Filed with the Securities and Exchange Commission on April 30, 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. 27
---- / X /
And/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
Amendment No. 31 / 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)
/ / 75 days after filing pursuant to paragraph (a) (2)
/ X / On May 1, 1999 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 as
funding vehicles for certain variable life insurance policies and variable
annuity contracts offered by the separate accounts of participating insurance
companies. The portfolios are:
o Money Market Portfolio
o Bond Portfolio
o Balanced Portfolio
o Growth and Income Portfolio
o Capital Growth Portfolio
o Large Company Growth Portfolio
o Small Company Growth Portfolio
o Global Discovery Portfolio
o International Portfolio
Prospectus
May 1, 1999
This prospectus should be read in conjunction with the variable life insurance
policy or variable annuity contract prospectus.
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 life insurance policies and variable annuity
contracts.
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.
Class A shares of beneficial interest
Class B shares of beneficial interest
<PAGE>
Contents
1 Investment Concept of the Fund
- --------------------------------------------------------------------------------
1 Portfolio Descriptions
- --------------------------------------------------------------------------------
An overview of each 1 Money Market Portfolio
portfolio's goal and
strategy, main risks, 3 Bond Portfolio
performance and expenses
5 Balanced Portfolio
8 Growth and Income Portfolio
10 Capital Growth Portfolio
12 Large Company Growth Portfolio
13 Small Company Growth Portfolio
15 Global Discovery Portfolio
18 International Portfolio
21 Financial highlights
27 About the Portfolios
- --------------------------------------------------------------------------------
Additional information 27 Investment adviser
that you should know about
the portfolios 27 Portfolio management
30 Distributions
30 Taxes
31 Shareholder communications
31 Distributor
31 Buying and selling shares
32 Share price
<PAGE>
Investment Concept of the Fund
Scudder Variable Life Investment 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. The Fund is intended to be a
funding vehicle for certain 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 of each portfolio,
except for Money Market Portfolio which does not offer separate classes of
shares. Class A shares are offered at net asset value. Class B shares are
offered at net asset value and are subject to a Rule 12b-1 fee.
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.
Individual variable annuity contract holders and variable life insurance
policyholders are not the "shareholders" of the Fund. Rather, certain
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. The variable annuity contracts and the variable life insurance
policies are described in separate prospectuses issued by participating
insurance companies. The Fund assumes no responsibility for such prospectuses.
An investment in the portfolios is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency.
Portfolio Descriptions
Money Market Portfolio
Investment objective
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 net asset value of $1.00 per
share. Unless otherwise indicated, the portfolio's investment objective and
policies may be changed without a vote of shareholders.
Main investment strategies
The portfolio pursues its objective by investing principally in short-term debt
securities issued by:
o U.S. corporations and financial institutions; and
o the U.S. government and its agencies.
The portfolio purchases money market securities such as U.S. Treasury, agency
and instrumentality obligations, finance company and corporate commercial paper,
bankers' acceptances and certificates of deposit of certain foreign and domestic
banks, including foreign branches of domestic banks, which involve different
risks than those associated with investments in certificates of deposit of
domestic banks, and corporate obligations. The portfolio generally invests only
in U.S. dollar-denominated 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 portfolio
management team believes to be of comparable quality. In addition, the portfolio
management team seeks through its own credit analysis to limit investments to
high quality instruments presenting minimal credit risks. The portfolio
purchases only securities with a maturity of one year or less and maintains an
average dollar-weighted maturity of 90 days or less.
1
<PAGE>
In selecting securities, the portfolio management team actively manages the
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, maturity and
diversification requirements applicable to money market funds under federal
securities regulations.
Of course, there can be no guarantee that by following these strategies, the
portfolio will achieve its objective.
Other investments
To a more limited extent, the portfolio may, but is not required to, make the
following 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. 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 utilize other investments and investment techniques that may
impact portfolio performance.
Risk management strategies
The portfolio manages credit risk by investing only in high quality securities,
whose issuers are considered by the portfolio management team to be unlikely to
default based on their credit rating. The portfolio also diversifies its
portfolio across many industry sectors and issuers.
Main risks
As with most money market funds, the major factor affecting the portfolio's
performance is short-term interest rates. If short-term interest rates fall, the
portfolio's yield is also likely to fall. The portfolio management team's skill
in choosing appropriate investments for the portfolio will determine in large
part the portfolio's ability to achieve its investment objective. The portfolio
may have lower returns than other mutual funds that invest in lower-quality
securities. It is also possible that securities held by the portfolio could be
downgraded in credit rating or go into default.
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.
There are market and investment risks with any security and the value of an
investment in the portfolio will fluctuate over time and it is possible to lose
money invested in the portfolio.
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.
This information does not reflect charges and fees associated with a separate
account that invests in the portfolio or any variable life insurance policy or
variable annuity contract for which the portfolio is an investment option. These
charges and fees will reduce returns. Of course, past performance is not
necessarily an indication of future performance.
2
<PAGE>
Total returns for years ended December 31
THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART TITLE:
Total returns for years ended December 31
BAR CHART DATA:
Year %
---- ----
1989 8.84
1990 7.83
1991 5.81
1992 3.33
1993 2.54
1994 3.72
1995 5.65
1996 5.09
1997 5.25
1998 5.29
For the periods included in the bar chart, the portfolio's highest return for a
calendar quarter was 2.27% (the second quarter of 1989), and the portfolio's
lowest return for a calendar quarter was 0.59% (the second quarter of 1993).
The portfolio's year-to-date total return as of March 31, 1999 was 1.16%.
Average annual total returns
For periods ended December 31, 1998
- -------------------------------------------------------
One Year 5.29%
Five Years 5.00%
Ten Years 5.32%
- -------------------------------------------------------
7-Day Annualized Yield
On December 31, 1998, the portfolio's 7-day annualized yield was 4.97%.
Bond Portfolio
Investment objective
Bond Portfolio pursues a policy of investing for a high level of income
consistent with a high quality portfolio of debt securities. Unless otherwise
indicated, the portfolio's investment objective and policies may be changed
without a vote of shareholders.
Main investment 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 assets in securities rated
within the three highest rating categories (AAA, AA, A or Aaa, Aa, A) by
Standard & Poor's Corporation or Moody's Investors Service or, if unrated, of
comparable quality at the time of purchase. The portfolio may also invest up to
20% of its assets in low-rated (or unrated equivalents) high yield/high risk
securities (i.e., those rated below BBB or Baa), commonly referred to as "junk
bonds."
Of course, there can be no guarantee that by following these strategies, the
portfolio will achieve its objective.
3
<PAGE>
Other investments
To a more limited extent, the portfolio may, but is not required to, make the
following investments:
The portfolio may invest in preferred stocks, indexed securities and securities
of real estate investment trusts. In addition, the portfolio may invest up to
20% of its assets in non-U.S. dollar-denominated foreign debt securities. The
portfolio may utilize other investments and investment techniques that may
impact portfolio performance including, but not limited to, options, futures and
other derivatives (financial instruments that derive their value from other
securities or commodities, or that are based on indices).
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, but is not required to, use certain derivatives in an attempt
to manage risk. The use of derivatives could magnify losses.
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.
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 (i.e., those rated below BBB or
Baa) may have a greater risk of default, may be in impaired financial condition
and the bonds 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.
Fixed-income securities are also subject to prepayment risk. Prepayment risk is
commonly associated with pooled debt securities, such as mortgage-backed
securities and asset-backed securities, but may affect other debt securities as
well. When the underlying debt obligations are prepaid ahead of schedule, the
return on the security will be lower than expected. Prepayment rates usually
increase when interest rates are falling.
A portion of the portfolio's assets may be invested outside the United States.
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.
The portfolio management team's skill in choosing appropriate investments for
the portfolio will determine in large part the portfolio's ability to achieve
its investment objective.
There are market and investment risks with any security and the value of an
investment in the portfolio will fluctuate over time and it is possible to lose
money invested in the portfolio.
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. This
information does not reflect charges and fees associated with a separate account
that invests in the portfolio or any variable life insurance policy or variable
annuity contract for which the portfolio is an investment option. These charges
and fees will reduce returns. Of course, past performance is not necessarily an
indication of future performance.
4
<PAGE>
The information provided in the chart is for Class A shares and does not reflect
sales charges, which reduce return.
Total returns for years ended December 31*
THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART TITLE:
Total returns for years ended December 31*
BAR CHART DATA:
Year %
---- ----
1989 11.65
1990 8.06
1991 17.61
1992 7.01
1993 12.38
1994 -4.79
1995 18.17
1996 2.82
1997 9.10
1998 6.57
For the periods included in the bar chart, the portfolio's highest return for a
calendar quarter was 6.32% (the third quarter of 1991), and the portfolio's
lowest return for a calendar quarter was ?3.89% (the first quarter of 1994).
The portfolio's year-to-date total return as of March 31, 1999 was -0.16%.
Average annual total returns*
<TABLE>
<CAPTION>
For periods ended December 31, 1998 Class A Lehman Brothers Aggregate Bond Index
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
One Year 6.57% 8.69%
Five Years 6.11% 7.27%
Ten Years 8.66% 9.26%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* As of December 31, 1998, there were no Class B shares of the portfolio
outstanding. Returns for Class B shares of the portfolio would differ from
those of Class A shares of the portfolio to the extent that the expenses of
the classes differ.
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.
Balanced Portfolio
Investment objective
Balanced 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. Unless otherwise indicated, the portfolio's
investment objective and policies may be changed without a vote of shareholders.
Main 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. In managing the portfolio, the portfolio management team 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 portfolio management team will generally make incremental
adjustments to the portfolio's asset allocation.
5
<PAGE>
In selecting equity securities, the portfolio management team seeks out
companies of above-average financial quality that also appear to offer
opportunities for growth in earnings, cash flow or assets relative to the
overall market as defined by the Russell 1000 Growth Index. Typically, medium-
to large-sized companies (those with annual revenues or market capitalizations
of at least $1 billion) will meet these criteria. The portfolio invests
primarily in U.S. companies but may also invest in the equity securities of
foreign companies.
To enhance income and stability, the portfolio will normally invest 25% to 50%
of its net 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 by a nationally recognized
rating association (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 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.
Of course, there can be no guarantee that by following these strategies, the
portfolio will achieve its objective.
Other investments
To a more limited extent, the portfolio may, but is not required to, utilize
other investments and investment techniques that may impact portfolio
performance including, but not limited to, options, futures and other
derivatives (financial instruments that derive their value from other securities
or commodities, or that are based on indices).
Risk management strategies
The portfolio manages risk in its stock allocation by diversifying widely among
industries and companies.
The portfolio's bond investments are diversified by maturity, credit quality and
industry.
For temporary defensive purposes, the portfolio may invest up to 100% of its
assets in cash and in money market and short-term instruments. In such a case,
the portfolio would not be pursuing, and may not achieve, its investment
objective.
The portfolio may, but is not required to, use certain derivatives in an attempt
to manage risk. The use of derivatives could magnify losses.
Main risks
The primary factor affecting the portfolio's performance is stock market
movements. Stock market movements will affect the portfolio's share prices on a
daily basis and the portfolio's returns and net asset value will go up and down.
Declines are possible both in the overall stock market and in the type of
securities held by the portfolio.
An investment in the common stock of a company represents a proportionate
ownership interest in that company. Therefore, the portfolio participates in the
success or failure of any company in which it holds stock. Compared to other
classes of financial assets, such as bonds or cash equivalents, common stocks
have historically offered the greatest potential for gain on your investment.
However, the market value of common stocks can fluctuate significantly,
reflecting such things as the business performance of the issuing company,
investors' perceptions of the company or the overall stock market and general
economic or financial market.
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.
A portion of the portfolio's assets may be invested outside the United States.
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.
6
<PAGE>
The portfolio management team's skill in choosing appropriate investments for
the portfolio will determine in large part the portfolio's ability to achieve
its investment objective. The portfolio's asset allocation could prove to be
less appropriate to market conditions than other balanced mutual funds and the
portfolio management team's attempts to manage downside risk may also reduce
performance in a strong market.
There are market and investment risks with any security and the value of an
investment in the portfolio will fluctuate over time and it is possible to lose
money invested in the portfolio.
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. This
information does not reflect charges and fees associated with a separate account
that invests in the portfolio or any variable life insurance policy or variable
annuity contract for which the portfolio is an investment option. These charges
and fees will reduce returns. Of course, past performance is not necessarily an
indication of future performance.
The information provided in the chart is for Class A shares and does not reflect
sales charges, which reduce return.
Total returns for years ended December 31*
THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART TITLE:
Total returns for years ended December 31*
BAR CHART DATA:
Year %
---- ----
1989 19.50
1990 -1.92
1991 26.93
1992 6.96
1993 7.45
1994 -2.05
1995 26.67
1996 11.89
1997 24.21
1998 23.19
For the periods included in the bar chart, the portfolio's highest return for a
calendar quarter was 15.51% (the fourth quarter of 1998), and the portfolio's
lowest return for a calendar quarter was ?10.03% (the third quarter of 1990).
The portfolio's year-to-date total return as of March 31, 1999 was 4.09%.
Average annual total returns*
<TABLE>
<CAPTION>
S&P 500 Index (60%) and
For periods ended Lehman Brothers
December31, 1998 Class A S&P 500 Index Aggregate Bond Index (40%)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
One Year 23.19% 28.58% 20.62%
Five Years 16.26% 24.06% 17.39%
Ten Years 13.77% 19.21% 15.35%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* As of December 31, 1998, there were no Class B shares of the portfolio
outstanding. Returns for Class B shares of the portfolio would differ from
those of Class A shares of the portfolio to the extent that the expenses of
the classes differ.
The Standard and Poor's 500 Composite Stock Price Index (S&P 500 Index) 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 Over-The-Counter market.
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.
7
<PAGE>
Growth and Income Portfolio
Investment objective
Growth and Income Portfolio seeks long-term growth of capital, current income
and growth of income. Unless otherwise indicated, the portfolio's investment
objective and policies may be changed without a vote of shareholders.
Main investment strategies
The portfolio pursues its goal by investing primarily in dividend-paying 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 do not pay current dividends but which offer prospects for growth of
capital and future income. The portfolio can invest in securities of companies
with varying market capitalizations.
In managing the portfolio, the portfolio management team employs a "relative
yield" discipline, meaning that it focuses the portfolio's 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 Price Index.
The portfolio will sell securities if their dividend yields fall below 80% of
the benchmark average. In addition to providing above-average yield, companies
in whose securities the portfolio may invest 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 non-U.S. dollar-denominated foreign securities.
Of course, there can be no guarantee that by following these strategies, the
portfolio will achieve its objective.
Other investments
To a more limited extent, the portfolio may, but is not required to, utilize
other investments and investment techniques that may impact portfolio
performance including, but not limited to, options, futures and other
derivatives (financial instruments that derive their value from other securities
or commodities, or that are based on indices).
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.
For temporary defensive purposes, 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 investment objective.
The portfolio may, but is not required to, use certain derivatives in an attempt
to manage risk. The use of derivatives could magnify losses.
Main risks
The primary factor affecting the portfolio's performance is stock market
movements. Stock market movements will affect the portfolio's share prices on a
daily basis and the portfolio's returns and net asset value will go up and down.
Declines are possible both in the overall stock market and in the type of
securities held by the portfolio.
An investment in the common stock of a company represents a proportionate
ownership interest in that company. Therefore, the portfolio participates in the
success or failure of any company in which it holds stock. Compared to other
classes of financial assets, such as bonds or cash equivalents, common stocks
have historically offered the greatest potential for gain on your investment.
However, the market value of common stocks can fluctuate significantly,
reflecting such things as the business performance of the
8
<PAGE>
issuing company, investors' perceptions of the company or the overall stock
market and general economic or financial market.
A portion of the portfolio's assets may be invested outside the United States.
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.
The portfolio management team's skill in choosing appropriate investments for
the portfolio will determine in large part the portfolio's ability to achieve
its investment objective. The relative yield strategy used by the portfolio or
specific investments may not perform as well as expected.
There are market and investment risks with any security and the value of an
investment in the portfolio will fluctuate over time and it is possible to lose
money invested in the portfolio.
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. This
information does not reflect charges and fees associated with a separate account
that invests in the portfolio or any variable life insurance policy or variable
annuity contract for which the portfolio is an investment option. These charges
and fees will reduce returns. Of course, past performance is not necessarily an
indication of future performance.
The information provided in the chart is for Class A shares and does not reflect
sales charges, which reduce return.
Total returns for years ended December 31*
THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART TITLE:
Total returns for years ended December 31*
BAR CHART DATA:
Year %
---- ----
1995 31.74
1996 22.17
1997 30.47
1998 7.18
- -----------
* Total returns for Class B shares of the portfolio would differ from those
of Class A shares of the portfolio to the extent that the expenses of the
classes differ.
For the periods included in the bar chart, the portfolio's highest return for a
calendar quarter was 15.86% (the second quarter of 1997), and the portfolio's
lowest return for a calendar quarter was ?12.58% (the third quarter of 1998).
The portfolio's year-to-date total return as of March 31, 1999 was -0.02%.
Average annual total returns
<TABLE>
<CAPTION>
For periods ended December 31, 1998 Class A S&P 500 Index Class B S&P 500 Index
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One Year 7.18% 28.58% 6.95% 28.58%
Since Class Inception** 20.20% 26.69%*** 17.80% 31.38%+
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
** Inception dates are May 2, 1994 for Class A shares and May 1, 1997 for
Class B shares.
*** Index comparison begins on April 30, 1994 for Class A shares.
+ Index comparison begins on April 30, 1997 for Class B shares.
9
<PAGE>
The Standard and Poor's 500 Composite Stock Price Index (S&P 500 Index) 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 Over-The-Counter market.
Index returns assume reinvestment of dividends and, unlike portfolio returns, do
not reflect any fees or expenses.
Capital Growth Portfolio
Investment objective
Capital Growth Portfolio seeks to maximize long-term capital growth through a
broad and flexible investment program. Unless otherwise indicated, the
portfolio's investment objective and policies may be changed without a vote of
shareholders.
Main investment strategies
The portfolio invests in marketable securities, principally common stocks and
preferred stocks. In selecting stocks for the portfolio, the portfolio
management team 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, new and improved
distribution techniques or new services, 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 due to factors that the portfolio's
management team believes 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. 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 non U.S. dollar-denominated
equity securities of foreign issuers.
Of course, there can be no guarantee that by following these strategies, the
portfolio will achieve its objective.
