree of
governmental regulation or deregulation facing a company, and quality and
experience of management.
For temporary defensive purposes the Portfolio may vary from its
investment policy during periods in which conditions in securities markets or
other economic or political conditions warrant. It is impossible to accurately
predict how long such alternate strategies may be utilized. In such cases, the
Portfolio may hold without limit, cash, high grade debt securities, without
equity features, which are rated Aaa, Aa or A by Moody's or AAA, AA or A by S&P,
or, if unrated, are deemed by the Adviser to be of equivalent quality, U.S.
Government securities and invest in money market instruments which are rated in
the two highest categories by Moody's or S&P, or, if unrated, are deemed by the
Adviser to be of equivalent quality. The Portfolio may borrow money for
temporary, emergency or other purposes, including investment leverage purposes,
as determined by the Trustees. The Portfolio may also borrow under reverse
repurchase agreements. The 1940 Act requires borrowings to have 300% asset
coverage.
In addition, the Portfolio may invest in preferred stocks when management
anticipates that the capital appreciation on such stocks is likely to equal or
exceed that of common stocks over a selected time. The Portfolio may enter into
repurchase agreements and may engage in strategic transactions.
The Portfolio offers participation in the potential growth of emerging
growth companies that may be destined to become leading companies in the 21st
century. The Portfolio offers the benefit of professional management to identify
investments in emerging growth companies with the greatest potential, in the
Adviser's opinion, to have a profound and positive impact on the lives of
consumers and businesses as we enter the 21st century. The Adviser anticipates
finding these companies in many rapidly changing sectors of the economy.
Examples include innovative retailing concepts, the on-going U.S. transition to
an increasingly service-based economy, advances in health care in areas such as
biotechnology, and the tremendous, rapid advances occurring in communications,
computing, software and technology generally. In return for accepting
above-average market risk, investors gain access to a broadly diversified
portfolio designed for above-average capital appreciation compared to that
available from larger companies such as those in the S&P 500 Stock Index.
Foreign securities such as those which may be purchased by the Portfolio
may be subject to foreign government taxes which could reduce the return on such
securities, although a shareholder of the Portfolio may, subject to certain
limitations, be entitled to claim a credit or deduction for U.S. federal income
tax purposes for his or her proportionate share of such foreign taxes paid by
the Portfolio. (See "TAXES.")
Historical small stock performance. The Ibbotson US Small Stock Index is
commonly used to show historical performance of smaller stocks due to the
extensive range of data points offered (1926 to the present). According to
Ibbotson, smaller stocks outperform larger stocks over time. For the years 1973
to 1997 (25 years), the average annual return for the Ibbotson Index was 16.30%
compared with 13.10% for larger stocks -- a difference of over 3%.
While, historically, small company stocks have outperformed the stocks of
large companies, the former have customarily involved more investment risk as
well. Small companies may have limited product lines, markets or financial
resources; may lack management depth or experience; and may be more vulnerable
to adverse general market or economic developments than large companies. The
prices of small company securities are often more volatile than prices
associated with large company issues, and can display abrupt or erratic
movements at times, due to limited trading volumes and less publicly available
information.
Also, because small companies normally have fewer shares outstanding and
these shares trade less frequently than large companies, 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
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personnel. The securities of small companies are often traded over-the-counter
and may not be traded in the volumes typical on a national securities exchange.
Consequently, in order to sell this type of holding, the Portfolio may need to
discount the securities from recent prices or dispose of the securities over a
long period of time.
Defining "emerging growth" companies. The Adviser's model of the corporate life
cycle begins with investment of venture capital, and proceeds to an `emerging
growth' stage. An `emerging growth' company is publicly traded, with a market
value of at least $50 million. Emerging growth companies are part of the `small
stock universe' as described above.
Emerging growth companies grow into `established growth' companies with
market values exceeding $500 million. Companies become mature over time as
growth slows and market capitalizations grow beyond $1 billion.
The Small Company 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 Corporation 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
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
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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 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 Portfolio 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
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
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the Portfolio to make intended security purchases due to settlement problems
could cause the Portfolio to miss attractive investment opportunities. Inability
to dispose of portfolio securities due to settlement problems either could
result in losses to the Portfolio due to subsequent declines in value of the
portfolio security or, if the Portfolio has entered into a contract to sell the
security, could result in possible liability to the purchaser. Fixed commissions
on some foreign securities exchanges are generally higher than negotiated
commissions on U.S. exchanges, although the Adviser will endeavor to achieve the
most favorable net results on the Portfolio's portfolio transactions. Further,
the Portfolio may encounter difficulties or be unable to pursue legal remedies
and obtain judgment in foreign courts. There is generally less government
supervision and regulation of business and industry practices, securities
exchanges, brokers and listed companies than in the U.S. It may be more
difficult for the Portfolio's agents to keep currently informed about corporate
actions such as stock dividends or other matters which may affect the prices of
portfolio securities. Communications between the U.S. and foreign countries may
be less reliable than within the U.S., thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio
securities. In addition, with respect to certain foreign countries, there is the
possibility of nationalization, expropriation, the imposition of confiscatory or
withholding taxation, political, social or economic instability, or diplomatic
developments which could affect U.S. investments in those countries. Investments
in foreign securities may also entail certain risks, such as possible currency
blockages or transfer restrictions, and the difficulty of enforcing rights in
other countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position. The Adviser seeks to mitigate the risks to the
Portfolio associated with the foregoing considerations through investment
variation and continuous professional management.
Limitations on Holdings of Foreign Securities. The Portfolio shall invest in no
less than five foreign countries; provided that, (i) if foreign securities
comprise less than 80% of the value of the Portfolio's net assets, the Portfolio
shall invest in no less than four foreign countries; (ii) if foreign securities
comprise less than 60% of the value of the Portfolio's net assets, the Portfolio
shall invest in no less than three foreign countries; (iii) if foreign
securities comprise less than 40% of the value of the Portfolio's net assets,
the Portfolio shall invest in no less than two foreign countries; and (iv) if
foreign securities comprise less than 20% of the value of the Portfolio's net
assets the Portfolio may invest in a single foreign country.
The Portfolio shall invest no more than 20% of the value of its net assets
in securities of issuers located in any one country; provided that an additional
15% of the value of the Portfolio's net assets may be invested in securities of
issuers located in any one of the following countries: Australia, Canada,
France, Japan, the United Kingdom and Germany; and provided further that 100% of
the Portfolio's assets may be invested in securities of issuers located in the
United States.
Eastern Europe. Investments in companies domiciled in Eastern European countries
may be subject to potentially greater risks than those of other foreign issuers.
These risks include (i) potentially less social, political and economic
stability; (ii) the small current size of the markets for such securities and
the low volume of trading, which result in less liquidity and in greater price
volatility; (iii) certain national policies which may restrict the Portfolio's
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in certain Eastern European countries, of a capital
market structure or market-oriented economy; and (vii) the possibility that
recent favorable economic developments in Eastern Europe may be slowed or
reversed by unanticipated political or social events in such countries, or in
the countries of the former Soviet Union. The Portfolio may invest up to 5% of
its total assets in the securities of issuers domiciled in Eastern European
countries.
Investments in such countries involve risks of nationalization,
expropriation and confiscatory taxation. The Communist governments of a number
of East European countries expropriated large amounts of private property in the
past, in many cases without adequate compensation, and there may be no assurance
that such expropriation will not occur in the future. In the event of such
expropriation, the Portfolio 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.
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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 the Portfolio's assets daily in terms of U.S. dollars, the Portfolio does
not intend to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. The Portfolio will do so from time to time, and investors should be
aware of the costs of currency conversion. Although foreign exchange dealers do
not charge a fee for conversion, they do realize a profit based on the
difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Portfolio at one rate, while offering a lesser rate of exchange should
the Portfolio desire to resell that currency to the dealer. The Portfolio will
conduct its foreign currency exchange transactions either on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market, or
through entering into forward or futures contracts to purchase or sell foreign
currencies.
Because the Portfolio normally will be invested in both U.S. and foreign
securities markets, changes in the Portfolio's share price may have a low
correlation with movements in the U.S. markets. The Portfolio's share price will
reflect the movements of both the different stock and bond markets in which it
is invested and of the currencies in which the investments are denominated. The
strength or weakness of the U.S. dollar against foreign currencies may account
for part of the Portfolio's investment performance. U.S. and foreign securities
markets do not always move in step with each other, and the total returns from
different markets may vary significantly. The Portfolio invests in many
securities markets around the world in an attempt to take advantage of
opportunities wherever they may arise.
Investing in Emerging Markets. Most emerging securities markets may have
substantially less volume and are subject to less government supervision than
U.S. securities markets. Securities of many issuers in emerging markets may be
less liquid and more volatile than securities of comparable domestic issuers. In
addition, there is less regulation of securities exchanges, securities dealers,
and listed and unlisted companies in emerging markets than in the United States.
Emerging markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions. Delays in settlement
could result in temporary periods when a portion of the assets of the Portfolio
is uninvested and no cash is earned thereon. The inability of the Portfolio to
make intended security purchases due to settlement problems could cause the
Portfolio to miss attractive investment opportunities. Inability to dispose of
portfolio securities due to settlement problems could result either in losses to
the Portfolio due to subsequent declines in value of the portfolio security or,
if the Portfolio 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
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economies and securities markets of certain emerging market countries. In an
attempt to control inflation, wage and price controls have been imposed in
certain countries. Of these countries, some, in recent years, have begun to
control inflation through prudent economic policies.
Investing in Latin America. Investing in securities of Latin American issuers
may entail risks relating to the potential political and economic instability of
certain Latin American countries and the risks of expropriation,
nationalization, confiscation or the imposition of restrictions on foreign
investment and on repatriation of capital invested. In the event of
expropriation, nationalization or other confiscation by any country, the
Portfolio could lose its entire investment in any such country.
The securities markets of Latin American countries are substantially
smaller, less developed, less liquid and more volatile than the major securities
markets in the U.S. Disclosure and regulatory standards are in many respects
less stringent than U.S. standards. Furthermore, there is a lower level of
monitoring and regulation of the markets and the activities of investors in such
markets.
The limited size of many Latin American securities markets and limited
trading volume in the securities of Latin American issuers compared to volume of
trading in the securities of U.S. issuers could cause prices to be erratic for
reasons apart from factors that affect the soundness and competitiveness of the
securities issuers. For example, limited market size may cause prices to be
unduly influenced by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on in-depth fundamental analysis,
may decrease the value and liquidity of portfolio securities.
The Portfolio may invest a portion of its assets in securities denominated
in currencies of Latin American countries. Accordingly, changes in the value of
these currencies against the U.S. dollar may result in corresponding changes in
the U.S. dollar value of the Portfolio's assets denominated in those currencies.
Some Latin American countries also may have managed currencies, which are
not free floating against the U.S. dollar. In addition, there is risk that
certain Latin American countries may restrict the free conversion of their
currencies into other currencies. Further, certain Latin American currencies may
not be internationally traded. Certain of these currencies have experienced a
steep devaluation relative to the U.S. dollar. Any devaluations in the
currencies in which the Portfolio securities are denominated may have a
detrimental impact on the Portfolio's net asset value.
The economies of individual Latin American countries may differ favorably
or unfavorably from the U.S. economy in such respects as the rate of growth of
gross domestic product, the rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. Certain Latin American
countries have experienced high levels of inflation which can have a
debilitating effect on an economy, although some have begun to control inflation
in recent years through prudent economic policies. Furthermore, certain Latin
American countries may impose withholding taxes on dividends payable to the
Portfolio at a higher rate than those imposed by other foreign countries. This
may reduce the Portfolio's investment income available for distribution to
shareholders.
Certain Latin American countries such as Argentina, Brazil and Mexico are
among the world's largest debtors to commercial banks and foreign governments.
At times, certain Latin American countries have declared moratoria on the
payment of principal and/or interest on outstanding debt.
Latin America is a region rich in natural resources such as oil, copper,
tin, silver, iron ore, forestry, fishing, livestock and agriculture. The region
has a large population (roughly 300 million) representing a large domestic
market. Economic growth was strong in the 1960s and 1970s, but slowed
dramatically (and in some instances was negative) in the 1980s as a result of
poor economic policies, higher international interest rates, and the denial of
access to new foreign capital. Although a number of Latin American countries are
currently experiencing lower rates of inflation and higher rates of real growth
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
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largest in those countries. As a result, government actions in the future could
have a significant effect on economic conditions which may adversely affect
prices of certain portfolio securities. Expropriation, confiscatory taxation,
nationalization, political, economic or social instability or other similar
developments, such as military coups, have occurred in the past and could also
adversely affect the Fund's investments in this region.
Changes in political leadership, the implementation of market oriented
economic policies, such as privatization, trade reform and fiscal and monetary
reform are among the recent steps taken to renew economic growth. External debt
is being restructured and flight capital (domestic capital that has left home
country) has begun to return. Inflation control efforts have also been
implemented. Free Trade Zones are being discussed in various areas around the
region, the most notable being a free zone among Mexico, the U.S. and Canada and
another zone among four countries in the southernmost point of Latin America.
Currencies are typically weak, but most are now relatively free floating, and it
is not unusual for the currencies to undergo wide fluctuations in value over
short periods of time due to changes in the market.
Investing in the Pacific Basin. Economies of individual Pacific Basin countries
may differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency, interest rate levels, and balance of payments
position. Of particular importance, most of the economies in this region of the
world are heavily dependent upon exports, particularly to developed countries,
and, accordingly, have been and may continue to be adversely affected by trade
barriers, managed adjustments in relative currency values, and other
protectionist measures imposed or negotiated by the U.S. and other countries
with which they trade. These economies also have been and may continue to be
negatively impacted by economic conditions in the U.S. and other trading
partners, which can lower the demand for goods produced in the Pacific Basin.
With respect to the Peoples Republic of China and other markets in which
the Portfolio 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.
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Economic reforms launched in the 1980s continue to benefit Turkey in the
1990s. Turkey's economy has grown steadily since the early 1980s, with real
growth in per capita Gross Domestic Product (the "GDP") increasing more than 6%
annually. Agriculture remains the most important economic sector, employing
approximately 55% of the labor force, and accounting for nearly 20% of GDP and
20% of exports. Inflation and interest rates remain high, and a large budget
deficit will continue to cause difficulties in Turkey's substantial
transformation to a dynamic free market economy.
Like many other Western economies, Greece suffered severely from the
global oil price hikes of the 1970s, with annual GDP growth plunging from 8% to
2% in the 1980s, and inflation, unemployment, and budget deficits rising
sharply. The fall of the socialist government in 1989 and the inability of the
conservative opposition to obtain a clear majority have led to business
uncertainty and the continued prospects for flat economic performance. Once
Greece has sorted out its political situation, it will have to face the
challenges posed by the steadily increasing integration of the EC, including the
progressive lowering of trade and investment barriers. Tourism continues as a
major industry, providing a vital offset to a sizable commodity trade deficit.
Securities traded in certain emerging European securities markets may be
subject to risks due to the inexperience of financial intermediaries, the lack
of modern technology and the lack of a sufficient capital base to expand
business operations. Additionally, former Communist regimes of a number of
Eastern European countries had expropriated a large amount of property, the
claims of which have not been entirely settled. There can be no assurance that
the Portfolio's investments in Eastern Europe would not also be expropriated,
nationalized or otherwise confiscated. Finally, any change in leadership or
policies of Eastern European countries, or countries that exercise a significant
influence over those countries, may halt the expansion of or reverse the
liberalization of foreign investment policies now occurring and adversely affect
existing investment opportunities.
Investing in Africa. Africa is a continent of roughly 50 countries with a total
population of approximately 840 million people. Literacy rates (the percentage
of people who are over 15 years of age and who can read and write) are
relatively low, ranging from 20% to 60%. The primary industries include crude
oil, natural gas, manganese ore, phosphate, bauxite, copper, iron, diamond,
cotton, coffee, cocoa, timber, tobacco, sugar, tourism, and cattle.
Many of the countries are fraught with political instability. However,
there has been a trend over the past five years toward democratization. Many
countries are moving from a military style, Marxist, or single party government
to a multi-party system. Still, there remain many countries that do not have a
stable political process. Other countries have been enmeshed in civil wars and
border clashes.
Economically, the Northern Rim countries (including Morocco, Egypt, and
Algeria) and Nigeria, Zimbabwe and South Africa are the wealthier countries on
the continent. The market capitalization of these countries has been growing
recently as more international companies invest in Africa and as local companies
start to list on the exchanges. However, religious and ethnic strife has been a
significant source of instability.
On the other end of the economic spectrum are countries, such as
Burkinafaso, Madagascar, and Malawi, that are considered to be among the poorest
or least developed in the world. These countries are generally landlocked or
have poor natural resources. The economies of many African countries are heavily
dependent on international oil prices. Of all the African industries, oil has
been the most lucrative, accounting for 40% to 60% of many countries' GDP.
However, general decline in oil prices has had an adverse impact on many
economies.
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
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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 foreign 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
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.
Master-feeder fund structure
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At the special meeting of shareholders, a majority of the stockholders of
each Portfolio of Scudder Variable Life Investment Fund (the "Fund") approved a
proposal which gives the Fund's Board of Trustees the discretion with respect to
each Portfolio to retain the current distribution arrangement for the Portfolio
while investing in a master fund in a master/feeder fund structure as described
below.
A master/feeder fund structure is one in which a fund (a "feeder fund"),
instead of investing directly in a portfolio of securities, invests most or all
of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS
(See "POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS"
in the Fund's prospectus.)
Except as otherwise noted below, the following description of additional
investment policies and techniques is applicable to all of the Portfolios.
Repurchase Agreements
On behalf of a Portfolio, the Fund may enter into repurchase agreements
with member banks of the Federal Reserve System, any foreign bank and any
broker-dealer which is recognized as a reporting government securities dealer if
the creditworthiness of the bank or broker-dealer has been determined by the
Adviser to be at least equal to that of issuers of commercial paper rated within
the two highest categories assigned by Moody's or S&P. A repurchase agreement
with a member bank of the Federal Reserve System, which provides a means for the
Portfolio to earn income on funds for periods as short as overnight, is an
arrangement through which the Portfolio acquires a U.S. Government or other high
quality short-term debt obligation (the "Obligation") and the seller agrees, at
the time of sale, to repurchase the Obligation at a specified time and price. A
repurchase agreement with foreign banks may be available with respect to
government securities of the particular foreign jurisdiction. The repurchase
price may be higher than the purchase price, the difference being income to the
Portfolio, or the purchase and repurchase prices may be the same, with interest
at a stated rate due to the Portfolio together with the repurchase price on
repurchase. In either case, the income to the Portfolio is unrelated to the
interest rate on the Obligation subject to the repurchase agreement. For
purposes of the Investment Company Act of 1940, 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.
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Debt Securities
The Bond, Balanced, Capital Growth, Small Company 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" 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.
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. A Portfolio may be deemed to be an
"underwriter" for purposes of the 1933 Act when selling restricted securities to
the public, and in such event the Portfolio may be liable to purchasers of such
securities 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
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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, Small Company
Growth, Large Company Growth, Global Discovery and International Portfolios may
each invest in zero coupon securities which pay no cash income and are sold at
substantial discounts from their value at maturity. When held to maturity, their
entire income, which consists of accretion of discount, comes from the
difference between the issue price and their value at maturity. Zero coupon
securities are subject to greater market value fluctuations from changing
interest rates than debt obligations of comparable maturities which make current
distributions of interest (cash). Zero coupon convertible securities offer the
opportunity for capital appreciation (or depreciation) as increases (or
decreases) in market value of such securities closely follow the movements in
the market value of the underlying common stock. Zero coupon convertible
securities generally are expected to be less volatile than the underlying common
stocks because zero coupon convertible securities are usually issued with
shorter maturities (15 years or less) and with options and/or redemption
features exercisable by the holder of the obligation entitling the holder to
redeem the obligation and receive a defined cash payment.
Zero coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of securities firms and
banks have stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" ("TIGRS") and Certificate of Accrual on Treasuries
("CATS"). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates or other evidences of ownership of the U.S.
Treasury securities has stated that for federal tax and securities purposes, in
their opinion purchasers of such certificates, such as the Portfolios, most
likely will be deemed the beneficial holders of the underlying U.S. government
securities.
The Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupons and corpus payments on Treasury securities through the Federal
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, Growth and Income, and Global Discovery Portfolios 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
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mortgage REITs may hold mortgages that the mortgagors elect to prepay, which
prepayment may diminish the yield on securities issued by those REITs.
Certain REITs have relatively small market capitalization, which may tend
to increase the volatility of the market price of their securities. Furthermore,
REITs are dependent upon specialized management skills, have limited
diversification and are, therefore, subject to risks inherent in operating and
financing a limited number of projects. REITs are also subject to heavy cash
flow dependency, defaults by borrowers and the possibility of failing to qualify
for tax-free pass-through of income under the Internal Revenue Code of 1986, as
amended and to maintain exemption from the registration requirements of the 1940
Act. By investing in REITs indirectly through a Portfolio, a shareholder will
bear not only his or her proportionate share of the expenses of the Portfolio,
but also, indirectly, similar expenses of the REITs. In addition, REITs depend
generally on their ability to generate cash flow to make distributions to
shareholders.
Mortgage-Backed Securities and Mortgage Pass-Through Securities
The Bond, Balanced, and Growth and Income Portfolios may also invest in
mortgage-backed securities, which are interests in pools of mortgage loans,
including mortgage loans made by savings and loan institutions, mortgage
bankers, commercial banks, and others. Pools of mortgage loans are assembled as
securities for sale to investors by various governmental, government-related,
and private organizations as further described below. The Portfolios may also
invest in debt securities which are secured with collateral consisting of
mortgage-backed securities (see "Collateralized Mortgage Obligations"), and in
other types of mortgage-related securities.
A decline in interest rates may lead to a faster rate of repayment of the
underlying mortgages, and expose the Portfolios to a lower rate of return upon
reinvestment. To the extent that such mortgage-backed securities are held by the
Portfolios, the prepayment right will tend to limit to some degree the increase
in net asset value of the Portfolios because the value of the mortgage-backed
securities held by the Portfolios may not appreciate as rapidly as the price of
non-callable debt securities.
Interests in pools of mortgage-backed securities differ from other forms
of debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a monthly payment which consists of both
interest and principal payments. In effect, these payments are a "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. Because principal may be prepaid at any time,
mortgage-backed securities may involve significantly greater price and yield
volatility than traditional debt securities. 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.
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FHLMC is a corporate instrumentality of the U.S. Government and was
created by Congress in 1970 for the purpose of increasing the availability of
mortgage credit for residential housing. Its stock is owned by the twelve
Federal Home Loan Banks. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal, but PCs are not backed by the full faith and credit of the U.S.
Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers, and other secondary market issuers also
create pass-through pools of conventional mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance, and
letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers, and the mortgage poolers. Such insurance and
guarantees and the creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets the Portfolios' investment
quality standards. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. The Portfolios may buy mortgage-related securities without
insurance or guarantees, if through an examination of the loan experience and
practices of the originators/servicers and poolers, the Adviser determines that
the securities meet the Portfolios' quality standards. Although the market for
such securities is becoming increasingly liquid, securities issued by certain
private organizations may not be readily marketable.
Collateralized Mortgage Obligations ("CMOs")
A CMO is a hybrid between a mortgage-backed bond and a mortgage
pass-through security. Similar to a bond, interest and prepaid principal are
paid, in most cases, semiannually. CMOs may be collateralized by whole mortgage
loans but are more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, FHLMC, or FNMA, and their income
streams.
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. The prices of certain CMOs,
depending on their structure and the rate of prepayments, can be volatile. Some
CMOs may also not be as liquid as other securities.
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
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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 15% of the value of the Portfolio's net assets will be illiquid. As new
types of mortgage-related securities are developed and offered to investors, the
Adviser will, consistent with the Portfolio's investment objectives, policies,
and quality standards, consider making investments in such new types of
mortgage-related securities.
Other Asset-Backed Securities
The securitization techniques used to develop mortgaged-backed securities
are now being applied to a broad range of assets. Through the use of trusts and
special purpose corporations, various types of assets, including automobile
loans, computer leases and credit card receivables, are being securitized in
pass-through structures similar to the mortgage pass-through structures
described above or in a structure similar to the CMO structure. Consistent with
the Bond Portfolio's 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 Receivables(SM) ("CARS(SM)").
CARS(SM) 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 CARS(SM) 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 CARS(SM) 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
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losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
results from payment of the insurance obligations on at least a portion of the
assets in the pool. This protection may be provided through guarantees, policies
or letters of credit obtained by the issuer or sponsor from third parties,
through various means of structuring the transaction or through a combination of
such approaches. The Bond Portfolio and the Balanced Portfolio will not pay any
additional or separate fees for credit support. The degree of credit support
provided for each issue is generally based on historical information respecting
the level of credit risk associated with the underlying assets. Delinquency or
loss in excess of that anticipated, or failure of the credit support could
adversely affect the return on an investment in such a security.
The Bond Portfolio and the Balanced Portfolio may also invest in residual
interests in asset-backed securities. In the case of asset-backed securities
issued in a pass-through structure, the cash flow generated by the underlying
assets is applied to make required payments on the securities and to pay related
administrative expenses. The residual in an asset-backed security pass-through
structure represents the interest in any excess cash flow remaining after making
the foregoing payments. The amount of residual cash flow resulting from a
particular issue of asset-backed securities will depend on, among other things,
the characteristics of the underlying assets, the coupon rates on the
securities, prevailing interest rates, the amount of administrative expenses and
the actual prepayment experience on the underlying assets. Asset-backed security
residuals not registered under the Securities Act of 1933 may be subject to
certain restrictions on transferability. In addition, there may be no liquid
market for such securities.
The availability of asset-backed securities may be affected by legislative
or regulatory developments. It is possible that such developments may require
the Bond Portfolio and the Balanced Portfolio to dispose of any then existing
holdings of such securities.
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, Large Company
Growth, Small Company 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,
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although typically not as much as the underlying common stock. While no
securities investments are without risk, investments in convertible securities
generally entail less risk than investments in common stock of the same issuer.
As fixed income securities, convertible securities are investments which
provide for a stream of income (or in the case of zero coupon securities,
accretion of income) with generally higher yields than common stocks. Of course,
like all fixed income securities, there can be no assurance of income or
principal payments because the issuers of the convertible securities may default
on their obligations. Convertible securities generally offer lower yields than
non-convertible securities of similar quality because of their conversion or
exchange features.
Convertible securities are generally subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar
non-convertible securities.
Convertible securities may be issued as fixed income obligations that pay
current income or as zero coupon notes and bonds, including Liquid Yield Option
Notes ("LYONs"). Zero coupon securities pay no cash income and are sold at
substantial discounts from their value at maturity. When held to maturity, their
entire income, which consists of accretion of discount, comes from the
difference between the purchase price and their value at maturity. Zero coupon
convertible securities offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follows the
movements in the market value of the underlying common stock. Zero coupon
convertible securities are generally expected to be less volatile than the
underlying common stocks as they are usually issued with short to medium length
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, Large Company Growth,
Small Company 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, Large Company
Growth, Small Company 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
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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 Small Company Growth Portfolio and
the International Portfolio may invest without limit, in non-U.S.
dollar-denominated equity securities of foreign issuers. However, the Small
Company Growth Portfolio has no current intention of investing more than 20% of
its net assets in foreign securities. The Large Company Growth Portfolio may
invest up to __% of its assets in non-U.S. dollar-denominated equity securities
of foreign issuers.
Investors should recognize that investing in foreign securities involves
certain special considerations, including those set forth below, which are not
typically associated with investing in U.S. securities and which may favorably
or unfavorably affect the Non-Money Market Portfolios' performance. As foreign
companies are not generally subject to uniform accounting and auditing and
financial reporting standards, practices and requirements comparable to those
applicable to domestic companies, there may be less publicly available
information about a foreign company than about a domestic company. Many foreign
stock markets, while growing in volume of trading activity, have substantially
less volume than the New York Stock Exchange (the "Exchange"), and securities of
some foreign companies are less liquid and more volatile than securities of
domestic companies. Similarly, volume and liquidity in most foreign bond markets
are less than the volume and liquidity in the U.S. and at times, volatility of
price can be greater than in the U.S. Further, foreign markets have different
clearance and settlement procedures and in certain markets there have been times
when settlements have been unable to keep pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of the Portfolios are
uninvested and no return is earned thereon. The inability of the Portfolios to
make intended security purchases due to settlement problems could cause the
Portfolios to miss attractive investment opportunities. Inability to dispose of
portfolio securities due to settlement problems either could result in losses to
the Portfolios due to subsequent declines in value of the portfolio security or,
if the Portfolios have entered into a contract to sell the security, could
result in possible liability to the purchaser. Fixed commissions on some foreign
stock exchanges are generally higher than negotiated commissions on U.S.
exchanges, although the Portfolios will endeavor to achieve the most favorable
net results on its portfolio transactions. Further, the Portfolios may encounter
difficulties or be unable to pursue legal remedies and obtain judgments in
foreign courts. There is generally less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the U.S. It may be more difficult for the Portfolios' agents to keep
currently informed about corporate actions such as stock dividends or other
matters which may affect the prices of portfolio securities. Communications
between the U.S. and foreign countries may be less reliable than within the
U.S., thus increasing the risk of delayed settlements of portfolio transactions
or loss of certificates for portfolio securities. In addition, with respect to
certain foreign countries, there is the possibility of nationalization,
expropriation, the imposition of withholding or confiscatory taxes, political,
social, or economic instability, devaluations in the currencies in which a
Portfolio's securities are denominated, or diplomatic developments which could
affect U.S. investments in those countries. Investments in foreign securities
may also entail certain risks, such as possible currency blockages or transfer
restrictions, and the difficulty of enforcing rights in other countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
These considerations generally are more of a concern in developing
countries. For example, the possibility of revolution and the dependence on
foreign economic assistance generally is greater in these countries than in
developed countries. The management of the Non-Money Market Portfolios seeks to
mitigate the risks associated with these considerations through diversification
and active professional management. Although investments in companies domiciled
in developing countries may be subject to potentially greater risks than
investments in developed countries, the Portfolios will not invest in any
securities of issuers located in developing countries if the securities, in the
judgment of the Adviser, are speculative.
To the extent that the Non-Money Market Portfolios invest in foreign
securities, the Portfolios' share price could reflect the movements of both the
different stock and bond markets in which it is invested and the currencies in
which the investments are denominated; the strength or weakness of the U.S.
dollar against foreign currencies could account for part of the Portfolios'
investment performance.
Limitations on Holdings of Foreign Securities for the Bond, Balanced, Growth and
Income, Large Company Growth, Small Company Growth and International Portfolios
Each Portfolio that invests in foreign securities shall invest in no less
than three 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
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less than four foreign countries; (ii) if foreign securities comprise less than
60% of the value of the Portfolio's net assets, the Portfolio shall invest in no
less than three foreign countries; (iii) if foreign securities comprise less
than 40% of the value of the Portfolio's net assets, the Portfolio shall invest
in no less than two foreign countries; and (iv) if foreign securities comprise
less than 20% of the value of the Portfolio's net assets the Portfolio may
invest in a single foreign country.
Each Portfolio shall invest no more than 20% of the value of its net
assets in securities of issuers located in any one country; provided that an
additional 15% of the value of each Portfolio's net assets may be invested in
securities of issuers located in any one of the following countries: Australia,
Canada, France, Japan, the United Kingdom and Germany; and provided further that
100% of a Portfolio's assets may be invested in securities of issuers located in
the United States.
Indexed Securities
The Bond Portfolio and the Balanced Portfolio may each invest in indexed
securities, the value of which is linked to currencies, interest rates,
commodities, indices or other financial indicators ("reference instruments").
Most indexed securities have maturities of three years or less.
Indexed securities differ from other types of debt securities in which a
Portfolio 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 or
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. A Portfolio will not enter
into such transactions for leverage purposes.
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Loans of Portfolio Securities
The Fund may lend the portfolio securities of any Portfolio (other than
the Money Market Portfolio) provided: (1) the loan is secured continuously by
collateral consisting of U.S. Government securities, cash or cash equivalents
adjusted daily to have market value at least equal to the current market value
of the securities loaned; (2) the Fund may at any time call the loan and regain
the securities loaned; (3) the Portfolio will receive any interest or dividends
paid on the loaned securities; and (4) the aggregate market value of securities
loaned will not at any time exceed one-third of the total assets of the
Portfolio. In addition, it is anticipated that the Portfolio may share with the
borrower some of the income received on the collateral for the loan or that it
will be paid a premium for the loan. Before the Portfolio enters into a loan,
the Adviser considers all relevant facts and circumstances including the
creditworthiness of the borrower.
Borrowing
As a matter of fundamental policy, each Portfolio (except Money Market
Portfolio) will not borrow money, except as permitted under the 1940 Act, as
amended, and as interpreted or modified by regulatory authority having
jurisdiction, from time to time. While the Trustees do not currently intend to
borrow for investment leverage purposes, if such a strategy were implemented in
the future it would increase a Portfolio's volatility and the risk of loss in a
declining market. Borrowing by a Portfolio will involve special risk
considerations. Although the principal of a Portfolio's borrowings will be
fixed, the Portfolio's assets may change in value during the time a borrowing is
outstanding, thus increasing exposure to capital risk.
Options for the Bond, Balanced, Growth and Income, Capital Growth and
International Portfolios
The Fund may, on behalf of each of the Bond, Balanced, Growth and Income,
Capital Growth, Large Company Growth, Small Company 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, Large Company Growth,
Small Company 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.
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When the Fund, on behalf of the Balanced, Growth and Income, Capital
Growth, Large Company Growth, Small Company Growth, Global Discovery and
International Portfolios, writes a put option, it gives the purchaser of the
option the right to sell the underlying security to the Portfolio at the
specified exercise price at any time during the option period. Some of the
European type options which the Fund writes may be exercised only at a specified
time. If the option expires unexercised, the Portfolio will realize income in
the amount of the premium received for writing the option. If the put option is
exercised, a decision over which the Portfolio has no control, the Portfolio
must purchase the underlying security from the option holder at the exercise
price. By writing a put option, the Portfolio, in exchange for the net premium
received, accepts the risk of a decline in the market value of the underlying
security below the exercise price. With respect to each put option it writes,
the Portfolio will have deposited in a separate account with its custodian U.S.
Treasury obligations, high-grade debt securities or cash equal in value to the
exercise price of the put option, will have purchased a put option with a higher
exercise price that will expire no earlier than the put option written or will
have used some combination of these two methods. The Fund on behalf of each
Portfolio, will only write put options involving securities for which a
determination is made that it wishes to acquire the securities at the exercise
price at the time the option is written.
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.
A 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, Large Company Growth,
Small Company 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.
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The Fund, on behalf of a Portfolio, may engage in over-the-counter options
transactions with broker-dealers who make markets in these options. At present,
approximately thirty broker-dealers make these markets and the Adviser will
consider risk factors such as their creditworthiness when determining a
broker-dealer with which to engage in options transactions. The ability to
terminate over-the-counter option positions is more limited than with
exchange-traded option positions because the predominant market is the issuing
broker rather than an exchange, and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. Written
over-the-counter options purchased by the Fund and portfolio securities
"covering" the Fund's obligation pursuant to an over-the-counter option may be
deemed to be illiquid and may not be readily marketable. The Adviser will
monitor the creditworthiness of dealers with whom the Fund enters into such
options transactions under the general supervision of the Fund's Trustees.
Securities Index Options
The Bond, Balanced, Growth and Income, Capital Growth, Large Company
Growth, Small Company 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.
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Futures on Debt Securities
A futures contract on a debt security is a binding contractual commitment
which, if held to maturity, will result in an obligation to make or accept
delivery, during a particular future month, of securities having a standardized
face value and rate of return. By purchasing futures on debt
securities--assuming a "long" position--the Fund, on behalf of a Portfolio, will
legally obligate itself to accept the future delivery of the underlying security
and pay the agreed price. By selling futures on debt securities--assuming a
"short" position--it will legally obligate itself to make the future delivery of
the security against payment of the agreed price. Open futures positions on debt
securities will be valued at the most recent settlement price, unless such price
does not appear to the Trustees to reflect the fair value of the contract, in
which case the positions will be valued by or under the direction of the
Trustees.
Positions taken in the futures markets are normally not held to maturity,
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures positions taken by the Fund on behalf of a
Portfolio will usually be liquidated in this manner, the Fund may instead make
or take delivery of the underlying securities whenever it appears 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, Large Company Growth, Small Company 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
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gives the purchaser the right, in return for the premium paid, to sell a futures
contract (assume a "short" position), for a specified exercise price, at any
time before the option expires.
Upon the exercise of a "call," the writer of the option is obligated to
sell the futures contract (to deliver a "long" position to the option holder) at
the option exercise price, which will presumably be lower than the current
market price of the contract in the futures market. Upon exercise of a "put,"
the writer of the option is obligated to purchase the futures contract (deliver
a "short" position to the option holder) at the option exercise price, which
will presumably be higher than the current market price of the contract in the
futures market. When a person exercises an option and assumes a long futures
position, in the case of a "call," or a short futures position, in the case of a
"put," his gain will be credited to his futures margin account, while the loss
suffered by the writer of the option will be debited to his account. However, as
with the trading of futures, most participants in the options markets do not
seek to realize their gains or losses by exercise of their option rights.
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
20% of its total assets. A futures contract for the receipt of a debt security
and long index futures will be offset by assets of the Portfolio held in a
segregated account in an amount equal to the total market value of the futures
contracts less the amount of the initial margin for the contracts.
Foreign Currency Transactions
The Non-Money Market Portfolios may enter into forward foreign currency
exchange contracts ("forward contracts") for hedging purposes. These Portfolios
may also, for hedging purposes, purchase foreign currencies in the form of bank
deposits as well as other foreign money market instruments, including but not
limited to, bankers' acceptances, certificates of deposit, commercial paper,
short-term government and corporate obligations and repurchase agreements. The
International Portfolio may also enter into foreign currency futures contracts
and foreign currency options.
Because investments in foreign companies usually will involve currencies
of foreign countries, and because the Non-Money Market Portfolios temporarily
may hold funds in bank deposits in foreign currencies during the completion of
investment programs, the value of their assets as measured in U.S. dollars may
be affected favorably or unfavorably by changes in foreign currency exchange
rates and exchange control regulations, and they may incur costs in connection
with conversions between various currencies. Although the Non-Money Market
Portfolios value their assets daily in terms of U.S. dollars, they do not intend
to convert their holdings of foreign currencies into U.S. dollars on a daily
basis. They will do so from time to time, and investors should be aware of the
costs of currency conversion. Although foreign exchange dealers do not charge a
fee for conversion, they do realize a profit based on the difference (the
"spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Non-Money
Market Portfolios at one rate, while offering a lesser rate of exchange should
the Non-Money Market Portfolios desire to resell that currency to the dealer.
The Non-Money Market Portfolios will conduct their foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market, or through entering into forward or, in
the case of the International Portfolio, futures contracts to purchase or sell
foreign currencies.
A forward contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades.
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A foreign currency futures contract is a standardized contract for the
future delivery of a specified amount of a foreign currency at a future date at
a price set at the time of the contract. The agreed price may be fixed or within
a specified range of prices. Foreign currency futures contracts traded in the
United States are designed by and traded on exchanges regulated by the CFTC,
such as the Chicago Mercantile Exchange. Futures contracts involve brokerage
costs, which may vary from less than 1% to 2.5% of the contract price, and
require parties to the contract to make "margin" deposits to secure performance
of the contract. The International Portfolio would also be required to segregate
assets to cover contracts that would require it to purchase foreign currencies.
The International Portfolio would enter into futures contracts solely for
hedging or other appropriate risk management purposes as defined in CFTC
regulations.
Forward contracts differ from foreign currency futures contracts in
certain respects. For example, the maturity date of a forward contract may be
any fixed number of days from the date of the contract agreed upon by the
parties, rather than a predetermined date in a given month, and they may be in
any amounts agreed upon by the parties rather than predetermined amounts. Also,
forward contracts are traded directly between currency traders so that no
intermediary is required. A forward contract generally requires no margin or
other deposit.
Upon the maturity of a forward or foreign currency futures contract a
Portfolio may either accept or make delivery of the currency specified in the
contract or, at or prior to maturity, enter into a closing purchase transaction
involving the purchase or sale of an offsetting contract. Closing purchase
transactions with respect to forward contracts are usually effected with the
currency trader who is a party to the original forward contract. Closing
purchase transactions with respect to futures contracts are effected on a
commodities exchange; a clearing corporation associated with the exchange
assumes responsibility for closing out such contracts.
A Portfolio may enter into forward contracts and foreign currency futures
contracts under certain circumstances. When a Portfolio enters into a contract
for the purchase or sale of a security denominated in a foreign currency, or
when a Portfolio anticipates the receipt in a foreign currency of dividends or
interest payments on such a security which it holds, the Portfolio may desire to
"lock in" the U.S. dollar price of the security or the U.S. dollar equivalent of
such dividend or interest payment, as the case may be. By entering into a
forward or futures contract for the purchase or sale, for a fixed amount of
dollars, of the amount of foreign currency involved in the underlying
transactions, the Portfolio will attempt to protect itself against a possible
loss resulting from an adverse change in the relationship between the U.S.
dollar and the foreign currency during the period between the date on which the
security is purchased or sold, or on which the dividend or interest payment is
declared, and the date on which such payments are made or received.
Additionally, when management of a Portfolio believes that the currency of
a particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward or futures contract to sell, for a fixed
amount of dollars, the amount of foreign currency approximating the value of
some or all of the Portfolio's securities denominated in such foreign currency.
The precise matching of the forward or futures contract amounts and the value of
the securities involved will not generally be possible because the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. The precise projection of
short-term currency market movements is not possible, and short-term hedging
provides a means of fixing the dollar value of a portion of the Portfolio's
foreign assets.
The Non-Money Market Portfolios do not intend to enter into such forward
or futures contracts to protect the value of their portfolio securities on a
regular continuous basis, and will not do so if, as a result, a Portfolio will
have more than 15% of the value of its total assets committed to the
consummation of such contracts. A Portfolio also will not enter into such
forward or foreign currency futures contracts or maintain a net exposure to such
contracts where the consummation of the contracts would obligate the Portfolio
to deliver an amount of foreign currency in excess of the value of the
Portfolio's securities or other assets denominated in that currency. Under
normal circumstances, consideration of the prospect for currency parities will
be incorporated into the long-term investment decisions made with regard to
overall diversification strategies. However, the Non-Money Market Portfolios
believe that it is important to have the flexibility to enter into such forward
or foreign currency futures contracts when each determines that the best
interests of the Portfolio will be served.
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, Brown
Brothers Harriman & Co. or 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
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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 Large Company Growth,
Small Company Growth and Global Discovery Portfolios
The Large Company Growth, Small Company Growth and Global Discovery
Portfolios may each, but are 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 Portfolios' 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 Portfolios 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
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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 Portfolios resulting from
securities markets or currency exchange rate fluctuations, to protect the
Portfolios' unrealized gains in the value of its portfolio securities in the
Portfolios, to facilitate the sale of such securities for investment purposes,
to manage the effective maturity or duration of fixed-income securities in the
Portfolios, 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 Portfolios' 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 Portfolios to utilize these Strategic Transactions successfully
will depend on the Adviser's ability to predict pertinent market movements,
which cannot be assured. The Portfolios 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 Portfolios, 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 Portfolios can
realize on its investments or cause the Portfolios to hold a security it might
otherwise sell. The use of currency transactions can result in the Portfolios
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 Portfolios creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Portfolios'
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 Portfolios' purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the Portfolios 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 Portfolios' purchase of a call
option on a security, financial future, index, currency or other instrument
might be intended to protect the Portfolios 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 Portfolios is authorized to purchase
and sell
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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 Portfolios' 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
Portfolios will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Portfolios to require the
Counterparty to sell the option back to the Portfolios at a formula price within
seven days. The Portfolios 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 Portfolios or fails to make a cash
settlement payment due in accordance with the terms of that option, the
Portfolios 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 Portfolios will engage in OTC
option transactions only with U.S. government securities dealers recognized by
the Federal Reserve Bank of New York as "primary dealers", or broker dealers,
domestic or foreign banks or other financial institutions which have received
(or the guarantors of the obligation of which have received) a short-term credit
rating of A-1 from S&P or P-1 from Moody's or an equivalent rating from any
other nationally recognized statistical rating organization ("NRSRO") or, in the
case of OTC currency transactions, are determined to be of equivalent credit
quality by the Adviser. The staff of the SEC currently takes the position that
OTC options purchased by the Portfolios, and Portfolios securities "covering"
the amount of the Portfolios' 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 Federal limits for investing assets in them.
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If the Portfolios 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
Portfolios or will increase the Portfolios' income. The sale of put options can
also provide income.
The Portfolios 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 Portfolios must be "covered" (i.e., the
Portfolios 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 Portfolios will receive the option premium to
help protect it against loss, a call sold by the Portfolios exposes the
Portfolios 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 Portfolios to hold a security or instrument which
it might otherwise have sold.
The Portfolios 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 Portfolios will not sell put options if, as a result,
more than 50% of the Portfolios' 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 Portfolios may be required to buy the underlying security at a
disadvantageous price above the market price.
General Characteristics of Futures. The Portfolios 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 Portfolios, 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 Portfolios' 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 Portfolios 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 Portfolios. If the Portfolios exercises an option on a futures contract
it will be obligated to post initial margin (and potential subsequent variation
margin) for the resulting futures position just as it would for any position.
Futures contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price, nor that delivery will
occur.
The Portfolios 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 Portfolios' 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 Portfolios 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
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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 Portfolios may engage in currency transactions with
Counterparties in order to hedge the value of Portfolios 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 Portfolios 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 Portfolios' 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 Portfolios, 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 Portfolios 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 Portfolios 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 Portfolios has or in
which the Portfolios expects to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Portfolios may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the
Portfolios' 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 Portfolios' 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
Portfolios' securities denominated in correlated currencies. For example, if the
Adviser considers that the Austrian schilling is correlated to the German
deutschemark (the "D-mark"), the Portfolios 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 Portfolios 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 Portfolios is engaging in proxy hedging. If the Portfolios enters into
a currency hedging transaction, the Portfolios will comply with the asset
segregation requirements described below.
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Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Portfolios 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 Portfolios 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 Portfolios 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
Portfolios may enter are interest rate, currency and index swaps and the
purchase or sale of related caps, floors and collars. The Portfolios 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 Portfolios anticipates purchasing at a
later date. The Portfolios 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
Portfolios may be obligated to pay. Interest rate swaps involve the exchange by
the Portfolios 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 Portfolios 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 Portfolios 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 Portfolios 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 Portfolios will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from an NRSRO or is determined to be of equivalent credit quality by the
Adviser. If there is a default by the Counterparty, the Portfolios 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 Portfolios 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
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("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 Portfolios 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 Portfolios' 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 Portfolios 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 Portfolios 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
Portfolios will require the Portfolios 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 a
Portfolio on an index will require the Portfolios to own Portfolios 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 a Portfolio requires that Portfolio to segregate cash or
liquid assets equal to the exercise price.
Except when a 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 Portfolios to buy or sell
currency will generally require the Portfolios to hold an amount of that
currency or liquid securities denominated in that currency equal to the
Portfolios' obligations or to segregate cash or liquid assets equal to the
amount of the Portfolio's obligation.
OTC options entered into by the Portfolios, 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
Portfolios 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 Portfolios, 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 Portfolios sell a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Portfolios 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
Portfolios other than those above generally settle with physical delivery, or
with an election of either physical delivery or cash settlement and the
Portfolios 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 Portfolios
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 Portfolios 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 assets
having a
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value equal to the accrued excess. Caps, floors and collars require segregation
of assets with a value equal to a Portfolio's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Portfolios 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 Portfolios 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 Portfolios. Moreover, instead of segregating assets if the
Portfolios 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.
Debt Securities
If the Adviser determines that the capital appreciation of debt securities
is likely to exceed that of common stocks, the Portfolios may invest in debt
securities of foreign and U.S. issuers. The Portfolios 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 Portfolios 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 (commonly referred to as "junk
bonds") (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 Portfolios 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
Portfolios. Prices and yields of high yield securities will fluctuate over time
and may affect a Portfolios'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 Portfolios 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
Portfolioss' 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
Portfolios security be downgraded the Adviser will determine whether it is in
the best interest of that Portfolios to retain or dispose of the security.
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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 a Portfolio'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 fundamental policies may
not be changed with respect to any Portfolio without the approval of the
majority of outstanding voting securities of that Portfolio (which, under the
1940 Act and the rules thereunder and as used in this Statement of Additional
Information, means the lesser of (1) 67% of the shares of that Portfolio present
at a meeting if the holders of more than 50% of the outstanding shares of that
Portfolio are present in person or by proxy, or (2) more than 50% of the
outstanding shares of that Portfolio). Any investment restrictions which involve
a maximum percentage of securities or assets shall not be considered to be
violated unless an excess over the percentage occurs immediately after, and is
caused by, an acquisition or encumbrance of securities or assets of, or
borrowings by or on behalf of, a Portfolio.
As a matter of fundamental policy, 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 Portfolio may be deemed to be an
underwriter in connection with the disposition of portfolio
securities;
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(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
Portfolio reserves freedom of action to hold and to sell real estate
acquired as a result of the Portfolio's ownership of securities;
(7) make loans 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.
As a matter of nonfundamental policy, the Fund may not on behalf of the
indicated Portfolio(s):
(1) For Money Market Portfolio: the Portfolio currently does not intend
to borrow money in an amount greater than 5% of its total assets,
except for temporary or emergency purposes;
(2) For all Portfolios (except Money Market Portfolio): the Portfolio
currently does not intend to borrow money in an amount greater than
5% of its total assets, except (i) for temporary or emergency
purposes and (ii) by engaging in reverse repurchase agreements,
dollar rolls, or other investments or transactions described in the
Portfolio's registration statement which may be deemed to be
borrowings;
(3) For all Portfolios (except Money Market Portfolio and Bond
Portfolio): the Portfolio currently does not intend to enter into
either of reverse repurchase agreements or dollar rolls in an amount
greater than 5% of its total assets;
(4) For all Portfolios (except Money Market Portfolio): the Portfolio
currently does not intend to purchase securities on margin or make
short sales, except (i) short sales against the box, (ii) in
connection with arbitrage transactions, (iii) for margin deposits in
connection with futures contracts, options or other permitted
investments, (iv) that transactions in futures contracts and options
shall not be deemed to constitute selling securities short, and (v)
that the Portfolio may obtain such short-term credits as may be
necessary for the clearance of securities transactions;
(5) For all Portfolios (except Money Market Portfolio): the Portfolio
currently does not intend to purchase options, unless the aggregate
premiums paid on all such options held by the Portfolio at any time
do not exceed 20% of its total assets; or sell put options, if as a
result, the aggregate value of the obligations underlying such put
options would exceed 50% of its total assets;
(6) For all Portfolios (except Money Market Portfolio): the Portfolio
currently does not intend to enter into futures contracts or
purchase options thereon, unless immediately after the purchase, the
value of the aggregate initial margin with respect to such futures
contracts entered into on behalf of the Portfolio and the premiums
paid for such options on futures contracts does not exceed 5% of the
fair market value of the Portfolio's total assets; provided that in
the case of an option that is in-the-money at the time of purchase,
and in-the-money amount may be excluded in computing the 5% limit;
(7) For all Portfolios (except Money Market Portfolio): the Portfolio
currently does not intend to purchase warrants if as a result, such
securities, taken at the lower of cost or market value, would
represent more than 5% of the value of the Portfolio's total assets
(for this purpose, warrants acquired in units or attached to
securities will be deemed to have no value);
(8) Each Portfolio currently does not intend to lend portfolio
securities in an amount greater than 5% of its total assets.
"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.)
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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.
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
Scudder Kemper Investments, Inc. (the "Adviser"), an investment counsel
firm, acts as investment adviser to the Portfolios. This organization, the
predecessor of which is Scudder, Stevens & Clark, Inc., is one of the most
experienced investment counsel firms in the U. S. It was established as a
partnership 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. In 1953 the Adviser introduced Scudder International
Fund, Inc., the first mutual fund available in the U.S. investing
internationally in securities of issuers in several foreign countries. The
predecessor firm reorganized from a partnership to a corporation on June 28,
1985. On June 26, 1997, Scudder, Stevens & Clark, Inc. ("Scudder") entered into
an agreement with Zurich Insurance Company ("Zurich") pursuant to which Scudder
and Zurich agreed to form an alliance. On December 31, 1997, Zurich acquired a
majority interest in Scudder, and Zurich Kemper Investments, Inc., a Zurich
subsidiary, became part of Scudder. Scudder's name has been changed to Scudder
Kemper Investments, Inc.
Founded in 1872, Zurich is a multinational, public corporation organized
under the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group"). Zurich and the Zurich
Insurance Group provide an extensive range of insurance products and services
and have branch offices and subsidiaries in more than 40 countries throughout
the world.
The Fund has seven investment management agreements with the Adviser, one
for each Portfolio (the "Agreements"). The Adviser is one of the most
experienced investment counsel firms in the United States. It currently manages
in excess of $200 billion in assets globally for its clients. The transaction
between Scudder and Zurich resulted in the assignment of the Fund's investment
management agreements with Scudder, those agreements automatically terminated at
the consummation of the transaction. In anticipation of the transaction,
however, new investment management agreements (the "Agreements") between each
Portfolio and the Adviser were approved by the Fund's Trustees on August 1,
1997. At the special meeting of the Fund's shareholders held on October 24,
1997, the shareholders also approved the Agreements. The Agreements became
effective as of December 31, 1997 and will be in effect for an initial term
ending on September 30, 1998. The Agreements are in all material respects on the
same terms as the previous investment management agreements which they
supersede. The Agreements incorporate conforming changes which promote
consistency among all of the funds advised by the Adviser and which permit ease
of administration. The Agreements will continue in effect from year to year
thereafter only if their continuance is approved
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annually by the vote of a majority of those Trustees who are not parties to the
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 a vote
of the Fund's Trustees on behalf of a Portfolio or of a majority of the
outstanding voting securities of each Portfolio. The Agreements 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 their assignment.
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 Global High Income
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,
The Argentina Fund, Inc., The Brazil Fund, Inc., The Korea Fund, Inc., The Japan
Fund, Inc. and Scudder Spain and Portugal 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.
Pursuant to an Agreement between Scudder Kemper Investments, Inc. and AMA
Solutions, Inc., a subsidiary of the American Medical Association (the "AMA"),
dated May 9, 1997, the Adviser has agreed, subject to applicable state
regulations, to pay AMA Solutions, Inc. royalties in an amount equal to 5% of
the management fee received by the Adviser with respect to assets invested by
AMA members in Scudder funds in connection with the AMA InvestmentLink(SM)
Program. The Adviser will also pay AMA Solutions, Inc. a general monthly fee,
currently in the amount of $833. The AMA and AMA Solutions, Inc. are not engaged
in the business of providing investment advice and neither is registered as an
investment adviser or broker/dealer under federal securities laws. Any person
who participates in the AMA InvestmentLink(SM) Program will be a customer of the
Adviser (or of a subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA
InvestmentLink(SM) is a service mark of AMA Solutions, Inc.
Certain investments may be appropriate for the Portfolios and for other
clients advised by the Adviser. Investment decisions for the Portfolios 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 a Portfolio. Purchase and sale orders for a Portfolio may
be combined with those of other clients of the Adviser in the interest of the
most favorable net results to a Portfolio.
The Adviser maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Adviser receives published
reports and statistical compilations from issuers and other sources, as well as
analyses from brokers and dealers who may execute portfolio transactions for the
Adviser's clients. However, the Adviser regards this information and material as
an adjunct to its own research activities. The Adviser'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 Portfolios 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
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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.
On September 7, 1998, the businesses of Zurich (including Zurich's 70%
interest in Scudder Kemper) and the financial services businesses of B.A.T
Industries p.l.c. ("B.A.T") were combined to form a new global insurance and
financial services company known as Zurich Financial Services Group. By way of a
dual holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services Group, with the balance initially
owned by former B.A.T shareholders.
Upon consummation of this transaction, the Fund's existing investment
management agreement with Scudder Kemper was deemed to have been assigned and,
therefore, terminated. The Board has approved a new investment management
agreement (the "Agreement") with Scudder Kemper, which is substantially
identical to the current investment management agreement, except for the date of
execution and termination. The agreement became effective September 7, 1998,
upon the termination of the then current investment management agreement and was
approved at a shareholder meeting held in December 1998.
The Agreement dated September 7, 1998, was approved by the Trustees of the
Trust on _______. The Agreement will continue in effect until September 30, 1999
and from year to year thereafter only if its continuance is approved annually by
the vote of a majority of those Trustees who are not parties to such Agreement
or interested persons of the Adviser or the Fund, cast in person at a meeting
called for the purpose of voting on such approval, and either by a vote of the
Trust's Trustees or of a majority of the outstanding voting securities of the
Fund. The Agreement may be terminated at any time without payment of penalty by
either party on sixty days' written notice, and automatically terminates in the
event of its assignment.
The Adviser renders significant administrative services (not otherwise
provided by third parties) necessary for each Portfolio's operations as an
open-end investment company including, but not limited to, preparing reports and
notices to the Trustees and shareholders; supervising, negotiating contractual
arrangements with, and monitoring various third-party service providers to the
Portfolios (such as the Portfolio's transfer agent, pricing agents, custodian,
accountants and others); preparing and making filings with the SEC and other
regulatory agencies; assisting in the preparation and filing of each Portfolio's
federal, state and local tax returns; preparing and filing the Fund's federal
excise tax returns; assisting with investor and public relations matters;
monitoring the valuation of securities and the calculation of net asset value,
monitoring the registration of shares of the Fund under applicable federal and
state securities laws; maintaining each Portfolio's books and records to the
extent not otherwise maintained by a third party; assisting in establishing
accounting policies of the Fund; assisting in the resolution of accounting and
legal issues; establishing and monitoring each Portfolio's operating budget;
processing the payment of each Portfolio's bills; assisting the Fund and the
Portfolios in, and otherwise arranging for, the payment of distributions and
dividends and otherwise assisting the Fund and the Portfolios in the conduct of
its business, subject to the direction and control of the Trustees.
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 investment management
services the Adviser receives compensation monthly at the following annual rates
for each Portfolio:
% of the
average daily
net asset
values of
Portfolio each Portfolio 1996 1997 1998
Money Market Portfolio .370% $325,791 $384,554
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Bond Portfolio .475% 291,740 321,323
Balanced Portfolio .475% 372,176 488,616
Growth and Income
Portfolio .475% 326,033 592,383
Capital Growth
Portfolio .475%* 1,870,361 2,691,980
Large Company Growth
Portfolio
Small Company Growth
Portfolio
Global Discovery
Portfolio .975% 12,607 179,723
International Portfolio .875%** 5,590,601 6,520,030
* For any calendar month during which the average daily net assets of
Capital Growth 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 0.450%. As a result, the Adviser received compensation at
an annual rate of 0.47% for the fiscal year ended December 31, 1997.
** 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 0.725%. As a result, the Adviser received compensation at
an annual rate of 0.83% for the fiscal year ended December 31, 1997.
Under the Agreements, each Portfolio 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 a Portfolio's shares. (See "Distributor" for expenses paid by
Scudder Investor Services, Inc.) Each Portfolio 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 management services provided by the
Adviser, the Trustees, consistent with the Portfolios' investment management
agreements and underwriting agreement, have approved payments to the Adviser and
Scudder Investor Services, Inc. for clerical, accounting and certain other
services they may provide the Fund. Effective October 1, 1994, the Trustees
authorized the elimination of these administrative expenses. Under a new
agreement, effective October 1, 1994, the Trustees authorized the Fund, on
behalf of each Portfolio, to pay Scudder Fund Accounting Corporation, a
subsidiary of the Adviser, for determining the daily net asset value per share
and maintaining the portfolio and general accounting records of the Portfolios.
For the year ended December 31, 1996, such compensation amounted to
$30,073 for Money Market Portfolio, $37,590 for Bond Portfolio, $39,830 for
Balanced Portfolio, $42,366 for Growth and Income Portfolio, $70,071 for Capital
Growth Portfolio, $33,383 for Global Discovery Portfolio and $335,822 for
International Portfolio.
For the year ended December 31, 1997, such compensation amounted to
$30,000 for Money Market Portfolio, $17,460 for Bond Portfolio, $39,456 for
Balanced Portfolio, $62,698 for Growth and Income Portfolio, $96,410 for Capital
Growth Portfolio, $61,692 for Global Discovery Portfolio and $466,669 for
International Portfolio.
For the year ended December 31, 1998, such compensation amounted to
$______ for Money Market Portfolio, $______ for Bond Portfolio, $______ for
Balanced Portfolio, $______ for Growth and Income Portfolio, $______ for Capital
Growth Portfolio and $_______ for International Portfolio.
The Agreements are each dated December 31, 1997, and will remain in effect
until September 30, 1998. 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
47
<PAGE>
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. Each Agreement was last approved by
such Trustees (including a majority of the Trustees who are not such "interested
persons") on August 1, 1997. 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 identifies the Adviser as the exclusive licensee of the
rights to use and sublicense the names "Scudder," "Scudder Kemper Investments,
Inc." and "Scudder Stevens and Clark, Inc." (together, the "Scudder Marks").
Under this license, the Fund, with respect to the Portfolios, has the
non-exclusive right to use and sublicense the Scudder name and marks as part of
its name, and to use the Scudder Marks in the Fund's investment products and
services.
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.
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.
The Adviser may serve as adviser to other funds with investment objectives
and policies similar to those of the Portfolios that may have different
distribution arrangements or expenses, which may affect performance.
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, 1998, 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. The underwriting agreement was last
approved by the Trustees on August 1, 1997.
48
<PAGE>
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
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 Non-Money
Market Portfolios (the "Plan") and related services and fees thereunder is
provided in the prospectus. The plan was last approved by the Trustees on August
1, 1997. 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.
49
<PAGE>
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.
TRUSTEES AND OFFICERS
Position with
Underwriter,
Scudder
Investor
Position with Services,
Name, Age and Address Fund Principal Occupation** Inc.
- --------------------- ------------- -------------------- -------------
William Thomas*@+ () President Managing Director of --
Scudder Kemper
Investments, Inc.
Daniel Pierce*@+ (65) Vice President Managing Director of Vice President,
and Trustee Scudder Kemper Director and
Investments, Inc. Assistant
Treasurer
Dr. Kenneth Black, Jr. Trustee Regents' Professor ____
(74) Emeritus of
Educational Insurance, Georgia
Foundation, Inc. State University
35 Broad Street
11th Floor, Room 1144
Atlanta, GA 30303
Dr. Rosita P. Chang (44) Trustee Professor of Finance ____
PACAP Research Center University of Rhode
College of Business Island
Administration
University of Rhode
Island ,
7 Lippitt Road
Kingston, RI 02881-0802
Peter B. Freeman@ (66) Trustee Corporate Director ____
100 Alumni Avenue and Trustee
Providence, RI 02906
Dr. J. D. Hammond (65) Trustee Dean, Smeal College ____
801 Business of Business
Administration Bldg. Administration,
Pennsylvania State Pennsylvania State
University University
University Park, PA
16802
Irene T. Cheng# (44) Vice President Senior Vice President ____
of Scudder Kemper
Investments, Inc.
50
<PAGE>
Position with
Underwriter,
Scudder
Investor
Position with Services,
Name, Age and Address Fund Principal Occupation** Inc.
- --------------------- ------------- -------------------- -------------
William F. Gadsden*# Vice President Managing Director of ____
(44) Scudder Kemper
Investments, Inc.
Jerard K. Hartman# (66) Vice President Managing Director of ____
Scudder Kemper
Investments, Inc.
Robert T. Hoffman*# Vice President Managing Director of ____
(40) Scudder Kemper
Investments, Inc.