Other investments
To a more limited extent, the portfolio may, but is not required to, make the
following 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 (AAA, AA, A, BBB or Aaa, Aa, A, Baa) by an
independent rating agency or, if unrated, considered of comparable quality,
although the portfolio may invest up to 5% of its net assets in low-rated high
yield/high risk securities (i.e., those rated below BBB or Baa), commonly
referred to as "junk bonds."
The portfolio may utilize other investments and investment techniques that may
impact portfolio performance including, but not limited to, options, futures and
other derivatives (financial instruments that derive their value from other
securities or commodities, or that are based on indices).
Risk management strategies
The portfolio manages risk by diversifying widely among market sectors and
companies.
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.
10
<PAGE>
The portfolio may, but is not required to, use certain derivatives in an attempt
to manage risk. The use of derivatives could magnify losses.
Main risks
The primary factor affecting the portfolio's performance is stock market
movements. Stock market movements will affect the portfolio's share prices on a
daily basis and the portfolio's returns and net asset value will go up and down.
Declines are possible both in the overall stock market and in the type of
securities held by the portfolio.
An investment in the common stock of a company represents a proportionate
ownership interest in that company. Therefore, the portfolio participates in the
success or failure of any company in which it holds stock. Compared to other
classes of financial assets, such as bonds or cash equivalents, common stocks
have historically offered the greatest potential for gain on your investment.
However, the market value of common stocks can fluctuate significantly,
reflecting such things as the business performance of the issuing company,
investors' perceptions of the company or the overall stock market and general
economic or financial market.
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 portfolio management team
believes is its full value. It may even decrease in value.
A portion of the portfolio's assets may be invested outside the United States.
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.
There are market and investment risks with any security and the value of an
investment in the portfolio will fluctuate over time and it is possible to lose
money invested in the portfolio.
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. This
information does not reflect charges and fees associated with a separate account
that invests in the portfolio or any variable life insurance policy or variable
annuity contract for which the portfolio is an investment option. These charges
and fees will reduce returns. Of course, past performance is not necessarily an
indication of future performance.
The information provided in the chart is for Class A shares and does not reflect
sales charges, which reduce return.
Total returns for years ended December 31*
THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART TITLE:
Total returns for years ended December 31*
BAR CHART DATA:
Year %
---- ----
1989 22.75
1990 -7.47
1991 39.55
1992 6.42
1993 20.88
1994 -9.67
1995 28.65
1996 20.13
1997 35.76
1998 23.23
- -----------
* Total returns for Class B shares of the portfolio would differ from those
of Class A shares of the portfolio to the extent that the expenses of the
classes differ.
11
<PAGE>
For the periods included in the bar chart, the portfolio's highest return for a
calendar quarter was 25.80% (the fourth quarter of 1998), and the portfolio's
lowest return for a calendar quarter was ?17.29% (the third quarter of 1990).
The portfolio's year-to-date total return as of March 31, 1999 was 3.78%.
Average annual total returns
<TABLE>
<CAPTION>
For periods ended December 31, 1998 Class A S&P 500 Index Class B S&P 500 Index
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One Year 23.23% 28.58% 22.94% 28.58%
Five Years 18.49% 24.06% - -
Ten Years 16.89% 19.21% - -
Since Class Inception** - - 25.49% 28.39%***
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
** Inception date is May 12, 1997 for Class B shares.
*** Index comparison begins on May 31, 1997 for Class B shares.
The Standard and Poor's 500 Composite Stock Price Index (S&P 500 Index) 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 Over-The-Counter market.
Index returns assume reinvestment of dividends and, unlike portfolio returns, do
not reflect any fees or expenses.
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. Unless otherwise indicated, the portfolio's investment
objective and policies may be changed without a vote of shareholders.
Main investment strategies
The portfolio pursues its investment objective by investing at least 65% of its
assets in equity securities issued by large-sized domestic companies that the
portfolio management team believes offer above-average appreciation potential.
These companies typically have market capitalizations 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 Stock 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 portfolio management team 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 portfolio management team 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 portfolio management team
weighs four elements of business risk. These factors are the portfolio
management team'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, when 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.
Of course, there can be no guarantee that by following these strategies, the
portfolio will achieve its objective.
12
<PAGE>
Other investments
To a more limited extent, the portfolio may, but is not required to, utilize
other investments and investment techniques that may impact portfolio
performance including, but not limited to, options, futures and other
derivatives (financial instruments that derive their value from other securities
or commodities, or that are based on indices).
Risk management strategies
The portfolio manages risk by diversifying widely among industries and
companies, and using disciplined security selection.
For temporary defensive purposes, 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 investment objective.
The portfolio may, but is not required to, use certain derivatives in an attempt
to manage risk. The use of derivatives could magnify losses.
Main risks
The primary factor affecting the portfolio's performance is stock market
movements. Stock market movements will affect the portfolio's share prices on a
daily basis and the portfolio's returns and net asset value will go up and down.
Declines are possible both in the overall stock market and in the type of
securities held by the portfolio.
An investment in the common stock of a company represents a proportionate
ownership interest in that company. Therefore, the portfolio participates in the
success or failure of any company in which it holds stock. Compared to other
classes of financial assets, such as bonds or cash equivalents, common stocks
have historically offered the greatest potential for gain on your investment.
However, the market value of common stocks can fluctuate significantly,
reflecting such things as the business performance of the issuing company,
investors' perceptions of the company or the overall stock market and general
economic or financial market.
The portfolio management team's skill in choosing appropriate investments for
the portfolio will determine in large part the portfolio's ability to achieve
its investment objective.
There are market and investment risks with any security and the value of an
investment in the portfolio will fluctuate over time and it is possible to lose
money invested in the portfolio.
Past performance
As this is a new portfolio, no past performance data are available.
Small Company Growth Portfolio
Investment objective
Small Company Growth Portfolio pursues long-term growth of capital by investing
primarily in equity securities issued by emerging growth companies. Unless
otherwise indicated, the portfolio's investment objective and policies may be
changed without a vote of shareholders.
Main investment strategies
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.
13
<PAGE>
In managing the 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 the portfolio
management team'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 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.
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) the company's fundamentals have deteriorated or (iii) the
portfolio is too heavily weighted in the particular stock or industry sector.
Of course, there can be no guarantee that by following these strategies, the
portfolio will achieve its objective.
Other investments
To a more limited extent, the portfolio may, but is not required to, make the
following investments:
The portfolio may also invest in the equity securities of foreign companies. The
portfolio may utilize other investments and investment techniques that may
impact portfolio performance including, but not limited to, futures, options and
other derivatives (financial instruments that derive their value from other
securities or commodities, or that are based on indices).
Risk management strategies
The portfolio manages risk by diversifying widely among industries and
companies, and using disciplined security selection.
For temporary defensive purposes, 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 investment objective.
The portfolio may, but is not required to, use certain derivatives in an attempt
to manage risk. The use of derivatives could magnify losses.
Main risks
The primary factor affecting the portfolio's performance is stock market
movements. Stock market movements will affect the portfolio's share prices on a
daily basis and the portfolio's returns and net asset value will go up and down.
Declines are possible both in the overall stock market and in the type of
securities held by the portfolio.
14
<PAGE>
An investment in the common stock of a company represents a proportionate
ownership interest in that company. Therefore, the portfolio participates in the
success or failure of any company in which it holds stock. Compared to other
classes of financial assets, such as bonds or cash equivalents, common stocks
have historically offered the greatest potential for gain on your investment.
However, the market value of common stocks can fluctuate significantly,
reflecting such things as the business performance of the issuing company,
investors' perceptions of the company or the overall stock market and general
economic or financial market.
While small company stocks have historically outperformed large company stocks,
they also have been subject to greater investment risk. The risks generally
associated with small companies include more limited product lines, markets and
financial resources, lack of management depth or experience, dependency on key
personnel and vulnerability to adverse market and economic developments.
Accordingly, the prices of small company stocks tend to be more volatile than
prices of large company stocks. Further, the prices of small company stocks are
often adversely affected by limited trading volumes and the lack of publicly
available information.
Also, because small companies normally have fewer shares outstanding and these
shares generally trade less frequently than large companies, it may be more
difficult for the fund to buy and sell significant amounts of small company
shares without having an unfavorable impact on the shares' stock market price.
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.
A portion of the portfolio's assets may be invested outside the United States.
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.
There are market and investment risks with any security and the value of an
investment in the portfolio will fluctuate over time and it is possible to lose
money invested in the portfolio.
Past performance
As this is a new portfolio, no past performance data are available.
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
located throughout the world. Unless otherwise indicated, the portfolio's
investment objective and policies may be changed without a vote of shareholders.
Main investment strategies
The portfolio invests primarily in a diversified portfolio of equity securities
of small rapidly growing companies that the portfolio management team 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
capitalization of between approximately $100 million and $4 billion. Under
normal circumstances, the portfolio invests at least 65% of its assets in the
equity securities of small companies.
Equity securities in which the portfolio primarily 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.
15
<PAGE>
The portfolio management team determines which 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; and
o the attractiveness of the country and region in which a company is located.
Of course, there can be no guarantee that by following these strategies, the
portfolio will achieve its objective.
Other investments
To a more limited extent, the portfolio may, but is not required to, make the
following 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
or AAA, AA, A, BBB, or their equivalents. The portfolio may also invest up to 5%
of its net assets in low-rated high yield/high risk bonds, (i.e., those rated
below BBB or Baa) commonly referred to as "junk bonds."
The portfolio may utilize other investments and investment techniques that may
impact portfolio performance including, but not limited to, futures, options and
other derivatives (financial instruments that derive their value from other
securities or commodities, or that are based on indices).
Risk management strategies
The portfolio attempts to manage risk by diversifying widely among regions,
industries and individual companies.
For temporary defensive purposes, 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 investment objective.
The portfolio may, but is not required to, use certain derivatives in an attempt
to manage risk. The use of derivatives could magnify losses.
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.
Foreign markets have been more volatile than the U.S. market.
As with all investments in the stock market, the portfolio's returns and net
asset value will go up and down. Stock market movements will affect the
portfolio's share price on a daily basis. Declines in value are possible both in
the overall stock market and in 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 addition, the portfolio management team's
choice of countries, market sectors or specific investments may not perform as
well as expected.
16
<PAGE>
In pursuit of higher investment returns, the 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 include such things as untested management, key personnel with varying
degrees of experience, 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.
There are market and investment risks with any security and the value of an
investment in the portfolio will fluctuate over time and it is possible to lose
money invested in the portfolio.
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. This
information does not reflect charges and fees associated with a separate account
that invests in the portfolio or any variable life insurance policy or variable
annuity contract for which the portfolio is an investment option. These charges
and fees will reduce returns. Of course, past performance is not necessarily an
indication of future performance.
The information provided in the chart is for Class A shares and does not reflect
sales charges, which reduce return.
Total returns for years ended December 31*
THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART TITLE:
Total returns for years ended December 31*
BAR CHART DATA:
Year %
---- ----
1997 12.38
1998 16.44
- -----------
* Total returns for Class B shares of the portfolio would differ from those
of Class A shares of the portfolio to the extent that the expenses of the
classes differ.
For the periods included in the bar chart, the portfolio's highest return for a
calendar quarter was 20.54% (the fourth quarter of 1998), and the portfolio's
lowest return for a calendar quarter was ?17.25% (the third quarter of 1998).
The portfolio's year-to-date total return as of March 31, 1999 was 1.74%.
Average annual total returns
<TABLE>
<CAPTION>
For periods ended Salomon Brothers World Equity Salomon Brothers World Equity
December 31, 1998 Class A Extended Market Index Class B Extended Market Index
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One Year 16.44% 5.92% 16.18% 5.92%
Since Class Inception** 12.85% 6.09%*** 18.39% 10.77%***
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
** Inception dates are May 1, 1996 for Class A shares and May 2, 1997 for
Class B shares.
*** Index comparisons begin on April 30, 1996 for Class A shares and April
30, 1997 for Class B shares.
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.
17
<PAGE>
International Portfolio
Investment objective
The International Portfolio seeks long-term growth of capital primarily through
diversified holdings of marketable foreign equity investments. Unless otherwise
indicated, the portfolio's investment objective and policies may be changed
without a vote of shareholders.
Main investment strategies
The portfolio pursues its objective by investing primarily in common stocks of
established companies, listed on foreign exchanges, which the portfolio
management team 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 United States.
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 governmental policies influencing business conditions;
o the outlook for currency relationships; and
o the range of individual investment opportunities available to the
international investor.
Of course, there can be no guarantee that by following these strategies, the
portfolio will achieve its objective.
Other investments
To a more limited extent, the portfolio may, but is not required to, make the
following 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 utilize other investments and investment techniques that may
impact portfolio performance including, but not limited to options, futures and
other derivatives (financial instruments that derive their value from other
securities or commodities, or that are based on indices).
Risk management strategies
The portfolio may, but is not required to, use certain derivatives in an attempt
to manage risk. The use of derivatives could magnify losses.
For temporary defensive purposes, the portfolio may invest up to 100% of 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. In such a case, the portfolio would not be pursuing, and may not
achieve, its investment 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
markets have been more volatile than the U.S. market. Stock market movements
will affect the portfolio's share prices on a daily basis and the portfolio's
returns and net asset value will go up and down. Declines are possible both in
the overall stock market and in the type of securities held by the portfolio.
An investment in the common stock of a company represents a proportionate
ownership interest in that company. Therefore, the portfolio participates in the
success or failure of any company in which it holds stock. Compared to other
classes of financial assets, such as bonds or cash equivalents, common stocks
18
<PAGE>
have historically offered the greatest potential for gain on your investment.
However, the market value of common stocks can fluctuate significantly,
reflecting such things as the business performance of the issuing company,
investors' perceptions of the company or the overall stock market and general
economic or financial market.
The portfolio management team's skill in choosing appropriate investments for
the portfolio will determine in large part the portfolio's ability to achieve
its investment objective. In addition, the portfolio management team's choice of
countries, market sectors or specific investments may not perform as well as
expected.
There are market and investment risks with any security and the value of an
investment in the portfolio will fluctuate over time and it is possible to lose
money invested in the portfolio.
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. This
information does not reflect charges and fees associated with a separate account
that invests in the portfolio or any variable life insurance policy or variable
annuity contract for which the portfolio is an investment option. These charges
and fees will reduce returns. Of course, past performance is not necessarily an
indication of future performance.
The information provided in the chart is for Class A shares and does not reflect
sales charges, which reduce return.
Total returns for years ended December 31*
THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART TITLE:
Total returns for years ended December 31*
BAR CHART DATA:
Year %
---- ----
1989 37.79
1990 -7.65
1991 11.45
1992 -3.08
1993 37.82
1994 -0.85
1995 11.11
1996 14.78
1997 9.07
1998 18.49
- -----------
* Total returns for Class B shares of the portfolio would differ from those
of Class A shares of the portfolio to the extent that the expenses of the
classes differ.
For the periods included in the bar chart, the portfolio's highest return for a
calendar quarter was 15.19% (the fourth quarter of 1998), and the portfolio's
lowest return for a calendar quarter was ?17.29% (the third quarter of 1990).
The portfolio's year-to-date total return as of March 31, 1999 was 2.34%.
19
<PAGE>
Average annual total returns
<TABLE>
<CAPTION>
MSCI EAFE and MSCI EAFE and
For periods ended December 31, 1998 Class A Canada Index Class B Canada Index
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One Year 18.49% 18.76% 18.28% 18.76%
Five Years 10.32% 9.21% - -
Ten Years 11.96% 5.59% - -
Since Class Inception** - - 12.27% 9.25%***
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
** Inception date is May 8, 1997 for Class B shares.
*** Index comparison begins on May 31, 1997 for Class B shares.
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.
20
<PAGE>
Financial highlights
The financial highlights tables are intended to help you understand each
portfolio's financial performance for the fiscal periods indicated. Certain
information reflects the financial results for a single portfolio share
outstanding (a) throughout each period. The total return figures represent the
rate that a shareholder in a portfolio would have earned (or lost) on an
investment in a portfolio assuming reinvestment of all distributions. This
information has been audited by PricewaterhouseCoopers LLP whose report, along
with the portfolios' financial statements, is included in the portfolios' annual
reports, which are available upon request by calling a participating insurance
company or by writing to broker/dealers offering the previously mentioned
variable annuity contracts and variable life insurance policies, or Scudder
Investor Services, Inc. collect at 617-295-1000.
Money Market Portfolio
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $1.000 $1.000 $1.000 $1.000 $1.000
Income from investment operations:
Net investment income .052 .051 .050 .055 .037
Less distributions from net investment income (.052) (.051) (.050) (.055) (.037)
Net asset value, end of period $1.000 $1.000 $1.000 $1.000 $1.000
- ---------------------------------------------------------------------------------------------------------------------------
Total Return (%) 5.29 5.25 5.09 5.65 3.72
Ratios and Supplemental Data
Net assets, end of period ($ millions) 148 103 98 80 90
Ratio of operating expenses to average daily net assets (%) .44 .46 .46 .50 .56
Ratio of net investment income to average daily net assets (%) 5.17 5.15 4.98 5.51 3.80
- ---------------------------------------------------------------------------------------------------------------------------
Bond Portfolio -- Class A shares
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $6.87 $6.73 $7.16 $6.48 $7.42
Income from investment operations:
Net investment income .43 .44 .41 .44 .43
Net realized and unrealized gain (loss) on investment transactions .01 .15 (.22) .69 (.77)
Total from investment operations .44 .59 .19 1.13 (.34)
Less distributions from:
Net investment income (.40) (.43) (.62) (.45) (.43)
Net realized gains on investment transactions (.03) (.02) -- -- (.17)
Total distributions (.43) (.45) (.62) (.45) (.60)
Net asset value, end of period $6.88 $6.87 $6.73 $7.16 $6.48
- ---------------------------------------------------------------------------------------------------------------------------
Total Return (%) 6.57 9.10 2.82 18.17 (4.79)
Ratios and Supplemental Data
Net assets, end of period ($ millions) 106 81 66 73 142
Ratio of operating expenses to average daily net assets (%) .57 .62 .61 .56 .58
Ratio of net investment income to average daily net assets (%) 6.34 6.55 6.20 6.29 6.43
Portfolio turnover rate (%) 115.14 56.07 85.11 177.21 96.55
(a) Based on monthly average shares outstanding during the period.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Balanced Portfolio -- Class A shares
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $13.30 $11.61 $10.95 $8.97 $10.23
Income from investment operations:
Net investment income .37 .34 .31 .30 .29
Net realized and unrealized gain (loss) on investment transactions 2.56 2.32 .95 2.04 (.48)
Total from investment operations 2.93 2.66 1.26 2.34 (.19)
Less distributions from:
Net investment income (.36) (.33) (.30) (.30) (.30)
Net realized gains on investment transactions (.66) (.64) (.30) (.06) (.77)
Total distributions (1.02) (.97) (.60) (.36) (1.07)
Net asset value, end of period $15.21 $13.30 $11.61 $10.95 $8.97
- ---------------------------------------------------------------------------------------------------------------------------
Total Return (%) 23.19 24.21 11.89 26.67 (2.05)
Ratios and Supplemental Data
Net assets, end of period ($ millions) 162 118 88 68 46
Ratio of operating expenses to average daily net assets (%) .56 .57 .60 .65 .75
Ratio of net investment income to average daily net assets (%) 2.71 2.73 2.82 3.01 3.19
Portfolio turnover rate (%) 74.08 43.10 67.56 87.98 101.64
(a) Based on monthly average shares outstanding during the period.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
Growth and Income Portfolio -- Class A shares
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Class A (c) For the Period
May 2, 1994
(commencement of
operations) to
Years Ended December 31, December 31,
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $11.48 $9.37 $7.98 $6.26 $6.00(b)
Income from investment operations:
Net investment income .27 .27 .27 .23 .13
Net realized and unrealized gain (loss) on investment .54 2.47 1.46 1.72 .17
transactions
Total from investment operations .81 2.74 1.73 1.95 .30
Less distributions from:
Net investment income (.25) (.26) (.23) (.19) (.04)
Net realized gains on investment transactions (.79) (.37) (.11) (.04) --
Total distributions (1.04) (.63) (.34) (.23) (.04)
Net asset value, end of period $11.25 $11.48 $9.37 $7.98 $6.26
- ---------------------------------------------------------------------------------------------------------------------------
Total Return (%) 7.18 30.47 22.17 31.74 4.91**
Ratios and Supplemental Data
Net assets, end of period ($ millions) 184 157 91 52 20
Ratio of operating expenses, net to average daily net assets .56 .58 .66 .75 .75*
(%)
Ratio of operating expenses, before reductions, to average .56 .58 .66 .75 1.62*
daily net assets (%)
Ratio of net investment income to average daily net assets (%) 2.41 2.54 3.14 3.18 3.63*
Portfolio turnover rate (%) 38.70 28.41 32.18 24.33 28.41*
(a) Based on monthly average shares outstanding during the period.