Richard A. Holt*** (57) Vice President Managing Director of ____
Scudder Kemper
Investments, Inc.
Thomas W. Joseph+ (60) Vice President Senior Vice President Vice President,
of Scudder Kemper Director,
Investments, Inc. Treasurer and
Assistant Clerk
Valerie F. Malter*#(40) Vice President Senior Vice President ____
of Scudder Kemper
Investments, Inc.
Steven M. Meltzer+ (40) Vice President Managing Director of ____
Scudder Kemper
Investments, Inc.
Gerald J. Moran*# (59) Vice President Senior Vice President ____
of Scudder Kemper
Investments, Inc.
Stephen A. Wohler+ (50) Vice President Managing Director of ____
Scudder Kemper
Investments, Inc.
Frank J. Rachwalski, Vice President Senior Vice President ____
Jr.# (54) of Scudder Kemper
Investments, Inc.
Randall K. Zeller# (44) Vice President Managing Director of ____
Scudder Kemper
Investments, Inc.
Thomas F. McDonough+ Vice President, Senior Vice President Clerk
(52) Treasurer and of Scudder Kemper
Secretary Investments, Inc.
Kathryn L. Quirk# (46) Vice President Managing Director of Vice President
and Assistant Scudder Kemper
Secretary Investments, Inc.
John R. Hebble+ (40) Assistant Senior Vice President ____
Treasurer of Scudder Kemper
Investments, Inc.
51
<PAGE>
Position with
Underwriter,
Scudder
Investor
Position with Services,
Name, Age and Address Fund Principal Occupation** Inc.
- --------------------- ------------- -------------------- -------------
Caroline Pearson+ (37) Assistant Vice President of
Secretary Scudder Kemper
Investments, Inc.;
Associate, Dechert
Price & Rhoads (law
firm), 1989 - 1997
* Messrs. Thomas 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 William Thomas 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
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.
Compensation of Officers and Trustees
The Independent Trustees receive the following compensation from Funds: an
annual trustee's fee of $4,000; a fee of $400 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; $150 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 1998 from the Trust and from all of the Scudder funds as a group.
52
<PAGE>
Scudder Variable Life
Name Investment Fund* All Scudder Funds
- ---- ---------------- -----------------
Dr. Kenneth Black, Jr., $ $ ( funds)
Trustee
Dr. Rosita P. Chang, $ $ (21 funds)
Trustee
Peter B. Freeman, $ $ (42 funds)
Trustee
Dr. J.D. Hammond, $ $ (21 funds)
Trustee
* Scudder Variable Life Investment Fund consists of nine 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, Dr. Martin Luther King, Jr. Day, Presidents
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas. Net asset value per share is determined by dividing the value of the
total assets of a Fund, less all liabilities, by the total number of shares
outstanding.
The valuation of the Money Market Portfolio securities is based upon their
amortized cost, which does not take into account unrealized securities gains or
losses. This method involves initially valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Money Market Portfolio would receive if it
sold the instrument. During periods of declining interest rates, the quoted
yield on shares of the Money Market Portfolio may tend to be higher than a like
computation made by a fund with identical investments utilizing a method of
valuation based upon market prices and estimates of market prices for all of its
portfolio instruments. Thus, if the use of amortized cost by the Portfolio
resulted in a lower aggregate portfolio value on a particular day, a prospective
investor in the Money Market Portfolio would be able to obtain a somewhat higher
yield if he purchased shares of the Money Market Portfolio on that day, than
would result/from investment in a fund utilizing solely market values, and
existing investors in the Money Market Portfolio would receive less investment
income. The converse would apply in a period of rising interest rates.
An exchange-traded equity security (not subject to resale restrictions) is
valued at its most recent sale price as of the Value Time. Lacking any sales,
the security is valued at the calculated mean between the most recent bid
quotation and the most recent asked quotation (the "Calculated Mean"). If there
are no bid and asked quotations, the security is valued at the most recent bid
quotation. An unlisted equity security which is traded on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") system is
valued at the most recent sale price. If there are no such sales, the security
is valued at the most recent 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
purchased with
53
<PAGE>
less than 60 days remaining to maturity are valued by the amortized cost method,
which the Board believes approximates market value. If it is not possible to
value a particular debt security pursuant to these valuation methods, the value
of such security is the most recent bid quotation supplied by a bona fide
marketmaker. If no such bid quotation is available, the Adviser may calculate
the price of that debt security, subject to limitations established by the
Board.
Option contracts on securities, currencies, futures and other financial
instruments traded on an exchange are valued at their most recent sale price on
the exchange. If no sales are reported, the value is the Calculated Mean, or if
the Calculated Mean is not available, the most recent bid quotation in the case
of purchased options, or the most recent asked quotation in the case of written
options. Option contracts traded over-the-counter are valued at the most recent
bid quotation in the case of purchased options and at the most recent asked
quotation in the case of written options. Futures contracts are valued at the
most recent settlement price. Foreign currency forward contracts are valued at
the value of the underlying currency at the prevailing currency exchange rate.
If a security is traded on more than one exchange, or on one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of the Fund's Valuation Committee, the value of an
asset as determined in accordance with these procedures does not represent the
fair market value of the asset, the value of the asset is taken to be an amount
which, in the opinion of the Valuation Committee, represents fair market value
on the basis of all available information. The value of other portfolio holdings
owned by the Fund is determined in a manner which, in the discretion of the
Valuation Committee most fairly reflects fair market value of the property on
the valuation date.
Following the valuations of securities or other portfolio assets in terms
of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rates on the valuation date.
TAX STATUS
(See "TAX STATUS, DIVIDENDS AND DISTRIBUTIONS" in the Fund's prospectus.)
Each Portfolio of the Fund has elected to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). Such qualification does not involve governmental
supervision or management of investment practices or policy.
Each Portfolio intends to comply with the provisions of Section 817(h) of
the Code relating to diversification requirements for variable annuity,
endowment and life insurance contracts. Specifically, each Portfolio intends to
comply with either (i) the requirement of Section 817(h)(1) of the Code that its
assets be adequately diversified, or (ii) the "Safe Harbor for Diversification"
specified in Section 817(h)(2) of the Code, or (iii) the diversification
requirement of Section 817(h)(1) of the Code by having all or part of its assets
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 taxable to individual shareholders at a
maximum 20% or 28% capital gains rate (depending on a Portfolio's holding period
for the assets giving rise to the gain), 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
54
<PAGE>
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.
Dividends from domestic corporations constitute a portion of a Portfolio's
gross income, a portion of the income distributions of the Portfolio may be
eligible for the deduction for dividends received by corporations. Shareholders
will be informed of the portion of dividends which so qualify. The
dividends-received deduction is reduced to the extent the Portfolio shares with
respect to which the dividends are received are treated as debt finance under
federal income tax law, and is eliminated if either those shares or the shares
of the Portfolio are held less than 46 days during the 90-day period beginning
45 days before the shares become ex-dividend.
Properly designated distributions of the excess of net long-term capital
gain over net short-term capital losses are taxable to individual shareholders
at a maximum 20% or 28% capital gains rate (depending on a Portfolio's holding
period for the assets giving rise to the gain), regardless of the length of time
the shares of the relevant Portfolio have been held by such individual
shareholders. Such distributions are not eligible for the dividends-received
deduction discussed above. Any loss realized upon the redemption of shares held
at the time of redemption for six months or less will be treated as a long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gain during such six-month period.
Distributions of investment company taxable income and net realized
capital gains will be taxable as described above, whether reinvested in
additional shares or in cash. Shareholders electing to receive distributions in
the form of additional shares will have a cost basis for federal income tax
purposes in each share so received equal to the net asset value of a share on
the reinvestment date.
All distributions of investment company taxable income and net realized
capital gain, whether reinvested in additional shares or in cash, must be
reported by each shareholder on its federal income tax return. Dividends
declared in October, November or December with a record date in such a month
will be deemed to have been received by shareholders on December 31 if paid
during January of the following year. Redemptions of shares may result in tax
consequences (gain or loss) to the shareholder and are also subject to these
reporting requirements.
Distributions by a Portfolio (except the Money Market Portfolio) result in
a reduction in the net asset value of the Portfolio's shares. Should a
distribution reduce the net asset value below a shareholder's cost basis, such
distribution would nevertheless be taxable to the shareholder as ordinary income
or capital gain as described above, even though, from an investment standpoint,
it may constitute a partial return of capital. In particular, investors should
consider the tax implications of buying shares just prior to a distribution. The
price of shares purchased at that time includes the amount of the forthcoming
distribution. Those purchasing just prior to a distribution will then receive a
partial return of capital upon the distribution, which will nevertheless be
taxable to them.
If the Balanced, Growth and Income, Capital Growth, Global Discovery or
International Portfolios invest in stock of certain foreign investment
companies, the Portfolios may be subject to U.S. federal income taxation on a
portion of any "excess distribution" with respect to, or gain from the
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.
The Balanced, Growth and Income, Capital Growth and International
Portfolios may 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; any mark to market losses
and any loss from an actual disposition of shares would be deductible as
ordinary losses to the extent of any net mark to market gains included in income
in prior years. The effect of the election would
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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.
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.
Notwithstanding any of the foregoing, recent tax law changes may require
the Fund to recognize gain (but not loss) from a constructive sale of certain
"appreciated financial positions" if the Fund enters into a short sale,
offsetting notional principal contract, futures or forward contract transaction
with respect to the appreciated position or substantially identical property.
Appreciated financial positions subject to this constructive sale treatment are
interests (including options, futures and forward contracts and short sales) in
stock, partnership interests, certain actively traded trust instruments and
certain debt instruments. Constructive sale treatment of appreciated financial
positions does not apply to certain transactions closed in the 90-day period
ending with the 30th day after the close of a Portfolio's taxable year, if
certain conditions are met.
Similarly, if a Portfolio enters into a short sale of property that
becomes substantially worthless, the Portfolio will be required to recognize
gain at that time as though it had closed the short sale. Future regulations may
apply similar treatment to other strategic transactions with respect to property
that becomes substantially worthless.
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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. The Global Discovery Portfolio and the International Portfolio may
qualify for and make the election permitted under Section 853 of the Code so
that shareholders may (subject to limitations) be able to claim a credit or
deduction on their federal income tax returns for, and will be required to treat
as part of the amounts distributed to them, their pro rata portion of qualified
taxes paid by a Portfolio to foreign countries (which taxes relate primarily to
investment income). Each Portfolio may make an election under Section 853 of the
Code, provided that more than 50% of the value of the total assets of the
Portfolio at the close of the taxable year consists of securities in foreign
corporations. The foreign tax credit available to shareholders is subject to
certain limitations imposed by the Code, except in the case of certain electing
individual taxpayers who have limited creditable foreign taxes and no foreign
source income other than passive investment-type income. Furthermore, the
foreign tax credit is eliminated with respect to foreign taxes withheld on
dividends if the dividend-paying shares or the shares of the Portfolio are held
by the Portfolio or the shareholder, as the case may be, for less than 16 days
(46 days in the case of preferred shares) during the 30-day period (90-day
period for preferred shares) beginning 15 days (45 days for preferred shares)
before the shares become ex-dividend.
Each Portfolio will be required to report to the Internal Revenue Service
all distributions of investment company taxable income and capital gains as well
as gross proceeds from the redemption or exchange of shares, except in the case
of certain exempt shareholders, which include most corporations. Under the
backup withholding provisions of Section 3406 of the Code, distributions of
taxable income and capital gains and proceeds from the redemption or exchange of
the shares of a regulated investment company may be subject to withholding of
federal income tax at the rate of 31% in the case of non-exempt shareholders who
fail to furnish the investment company with their taxpayer identification
numbers and with required certifications regarding their status under the
federal income tax law. Withholding may also be required if a Portfolio is
notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. Participating Insurance Companies
that are corporations should furnish their taxpayer identification numbers and
certify their status as corporations in order to avoid possible erroneous
application of backup withholding.
Shareholders of the Portfolios may be subject to state and local taxes on
distributions received from such Portfolios and on redemptions of their shares.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution.
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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.
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
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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, Balanced, Growth and Income, Capital Growth, Large
Company Growth and Small Company Growth 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. Performance information for each Portfolio (other than Money Market
Portfolio) is completed separately for each class of such Portfolio in
accordance with formulae prescribed by the Securities and Exchange Commission.
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 5.31%.
B. Effective yield is the net annualized yield for a specified seven
calendar days assuming a reinvestment of the income or compounding.
Effective yield is calculated by the same method as yield except the
yield figure is compounded by adding 1, raising the sum to a power
equal to 365 divided by 7, and subtracting one from the result,
according to the following formula:
Effective Yield = [(Base Period Return + 1)^365/7] - 1.
The net annualized yield of the Portfolio for the seven-day period
ended December 31, 1997, was 5.45%.
As described above, yield and effective yield are based on historical
earnings and show the performance of a hypothetical investment and are not
intended to indicate future performance. Yield and effective yield will vary
based on changes in market conditions and the level of expenses.
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In connection with communicating its yield or effective yield to current
or prospective shareholders, the Money Market Portfolio also may compare these
figures to the performance of other mutual funds tracked by mutual fund rating
services or to other unmanaged indexes which may assume reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs.
From time to time, in marketing pieces and other fund literature, a
Portfolio'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 6.28%
All Portfolios
A. Average Annual Total Return is the average annual compound rate of
return for the periods of one year and five years (or such shorter
periods as may be applicable dating from the commencement of the
Portfolio's operations) all ended on the date of a recent calendar
quarter.
Average annual total return quotations reflect changes in the price
of a Portfolio's shares and assume that all dividends and capital
gains distributions during the respective periods were reinvested in
Portfolio shares. Average annual total return is calculated by
finding the average annual compound rates of return of a
hypothetical investment over such periods, according to the
following formula (average annual total return is then expressed as
a percentage):
T = (ERV/P)^1/n - 1
Where:
P = a hypothetical initial investment of $1,000
T = Average Annual Total Return
n = number of years
ERV = ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable
period.
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Average Annual Total Return for periods ended December 31, 1998
One Year Five Years Ten Years Life of Fund
Money Market Portfolio % % % --
Bond Portfolio --
Balanced Portfolio* --
Growth and Income Portfolio -- %(1)
Capital Growth Portfolio --
Global Discovery Portfolio -- -- (2)
International Portfolio --
(1) For the period beginning May 2, 1994 (commencement of operations)
(2) 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.
Cumulative Total Return for periods ended December 31, 1998
One Year Five Years Ten Years Life of Fund
Money Market Portfolio % % % --
Bond Portfolio --
Balanced Portfolio* --
Growth and Income Portfolio -- %(1)
Capital Growth Portfolio --
Global Discovery Portfolio -- -- (2)
International Portfolio --
(1) For the period beginning May 2, 1994 (commencement of operations)
- ------------
* On May 1, 1993, the Portfolio adopted its present name and investment
objective which is a balance of growth and income from a diversified
portfolio of equity and fixed income securities. Prior to that date, the
Portfolio was known as the Managed Diversified Portfolio and its
investment objective was to realize a high level of long-term total rate
of return consistent with prudent investment risk. Performance information
for the five years and life of Fund periods should not be considered
representative of the present Portfolio.
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(2) 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 Portfolio Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of a Portfolio 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 Portfolio 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 Corporation 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
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 and
officers of the Fund, the Portfolios' 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 Portfolios. 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 Portfolios 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 Portfolios. The
description may include a "risk/return spectrum" which compares the Portfolios
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
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fluctuate. The description may also compare the Portfolios to bank products,
such as certificates of deposit. Unlike mutual funds, certificates of deposit
are insured up to $100,000 by the U.S. government and offer a fixed rate of
return.
Because bank products guarantee the principal value of an investment and
money market funds seek stability of principal, these investments are considered
to be less risky than investments in either bond or equity funds, which may
involve the loss of principal. However, all long-term investments, including
investments in bank products, may be subject to inflation risk, which is the
risk of erosion of the value of an investment as prices increase over a long
time period. The risks/returns associated with an investment in bond or equity
funds depend upon many factors. For bond funds these factors include, but are
not limited to, a fund's overall investment objective, the average portfolio
maturity, credit quality of the securities held, and interest rate movements.
For equity funds, factors include a fund's overall investment objective, the
types of equity securities held and the financial position of the issuers of the
securities. The risks/returns associated with an investment in international
bond or equity funds also will depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds. Shorter-term bond funds generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase higher quality securities relative to bond funds that purchase
lower quality securities. Growth and income equity funds are generally
considered to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.
Risk/return spectrums also may depict funds that invest in both domestic
and foreign securities or a combination of bond and equity securities.
Evaluation of Fund performance or other relevant statistical information
made by independent sources may also be used in advertisements concerning the
Funds, including reprints of, or selections from, editorials or articles about
these Funds. Sources for Fund performance information and articles about the
Funds include the following:
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by Masterfund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
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.
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<PAGE>
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
IBC Money Fund Report, a weekly publication of IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity and including certain averages as performance
benchmarks, specifically "IBC's Money Fund Average," and "IBC's Government Money
Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
Investor's Business Daily, a daily newspaper that features financial, economic,
and business news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morgan Stanley International, an integrated investment banking firm that
compiles statistical information.
Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance, risk and portfolio
characteristics.
The New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter, published by Sheldon Jacobs,
that includes mutual fund performance data and recommendations for the mutual
fund investor.
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.
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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
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.
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
Portfolios' independent public accountants. Each report will show the
investments owned by a Portfolio and the market values thereof as determined by
the Trustees and will provide other information about a Portfolio and its
operations.
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Participating Insurance Companies with inquiries regarding the Fund or its
Portfolios may call the Fund's underwriter, Scudder Investor Services, Inc., at
617-295-1000 or write Scudder Investor Services, Inc., Two International Place,
Boston, Massachusetts 02110-4103.
ORGANIZATION AND CAPITALIZATION
(See "ADDITIONAL INFORMATION - Shareholder
Indemnification" in the Fund's prospectus.)
General [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, 1998, American Maturity Life Insurance Co. (200
Hopmeadow Street, Simsbury, CT 06089) owned of record and beneficially 0.33% of
the Money Market Portfolio, 0.69% of the Bond Portfolio, 0.08% of the Capital
Growth Portfolio and 1.31% of the Growth and Income Portfolio; they owned of
record and beneficially 0.31% of the Fund's outstanding shares. Banner Life
Insurance Company of Rockville, MD (1701 Research Blvd., Rockville, MD 20850)
owned of record and beneficially 0.84% of the Money Market Portfolio, 1.92% of
the Bond Portfolio, 6.56% of the Balanced Portfolio, 1.33% of the International
Portfolio, 4.88% of the Growth and Income Portfolio, 8.86% of the Global
Discovery Portfolio and 2.02% of the Capital Growth Portfolio; they owned of
record and beneficially 1.78% 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 2.28% of the Money Market Portfolio, 3.58% of the Bond Portfolio,
8.16% of the Balanced Portfolio, 2.07% of the Capital Growth Portfolio, 0.00% of
the Growth and Income Portfolio, 0.00% of the Global Discovery Portfolio and
1.03% of the International Portfolio; they owned of record and beneficially
2.20% 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 (Bank,
Sixth and Marquette-MS0063, Minneapolis, MN 55479) owned of record and
beneficially 1.45% of the International Portfolio; they owned of record and
beneficially 0.22% 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 5.67% of the Bond Portfolio and 8.46% of the
Balanced Portfolio; they owned of record and beneficially 0.70% 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 38.57% of the Bond Portfolio, 58.33% of
the Capital Growth Portfolio and 40.30% of the International Portfolio; they
owned of record and beneficially 17.63% of the Fund's total outstanding shares;
and Paragon Life Insurance Company (100 South Brentwood, St. Louis, MO 63105)
owned of record and beneficially 0.15% of the Money Market Portfolio, 0.16% of
the Bond Portfolio, 0.18% of the Capital Growth Portfolio, 0.45% of the Balanced
Portfolio, 0.14% of the Growth and Income Portfolio, and 0.30% of the
International Portfolio; they owned of record and beneficially 0.19% 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
10.59% of the Bond Portfolio, 11.35% of the Growth and Income Portfolio, and
2.69% of the International Portfolio; they owned of record and beneficially
1.78% 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 27.48% of the Balanced Portfolio and 7.28% of the International
Portfolio; they owned of record and beneficially 2.28% 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 1.49% of
the International Portfolio; and Southwestern Life Insurance Company (500 North
Akard, Dallas, TX 75201) owned of record and beneficially 1.18% of the Capital
Growth Portfolio; and The Union Central Life Insurance Company (1876 Waycross
Road, Cincinnati, OH 45240) owned of record and beneficially 40.24% of the Money
Market Portfolio, 6.49% of the Capital Growth Portfolio and 16.16% of the
International Portfolio; they owned of record and beneficially 23.73% 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 4.83% of the Money Market Portfolio and 0.82% of the International
Portfolio; and United of Omaha Life Insurance Company (Mutual of Omaha Plaza,
Law Division, 3301 Dodge Street, Omaha, NE 68131) owned of record and
beneficially 0.15% of the
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Money Market Portfolio, 0.59% of the Bond Portfolio, and 7.35% of the
International Portfolio; they owned of record and beneficially 1.65% 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 3.32% of the Capital Growth Portfolio; and Washington National Life
Insurance Company (c/o United Presidential Life Insurance Co., One Presidential
Pkwy., Kokomo, IN 46904) owned of record and beneficially 0.42% of the Money
Market Portfolio, 6.72% of the Bond Portfolio, 1.30% of the Growth and Income
Portfolio and 4.86% of the Capital Growth Portfolio; they owned of record and
beneficially 1.30% of the Fund's outstanding shares; WM Life Insurance Company
(15411 North East 51st Street, Redmond, WA 98052) owned of record and
beneficially 0.15% of the Money Market Portfolio; they owned of record and
beneficially 0.10% of the Fund's outstanding shares.
Shares entitle their holders to one vote per share; however, separate
votes will be taken by each Portfolio on matters affecting an individual
Portfolio. For example, a change in investment policy for the Money Market
Portfolio would be voted upon only by shareholders of the Money Market
Portfolio. Additionally, approval of the investment advisory agreement covering
a Portfolio is a matter to be determined separately by each Portfolio. Approval
by the shareholders of one Portfolio is effective as to that Portfolio. Shares
have noncumulative voting rights, which means that holders of more than 50% of
the shares voting for the election of Trustees can elect all Trustees and, in
such event, the holders of the remaining shares voting for the election of
Trustees will not be able to elect any person or persons as Trustees. Shares
have no preemptive or subscription rights, and are transferable.
Shareholders have certain rights, as set forth in the Declaration of Trust
of the Fund, including the right to call a meeting of shareholders for the
purpose of voting on the removal of one or more Trustees. Such removal can be
effected upon the action of two-thirds of the outstanding shares of beneficial
interest of the Fund.
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. It is possible that a Portfolio might become liable
for a misstatement regarding another Portfolio. The Trustees of the Fund have
considered this and approved the use of a combined Statement of Additional
Information for the Portfolios.
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 a Portfolio 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.
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The primary objective of the Adviser in placing orders for the purchase
and sale of securities for any Portfolio is to obtain the most favorable net
results taking into account such factors as price, commission (negotiable in the
case of U.S. stock exchange transactions but which is generally fixed in the
case of foreign exchange transactions), if any, size of order, difficulty of
execution and skill required of the executing broker/dealer. Subject to the
foregoing, the Adviser may consider sales of variable life insurance policies
and variable annuity contracts for which the Fund is an investment option as a
factor in the selection of firms to execute portfolio transactions. The Adviser
seeks to evaluate the overall reasonableness of brokerage commissions paid
through the familiarity of the Distributor with commissions charged on
comparable transactions, as well as by comparing commissions paid by the Fund to
reported commissions paid by others. The Adviser reviews on a routine basis
commission rates, execution and settlement services performed, making internal
and external comparisons.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
brokers and dealers who supply research, market and statistical information to
the Adviser. The term "research, market and statistical information" includes
advice as to the value of securities, the advisability of investing in,
purchasing or selling securities; and the availability of securities or
purchasers or sellers of securities; and furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts. The Adviser is authorized
when placing portfolio transactions for the Fund to pay a brokerage commission
(to the extent applicable) in excess of that which another broker might have
charged for effecting the same transaction 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 Portfolios are 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 Portfolios.
In the years ended December 31, 1995, 1996 and 1997, the Fund paid
brokerage commissions of $2,669,610, $2,106,414 and $2,708,797, 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 $2,018,972,
respectively, the Capital Growth Portfolio paid brokerage commissions of
$788,596, $505,817 and $474,905, respectively, and the Balanced Portfolio paid
brokerage commissions of $67,758, $67,828 and $64,496, respectively. The Growth
and Income Portfolio paid brokerage commissions of $54,235, $78,517 and
$100,066, respectively. In the year ended December 31, 1997, Global Discovery
Portfolio paid brokerage commissions of $50,358. In the year ended December 31,
1997, $2,008,842 of the total brokerage commissions paid by the International
Portfolio, $458,559 of the total brokerage commissions paid by the Capital
Growth Portfolio, $82,092 of the total brokerage commissions paid by the Growth
and Income Portfolio, $57,105 of the total brokerage commissions paid by the
Balanced Portfolio, and $49,361 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 $766,810,156 for the International
Portfolio (97% of all brokerage transactions), $490,539,121 for the Capital
Growth Portfolio (94% of all brokerage transactions), $91,559,039 for the Growth
and Income Portfolio (83% of all brokerage transactions), $62,141,402 (74% of
all brokerage transactions) for the Balanced Portfolio and $24,566,333 (87% 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, 1997 and 1998, respectively, was:
December 31,
1997 1998
Bond Portfolio 56.07% %
Balanced Portfolio 43.10
Growth and Income Portfolio 28.41
Capital Growth Portfolio 41.77
Global Discovery Portfolio 83.16
International Portfolio 61.35
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 Fund's prospectus and
the Financial Statements incorporated by reference in this Statement of
Additional Information have been so included or incorporated by reference in
reliance on the report of PricewaterhouseCoopers LLP, One Post Office Square,
Boston, Massachusetts 02109, independent accountants, and given on the authority
of that firm as experts in accounting and auditing. Effective July 1, 1998,
Coopers & Lybrand L.L.P. and Price Waterhouse LLP merged to become
PricewaterhouseCoopers LLP. PricewaterhouseCoopers, LLP is responsible for
performing annual audits of the financial statements and financial highlights of
the Fund in accordance with generally accepted auditing standards, and the
preparation of federal tax returns.
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, Capital Growth, Large Company Growth and Small Company 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, Capital Growth,
Large Company Growth and Small Company 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
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and transaction charges for this service. Global Discovery and International
Portfolios pay SFAC an annual fee equal to 0.065% of the first $150 million of
average daily net assets, 0.040% of such assets in excess of $150 million and
0.020% of such assets in excess of $1 billion, plus holding and transaction
charges for this 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.
Certain record-keeping and administrative services that would otherwise be
performed by the transfer agent may be performed by the Participating Insurance
Company that purchases a Portfolio's shares, and the Fund or the Adviser
(including any affiliate of the Adviser), or both, may pay the Participating
Insurance Company for such services.
Each Portfolio 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
Large Company Growth
Small Company Growth
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, 1998, 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 Corporation
AAA: Bonds rated AAA are highest grade debt obligations. This rating
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A: Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Bonds rated BB and B are regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
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BB: Bonds rated BB have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB-rating.
B: Bonds rated B have a greater vulnerability to default but currently
have the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB-rating.
Description of Commercial Paper Ratings
Moody's Investors Service, Inc.
P-1: Moody's Commercial Paper ratings are opinions of the ability of
issuers to repay punctually senior debt obligations which have an
original maturity not exceeding one year. The designation "Prime-1"
or "P-1" indicates the highest quality repayment capacity of the
rated issue.
Standard & Poor's Corporation
A-1: Standard & Poor's Commercial Paper ratings are current assessments
of the likelihood of timely payment of debt considered short-term in
the relevant market. The A-1 designation indicates the degree of
safety regarding timely payment is strong. Those issues determined
to possess extremely strong safety characteristics are denoted with
a plus (+) sign designation.
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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) long-term growth of capital through
investment primarily in equity securities of seasoned,
financially strong U.S. growth companies, (vii) long-term
capital appreciation through investment primarily in
securities of emerging growth companies poised to be leaders
in the 21st century, (viii) above-average capital
appreciation over the long term by investing primarily in
the equity securities of small companies located throughout
the world, and (ix) long-term growth of capital principally
from a diversified portfolio of foreign equity securities
(A Mutual Fund)
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STATEMENT OF ADDITIONAL INFORMATION
May 1, 1998
CLASS B SHARES OF BENEFICIAL INTEREST
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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.
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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
Large Company Growth Portfolio...........................................6
Small Company Growth Portfolio...........................................7
Global Discovery Portfolio...............................................9
Risk Factors Regarding Global Discovery Portfolio.......................10
International Portfolio.................................................15
POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS..........................17
Repurchase Agreements...................................................17
Debt Securities.........................................................18
Illiquid Securities.....................................................18
Trust Preferred Securities..............................................18
Zero Coupon Securities..................................................19
Real Estate Investment Trusts...........................................19
Mortgage-Backed Securities and Mortgage Pass-Through Securities.........20
Collateralized Mortgage Obligations ("CMOs")............................21
FHLMC Collateralized Mortgage Obligations...............................21
Other Mortgage-Backed Securities........................................22
Other Asset-Backed Securities...........................................22
Municipal Obligations...................................................23
Convertible Securities..................................................23
Depositary Receipts.....................................................24
Foreign Securities......................................................24
Limitations on Holdings of Foreign Securities for the Bond, Balanced,
Growth and Income, Large Company Growth, Small Company Growth and
International Portfolios................................................25
Indexed Securities......................................................26
When-Issued Securities..................................................26
Loans of Portfolio Securities...........................................26
Borrowing...............................................................27
Options for the Bond, Balanced, Growth and Income, Capital Growth and
International Portfolios................................................27
Securities Index Options................................................29
Futures Contracts.......................................................29
Futures on Debt Securities..............................................29
Limitations on the Use of Futures Contracts and Options on Futures......31
Foreign Currency Transactions...........................................32
Strategic Transactions and Derivatives Applicable to the Large Company
Growth, Small Company Growth and Global Discovery Portfolios............34
Debt Securities.........................................................41
High Yield, High Risk Securities........................................41
Combined Transactions...................................................42
Risks of Specialized Investment Techniques Abroad.......................42
INVESTMENT RESTRICTIONS.......................................................42
PURCHASES AND REDEMPTIONS.....................................................43
INVESTMENT ADVISER AND DISTRIBUTOR............................................44
Investment Adviser......................................................44
Personal Investments by Employees of the Adviser........................48
Distributor.............................................................48
TRUSTEES AND OFFICERS.........................................................50
REMUNERATION..................................................................52
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TABLE OF CONTENTS (continued)
Page
Responsibilities of the Board--Board and Committee Meetings.............52
Compensation of Officers and Trustees...................................52
NET ASSET VALUE...............................................................53
TAX STATUS....................................................................54
DIVIDENDS AND DISTRIBUTIONS...................................................58
Money Market Portfolio..................................................58
Global Discovery Portfolio and International Portfolio..................59
Other Portfolios........................................................59
PERFORMANCE INFORMATION.......................................................59
Money Market Portfolio..................................................59
Bond Portfolio..........................................................60
All Portfolios..........................................................60
Comparison of Portfolio Performance.....................................62
SHAREHOLDER COMMUNICATIONS....................................................66
ORGANIZATION AND CAPITALIZATION...............................................66
General [TO BE UPDATED].................................................66
Shareholder and Trustee Liability.......................................67
ALLOCATION OF PORTFOLIO BROKERAGE.............................................67
PORTFOLIO TURNOVER............................................................69
EXPERTS.......................................................................69
COUNSEL.......................................................................69
ADDITIONAL INFORMATION........................................................69
FINANCIAL STATEMENTS..........................................................70
APPENDIX......................................................................72
Description of Bond Ratings.............................................72
Description of Commercial Paper Ratings.................................73
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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, Large Company Growth Portfolio, Small
Company 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 U.S. 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 short-term rating categories) by any two
nationally-recognized statistical 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
short-term rating 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 eligible for
investment by the Money Market Portfolio 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 statistical
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
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necessarily indicative of its creditworthiness. Investment in certificates of
deposit and bankers' acceptances issued by foreign banks and foreign branches of
domestic banks involves investment risks that are different in some respects
from those associated with investments in certificates of deposit and bankers'
acceptances issued by domestic banks. (See "Foreign Securities" in this
Statement of Additional Information for further risks of foreign investment.)