(b) Original capital.
(c) On May 1, 1997 existing shares were designated as Class A shares.
* Annualized
** Not annualized
- ---------------------------------------------------------------------------------------------------------------------------
Growth and Income Portfolio -- Class B shares
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended For the Period
December 31, 1998 May 1, 1997
(commencement of
sale of Class B
shares) to
Class B December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $11.47 $9.44
Income from investment operations:
Net investment income .25 .14
Net realized and unrealized gain (loss) on investment transactions .54 2.02
Total from investment operations .79 2.16
Less distributions from:
Net investment income (.23) (.13)
Net realized gains on investment transactions (.79) --
Total distributions (1.02) (.13)
Net asset value, end of period $11.24 $11.47
- ---------------------------------------------------------------------------------------------------------------------------
Total Return (%) 6.95 22.89**
Ratios and Supplemental Data
Net assets, end of period ($ millions) 14 7
Ratio of operating expenses to average daily net assets (%) .79 .80*
Ratio of net investment income to average daily net assets (%) 2.20 2.13*
Portfolio turnover rate (%) 38.70 28.41
(a) Based on monthly average shares outstanding during the period.
* Annualized
** Not annualized
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
Capital Growth Portfolio -- Class A shares
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Class A (b) Years Ended December 31,
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $20.63 $16.50 $15.08 $12.23 $14.95
Income from investment operations:
Net investment income .16 .18 .19 .14 .06
Net realized and unrealized gain (loss) on investment transactions 4.46 5.39 2.68 3.25 (1.42)
Total from investment operations 4.62 5.57 2.87 3.39 (1.36)
Less distributions from:
Net investment income (.17) (.19) (.19) (.11) (.05)
Net realized gains on investment transactions (1.13) (1.25) (1.26) (.43) (1.31)
Total distributions (1.30) (1.44) (1.45) (.54) (1.36)
Net asset value, end of period $23.95 $20.63 $ 16.50 $15.08 $12.23
- ---------------------------------------------------------------------------------------------------------------------------
Total Return (%) 23.23 35.76 20.13 28.65 (9.67)
Ratios and Supplemental Data
Net assets, end of period ($ millions) 901 676 440 338 257
Ratio of operating expenses to average daily net assets (%) .50 .51 .53 .57 .58
Ratio of net investment income to average daily net assets (%) .75 .96 1.27 1.06 .47
Portfolio turnover rate (%) 54.73 41.77 65.56 119.41 66.44
(a) Based on monthly average shares outstanding during the period.
(b) On May12, 1997 existing shares were designated as Class A shares.
- ---------------------------------------------------------------------------------------------------------------------------
Capital Growth Portfolio -- Class B shares
- ---------------------------------------------------------------------------------------------------------------------------
Class B Year Ended For the Period
December 31, 1998 May 12, 1997
(commencement of
sale of Class B
shares) to
December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $20.61 $17.54
Income from investment operations:
Net investment income .11 .08
Net realized and unrealized gain (loss) on investment transactions 4.45 3.08
Total from investment operations 4.56 3.16
Less distributions from:
Net investment income (.12) (.09)
Net realized gains on investment transactions (1.13) --
Total distributions (1.25) (.09)
Net asset value, end of period $23.92 $20.61
- ---------------------------------------------------------------------------------------------------------------------------
Total Return (%) 22.94 18.00**
Ratios and Supplemental Data
Net assets, end of period ($ millions) .83 .55
Ratio of operating expenses to average daily net assets (%) .75 .75*
Ratio of net investment income to average daily net assets (%) .49 .64*
Portfolio turnover rate (%) 54.73 41.77
(a) Based on monthly average shares outstanding during the period.
* Annualized
** Not annualized
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
Global Discovery Portfolio -- Class A shares
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Class A (c) For the Period
May 1, 1996
(commencement of
operations) to
Years Ended December 31, December 31,
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $7.08 $6.33 $6.00(b)
Income from investment operations:
Net investment income (loss) (.03) (.03) (.01)
Net realized and unrealized gain (loss) on investment transactions 1.18 .81 .34
Total from investment operations 1.15 .78 .33
Less distributions from:
Net investment income (.12) (.02) --
Net realized gains on investment transactions (.07) (.01) --
Total distributions (.19) (.03) --
Net asset value, end of period $8.04 $7.08 $6.33
- ---------------------------------------------------------------------------------------------------------------------------
Total Return (%) (d) 16.44 12.38 5.50**
Ratios and Supplemental Data
Net assets, end of period ($ millions) 25 18 17
Ratio of operating expenses, net to average daily net assets (%) 1.72 1.50 1.50*
Ratio of operating expenses before expense reductions, to average daily net 1.79 1.79 2.32*
assets (%)
Ratio of net investment income (loss) to average daily net assets (%) (.40) (.44) (.13)*
Portfolio turnover rate (%) 54.37 83.16 50.31*
- ---------------------------------------------------------------------------------------------------------------------------
(a) Based on monthly average shares outstanding during the period.
(b) Original capital.
(c) On May 2, 1997 existing shares were designated as Class A shares.
(d) Total returns would have been lower had certain expenses not been reduced.
* Annualized
** Not annualized
- ---------------------------------------------------------------------------------------------------------------------------
Global Discovery Portfolio -- Class B shares
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended For the Period
December 31, 1998 May 2, 1997
(commencement of
sale of Class B
shares) to
Class B December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $7.07 $6.20
Income from investment operations:
Net investment loss (.05) (.04)
Net realized and unrealized gain (loss) on investment transactions 1.18 .91
Total from investment operations 1.13 .87
Less distributions from:
Net investment income (.12) --
Net realized gains on investment transactions (.07) --
Total distributions (.19) --
Net asset value, end of period $8.01 $7.07
- ---------------------------------------------------------------------------------------------------------------------------
Total Return (%) (b) 16.18 14.03**
Ratios and Supplemental Data
Net assets, end of period ($ millions) 4 2
Ratio of operating expenses, net to average daily net assets (%) 1.98 1.75
Ratio of operating expenses, before reductions, to average daily net assets (%) 2.04 2.00*
Ratio of net investment loss to average daily net assets (%) (.69) (.89)*
Portfolio turnover rate (%) 54.37 83.16
(a) Based on monthly average shares outstanding during the period.
(b) Total return would have been lower had certain expenses not been reduced.
* Annualized
** Not annualized
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
International Portfolio -- Class A shares
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
Class A (b) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $14.11 $13.25 $11.82 $10.69 $10.85
Income from investment operations:
Net investment income .13 .14 .12 .11 .06
Net realized and unrealized gain (loss) on investment transactions 2.29 1.04 1.60 1.07 (.15)
Total from investment operations 2.42 1.18 1.72 1.18 (.09)
Less distributions:
From net investment income (.26) (.21) (.29) (.01) (.07)
From net realized gains on investment transactions (1.71) (.11) -- (.04) --
Total distributions (1.97) (.32) (.29) (.05) (.07)
Net asset value, end of period $14.56 $14.11 $13.25 $11.82 $10.69
- ---------------------------------------------------------------------------------------------------------------------------
Total Return (%) 18.49 9.07 14.78 11.11 (.85)
Ratios and Supplemental Data
Net assets, end of period ($ millions) 509 427 726 548 472
Ratio of operating expenses to average daily net assets (%) 1.04 1.00 1.05 1.08 1.08
Ratio of net investment income to average daily net assets (%) .90 .94 .95 .95 .57
Portfolio turnover rate (%) 70.65 61.35 32.63 45.76 33.52
(a) Based on monthly average shares outstanding during the period.
(b) On May 8, 1997, existing shares were designated as Class A shares.
- ---------------------------------------------------------------------------------------------------------------------------
International Portfolio -- Class B shares
- ---------------------------------------------------------------------------------------------------------------------------
Class B Year Ended For the Period
December 31, 1998 May 8, 1997
(commencement of
sale of Class B
shares) to
December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $14.08 $13.76
Income from investment operations:
Net investment income (loss) .10 (.00)(b)
Net realized and unrealized gain (loss) on investment transactions 2.29 .32
Total from investment operations 2.39 .32
Less distributions:
From net investment income (.25) --
From net realized gains on investment transactions (1.71) --
Total distributions (1.96) --
Net asset value, end of period $14.51 $14.08
- ---------------------------------------------------------------------------------------------------------------------------
Total Return (%) 18.28 2.33**
Ratios and Supplemental Data
Net assets, end of period ($ millions) .37 .35
Ratio of operating expenses to average daily net assets (%) 1.28 1.24*
Ratio of net investment income to average daily net assets (%) .69 (.00)(b)*
Portfolio turnover rate (%) 70.65 61.35**
(a) Based on monthly average shares outstanding during the period.
(b) Amount shown is less than one half of .005.
* Annualized
** Not annualized
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
About the Portfolios
Investment adviser
The Fund retains the investment management firm of Scudder Kemper Investments,
Inc. (the "Adviser"), Two International Place, Boston, MA, to manage the
portfolios' daily investment and business affairs subject to the policies
established by the Board. The Adviser actively manages each portfolio's
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, the Adviser received the following
investment management fee from each portfolio on an annual basis, as follows:
Portfolio % of average daily net assets
- --------------------------------------------------------------------------------
Money Market Portfolio 0.370%
Bond Portfolio 0.475%
Balanced Portfolio 0.475%
Growth and Income Portfolio 0.475%
Capital Growth Portfolio 0.466%
Global Discovery Portfolio 0.907%*
International Portfolio 0.867%
- --------------------------------------------------------------------------------
* The Adviser agreed to waive all or a portion of its management fee to limit
the expenses of the Global Discovery Portfolio to 1.50% of average daily
net assets until April 30, 1998.
The Adviser receives an annual fee payable monthly from Large Company Growth
Portfolio of 0.625% of the portfolio's average daily net assets and from Small
Company Growth Portfolio of 0.875% of the portfolio's average daily net assets.
Until April 30, 2000, the Adviser has agreed to waive all or a portion of its
management fees to limit the expenses of Large Company Growth Portfolio to 1.25%
of the portfolio's average daily nets assets and of Small Company Growth
Portfolio to 1.50% of the portfolio's 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 each
portfolio. They are supported by the portfolios' investment adviser's large
staff of economists, research analysts, traders and other investment specialists
who work in the Adviser's offices across the United States and abroad. The
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
<TABLE>
<CAPTION>
Name and Title Joined the Portfolio Responsibilities and Background
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Frank J. Rachwalski, Jr. 1998 Mr. Rachwalski joined the Adviser in 1973. Mr. Rachwalski has
Lead Manager served as portfolio manager for other affiliated mutual funds and
has over 20 years of experience in short-term fixed-income
investing and research.
Geoffrey A. Gibbs 1999 Mr. Gibbs joined the Adviser in 1996 as a fixed-income trader and
Manager has eight years of investment industry experience. Prior to
joining the Adviser, Mr. Gibbs was an analyst at an unaffiliated
investment research firm.
- ---------------------------------------------------------------------------------------------------------------------------
27
<PAGE>
Bond Portfolio
Name and Title Joined the Portfolio Responsibilities and Background
- ---------------------------------------------------------------------------------------------------------------------------
Stephen A. Wohler 1998 Mr. Wohler joined the Adviser in 1979 and has served as portfolio
Lead Manager manager for other affiliated mutual funds. Mr. Wohler has over 20
years of investment experience.
Kelly D. Babson 1998 Ms. Babson joined the Adviser in 1992 and is a portfolio manager
Manager in the Adviser's Global Bond Group. Ms. Babson has 17 years of
experience in fixed-income investing, including ten years of
high-yield portfolio management prior to joining the Adviser.
- ---------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio
Name and Title Joined the Portfolio Responsibilities and Background
- ---------------------------------------------------------------------------------------------------------------------------
Valerie F. Malter 1996 Ms. Malter joined the Adviser in 1995 as Product Leader of
Lead Manager Quality Growth Equity and began her investment career in 1984.
Prior to joining the Adviser, Ms. Malter spent ten years as an
analyst and portfolio manager at an unaffiliated investment
advisory firm.
George P. Fraise 1998 Mr. Fraise joined the Adviser in 1997 as a portfolio manager and
Manager began his investment career in 1986. Prior to joining the
Adviser, Mr. Fraise was a senior equity analyst at several
unaffiliated investment management firms.
Stephen A. Wohler 1998 Mr. Wohler joined the Adviser in 1979 and has served as portfolio
Manager manager for other affiliated mutual funds. Mr. Wohler has over 20
years of investment experience.
Kelly D. Babson 1998 Ms. Babson joined the Adviser in 1992 and is a portfolio manager
Manager in the Adviser's Global Bond Group. Ms. Babson has 17 years of
experience in fixed-income investing, including ten years of
high-yield portfolio management prior to joining the Adviser.
- ---------------------------------------------------------------------------------------------------------------------------
Growth and Income Portfolio
Name and Title Joined the Portfolio Responsibilities and Background
- ---------------------------------------------------------------------------------------------------------------------------
Robert T. Hoffman 1994 Mr. Hoffman joined the Adviser in 1990 as a portfolio manager and
Lead Manager began his investment career in 1985.
Benjamin W. Thorndike 1994 Mr. Thorndike joined the Adviser in 1983 as a portfolio manager
Manager and began his investment career in 1980.
Kathleen T. Millard 1994 Ms. Millard joined the Adviser in 1983 as a portfolio manager and
Manager began her investment career in 1980. Ms. Millard has 16 years of
investment industry experience as a portfolio manager
specializing in value portfolios.
Lori J. Ensinger 1996 Ms. Ensinger joined the Adviser in 1993 as a portfolio manager
Manager and began her investment career in 1983. Ms. Ensinger has 16
years of experience as a portfolio manager specializing in mid-
and large-cap stocks.
- ---------------------------------------------------------------------------------------------------------------------------
Capital Growth Portfolio
Name and Title Joined the Portfolio Responsibilities and Background
- ---------------------------------------------------------------------------------------------------------------------------
William F. Gadsden 1989 Mr. Gadsden joined the Adviser in 1983 and has over 15 years of
Lead Manager investment industry experience.
Bruce F. Beaty 1995 Mr. Beaty joined the Adviser in 1991 as a portfolio manager and
Manager has over 16 years of investment industry experience.
- ---------------------------------------------------------------------------------------------------------------------------
28
<PAGE>
Large Company Growth Portfolio
Name and Title Joined the Portfolio Responsibilities and Background
- ---------------------------------------------------------------------------------------------------------------------------
Valerie F. Malter 1999 Ms. Malter joined the Adviser in 1995 as Product Leader of
Lead Manager Quality Growth Equity and began her investment career in 1984.
Prior to joining the Adviser, Ms. Malter spent ten years as an
analyst and portfolio manager at an unaffiliated investment
management firm.
George P. Fraise 1999 Mr. Fraise joined the Adviser in 1997 as a portfolio manager.
Manager Between 1993 and 1997, Mr. Fraise served as an analyst for two
unaffiliated investment management firms and began his investment
career in 1987.
- ---------------------------------------------------------------------------------------------------------------------------
Small Company Growth Portfolio
Name and Title Joined the Portfolio Responsibilities and Background
- ---------------------------------------------------------------------------------------------------------------------------
Peter Chin 1999 Mr. Chin joined the Adviser in 1973 and has over 25 years of
Lead Manager research and portfolio management experience, primarily in small
company growth stocks.
Roy C. McKay 1999 Mr. McKay joined the Adviser in 1988 and has over 31 years of
Manager investment experience, including 22 years of experience
specializing in small company growth stocks.
- ---------------------------------------------------------------------------------------------------------------------------
Global Discovery Portfolio
Name and Title Joined the Portfolio Responsibilities and Background
- ---------------------------------------------------------------------------------------------------------------------------
Gerald J. Moran 1996 Mr. Moran joined the Adviser's equity research and management
Lead Manager area in 1968 as an analyst and has focused on small company
stocks since 1982. Mr. Moran has been a portfolio manager since
1985.
Sewall Hodges 1996 Mr. Hodges joined the Adviser in 1995 as a portfolio manager and
Manager has 12 years of experience in global analysis and portfolio
management.
- ---------------------------------------------------------------------------------------------------------------------------
International Portfolio
Name and Title Joined the Portfolio Responsibilities and Background
- ---------------------------------------------------------------------------------------------------------------------------
Irene Cheng 1998 Ms. Cheng joined the Adviser in 1993 and began her investment
Lead Manager career in 1985. Prior to joining the Adviser, Ms. Cheng spent
three years in merchant banking activities and three years as an
equity analyst at an unaffiliated investment management firm.
Nicholas Bratt 1987 Mr. Bratt joined the Adviser in 1976 and has 24 years of
Manager experience in worldwide investing, including 22 years of
experience as a portfolio manager. Mr. Bratt is the head of the
Adviser's Global Equity Department.
Deborah A. Chaplin 1998 Ms. Chaplin joined the Adviser in 1996 as a portfolio manager and
Manager has over six years of experience as a securities analyst and
portfolio manager.
Sheridan Reilly 1998 Mr. Reilly joined the Adviser in 1995 and began his investment
Manager career in 1987. Prior to joining the Adviser, Mr. Reilly focused
on strategies for global bond portfolios, currency hedging and
foreign equity markets at an unaffiliated investment management
firm.
Carol L. Franklin 1998 Ms. Franklin joined the Adviser in 1981 and has worked in
Manager international equity investing as a portfolio manager,
specializing in European investments.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
Year 2000 readiness
Like other mutual funds and financial and business organizations worldwide, the
portfolios could be adversely affected if computer systems on which the
portfolios rely, which primarily include those used by the portfolios'
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 a portfolio's business and operations, such as problems with
calculating net asset value and difficulties in implementing a portfolio's
purchase and redemption procedures. The portfolios' investment adviser has
commenced a review of the Year 2000 issue as it may affect the portfolios 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 a portfolio or on
global markets or economies generally.
Euro conversion
The introduction of a new European currency, the Euro, may result in
uncertainties for European securities and for the operation of the portfolios.
The Euro was introduced on January 1, 1999 by eleven member countries of the
European Economic and Monetary Union (EMU). The introduction of the Euro
requires the redenomination of European debt and equity securities over a period
of time, which may result in various accounting differences and/or tax
treatments. Additional questions are raised by the fact that certain other
European community 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 degree of impact will be. To the
extent that the market impact or effect on the portfolios' holdings is negative,
it could hurt the portfolios' performance.
Distributions
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. All other portfolios will declare and distribute dividends from their
net investment income, if any, in April, although an additional distribution may
be made if necessary.
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.
Taxes
Each portfolio intends to comply with the diversification requirements of
Internal Revenue 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.
Distributions of net investment income are treated by shareholders as ordinary
income. Long-term capital gains distributions are treated by shareholders as
long-term capital gains, regardless of how long they have owned their shares.
Short-term capital gains and any other taxable income distributions are treated
by shareholders as ordinary income. 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.
30
<PAGE>
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
portfolio's 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 the portfolio and its
operations.
Distributor
Scudder Investor Services, Inc., a subsidiary of the Adviser, 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 each portfolio, except Money Market
Portfolio, which does not offer separate classes of shares. 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 applicable portfolio, will
pay Scudder Investor Services, Inc. as distributor a fee of up to 0.25% of the
average daily net assets of the portfolio attributable to that portfolio's 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.
Because 12b-1 fees for Class B shares are paid out of portfolio assets on an
ongoing basis, they will, over time, increase the cost of investment in Class B
shares and may cost more than other types of sales charges.
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 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-dealer 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.
Buying and selling shares
Except for Money Market Portfolio, each portfolio offers two classes of shares:
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 which 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 Money Market
31
<PAGE>
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.
Share price
Scudder Fund Accounting Corporation, a subsidiary of the Adviser, 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.
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. Market
prices are used to determine the value of each portfolio's assets other than
Money Market Portfolio, which uses amortized cost value. The net asset value per
share of 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).
If market prices are not readily available for a security or if a security's
price is not considered to be market indicative, that security may be valued by
another method that the Board or its delegate believes accurately reflects fair
value. In those circumstances where a security's price is not considered to be
market indicative, the security's valuation may differ from an available market
quotation.
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.
32
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Additional information about the portfolios may be found in the Fund's Statement
of Additional Information and in shareholder reports. Participating insurance
companies with inquiries may call the 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 each portfolio's 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:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
<S> <C>
By Telephone Call Scudder Investor Services, Inc. collect at 617-295-1000
- ----------------------------------------------------------------------------------------------------
By Mail Scudder Investor Services, Inc.
Two International Place
Boston, MA 02110-4103
or
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
(a duplication fee is charged)
- ----------------------------------------------------------------------------------------------------
In Person Public Reference Room
Securities and Exchange Commission
Washington, D.C.
(Call 1-800-SEC-0330 for more information.)
- ----------------------------------------------------------------------------------------------------
By Internet http://www.sec.gov
http://www.scudder.com
- ----------------------------------------------------------------------------------------------------
</TABLE>
The Statement of Additional Information is incorporated by reference into this
prospectus (is legally a part of this prospectus).
Investment Company Act file number: 811-4257
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
Two International Place
Boston, Massachusetts 02110-4103
Scudder Variable Life Investment Fund is a professionally managed,
open-end investment company that offers nine investment portfolios.
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
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1999
CLASS A SHARES OF BENEFICIAL INTEREST
CLASS B SHARES OF BENEFICIAL INTEREST
- --------------------------------------------------------------------------------
This combined Statement of Additional Information is not a prospectus .
The combined prospectus of Scudder Variable Life Investment Fund dated May 1,
1999, as amended from time to time, 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 or calling collect 617-295-1000.
The Statements of Assets and Liabilities of Large Company Growth Portfolio
and Small Company Growth Portfolio are incorporated by reference and are hereby
deemed to be part of this Statement of Additional Information.
<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.................................................6
Large Company Growth Portfolio...........................................6
Small Company Growth Portfolio...........................................7
Global Discovery Portfolio...............................................9
International Portfolio.................................................10
Master-feeder Fund Structure............................................12
Special Risk Factors....................................................12
POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS..........................17
Repurchase Agreements...................................................17
Illiquid Securities....................................................18
Trust Preferred Securities..............................................19
Zero Coupon Securities..................................................19
Real Estate Investment Trusts...........................................20
Mortgage-Backed Securities and Mortgage Pass-Through Securities.........20
Collateralized Mortgage Obligations ("CMOs")............................21
FHLMC Collateralized Mortgage Obligations...............................22
Other Mortgage-Backed Securities........................................22
Other Asset-Backed Securities...........................................22
Municipal Obligations...................................................23
Convertible Securities..................................................24
Depositary Receipts.....................................................24
Foreign Securities......................................................25
Indexed Securities......................................................26
When-Issued Securities..................................................26
Loans of Portfolio Securities...........................................27
Borrowing...............................................................27
Options.................................................................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 Growth
and Income, Large Company Growth, Small Company Growth and
Global Discovery Portfolios.............................................34
Debt Securities.........................................................41
High Yield, High Risk Securities........................................41
Combined Transactions...................................................41
Risks of Specialized Investment Techniques Abroad.......................42
Common stocks...........................................................42
Reverse Repurchase Agreements...........................................42
INVESTMENT RESTRICTIONS.......................................................42
PURCHASES AND REDEMPTIONS.....................................................44
INVESTMENT ADVISER AND DISTRIBUTOR............................................44
Investment Adviser......................................................44
Personal Investments by Employees of the Adviser........................49
Distributor.............................................................49
TRUSTEES AND OFFICERS.........................................................50
REMUNERATION..................................................................52
i
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TABLE OF CONTENTS (continued)
Page
Responsibilities of the Board -- Board and Committee Meetings..........52
Compensation of Officers and Trustees...................................53
NET ASSET VALUE...............................................................53
TAX STATUS....................................................................55
DIVIDENDS AND DISTRIBUTIONS...................................................58
Money Market Portfolio..................................................58
Other Portfolios.......................................................59
PERFORMANCE INFORMATION.......................................................60
Money Market Portfolio..................................................60
Bond Portfolio..........................................................60
All Portfolios..........................................................61
Comparison of Portfolio Performance.....................................63
Taking a Global Approach................................................66
SHAREHOLDER COMMUNICATIONS....................................................67
ORGANIZATION AND CAPITALIZATION...............................................67
General.................................................................67
Shareholder and Trustee Liability.......................................70
PORTFOLIO TRANSACTIONS........................................................71
Brokerage Commissions...................................................71
PORTFOLIO TURNOVER............................................................72
EXPERTS.......................................................................72
COUNSEL.......................................................................73
ADDITIONAL INFORMATION........................................................73
FINANCIAL STATEMENTS..........................................................74
APPENDIX
Description of Bond Ratings
Description of Commercial Paper Ratings
ii
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
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 nine
diversified portfolios: 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").
Except for Money Market Portfolio, which does not offer separate classes
of shares, two classes of shares of each Portfolio of the Fund are currently
offered by Participating Insurance Companies. Class A shares are offered at net
asset value and are not subject to a Rule 12b-1 Distribution Plan. Class B
shares are offered at net asset value and are subject to a Distribution Plan.
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.
Descriptions in this Statement of Additional Information of a particular
investment practice or technique in a Portfolio may engage (such as hedging,
etc.) or a financial instrument which a Portfolio may purchase (such as options,
forward foreign currency contracts, etc.) are meant to describe the spectrum of
investments that Scudder Kemper Investments, Inc. (the "Adviser"), in its
discretion, might, but is not required to, use in managing the Portfolios'
assets. The Adviser may, in its discretion, at any time employ such practice,
technique or instrument for one or more Portfolios but not all Funds advised by
it. Furthermore, it is possible that certain types of financial instruments or
investment techniques described herein may not be available, permissible,
economically feasible or effective for their intended purposes in all markets.
Certain practices, techniques, or instruments may not be principal activities of
a Portfolio but, to the extent employed, could from time to time have a material
impact on the Portfolio's performance.
Money Market Portfolio
Money Market Portfolio seeks to maintain the stability of capital and,
consistent therewith, to maintain the liquidity of capital and to provide
current income. The Portfolio seeks to maintain a constant net asset value of
$1.00 per share, although there can be no assurance that this will be achieved.
The Portfolio uses the amortized cost method of securities valuation.
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 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 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 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
<PAGE>
and quality described above. 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.
Money Market Portfolio may invest in certificates of deposit and bankers'
acceptances of large domestic or foreign banks (i.e., banks which at the time of
their most recent annual financial statements show total assets in excess of $1
billion) including foreign branches of such domestic banks, which involve
different risks than those associated with investments in certificates of
deposit of domestic banks, and of smaller banks as described below. The
Portfolio will invest in U.S. dollar-denominated certificates of deposit and
bankers' acceptances of foreign banks if such banks meet the stated
qualifications. Although the Portfolio recognizes that the size of a bank is
important, this fact alone is not necessarily indicative of its
creditworthiness. Investment in certificates of deposit and bankers' acceptances
issued by foreign banks and foreign branches of domestic banks involves
investment risks that are different in some respects from those associated with
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.)
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 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
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.
Bond Portfolio may purchase corporate notes and bonds including issues
convertible into common stock and obligations of municipalities. The Portfolio
may purchase securities of certain mortgage-backed securities. It may purchase
U.S. Government securities and obligations of federal agencies that are not
backed by the full faith and credit of the U.S. Government, such as obligations
of Federal Home Loan Banks, Farm Credit Banks and the Federal Home Loan Mortgage
Corporation. The Portfolio may also purchase obligations of international
agencies such as the International Bank for Reconstruction and Development and
the Inter-American Development Bank. Other eligible investments include foreign
securities, such as non-U.S. dollar-denominated foreign debt securities and U.S.
dollar-denominated foreign debt securities (such as those issued by the Dominion
of Canada and its provinces), including without limitation, Eurodollar Bonds and
Yankee Bonds, mortgage and other asset-backed securities and money market
instruments such as commercial paper and bankers' acceptances and certificates
of deposit issued by domestic and
2
<PAGE>
foreign branches of U.S. banks. The Portfolio may also enter into repurchase
agreements and may invest in trust preferred securities and zero coupon
securities. The 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.
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, 1998, the average monthly
dollar-weighted market value of the bonds in the Portfolio's portfolio was rated
as follows: 7% Aaa, 10% Aa, 22% A, 15% BBB, 13% BB, 5% B and 28% U.S. Government
and Agencies.
The Portfolio may, for hedging purposes, enter into forward foreign
currency exchange contracts and foreign currencies in the form of bank deposits.
The Portfolio may also purchase other foreign money market instruments
including, but not limited to, bankers' acceptances, certificates of deposit,
commercial paper, short-term government obligations and repurchase agreements.
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 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.
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). The Portfolios may
purchase securities of real estate investment trusts ("REITs") and certain
mortgage-backed securities.
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
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 Russell 1000 Growth Index. The Portfolio will invest primarily in securities
issued by medium-to-large sized domestic companies with annual revenues or
market capitalization of at least $1 billion, 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
3
<PAGE>
distribution systems; companies guided by experienced and motivated managements;
and companies selling at attractive market valuations.
At least 65% of the value of the Portfolio's common stocks will be of
issuers which qualify, at the time of purchase, for one of the three highest
equity earnings and dividends ranking categories (A+, A, or A-) of S&P, or if
not ranked by S&P, are judged to be of comparable quality by the Adviser. S&P
assigns earnings and dividends rankings to corporations based on a number of
factors, including stability and growth of earnings and dividends. Rankings by
S&P are not an appraisal of a company's creditworthiness, as is true for S&P's
debt security ratings, nor are these rankings intended as a forecast of future
stock market performance. In addition to using S&P rankings of earnings and
dividends of common stocks, the Adviser conducts its own analysis of a company's
history, current financial position, and earnings prospects.
To enhance income and stability, the Portfolio's remaining assets are
allocated to bonds and other fixed income securities, including cash reserves.
The Portfolio will normally invest 25% to 50% of its net assets in fixed income
securities. However, at least 25% of the Portfolio's net assets will always be
invested in fixed income securities. The Portfolio can invest in a broad range
of corporate bonds and notes, convertible bonds, and preferred and convertible
preferred securities. It may also purchase U.S. Government securities and
obligations of federal agencies and instrumentalities that are not backed by the
full faith and credit of the U.S. Government, such as obligations of the Federal
Home Loan Banks, Farm Credit Banks, and the Federal Home Loan Mortgage
Corporation. The Portfolio may also invest in obligations of international
agencies, foreign debt securities (both U.S. and non-U.S. dollar-denominated),
mortgage-backed and other asset-backed securities, municipal obligations,
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
4
<PAGE>
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.
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
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 without limit 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
Standard & Poor's Corporation 500 Composite Stock Price Index (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.
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.
5
<PAGE>
Capital Growth Portfolio
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:
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 Portfolio may, for hedging purposes, enter into forward foreign
currency exchange contracts and foreign currencies in the form of bank deposits.
The Portfolio may also purchase other foreign money market instruments
including, but not limited to, bankers' acceptances, certificates of deposit,
commercial paper, short-term government obligations and repurchase agreements.
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
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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.
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 that the Adviser
believes have 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 without limit 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 in excess of $1 billion . The Adviser 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.
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
Small Company Growth Portfolio pursues long-term growth of capital by
investing primarily 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.
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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.
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 next
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. The
Portfolio may also invest in convertible securities.
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
the following characteristics: low debt positions; clean balance sheets;
excellent management who own a significant stake in the company; projected
annual earnings growth rates of at least 15%; and either a commanding position
in a growing market or the ability to build such a position in the future.
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 1940 Act requires borrowings to have 300%
asset coverage. The Portfolio may also engage in reverse repurchase agreements.
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 next
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 next 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 and
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 portfolios of stock of larger companies such as those in the S&P
500 .
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 "TAX STATUS.")
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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 1998 (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 tend to 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 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.
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
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 the S&P 500) 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 the Adviser believes offer the potential for
above-average returns relative to larger companies, yet are frequently
overlooked and thus undervalued by the market. The Portfolio has the flexibility
to invest in any region of the world. It can invest in companies based in
emerging markets, typically in the Far East, Latin America and lesser developed
countries in Europe, as well as in firms operating in developed economies, such
as those of the United States, Japan and Western Europe. The Portfolio will
limit investments in securities of issuers located in Eastern Europe to 5% of
its total assets. Since the Portfolio normally will invest in both U.S. and
foreign securities markets, changes in the Portfolio's share price may have a
low correlation with movements in the U.S. markets, which may enhance the
Portfolio's appeal as a diversification tool.
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
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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 may purchase securities of REITs and certain mortgage-backed
securities.
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 world market
capitalization as represented by the Salomon Brothers Broad Market Index, an
index comprised of global equity securities of companies with total available
market capitalization greater than $100 million. Based on this policy, the
companies held by the Portfolio typically will have individual equity market
capitalizations of between approximately $100 million and $4 billion (although
the Portfolio will be free to invest in smaller capitalization issues that
satisfy the Portfolio's size standard).
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.
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.
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.
International Portfolio
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
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outside the United States. The Fund, on behalf of the Portfolio, intends to
diversify investments among several countries and to have represented in the
program business activities in not less than three different countries. The
management considers it consistent with this policy for the Portfolio to acquire
securities of companies incorporated in the United States and having their
principal activities and interests outside of the United States, and such
investments may be included in the program.
It is not the policy of the Portfolio to concentrate its investments in
any particular industry, and the Portfolio's management does not intend to make
acquisitions in particular industries which would increase the percentage of the
market value of the Portfolio's assets above 25% for any one industry. The
Portfolio does not invest for the purpose of controlling or managing other
companies.
The major portion of the Portfolio's assets consists of equity securities
of established companies listed on recognized 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.
The Portfolio may, for hedging purposes, enter into forward foreign
currency exchange contracts and foreign currencies in the form of bank deposits.
The Portfolio may also purchase other foreign money market instruments
including, but not limited to, bankers' acceptances, certificates of deposit,
commercial paper, short-term government obligations and repurchase agreements.
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
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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
At the special meeting of shareholders, a majority of the stockholders of
each Portfolio of 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.
Special Risk Factors
Small Company Risk. The Adviser believes that small companies often have sales
and earnings growth rates which exceed those of larger companies, and that such
growth rates may in turn be reflected in more rapid share price appreciation
over time. However, investing in smaller company stocks involves greater risk
than is customarily associated with investing in larger, more established
companies. For example, smaller companies can have limited product lines,
markets, or financial and managerial resources. Smaller companies may also be
dependent on one or a few key persons, and may be more susceptible to losses and
risks of bankruptcy. Also, the securities of smaller companies may be thinly
traded (and therefore have to be sold at a discount from current market prices
or sold in small lots over an extended period of time). Transaction costs in
smaller company stocks may be higher than those of larger companies.