The Money Market Portfolio may also invest in certificates of deposit
issued by banks and savings and loan institutions which had at the time of their
most recent annual financial statements total assets of less than $1 billion,
provided that (i) the principal amounts of such certificates of deposit are
insured by an agency of the U.S. Government, (ii) at no time will the Portfolio
hold more than $100,000 principal amount of certificates of deposit of any one
such bank, and (iii) at the time of acquisition, no more than 10% of the
Portfolio's assets (taken at current value) are invested in certificates of
deposit of such banks having total assets not in excess of $1 billion.
The assets of the Money Market Portfolio consist entirely of cash items
and investments having a remaining maturity date of 397 calendar days or less
from date of purchase. The Portfolio will be managed so that the average
maturity of all instruments in the portfolio (on a dollar-weighted basis) will
be 90 days or less. The average maturity of the Portfolio's investments varies
according to the Adviser's appraisal of money market conditions.
The Portfolio may invest more than 5% but not more than 25% 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 debt 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
Baa or BBB
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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.
During the fiscal year ended December 31, 1997, the average monthly
dollar-weighted market value of the bonds in the Portfolio's portfolio was rated
as follows: 53% Aaa, 4% Aa, 15% A, 18% Baa, 6% Ba and 4% B.
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 Corporation 500 Composite Stock Price Index ("S&P 500").
The Portfolio will invest primarily in securities issued by medium-to-large
sized domestic companies with annual revenues or market capitalization of at
least $600 million, and which, in the opinion of the Adviser, offer
above-average potential for price appreciation. The Portfolio seeks to invest in
companies that have relatively consistent and above-average rates of growth;
companies that are in a strong financial position with high credit standings and
profitability; firms with important business franchises, leading products, or
dominant marketing and distribution systems; companies guided by experienced and
motivated managements; and companies selling at attractive market valuations.
The Adviser believes that companies with these characteristics will be rewarded
by the market with higher stock prices over time and provide investment returns,
on average, in excess of the S&P 500.
At least 65% of the value of the Portfolio's common stocks will be of
issuers which qualify, at the time of purchase, for one of the three highest
equity earnings and dividends ranking categories (A+, A, or A-) of S&P, or if
not ranked by S&P, are judged to be of comparable quality by the Adviser. S&P
assigns earnings and dividends rankings to corporations based on a number of
factors, including stability and growth of earnings and dividends. Rankings by
S&P are not an appraisal of a company's creditworthiness, as is true for S&P's
debt security ratings, nor are these rankings intended as a forecast of future
stock market performance. In addition to using S&P rankings of earnings and
dividends of common stocks, the Adviser conducts its own analysis of a company's
history, current financial position, and earnings prospects.
3
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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
deposit, commercial paper, short-term government obligations and repurchase
agreements.
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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.
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:
5
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1. Companies that generate or apply new technologies, new and improved
distribution techniques, or new services, such as those in the
business equipment, electronics, specialty merchandising, and health
service industries.
2. Companies that own or develop natural resources, such as energy
exploration or precious metals companies.
3. Companies that may benefit from changing consumer demands and
lifestyles, such as financial service organizations and
telecommunications companies.
4. Foreign companies.
While emphasizing investments in companies with above-average growth
prospects, the Portfolio may also purchase and hold equity securities of
companies that may have only average growth prospects, but seem undervalued due
to factors thought to be of a temporary nature which may cause their securities
to be out of favor and to trade at a price below their potential value.
The Portfolio, as a matter of nonfundamental policy, may invest up to 20%
of its net assets in intermediate to longer term debt securities when management
anticipates that the total return on debt securities is likely to equal or
exceed the total return on common stocks over a selected period of time. The
Portfolio may purchase investment-grade debt securities, which are those rated
Aaa, Aa, A or Baa by Moody's, or AAA, AA, A or BBB by S&P, or, if unrated, of
equivalent quality as determined by the Adviser. Bonds that are rated Baa by
Moody's or BBB by S&P have some speculative characteristics. The Portfolio's
intermediate to longer-term debt securities may also include those which are
rated below investment grade as long as no more than 5% of its net assets are
invested in such securities. As interest rates fall the prices of debt
securities tend to rise and vice versa. Should the rating of any security held
by the Portfolio be downgraded after the time of purchase, the Adviser will
determine whether it is in the best interest of the Portfolio to retain or
dispose of the security. (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.
Large Company Growth Portfolio
Large Company Growth Portfolio seeks to provide long-term growth of
capital through investment primarily in the equity securities of seasoned,
financially strong U.S. growth companies. Although current income is an
incidental consideration, many of the Portfolio's securities should provide
regular dividends which are expected to grow over time.
The Portfolio's equity investments consist of common stocks, preferred
stocks and securities convertible into common stocks of companies which offer
the prospect for above-average growth in earnings, cash flow or assets relative
to the overall market as defined by the S&P 500. The prospect for above-average
growth in assets is evaluated in terms of the potential future earnings such
growth in assets can produce.
The Portfolio allocates its investments among different industries and
companies, and adjusts its portfolio securities based on long-term investment
considerations as opposed to short-term trading. While the Portfolio emphasizes
U.S. investments, it can commit a portion of assets to the equity securities of
foreign growth companies which meet the criteria applicable to domestic
investments.
Except as otherwise indicated, the Portfolio's investment objective and
policies are not fundamental and may be changed without a vote of shareholders.
If there is a change in investment objective, shareholders should consider
whether the Portfolio remains an appropriate investment in light of their then
current financial position and needs. The net asset value of the Portfolio's
shares will increase or decrease with changes in the market price of the
Portfolio's investments, and there can be no assurance that the Portfolio's
objective will be met.
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The Portfolio invests primarily in the equity securities issued by
large-sized domestic companies that offer above-average appreciation potential.
In seeking such investments, the Portfolio invests in companies with the
following characteristics:
o companies that have exhibited above-average growth rates over an
extended period with prospects for maintaining greater than average
rates of growth in earnings, cash flow or assets in the future;
o companies that are in a strong financial position with high credit
standings and profitability;
o companies with important business franchises, leading products or
dominant marketing and distribution systems;
o companies guided by experienced, motivated management;
o companies selling at attractive prices relative to potential growth
in earnings, cash flow or assets.
The Adviser utilizes a combination of qualitative and quantitative
research techniques to identify companies that have above-average quality and
growth characteristics and that are deemed to be selling at attractive market
valuations. In-depth fundamental research is used to evaluate various aspects of
corporate performance, with a particular focus on consistency of results,
long-term growth prospects and financial strength. Quantitative valuation models
are designed to help determine which growth companies offer the best values at a
given point in time. From time to time, for temporary defensive or emergency
purposes, the Portfolio may invest a portion of its assets in cash and cash
equivalents when the Adviser deems such a position advisable in light of
economic or market conditions. It is impossible to predict for how long such
alternate strategies may be utilized. The Portfolio also may invest in foreign
securities, repurchase agreements, and may engage in strategic transactions.
The Portfolio invests at least 65% of its total assets in the equity
securities of large U.S. growth companies, i.e., those with total market
capitalization of $1 billion or more. The Portfolio looks for companies with
above-average financial quality. When assessing financial quality, the Adviser
weighs four elements of business risk. These factors are the Adviser's
assessment of the strength of a company's balance sheet, the accounting
practices a company follows, the volatility of a company's earnings over time
and the vulnerability of earnings to changes in external factors, such as the
general economy, the competitive environment, governmental action and
technological change.
The Large Company 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.
Small Company Growth Portfolio
The Small Company Growth Portfolio pursues long-term growth of capital by
investing in emerging growth companies that are poised to be leaders in the next
century. The Portfolio is designed for investors in search of substantial
long-term growth who can accept above-average stock market risk and little or no
current income.
Due to the business characteristics and risks of emerging growth
companies, the Portfolio's share price can experience periods of volatility. As
a result, the Portfolio should be considered a long-term investment and only one
part of a well-diversified personal investment portfolio. Except as otherwise
indicated, the Portfolio's investment objective and policies are not fundamental
and may be changed without a vote of shareholders. If there is a change in
investment objective, shareholders should consider whether the Portfolio remains
an appropriate investment in light of their then current financial position and
needs. There can be no assurance that the Portfolio's objective will be met.
The Portfolio normally invests at least 80% of its assets in common
stocks. Companies in which the Portfolio invests generally are similar in size
to those included in the Russell 2000(R) Index --a widely used benchmark of
small stock performance. The Portfolio's Adviser believes these companies are
well-positioned for above-average earnings growth and/or greater market
recognition. Such favorable prospects may be a result of new or innovative
products or services a given company is developing or provides, products or
services that have the potential to impact significantly the industry in which
the company competes or to change dramatically customer behavior into the 21st
century. The above-average earnings growth potential and/or greater market
recognition expected are factors believed to offer significant opportunity for
capital appreciation, and the Adviser will attempt to identify these
opportunities before their potential is recognized by investors in general.
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To help reduce risk in its search for high quality, emerging growth
companies, the Adviser allocates the Portfolio's investments among many
companies and different industries in the U. S. and, where opportunity warrants,
abroad as well. The Adviser seeks companies that, in the Adviser's opinion, have
excellent management which own a significant stake in the company, clean balance
sheets, conservative accounting, and either a commanding position in a growing
market or the real possibility of building a commanding position as the 21st
century approaches. Emerging growth companies are those with the ability, in the
Adviser's opinion, to expand earnings per share by at least 15% per annum over
the next three to five years at a minimum. In selecting specific industries and
companies for investment, the Adviser will make full use of its extensive
fundamental and field research capabilities in taking into account such other
factors as overall growth prospects and financial condition, competitive
situation, technology, research and development activities, productivity, labor
costs, raw material costs and sources, profit margins, return on investment,
structural changes in local economies, capital resources, the degree of
governmental regulation or deregulation facing a company, and quality and
experience of management.
For temporary defensive purposes the Portfolio may vary from its
investment policy during periods in which conditions in securities markets or
other economic or political conditions warrant. It is impossible to accurately
predict how long such alternate strategies may be utilized. In such cases, the
Portfolio may hold without limit, cash, high grade debt securities, without
equity features, which are rated Aaa, Aa or A by Moody's or AAA, AA or A by S&P,
or, if unrated, are deemed by the Adviser to be of equivalent quality, U.S.
Government securities and invest in money market instruments which are rated in
the two highest categories by Moody's or S&P, or, if unrated, are deemed by the
Adviser to be of equivalent quality. The Portfolio may borrow money for
temporary, emergency or other purposes, including investment leverage purposes,
as determined by the Trustees. The Portfolio may also borrow under reverse
repurchase agreements. The 1940 Act requires borrowings to have 300% asset
coverage.
In addition, the Portfolio may invest in preferred stocks when management
anticipates that the capital appreciation on such stocks is likely to equal or
exceed that of common stocks over a selected time. The Portfolio may enter into
repurchase agreements and may engage in strategic transactions.
The Portfolio offers participation in the potential growth of emerging
growth companies that may be destined to become leading companies in the 21st
century. The Portfolio offers the benefit of professional management to identify
investments in emerging growth companies with the greatest potential, in the
Adviser's opinion, to have a profound and positive impact on the lives of
consumers and businesses as we enter the 21st century. The Adviser anticipates
finding these companies in many rapidly changing sectors of the economy.
Examples include innovative retailing concepts, the on-going U.S. transition to
an increasingly service-based economy, advances in health care in areas such as
biotechnology, and the tremendous, rapid advances occurring in communications,
computing, software and technology generally. In return for accepting
above-average market risk, investors gain access to a broadly diversified
portfolio designed for above-average capital appreciation compared to that
available from larger companies such as those in the S&P 500 Stock Index.
Foreign securities such as those which may be purchased by the Portfolio
may be subject to foreign government taxes which could reduce the return on such
securities, although a shareholder of the Portfolio may, subject to certain
limitations, be entitled to claim a credit or deduction for U.S. federal income
tax purposes for his or her proportionate share of such foreign taxes paid by
the Portfolio. (See "TAXES.")
Historical small stock performance. The Ibbotson US Small Stock Index is
commonly used to show historical performance of smaller stocks due to the
extensive range of data points offered (1926 to the present). According to
Ibbotson, smaller stocks outperform larger stocks over time. For the years 1973
to 1997 (25 years), the average annual return for the Ibbotson Index was 16.30%
compared with 13.10% for larger stocks -- a difference of over 3%.
While, historically, small company stocks have outperformed the stocks of
large companies, the former have customarily involved more investment risk as
well. Small companies may have limited product lines, markets or financial
resources; may lack management depth or experience; and may be more vulnerable
to adverse general market or economic developments than large companies. The
prices of small company securities are often more volatile than prices
associated with large company issues, and can display abrupt or erratic
movements at times, due to limited trading volumes and less publicly available
information.
Also, because small companies normally have fewer shares outstanding and
these shares trade less frequently than large companies, 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
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personnel. The securities of small companies are often traded over-the-counter
and may not be traded in the volumes typical on a national securities exchange.
Consequently, in order to sell this type of holding, the Portfolio may need to
discount the securities from recent prices or dispose of the securities over a
long period of time.
Defining "emerging growth" companies. The Adviser's model of the corporate life
cycle begins with investment of venture capital, and proceeds to an 'emerging
growth' stage. An 'emerging growth' company is publicly traded, with a market
value of at least $50 million. Emerging growth companies are part of the `small
stock universe' as described above.
Emerging growth companies grow into 'established growth' companies with
market values exceeding $500 million. Companies become mature over time as
growth slows and market capitalizations grow beyond $1 billion.
The Small Company 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 Corporation 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
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
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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 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 Portfolio 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
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
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the Portfolio to make intended security purchases due to settlement problems
could cause the Portfolio to miss attractive investment opportunities. Inability
to dispose of portfolio securities due to settlement problems either could
result in losses to the Portfolio due to subsequent declines in value of the
portfolio security or, if the Portfolio has entered into a contract to sell the
security, could result in possible liability to the purchaser. Fixed commissions
on some foreign securities exchanges are generally higher than negotiated
commissions on U.S. exchanges, although the Adviser will endeavor to achieve the
most favorable net results on the Portfolio's portfolio transactions. Further,
the Portfolio may encounter difficulties or be unable to pursue legal remedies
and obtain judgment in foreign courts. There is generally less government
supervision and regulation of business and industry practices, securities
exchanges, brokers and listed companies than in the U.S. It may be more
difficult for the Portfolio's agents to keep currently informed about corporate
actions such as stock dividends or other matters which may affect the prices of
portfolio securities. Communications between the U.S. and foreign countries may
be less reliable than within the U.S., thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio
securities. In addition, with respect to certain foreign countries, there is the
possibility of nationalization, expropriation, the imposition of confiscatory or
withholding taxation, political, social or economic instability, or diplomatic
developments which could affect U.S. investments in those countries. Investments
in foreign securities may also entail certain risks, such as possible currency
blockages or transfer restrictions, and the difficulty of enforcing rights in
other countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position. The Adviser seeks to mitigate the risks to the
Portfolio associated with the foregoing considerations through investment
variation and continuous professional management.
Limitations on Holdings of Foreign Securities. The Portfolio shall invest in no
less than five foreign countries; provided that, (i) if foreign securities
comprise less than 80% of the value of the Portfolio's net assets, the Portfolio
shall invest in no less than four foreign countries; (ii) if foreign securities
comprise less than 60% of the value of the Portfolio's net assets, the Portfolio
shall invest in no less than three foreign countries; (iii) if foreign
securities comprise less than 40% of the value of the Portfolio's net assets,
the Portfolio shall invest in no less than two foreign countries; and (iv) if
foreign securities comprise less than 20% of the value of the Portfolio's net
assets the Portfolio may invest in a single foreign country.
The Portfolio shall invest no more than 20% of the value of its net assets
in securities of issuers located in any one country; provided that an additional
15% of the value of the Portfolio's net assets may be invested in securities of
issuers located in any one of the following countries: Australia, Canada,
France, Japan, the United Kingdom and Germany; and provided further that 100% of
the Portfolio's assets may be invested in securities of issuers located in the
United States.
Eastern Europe. Investments in companies domiciled in Eastern European countries
may be subject to potentially greater risks than those of other foreign issuers.
These risks include (i) potentially less social, political and economic
stability; (ii) the small current size of the markets for such securities and
the low volume of trading, which result in less liquidity and in greater price
volatility; (iii) certain national policies which may restrict the Portfolio's
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in certain Eastern European countries, of a capital
market structure or market-oriented economy; and (vii) the possibility that
recent favorable economic developments in Eastern Europe may be slowed or
reversed by unanticipated political or social events in such countries, or in
the countries of the former Soviet Union. The Portfolio may invest up to 5% of
its total assets in the securities of issuers domiciled in Eastern European
countries.
Investments in such countries involve risks of nationalization,
expropriation and confiscatory taxation. The Communist governments of a number
of East European countries expropriated large amounts of private property in the
past, in many cases without adequate compensation, and there may be no assurance
that such expropriation will not occur in the future. In the event of such
expropriation, the Portfolio 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.
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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 the Portfolio's assets daily in terms of U.S. dollars, the Portfolio does
not intend to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. The Portfolio will do so from time to time, and investors should be
aware of the costs of currency conversion. Although foreign exchange dealers do
not charge a fee for conversion, they do realize a profit based on the
difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Portfolio at one rate, while offering a lesser rate of exchange should
the Portfolio desire to resell that currency to the dealer. The Portfolio will
conduct its foreign currency exchange transactions either on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market, or
through entering into forward or futures contracts to purchase or sell foreign
currencies.
Because the Portfolio normally will be invested in both U.S. and foreign
securities markets, changes in the Portfolio's share price may have a low
correlation with movements in the U.S. markets. The Portfolio's share price will
reflect the movements of both the different stock and bond markets in which it
is invested and of the currencies in which the investments are denominated. The
strength or weakness of the U.S. dollar against foreign currencies may account
for part of the Portfolio's investment performance. U.S. and foreign securities
markets do not always move in step with each other, and the total returns from
different markets may vary significantly. The Portfolio invests in many
securities markets around the world in an attempt to take advantage of
opportunities wherever they may arise.
Investing in Emerging Markets. Most emerging securities markets may have
substantially less volume and are subject to less government supervision than
U.S. securities markets. Securities of many issuers in emerging markets may be
less liquid and more volatile than securities of comparable domestic issuers. In
addition, there is less regulation of securities exchanges, securities dealers,
and listed and unlisted companies in emerging markets than in the United States.
Emerging markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions. Delays in settlement
could result in temporary periods when a portion of the assets of the Portfolio
is uninvested and no cash is earned thereon. The inability of the Portfolio to
make intended security purchases due to settlement problems could cause the
Portfolio to miss attractive investment opportunities. Inability to dispose of
portfolio securities due to settlement problems could result either in losses to
the Portfolio due to subsequent declines in value of the portfolio security or,
if the Portfolio 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
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economies and securities markets of certain emerging market countries. In an
attempt to control inflation, wage and price controls have been imposed in
certain countries. Of these countries, some, in recent years, have begun to
control inflation through prudent economic policies.
Investing in Latin America. Investing in securities of Latin American issuers
may entail risks relating to the potential political and economic instability of
certain Latin American countries and the risks of expropriation,
nationalization, confiscation or the imposition of restrictions on foreign
investment and on repatriation of capital invested. In the event of
expropriation, nationalization or other confiscation by any country, the
Portfolio could lose its entire investment in any such country.
The securities markets of Latin American countries are substantially
smaller, less developed, less liquid and more volatile than the major securities
markets in the U.S. Disclosure and regulatory standards are in many respects
less stringent than U.S. standards. Furthermore, there is a lower level of
monitoring and regulation of the markets and the activities of investors in such
markets.
The limited size of many Latin American securities markets and limited
trading volume in the securities of Latin American issuers compared to volume of
trading in the securities of U.S. issuers could cause prices to be erratic for
reasons apart from factors that affect the soundness and competitiveness of the
securities issuers. For example, limited market size may cause prices to be
unduly influenced by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on in-depth fundamental analysis,
may decrease the value and liquidity of portfolio securities.
The Portfolio may invest a portion of its assets in securities denominated
in currencies of Latin American countries. Accordingly, changes in the value of
these currencies against the U.S. dollar may result in corresponding changes in
the U.S. dollar value of the Portfolio's assets denominated in those currencies.
Some Latin American countries also may have managed currencies, which are
not free floating against the U.S. dollar. In addition, there is risk that
certain Latin American countries may restrict the free conversion of their
currencies into other currencies. Further, certain Latin American currencies may
not be internationally traded. Certain of these currencies have experienced a
steep devaluation relative to the U.S. dollar. Any devaluations in the
currencies in which the Portfolio securities are denominated may have a
detrimental impact on the Portfolio's net asset value.
The economies of individual Latin American countries may differ favorably
or unfavorably from the U.S. economy in such respects as the rate of growth of
gross domestic product, the rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. Certain Latin American
countries have experienced high levels of inflation which can have a
debilitating effect on an economy, although some have begun to control inflation
in recent years through prudent economic policies. Furthermore, certain Latin
American countries may impose withholding taxes on dividends payable to the
Portfolio at a higher rate than those imposed by other foreign countries. This
may reduce the Portfolio's investment income available for distribution to
shareholders.
Certain Latin American countries such as Argentina, Brazil and Mexico are
among the world's largest debtors to commercial banks and foreign governments.
At times, certain Latin American countries have declared moratoria on the
payment of principal and/or interest on outstanding debt.
Latin America is a region rich in natural resources such as oil, copper,
tin, silver, iron ore, forestry, fishing, livestock and agriculture. The region
has a large population (roughly 300 million) representing a large domestic
market. Economic growth was strong in the 1960s and 1970s, but slowed
dramatically (and in some instances was negative) in the 1980s as a result of
poor economic policies, higher international interest rates, and the denial of
access to new foreign capital. Although a number of Latin American countries are
currently experiencing lower rates of inflation and higher rates of real growth
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
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largest in those countries. As a result, government actions in the future could
have a significant effect on economic conditions which may adversely affect
prices of certain portfolio securities. Expropriation, confiscatory taxation,
nationalization, political, economic or social instability or other similar
developments, such as military coups, have occurred in the past and could also
adversely affect the Fund's investments in this region.
Changes in political leadership, the implementation of market oriented
economic policies, such as privatization, trade reform and fiscal and monetary
reform are among the recent steps taken to renew economic growth. External debt
is being restructured and flight capital (domestic capital that has left home
country) has begun to return. Inflation control efforts have also been
implemented. Free Trade Zones are being discussed in various areas around the
region, the most notable being a free zone among Mexico, the U.S. and Canada and
another zone among four countries in the southernmost point of Latin America.
Currencies are typically weak, but most are now relatively free floating, and it
is not unusual for the currencies to undergo wide fluctuations in value over
short periods of time due to changes in the market.
Investing in the Pacific Basin. Economies of individual Pacific Basin countries
may differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency, interest rate levels, and balance of payments
position. Of particular importance, most of the economies in this region of the
world are heavily dependent upon exports, particularly to developed countries,
and, accordingly, have been and may continue to be adversely affected by trade
barriers, managed adjustments in relative currency values, and other
protectionist measures imposed or negotiated by the U.S. and other countries
with which they trade. These economies also have been and may continue to be
negatively impacted by economic conditions in the U.S. and other trading
partners, which can lower the demand for goods produced in the Pacific Basin.
With respect to the Peoples Republic of China and other markets in which
the Portfolio 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.
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Economic reforms launched in the 1980s continue to benefit Turkey in the
1990s. Turkey's economy has grown steadily since the early 1980s, with real
growth in per capita Gross Domestic Product (the "GDP") increasing more than 6%
annually. Agriculture remains the most important economic sector, employing
approximately 55% of the labor force, and accounting for nearly 20% of GDP and
20% of exports. Inflation and interest rates remain high, and a large budget
deficit will continue to cause difficulties in Turkey's substantial
transformation to a dynamic free market economy.
Like many other Western economies, Greece suffered severely from the
global oil price hikes of the 1970s, with annual GDP growth plunging from 8% to
2% in the 1980s, and inflation, unemployment, and budget deficits rising
sharply. The fall of the socialist government in 1989 and the inability of the
conservative opposition to obtain a clear majority have led to business
uncertainty and the continued prospects for flat economic performance. Once
Greece has sorted out its political situation, it will have to face the
challenges posed by the steadily increasing integration of the EC, including the
progressive lowering of trade and investment barriers. Tourism continues as a
major industry, providing a vital offset to a sizable commodity trade deficit.
Securities traded in certain emerging European securities markets may be
subject to risks due to the inexperience of financial intermediaries, the lack
of modern technology and the lack of a sufficient capital base to expand
business operations. Additionally, former Communist regimes of a number of
Eastern European countries had expropriated a large amount of property, the
claims of which have not been entirely settled. There can be no assurance that
the Portfolio's investments in Eastern Europe would not also be expropriated,
nationalized or otherwise confiscated. Finally, any change in leadership or
policies of Eastern European countries, or countries that exercise a significant
influence over those countries, may halt the expansion of or reverse the
liberalization of foreign investment policies now occurring and adversely affect
existing investment opportunities.
Investing in Africa. Africa is a continent of roughly 50 countries with a total
population of approximately 840 million people. Literacy rates (the percentage
of people who are over 15 years of age and who can read and write) are
relatively low, ranging from 20% to 60%. The primary industries include crude
oil, natural gas, manganese ore, phosphate, bauxite, copper, iron, diamond,
cotton, coffee, cocoa, timber, tobacco, sugar, tourism, and cattle.
Many of the countries are fraught with political instability. However,
there has been a trend over the past five years toward democratization. Many
countries are moving from a military style, Marxist, or single party government
to a multi-party system. Still, there remain many countries that do not have a
stable political process. Other countries have been enmeshed in civil wars and
border clashes.
Economically, the Northern Rim countries (including Morocco, Egypt, and
Algeria) and Nigeria, Zimbabwe and South Africa are the wealthier countries on
the continent. The market capitalization of these countries has been growing
recently as more international companies invest in Africa and as local companies
start to list on the exchanges. However, religious and ethnic strife has been a
significant source of instability.
On the other end of the economic spectrum are countries, such as
Burkinafaso, Madagascar, and Malawi, that are considered to be among the poorest
or least developed in the world. These countries are generally landlocked or
have poor natural resources. The economies of many African countries are heavily
dependent on international oil prices. Of all the African industries, oil has
been the most lucrative, accounting for 40% to 60% of many countries' GDP.
However, general decline in oil prices has had an adverse impact on many
economies.
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
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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 foreign 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
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.
Master-feeder fund structure
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At the special meeting of shareholders, a majority of the stockholders of
each Portfolio of Scudder Variable Life Investment Fund (the "Fund") approved a
proposal which gives the Fund's Board of Trustees the discretion with respect to
each Portfolio to retain the current distribution arrangement for the Portfolio
while investing in a master fund in a master/feeder fund structure as described
below.
A master/feeder fund structure is one in which a fund (a "feeder fund"),
instead of investing directly in a portfolio of securities, invests most or all
of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS
(See "POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS"
in the Fund's prospectus.)
Except as otherwise noted below, the following description of additional
investment policies and techniques is applicable to all of the Portfolios.
Repurchase Agreements
On behalf of a Portfolio, the Fund may enter into repurchase agreements
with member banks of the Federal Reserve System, any foreign bank and any
broker-dealer which is recognized as a reporting government securities dealer if
the creditworthiness of the bank or broker-dealer has been determined by the
Adviser to be at least equal to that of issuers of commercial paper rated within
the two highest categories assigned by Moody's or S&P. A repurchase agreement
with a member bank of the Federal Reserve System, which provides a means for the
Portfolio to earn income on funds for periods as short as overnight, is an
arrangement through which the Portfolio acquires a U.S. Government or other high
quality short-term debt obligation (the "Obligation") and the seller agrees, at
the time of sale, to repurchase the Obligation at a specified time and price. A
repurchase agreement with foreign banks may be available with respect to
government securities of the particular foreign jurisdiction. The repurchase
price may be higher than the purchase price, the difference being income to the
Portfolio, or the purchase and repurchase prices may be the same, with interest
at a stated rate due to the Portfolio together with the repurchase price on
repurchase. In either case, the income to the Portfolio is unrelated to the
interest rate on the Obligation subject to the repurchase agreement. For
purposes of the Investment Company Act of 1940, 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.
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Debt Securities
The Bond, Balanced, Capital Growth, Small Company 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" 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.
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. A Portfolio may be deemed to be an
"underwriter" for purposes of the 1933 Act when selling restricted securities to
the public, and in such event the Portfolio may be liable to purchasers of such
securities 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
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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, Small Company
Growth, Large Company Growth, Global Discovery and International Portfolios may
each invest in zero coupon securities which pay no cash income and are sold at
substantial discounts from their value at maturity. When held to maturity, their
entire income, which consists of accretion of discount, comes from the
difference between the issue price and their value at maturity. Zero coupon
securities are subject to greater market value fluctuations from changing
interest rates than debt obligations of comparable maturities which make current
distributions of interest (cash). Zero coupon convertible securities offer the
opportunity for capital appreciation (or depreciation) as increases (or
decreases) in market value of such securities closely follow the movements in
the market value of the underlying common stock. Zero coupon convertible
securities generally are expected to be less volatile than the underlying common
stocks because zero coupon convertible securities are usually issued with
shorter maturities (15 years or less) and with options and/or redemption
features exercisable by the holder of the obligation entitling the holder to
redeem the obligation and receive a defined cash payment.
Zero coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of securities firms and
banks have stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" ("TIGRS") and Certificate of Accrual on Treasuries
("CATS"). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates or other evidences of ownership of the U.S.
Treasury securities has stated that for federal tax and securities purposes, in
their opinion purchasers of such certificates, such as the Portfolios, most
likely will be deemed the beneficial holders of the underlying U.S. government
securities.
The Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupons and corpus payments on Treasury securities through the Federal
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, Growth and Income, and Global Discovery Portfolios 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
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mortgage REITs may hold mortgages that the mortgagors elect to prepay, which
prepayment may diminish the yield on securities issued by those REITs.
Certain REITs have relatively small market capitalization, which may tend
to increase the volatility of the market price of their securities. Furthermore,
REITs are dependent upon specialized management skills, have limited
diversification and are, therefore, subject to risks inherent in operating and
financing a limited number of projects. REITs are also subject to heavy cash
flow dependency, defaults by borrowers and the possibility of failing to qualify
for tax-free pass-through of income under the Internal Revenue Code of 1986, as
amended and to maintain exemption from the registration requirements of the 1940
Act. By investing in REITs indirectly through a Portfolio, a shareholder will
bear not only his or her proportionate share of the expenses of the Portfolio,
but also, indirectly, similar expenses of the REITs. In addition, REITs depend
generally on their ability to generate cash flow to make distributions to
shareholders.
Mortgage-Backed Securities and Mortgage Pass-Through Securities
The Bond, Balanced, and Growth and Income Portfolios may also invest in
mortgage-backed securities, which are interests in pools of mortgage loans,
including mortgage loans made by savings and loan institutions, mortgage
bankers, commercial banks, and others. Pools of mortgage loans are assembled as
securities for sale to investors by various governmental, government-related,
and private organizations as further described below. The Portfolios may also
invest in debt securities which are secured with collateral consisting of
mortgage-backed securities (see "Collateralized Mortgage Obligations"), and in
other types of mortgage-related securities.
A decline in interest rates may lead to a faster rate of repayment of the
underlying mortgages, and expose the Portfolios to a lower rate of return upon
reinvestment. To the extent that such mortgage-backed securities are held by the
Portfolios, the prepayment right will tend to limit to some degree the increase
in net asset value of the Portfolios because the value of the mortgage-backed
securities held by the Portfolios may not appreciate as rapidly as the price of
non-callable debt securities.