Foreign Securities. Certain Portfolios are 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 are designed for
long-term investors who can accept currency and other forms of international
investment risk. The Adviser believes that allocation of a 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 a
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 a Portfolio are uninvested and no return is earned thereon. The inability of
a Portfolio to make intended security purchases due to settlement problems could
cause a Portfolio to miss attractive investment opportunities. Inability to
dispose of portfolio securities due to settlement problems either could result
in losses to a Portfolio due to subsequent declines in value of the portfolio
security or, if a Portfolio has entered into a
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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 a Portfolio's portfolio
transactions. Further, a 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 a 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 a Portfolio associated with the foregoing considerations through
investment variation and continuous professional management.
Limitations on Holdings of Foreign Securities. Global Discovery 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. Global Discovery Portfolio may invest up to 5% of its total
assets in the securities of issuers domiciled in Eastern European countries.
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.
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.
Foreign Currencies. Investments in foreign securities usually will involve
currencies of foreign countries. Moreover, certain Portfolios 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 a Portfolio as measured in U.S. dollars may
be affected
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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 a Portfolio's custodian
values the Portfolio's assets daily in terms of U.S. dollars, a Portfolio does
not intend to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. A 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 a Portfolio at one rate, while offering a lesser rate of exchange should the
Portfolio desire to resell that currency to the dealer. A 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 a Portfolio normally will be invested in both U.S. and foreign
securities markets, changes in a Portfolio's share price may have a low
correlation with movements in the U.S. markets. A 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 a 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. A 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 a Portfolio is
uninvested and no cash is earned thereon. The inability of a Portfolio to make
intended security purchases due to settlement problems could cause a 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 a
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 a Portfolio. Certain emerging
markets require prior governmental approval of investments by foreign persons,
limit the amount of investment by foreign persons in a particular company, limit
the investment by foreign persons only to a specific class of securities of a
company that may have less advantageous rights than the classes available for
purchase by domiciliaries of the countries and/or impose additional taxes on
foreign investors. Certain emerging markets may also restrict investment
opportunities in issuers in industries deemed important to national interest.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. The Portfolio
could be adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
to the Portfolio of any restrictions on investments.
Many emerging markets have experienced substantial, and in some periods,
extremely high rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price controls have been
imposed in certain countries. Of these countries, some, in recent years, have
begun to control inflation through prudent economic policies.
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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.
Certain Portfolios 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 a 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 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 a
Portfolio at a higher rate than those imposed by other foreign countries. This
may reduce the Portfolio's investment income available for distribution to
shareholders.
Certain Latin American countries such as Argentina, Brazil and Mexico are
among the world's largest debtors to commercial banks and foreign governments.
At times, certain Latin American countries have declared moratoria on the
payment of principal and/or interest on outstanding debt.
Latin America is a region rich in natural resources such as oil, copper,
tin, silver, iron ore, forestry, fishing, livestock and agriculture. The region
has a large population (roughly 300 million) representing a large domestic
market. Economic growth was strong in the 1960s and 1970s, but slowed
dramatically (and in some instances was negative) in the 1980s as a result of
poor economic policies, higher international interest rates, and the denial of
access to new foreign capital. Although a number of Latin American countries are
currently experiencing lower rates of inflation and higher rates of real growth
in gross domestic product than they have in the past, other Latin American
countries continue to experience significant problems, including high inflation
rates and high interest rates. Capital flight has proven a persistent problem
and external debt has been forcibly restructured. Political turmoil, high
inflation, capital repatriation restrictions and nationalization have further
exacerbated conditions.
Governments of many Latin American countries have exercised and continue
to exercise substantial influence over many aspects of the private sector
through the ownership or control of many companies, including some of the
largest in those countries. As a result, government actions in the future could
have a significant effect on economic conditions which may adversely affect
prices of certain portfolio securities. Expropriation, confiscatory taxation,
nationalization, political, economic or social instability or other similar
developments, such as military coups, have occurred in the past and could also
adversely affect a Portfolio's investments in this region.
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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.
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
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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. Global Discovery Portfolio will limit
investments in securities of issuers located in Eastern Europe to 5% of its
total assets.
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 African 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 certain Portfolios 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 a
Portfolio. (See "TAX STATUS.")
POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS
Except as otherwise noted below, the following description of additional
investment policies and techniques is applicable to all of the Portfolios.
Repurchase Agreements
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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.
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.
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Trust Preferred Securities
Bond Portfolio and Balanced Portfolio may each invest in Trust Preferred
Securities, which are hybrid instruments issued by a special purpose trust (the
"Special Trust"), the entire equity interest of which is owned by a single
issuer. The proceeds of the issuance to the Portfolios of Trust Preferred
Securities are typically used to purchase a junior subordinated debenture, and
distributions from the Special Trust are funded by the payments of principal and
interest on the subordinated debenture.
If payments on the underlying junior subordinated debentures held by the
Special Trust are deferred by the debenture issuer, the debentures would be
treated as original issue discount ("OID") obligations for the remainder of
their term. As a result, holders of Trust Preferred Securities, such as the
Portfolios, would be required to accrue daily for Federal income tax purposes,
their share of the stated interest and the de minimis OID on the debentures
(regardless of whether a Portfolio receives any cash distributions from the
Special Trust), and the value of Trust Preferred Securities would likely be
negatively affected. Interest payments on the underlying junior subordinated
debentures typically may only be deferred if dividends are suspended on both
common and preferred stock of the issuer. The underlying junior subordinated
debentures generally rank slightly higher in terms of payment priority than both
common and preferred securities of the issuer, but rank below other subordinated
debentures and debt securities. Trust Preferred Securities may be subject to
mandatory prepayment under certain circumstances. The market values of Trust
Preferred Securities may be more volatile than those of conventional debt
securities. Trust Preferred Securities may be issued in reliance on Rule 144A
under the Securities Act of 1933, as amended, and, unless and until registered,
are restricted securities; there can be no assurance as to the liquidity of
Trust Preferred Securities and the ability of holders of Trust Preferred
Securities, such as the Portfolios, to sell their holdings.
Zero Coupon Securities
The Bond, Balanced, Growth and Income, Capital Growth and Global Discovery
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 to be 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.
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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, 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 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 a 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.
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The principal governmental guarantor of mortgage-related securities is
GNMA. GNMA is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks, and mortgage bankers) and backed by
pools of FHA-insured or VA-guaranteed mortgages. These guarantees, however, do
not apply to the market value or yield of mortgage-backed securities or to the
value of Portfolio shares. Also, GNMA securities often are purchased at a
premium over the maturity value of the underlying mortgages. This premium is not
guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) mortgages from a list of approved seller/servicers which include state
and federally-chartered savings and loan associations, mutual savings banks,
commercial banks, credit unions, and mortgage bankers. Pass-through securities
issued by FNMA are guaranteed as to timely payment of principal and interest by
FNMA but are not backed by the full faith and credit of the U.S. Government.
FHLMC is a corporate instrumentality of the U.S. Government and was
created by Congress in 1970 for the purpose of increasing the availability of
mortgage credit for residential housing. Its stock is owned by the twelve
Federal Home Loan Banks. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal, but PCs are not backed by the full faith and credit of the U.S.
Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers, and other secondary market issuers also
create pass-through pools of conventional mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance, and
letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers, and the mortgage poolers. Such insurance and
guarantees and the creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets the Portfolios' investment
quality standards. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. The Portfolios may buy mortgage-related securities without
insurance or guarantees, if through an examination of the loan experience and
practices of the originators/servicers and poolers, the Adviser determines that
the securities meet the Portfolios' quality standards. Although the market for
such securities is becoming increasingly liquid, securities issued by certain
private organizations may not be readily marketable.
Collateralized Mortgage Obligations ("CMOs")
A CMO is a hybrid between a mortgage-backed bond and a mortgage
pass-through security. Similar to a bond, interest and prepaid principal are
paid, in most cases, semiannually. CMOs may be collateralized by whole mortgage
loans but are more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, FHLMC, or FNMA, and their income
streams.
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.
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In a typical CMO transaction, a corporation issues multiple series, (e.g.,
A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are used to
purchase mortgages or mortgage pass-through certificates ("Collateral"). The
Collateral is pledged to a third party trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on
the Bonds in the order A, B, C, Z. The Series A, B, and C bonds all bear current
interest. Interest on the Series Z Bond is accrued and added to principal and a
like amount is paid as principal on the Series A, B, or C Bond currently being
paid off. When the Series A, B, and C Bonds are paid in full, interest and
principal on the Series Z Bond begins to be paid currently. With some CMOs, the
issuer serves as a conduit to allow loan originators (primarily builders or
savings and loan associations) to borrow against their loan portfolios.
FHLMC Collateralized Mortgage Obligations
FHLMC CMOs are debt obligations of FHLMC issued in multiple classes having
different maturity dates which are secured by the pledge of a pool of
conventional mortgage loans purchased by FHLMC. Unlike FHLMC PCs, payments of
principal and interest on the CMOs are made semiannually, as opposed to monthly.
The amount of principal payable on each semiannual payment date is determined in
accordance with FHLMC's mandatory sinking fund schedule, which, in turn, is
equal to approximately 100% of FHA prepayment experience applied to the mortgage
collateral pool. All sinking fund payments in the CMOs are allocated to the
retirement of the individual classes of bonds in the order of their stated
maturities. Payment of principal on the mortgage loans in the collateral pool in
excess of the amount of FHLMC's minimum sinking fund obligation for any payment
date are paid to the holders of the CMOs as additional sinking fund payments.
Because of the "pass-through" nature of all principal payments received on the
collateral pool in excess of FHLMC's minimum sinking fund requirement, the rate
at which principal of the CMOs is actually repaid is likely to be such that each
class of bonds will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage loans
during any semiannual payment period is not sufficient to meet FHLMC's minimum
sinking fund obligation on the next sinking fund payment date, FHLMC agrees to
make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the CMOs are identical
to those of FHLMC PCs. FHLMC has the right to substitute collateral in the event
of delinquencies and/or defaults.
Other Mortgage-Backed Securities
The Adviser expects that governmental, government-related, or private
entities may create mortgage loan pools and other mortgage-related securities
offering mortgage pass-through and mortgage-collateralized investments in
addition to those described above. The mortgages underlying these securities may
include alternative mortgage instruments, that is, mortgage instruments whose
principal or interest payments may vary or whose terms to maturity may differ
from customary long-term fixed rate mortgages. Bond Portfolio and 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
Bond Portfolio's and Balanced Portfolio's investment objectives and policies,
the Portfolios may invest in these and other types of asset-backed securities
that may be developed in the future. In general, the collateral supporting these
securities is of shorter maturity than mortgage loans and is less likely to
experience substantial prepayments with interest rate fluctuations.
Several types of asset-backed securities have already been offered to
investors, including Certificates for Automobile ReceivablesSM ("CARSSM").
CARSSM represent undivided fractional interests in a trust ("Trust") whose
assets consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing
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the contracts. Payments of principal and interest on CARSSM are passed through
monthly to certificate holders, and are guaranteed up to certain amounts and for
a certain time period by a letter of credit issued by a financial institution
unaffiliated with the trustee or originator of the Trust. An investor's return
on CARSSM may be affected by early prepayment of principal on the underlying
vehicle sales contracts. If the letter of credit is exhausted, the Trust may be
prevented from realizing the full amount due on a sales contract because of
state law requirements and restrictions relating to foreclosure sales of
vehicles and the obtaining of deficiency judgments following such sales or
because of depreciation, damage to or loss of a vehicle, the application of
federal and state bankruptcy and insolvency laws, or other factors. As a result,
certificate holders may experience delays in payments or losses if the letter of
credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security interest in the related assets. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. There is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
Asset-backed securities are often backed by a pool of assets representing
the obligations of a number of different parties. To lessen the effect of
failures by obligors on underlying assets to make payments, the securities may
contain elements of credit support which fall into two categories: (i) liquidity
protection, and (ii) protection against losses resulting from ultimate default
by an obligor on the underlying assets. Liquidity protection refers to the
provision of advances, generally by the entity administering the pool of assets,
to ensure that the receipt of payments on the underlying pool occurs in a timely
fashion. Protection against losses results from payment of the insurance
obligations on at least a portion of the assets in the pool. This protection may
be provided through guarantees, policies or letters of credit obtained by the
issuer or sponsor from third parties, through various means of structuring the
transaction or through a combination of such approaches. Bond Portfolio and
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.
Bond Portfolio and 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 interest 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
Bond Portfolio and Balanced Portfolio to dispose of any then existing holdings
of such securities.
Municipal Obligations
Bond Portfolio and 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. Bond
Portfolio and 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. Bond Portfolio
and 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.
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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 values of convertible
securities tend to decline as interest rates increase and, conversely, tend to
increase as interest rates decline. In addition, because of the conversion or
exchange feature, the market values of convertible securities typically changes
as the market value of the underlying common stocks change, and, therefore, also
tend to follow movements in the general market for equity securities. A unique
feature of convertible securities is that as the market price of the underlying
common stock declines, convertible securities tend to trade increasingly on a
yield basis, and so may not experience market value declines to the same extent
as the underlying common stock. When the market price of the underlying common
stock increases, the prices of the convertible securities tend to rise as a
reflection of the value of the underlying common stock, although typically not
as much as the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.
As fixed income securities, convertible securities are investments which
provide for a stream of income (or in the case of zero coupon securities,
accretion of income) with generally higher yields than common stocks. Of course,
like all fixed income securities, there can be no assurance of income or
principal payments because the issuers of the convertible securities may default
on their obligations. Convertible securities generally offer lower yields than
non-convertible securities of similar quality because of their conversion or
exchange features.
Convertible securities are generally subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar
non-convertible securities.
Convertible securities may be issued as fixed income obligations that pay
current income or as zero coupon notes and bonds, including Liquid Yield Option
Notes ("LYONs"). Zero coupon securities pay no cash income and are sold at
substantial discounts from their value at maturity. When held to maturity, their
entire income, which consists of accretion of discount, comes from the
difference between the purchase price and their value at maturity. Zero coupon
convertible securities offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follows the
movements in the market value of the underlying common stock. Zero coupon
convertible securities are generally expected to be less volatile than the
underlying common stocks as they are usually issued with short to medium length
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, Small Company Growth and Global Discovery 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
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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 subject to a Portfolio's
restrictions on investment in illiquid securities.
Foreign Securities
The Bond, Balanced, Growth and Income, Capital Growth, Large Company
Growth, Small Company Growth, Global Discovery and International 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. Bond Portfolio
may invest up to 20% of its assets in non-U.S. dollar-denominated foreign debt
securities. 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.
Growth and Income Portfolio may invest up to 25% of its assets in non-U.S.
dollar denominated equity securities of foreign issuers. Capital Growth
Portfolio may invest up to 25% of its assets, and Small Company Growth Portfolio
and International Portfolio may invest without limit, in non-U.S.
dollar-denominated equity securities of foreign issuers. However, Small Company
Growth Portfolio has no current intention of investing more than 20% of its net
assets in foreign securities.
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 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 governmental supervision and regulation
of business and industry practices, stock exchanges, brokers and listed
companies in most foreign countries than in the U.S. It may be more difficult
for the Portfolios' agents to keep currently informed about corporate actions in
foreign countries 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.
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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 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 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.
Indexed Securities
Bond Portfolio and 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
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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
The Fund may lend the portfolio securities of any Portfolio (other than
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 5% of the total assets of the Portfolio. In
addition, it is anticipated that a 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 leveraging 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 that a
borrowing is outstanding, thus increasing exposure to capital risk.
Options
The Fund may, on behalf of each of the Bond, Balanced, Capital Growth and
International Portfolios, write covered call options on the portfolio securities
of such Portfolio in an attempt to enhance investment performance. A call option
is a contract generally having a duration of nine months or less which gives the
purchaser of the option, in return for a premium paid, the right to buy, and the
writer the obligation to sell, the underlying security at the exercise price at
any time upon the assignment of an exercise notice prior to the expiration of
the option, regardless of the market price of the security during the option
period. A covered call option is an option written on a security which is owned
by the writer throughout the option period.
The Fund will write, on behalf of a Portfolio, covered call options both
to reduce the risks associated with certain of its investments and to increase
total investment return. In return for the premium income, the Portfolio will
give up the opportunity to profit from an increase in the market price of the
underlying security above the exercise price so long as its obligations under
the contract continue, except insofar as the premium represents a profit.
Moreover, in writing the option, the Portfolio will retain the risk of loss
should the price of the security decline, which loss the premium is intended to
offset in whole or in part. Unlike the situation in which the Fund owns
securities not subject to a call option, the Fund, in writing call options, must
assume that the call may be exercised at any time prior to the expiration of its
obligations as a writer, and that in such circumstances the net proceeds
realized from the sale of the underlying securities pursuant to the call may be
substantially below the prevailing market price. The Fund may forego the benefit
of appreciation in its Portfolios on securities sold pursuant to call options.
When the Portfolio writes a covered call option, it gives the purchaser of
the option the right to buy the underlying security at the price specified in
the option (the "exercise price") by exercising the option at any time during
the option period, generally ranging up to nine months. Some of the options
which the Fund writes may be of the European type which means they may be
exercised only at a specified time. If the option expires unexercised, the
Portfolio will realize income in an amount equal to the premium received for the
written option. If the option is exercised, a decision over which the Portfolio
has no control, the Portfolio must sell the underlying security to the option
holder at the exercise price. By writing a covered call option, the Portfolio
forgoes, in exchange for the premium less the commission ("net premium"), the
opportunity to profit during the option period from an increase in the market
value of the underlying security above the exercise price.
The Balanced, Capital Growth 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.
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The Portfolios may forego the benefits of appreciation on securities sold or
depreciation on securities acquired pursuant to call and put options written by
the Portfolios. Each Portfolio has no current intention of writing options on
more than 5% of its net assets.
When the Fund, on behalf of the Balanced, Capital Growth 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, Capital Growth 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
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predict the volume of trading that may exist in such options, and there can be
no assurance that viable exchange markets will develop or continue.
The Fund, 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, Capital Growth 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 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
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meet International Portfolio's investment criteria are available, there are U.S.
stock indices which may be used to hedge U.S. securities held in that Portfolio.
Futures on Debt Securities
A futures contract on a debt security is a binding contractual commitment
which, if held to maturity, will result in an obligation to make or accept
delivery, during a particular future month, of securities having a standardized
face value and rate of return. By purchasing futures on debt securities --
assuming a "long" position -- the Fund, on behalf of a Portfolio, will legally
obligate itself to accept the future delivery of the underlying security and pay
the agreed price. By selling futures on debt securities -- assuming a "short"
position -- it will legally obligate itself to make the future delivery of the
security against payment of the agreed price. Open futures positions on debt
securities will be valued at the most recent settlement price, unless such price
does not appear to the Trustees to reflect the fair value of the contract, in
which case the positions will be valued by or under the direction of the
Trustees.