Interests in pools of mortgage-backed securities differ from other forms
of debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a monthly payment which consists of both
interest and principal payments. In effect, these payments are a "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. Because principal may be prepaid at any time,
mortgage-backed securities may involve significantly greater price and yield
volatility than traditional debt securities. 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.
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FHLMC is a corporate instrumentality of the U.S. Government and was
created by Congress in 1970 for the purpose of increasing the availability of
mortgage credit for residential housing. Its stock is owned by the twelve
Federal Home Loan Banks. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal, but PCs are not backed by the full faith and credit of the U.S.
Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers, and other secondary market issuers also
create pass-through pools of conventional mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance, and
letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers, and the mortgage poolers. Such insurance and
guarantees and the creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets the Portfolios' investment
quality standards. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. The Portfolios may buy mortgage-related securities without
insurance or guarantees, if through an examination of the loan experience and
practices of the originators/servicers and poolers, the Adviser determines that
the securities meet the Portfolios' quality standards. Although the market for
such securities is becoming increasingly liquid, securities issued by certain
private organizations may not be readily marketable.
Collateralized Mortgage Obligations ("CMOs")
A CMO is a hybrid between a mortgage-backed bond and a mortgage
pass-through security. Similar to a bond, interest and prepaid principal are
paid, in most cases, semiannually. CMOs may be collateralized by whole mortgage
loans but are more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, FHLMC, or FNMA, and their income
streams.
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. The prices of certain CMOs,
depending on their structure and the rate of prepayments, can be volatile. Some
CMOs may also not be as liquid as other securities.
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
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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 15% of the value of the Portfolio's net assets will be illiquid. As new
types of mortgage-related securities are developed and offered to investors, the
Adviser will, consistent with the Portfolio's investment objectives, policies,
and quality standards, consider making investments in such new types of
mortgage-related securities.
Other Asset-Backed Securities
The securitization techniques used to develop mortgaged-backed securities
are now being applied to a broad range of assets. Through the use of trusts and
special purpose corporations, various types of assets, including automobile
loans, computer leases and credit card receivables, are being securitized in
pass-through structures similar to the mortgage pass-through structures
described above or in a structure similar to the CMO structure. Consistent with
the Bond Portfolio's 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 Receivables(SM) ("CARS(SM)").
CARS(SM) 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 CARS(SM) 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 CARS(SM) 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
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losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
results from payment of the insurance obligations on at least a portion of the
assets in the pool. This protection may be provided through guarantees, policies
or letters of credit obtained by the issuer or sponsor from third parties,
through various means of structuring the transaction or through a combination of
such approaches. The Bond Portfolio and the Balanced Portfolio will not pay any
additional or separate fees for credit support. The degree of credit support
provided for each issue is generally based on historical information respecting
the level of credit risk associated with the underlying assets. Delinquency or
loss in excess of that anticipated, or failure of the credit support could
adversely affect the return on an investment in such a security.
The Bond Portfolio and the Balanced Portfolio may also invest in residual
interests in asset-backed securities. In the case of asset-backed securities
issued in a pass-through structure, the cash flow generated by the underlying
assets is applied to make required payments on the securities and to pay related
administrative expenses. The residual in an asset-backed security pass-through
structure represents the interest in any excess cash flow remaining after making
the foregoing payments. The amount of residual cash flow resulting from a
particular issue of asset-backed securities will depend on, among other things,
the characteristics of the underlying assets, the coupon rates on the
securities, prevailing interest rates, the amount of administrative expenses and
the actual prepayment experience on the underlying assets. Asset-backed security
residuals not registered under the Securities Act of 1933 may be subject to
certain restrictions on transferability. In addition, there may be no liquid
market for such securities.
The availability of asset-backed securities may be affected by legislative
or regulatory developments. It is possible that such developments may require
the Bond Portfolio and the Balanced Portfolio to dispose of any then existing
holdings of such securities.
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, Large Company
Growth, Small Company 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,
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although typically not as much as the underlying common stock. While no
securities investments are without risk, investments in convertible securities
generally entail less risk than investments in common stock of the same issuer.
As fixed income securities, convertible securities are investments which
provide for a stream of income (or in the case of zero coupon securities,
accretion of income) with generally higher yields than common stocks. Of course,
like all fixed income securities, there can be no assurance of income or
principal payments because the issuers of the convertible securities may default
on their obligations. Convertible securities generally offer lower yields than
non-convertible securities of similar quality because of their conversion or
exchange features.
Convertible securities are generally subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar
non-convertible securities.
Convertible securities may be issued as fixed income obligations that pay
current income or as zero coupon notes and bonds, including Liquid Yield Option
Notes ("LYONs"). Zero coupon securities pay no cash income and are sold at
substantial discounts from their value at maturity. When held to maturity, their
entire income, which consists of accretion of discount, comes from the
difference between the purchase price and their value at maturity. Zero coupon
convertible securities offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follows the
movements in the market value of the underlying common stock. Zero coupon
convertible securities are generally expected to be less volatile than the
underlying common stocks as they are usually issued with short to medium length
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, Large Company Growth,
Small Company 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, Large Company
Growth, Small Company 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
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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 Small Company Growth Portfolio and the International Portfolio may invest
without limit, in non-U.S. dollar-denominated equity securities of foreign
issuers. However, the Small Company Growth Portfolio has no current intention of
investing more than 20% of its net assets in foreign securities. The Large
Company Growth Portfolio may invest up to __% of its assets in non-U.S.
dollar-denominated equity securities of foreign issuers.
Investors should recognize that investing in foreign securities involves
certain special considerations, including those set forth below, which are not
typically associated with investing in U.S. securities and which may favorably
or unfavorably affect the Non-Money Market Portfolios' performance. As foreign
companies are not generally subject to uniform accounting and auditing and
financial reporting standards, practices and requirements comparable to those
applicable to domestic companies, there may be less publicly available
information about a foreign company than about a domestic company. Many foreign
stock markets, while growing in volume of trading activity, have substantially
less volume than the New York Stock Exchange (the "Exchange"), and securities of
some foreign companies are less liquid and more volatile than securities of
domestic companies. Similarly, volume and liquidity in most foreign bond markets
are less than the volume and liquidity in the U.S. and at times, volatility of
price can be greater than in the U.S. Further, foreign markets have different
clearance and settlement procedures and in certain markets there have been times
when settlements have been unable to keep pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of the Portfolios are
uninvested and no return is earned thereon. The inability of the Portfolios to
make intended security purchases due to settlement problems could cause the
Portfolios to miss attractive investment opportunities. Inability to dispose of
portfolio securities due to settlement problems either could result in losses to
the Portfolios due to subsequent declines in value of the portfolio security or,
if the Portfolios have entered into a contract to sell the security, could
result in possible liability to the purchaser. Fixed commissions on some foreign
stock exchanges are generally higher than negotiated commissions on U.S.
exchanges, although the Portfolios will endeavor to achieve the most favorable
net results on its portfolio transactions. Further, the Portfolios may encounter
difficulties or be unable to pursue legal remedies and obtain judgments in
foreign courts. There is generally less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the U.S. It may be more difficult for the Portfolios' agents to keep
currently informed about corporate actions such as stock dividends or other
matters which may affect the prices of portfolio securities. Communications
between the U.S. and foreign countries may be less reliable than within the
U.S., thus increasing the risk of delayed settlements of portfolio transactions
or loss of certificates for portfolio securities. In addition, with respect to
certain foreign countries, there is the possibility of nationalization,
expropriation, the imposition of withholding or confiscatory taxes, political,
social, or economic instability, devaluations in the currencies in which a
Portfolio's securities are denominated, or diplomatic developments which could
affect U.S. investments in those countries. Investments in foreign securities
may also entail certain risks, such as possible currency blockages or transfer
restrictions, and the difficulty of enforcing rights in other countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position.
These considerations generally are more of a concern in developing
countries. For example, the possibility of revolution and the dependence on
foreign economic assistance generally is greater in these countries than in
developed countries. The management of the Non-Money Market Portfolios seeks to
mitigate the risks associated with these considerations through diversification
and active professional management. Although investments in companies domiciled
in developing countries may be subject to potentially greater risks than
investments in developed countries, the Portfolios will not invest in any
securities of issuers located in developing countries if the securities, in the
judgment of the Adviser, are speculative.
To the extent that the Non-Money Market Portfolios invest in foreign
securities, the Portfolios' share price could reflect the movements of both the
different stock and bond markets in which it is invested and the currencies in
which the investments are denominated; the strength or weakness of the U.S.
dollar against foreign currencies could account for part of the Portfolios'
investment performance.
Limitations on Holdings of Foreign Securities for the Bond, Balanced, Growth and
Income, Large Company Growth, Small Company Growth and International Portfolios
Each Portfolio that invests in foreign securities shall invest in no less
than three 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,
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the Portfolio shall invest in no less than three foreign countries; (iii) if
foreign securities comprise less than 40% of the value of the Portfolio's net
assets, the Portfolio shall invest in no less than two foreign countries; and
(iv) if foreign securities comprise less than 20% of the value of the
Portfolio's net assets the Portfolio may invest in a single foreign country.
Each Portfolio shall invest no more than 20% of the value of its net
assets in securities of issuers located in any one country; provided that an
additional 15% of the value of each Portfolio's net assets may be invested in
securities of issuers located in any one of the following countries: Australia,
Canada, France, Japan, the United Kingdom and Germany; and provided further that
100% of a Portfolio's assets may be invested in securities of issuers located in
the United States.
Indexed Securities
The Bond Portfolio and the Balanced Portfolio may each invest in indexed
securities, the value of which is linked to currencies, interest rates,
commodities, indices or other financial indicators ("reference instruments").
Most indexed securities have maturities of three years or less.
Indexed securities differ from other types of debt securities in which a
Portfolio 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 or
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. A Portfolio will not enter
into such transactions for leverage purposes.
Loans of Portfolio Securities
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The Fund may lend the portfolio securities of any Portfolio (other than
the Money Market Portfolio) provided: (1) the loan is secured continuously by
collateral consisting of U.S. Government securities, cash or cash equivalents
adjusted daily to have market value at least equal to the current market value
of the securities loaned; (2) the Fund may at any time call the loan and regain
the securities loaned; (3) the Portfolio will receive any interest or dividends
paid on the loaned securities; and (4) the aggregate market value of securities
loaned will not at any time exceed one-third of the total assets of the
Portfolio. In addition, it is anticipated that the Portfolio may share with the
borrower some of the income received on the collateral for the loan or that it
will be paid a premium for the loan. Before the Portfolio enters into a loan,
the Adviser considers all relevant facts and circumstances including the
creditworthiness of the borrower.
Borrowing
As a matter of fundamental policy, each Portfolio (except Money Market
Portfolio) will not borrow money, except as permitted under the 1940 Act, as
amended, and as interpreted or modified by regulatory authority having
jurisdiction, from time to time. While the Trustees do not currently intend to
borrow for investment leverage purposes, if such a strategy were implemented in
the future it would increase a Portfolio's volatility and the risk of loss in a
declining market. Borrowing by a Portfolio will involve special risk
considerations. Although the principal of a Portfolio's borrowings will be
fixed, the Portfolio's assets may change in value during the time a borrowing is
outstanding, thus increasing exposure to capital risk.
Options for the Bond, Balanced, Growth and Income, Capital Growth and
International Portfolios
The Fund may, on behalf of each of the Bond, Balanced, Growth and Income,
Capital Growth, Large Company Growth, Small Company 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, Large Company Growth,
Small Company 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.
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When the Fund, on behalf of the Balanced, Growth and Income, Capital
Growth, Large Company Growth, Small Company Growth, Global Discovery and
International Portfolios, writes a put option, it gives the purchaser of the
option the right to sell the underlying security to the Portfolio at the
specified exercise price at any time during the option period. Some of the
European type options which the Fund writes may be exercised only at a specified
time. If the option expires unexercised, the Portfolio will realize income in
the amount of the premium received for writing the option. If the put option is
exercised, a decision over which the Portfolio has no control, the Portfolio
must purchase the underlying security from the option holder at the exercise
price. By writing a put option, the Portfolio, in exchange for the net premium
received, accepts the risk of a decline in the market value of the underlying
security below the exercise price. With respect to each put option it writes,
the Portfolio will have deposited in a separate account with its custodian U.S.
Treasury obligations, high-grade debt securities or cash equal in value to the
exercise price of the put option, will have purchased a put option with a higher
exercise price that will expire no earlier than the put option written or will
have used some combination of these two methods. The Fund on behalf of each
Portfolio, will only write put options involving securities for which a
determination is made that it wishes to acquire the securities at the exercise
price at the time the option is written.
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.
A 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, Large Company Growth,
Small Company 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.
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The Fund, on behalf of a Portfolio, may engage in over-the-counter options
transactions with broker-dealers who make markets in these options. At present,
approximately thirty broker-dealers make these markets and the Adviser will
consider risk factors such as their creditworthiness when determining a
broker-dealer with which to engage in options transactions. The ability to
terminate over-the-counter option positions is more limited than with
exchange-traded option positions because the predominant market is the issuing
broker rather than an exchange, and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. Written
over-the-counter options purchased by the Fund and portfolio securities
"covering" the Fund's obligation pursuant to an over-the-counter option may be
deemed to be illiquid and may not be readily marketable. The Adviser will
monitor the creditworthiness of dealers with whom the Fund enters into such
options transactions under the general supervision of the Fund's Trustees.
Securities Index Options
The Bond, Balanced, Growth and Income, Capital Growth, Large Company
Growth, Small Company 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
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A futures contract on a debt security is a binding contractual commitment
which, if held to maturity, will result in an obligation to make or accept
delivery, during a particular future month, of securities having a standardized
face value and rate of return. By purchasing futures on debt
securities--assuming a "long" position--the Fund, on behalf of a Portfolio, will
legally obligate itself to accept the future delivery of the underlying security
and pay the agreed price. By selling futures on debt securities--assuming a
"short" position--it will legally obligate itself to make the future delivery of
the security against payment of the agreed price. Open futures positions on debt
securities will be valued at the most recent settlement price, unless such price
does not appear to the Trustees to reflect the fair value of the contract, in
which case the positions will be valued by or under the direction of the
Trustees.
Positions taken in the futures markets are normally not held to maturity,
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures positions taken by the Fund on behalf of a
Portfolio will usually be liquidated in this manner, the Fund may instead make
or take delivery of the underlying securities whenever it appears 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, Large Company Growth, Small Company 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
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gives the purchaser the right, in return for the premium paid, to sell a futures
contract (assume a "short" position), for a specified exercise price, at any
time before the option expires.
Upon the exercise of a "call," the writer of the option is obligated to
sell the futures contract (to deliver a "long" position to the option holder) at
the option exercise price, which will presumably be lower than the current
market price of the contract in the futures market. Upon exercise of a "put,"
the writer of the option is obligated to purchase the futures contract (deliver
a "short" position to the option holder) at the option exercise price, which
will presumably be higher than the current market price of the contract in the
futures market. When a person exercises an option and assumes a long futures
position, in the case of a "call," or a short futures position, in the case of a
"put," his gain will be credited to his futures margin account, while the loss
suffered by the writer of the option will be debited to his account. However, as
with the trading of futures, most participants in the options markets do not
seek to realize their gains or losses by exercise of their option rights.
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
20% of its total assets. A futures contract for the receipt of a debt security
and long index futures will be offset by assets of the Portfolio held in a
segregated account in an amount equal to the total market value of the futures
contracts less the amount of the initial margin for the contracts.
Foreign Currency Transactions
The Non-Money Market Portfolios may enter into forward foreign currency
exchange contracts ("forward contracts") for hedging purposes. These Portfolios
may also, for hedging purposes, purchase foreign currencies in the form of bank
deposits as well as other foreign money market instruments, including but not
limited to, bankers' acceptances, certificates of deposit, commercial paper,
short-term government and corporate obligations and repurchase agreements. The
International Portfolio may also enter into foreign currency futures contracts
and foreign currency options.
Because investments in foreign companies usually will involve currencies
of foreign countries, and because the Non-Money Market Portfolios temporarily
may hold funds in bank deposits in foreign currencies during the completion of
investment programs, the value of their assets as measured in U.S. dollars may
be affected favorably or unfavorably by changes in foreign currency exchange
rates and exchange control regulations, and they may incur costs in connection
with conversions between various currencies. Although the Non-Money Market
Portfolios value their assets daily in terms of U.S. dollars, they do not intend
to convert their holdings of foreign currencies into U.S. dollars on a daily
basis. They will do so from time to time, and investors should be aware of the
costs of currency conversion. Although foreign exchange dealers do not charge a
fee for conversion, they do realize a profit based on the difference (the
"spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Non-Money
Market Portfolios at one rate, while offering a lesser rate of exchange should
the Non-Money Market Portfolios desire to resell that currency to the dealer.
The Non-Money Market Portfolios will conduct their foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market, or through entering into forward or, in
the case of the International Portfolio, futures contracts to purchase or sell
foreign currencies.
A forward contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades.
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A foreign currency futures contract is a standardized contract for the
future delivery of a specified amount of a foreign currency at a future date at
a price set at the time of the contract. The agreed price may be fixed or within
a specified range of prices. Foreign currency futures contracts traded in the
United States are designed by and traded on exchanges regulated by the CFTC,
such as the Chicago Mercantile Exchange. Futures contracts involve brokerage
costs, which may vary from less than 1% to 2.5% of the contract price, and
require parties to the contract to make "margin" deposits to secure performance
of the contract. The International Portfolio would also be required to segregate
assets to cover contracts that would require it to purchase foreign currencies.
The International Portfolio would enter into futures contracts solely for
hedging or other appropriate risk management purposes as defined in CFTC
regulations.
Forward contracts differ from foreign currency futures contracts in
certain respects. For example, the maturity date of a forward contract may be
any fixed number of days from the date of the contract agreed upon by the
parties, rather than a predetermined date in a given month, and they may be in
any amounts agreed upon by the parties rather than predetermined amounts. Also,
forward contracts are traded directly between currency traders so that no
intermediary is required. A forward contract generally requires no margin or
other deposit.
Upon the maturity of a forward or foreign currency futures contract a
Portfolio may either accept or make delivery of the currency specified in the
contract or, at or prior to maturity, enter into a closing purchase transaction
involving the purchase or sale of an offsetting contract. Closing purchase
transactions with respect to forward contracts are usually effected with the
currency trader who is a party to the original forward contract. Closing
purchase transactions with respect to futures contracts are effected on a
commodities exchange; a clearing corporation associated with the exchange
assumes responsibility for closing out such contracts.
A Portfolio may enter into forward contracts and foreign currency futures
contracts under certain circumstances. When a Portfolio enters into a contract
for the purchase or sale of a security denominated in a foreign currency, or
when a Portfolio anticipates the receipt in a foreign currency of dividends or
interest payments on such a security which it holds, the Portfolio may desire to
"lock in" the U.S. dollar price of the security or the U.S. dollar equivalent of
such dividend or interest payment, as the case may be. By entering into a
forward or futures contract for the purchase or sale, for a fixed amount of
dollars, of the amount of foreign currency involved in the underlying
transactions, the Portfolio will attempt to protect itself against a possible
loss resulting from an adverse change in the relationship between the U.S.
dollar and the foreign currency during the period between the date on which the
security is purchased or sold, or on which the dividend or interest payment is
declared, and the date on which such payments are made or received.
Additionally, when management of a Portfolio believes that the currency of
a particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward or futures contract to sell, for a fixed
amount of dollars, the amount of foreign currency approximating the value of
some or all of the Portfolio's securities denominated in such foreign currency.
The precise matching of the forward or futures contract amounts and the value of
the securities involved will not generally be possible because the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. The precise projection of
short-term currency market movements is not possible, and short-term hedging
provides a means of fixing the dollar value of a portion of the Portfolio's
foreign assets.
The Non-Money Market Portfolios do not intend to enter into such forward
or futures contracts to protect the value of their portfolio securities on a
regular continuous basis, and will not do so if, as a result, a Portfolio will
have more than 15% of the value of its total assets committed to the
consummation of such contracts. A Portfolio also will not enter into such
forward or foreign currency futures contracts or maintain a net exposure to such
contracts where the consummation of the contracts would obligate the Portfolio
to deliver an amount of foreign currency in excess of the value of the
Portfolio's securities or other assets denominated in that currency. Under
normal circumstances, consideration of the prospect for currency parities will
be incorporated into the long-term investment decisions made with regard to
overall diversification strategies. However, the Non-Money Market Portfolios
believe that it is important to have the flexibility to enter into such forward
or foreign currency futures contracts when each determines that the best
interests of the Portfolio will be served.
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, Brown
Brothers Harriman & Co. or 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
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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 Large Company Growth,
Small Company Growth and Global Discovery Portfolios
The Large Company Growth, Small Company Growth and Global Discovery
Portfolios may each, but are 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 Portfolios' 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 Portfolios 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
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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 Portfolios resulting from
securities markets or currency exchange rate fluctuations, to protect the
Portfolios' unrealized gains in the value of its portfolio securities in the
Portfolios, to facilitate the sale of such securities for investment purposes,
to manage the effective maturity or duration of fixed-income securities in the
Portfolios, 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 Portfolios' 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 Portfolios to utilize these Strategic Transactions successfully
will depend on the Adviser's ability to predict pertinent market movements,
which cannot be assured. The Portfolios 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 Portfolios, 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 Portfolios can
realize on its investments or cause the Portfolios to hold a security it might
otherwise sell. The use of currency transactions can result in the Portfolios
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 Portfolios creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Portfolios'
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 Portfolios' purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the Portfolios 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 Portfolios' purchase of a call
option on a security, financial future, index, currency or other instrument
might be intended to protect the Portfolios 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 Portfolios is authorized to purchase
and sell
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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 Portfolios' 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
Portfolios will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Portfolios to require the
Counterparty to sell the option back to the Portfolios at a formula price within
seven days. The Portfolios 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 Portfolios or fails to make a cash
settlement payment due in accordance with the terms of that option, the
Portfolios 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 Portfolios will engage in OTC
option transactions only with U.S. government securities dealers recognized by
the Federal Reserve Bank of New York as "primary dealers", or broker dealers,
domestic or foreign banks or other financial institutions which have received
(or the guarantors of the obligation of which have received) a short-term credit
rating of A-1 from S&P or P-1 from Moody's or an equivalent rating from any
other nationally recognized statistical rating organization ("NRSRO") or, in the
case of OTC currency transactions, are determined to be of equivalent credit
quality by the Adviser. The staff of the SEC currently takes the position that
OTC options purchased by the Portfolios, and Portfolios securities "covering"
the amount of the Portfolios' 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 Federal limits for investing assets in them.
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If the Portfolios 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
Portfolios or will increase the Portfolios' income. The sale of put options can
also provide income.
The Portfolios 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 Portfolios must be "covered" (i.e., the
Portfolios 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 Portfolios will receive the option premium to
help protect it against loss, a call sold by the Portfolios exposes the
Portfolios 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 Portfolios to hold a security or instrument which
it might otherwise have sold.
The Portfolios 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 Portfolios will not sell put options if, as a result,
more than 50% of the Portfolios' 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 Portfolios may be required to buy the underlying security at a
disadvantageous price above the market price.
General Characteristics of Futures. The Portfolios 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 Portfolios, 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 Portfolios' 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 Portfolios 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 Portfolios. If the Portfolios exercises an option on a futures contract
it will be obligated to post initial margin (and potential subsequent variation
margin) for the resulting futures position just as it would for any position.
Futures contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price, nor that delivery will
occur.
The Portfolios 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 Portfolios' 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 Portfolios 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
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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 Portfolios may engage in currency transactions with
Counterparties in order to hedge the value of Portfolios 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 Portfolios 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 Portfolios' 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 Portfolios, 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 Portfolios 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 Portfolios 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 Portfolios has or in
which the Portfolios expects to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Portfolios may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the
Portfolios' 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 Portfolios' 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
Portfolios' securities denominated in correlated currencies. For example, if the
Adviser considers that the Austrian schilling is correlated to the German
deutschemark (the "D-mark"), the Portfolios 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 Portfolios 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 Portfolios is engaging in proxy hedging. If the Portfolios enters into
a currency hedging transaction, the Portfolios will comply with the asset
segregation requirements described below.
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Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Portfolios 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 Portfolios 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 Portfolios 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
Portfolios may enter are interest rate, currency and index swaps and the
purchase or sale of related caps, floors and collars. The Portfolios 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 Portfolios anticipates purchasing at a
later date. The Portfolios 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
Portfolios may be obligated to pay. Interest rate swaps involve the exchange by
the Portfolios 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 Portfolios 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 Portfolios 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 Portfolios 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 Portfolios will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from an NRSRO or is determined to be of equivalent credit quality by the
Adviser. If there is a default by the Counterparty, the Portfolios 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 Portfolios 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
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("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 Portfolios 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 Portfolios' 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 Portfolios 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 Portfolios 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
Portfolios will require the Portfolios 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 a
Portfolio on an index will require the Portfolios to own Portfolios 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 a Portfolio requires that Portfolio to segregate cash or
liquid assets equal to the exercise price.
Except when a 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 Portfolios to buy or sell
currency will generally require the Portfolios to hold an amount of that
currency or liquid securities denominated in that currency equal to the
Portfolios' obligations or to segregate cash or liquid assets equal to the
amount of the Portfolio's obligation.
OTC options entered into by the Portfolios, 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
Portfolios 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 Portfolios, 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 Portfolios sell a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Portfolios 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
Portfolios other than those above generally settle with physical delivery, or
with an election of either physical delivery or cash settlement and the
Portfolios 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 Portfolios
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 Portfolios 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 assets
having a
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value equal to the accrued excess. Caps, floors and collars require segregation
of assets with a value equal to a Portfolio's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Portfolios 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 Portfolios 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 Portfolios. Moreover, instead of segregating assets if the
Portfolios 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.
Debt Securities
If the Adviser determines that the capital appreciation of debt securities
is likely to exceed that of common stocks, the Portfolios may invest in debt
securities of foreign and U.S. issuers. The Portfolios 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 Portfolios 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 (commonly referred to as "junk
bonds") (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 Portfolios 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
Portfolios. Prices and yields of high yield securities will fluctuate over time
and may affect a Portfolios'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 Portfolios 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
Portfolioss' 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
Portfolios security be downgraded the Adviser will determine whether it is in
the best interest of that Portfolios to retain or dispose of the security.
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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 a Portfolio'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 fundamental policies may
not be changed with respect to any Portfolio without the approval of the
majority of outstanding voting securities of that Portfolio (which, under the
1940 Act and the rules thereunder and as used in this Statement of Additional
Information, means the lesser of (1) 67% of the shares of that Portfolio present
at a meeting if the holders of more than 50% of the outstanding shares of that
Portfolio are present in person or by proxy, or (2) more than 50% of the
outstanding shares of that Portfolio). Any investment restrictions which involve
a maximum percentage of securities or assets shall not be considered to be
violated unless an excess over the percentage occurs immediately after, and is
caused by, an acquisition or encumbrance of securities or assets of, or
borrowings by or on behalf of, a Portfolio.
As a matter of fundamental policy, 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 Portfolio may be deemed to be an
underwriter in connection with the disposition of portfolio
securities;
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(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
Portfolio reserves freedom of action to hold and to sell real estate
acquired as a result of the Portfolio's ownership of securities;
(7) make loans 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.
As a matter of nonfundamental policy, the Fund may not on behalf of the
indicated Portfolio(s):
(1) For Money Market Portfolio: the Portfolio currently does not intend
to borrow money in an amount greater than 5% of its total assets,
except for temporary or emergency purposes;
(2) For all Portfolios (except Money Market Portfolio): the Portfolio
currently does not intend to borrow money in an amount greater than
5% of its total assets, except (i) for temporary or emergency
purposes and (ii) by engaging in reverse repurchase agreements,
dollar rolls, or other investments or transactions described in the
Portfolio's registration statement which may be deemed to be
borrowings;
(3) For all Portfolios (except Money Market Portfolio and Bond
Portfolio): the Portfolio currently does not intend to enter into
either of reverse repurchase agreements or dollar rolls in an amount
greater than 5% of its total assets;
(4) For all Portfolios (except Money Market Portfolio): the Portfolio
currently does not intend to purchase securities on margin or make
short sales, except (i) short sales against the box, (ii) in
connection with arbitrage transactions, (iii) for margin deposits in
connection with futures contracts, options or other permitted
investments, (iv) that transactions in futures contracts and options
shall not be deemed to constitute selling securities short, and (v)
that the Portfolio may obtain such short-term credits as may be
necessary for the clearance of securities transactions;
(5) For all Portfolios (except Money Market Portfolio): the Portfolio
currently does not intend to purchase options, unless the aggregate
premiums paid on all such options held by the Portfolio at any time
do not exceed 20% of its total assets; or sell put options, if as a
result, the aggregate value of the obligations underlying such put
options would exceed 50% of its total assets;
(6) For all Portfolios (except Money Market Portfolio): the Portfolio
currently does not intend to enter into futures contracts or
purchase options thereon, unless immediately after the purchase, the
value of the aggregate initial margin with respect to such futures
contracts entered into on behalf of the Portfolio and the premiums
paid for such options on futures contracts does not exceed 5% of the
fair market value of the Portfolio's total assets; provided that in
the case of an option that is in-the-money at the time of purchase,
and in-the-money amount may be excluded in computing the 5% limit;
(7) For all Portfolios (except Money Market Portfolio): the Portfolio
currently does not intend to purchase warrants if as a result, such
securities, taken at the lower of cost or market value, would
represent more than 5% of the value of the Portfolio's total assets
(for this purpose, warrants acquired in units or attached to
securities will be deemed to have no value);
(8) Each Portfolio currently does not intend to lend portfolio
securities in an amount greater than 5% of its total assets.
"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.)
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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.
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
Scudder Kemper Investments, Inc. (the "Adviser"), an investment counsel
firm, acts as investment adviser to the Portfolios. This organization, the
predecessor of which is Scudder, Stevens & Clark, Inc., is one of the most
experienced investment counsel firms in the U. S. It was established as a
partnership 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. In 1953 the Adviser introduced Scudder International
Fund, Inc., the first mutual fund available in the U.S. investing
internationally in securities of issuers in several foreign countries. The
predecessor firm reorganized from a partnership to a corporation on June 28,
1985. On June 26, 1997, Scudder, Stevens & Clark, Inc. ("Scudder") entered into
an agreement with Zurich Insurance Company ("Zurich") pursuant to which Scudder
and Zurich agreed to form an alliance. On December 31, 1997, Zurich acquired a
majority interest in Scudder, and Zurich Kemper Investments, Inc., a Zurich
subsidiary, became part of Scudder. Scudder's name has been changed to Scudder
Kemper Investments, Inc.
Founded in 1872, Zurich is a multinational, public corporation organized
under the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group"). Zurich and the Zurich
Insurance Group provide an extensive range of insurance products and services
and have branch offices and subsidiaries in more than 40 countries throughout
the world.
The Fund has seven investment management agreements with the Adviser, one
for each Portfolio (the "Agreements"). The Adviser is one of the most
experienced investment counsel firms in the United States. It currently manages
in excess of $200 billion in assets globally for its clients. The transaction
between Scudder and Zurich resulted in the assignment of the Fund's investment
management agreements with Scudder, those agreements automatically terminated at
the consummation of the transaction. In anticipation of the transaction,
however, new investment management agreements (the "Agreements") between each
Portfolio and the Adviser were approved by the Fund's Trustees on August 1,
1997. At the special meeting of the Fund's shareholders held on October 24,
1997, the shareholders also approved the Agreements. The Agreements became
effective as of December 31, 1997 and will be in effect for an initial term
ending on September 30, 1998. The Agreements are in all material respects on the
same terms as the previous investment management agreements which they
supersede. The Agreements incorporate conforming changes which promote
consistency among all of the funds advised by the Adviser and which permit ease
of administration. The Agreements will continue in effect from year to year
thereafter only if their continuance is approved
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annually by the vote of a majority of those Trustees who are not parties to the
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 a vote
of the Fund's Trustees on behalf of a Portfolio or of a majority of the
outstanding voting securities of each Portfolio. The Agreements 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 their assignment.
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 Global High Income
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,
The Argentina Fund, Inc., The Brazil Fund, Inc., The Korea Fund, Inc., The Japan
Fund, Inc. and Scudder Spain and Portugal 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.
Pursuant to an Agreement between Scudder Kemper Investments, Inc. and AMA
Solutions, Inc., a subsidiary of the American Medical Association (the "AMA"),
dated May 9, 1997, the Adviser has agreed, subject to applicable state
regulations, to pay AMA Solutions, Inc. royalties in an amount equal to 5% of
the management fee received by the Adviser with respect to assets invested by
AMA members in Scudder funds in connection with the AMA InvestmentLink(SM)
Program. The Adviser will also pay AMA Solutions, Inc. a general monthly fee,
currently in the amount of $833. The AMA and AMA Solutions, Inc. are not engaged
in the business of providing investment advice and neither is registered as an
investment adviser or broker/dealer under federal securities laws. Any person
who participates in the AMA InvestmentLink(SM) Program will be a customer of the
Adviser (or of a subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA
InvestmentLink(SM) is a service mark of AMA Solutions, Inc.
Certain investments may be appropriate for the Portfolios and for other
clients advised by the Adviser. Investment decisions for the Portfolios 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 a Portfolio. Purchase and sale orders for a Portfolio may
be combined with those of other clients of the Adviser in the interest of the
most favorable net results to a Portfolio.
The Adviser maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Adviser receives published
reports and statistical compilations from issuers and other sources, as well as
analyses from brokers and dealers who may execute portfolio transactions for the
Adviser's clients. However, the Adviser regards this information and material as
an adjunct to its own research activities. The Adviser'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 Portfolios 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
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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.
On September 7, 1998, the businesses of Zurich (including Zurich's 70%
interest in Scudder Kemper) and the financial services businesses of B.A.T
Industries p.l.c. ("B.A.T") were combined to form a new global insurance and
financial services company known as Zurich Financial Services Group. By way of a
dual holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services Group, with the balance initially
owned by former B.A.T shareholders.
Upon consummation of this transaction, the Fund's existing investment
management agreement with Scudder Kemper was deemed to have been assigned and,
therefore, terminated. The Board has approved a new investment management
agreement (the "Agreement") with Scudder Kemper, which is substantially
identical to the current investment management agreement, except for the date of
execution and termination. The agreement became effective September 7, 1998,
upon the termination of the then current investment management agreement and was
approved at a shareholder meeting held in December 1998.
The Agreement dated September 7, 1998, was approved by the Trustees of the
Trust on _______. The Agreement will continue in effect until September 30, 1999
and from year to year thereafter only if its continuance is approved annually by
the vote of a majority of those Trustees who are not parties to such Agreement
or interested persons of the Adviser or the Fund, cast in person at a meeting
called for the purpose of voting on such approval, and either by a vote of the
Trust's Trustees or of a majority of the outstanding voting securities of the
Fund. The Agreement may be terminated at any time without payment of penalty by
either party on sixty days' written notice, and automatically terminates in the
event of its assignment.
The Adviser renders significant administrative services (not otherwise
provided by third parties) necessary for each Portfolio's operations as an
open-end investment company including, but not limited to, preparing reports and
notices to the Trustees and shareholders; supervising, negotiating contractual
arrangements with, and monitoring various third-party service providers to the
Portfolios (such as the Portfolio's transfer agent, pricing agents, custodian,
accountants and others); preparing and making filings with the SEC and other
regulatory agencies; assisting in the preparation and filing of each Portfolio's
federal, state and local tax returns; preparing and filing the Fund's federal
excise tax returns; assisting with investor and public relations matters;
monitoring the valuation of securities and the calculation of net asset value,
monitoring the registration of shares of the Fund under applicable federal and
state securities laws; maintaining each Portfolio's books and records to the
extent not otherwise maintained by a third party; assisting in establishing
accounting policies of the Fund; assisting in the resolution of accounting and
legal issues; establishing and monitoring each Portfolio's operating budget;
processing the payment of each Portfolio's bills; assisting the Fund and the
Portfolios in, and otherwise arranging for, the payment of distributions and
dividends and otherwise assisting the Fund and the Portfolios in the conduct of
its business, subject to the direction and control of the Trustees.
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 investment management
services the Adviser receives compensation monthly at the following annual rates
for each Portfolio:
% of the
average daily
net asset
values of
Portfolio each Portfolio 1996 1997 1998
Money Market Portfolio .370% $325,791 $384,554
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Bond Portfolio .475% 291,740 321,323
Balanced Portfolio .475% 372,176 488,616
Growth and Income
Portfolio .475% 326,033 592,383
Capital Growth
Portfolio .475%* 1,870,361 2,691,980
Large Company Growth
Portfolio
Small Company Growth
Portfolio
Global Discovery
Portfolio .975% 12,607 179,723
International Portfolio .875%** 5,590,601 6,520,030
* For any calendar month during which the average daily net assets of
Capital Growth 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 0.450%. As a result, the Adviser received compensation at
an annual rate of 0.47% for the fiscal year ended December 31, 1997.
** 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 0.725%. As a result, the Adviser received compensation at
an annual rate of 0.83% for the fiscal year ended December 31, 1997.
Under the Agreements, each Portfolio 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 a Portfolio's shares. (See "Distributor" for expenses paid by
Scudder Investor Services, Inc.) Each Portfolio 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 management services provided by the
Adviser, the Trustees, consistent with the Portfolios' investment management
agreements and underwriting agreement, have approved payments to the Adviser and
Scudder Investor Services, Inc. for clerical, accounting and certain other
services they may provide the Fund. Effective October 1, 1994, the Trustees
authorized the elimination of these administrative expenses. Under a new
agreement, effective October 1, 1994, the Trustees authorized the Fund, on
behalf of each Portfolio, to pay Scudder Fund Accounting Corporation, a
subsidiary of the Adviser, for determining the daily net asset value per share
and maintaining the portfolio and general accounting records of the Portfolios.
For the year ended December 31, 1996, such compensation amounted to
$30,073 for Money Market Portfolio, $37,590 for Bond Portfolio, $39,830 for
Balanced Portfolio, $42,366 for Growth and Income Portfolio, $70,071 for Capital
Growth Portfolio, $33,383 for Global Discovery Portfolio and $335,822 for
International Portfolio.
For the year ended December 31, 1997, such compensation amounted to
$30,000 for Money Market Portfolio, $17,460 for Bond Portfolio, $39,456 for
Balanced Portfolio, $62,698 for Growth and Income Portfolio, $96,410 for Capital
Growth Portfolio, $61,692 for Global Discovery Portfolio and $466,669 for
International Portfolio.
For the year ended December 31, 1998, such compensation amounted to
$______ for Money Market Portfolio, $______ for Bond Portfolio, $______ for
Balanced Portfolio, $______ for Growth and Income Portfolio, $______ for Capital
Growth Portfolio and $_______ for International Portfolio.
The Agreements are each dated December 31, 1997, and will remain in effect
until September 30, 1998. 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
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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. Each Agreement was last approved by
such Trustees (including a majority of the Trustees who are not such "interested
persons") on August 1, 1997. 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 identifies the Adviser as the exclusive licensee of the
rights to use and sublicense the names "Scudder," "Scudder Kemper Investments,
Inc." and "Scudder Stevens and Clark, Inc." (together, the "Scudder Marks").
Under this license, the Fund, with respect to the Portfolios, has the
non-exclusive right to use and sublicense the Scudder name and marks as part of
its name, and to use the Scudder Marks in the Fund's investment products and
services.
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.
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.
The Adviser may serve as adviser to other funds with investment objectives
and policies similar to those of the Portfolios that may have different
distribution arrangements or expenses, which may affect performance.
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, 1998, 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. The underwriting agreement was last
approved by the Trustees on August 1, 1997.
48
<PAGE>
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
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 Non-Money
Market Portfolios (the "Plan") and related services and fees thereunder is
provided in the prospectus. The plan was last approved by the Trustees on August
1, 1997. 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
49
<PAGE>
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.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position with
Principal Underwriter, Scudder
Name, Age and Address Position with Fund Occupation** Investor Services, Inc.
- --------------------- ------------------ ------------ -----------------------
<S> <C> <C> <C>
William Thomas*@+ ( ) President Managing Director of --
Scudder Kemper
Investments, Inc.
Daniel Pierce*@+ (65) Vice President and Managing Director of Vice President,
Trustee Scudder Kemper Director and Assistant
Investments, Inc. Treasurer
Dr. Kenneth Black, Jr. (74) Trustee Regents' Professor _____
Educational Foundation, Inc. Emeritus of
35 Broad Street Insurance, Georgia
11th Floor, Room 1144 State University
Atlanta, GA 30303
Dr. Rosita P. Chang (44) Trustee Professor of _____
PACAP Research Center Finance, University
College of Business of Rhode Island
Administration
University of Rhode Island
7 Lippitt Road
Kingston, RI 02881-0802
Peter B. Freeman@ (66) Trustee Corporate Director _____
100 Alumni Avenue and Trustee
Providence, RI 02906
Dr. J. D. Hammond (65) Trustee Dean, Smeal College _____
801 Business of Business
Administration Bldg. Administration,
Pennsylvania State University Pennsylvania State
University Park, PA 16802 University
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
Position with
Principal Underwriter, Scudder
Name, Age and Address Position with Fund Occupation** Investor Services, Inc.
- --------------------- ------------------ ------------ -----------------------
<S> <C> <C> <C>
Irene T. Cheng# (44) Vice President Senior Vice _____
President of Scudder
Kemper Investments,
Inc.
William F. Gadsden*# (44) Vice President Managing Director of _____
Scudder Kemper
Investments, Inc.
Jerard K. Hartman# (66) Vice President Managing Director of _____
Scudder Kemper
Investments, Inc.
Robert T. Hoffman*# (40) Vice President Managing Director of _____
Scudder Kemper
Investments, Inc.
Richard A. Holt*** (57) Vice President Managing Director of _____
Scudder Kemper
Investments, Inc.
Thomas W. Joseph+ (60) Vice President Senior Vice Vice President,
President of Scudder Director, Treasurer
Kemper Investments, and Assistant Clerk
Inc.
Valerie F. Malter*#(40) Vice President Senior Vice _____
President of Scudder
Kemper Investments,
Inc.
Steven M. Meltzer+ (40) Vice President Managing Director of _____
Scudder Kemper
Investments, Inc.
Gerald J. Moran*# (59) Vice President Senior Vice _____
President of Scudder
Kemper Investments,
Inc.
Stephen A. Wohler+ (50) Vice President Managing Director of _____
Scudder Kemper
Investments, Inc.
Frank J. Rachwalski, Jr.# (54) Vice President Senior Vice _____
President of Scudder
Kemper Investments,
Inc.
Randall K. Zeller# (44) Vice President Managing Director of _____
Scudder Kemper
Investments, Inc.
Thomas F. McDonough+ (52) Vice President, Senior Vice Clerk
Treasurer and President of Scudder
Secretary Kemper Investments,
Inc.
Kathryn L. Quirk# (46) Vice President and Managing Director of Vice President
Assistant Secretary Scudder Kemper
Investments, Inc.
John R. Hebble+ (40) Assistant Treasurer Senior Vice _____
President of Scudder
Kemper Investments,
Inc.
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Position with
Principal Underwriter, Scudder
Name, Age and Address Position with Fund Occupation** Investor Services, Inc.
- --------------------- ------------------ ------------ -----------------------
<S> <C> <C> <C>
Caroline Pearson+ (37) Assistant Secretary Vice President of
Scudder Kemper
Investments, Inc.;
Associate, Dechert
Price & Rhoads (law
firm), 1989 - 1997
</TABLE>
* Messrs. Thomas 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 William Thomas 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
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.
Compensation of Officers and Trustees
The Independent Trustees receive the following compensation from Funds: an
annual trustee's fee of $4,000; a fee of $400 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; $150 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.
52
<PAGE>
The following table shows the aggregate compensation received by each
Independent Trustee during 1998 from the Trust and from all of the Scudder funds
as a group.
Scudder Variable Life
Name Investment Fund* All Scudder Funds
- ---- ---------------- -----------------
Dr. Kenneth Black, Jr., $ $ ( funds)
Trustee
Dr. Rosita P. Chang, $ $ (21 funds)
Trustee
Peter B. Freeman, $ $ (42 funds)
Trustee
Dr. J.D. Hammond, $ $ (21 funds)
Trustee
* Scudder Variable Life Investment Fund consists of nine 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, Dr. Martin Luther King, Jr. Day, Presidents
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas. Net asset value per share is determined by dividing the value of the
total assets of a Fund, less all liabilities, by the total number of shares
outstanding.
The valuation of the Money Market Portfolio securities is based upon their
amortized cost, which does not take into account unrealized securities gains or
losses. This method involves initially valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Money Market Portfolio would receive if it
sold the instrument. During periods of declining interest rates, the quoted
yield on shares of the Money Market Portfolio may tend to be higher than a like
computation made by a fund with identical investments utilizing a method of
valuation based upon market prices and estimates of market prices for all of its
portfolio instruments. Thus, if the use of amortized cost by the Portfolio
resulted in a lower aggregate portfolio value on a particular day, a prospective
investor in the Money Market Portfolio would be able to obtain a somewhat higher
yield if he purchased shares of the Money Market Portfolio on that day, than
would result/from investment in a fund utilizing solely market values, and
existing investors in the Money Market Portfolio would receive less investment
income. The converse would apply in a period of rising interest rates.
An exchange-traded equity security (not subject to resale restrictions) is
valued at its most recent sale price as of the Value Time. Lacking any sales,
the security is valued at the calculated mean between the most recent bid
quotation and the most recent asked quotation (the "Calculated Mean"). If there
are no bid and asked quotations, the security is valued at the most recent bid
quotation. An unlisted equity security which is traded on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") system is
valued at the most recent sale price. If there are no such sales, the security
is valued at the most recent 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.
53
<PAGE>
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
purchased with less than 60 days remaining to maturity are valued by the
amortized cost method, which the Board believes approximates market value. If it
is not possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If no such bid quotation is available, the Adviser may
calculate the price of that debt security, subject to limitations established by
the Board.
Option contracts on securities, currencies, futures and other financial
instruments traded on an exchange are valued at their most recent sale price on
the exchange. If no sales are reported, the value is the Calculated Mean, or if
the Calculated Mean is not available, the most recent bid quotation in the case
of purchased options, or the most recent asked quotation in the case of written
options. Option contracts traded over-the-counter are valued at the most recent
bid quotation in the case of purchased options and at the most recent asked
quotation in the case of written options. Futures contracts are valued at the
most recent settlement price. Foreign currency forward contracts are valued at
the value of the underlying currency at the prevailing currency exchange rate.
If a security is traded on more than one exchange, or on one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of the Fund's Valuation Committee, the value of an
asset as determined in accordance with these procedures does not represent the
fair market value of the asset, the value of the asset is taken to be an amount
which, in the opinion of the Valuation Committee, represents fair market value
on the basis of all available information. The value of other portfolio holdings
owned by the Fund is determined in a manner which, in the discretion of the
Valuation Committee most fairly reflects fair market value of the property on
the valuation date.
Following the valuations of securities or other portfolio assets in terms
of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rates on the valuation date.
TAX STATUS
(See "TAX STATUS, DIVIDENDS AND DISTRIBUTIONS" in the Fund's prospectus.)
Each Portfolio of the Fund has elected to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). Such qualification does not involve governmental
supervision or management of investment practices or policy.
Each Portfolio intends to comply with the provisions of Section 817(h) of
the Code relating to diversification requirements for variable annuity,
endowment and life insurance contracts. Specifically, each Portfolio intends to
comply with either (i) the requirement of Section 817(h)(1) of the Code that its
assets be adequately diversified, or (ii) the "Safe Harbor for Diversification"
specified in Section 817(h)(2) of the Code, or (iii) the diversification
requirement of Section 817(h)(1) of the Code by having all or part of its assets
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 taxable to individual shareholders at a
maximum 20% or 28% capital gains rate
54
<PAGE>
(depending on a Portfolio's holding period for the assets giving rise to the
gain), 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.
Dividends from domestic corporations constitute a portion of a Portfolio's
gross income, a portion of the income distributions of the Portfolio may be
eligible for the deduction for dividends received by corporations. Shareholders
will be informed of the portion of dividends which so qualify. The
dividends-received deduction is reduced to the extent the Portfolio shares with
respect to which the dividends are received are treated as debt finance under
federal income tax law, and is eliminated if either those shares or the shares
of the Portfolio are held less than 46 days during the 90-day period beginning
45 days before the shares become ex-dividend.
Properly designated distributions of the excess of net long-term capital
gain over net short-term capital losses are taxable to individual shareholders
at a maximum 20% or 28% capital gains rate (depending on a Portfolio's holding
period for the assets giving rise to the gain), regardless of the length of time
the shares of the relevant Portfolio have been held by such individual
shareholders. Such distributions are not eligible for the dividends-received
deduction discussed above. Any loss realized upon the redemption of shares held
at the time of redemption for six months or less will be treated as a long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gain during such six-month period.
Distributions of investment company taxable income and net realized
capital gains will be taxable as described above, whether reinvested in
additional shares or in cash. Shareholders electing to receive distributions in
the form of additional shares will have a cost basis for federal income tax
purposes in each share so received equal to the net asset value of a share on
the reinvestment date.
All distributions of investment company taxable income and net realized
capital gain, whether reinvested in additional shares or in cash, must be
reported by each shareholder on its federal income tax return. Dividends
declared in October, November or December with a record date in such a month
will be deemed to have been received by shareholders on December 31 if paid
during January of the following year. Redemptions of shares may result in tax
consequences (gain or loss) to the shareholder and are also subject to these
reporting requirements.
Distributions by a Portfolio (except the Money Market Portfolio) result in
a reduction in the net asset value of the Portfolio's shares. Should a
distribution reduce the net asset value below a shareholder's cost basis, such
distribution would nevertheless be taxable to the shareholder as ordinary income
or capital gain as described above, even though, from an investment standpoint,
it may constitute a partial return of capital. In particular, investors should
consider the tax implications of buying shares just prior to a distribution. The
price of shares purchased at that time includes the amount of the forthcoming
distribution. Those purchasing just prior to a distribution will then receive a
partial return of capital upon the distribution, which will nevertheless be
taxable to them.
If the Balanced, Growth and Income, Capital Growth, Global Discovery or
International Portfolios invest in stock of certain foreign investment
companies, the Portfolios may be subject to U.S. federal income taxation on a
portion of any "excess distribution" with respect to, or gain from the
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.
The Balanced, Growth and Income, Capital Growth and International
Portfolios may 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
55
<PAGE>
shares; any mark to market losses and any loss from an actual disposition of
shares would be deductible as ordinary losses to the extent of any net mark to
market gains included in income in prior years. 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.
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.
Notwithstanding any of the foregoing, recent tax law changes may require
the Fund to recognize gain (but not loss) from a constructive sale of certain
"appreciated financial positions" if the Fund enters into a short sale,
offsetting notional principal contract, futures or forward contract transaction
with respect to the appreciated position or substantially identical property.
Appreciated financial positions subject to this constructive sale treatment are
interests (including options, futures and forward contracts and short sales) in
stock, partnership interests, certain actively traded trust instruments and
certain debt instruments. Constructive sale treatment of appreciated financial
positions does not apply to certain transactions closed in the 90-day period
ending with the 30th day after the close of a Portfolio's taxable year, if
certain conditions are met.
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Similarly, if a Portfolio enters into a short sale of property that
becomes substantially worthless, the Portfolio will be required to recognize
gain at that time as though it had closed the short sale. Future regulations may
apply similar treatment to other strategic transactions with respect to property
that becomes substantially worthless.
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. The Global Discovery Portfolio and the International Portfolio may
qualify for and make the election permitted under Section 853 of the Code so
that shareholders may (subject to limitations) be able to claim a credit or
deduction on their federal income tax returns for, and will be required to treat
as part of the amounts distributed to them, their pro rata portion of qualified
taxes paid by a Portfolio to foreign countries (which taxes relate primarily to
investment income). Each Portfolio may make an election under Section 853 of the
Code, provided that more than 50% of the value of the total assets of the
Portfolio at the close of the taxable year consists of securities in foreign
corporations. The foreign tax credit available to shareholders is subject to
certain limitations imposed by the Code, except in the case of certain electing
individual taxpayers who have limited creditable foreign taxes and no foreign
source income other than passive investment-type income. Furthermore, the
foreign tax credit is eliminated with respect to foreign taxes withheld on
dividends if the dividend-paying shares or the shares of the Portfolio are held
by the Portfolio or the shareholder, as the case may be, for less than 16 days
(46 days in the case of preferred shares) during the 30-day period (90-day
period for preferred shares) beginning 15 days (45 days for preferred shares)
before the shares become ex-dividend.
Each Portfolio will be required to report to the Internal Revenue Service
all distributions of investment company taxable income and capital gains as well
as gross proceeds from the redemption or exchange of shares, except in the case
of certain exempt shareholders, which include most corporations. Under the
backup withholding provisions of Section 3406 of the Code, distributions of
taxable income and capital gains and proceeds from the redemption or exchange of
the shares of a regulated investment company may be subject to withholding of
federal income tax at the rate of 31% in the case of non-exempt shareholders who
fail to furnish the investment company with their taxpayer identification
numbers and with required certifications regarding their status under the
federal income tax law. Withholding may also be required if a Portfolio is
notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. Participating Insurance Companies
that are corporations should furnish their taxpayer identification numbers and
certify their status as corporations in order to avoid possible erroneous
application of backup withholding.
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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.
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
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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, Balanced, Growth and Income, Capital Growth, Large
Company Growth and Small Company Growth 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. Performance information for each Portfolio (other than Money Market
Portfolio) is completed separately for each class of such Portfolio in
accordance with formulae prescribed by the Securities and Exchange Commission.
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 5.31%.
B. Effective yield is the net annualized yield for a specified seven
calendar days assuming a reinvestment of the income or compounding.
Effective yield is calculated by the same method as yield except the
yield figure is compounded by adding 1, raising the sum to a power
equal to 365 divided by 7, and subtracting one from the result,
according to the following formula:
Effective Yield = [(Base Period Return + 1)^365/7] - 1.
The net annualized yield of the Portfolio for the seven-day period
ended December 31, 1997, was 5.45%.
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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, a
Portfolio'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 6.28%
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, 1998
One Year Five Years Ten Years Life of Fund
Money Market Portfolio % % % --
Bond Portfolio --
Balanced Portfolio* --
Growth and Income Portfolio -- %(1)
Capital Growth Portfolio --
Global Discovery Portfolio -- -- (2)
International Portfolio --
(1) For the period beginning May 2, 1994 (commencement of operations)
(2) 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.
Cumulative Total Return for periods ended December 31, 1998
One Year Five Years Ten Years Life of Fund
Money Market Portfolio % % % --
Bond Portfolio --
Balanced Portfolio* --
- ------------
* 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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Growth and Income Portfolio -- %(1)
Capital Growth Portfolio --
Global Discovery Portfolio -- -- (2)
International Portfolio --
(1) For the period beginning May 2, 1994 (commencement of operations)
(2) 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 Portfolio Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of a Portfolio 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 Portfolio 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 Corporation 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
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 and
officers of the Fund, the Portfolios' 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 Portfolios. In addition, the amount of assets that the Adviser has
under management in various geographical areas may be quoted in advertising and
marketing materials.
- ------------
* 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>
The Portfolios 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 Portfolios. The
description may include a "risk/return spectrum" which compares the Portfolios
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 Portfolios to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment and
money market funds seek stability of principal, these investments are considered
to be less risky than investments in either bond or equity funds, which may
involve the loss of principal. However, all long-term investments, including
investments in bank products, may be subject to inflation risk, which is the
risk of erosion of the value of an investment as prices increase over a long
time period. The risks/returns associated with an investment in bond or equity
funds depend upon many factors. For bond funds these factors include, but are
not limited to, a fund's overall investment objective, the average portfolio
maturity, credit quality of the securities held, and interest rate movements.
For equity funds, factors include a fund's overall investment objective, the
types of equity securities held and the financial position of the issuers of the
securities. The risks/returns associated with an investment in international
bond or equity funds also will depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds. Shorter-term bond funds generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase higher quality securities relative to bond funds that purchase
lower quality securities. Growth and income equity funds are generally
considered to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.
Risk/return spectrums also may depict funds that invest in both domestic
and foreign securities or a combination of bond and equity securities.
Evaluation of Fund performance or other relevant statistical information
made by independent sources may also be used in advertisements concerning the
Funds, including reprints of, or selections from, editorials or articles about
these Funds. Sources for Fund performance information and articles about the
Funds include the following:
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by Masterfund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
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.
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<PAGE>
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
IBC Money Fund Report, a weekly publication of IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity and including certain averages as performance
benchmarks, specifically "IBC's Money Fund Average," and "IBC's Government Money
Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
Investor's Business Daily, a daily newspaper that features financial, economic,
and business news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morgan Stanley International, an integrated investment banking firm that
compiles statistical information.
Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance, risk and portfolio
characteristics.
The New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter, published by Sheldon Jacobs,
that includes mutual fund performance data and recommendations for the mutual
fund investor.
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.
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<PAGE>
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
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.
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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
Portfolios' independent public accountants. Each report will show the
investments owned by a Portfolio and the market values thereof as determined by
the Trustees and will provide other information about a Portfolio and its
operations.
Participating Insurance Companies with inquiries regarding the Fund or its
Portfolios may call the Fund's underwriter, Scudder Investor Services, Inc., at
617-295-1000 or write Scudder Investor Services, Inc., Two International Place,
Boston, Massachusetts 02110-4103.
ORGANIZATION AND CAPITALIZATION
(See "ADDITIONAL INFORMATION - Shareholder
Indemnification" in the Fund's prospectus.)
General [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, 1998, American Maturity Life Insurance Co. (200
Hopmeadow Street, Simsbury, CT 06089) owned of record and beneficially 0.33% of
the Money Market Portfolio, 0.69% of the Bond Portfolio, 0.08% of the Capital
Growth Portfolio and 1.31% of the Growth and Income Portfolio; they owned of
record and beneficially 0.31% of the Fund's outstanding shares. Banner Life
Insurance Company of Rockville, MD (1701 Research Blvd., Rockville, MD 20850)
owned of record and beneficially 0.84% of the Money Market Portfolio, 1.92% of
the Bond Portfolio, 6.56% of the Balanced Portfolio, 1.33% of the International
Portfolio, 4.88% of the Growth and Income Portfolio, 8.86% of the Global
Discovery Portfolio and 2.02% of the Capital Growth Portfolio; they owned of
record and beneficially 1.78% 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 2.28% of the Money Market Portfolio, 3.58% of the Bond Portfolio,
8.16% of the Balanced Portfolio, 2.07% of the Capital Growth Portfolio, 0.00% of
the Growth and Income Portfolio, 0.00% of the Global Discovery Portfolio and
1.03% of the International Portfolio; they owned of record and beneficially
2.20% 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 (Bank,
Sixth and Marquette-MS0063, Minneapolis, MN 55479) owned of record and
beneficially 1.45% of the International Portfolio; they owned of record and
beneficially 0.22% 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 5.67% of the Bond Portfolio and 8.46% of the
Balanced Portfolio; they owned of record and beneficially 0.70% 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 38.57% of the Bond Portfolio, 58.33% of
the Capital Growth Portfolio and 40.30% of the International Portfolio; they
owned of record and beneficially 17.63% of the Fund's total outstanding shares;
and Paragon Life Insurance Company (100 South Brentwood, St. Louis, MO 63105)
owned of record and beneficially 0.15% of the Money Market Portfolio, 0.16% of
the Bond Portfolio, 0.18% of the Capital Growth Portfolio, 0.45% of the Balanced
Portfolio, 0.14% of the Growth and Income Portfolio, and 0.30% of the
International Portfolio; they owned of record and beneficially 0.19% 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
10.59% of the Bond Portfolio, 11.35% of the Growth and Income Portfolio, and
2.69% of the International Portfolio; they owned of record and beneficially
1.78% 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 27.48% of the Balanced Portfolio and 7.28%
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of the International Portfolio; they owned of record and beneficially 2.28% 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 1.49% of the International Portfolio; and Southwestern Life
Insurance Company (500 North Akard, Dallas, TX 75201) owned of record and
beneficially 1.18% of the Capital Growth Portfolio; and The Union Central Life
Insurance Company (1876 Waycross Road, Cincinnati, OH 45240) owned of record and
beneficially 40.24% of the Money Market Portfolio, 6.49% of the Capital Growth
Portfolio and 16.16% of the International Portfolio; they owned of record and
beneficially 23.73% 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 4.83% of the Money Market Portfolio and 0.82% of the
International Portfolio; and United of Omaha Life Insurance Company (Mutual of
Omaha Plaza, Law Division, 3301 Dodge Street, Omaha, NE 68131) owned of record
and beneficially 0.15% of the Money Market Portfolio, 0.59% of the Bond
Portfolio, and 7.35% of the International Portfolio; they owned of record and
beneficially 1.65% 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 3.32% of the Capital Growth Portfolio;
and Washington National Life Insurance Company (c/o United Presidential Life
Insurance Co., One Presidential Pkwy., Kokomo, IN 46904) owned of record and
beneficially 0.42% of the Money Market Portfolio, 6.72% of the Bond Portfolio,
1.30% of the Growth and Income Portfolio and 4.86% of the Capital Growth
Portfolio; they owned of record and beneficially 1.30% of the Fund's outstanding
shares; WM Life Insurance Company (15411 North East 51st Street, Redmond, WA
98052) owned of record and beneficially 0.15% of the Money Market Portfolio;
they owned of record and beneficially 0.10% of the Fund's outstanding shares.
Shares entitle their holders to one vote per share; however, separate
votes will be taken by each Portfolio on matters affecting an individual
Portfolio. For example, a change in investment policy for the Money Market
Portfolio would be voted upon only by shareholders of the Money Market
Portfolio. Additionally, approval of the investment advisory agreement covering
a Portfolio is a matter to be determined separately by each Portfolio. Approval
by the shareholders of one Portfolio is effective as to that Portfolio. Shares
have noncumulative voting rights, which means that holders of more than 50% of
the shares voting for the election of Trustees can elect all Trustees and, in
such event, the holders of the remaining shares voting for the election of
Trustees will not be able to elect any person or persons as Trustees. Shares
have no preemptive or subscription rights, and are transferable.
Shareholders have certain rights, as set forth in the Declaration of Trust
of the Fund, including the right to call a meeting of shareholders for the
purpose of voting on the removal of one or more Trustees. Such removal can be
effected upon the action of two-thirds of the outstanding shares of beneficial
interest of the Fund.
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. It is possible that a Portfolio might become liable
for a misstatement regarding another Portfolio. The Trustees of the Fund have
considered this and approved the use of a combined Statement of Additional
Information for the Portfolios.
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 a Portfolio with the issuer, underwriters or other brokers and
dealers.
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The Distributor will receive no commissions, fees or other remuneration for this
service. Allocation of brokerage is supervised by the Adviser.
The Fund's purchases and sales of portfolio securities of the Money Market
Portfolio and the Bond Portfolio and of debt securities acquired for the other
Portfolios, are generally placed by the Adviser with primary market makers for
these securities on a net basis, without any brokerage commission being paid by
the Fund. Trading does, however, involve transaction costs. Transactions with
dealers serving as primary market makers reflect the spread between the bid and
asked prices. Purchases of underwritten issues may be made which will include an
underwriting fee paid to the underwriter. Transactions in equity securities
generally involve the payment of a brokerage commission.