Positions taken in the futures markets are normally not held to maturity,
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures positions taken by the Fund on behalf of a
Portfolio will usually be liquidated in this manner, the Fund may instead make
or take delivery of the underlying securities whenever it appears 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, Capital Growth and
International Portfolios, call and put options on futures contracts, which are
traded on exchanges that are licensed and regulated by the CFTC or on any
foreign exchange for the purpose of options
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trading, to the extent permitted by law. A "call" option on a futures contract
gives the purchaser the right, in return for the premium paid, to purchase a
futures contract (assume a "long" position) at a specified exercise price at any
time before the option expires. A "put" option gives the purchaser the right, in
return for the premium paid, to sell a futures contract (assume a "short"
position), for a specified exercise price, at any time before the option
expires.
Upon the exercise of a "call," the writer of the option is obligated to
sell the futures contract (to deliver a "long" position to the option holder) at
the option exercise price, which will presumably be lower than the current
market price of the contract in the futures market. Upon exercise of a "put,"
the writer of the option is obligated to purchase the futures contract (deliver
a "short" position to the option holder) at the option exercise price, which
will presumably be higher than the current market price of the contract in the
futures market. When a person exercises an option and assumes a long futures
position, in the case of a "call," or a short futures position, in the case of a
"put," his gain will be credited to his futures margin account, while the loss
suffered by the writer of the option will be debited to his account. However, as
with the trading of futures, most participants in the options markets do not
seek to realize their gains or losses by exercise of their option rights.
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
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economically advantageous to the Portfolio, a long futures position may be
terminated (or an option may expire) without the corresponding purchase of
securities.
As an alternative to literal compliance with the bona fide hedging
definition, a CFTC definition now permits the Fund to elect to comply with a
different test, under which its long futures positions will not exceed the sum
of (a) cash or cash equivalents segregated for this purpose, (b) cash proceeds
on existing investments due within thirty days and (c) accrued profits on the
particular futures or options positions. However, the Fund will not utilize this
alternative unless it is advised by counsel that to do so is consistent with the
requirements of the SEC.
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 Bond, Balanced, Capital Growth and International 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. 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 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 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 Portfolios at one
rate, while offering a lesser rate of exchange should the Portfolios desire to
resell that currency to the dealer. The 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 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
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commercial banks) and their customers. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for trades.
A foreign currency futures contract is a standardized contract for the
future delivery of a specified amount of a foreign currency at a future date at
a price set at the time of the contract. The agreed price may be fixed or within
a specified range of prices. Foreign currency futures contracts traded in the
United States are designed by and traded on exchanges regulated by the CFTC,
such as the Chicago Mercantile Exchange. Futures contracts involve brokerage
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. International Portfolio would also be required to segregate
assets to cover contracts that would require it to purchase foreign currencies.
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 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 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
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"Custodian"), will place cash or liquid securities into a segregated account of
the Portfolio in an amount equal to the value of the Portfolio's total assets
committed to the consummation of forward contracts (or the Portfolio's forward
contracts will be otherwise covered consistent with applicable regulatory
policies) and foreign currency futures contracts that require the Portfolio to
purchase foreign currencies. If the value of the securities placed in the
segregated account declines, additional cash or securities will be placed in the
account on a daily basis so that the value of the account will equal the amount
of the Portfolio's commitments with respect to such contracts.
The 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 Portfolios will enter into forward and, in the case of
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.
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,
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.
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 Growth and Income, Large
Company Growth, Small Company Growth and Global Discovery Portfolios
Growth and Income Portfolio, Large Company Growth Portfolio, Small Company
Growth Portfolio and Global Discovery Portfolio 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 a Portfolio's portfolio, or
to enhance potential gain. These strategies may be executed through the use of
derivative contracts. Such strategies are generally accepted as a part of modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur.
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In the course of pursuing these investment strategies, a Portfolio may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various interest rate transactions such as swaps, caps, floors or collars, and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used without limit to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for a Portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect a Portfolio's unrealized gains in the value of its
portfolio securities in a Portfolio, to facilitate the sale of such securities
for investment purposes, to manage the effective maturity or duration of
fixed-income securities in a Portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. Some Strategic Transactions may also be used to enhance
potential gain although no more than 5% of a Portfolio's assets will be
committed to Strategic Transactions entered into for non-hedging purposes. Any
or all of these investment techniques may be used at any time and in any
combination and there is no particular strategy that dictates the use of one
technique rather than another, as use of any Strategic Transaction is a function
of numerous variables including market conditions. The ability of a Portfolio to
utilize these Strategic Transactions successfully will depend on the Adviser's
ability to predict pertinent market movements, which cannot be assured. A
Portfolio will comply with applicable regulatory requirements when implementing
these strategies, techniques and instruments. Strategic Transactions involving
financial futures and options thereon will be purchased, sold or entered into
only for bona fide hedging, risk management or portfolio management purposes or
return enhancement 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 a Portfolio, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation a Portfolio can realize on its
investments or cause a Portfolio to hold a security it might otherwise sell. The
use of currency transactions can result in a Portfolio incurring losses as a
result of a number of factors including the imposition of exchange controls,
suspension of settlements, or the inability to deliver or receive a specified
currency. The use of options and futures transactions entails certain other
risks. In particular, the variable degree of correlation between price movements
of futures contracts and price movements in the related portfolio position of a
Portfolio creates the possibility that losses on the hedging instrument may be
greater than gains in the value of a Portfolio's position. In addition, futures
and options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets, a
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, a Portfolio's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving a Portfolio the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. A Portfolio's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect a Portfolio against an increase in the price of the
underlying instrument that it intends to
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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. A
Portfolio is authorized to purchase and sell exchange listed options and
over-the-counter options ("OTC options"). Exchange listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the- money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
A Portfolio's ability to close out its position as a purchaser or seller
of an OCC or exchange-listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all of 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.
A Portfolio will only sell OTC options (other than OTC currency options) that
are subject to a buy-back provision permitting a Portfolio to require the
Counterparty to sell the option back to a Portfolios at a formula price within
seven days. A Portfolio expects generally to enter into OTC options that have
cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying
an OTC option it has entered into with a Portfolio or fails to make a cash
settlement payment due in accordance with the terms of that option, a Portfolio
will lose any premium it paid for the option as well as any anticipated benefit
of the transaction. Accordingly, the Adviser must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be satisfied. A Portfolio will engage in OTC option transactions
only with U.S. government securities dealers recognized by the Federal Reserve
Bank of New York as "primary dealers", or broker dealers, domestic or foreign
banks or other financial institutions which have received (or the guarantors of
the obligation of which have received) a short-term credit rating of A-1 from
S&P or P-1 from Moody's or an equivalent rating from any other nationally
recognized statistical rating organization ("NRSRO") or, in the case of OTC
currency transactions, are determined to be of equivalent credit quality by the
Adviser. The staff of the SEC currently takes the position that OTC options
purchased by a Portfolio, and Portfolio securities "covering" the amount of a
Portfolio's obligation pursuant to an OTC option sold by it (the cost of the
sell-back plus the in-the-money amount, if any) are illiquid, and are subject to
the Federal limits for investing assets in them.
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If a Portfolio sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments in its Portfolio or will
increase a Portfolio's income. The sale of put options can also provide income.
A Portfolio may purchase and sell call options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets, and on securities indices, currencies and futures
contracts. All calls sold by a Portfolio must be "covered" (i.e., a Portfolio
must own the securities or futures contract subject to the call) or must meet
the asset segregation requirements described below as long as the call is
outstanding. Even though a Portfolio will receive the option premium to help
protect it against loss, a call sold by a Portfolios exposes a Portfolio during
the term of the option to possible loss of opportunity to realize appreciation
in the market price of the underlying security or instrument and may require a
Portfolio to hold a security or instrument which it might otherwise have sold.
A Portfolio may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, foreign sovereign
debt, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments (whether or not it holds the above
securities in its portfolio), and on securities indices, currencies and futures
contracts other than futures on individual corporate debt and individual equity
securities. A Portfolio will not sell put options if, as a result, more than 50%
of a Portfolio' 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 a Portfolio may be
required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures. A Portfolio may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate, currency or equity market changes, for
duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below. The sale of a futures
contract creates a firm obligation by a Portfolio, as seller, to deliver to the
buyer the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.
A Portfolio' 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 and return enhancement purposes.
Typically, maintaining a futures contract or selling an option thereon requires
a Portfolio to deposit with a financial intermediary as security for its
obligations an amount of cash or other specified assets (initial margin) which
initially is typically 1% to 10% of the face amount of the contract (but may be
higher in some circumstances). Additional cash or assets (variation margin) may
be required to be deposited thereafter on a daily basis as the mark to market
value of the contract fluctuates. The purchase of an option on financial futures
involves payment of a premium for the option without any further obligation on
the part of a Portfolio. If a Portfolio exercises an option on a futures
contract it will be obligated to post initial margin (and potential subsequent
variation margin) for the resulting futures position just as it would for any
position. Futures contracts and options thereon are generally settled by
entering into an offsetting transaction but there can be no assurance that the
position can be offset prior to settlement at an advantageous price, nor that
delivery will occur.
A Portfolio will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of a Portfolio' 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. A Portfolio also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on
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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. A Portfolio may engage in currency transactions with
Counterparties in order to hedge the value of Portfolio holdings denominated in
particular currencies against fluctuations in relative value. Currency
transactions include forward currency contracts, exchange listed currency
futures, exchange-listed and OTC options on currencies, and currency swaps. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. A currency swap is
an agreement to exchange cash flows based on the notional difference among two
or more currencies and operates similarly to an interest rate swap, which is
described below. A Portfolio may enter into currency transactions with
Counterparties which have received (or the guarantors of the obligations of
which have received) a credit rating of A-1 or P-1 by S&P or Moody's,
respectively, or that have an equivalent rating from an NRSRO or are determined
to be of equivalent credit quality by the Adviser.
A Portfolio' 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 a Portfolio, which will generally
be used 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.
A Portfolio will not enter into a transaction to hedge currency exposure
to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.
A Portfolio may also cross-hedge currencies by entering into transactions
to purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which a Portfolio has or in which a Portfolio
expects to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, a Portfolio may also engage in
proxy hedging. Proxy hedging is often used when the currency to which a
Portfolio' 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 a Portfolio' 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 a Portfolio'
securities denominated in correlated currencies. For example, if the Adviser
considers that the Austrian schilling is correlated to the German deutschemark
(the "D-mark"), a Portfolio holds securities denominated in schillings and the
Adviser believes that the value of schillings will decline against the U.S.
dollar, the Adviser may enter into a commitment or option to sell D-marks and
buy dollars. Currency hedging involves some of the same risks and considerations
as other transactions with similar instruments. Currency transactions can result
in losses to a Portfolio if the currency being hedged fluctuates in value to a
degree or in a direction that is not anticipated. Further, there is the risk
that the perceived correlation between various currencies may not be present or
may not be present during the particular time that a Portfolio is engaging in
proxy hedging. If a Portfolio enters into a currency hedging transaction, a
Portfolio will comply with the asset segregation requirements described below.
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Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to a Portfolio if it is unable to deliver or receive currency or funds
in settlement of obligations and could also cause hedges it has entered into to
be rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which a
Portfolio may enter are interest rate, currency and index swaps and the purchase
or sale of related caps, floors and collars. A Portfolio expects to enter into
these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities a Portfolio anticipates purchasing at a
later date. A Portfolio will not sell interest rate caps or floors where it does
not own securities or other instruments providing the income stream a Portfolio
may be obligated to pay. Interest rate swaps involve the exchange by a Portfolio
with another party of their respective commitments to pay or receive interest,
e.g., an exchange of floating rate payments for fixed rate payments with respect
to a notional amount of principal. A currency swap is an agreement to exchange
cash flows on a notional amount of two or more currencies based on the relative
value differential among them and an index swap is an agreement to swap cash
flows on a notional amount based on changes in the values of the reference
indices. The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling such cap to the extent that a
specified index exceeds a predetermined interest rate or amount. The purchase of
a floor entitles the purchaser to receive payments on a notional principal
amount from the party selling such floor to the extent that a specified index
falls below a predetermined interest rate or amount. A collar is a combination
of a cap and a floor that preserves a certain return within a predetermined
range of interest rates or values.
A Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Portfolio receiving or paying, as the case
may be, only the net amount of the two payments. The Adviser and a Portfolio
believe such obligations do not constitute senior securities under the 1940 Act
and, accordingly, will not treat them as being subject to its borrowing
restrictions. A Portfolio will not enter into any swap, cap, floor or collar
transaction unless, at the time of entering into such transaction, the unsecured
long-term debt of the Counterparty, combined with any credit enhancements, is
rated at least A by S&P or Moody's or has an equivalent rating from another
NRSRO or is determined to be of equivalent credit quality by the Adviser. If
there is a default by the Counterparty, a Portfolio may have contractual
remedies pursuant to the agreements related to the transaction. The swap market
has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments. A Portfolio may make investments in Eurodollar
instruments. Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon which are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency-denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. A Portfolio might use Eurodollar futures contracts and options
thereon to hedge against changes in LIBOR, to which many interest rate swaps and
fixed income instruments are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic
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factors, (ii) lesser availability than in the U.S. of data on which to make
trading decisions, (iii) delays in a Portfolio' 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 a Portfolio segregate cash or
liquid assets with its custodian to the extent Portfolio obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
a Portfolio to pay or deliver securities or assets must be covered at all times
by the securities, instruments or currency required to be delivered, or, subject
to any regulatory restrictions, an amount of cash or liquid high grade
securities at least equal to the current amount of the obligation must be
segregated with the custodian. The segregated assets cannot be sold or
transferred unless equivalent assets are substituted in their place or it is no
longer necessary to segregate them. For example, a call option written by a
Portfolio will require a Portfolio to hold the securities subject to the call
(or securities convertible into the needed securities without additional
consideration) or to segregate cash or liquid securities sufficient to purchase
and deliver the securities if the call is exercised. A call option sold by a
Portfolio on an index will require a Portfolio to own Portfolio securities which
correlate with the index or to segregate cash or liquid assets equal to the
excess of the index value over the exercise price on a current basis. A put
option written by 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 a Portfolio to buy or sell
currency will generally require a Portfolio to hold an amount of that currency
or liquid securities denominated in that currency equal to a Portfolio'
obligations or to segregate cash or liquid assets equal to the amount of a
Portfolio's obligation.
OTC options entered into by a Portfolio, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when a
Portfolio sells these instruments it will only segregate an amount of assets
equal to its accrued net obligations, as there is no requirement for payment or
delivery of amounts in excess of the net amount. These amounts will equal 100%
of the exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by a Portfolio, or the in-the-money amount plus
any sell-back formula amount in the case of a cash-settled put or call. In
addition, when a Portfolio sell a call option on an index at a time when the
in-the-money amount exceeds the exercise price, a Portfolio will segregate,
until the option expires or is closed out, cash or cash equivalents equal in
value to such excess. OCC issued and exchange listed options sold by a Portfolio
other than those above generally settle with physical delivery, or with an
election of either physical delivery or cash settlement and a Portfolio will
segregate an amount of assets equal to the full value of the option. OTC options
settling with physical delivery, or with an election of either physical delivery
or cash settlement will be treated the same as other options settling with
physical delivery.
In the case of a futures contract or an option thereon, a Portfolio must
deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash or liquid assets.
With respect to swaps, a Portfolio will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid assets
having a 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. A Portfolio may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, a Portfolio could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by a Portfolio. Moreover, if a Portfolio held a futures or forward contract
instead of segregating assets, 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
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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, Capital Growth, Large Company Growth,
Small Company Growth, Global Discovery and International Portfolios may each
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. 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. 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 Portfolio's net asset value. In addition, investments in high
yield zero coupon or pay-in-kind bonds, rather than income-bearing high yield
securities, may be more speculative and may be subject to greater fluctuations
in value due to changes in interest rates.
The trading market for high yield securities may be thin to the extent
that there is no established retail secondary market or because of a decline in
the value of such securities. A thin trading market may limit the ability of the
Trustees to value high yield securities accurately in a 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
Portfolios' investment objectives may be more dependent on the Adviser's credit
analysis than is the case for higher quality bonds. Should the rating of a
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.
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
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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.
Common stocks
Balanced, Growth and Income Portfolio, Capital Growth Portfolio, Large
Company Growth Portfolio, Small Company Growth Portfolio, Global Discovery
Portfolio and International Portfolio may each invest primarily in common
stocks. Common stock is issued by companies to raise cash for business purposes
and represents a proportionate interest in the issuing companies. Therefore, the
Portfolios may participate in the success or failure of any company in which it
holds stock. The market values of common stock can fluctuate significantly,
reflecting the business performance of the issuing company, investor perception
and general economic or financial market movements. Smaller companies are
especially sensitive to these factors and may even become valueless. Despite the
risk of price volatility, however, common stocks also offer a greater potential
for gain on investment, compared to other classes of financial assets such as
bonds or cash equivalents.
Reverse Repurchase Agreements
Each Portfolio may enter into "reverse repurchase agreements," which are
repurchase agreements in which a Portfolio, as the seller of the securities,
agrees to repurchase them at an agreed time and price. The Portfolio maintains a
segregated account in connection with outstanding reverse repurchase agreements.
Each Portfolio will enter into reverse repurchase agreements only when the
Adviser believes that the interest income to be earned from the investment of
the proceeds of the transaction will be greater than the interest expense of the
transaction.
INVESTMENT RESTRICTIONS
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;
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(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;
(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.
Other Investment Policies. The Trustees of the Fund voluntarily adopted
policies and restrictions which are observed in the conduct of the Fund's
affairs. These represent intentions of the Trustees based upon current
circumstances. They differ from fundamental investment policies in that
they may be changed or amended by action of the Trustees without prior
notice to or approval of shareholders.
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;
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(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); and
(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
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 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
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
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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 Adviser is one of the most experienced investment counsel firms in the
United States. It currently manages in excess of $280 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
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 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 Adviser, an investment counsel firm, acts as investment adviser to the
Fund. 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 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, Value Equity Trust, Scudder Fund,
Inc., Scudder Funds Trust, Global/International Fund, Inc., Scudder Global High
Income Fund, Inc., Scudder GNMA Fund, Scudder Portfolio Trust, Scudder
International Fund, Inc., 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. and The Japan 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 the Adviser 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
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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.
In certain cases, the investments for the Portfolios are managed by the
same individuals who manage one or more other mutual funds advised by Scudder
Kemper Investments, Inc. that have similar names, objectives and investment
styles as a Portfolio. You should be aware that the Portfolios are likely to
differ from these other mutual funds in size, cash flow pattern and tax matters.
Accordingly, the holdings and performance of the Portfolios can be expected can
be expected to vary from those of the other mutual funds.
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.
The Fund has nine investment management agreements with the Adviser, one
for each Portfolio (the "Agreements"). 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 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 agreements with the Adviser, on behalf of each Portfolio, were deemed
to have been assigned and, therefore, terminated. The Board has approved a new
investment management agreements (the "Agreements") with Scudder Kemper, which
are substantially identical to the current investment management agreements,
except for the date of execution and termination. The Agreements became
effective September 7, 1998, upon the termination of the then current investment
management agreement and were approved at a shareholder meeting held in December
1998.
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The Agreements dated September 7, 1998, were approved by the Trustees of
the Trust on August 12, 1998. Investment management agreements for Large Company
Growth Portfolio and Small Company Growth Portfolio dated May 1, 1999 were
approved by the Trustees of the Trust on February 11, 1999. Each 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 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 Trust's Trustees or of a
majority of the outstanding voting securities of the Fund. 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 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 Portfolios' 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
from each Portfolio:
% of the average
daily net asset
values of each
Portfolio Portfolio 1996 1997 1998
--------- --------- ---- ---- ----
Money Market Portfolio 0.370% $325,791 $384,554 $486,458
Bond Portfolio 0.475 291,740 321,323 439,858
Balanced Portfolio 0.475 372,176 488,616 648,870
Growth and Income
Portfolio 0.475 326,033 592,383 874,193
Capital Growth
Portfolio 0.475* 1,870,361 2,691,980 3,628,132
Large Company Growth
Portfolio 0.625** -- -- --
Small Company Growth
Portfolio 0.875** -- -- --
Global Discovery
Portfolio 0.975+ 12,607*** 179,723 237,980
International Portfolio 0.875**** 5,590,601 6,520,030 4,168,595
* For any calendar month during which the average daily net assets of
Capital Growth Portfolio exceed $500,000,000 or $1 billion, the fee
payable for that month, with respect to the excess over $500,000,000 or $1
billion, is calculated at an annual rate of 0.450% and 0.425%,
respectively. As a result, the Adviser received compensation at an annual
rate of 0.47% for the fiscal year ended December 31, 1998.
** Large Company Growth Portfolio and Small Company Portfolio each commenced
operations on May 1, 1999.
*** Global Discovery Portfolio commenced operations on May 1, 1996.
**** 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
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annual rate of 0.725%. As a result, the Adviser received compensation at
an annual rate of 0.87% for the fiscal year ended December 31, 1998.
+ Until April 30, 1998, the Adviser agreed to waive all or a portion of its
management fee to limit the expenses of the Portfolio to 1.50% of average
daily net assets. As a result, the Adviser received compensation at an
annual rate of 0.907% for the fiscal year ended December 31, 1998.
Under the Agreements, each Portfolio is responsible for all of 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 or the particular Portfolio. 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.
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.
48
<PAGE>
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, 1999, 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 12, 1998.
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.
Each Portfolio, except Money Market Portfolio, has adopted a distribution
plan under Rule 12b-1 (the "Plan") that provides for fees payable as an expense
of the Class B shares that are used by Scudder Investor Services, Inc. to pay
for distribution and services for that class. The fee is payable monthly by a
Portfolio at an annual rate of 0.25% of the net assets attributable to the Class
B shares of a Portfolio. Because 12b-1 fees are paid out of Portfolio assets on
an ongoing basis, they will, over time, increase the cost of investment and may
cost more than other types of sales charges. The Plan was last approved by the
Trustees on August 12, 1998. 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
49
<PAGE>
for the Fund provided additional information, summarized the provisions of the
proposed Plan and discussed the legal and regulatory considerations in adopting
such Plan.
The Board considered various factors in connection with its decision as to
whether to approve the Plan, including (a) the nature and causes of the
circumstances which make implementation of the Plan necessary and appropriate;
(b) the way in which the Plan would address those circumstances, including the
nature and potential amount of expenditures; (c) the nature of the anticipated
benefits; (d) the possible benefits of the Plan to any other person relative to
those of the Fund; (e) the effect of the Plan on existing owners of VA contracts
and VLI policies; (f) the merits of possible alternative plans or pricing
structures; (g) competitive conditions in the variable products industry and (h)
the relationship of the Plan to other distribution efforts of the Fund.
Based upon its review of the foregoing factors and the materials presented
to it, and in light of its fiduciary duties under relevant state law and the
1940 Act, the Board determined, in the exercise of its business judgment, that
the Fund's Plan is reasonably likely to benefit the Fund and the VA contract and
VLI policy owners in at least one of several ways. Specifically, the Board
concluded that the Participating Insurance Companies would have less incentive
to educate VA contract and VLI policy owners and sales people concerning the
Fund if expenses associated with such services were not paid for by the Fund. In
addition, the Board determined that the payment of distribution fees to insurers
should motivate them to maintain and enhance the level of services relating to
the Fund provided to VA contract and VLI policy owners, which would, of course,
benefit such VA contract and VLI policy owners. Further, the adoption of the
Plan would likely help to maintain and may lead to an increase in net assets
under management given the distribution financing alternatives available through
the multi-class structure. The Board also took into account expense structures
of other competing products and administrative compensation arrangements between
other funds, their advisers and insurance companies that currently are in use in
the variable products industry. Further, it is anticipated that Plan fees may be
used to educate potential and existing owners of VA contracts and VLI policies
concerning the Fund, the securities markets and related risks. A better educated
investor, in the Distributor's view, is less likely to surrender his or her VA
contract or VLI policy early, thereby avoiding the costs associated with such an
event. Accordingly, the Plan may help the Fund and Participating Insurance
Companies meet investor education needs.
The Board realizes that there is no assurance that the expenditure of Fund
assets to finance distribution of Fund shares will have the anticipated results.
However, the Board believes there is a reasonable likelihood that one or more of
such benefits will result, and since the Board will be in a position to monitor
the distribution expenses of the Fund, it will be able to evaluate the benefit
of such expenditures in deciding whether to continue the Plan.
The Plan and any Rule 12b-1-related agreement that is entered into by the
Fund or the Distributor in connection with the Plan will continue in effect for
a period of more than one year only so long as continuance is specifically
approved at least annually by a vote of a majority of the Fund's Board of
Trustees, and of a majority of the Trustees who are not interested persons (as
defined in the 1940 Act) of the Fund or a Portfolio ("Independent Trustees"),
cast in person at a meeting called for the purpose of voting on the Plan, or the
Rule 12b-1 related agreement, as applicable. In addition, the Plan and any Rule
12b-1 related agreement, may be terminated as to Class B shares of a Portfolio
at any time, without penalty, by vote of a majority of the outstanding Class B
shares of that Portfolio or by vote of a majority of the Independent Trustees.
The Plan also provides that it may not be amended to increase materially the
amount that may be spent for distribution of Class B shares of a Portfolio
without the approval of Class B shareholders of that Portfolio.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position with
Underwriter,
Scudder Investor
Name, Age and Address Position with Fund Principal Occupation** Services, Inc.
- --------------------- ------------------ ---------------------- --------------
<S> <C> <C> <C>
William M. Thomas*@+ (37) President Senior Vice President of --
Scudder Kemper Investments, Inc.
Daniel Pierce*@+ (65) Vice President and Managing Director of Scudder Vice President,
Trustee Kemper Investments, Inc. Director and Assistant
Treasurer
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
Position with
Underwriter,
Scudder Investor
Name, Age and Address Position with Fund Principal Occupation** Services, Inc.
- --------------------- ------------------ ---------------------- --------------
<S> <C> <C> <C>
Dr. Kenneth Black, Jr. (74) Trustee Regents' Professor Emeritus --
Georgia State University Georgia 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 Island
College of Business
Administration
University of Rhode Island
7 Lippitt Road
Kingston, RI 02881-0802
Peter B. Freeman@ (66) Trustee Corporate Director and Trustee --
100 Alumni Avenue
Providence, RI 02906
Dr. J. D. Hammond (65) Trustee Dean, Smeal College of Business --
801 Business Administration, Pennsylvania
Administration Bldg. State University
Pennsylvania State University
University Park, PA 16802
Irene T. Cheng# (44) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Peter Chin# (57) Vice President Senior Vice President of --
Scudder Kemper Investments,
Inc.
William F. Gadsden# (44) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Robert T. Hoffman# (40) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Thomas W. Joseph+ (60) Vice President Senior Vice President of Vice President,
Scudder Kemper Investments, Inc. Director, Treasurer
and Assistant Clerk
Valerie F. Malter# (40) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Ann McCreary# (42) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Steven M. Meltzer+ (40) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Position with
Underwriter,
Scudder Investor
Name, Age and Address Position with Fund Principal Occupation** Services, Inc.
- --------------------- ------------------ ---------------------- --------------
<S> <C> <C> <C>
Gerald J. Moran# (59) Vice President Senior Vice President of --
Scudder Kemper Investments, Inc.
Frank J. Rachwalski, Jr.*** (54) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Stephen A. Wohler+ (50) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Randall K. Zeller# (44) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Kathryn L. Quirk# (46) Vice President and Managing Director of Scudder Vice President
Assistant Secretary Kemper Investments, Inc.
John R. Hebble+ (40) Treasurer Senior Vice President of --
Scudder Kemper Investments, Inc.
Caroline Pearson+ (37) Assistant Secretary Senior Vice President of Clerk
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.
@ Messrs. Freeman, Pierce and 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: 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,
52
<PAGE>
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
Each Independent Trustee, except Peter B. Freeman, receives the following
compensation from the Fund: an annual trustee's fee of $2,000, a fee of $200 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 and $100 for any other committee meeting (although
in some cases the Independent Trustees have waived committee meeting fees);
Peter B. Freeman receives $1,200, $125 and $75, respectively; 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.
<TABLE>
<CAPTION>
Name Scudder Variable Life Investment Fund(1)(2) All Scudder Funds
- ---- ------------------------------------------- -----------------
<S> <C> <C> <C>
Dr. Kenneth Black, Jr., Trustee $28,700 $0 (7 funds)
Dr. Rosita P. Chang, Trustee $28,700 $46,750 (26 funds)
Peter B. Freeman, Trustee $18,775 $172,425 (46 funds)
Dr. J.D. Hammond, Trustee $28,700 $50,430 (27 funds)
</TABLE>
(1) Scudder Variable Life Investment Fund consists of nine portfolios: 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.
(2) Large Company Growth Portfolio and Small Company Growth Portfolio each
commenced operations on May 1, 1999.
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
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, President's
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 Portfolio, less all liabilities, by the total number of shares
outstanding.
The valuation of 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
53
<PAGE>
result in periods during which value, as determined by amortized cost, is higher
or lower than the price Money Market Portfolio would receive if it sold the
instrument. During periods of declining interest rates, the quoted yield on
shares of 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
Money Market Portfolio would be able to obtain a somewhat higher yield if he
purchased shares of Money Market Portfolio on that day, than would result/from
investment in a fund utilizing solely market values, and existing investors in
Money Market Portfolio would receive less investment income. The converse would
apply in a period of rising interest rates.
An exchange-traded equity security is valued at its most recent sale price
on the exchange it is traded 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") on such exchange as
of the Value Time. Lacking a Calculated Mean quotation the security is valued at
the most recent bid quotation on such exchange as of the Value Time. An equity
security which is traded on the National Association of Securities Dealers
Automated Quotation ("Nasdaq") system will be valued at its most recent sale
price on such system as of the Value Time. Lacking any sales, the security will
be valued at the most recent bid quotation as of the Value Time. The value of an
equity security not quoted on the Nasdaq system, but traded in another
over-the-counter market, is its most recent sale price if there are any sales of
such security on such market as of the Value Time. Lacking any sales, the
security is valued at the Calculated Mean quotation for such security as of the
Value Time. Lacking a Calculated Mean quotation the security is valued at the
most recent bid quotation as of the Value Time.
Debt securities, other than money market instruments, are valued at prices
supplied by the Fund's pricing agent(s) which reflect broker/dealer supplied
valuations and electronic data processing techniques. Money market instruments
with an original maturity of sixty days or less maturing at par shall be valued
at amortized cost , which the Board believes approximates market value. If it is
not possible to value a particular debt security pursuant to these valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker. If it is not possible to value a particular debt
security pursuant to the above methods, the Adviser may calculate the price of
that debt security, subject to limitations established by the Board.
An exchange traded options contract on securities, currencies, futures and
other financial instruments is valued at its most recent sale price on such
exchange. Lacking any sales, the options contract is valued at the Calculated
Mean. Lacking any Calculated Mean , the options contract is valued at the most
recent bid quotation in the case of a purchased options contract, or the most
recent asked quotation in the case of a written options contract. An options
contract on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate.
If a security is traded on more than one exchange, or upon one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of the Trust's Valuation Committee, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio asset is taken to be an amount which, in the opinion of the Valuation
Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by the Fund is
determined in a manner which, in the discretion of the Valuation Committee most
fairly reflects fair market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in terms
of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these portfolio assets in terms of U.S. dollars is
calculated by converting the Local Currency into U.S. dollars at the prevailing
currency exchange rate on the valuation date.
54
<PAGE>
TAX STATUS
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 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.
55
<PAGE>
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 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, Large Company Growth,
Small Company 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, Small Company Growth,
Large Company 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, a Portfolio would report as ordinary income the
amount by which the fair market value of the foreign company's stock exceeds a
Portfolio's 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 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%
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<PAGE>
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.
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.
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<PAGE>
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. Global Discovery Portfolio and 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. In addition, if a Portfolio fails to
satisfy these holding period requirements, it cannot elect under Section 853 to
pass through to shareholders the ability to claim a deduction for the related
foreign taxes.
Each Portfolio will be required to report to the Internal Revenue Service
all distributions of investment company taxable income and capital gains as well
as gross proceeds from the redemption or exchange of shares, except in the case
of certain exempt shareholders, which include most corporations. Under the
backup withholding provisions of Section 3406 of the Code, distributions of
taxable income and capital gains and proceeds from the redemption or exchange of
the shares of a regulated investment company may be subject to withholding of
federal income tax at the rate of 31% in the case of non-exempt shareholders who
fail to furnish the investment company with their taxpayer identification
numbers and with required certifications regarding their status under the
federal income tax law. Withholding may also be required if a Portfolio is
notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. Participating Insurance Companies
that are corporations should furnish their taxpayer identification numbers and
certify their status as corporations in order to avoid possible erroneous
application of backup withholding.
Shareholders of the Portfolios may be subject to state and local taxes on
distributions received from such Portfolios and on redemptions of their shares.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution.
The Fund is organized as a Massachusetts business trust, and neither the
Fund nor the Portfolios are liable for any income or franchise tax in the
Commonwealth of Massachusetts providing each Portfolio continues to qualify as a
regulated investment company under Subchapter M of the Code.
The foregoing discussion of U.S. federal income tax law relates solely to
the application of that law to U.S. persons. Each shareholder which is not a
U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the Portfolio, including the possibility that such a shareholder
may be subject to a U.S. withholding tax at a rate of 30% (or at a lower rate
under an applicable income tax treaty) on amounts constituting ordinary income
received by it, where such amounts are treated as income from U.S. sources under
the Code.
For further information concerning federal income tax consequences for the
holders of the VA contracts and VLI policies, shareholders should consult the
prospectus used in connection with the issuance of their particular contracts or
policies. Shareholders should consult their tax advisers about the application
of the provisions of tax law described in this statement of additional
information in light of their particular tax situations.
DIVIDENDS AND DISTRIBUTIONS
Money Market Portfolio
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The net investment income of 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 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 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 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 Money Market Portfolio
incur or anticipate any unusual or unexpected significant income, appreciation
or gain which would affect disproportionately the fund's income for a particular
period, the Trustees or the Executive Committee of the Trustees may consider
whether to adhere to the dividend policy described above or to revise it in
light of the then prevailing circumstances in order to ameliorate to the extent
possible the disproportionate effect of such income, appreciation or gain on the
dividend received by existing shareholders. Such actions may reduce the amount
of the daily dividend received by existing shareholders.
Other Portfolios
Each Portfolio, except Money Market Portfolio, intends to follow the
practice of distributing substantially all of its investment company taxable
income which includes any excess of net realized short-term capital gains over
net realized long-term capital losses. A Portfolio may follow the practice of
distributing the entire excess of net realized long-term capital gains over net
realized short-term capital losses. However, a Portfolio may retain all or part
of such gain for reinvestment, after paying the related federal taxes for which
shareholders may then be able to claim a credit against their federal tax
liability. If a Portfolio does not distribute the amount of capital gain and/or
ordinary income required to be distributed by an excise tax provision of the
Code, that Portfolio may be subject to that excise tax.
Each Portfolio, except Money Market Portfolio, intends to distribute
investment company taxable income and any net realized capital gains in April
each year. Additional distributions may be made if necessary.
All distributions will be made in shares of a Portfolio. 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.
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<PAGE>
PERFORMANCE INFORMATION
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 calculated 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 Money Market Portfolio for the seven-day period ended
December 31, 1998, was 4.97%.
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, 1998, was 5.09%.
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, 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:
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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, 1998
Bond Portfolio Class A shares 5.84%
As of December 31, 1998, Bond Portfolio had not begun issuing Class B shares.
All Portfolios
A. Average Annual Total Return is the average annual compound rate of
return for the periods of one year and five years (or such shorter
periods as may be applicable dating from the commencement of the
Portfolio's operations) all ended on the date of a recent calendar
quarter.
Average annual total return quotations reflect changes in the price
of a Portfolio's shares and assume that all dividends and capital
gains distributions during the respective periods were reinvested in
Portfolio shares. Average annual total return is calculated by
finding the average annual compound rates of return of a
hypothetical investment over such periods, according to the
following formula (average annual total return is then expressed as
a percentage):
T = (ERV/P)^1/n - 1
Where:
P = a hypothetical initial investment of $1,000
T = Average Annual Total Return
n = number of years
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made
at the beginning of the applicable period.
Average Annual Total Return for periods ended December 31, 1998 -- Class A
Shares*
<TABLE>
<CAPTION>
One Year Five Years Ten Years Life of Fund
<S> <C> <C> <C> <C>
Money Market Portfolio 5.29% 5.00% 5.32% --
Bond Portfolio 6.57 6.11 8.66 --
Balanced Portfolio 23.19 16.26 13.77 --
Growth and Income Portfolio ** 7.18 -- -- 20.20%(1)
Capital Growth Portfolio *** 23.23 18.49 16.89 --
Global Discovery Portfolio**** 16.44 -- -- 12.85(2)(3)
International Portfolio***** 18.49 10.32 11.96 --
</TABLE>
* As of December 31, 1998, Bond and Balanced Portfolios each had not begun
issuing Class B shares.