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for any Portfolio is to obtain the most favorable net
results taking into account such factors as price, commission (negotiable in the
case of U.S. stock exchange transactions but which is generally fixed in the
case of foreign exchange transactions), if any, size of order, difficulty of
execution and skill required of the executing broker/dealer. Subject to the
foregoing, the Adviser may consider sales of variable life insurance policies
and variable annuity contracts for which the Fund is an investment option as a
factor in the selection of firms to execute portfolio transactions. The Adviser
seeks to evaluate the overall reasonableness of brokerage commissions paid
through the familiarity of the Distributor with commissions charged on
comparable transactions, as well as by comparing commissions paid by the Fund to
reported commissions paid by others. The Adviser reviews on a routine basis
commission rates, execution and settlement services performed, making internal
and external comparisons.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
brokers and dealers who supply research, market and statistical information to
the Adviser. The term "research, market and statistical information" includes
advice as to the value of securities, the advisability of investing in,
purchasing or selling securities; and the availability of securities or
purchasers or sellers of securities; and furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts. The Adviser is authorized
when placing portfolio transactions for the Fund to pay a brokerage commission
(to the extent applicable) in excess of that which another broker might have
charged for effecting the same transaction 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 Portfolios are 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 Portfolios.
In the years ended December 31, 1995, 1996 and 1997, the Fund paid
brokerage commissions of $2,669,610, $2,106,414 and $2,708,797, 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 $2,018,972,
respectively, the Capital Growth Portfolio paid brokerage commissions of
$788,596, $505,817 and $474,905, respectively, and the Balanced Portfolio paid
brokerage commissions of $67,758, $67,828 and $64,496, respectively. The Growth
and Income Portfolio paid brokerage commissions of $54,235, $78,517 and
$100,066, respectively. In the year ended December 31, 1997, Global Discovery
Portfolio paid brokerage commissions of $50,358. In the year ended December 31,
1997, $2,008,842 of the total brokerage commissions paid by the International
Portfolio, $458,559 of the total brokerage commissions paid by the Capital
Growth Portfolio, $82,092 of the total brokerage commissions paid by the Growth
and Income Portfolio, $57,105 of the total brokerage commissions paid by the
Balanced Portfolio, and $49,361 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
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Portfolios or the Adviser. The amount of such transactions aggregated
$766,810,156 for the International Portfolio (97% of all brokerage
transactions), $490,539,121 for the Capital Growth Portfolio (94% of all
brokerage transactions), $91,559,039 for the Growth and Income Portfolio (83% of
all brokerage transactions), $62,141,402 (74% of all brokerage transactions) for
the Balanced Portfolio and $24,566,333 (87% 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.
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, 1997 and 1998, respectively, was:
December 31,
1997 1998
Bond Portfolio 56.07% %
Balanced Portfolio 43.10
Growth and Income Portfolio 28.41
Capital Growth Portfolio 41.77
Global Discovery Portfolio 83.16
International Portfolio 61.35
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 Fund's prospectus and
the Financial Statements incorporated by reference in this Statement of
Additional Information have been so included or incorporated by reference in
reliance on the report of PricewaterhouseCoopers LLP, One Post Office Square,
Boston, Massachusetts 02109, independent accountants, and given on the authority
of that firm as experts in accounting and auditing. Effective July 1, 1998,
Coopers & Lybrand L.L.P. and Price Waterhouse LLP merged to become
PricewaterhouseCoopers LLP. PricewaterhouseCoopers, LLP is responsible for
performing annual audits of the financial statements and financial highlights of
the Fund in accordance with generally accepted auditing standards, and the
preparation of federal tax returns.
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, Capital Growth, Large Company Growth and Small Company Growth Portfolios
are held separately, pursuant to a custodian agreement, by
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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 , Capital Growth,
Large Company Growth and Small Company Growth Portfolio each pay SFAC an annual
fee equal to 0.025% of the first $150 million of average daily net assets,
0.0075% of such assets in excess of $150 million and 0.0045% of such assets in
excess of $1 billion, plus holding and transaction charges for this service.
Global Discovery and International Portfolios pay SFAC an annual fee equal to
0.065% of the first $150 million of average daily net assets, 0.040% of such
assets in excess of $150 million and 0.020% of such assets in excess of $1
billion, plus holding and transaction charges for this 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.
Certain record-keeping and administrative services that would otherwise be
performed by the transfer agent may be performed by the Participating Insurance
Company that purchases a Portfolio's shares, and the Fund or the Adviser
(including any affiliate of the Adviser), or both, may pay the Participating
Insurance Company for such services.
Each Portfolio 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
Large Company Growth
Small Company Growth
Global Discovery Portfolio
International Portfolio
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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, 1998, 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 Corporation
AAA: Bonds rated AAA are highest grade debt obligations. This rating
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A: Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Bonds rated BB and B are regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
<PAGE>
BB: Bonds rated BB have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB-rating.
B: Bonds rated B have a greater vulnerability to default but currently
have the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB-rating.
Description of Commercial Paper Ratings
Moody's Investors Service, Inc.
P-1: Moody's Commercial Paper ratings are opinions of the ability of
issuers to repay punctually senior debt obligations which have an
original maturity not exceeding one year. The designation "Prime-1"
or "P-1" indicates the highest quality repayment capacity of the
rated issue.
Standard & Poor's Corporation
A-1: Standard & Poor's Commercial Paper ratings are current assessments
of the likelihood of timely payment of debt considered short-term in
the relevant market. The A-1 designation indicates the degree of
safety regarding timely payment is strong. Those issues determined
to possess extremely strong safety characteristics are denoted with
a plus (+) sign designation.
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
PART C. OTHER INFORMATION
<TABLE>
<CAPTION>
Item 23. Exhibits
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<S> <C> <C> <C>
(a) (1) 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.)
(2) 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.)
(3) 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.)
(4) 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.)
(5) 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.)
(6) Redesignation of Series.
(Previously filed as Exhibit 1(g) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(7) Abolition of Series.
(Previously filed as Exhibit 1(h) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(8) 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.)
(b) (1) 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.)
(2) 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.)
(c) Inapplicable.
(d) (1) 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.
Part C - Page 2
<PAGE>
(2) Investment Management Agreement between the Registrant and Scudder Kemper
Investments, Inc. with respect to the Bond Portfolio dated December 31,
1997 is filed herein.
(3) Investment Management Agreement between the Registrant and Scudder Kemper
Investments, Inc. with respect to the Balanced Portfolio dated December
31, 1997 is filed herein.
(4) 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.
(5) 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.
(6) 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.
(7) Investment Management Agreement between the Registrant and Scudder Kemper
Investments, Inc. with respect to the International Portfolio dated
December 31, 1997 is filed herein.
(8) Investment Management Agreement between the Registrant and Scudder Kemper
Investments, Inc. with respect to the Money Market Portfolio dated
September 7, 1998 is filed herein.
(9) Investment Management Agreement between the Registrant and Scudder Kemper
Investments, Inc. with respect to the Bond Portfolio dated September 7,
1998 is filed herein.
(10) Investment Management Agreement between the Registrant and Scudder Kemper
Investments, Inc. with respect to the Balanced Portfolio dated September
7, 1998 is filed herein.
(11) Investment Management Agreement between the Registrant and Scudder Kemper
Investments, Inc. with respect to the Growth and Income Portfolio dated
September 7, 1998 is filed herein.
(12) Investment Management Agreement between the Registrant and Scudder Kemper
Investments, Inc. with respect to the Capital Growth Portfolio dated
September 7, 1998 is filed herein.
(13) Investment Management Agreement between the Registrant and Scudder Kemper
Investments, Inc. with respect to the Global Discovery Portfolio dated
September 7, 1998 is filed herein.
(14) Investment Management Agreement between the Registrant and Scudder Kemper
Investments, Inc. with respect to the International Portfolio dated
September 7, 1998 is filed herein.
(15) Investment Management Agreement between the Registrant and Scudder Kemper
Investments, Inc. with respect to the Large Company Growth Portfolio dated
May 1, 1999 to be filed by amendment.
Part C - Page 3
<PAGE>
Investment Management Agreement between the Registrant and Scudder Kemper
Investments, Inc. with respect to the Small Company Growth Portfolio dated
May 1, 1999 to be filed by amendment.
(e) (1) Underwriting Agreement for Class A Shares between the Registrant and
Scudder Investor Services, Inc. dated September 7, 1998 is filed herein.
(2) Underwriting Agreement for Class B Shares between the Registrant and
Scudder Investor Services, Inc. dated September 7, 1998 is filed herein.
(3) 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.)
(4) 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.)
(5) 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.)
(6) 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) Inapplicable.
(g) (1) 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.)
(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.)
(3) Fee schedule for Exhibit (g)(2).
(Previously filed as Exhibit 8(b)(1) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(h) (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.)
(2) Fee schedule for Exhibit (h)(1).
(Previously filed as Exhibit 9(a)(2)(i) to Post-Effective Amendment No. 23
to the Registration Statement.)
Part C - Page 4
<PAGE>
(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.)
(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.)
(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.)
(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.)
(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.)
(8) 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.)
(9) 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.)
(10) 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.)
(11) 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.)
(12) 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.)
(13) 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.)
(14) Participation Agreement between the Registrant and Banner Life Insurance
Company dated January 18, 1995.
Part C - Page 5
<PAGE>
(Previously filed as Exhibit 9(c)(17) to Post-Effective Amendment No. 16
to this Registration Statement.)
(15) 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.)
(16) 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.)
(17) 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.)
(18) 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.)
(19) 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.)
(20) 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.)
(21) 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.)
(22) 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.)
(23) 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.)
(24) 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.)
(25) 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.)
Part C - Page 6
<PAGE>
(26) 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.)
(27) 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.)
(28) 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.)
(29) 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.)
(30) 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.)
(31) 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.)
(32) 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.)
(33) 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.)
(34) 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.)
(35) 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.)
Part C - Page 7
<PAGE>
(36) 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.)
(i) Inapplicable.
(j) Consent of Independent Accountants to be filed by amendment.
(k) Inapplicable.
(l) Inapplicable.
(m) 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.)
(n) Article 6 Financial Data Schedules to be filed by amendment.
(o) Inapplicable.
</TABLE>
Item 24. Persons Controlled by or under Common Control with Registrant
- -------- -------------------------------------------------------------
As of December 31, 1997, 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 25. 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
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.
Part C - Page 8
<PAGE>
Section 4.2. Non-Liability of Trustees, etc. No
Trustee, officer, employee or agent of the Fund shall
be liable to the Fund, its Shareholders, or to any
Shareholder, Trustee, officer, employee, or agent
thereof for any action or failure to act (including
without limitation the failure to compel in any way
any former or acting Trustee to redress any breach of
trust) except for his own bad faith, willful
misfeasance, gross negligence or reckless disregard
of the duties involved in the conduct of his office.
Section 4.3 Mandatory Indemnification. (a) Subject to
the exceptions and limitations contained in paragraph
(b) below:
(i) every person who is, or has been, a
Trustee or officer of the Fund
shall be indemnified by the Fund to
the fullest extent permitted by law
against all liability and against
all expenses reasonably incurred or
paid by him in connection with any
claim, action, suit or proceeding
in which he becomes involved as a
party or otherwise by virtue of his
being or having been a Trustee or
officer and against amounts paid or
incurred by him in the settlement
thereof;
(ii) the words "claim," "action,"
"suit," or "proceeding" shall apply
to all claims, actions, suits or
proceedings (civil, criminal, or
other, including appeals), actual
or threatened; and the words
"liability" and "expenses" shall
include, without limitation,
attorneys' fees, costs, judgments,
amounts paid in settlement, fines,
penalties and other liabilities.
(b) No indemnification shall be provided
hereunder to a Trustee or officer:
(i) against any liability to the Fund
or the Shareholders by reason of
willful misfeasance, bad faith,
gross negligence or reckless
disregard of the duties involved in
the conduct of his office;
(ii) with respect to any matter as to
which he shall have been finally
adjudicated not to have acted in
good faith in the reasonable belief
that his action was in the best
interest of the Fund;
(iii) in the event of a settlement or
other disposition not involving a
final adjudication as provided in
paragraph (b)(i) resulting in a
payment by a Trustee or officer,
unless there has been a
determination that such Trustee or
officer did not engage in willful
misfeasance, bad faith, gross
negligence or reckless disregard of
the duties involved in the conduct
of his office;
(A) by the court or
other body approving
the settlement or
other disposition;
or
(B) based upon a review
of readily available
facts (as opposed to
a full trial-type
inquiry) by (x) vote
of a majority of the
Disinterested
Trustees acting on
the matter (provided
that a majority of
the Disinterested
Trustees then in
office act on the
matter) or (y)
written opinion of
independent legal
counsel.
(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.
Part C - Page 9
<PAGE>
(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 26. 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 26.
<TABLE>
<CAPTION>
Business and Other Connections of Board
Name of Directors of Registrant's Adviser
---- ------------------------------------
<S> <C>
Stephen R. Beckwith Treasurer and Chief Financial Officer, Scudder Kemper 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.#
William H. Bolinder Director, Scudder Kemper Investments, Inc.**
Member, Group Executive Board, Zurich Financial Services, Inc. ##
Chairman, Zurich-American Insurance Company o
Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland ##
Director, ZKI Holding Corporation xx
Gunther Gose Director, Scudder Kemper Investments, Inc.**
CFO and Member, Group Executive Board, Zurich Financial Services, Inc. ##
CEO/Branch Offices, Zurich Life Insurance Company ##
Part C - Page 10
<PAGE>
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 o
Director, ZKI Holding Corporation xx
Kathryn L. Quirk 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.+
Cornelia M. Small Director and 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 Corporation oo
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
xx 222 S. Riverside, Chicago, IL
o Zurich Towers, 1400 American Ln., Schaumburg, IL
+ P.O. Box 309, Upland House, S. Church St., Grand Cayman, British West Indies
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
</TABLE>
Item 27. Principal Underwriters.
- -------- -----------------------
Part C - Page 11
<PAGE>
(a)
Scudder Investor Services, Inc. acts as principal underwriter of the
Registrant's shares and also acts as principal underwriter for other
funds managed by Scudder Kemper Investments, Inc.
(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 27.
<TABLE>
<CAPTION>
(1) (2) (3)
Name and Principal Positions and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
<S> <C> <C>
Lynn S. Birdsong Senior Vice President None
345 Park Avenue
New York, NY 10154
Mary Elizabeth Beams Vice President None
Two International Place
Boston, MA 02110
Mark S. Casady Director, President and Assistant None
Two International Place Treasurer
Boston, MA 02110
Linda Coughlin Director and Senior Vice President None
Two International Place
Boston, MA 02110
Richard W. Desmond Vice President None
345 Park Avenue
New York, NY 10154
Paul J. Elmlinger Senior Vice President and Assistant None
345 Park Avenue Clerk
New York, NY 10154
Philip S. Fortuna Vice President None
101 California Street
San Francisco, CA 94111
William F. Glavin Vice President None
Two International Place
Boston, MA 02110
Margaret D. Hadzima Assistant Treasurer None
Two International Place
Boston, MA 02110
Thomas W. Joseph Director, Vice President, Treasurer Vice President
Two International Place and Assistant Clerk
Boston, MA 02110
Thomas F. McDonough Clerk Vice President and
Two International Place Secretary
Boston, MA 02110
Part C - Page 12
<PAGE>
Name and Principal Positions and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
James J. McGovern Chief Financial Officer None
345 Park Avenue
New York, NY 10154
Lorie C. O'Malley Vice President None
Two International Place
Boston, MA 02110
Daniel Pierce Director, Vice President President and Trustee
Two International Place and Assistant Treasurer
Boston, MA 02110
Kathryn L. Quirk Director, Senior Vice President, Chief Vice President, Assistant
345 Park Avenue Legal Officer and Assistant Clerk Secretary and Trustee
New York, NY 10154
Robert A. Rudell Director and Vice President None
Two International Place
Boston, MA 02110
William M. Thomas Vice President None
Two International Place
Boston, MA 02110
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 and Chief Compliance None
Two International Place Officer
Boston, MA 02110
David B. Watts Assistant Treasurer None
Two International Place
Boston, MA 02110
</TABLE>
<TABLE>
<CAPTION>
(c)
(1) (2) (3) (4) (5)
Net Underwriting Compensation on
Name of Principal Discounts and Redemptions Brokerage
Underwriter Commissions and Repurchases Commissions Other Compensation
----------- ----------- --------------- ----------- ------------------
<S> <C> <C> <C> <C>
Scudder Investor None None None None
Services, Inc.
</TABLE>
Item 28. Location of Accounts and Records.
- -------- ---------------------------------
Certain accounts, books and other documents required to be
maintained by Section 31(a) of the 1940 Act and the Rules
promulgated thereunder are maintained by Scudder Kemper
Investments, Inc., Two
Part C - Page 13
<PAGE>
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 29. Management Services.
- -------- --------------------
Inapplicable.
Item 30. Undertakings.
- -------- -------------
Inapplicable.
14
<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 12th day of February, 1999.
SCUDDER VARIABLE LIFE INVESTMENT FUND
By /s/Thomas F. McDonough
---------------------------------------------------
Thomas F. McDonough, Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/William M. Thomas
- --------------------------------------
William M. Thomas* President (Principal Executive February 12, 1999
Officer)
/s/Daniel Pierce
- --------------------------------------
Daniel Pierce* Vice President and Trustee February 12, 1999
/s/Dr. Kenneth Black, Jr.
- --------------------------------------
Dr. Kenneth Black, Jr.* Trustee February 12, 1999
/s/Dr. Rosita P. Chang
- --------------------------------------
Dr. Rosita P. Chang* Trustee February 12, 1999
/s/Peter B. Freeman
- --------------------------------------
Peter B. Freeman* Trustee February 12, 1999
/s/J. D. Hammond
- --------------------------------------
Dr. J. D. Hammond* Trustee February 12, 1999
/s/John R. Hebble
- -----------------------------
John R. Hebble Treasurer (Principal Financial and February 12, 1999
Accounting Officer)
</TABLE>
<PAGE>
*By: /s/Thomas F. McDonough
------------------------------------
Thomas F. McDonough**
** Attorney-in-fact pursuant to the powers of attorney
contained in the signature pages of Post-Effective
Amendment No. 9 to the Registration Statement filed
March 3, 1989, Post-Effective Amendment No. 19 to
the Registration Statement filed May 1, 1996 and
Post-Effective Amendment No. 26 to the Registration
Statement filed herein.
2
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this amendment to
its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Boston, and Commonwealth of
Massachusetts on the 12th day of February, 1999.
SCUDDER VARIABLE LIFE INVESTMENT FUND
By /s/Thomas F. McDonough
----------------------------------
Thomas F. McDonough,
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated. By so signing, the
undersigned in his capacity as trustee or officer, or both, as the case may be
of the Registrant, does hereby appoint Caroline Pearson, Thomas F. McDonough and
Sheldon A. Jones and each of them, severally, or if more than one acts, a
majority of them, his true and lawful attorney and agent to execute in his name,
place and stead (in such capacity) any and all amendments to the Registration
Statement and any post-effective amendments thereto and all instruments
necessary or desirable in connection therewith, to attest the seal of the
Registrant thereon and to file the same with the Securities and Exchange
Commission. Each of said attorneys and agents shall have power to act with or
without the other and have full power and authority to do and perform in the
name and on behalf of the undersigned, in any and all capacities, every act
whatsoever necessary or advisable to be done in the premises as fully and to all
intents and purposes as the undersigned might or could do in person, hereby
ratifying and approving the act of said attorneys and agents and each of them.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/William M. Thomas President February 12, 1999
- --------------------------------------
William M. Thomas
</TABLE>
3
<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. 26
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 30
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
SCUDDER VARIABLE LIFE INVESTMENT FUND
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
EXHIBIT INDEX
Exhibit (d)(1)
Exhibit (d)(2)
Exhibit (d)(3)
Exhibit (d)(4)
Exhibit (d)(5)
Exhibit (d)(6)
Exhibit (d)(7)
Exhibit (d)(8)
Exhibit (d)(9)
Exhibit (d)(10)
Exhibit (d)(11)
Exhibit (d)(12)
Exhibit (d)(13)
Exhibit (d)(14)
Exhibit (e)(1)
Exhibit (e)(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
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: /s/ Daniel Pierce
--------------------------
Vice President
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By: /s/ Stephen R. Beckwith
--------------------------
Managing Director
7
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 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
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<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
Bond Portfolio
By: /s/ Daniel Pierce
--------------------------
Vice President
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<PAGE>
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By: /s/ Stephen R. Beckwith
--------------------------
Managing Director
8
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
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 0.475 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
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
Balanced Portfolio
By: /s/ Daniel Pierce
--------------------------
Vice President
7
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
<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 0.475 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
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
Growth and Income Portfolio
By: /s/ Daniel Pierce
--------------------------
Vice President
7
<PAGE>
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By: /s/ Stephen R. Beckwith
--------------------------
Managing Director
8
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;
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 .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
<PAGE>
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: /s/ Daniel Pierce
--------------------------
Vice President
7
<PAGE>
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By: /s/ Stephen R. Beckwith
--------------------------
Managing Director
8
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;
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 0.975 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: /s/ Daniel Pierce
--------------------------
Vice President
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By: /s/ Stephen R. Beckwith
--------------------------
Managing Director
7
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
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 0.875 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 0.725 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: /s/ Thomas F. McDonough
--------------------------
Vice President
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<PAGE>
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By: /s/ Daniel Pierce
--------------------------
Managing Director
8
Scudder Variable Life Investment Fund
Two International Place
Boston, Massachusetts 02110
September 7, 1998
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, 1999, 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: /s/ Thomas F. McDonough
--------------------------
Vice President
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By: /s/ Daniel Pierce
--------------------------
Managing Director
7
Scudder Variable Life Investment Fund
Two International Place
Boston, Massachusetts 02110
September 7, 1998
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 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 0.475 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
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, 1999, 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
Bond Portfolio
By: /s/ Thomas F. McDonough
--------------------------
Vice President
7
<PAGE>
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By: /s/ Daniel Pierce
--------------------------
Managing Director
8
Scudder Variable Life Investment Fund
Two International Place
Boston, Massachusetts 02110
September 7, 1998
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
2
<PAGE>
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 shareholders, preparing and arranging for the
3
<PAGE>
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 Fund
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<PAGE>
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, 1999, 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.
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<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
Balanced Portfolio
By:
--------------------------
Vice President
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The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By:
--------------------------
Managing Director
8
Scudder Variable Life Investment Fund
Two International Place
Boston, Massachusetts 02110
September 7, 1998
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").
<PAGE>
(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.
(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
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<PAGE>
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 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,
3
<PAGE>
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; 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
4
<PAGE>
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 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
5
<PAGE>
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.
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.
6
<PAGE>
9. Duration and Termination of This Agreement. This Agreement shall remain
in force until September 30, 1999, 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 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
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<PAGE>
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: /s/ Thomas F. McDonough
--------------------------
Vice President
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By: /s/ Daniel Pierce
--------------------------
Managing Director
8
Exhibit (d)(12)
Scudder Variable Life Investment Fund
Two International Place
Boston, Massachusetts 02110
September 7, 1998
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;
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 0.475 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, and provided that, for any calendar
month beginning September 30, 1998 during which the average of such values
exceeds $1 billion, the fee payable for that month based on the portion of the
average of such values in excess of $1 billion shall be 1/12 of 0.425 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
5
<PAGE>
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.
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, 1999, 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: /s/Thomas F. McDonough
--------------------------------
Vice President
7
<PAGE>
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By: /s/Daniel Pierce
--------------------------------
Managing Director
8
Scudder Variable Life Investment Fund
Two International Place
Boston, Massachusetts 02110
September 7, 1998
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;
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 0.975 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, 1999, 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: /s/ Thomas F. McDonough
--------------------------
Vice President
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By: /s/ Daniel Pierce
--------------------------
Managing Director
7
Scudder Variable Life Investment Fund
Two International Place
Boston, Massachusetts 02110
September 7, 1998
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
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
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<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 0.725 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, 1999, 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
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<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: /s/ Thomas F. McDonough
--------------------------
Vice President
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The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By: /s/ Daniel Pierce
--------------------------
Managing Director
8
SCUDDER VARIABLE LIFE INVESTMENT FUND
Two International Place
Boston, Massachusetts 02110
September 7, 1998
Scudder Investor Services, Inc.
Two International Place
Boston, Massachusetts 02110
Underwriting Agreement for Class A Shares
Dear Sirs:
Scudder Variable Life Investment Fund (the "Fund") has been formed under
the laws of the Commonwealth of Massachusetts to engage in the business of an
investment company. The shares of beneficial interest of the Fund ("Shares") are
currently divided into certain portfolios ("Portfolios"), each of which (with
the exception of the Money Market Portfolio) is divided into two classes of
shares, Class A and Class B shares. However, additional Portfolios and/or
classes of shares may be established from time to time by action of the
Trustees. If the context requires and unless otherwise specifically provided
herein, the term "Fund" as used in this Agreement shall mean, in addition, each
separate Portfolio now existing and subsequently created. The Fund has selected
you to act as principal underwriter as such term is defined in Section 2(a)(29)
of the Investment Company Act of 1940, as amended (the "Investment Company
Act"), of the Class A Shares of the Fund and you are willing to act as such
principal underwriter and to perform the duties and functions of underwriter in
the manner and on the terms and conditions hereinafter set forth. Accordingly,
the Fund hereby agrees with you as follows:
1. Delivery of Fund Documents. The Fund has furnished you with copies,
properly certified or authenticated, of each of the following:
(a) Declaration of Trust of the Fund dated December 11, 1997, as
amended to date, (the "Declaration of Trust"), including a
(b) Written Instrument to Establish and Designate Separate Series of
Shares, as amended or supplemented from time to time.
(c) Written Instrument Establishing and Designating Separate Classes
of Shares, as amended or supplemented from time to time.
(d) By-laws of the Fund.
<PAGE>
(e) Resolutions of the Trustees of the Fund selecting you as
principal underwriter and approving this form of Agreement.
The Fund will furnish you from time to time with copies, properly
certified or authenticated, of all amendments of or supplements to the
foregoing, if any.
The Fund will furnish you promptly with properly certified or
authenticated copies of any registration statements filed by it with the
Securities and Exchange Commission under the Securities Act of 1933, as amended
("Securities Act"), or the Investment Company Act, together with any financial
statements and exhibits included therein, and all amendments or supplements
thereto hereafter filed.
2. Registration of Additional Class A Shares. The Fund will from time to
time use its best efforts to register under the Securities Act such Class A
Shares as you may reasonably be expected to sell on behalf of the Fund. You and
the Fund will cooperate in taking such action as may be necessary from time to
time to qualify Class A Shares so registered for sale by you or the Fund in any
jurisdictions mutually agreeable to you and the Fund, and to maintain such
qualifications. This Agreement relates to the issue and sale of Class A Shares
that are duly authorized and registered and available for sale by the Fund,
including redeemed or repurchased Class A Shares if and to the extent that they
may be legally sold and if, but only if, the Fund sees fit to sell them.
3. Sale of Class A Shares. The Fund has been formed to provide an
investment vehicle for the separate accounts of life insurance companies
offering variable life insurance policies and variable annuity contracts.
Consequently, when used herein the terms "investor", "public", and similar terms
include such insurance companies and their separate accounts. No person other
than you is authorized to act as principal underwriter (as such term is defined
in the Investment Company Act) for the Class A Shares of the Fund. Subject to
the provisions of paragraph 5 and 7 hereof and to such minimum or maximum
purchase or other requirements as may from time to time be currently indicated
in the Fund's registration statement or prospectus, you are authorized to sell,
as agent on behalf of the Fund, Class A Shares authorized for issue and
registered under the Securities Act. You may also purchase as principal such
Class A Shares for resale to the public. Such sales will be made by you on
behalf of the Fund by accepting unconditional orders to purchase such Class A
Shares placed with you by investors and such purchases will be made by you only
after acceptance by you of such orders. The sales price to the public of such
Class A Shares shall be the public offering price as defined in paragraph 6
hereof.
4. Solicitation of Orders. You will use your best efforts (but only in
jurisdictions in which you may lawfully do so) to obtain from investors
unconditional orders for Class A Shares authorized for issue by the Fund and
registered under the Securities Act, provided that you may in your discretion
refuse to accept orders for Class A Shares from any particular investor.
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<PAGE>
5. Sale of Class A Shares by the Fund. Unless you are otherwise notified
by the Fund, any right granted to you to accept orders for Class A Shares or to
make sales on behalf of the Fund or to purchase Class A Shares for resale will
not apply to Class A Shares issued in connection with the merger or
consolidation of any other investment company with the Fund or its acquisition,
by purchase or otherwise, of all or substantially all of the assets of any
investment company or substantially all the outstanding shares of any such
company and such right shall not apply to Class A Shares that may be offered by
the Fund to shareholders by virtue of their being holders of Class A Shares of
the Fund, including Class A Shares to be purchased through reinvestment of
income dividends and capital gains distributions.
6. Public Offering Price. All Class A Shares offered and sold to
investors by you will be offered and sold at the public offering price for that
class of shares. The public offering price for all accepted subscriptions for
Class A Shares will be the net asset value per Class A Share, as determined by
the Fund in accordance with the Declaration of Trust, as now in effect or as it
may be amended, next after the order is accepted by you.
7. Suspension of Sales. If and whenever the determination of net asset
value is suspended and until such suspension is terminated, no further orders
for Class A Shares shall be accepted by you except unconditional orders placed
with you before you had knowledge of the suspension. In addition, the Fund
reserves the right to suspend sales and your authority to accept orders for
Class A Shares on behalf of the Fund if, in the judgment of the Fund, it is in
the best interests of the Fund to do so, such suspension to continue for such
period as may be determined by the Fund; and in that event, no Class A Shares
will be sold by you on behalf of the Fund while such suspension remains in
effect except for Class A Shares necessary to cover unconditional orders
accepted by you before you had knowledge of the suspension.
8. Suspension, Termination or Limitation of Portfolios. You acknowledge
that the Fund may, at any time such action is deemed desirable, suspend or
terminate sales of Class A Shares of a Portfolio and that upon your receipt of
notice of such action by the Fund you will, for such period as determined by the
Fund, accept no further orders for Class A Shares of that Portfolio except
unconditional orders placed with you before you had knowledge of such action.
You acknowledge further that the Fund may from time to time set upper and lower
limits on the number of Class A Shares of a Portfolio for which a purchaser may
subscribe and may limit sales of Class A Shares of a Portfolio to their existing
shareholders.
9. Portfolio Transactions. Securities may be bought or sold for the Fund
by or through you and you may participate directly or indirectly in brokerage
commissions or "spread" in respect of transactions in securities of the Fund;
provided, however, that all sums of money received by you as a result of such
purchases and sales or as a result of such participation must, after
reimbursement of your actual expenses in connection with such activity, be paid
over by you to or for the benefit of the Fund.
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<PAGE>
10. Expenses.
(a) The Fund shall pay or arrange for the payment of all fees and
expenses:
(1) in connection with the preparation, setting in type and
filing of any registration statement and prospectus under the
Securities Act and/or the Investment Company Act, and any
amendments or supplements thereto that may be made from time to
time;
(2) in connection with the registration and qualification of
Class A Shares for sale in the various jurisdictions in which the
Fund shall determine it advisable to qualify such Class A Shares
for sale (including registering the Fund as a broker or dealer or
any officer of the Fund or other person as agent or salesman of
the Fund in any state);
(3) of preparing, setting in type, printing and mailing any
notice, proxy statement, report, prospectus or other
communication to Class A shareholders of the Fund in their
capacity as such;
(4) of preparing, setting in type, printing and mailing
prospectuses annually to existing Class A shareholders;
(5) in connection with the issue and transfer of Class A Shares
resulting from the acceptance by you of orders to purchase Class
A Shares placed with you by investors, including the expenses of
printing and mailing confirmations of such purchase orders and
the expenses of printing and mailing a prospectus included with
the confirmation of such orders;
(6) of any issue taxes or any initial transfer taxes;
(7) of that portion of WATS (or equivalent) telephone lines other
than the portion allocated to you in this paragraph 10;
(8) of wiring funds in payment of Class A Share purchases or in
satisfaction of redemption or repurchase requests, unless such
expenses are paid for by the investor or shareholder who
initiates the transaction;
(9) of that portion of the cost of printing business reply
envelopes allocated to the Fund on the basis of use by existing
shareholders to place redemption requests or to request
information;
(10) of postage for all business reply envelopes;
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<PAGE>
(11) of that portion of one or more CRT terminals connected with
the computer facilities of the transfer agent and used by the
Fund to gain access to its shareholder records, allocated on the
basis of such use;
(12) permitted to be paid or assumed by the Fund pursuant to a
plan ("12b-1 Plan") adopted by the Fund in conformity with the
requirements of Rule 12b-1 under the Investment Company Act
("Rule 12b-1") or any successor rule, notwithstanding any other
provision to the contrary herein; and
(13) not specifically allocated to you hereunder.
(b) You shall pay or arrange for the payment of all fees and
expenses, subject to the Fund reimbursing you for such fees and
expenses as may be permitted by the Fund pursuant to the Rule 12b-1
Plan in effect for the Class A Shares:
(1) of printing and distributing any prospectuses or reports
prepared for your use in connection with the offering of Class A
Shares to the public;
(2) of preparing, setting in type, printing and mailing any other
literature used by you in connection with the offering of Class A
Shares to the public;
(3) of advertising in connection with the offering of Class A
Shares to the public;
(4) incurred in connection with your registration as a broker or
dealer or the registration or qualification of your officers,
directors, agents or representatives under Federal and state
laws;
(5) of that portion of WATS (or equivalent) telephone lines,
allocated to you on the basis of use by investors (but not
shareholders) who request information about or prospectuses of
the Fund;
(6) of that portion of printing business reply envelopes,
allocated to you on the basis of use by investors and
shareholders to purchase Class A Shares; and
(7) of any activity which is primarily intended to result in the
sale of Class A shares issued by the Fund.
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<PAGE>
Expenses which are to be allocated between you and the Fund shall be
allocated pursuant to reasonable procedures or formulae mutually agreed upon,
which procedures or formulae shall to the extent practicable reflect studies of
relevant empirical data.
11. Selected Dealers. In connection with the offering of shares to the
separate accounts of life insurance companies, or to the extent that the offer
of variable life insurance policies and variable annuity contracts the premiums
for which are allocated to such separate accounts which invest in Class A Shares
may be deemed to include an offer of Class A Shares, you may enter into
agreements with other broker-dealers registered under the Securities Exchange
Act of 1934, as amended, provided that any such agreement shall be subject to
the approval of the Trustees of the Fund.
12. Conformity with Law. You agree that in selling Class A Shares you
will duly conform in all respects with the laws of the United States and any
jurisdiction in which such Class A Shares may be offered for sale by you
pursuant to this Agreement and to the rules and regulations of the National
Association of Securities Dealers, Inc., of which you are a member.
13. Independent Contractor. You shall be an independent contractor and
neither you nor any of your officers or employees is or shall be an employee of
the Fund in the performance of your duties hereunder. You shall be responsible
for your own conduct and the employment, control and conduct of your agents and
employees and for injury to such agents or employees or to others through your
agents or employees. You assume full responsibility for your agents or employees
under applicable statutes and agree to pay all employee taxes thereunder.
14. Services Not Exclusive. Except to the extent necessary to perform
your obligations hereunder, nothing herein shall be deemed to limit or restrict
your right or that of any of your affiliates or employees, including any of your
employees who may also be a Trustee, officer or employee of the Fund, to engage
in any other business or to devote time and attention to the distribution or
other related aspects of any other registered investment company or to render
services of any kind to any other corporation, firm, individual or association.
15. Indemnification. You agree to indemnify and hold harmless the Fund
and each of its Trustees and officers and each person, if any, who controls the
Fund within the meaning of Section 15 of the Securities Act against any and all
losses, claims, damages, liabilities or litigation (including legal and other
expenses) to which the Fund or such Trustees, officers or controlling person may
become subject under such Act, under any other statute, at common law or
otherwise, arising out of the acquisition of any Shares by any person which (i)
may be based upon any wrongful act by you or any of your employees or
representatives, or (ii) may be based upon any untrue statement or alleged
untrue statement of a material fact contained in a registration statement or
prospectus covering Shares or any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary
6
<PAGE>
to make the statements therein not misleading if such a statement or omission
was made in reliance upon information furnished to the Fund by you, or (iii) may
be incurred or arise by reason of your acting as the Fund's agent instead of
purchasing and reselling Shares as principal in distributing Shares to the
public, provided, however, that in no case (i) is your indemnity in favor of a
Trustee or officer or any other person deemed to protect such Trustee or officer
or other person against any liability to which any such person would otherwise
be subject by reason of willful misfeasance, bad faith, or gross negligence in
the performance of his duties or by reason of his reckless disregard of
obligations and duties under this Agreement or (ii) are you to be liable under
your indemnity agreement contained in this paragraph with respect to any claim
made against the Fund or any person indemnified unless the Fund or such person,
as the case may be, shall have notified you in writing within a reasonable time
after the summons or other first legal process giving information of the nature
of the claims shall have been served upon the Fund or upon such person (or after
the Fund or such person shall have received notice of such service on any
designated agent), but failure to notify you of any such claim shall not relieve
you from any liability which you have to the Fund or any person against whom
such action is brought otherwise than on account of your indemnity agreement
contained in this paragraph. You shall be entitled to participate, at your own
expense, in the defense, or, if you so elect, to assume the defense of any suit
brought to enforce any such liability, but, if you elect to assume the defense,
such defense shall be conducted by counsel chosen by you and satisfactory to the
Fund, to its officers and Trustees, or to any controlling person or persons,
defendant or defendants in the suit. In the event that you elect to assume the
defense of any such suit and retain such counsel, the Fund, such officers and
Trustees or controlling person or persons, defendant or defendants in the suit,
shall bear the fees and expenses of any additional counsel retained by them,
but, in case you do not elect to assume the defense of any such suit, you will
reimburse the Fund, such officers and Trustees or controlling person or persons,
defendant or defendants in such suit, for the reasonable fees and expenses of
any counsel retained by them. You agree promptly to notify the Fund of the
commencement of any litigation or proceedings against it in connection with the
issue and sale of any Shares.
The Fund agrees to indemnify and hold harmless you and each of your
directors and officers and each person, if any, who controls you within the
meaning of Section 15 of the Securities Act against any and all losses, claims,
damages, liabilities or litigation (including legal and other expenses) to which
you or such directors, officers or controlling person may become subject under
such Act, under any other statute, at common law or otherwise, arising out of
the acquisition of any Shares by any person which (i) may be based upon any
wrongful act by the Fund or any of its employees or representatives, or (ii) may
be based upon any untrue statement or alleged untrue statement of a material
fact contained in a registration statement or prospectus covering Shares or any
amendment thereof or supplement thereto or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading if such statements or omission was made in
reliance upon information furnished to you by the Fund; provided, however, that
in no case (i) is the Fund's indemnity in favor of a director or officer or any
other person deemed to
7
<PAGE>
protect such director or officer or other person against any liability to which
any such person would otherwise be subject by reason of willful misfeasance, bad
faith, or gross negligence in the performance of his duties or by reason of his
reckless disregard of obligations and duties under this Agreement or (ii) is the
Fund to be liable under its indemnity agreement contained in this paragraph with
respect to any claims made against you or any such director, officer or
controlling person unless you or such director, officer or controlling person,
as the case may be, shall have notified the Fund in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon you or upon such director,
officer or controlling person (or after you or such director, officer or
controlling person shall have received notice of such service on any designated
agent), but failure to notify the Fund of any claim shall not relieve it from
any liability which it may have to the person against whom such action is
brought otherwise than on account of its indemnity agreement contained in this
paragraph. The Fund will be entitled to participate at its own expense in the
defense, or, if it so elects, to assume the defense of any suit brought to
enforce any such liability, but if the Fund elects to assume the defense, such
defense shall be conducted by counsel chosen by it and satisfactory to you, its
directors, officers or controlling person or persons, defendant or defendants,
in the suit. In the event the Fund elects to assume the defense of any such suit
and retain such counsel, you, your directors, officers or controlling person or
persons, defendant or defendants in the suit, shall bear the fees and expenses
of any additional counsel retained by them, but, in case the Fund does not elect
to assume the defense of any such suit, it will reimburse you or such directors,
officers or controlling person or persons, defendant or defendants in the suit,
for the reasonable fees and expenses of any counsel retained by them. The Fund
agrees promptly to notify you of the commencement of any litigation or
proceedings against it or any of its officers or Trustees in connection with the
issuance or sale of any Shares.
16. Authorized Representations. The Fund is not authorized to give any
information or to make any representations on behalf of you other than the
information and representations contained in a registration statement or
prospectus covering Class A Shares, as such registration statement and
prospectus may be amended or supplemented from time to time, or reports prepared
for distribution to shareholders of the Fund. You are not authorized to give any
information or to make any representations on behalf of the Fund in connection
with the sale of Class A Shares other than the information and representations
contained in a registration statement or prospectus covering Class A Shares, as
such registration statement and prospectus may be amended or supplemented from
time to time, or reports prepared for distribution to shareholders of the Fund.
17. Duration and Termination of the Agreement. This Agreement shall
become effective upon the effective date of the Fund's post-effective amendment
to its registration statement under Securities Act for Class A Shares and,
unless sooner terminated as provided herein, will remain in effect until
September 30, 1999 and from year to year thereafter, but only so long as such
continuance is specifically approved at least annually by the vote of a majority
of the Trustees of the Fund who are not interested persons of you or of the
Fund, cast in person at a meeting called for the purpose of voting on such
8
<PAGE>
approval, and by vote of the Trustees or of a majority of the outstanding voting
securities of the Fund. This Agreement may, on 60 days' written notice, be
terminated at any time, without the payment of any penalty, by the Trustees, by
a vote of a majority of the outstanding voting securities of Class A Shares of
the Fund, or by you. This Agreement will automatically terminate in the event of
its assignment. In interpreting the provisions of this paragraph 17, the
definitions contained in Section 2(a) of the Investment Company Act
(particularly the definitions of "interested person," "assignment" and "majority
of the outstanding voting securities"), shall be applied.
18. Amendment of this Agreement. No provisions of this Agreement may be
changed, waived, discharged or terminated orally, but only by instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. If the Fund should at any time deem it
necessary or advisable in the best interests of the Fund that any amendment of
this Agreement be made in order to comply with the recommendations or
requirements of the Securities and Exchange Commission or other governmental
authority or to obtain any advantage under state or federal tax laws and should
notify you of the form of such amendment, and the reasons therefor, and if you
should decline to assent to such amendment, the Fund may terminate this
Agreement forthwith. If you should at any time request that a change be made in
the Fund's Declaration of Trust or By-laws or in the Fund's methods of doing
business, in order to comply with any requirements of federal law or regulations
of the Securities and Exchange Commission or of a national securities
association of which you are or may be a member relating to the sale of Class A
Shares, and the Fund should not make such necessary change within a reasonable
time, you may terminate this Agreement forthwith.
19. Miscellaneous. The captions in this Agreement are included for the
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement may be executed simultaneously in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument. The name "Scudder Variable Life Investment Fund" is
the designation of the Trustees for the time being under a Declaration of Trust
dated December 11, 1997, and all persons dealing with the Fund must look solely
to the property of the Fund for the enforcement of any claims against the Fund
as neither the Trustees, officers, employees, agents or shareholders assume any
personal liability for obligations entered into on behalf of the Fund, nor shall
resort be had to their private property for the satisfaction of any obligation
or claim or otherwise in connection with the affairs of the Fund.
9
<PAGE>
If you are in agreement with the foregoing, please sign the form of
acceptance on the accompanying counterpart of this letter and return such
counterpart to the Fund, whereupon this letter shall become a binding contract.
Yours very truly,
SCUDDER VARIABLE LIFE INVESTMENT FUND
By:
---------------------------
Thomas F. McDonough
Vice President
The foregoing Agreement is hereby accepted as of the date thereof.
SCUDDER INVESTOR SERVICES, INC.
By:
---------------------------
Daniel Pierce
Vice President
10
SCUDDER VARIABLE LIFE INVESTMENT FUND
Two International Place
Boston, Massachusetts 02110
September 7, 1998
Scudder Investor Services, Inc.
Two International Place
Boston, Massachusetts 02110
Underwriting Agreement for Class B Shares
Dear Sirs:
Scudder Variable Life Investment Fund (the "Fund") has been formed under
the laws of the Commonwealth of Massachusetts to engage in the business of an
investment company. The shares of beneficial interest of the Fund ("Shares") are
currently divided into certain portfolios ("Portfolios"), each of which (with
the exception of the Money Market Portfolio) is divided into two classes of
shares, Class A and Class B shares. However, additional Portfolios and/or
classes of shares may be established from time to time by action of the
Trustees. If the context requires and unless otherwise specifically provided
herein, the term "Fund" as used in this Agreement shall mean, in addition, each
separate Portfolio now existing and subsequently created. The Fund has selected
you to act as principal underwriter as such term is defined in Section 2(a)(29)
of the Investment Company Act of 1940, as amended (the "Investment Company
Act"), of the Class B Shares of the Fund and you are willing to act as such
principal underwriter and to perform the duties and functions of underwriter in
the manner and on the terms and conditions hereinafter set forth. Accordingly,
the Fund hereby agrees with you as follows:
1. Delivery of Fund Documents. The Fund has furnished you with copies,
properly certified or authenticated, of each of the following:
(a) Declaration of Trust of the Fund dated December 11, 1997, as
amended to date, (the "Declaration of Trust"), including a
(b) Written Instrument to Establish and Designate Separate Series of
Shares, as amended or supplemented from time to time.
(c) Written Instrument Establishing and Designating Separate Classes
of Shares, as amended or supplemented from time to time.
(d) By-laws of the Fund.
<PAGE>
(e) Resolutions of the Trustees of the Fund selecting you as
principal underwriter and approving this form of Agreement.
The Fund will furnish you from time to time with copies, properly
certified or authenticated, of all amendments of or supplements to the
foregoing, if any.
The Fund will furnish you promptly with properly certified or
authenticated copies of any registration statements filed by it with the
Securities and Exchange Commission under the Securities Act of 1933, as amended
("Securities Act"), or the Investment Company Act, together with any financial
statements and exhibits included therein, and all amendments or supplements
thereto hereafter filed.
2. Registration of Additional Class B Shares. The Fund will from time to
time use its best efforts to register under the Securities Act such Class B
Shares as you may reasonably be expected to sell on behalf of the Fund. You and
the Fund will cooperate in taking such action as may be necessary from time to
time to qualify Class B Shares so registered for sale by you or the Fund in any
jurisdictions mutually agreeable to you and the Fund, and to maintain such
qualifications. This Agreement relates to the issue and sale of Class B Shares
that are duly authorized and registered and available for sale by the Fund,
including redeemed or repurchased Class B Shares if and to the extent that they
may be legally sold and if, but only if, the Fund sees fit to sell them.
3. Sale of Class B Shares. The Fund has been formed to provide an
investment vehicle for the separate accounts of life insurance companies
offering variable life insurance policies and variable annuity contracts.
Consequently, when used herein the terms "investor", "public", and similar terms
include such insurance companies and their separate accounts. No person other
than you is authorized to act as principal underwriter (as such term is defined
in the Investment Company Act) for the Class B Shares of the Fund. Subject to
the provisions of paragraph 5 and 7 hereof and to such minimum or maximum
purchase or other requirements as may from time to time be currently indicated
in the Fund's registration statement or prospectus, you are authorized to sell,
as agent on behalf of the Fund, Class B Shares authorized for issue and
registered under the Securities Act. You may also purchase as principal such
Class B Shares for resale to the public. Such sales will be made by you on
behalf of the Fund by accepting unconditional orders to purchase such Class B
Shares placed with you by investors and such purchases will be made by you only
after acceptance by you of such orders. The sales price to the public of such
Class B Shares shall be the public offering price as defined in paragraph 6
hereof.
4. Solicitation of Orders. You will use your best efforts (but only in
jurisdictions in which you may lawfully do so) to obtain from investors
unconditional orders for Class B Shares authorized for issue by the Fund and
registered under the Securities Act, provided that you may in your discretion
refuse to accept orders for Class B Shares from any particular investor.
2
<PAGE>
5. Sale of Class B Shares by the Fund. Unless you are otherwise notified
by the Fund, any right granted to you to accept orders for Class B Shares or to
make sales on behalf of the Fund or to purchase Class B Shares for resale will
not apply to Class B Shares issued in connection with the merger or
consolidation of any other investment company with the Fund or its acquisition,
by purchase or otherwise, of all or substantially all of the assets of any
investment company or substantially all the outstanding shares of any such
company and such right shall not apply to Class B Shares that may be offered by
the Fund to shareholders by virtue of their being holders of Class B Shares of
the Fund, including Class B Shares to be purchased through reinvestment of
income dividends and capital gains distributions.
6. Public Offering Price. All Class B Shares offered and sold to
investors by you will be offered and sold at the public offering price for that
class of shares. The public offering price for all accepted subscriptions for
Class B Shares will be the net asset value per Class B Share, as determined by
the Fund in accordance with the Declaration of Trust, as now in effect or as it
may be amended, next after the order is accepted by you.
7. Suspension of Sales. If and whenever the determination of net asset
value is suspended and until such suspension is terminated, no further orders
for Class B Shares shall be accepted by you except unconditional orders placed
with you before you had knowledge of the suspension. In addition, the Fund
reserves the right to suspend sales and your authority to accept orders for
Class B Shares on behalf of the Fund if, in the judgment of the Fund, it is in
the best interests of the Fund to do so, such suspension to continue for such
period as may be determined by the Fund; and in that event, no Class B Shares
will be sold by you on behalf of the Fund while such suspension remains in
effect except for Class B Shares necessary to cover unconditional orders
accepted by you before you had knowledge of the suspension.
8. Suspension, Termination or Limitation of Portfolios. You acknowledge
that the Fund may, at any time such action is deemed desirable, suspend or
terminate sales of Class B Shares of a Portfolio and that upon your receipt of
notice of such action by the Fund you will, for such period as determined by the
Fund, accept no further orders for Class B Shares of that Portfolio except
unconditional orders placed with you before you had knowledge of such action.
You acknowledge further that the Fund may from time to time set upper and lower
limits on the number of Class B Shares of a Portfolio for which a purchaser may
subscribe and may limit sales of Class B Shares of a Portfolio to their existing
shareholders.
9. Portfolio Transactions. Securities may be bought or sold for the Fund
by or through you and you may participate directly or indirectly in brokerage
commissions or "spread" in respect of transactions in securities of the Fund;
provided, however, that all sums of money received by you as a result of such
purchases and sales or as a result of such participation must, after
reimbursement of your actual expenses in connection with such activity, be paid
over by you to or for the benefit of the Fund.
3
<PAGE>
10. Expenses.
(a) The Fund shall pay or arrange for the payment of all fees and
expenses:
(1) in connection with the preparation, setting in type and
filing of any registration statement and prospectus under the
Securities Act and/or the Investment Company Act, and any
amendments or supplements thereto that may be made from time to
time;
(2) in connection with the registration and qualification of
Class B Shares for sale in the various jurisdictions in which the
Fund shall determine it advisable to qualify such Class B Shares
for sale (including registering the Fund as a broker or dealer or
any officer of the Fund or other person as agent or salesman of
the Fund in any state);
(3) of preparing, setting in type, printing and mailing any
notice, proxy statement, report, prospectus or other
communication to Class B shareholders of the Fund in their
capacity as such;
(4) of preparing, setting in type, printing and mailing
prospectuses annually to existing Class B shareholders;
(5) in connection with the issue and transfer of Class B Shares
resulting from the acceptance by you of orders to purchase Class
B Shares placed with you by investors, including the expenses of
printing and mailing confirmations of such purchase orders and
the expenses of printing and mailing a prospectus included with
the confirmation of such orders;
(6) of any issue taxes or any initial transfer taxes;
(7) of that portion of WATS (or equivalent) telephone lines other
than the portion allocated to you in this paragraph 10;
(8) of wiring funds in payment of Class B Share purchases or in
satisfaction of redemption or repurchase requests, unless such
expenses are paid for by the investor or shareholder who
initiates the transaction;
(9) of that portion of the cost of printing business reply
envelopes allocated to the Fund on the basis of use by existing
shareholders to place redemption requests or to request
information;
(10) of postage for all business reply envelopes;
4
<PAGE>
(11) of that portion of one or more CRT terminals connected with
the computer facilities of the transfer agent and used by the
Fund to gain access to its shareholder records, allocated on the
basis of such use;
(12) permitted to be paid or assumed by the Fund pursuant to a
plan ("12b-1 Plan") adopted by the Fund in conformity with the
requirements of Rule 12b-1 under the Investment Company Act
("Rule 12b-1") or any successor rule, notwithstanding any other
provision to the contrary herein; and
(13) not specifically allocated to you hereunder.
(b) You shall pay or arrange for the payment of all fees and
expenses, subject to the Fund reimbursing you for such fees and
expenses as may be permitted by the Fund pursuant to the Rule 12b-1
Plan in effect for the Class B Shares:
(1) of printing and distributing any prospectuses or reports
prepared for your use in connection with the offering of Class B
Shares to the public;
(2) of preparing, setting in type, printing and mailing any other
literature used by you in connection with the offering of Class B
Shares to the public;
(3) of advertising in connection with the offering of Class B
Shares to the public;
(4) incurred in connection with your registration as a broker or
dealer or the registration or qualification of your officers,
directors, agents or representatives under Federal and state
laws;
(5) of that portion of WATS (or equivalent) telephone lines,
allocated to you on the basis of use by investors (but not
shareholders) who request information about or prospectuses of
the Fund;
(6) of that portion of printing business reply envelopes,
allocated to you on the basis of use by investors and
shareholders to purchase Class B Shares; and
(7) of any activity which is primarily intended to result in the
sale of Class B shares issued by the Fund.
Expenses which are to be allocated between you and the Fund shall be
allocated pursuant to reasonable procedures or formulae mutually agreed upon,
which procedures or formulae shall to the extent practicable reflect studies of
relevant empirical data.
5
<PAGE>
11. Selected Dealers. In connection with the offering of shares to the
separate accounts of life insurance companies, or to the extent that the offer
of variable life insurance policies and variable annuity contracts the premiums
for which are allocated to such separate accounts which invest in Class B Shares
may be deemed to include an offer of Class B Shares, you may enter into
agreements with other broker-dealers registered under the Securities Exchange
Act of 1934, as amended, provided that any such agreement shall be subject to
the approval of the Trustees of the Fund.
12. Conformity with Law. You agree that in selling Class B Shares you
will duly conform in all respects with the laws of the United States and any
jurisdiction in which such Class B Shares may be offered for sale by you
pursuant to this Agreement and to the rules and regulations of the National
Association of Securities Dealers, Inc., of which you are a member.
13. Independent Contractor. You shall be an independent contractor and
neither you nor any of your officers or employees is or shall be an employee of
the Fund in the performance of your duties hereunder. You shall be responsible
for your own conduct and the employment, control and conduct of your agents and
employees and for injury to such agents or employees or to others through your
agents or employees. You assume full responsibility for your agents or employees
under applicable statutes and agree to pay all employee taxes thereunder.
14. Services Not Exclusive. Except to the extent necessary to perform
your obligations hereunder, nothing herein shall be deemed to limit or restrict
your right or that of any of your affiliates or employees, including any of your
employees who may also be a Trustee, officer or employee of the Fund, to engage
in any other business or to devote time and attention to the distribution or
other related aspects of any other registered investment company or to render
services of any kind to any other corporation, firm, individual or association.
15. Indemnification. You agree to indemnify and hold harmless the Fund
and each of its Trustees and officers and each person, if any, who controls the
Fund within the meaning of Section 15 of the Securities Act against any and all
losses, claims, damages, liabilities or litigation (including legal and other
expenses) to which the Fund or such Trustees, officers or controlling person may
become subject under such Act, under any other statute, at common law or
otherwise, arising out of the acquisition of any Shares by any person which (i)
may be based upon any wrongful act by you or any of your employees or
representatives, or (ii) may be based upon any untrue statement or alleged
untrue statement of a material fact contained in a registration statement or
prospectus covering Shares or any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading if
such a statement or omission was made in reliance upon information furnished to
the Fund by you, or (iii) may be incurred or arise by reason of your acting as
the Fund's agent instead of purchasing and reselling Shares as
6
<PAGE>
principal in distributing Shares to the public, provided, however, that in no
case (i) is your indemnity in favor of a Trustee or officer or any other person
deemed to protect such Trustee or officer or other person against any liability
to which any such person would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence in the performance of his duties or
by reason of his reckless disregard of obligations and duties under this
Agreement or (ii) are you to be liable under your indemnity agreement contained
in this paragraph with respect to any claim made against the Fund or any person
indemnified unless the Fund or such person, as the case may be, shall have
notified you in writing within a reasonable time after the summons or other
first legal process giving information of the nature of the claims shall have
been served upon the Fund or upon such person (or after the Fund or such person
shall have received notice of such service on any designated agent), but failure
to notify you of any such claim shall not relieve you from any liability which
you have to the Fund or any person against whom such action is brought otherwise
than on account of your indemnity agreement contained in this paragraph. You
shall be entitled to participate, at your own expense, in the defense, or, if
you so elect, to assume the defense of any suit brought to enforce any such
liability, but, if you elect to assume the defense, such defense shall be
conducted by counsel chosen by you and satisfactory to the Fund, to its officers
and Trustees, or to any controlling person or persons, defendant or defendants
in the suit. In the event that you elect to assume the defense of any such suit
and retain such counsel, the Fund, such officers and Trustees or controlling
person or persons, defendant or defendants in the suit, shall bear the fees and
expenses of any additional counsel retained by them, but, in case you do not
elect to assume the defense of any such suit, you will reimburse the Fund, such
officers and Trustees or controlling person or persons, defendant or defendants
in such suit, for the reasonable fees and expenses of any counsel retained by
them. You agree promptly to notify the Fund of the commencement of any
litigation or proceedings against it in connection with the issue and sale of
any Shares.
The Fund agrees to indemnify and hold harmless you and each of your
directors and officers and each person, if any, who controls you within the
meaning of Section 15 of the Securities Act against any and all losses, claims,
damages, liabilities or litigation (including legal and other expenses) to which
you or such directors, officers or controlling person may become subject under
such Act, under any other statute, at common law or otherwise, arising out of
the acquisition of any Shares by any person which (i) may be based upon any
wrongful act by the Fund or any of its employees or representatives, or (ii) may
be based upon any untrue statement or alleged untrue statement of a material
fact contained in a registration statement or prospectus covering Shares or any
amendment thereof or supplement thereto or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading if such statements or omission was made in
reliance upon information furnished to you by the Fund; provided, however, that
in no case (i) is the Fund's indemnity in favor of a director or officer or any
other person deemed to protect such director or officer or other person against
any liability to which any such person would otherwise be subject by reason of
willful misfeasance, bad faith, or gross negligence in the performance of his
duties or by reason of his reckless disregard of obligations and duties under
this
7
<PAGE>
Agreement or (ii) is the Fund to be liable under its indemnity agreement
contained in this paragraph with respect to any claims made against you or any
such director, officer or controlling person unless you or such director,
officer or controlling person, as the case may be, shall have notified the Fund
in writing within a reasonable time after the summons or other first legal
process giving information of the nature of the claim shall have been served
upon you or upon such director, officer or controlling person (or after you or
such director, officer or controlling person shall have received notice of such
service on any designated agent), but failure to notify the Fund of any claim
shall not relieve it from any liability which it may have to the person against
whom such action is brought otherwise than on account of its indemnity agreement
contained in this paragraph. The Fund will be entitled to participate at its own
expense in the defense, or, if it so elects, to assume the defense of any suit
brought to enforce any such liability, but if the Fund elects to assume the
defense, such defense shall be conducted by counsel chosen by it and
satisfactory to you, its directors, officers or controlling person or persons,
defendant or defendants, in the suit. In the event the Fund elects to assume the
defense of any such suit and retain such counsel, you, your directors, officers
or controlling person or persons, defendant or defendants in the suit, shall
bear the fees and expenses of any additional counsel retained by them, but, in
case the Fund does not elect to assume the defense of any such suit, it will
reimburse you or such directors, officers or controlling person or persons,
defendant or defendants in the suit, for the reasonable fees and expenses of any
counsel retained by them. The Fund agrees promptly to notify you of the
commencement of any litigation or proceedings against it or any of its officers
or Trustees in connection with the issuance or sale of any Shares.
16. Authorized Representations. The Fund is not authorized to give any
information or to make any representations on behalf of you other than the
information and representations contained in a registration statement or
prospectus covering Class B Shares, as such registration statement and
prospectus may be amended or supplemented from time to time, or reports prepared
for distribution to shareholders of the Fund. You are not authorized to give any
information or to make any representations on behalf of the Fund in connection
with the sale of Class B Shares other than the information and representations
contained in a registration statement or prospectus covering Class B Shares, as
such registration statement and prospectus may be amended or supplemented from
time to time, or reports prepared for distribution to shareholders of the Fund.
17. Duration and Termination of the Agreement. This Agreement shall
become effective upon the effective date of the Fund's post-effective amendment
to its registration statement under Securities Act for Class B Shares and,
unless sooner terminated as provided herein, will remain in effect until
September 30, 1999 and from year to year thereafter, but only so long as such
continuance is specifically approved at least annually by the vote of a majority
of the Trustees of the Fund who are not interested persons of you or of the
Fund, cast in person at a meeting called for the purpose of voting on such
approval, and by vote of the Trustees or of a majority of the outstanding voting
securities of the Fund. This Agreement may, on 60 days' written notice, be
terminated at any time, without the payment of any penalty, by the Trustees, by
a vote of a majority of the
8
<PAGE>
outstanding voting securities of Class B Shares of the Fund, or by you. This
Agreement will automatically terminate in the event of its assignment. In
interpreting the provisions of this paragraph 17, the definitions contained in
Section 2(a) of the Investment Company Act (particularly the definitions of
"interested person," "assignment" and "majority of the outstanding voting
securities"), shall be applied.
18. Amendment of this Agreement. No provisions of this Agreement may be
changed, waived, discharged or terminated orally, but only by instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. If the Fund should at any time deem it
necessary or advisable in the best interests of the Fund that any amendment of
this Agreement be made in order to comply with the recommendations or
requirements of the Securities and Exchange Commission or other governmental
authority or to obtain any advantage under state or federal tax laws and should
notify you of the form of such amendment, and the reasons therefor, and if you
should decline to assent to such amendment, the Fund may terminate this
Agreement forthwith. If you should at any time request that a change be made in
the Fund's Declaration of Trust or By-laws or in the Fund's methods of doing
business, in order to comply with any requirements of federal law or regulations
of the Securities and Exchange Commission or of a national securities
association of which you are or may be a member relating to the sale of Class B
Shares, and the Fund should not make such necessary change within a reasonable
time, you may terminate this Agreement forthwith.
19. Miscellaneous. The captions in this Agreement are included for the
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement may be executed simultaneously in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument. The name "Scudder Variable Life Investment Fund" is
the designation of the Trustees for the time being under a Declaration of Trust
dated December 11, 1997, and all persons dealing with the Fund must look solely
to the property of the Fund for the enforcement of any claims against the Fund
as neither the Trustees, officers, employees, agents or shareholders assume any
personal liability for obligations entered into on behalf of the Fund, nor shall
resort be had to their private property for the satisfaction of any obligation
or claim or otherwise in connection with the affairs of the Fund.
9
<PAGE>
If you are in agreement with the foregoing, please sign the form of
acceptance on the accompanying counterpart of this letter and return such
counterpart to the Fund, whereupon this letter shall become a binding contract.
Yours very truly,
SCUDDER VARIABLE LIFE
INVESTMENT FUND
By: /s/ Thomas F. McDonough
---------------------------
Thomas F. McDonough
Vice President
The foregoing Agreement is hereby accepted as of the date thereof.
SCUDDER INVESTOR SERVICES, INC.
By: /s/ Daniel Pierce
---------------------------
Daniel Pierce
Vice President
10