** On May 1, 1997, existing Growth and Income Portfolio shares were
designated as Class A shares.
*** On May 12, 1997, existing Capital Growth Portfolio shares were designated
as Class A shares.
**** On May 2, 1997, existing Global Discovery Portfolio shares were designated
as Class A shares.
***** On May 8, 1997, existing International Portfolio shares were designated as
Class A shares.
(1) For the period beginning May 2, 1994 (commencement of operations).
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<PAGE>
(2) For the period beginning May 1, 1996 (commencement of operations).
(3) Until April 30, 1998, the Adviser had agreed to waive all or part of its
fees for Global Discovery Portfolio, excluding 12b-1 fees, to the extent
necessary so that the Portfolio's total expenses did not exceed 1.50% of
average annual net assets. If the Adviser had not done so, average annual
total returns would have been lower.
Average Annual Total Return for periods ended December 31, 1998 -- Class B
Shares*
<TABLE>
<CAPTION>
One Year Five Years Ten Years Life of Fund
<S> <C> <C> <C> <C>
Growth and Income Portfolio 6.95% -- -- 17.80%(1)
Capital Growth Portfolio 22.94 -- -- 25.49(2)
Global Discovery Portfolio 16.18 -- -- 18.39(3)**
International Portfolio 18.28 -- -- 12.27(4)
</TABLE>
* As of December 31, 1998, Bond and Balanced Portfolios each had not begun
issuing Class B shares.
** Until April 30, 1998, the Adviser had agreed to waive all or part of its
fees for Global Discovery Portfolio, excluding 12b-1 fees, to the extent
necessary so that the Portfolio's total expenses did not exceed 1.50% of
average annual net assets. If the Adviser had not done so, average annual
total returns would have been lower.
(1) The Fund commenced selling Growth and Income Portfolio Class B shares on
May 1, 1997.
(2) The Fund commenced selling Capital Growth Portfolio Class B shares on May
12, 1997.
(3) The Fund commenced selling Global Discovery Portfolio Class B shares on
May 2, 1997.
(4) The Fund commenced selling International Portfolio Class B shares on May
8, 1997.
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 -- Class A Shares*
<TABLE>
<CAPTION>
One Year Five Years Ten Years Life of Fund
<S> <C> <C> <C> <C>
Money Market Portfolio 5.29% 27.63% 67.92% --
Bond Portfolio 6.57 34.50 129.50 --
Balanced Portfolio 23.19 112.40 263.16 --
Growth and Income Portfolio ** 7.18 -- -- 136.11%(1)
Capital Growth Portfolio *** 22.94 133.54 376.18 --
Global Discovery Portfolio**** 16.44 -- -- 38.06(2)(3)
International Portfolio***** 18.49 63.42 209.53 --
</TABLE>
* As of December 31, 1998, Bond and Balanced Portfolios each had not begun
issuing Class B shares.
** On May 1, 1997, existing Growth and Income Portfolio shares were
designated as Class A shares.
*** On May 12, 1997, existing Capital Growth Portfolio shares were designated
as Class A shares.
**** On May 2, 1997, existing Global Discovery Portfolio shares were designated
as Class A shares.
***** On May 8, 1997, existing International Portfolio shares were designated as
Class A shares.
(1) For the period beginning May 2, 1994 (commencement of operations)
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<PAGE>
(2) For the period beginning May 1, 1996 (commencement of operations)
(3) Until April 30, 1998, the Adviser had agreed to waive all or part of its
fees for Global Discovery Portfolio, excluding 12b-1 fees, to the extent
necessary so that the Portfolio's total expenses did not exceed 1.50% of
average annual net assets. If the Adviser had not done so, cumulative
total returns would have been lower.
Cumulative Total Return for periods ended December 31, 1998 -- Class B Shares*
<TABLE>
<CAPTION>
One Year Five Years Ten Years Life of Fund
<S> <C> <C> <C> <C>
Growth and Income Portfolio 6.95% -- -- 31.43%(1)
Capital Growth Portfolio 28.58 -- -- 45.06(2)
Global Discovery Portfolio 16.18 -- -- 32.48(3)**
International Portfolio 18.28 -- -- 21.03(4)
</TABLE>
* As of December 31, 1998, Bond and Balanced Portfolios each had not begun
issuing Class B shares.
** Until April 30, 1998, the Adviser had agreed to waive all or part of its
fees for Global Discovery Portfolio, excluding 12b-1 fees, to the extent
necessary so that the Portfolio's total expenses did not exceed 1.50% of
average annual net assets. If the Adviser had not done so, cumulative
total returns would have been lower.
(1) The Fund commenced selling Growth and Income Portfolio Class B shares on
May 1, 1997.
(2) The Fund commenced selling Capital Growth Portfolio Class B shares on May
12, 1997.
(3) The Fund commenced selling Global Discovery Portfolio Class B shares on
May 2, 1997.
(4) The Fund commenced selling International Portfolio Class B shares on May
8, 1997.
As Large Company Growth Portfolio and Small Company Growth Portfolio are
each new portfolios, no performance data are available.
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,
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<PAGE>
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 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.
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Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by Masterfund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
IBC Money Fund Report, a weekly publication of IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity and including certain averages as performance
benchmarks, specifically "IBC's Money Fund Average," and "IBC's Government
Money Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
Investor's Business Daily, a daily newspaper that features financial, economic,
and business news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
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.
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The No-Load Fund Investor, a monthly newsletter, published by Sheldon Jacobs,
that includes mutual fund performance data and recommendations for the mutual
fund investor.
No-Load Fund*X, a monthly newsletter, published by DAL Investment Company, Inc.,
that reports on mutual fund performance, rates funds and discusses investment
strategies for the mutual fund investor.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
SmartMoney, a national personal finance magazine published monthly by Dow Jones
and Company, Inc. and The Hearst Corporation. Focus is placed on ideas for
investing, spending and saving.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
U.S. News and World Report, a national news weekly that periodically reports
mutual fund performance data.
Value Line Mutual Fund Survey, an independent organization that provides
biweekly performance and other information on mutual funds.
The Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
Wiesenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records and price ranges.
Working Woman, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Worth, a national publication issued 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
Taking a Global Approach
Many U.S. investors limit their holdings to U.S. securities because they
assume that international or global investing is too risky. While there are
risks connected with investing overseas, it's important to remember that no
investment -- even in blue-chip domestic securities -- is entirely risk free.
Looking outside U.S. borders, an investor today can find opportunities that
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
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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.
Participating Insurance Companies with inquiries regarding the Fund or its
Portfolios may call the Fund's underwriter, Scudder Investor Services, Inc.,
collect at 617-295-1000 or write Scudder Investor Services, Inc., Two
International Place, Boston, Massachusetts 02110-4103.
ORGANIZATION AND CAPITALIZATION
General
The Portfolios are portfolios of Scudder Variable Life Investment Fund, a
Massachusetts business trust established under a Declaration of Trust dated
March 15, 1985, as amended from time to time. The Fund offers nine portfolios:
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.
The Trust may issue an unlimited number of shares of beneficial interest
in the Portfolios, all having $.01 par value, which may be divided by the Board
of Trustees into classes of shares. The Board of Trustees of the Trust may
authorize the issuance of additional classes and additional Portfolios if deemed
desirable, each with its own investment objective, policies and restrictions.
Since the Trust offers multiple Portfolios, it is known as a "series company."
Shares of a Portfolio have equal noncumulative voting rights and equal rights
with respect to dividends, assets and liquidation of such Portfolio and are
subject to any preferences, rights or privileges of any classes of shares of the
Portfolio. Currently, each Portfolio (except Money Market Portfolio, which does
not offer separate classes of shares) offers two classes of shares: Class A and
Class B shares. Shares of each Portfolio have equal noncumulative voting rights
except that each Portfolio's Class A and Class B shares have separate and
exclusive voting rights with respect to the Portfolios' Class A and Class B Rule
12b-1 Plans, respectively. Shares of each class also have equal rights with
respect to dividends, assets and liquidation subject to any preferences (such as
resulting from different Rule 12b-1 distribution fees), rights or privileges of
any classes of shares of a Portfolio. Shares of each Portfolio are fully paid
and nonassessable when issued, are transferable without restriction and have no
preemptive or conversion rights. The Trust is not required to hold annual
shareholder meetings and does not intend to do so. However, the Trust will hold
special meetings as required or deemed desirable for such purposes as electing
Trustees, changing fundamental policies or approving an investment management
agreement. Subject to the Declaration of Trust, shareholders may remove
Trustees. If shares of more than one Portfolio are outstanding, shareholders
will vote by Portfolio and not in the aggregate or by class except when voting
in the aggregate is required under the Investment Company Act of 1940 (the "1940
Act"), such as for the election of Trustees, or when voting by class is
appropriate.
The Portfolios generally are not required to hold meetings of their
shareholders. Under the Declaration of Trust, however, shareholder meetings will
be held in connection with the following matters: (a) the election or removal of
Trustees if a meeting is called for such purpose; (b) the adoption of any
contract for which shareholder approval is required by the 1940 Act; (c) any
termination of a Portfolio or a class to the extent and as provided in the
Declaration of Trust; (d) any amendment of the Declaration of Trust (other than
amendments changing the name of the Trust or
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Portfolios, supplying any omission, curing any ambiguity or curing, correcting
or supplementing any defective or inconsistent provision thereof); and (e) such
additional matters as may be required by law, the Declaration of Trust, the
By-laws of the Portfolios, or any registration of the Portfolios with the
Securities and Exchange Commission or any state, or as the Trustees may consider
necessary or desirable. The shareholders also would vote upon changes in
fundamental investment objectives, policies or restrictions.
Each Trustee serves until the next meeting of shareholders, if any, called
for the purpose of electing trustees and until the election and qualification of
a successor or until such trustee sooner dies, resigns, retires or is removed by
a majority vote of the shares entitled to vote (as described below) or a
majority of the trustees. In accordance with the 1940 Act (a) each Fund will
hold a shareholder meeting for the election of trustees at such time as less
than a majority of the trustees have been elected by shareholders, and (b) if,
as a result of a vacancy on the Board of Trustees, less than two-thirds of the
trustees have been elected by the shareholders, that vacancy will be filled only
by a vote of the shareholders.
Trustees may be removed from office by a vote of the holders of two-thirds
of the outstanding shares at a meeting called for that purpose, which meeting
shall be held upon the written request of the holders of not less than 10% of
the outstanding shares. Upon the written request of ten or more shareholders who
have been such for at least six months and who hold shares constituting at least
1% of the outstanding shares of a Portfolio stating that such shareholders wish
to communicate with the other shareholders for the purpose of obtaining the
signatures necessary to demand a meeting to consider removal of a trustee, each
Portfolio has undertaken to disseminate appropriate materials at the expense of
the requesting shareholders.
The Trust's Declaration of Trust provides that the presence at a
shareholder meeting in person or by proxy of at least 30% of the shares entitled
to vote on a matter shall constitute a quorum. Thus, a meeting of shareholders
of a Portfolio could take place even if less than a majority of the shareholders
were represented on its scheduled date. Shareholders would in such a case be
permitted to take action which does not require a larger vote than a majority of
a quorum, such as the election of trustees and ratification of the selection of
auditors. Some matters requiring a larger vote under the Declaration of Trust,
such as termination or reorganization of a Portfolio and certain amendments of
the Declaration of Trust, would not be effected by this provision; nor would
matters which under the 1940 Act require the vote of a "majority of the
outstanding voting securities" as defined in the 1940 Act.
The Trust's Declaration of Trust specifically authorizes the Board of
Trustees to terminate any Portfolio or class by notice to the shareholders
without shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain circumstances, be held personally liable for obligations of
a Portfolio. The Declaration of Trust, however, disclaims shareholder liability
for acts or obligations of each Portfolio and requires that notice of such
disclaimer be given in each agreement, obligation, or instrument entered into or
executed by a Portfolio or the Trust's Trustees. Moreover, the Declaration of
Trust provides for indemnification out of Portfolio property for all losses and
expenses of any shareholder held personally liable for the obligations of a
Portfolio and each Portfolio will be covered by insurance which the Trustees
consider adequate to cover foreseeable tort claims. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
considered by the Adviser remote and not material, since it is limited to
circumstances in which a disclaimer is inoperative and such Portfolio itself is
unable to meet its obligations. The Trust will vote its shares in each
Underlying Fund in proportion to the vote of all other shareholders of each
respective Underlying Fund.
The Declaration of Trust provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust,
that the Trustees and officers will not be liable for errors of judgment or
mistakes of fact or law, and that the Trust, will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, except if
it is determined in the manner provided in the Declaration of Trust that they
have not acted in good faith in the reasonable belief that their actions were in
the best interests of the Trust. However, nothing in the Declaration of Trust
protects or indemnifies a Trustee or officer against any liability to which he
or she would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, of reckless disregard of duties involved in the conduct of his
or her office.
The Adviser will be the sole shareholder of Large Company Growth Portfolio
and Small Company Growth Portfolio until such time as each Portfolio has public
shareholders and therefore may be deemed a controlling person.
As of December 31, 1998, American Maturity Life Insurance Co. (200
Hopmeadow Street, Simsbury, CT 06089) owned of record and beneficially 0.27% of
Money Market Portfolio, 6.63% of Bond Portfolio Class A shares, 0.319% of
Capital Growth Portfolio Class A shares and 5.62% of Growth and Income Portfolio
Class A shares; they owned of record and beneficially 2.26% of the Fund's
outstanding shares. Allmerica Life Insurance Co. (440 Lincoln Street, Worcester,
MA 01653) owned of record and beneficially 0.63% of Capital Growth Portfolio
Class A
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shares, 6.754% of Growth and Income Portfolio Class A shares and 13.75% of
Global Discovery Portfolio Class A shares; they owned of record and beneficially
0.81% of the Fund's outstanding shares. American Life Insurance Company [a
subsidiary of Mutual of America] (320 Park Avenue, 9th Floor, New York, NY
10022) owned of record and beneficially 1.22% of Bond Portfolio Class A shares,
2.16% of Capital Growth Portfolio Class A shares and 1.21% of International
Portfolio Class A shares; they owned of record and beneficially 0.53% of the
Fund's outstanding shares. Banner Life Insurance Company of Rockville, MD (1701
Research Blvd., Rockville, MD 20850) owned of record and beneficially 0.355% of
Money Market Portfolio, 1.37% of Bond Portfolio, 4.94% of Balanced Portfolio
Class A shares, 1.05% of International Portfolio Class A shares, 3.97% of Growth
and Income Portfolio Class A shares, 8.40% of Global Discovery Portfolio Class A
shares and 1.72% of Capital Growth Portfolio Class A shares; they owned of
record and beneficially 1.19% of the Fund's total outstanding shares. 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 3.00%
of Money Market Portfolio, 2.47% of Bond Portfolio Class A shares, 4.94% of
Balanced Portfolio Class A shares, 1.53% of Capital Growth Portfolio Class A
shares and 0.81% of International Portfolio Class A shares; they owned of record
and beneficially 2.38% 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. Companion Life Insurance
Company (Mutual of Omaha Plaza, Omaha, NE 68175-1020), owned of record and
beneficially 0.13% of Money Market Portfolio, 0.12% of Bond Portfolio Class A
shares, 0.12% of International Portfolio Class A shares, 2.03% of Growth and
Income Portfolio Class B shares and 0.59% of Global Discovery Portfolio Class B
shares; they owned of record and beneficially 0.11% of the Fund's outstanding
shares. Fortis Benefits Insurance Company (Bank, Sixth and Marquette-MS0063,
Minneapolis, MN 55479) owned of record and beneficially 1.65% of International
Portfolio Class A shares; they owned of record and beneficially 0.22% of the
Fund's total outstanding shares. Glenbrook Life and Annuity Company (3100
Sanders Road, Suite N4A, Northbrook, IL 60002) owned of record and beneficially
0.02% of Money Market Portfolio, 0.01% of Bond Portfolio Class A shares, 0.01%
of Capital Growth Portfolio Class A shares, 0.01% of Balanced Portfolio Class A
shares and 0.01% of Growth and Income Portfolio Class A shares; they owned of
record and beneficially 0.01% of the Fund's outstanding shares. Scudder Horizon
Plan (3100 Sanders Road, Suite N4A, Northbrook, IL 60002) owned of record and
beneficially 45.07% of Money Market Portfolio, 26.51% of Bond Portfolio Class A
shares, 19.82% of Capital Growth Portfolio Class A shares, 46.83% of Balanced
Portfolio Class A shares, 18.36% of International Portfolio Class A shares,
66.38% of Growth and Income Portfolio Class A shares and 74.83% of Global
Discovery Portfolio Class A shares. Kemper Investors Life Insurance Co. (One
Kemper Drive, Long Grove, IL 60049) owned of record and beneficially 0.07% of
Capital Growth Portfolio Class A shares, 0.17% of International Portfolio Class
A shares, 2.32% of International Portfolio Class B shares, 0.92% of Growth and
Income Portfolio Class A shares, 0.04% of Growth and Income Portfolio Class B
shares and 2.92% of Global Discovery Portfolio Class A shares; they owned of
record and beneficially 0.12% of the Fund's outstanding shares. Lincoln Benefit
Life Insurance Company (206 South 13th Street, Ste. 300, Lincoln, NE 68508)
owned of record and beneficially 6.37% of Bond Portfolio Class A shares, 10.92%
of Balanced Portfolio Class A shares, 0.02% of International Portfolio Class A
shares, 0.11% of Growth and Income Portfolio Class A shares and 0.10% of Global
Discovery Portfolio Class A shares; they owned of record and beneficially 0.81%
of the Fund's total outstanding shares. Mutual of America Life Insurance Company
of New York (320 Park Ave., 6th Fl., New York, NY 10022, a New York corporation)
, owned of record and beneficially 37.23% of Bond Portfolio Class A shares,
56.87% of Capital Growth Portfolio Class A shares and 37.85% of International
Portfolio Class A shares; they owned of record and beneficially 15.05% of the
Fund's total outstanding shares. Paragon Life Insurance Company (100 South
Brentwood, St. Louis, MO 63105) owned of record and beneficially 0.24% of Money
Market Portfolio, 0.17% of Bond Portfolio Class A shares, 0.17% of Capital
Growth Portfolio Class A shares, 0.47% of Balanced Portfolio Class A shares,
0.20% of Growth and Income Portfolio Class A shares, 0.40% of International
Portfolio Class A shares and 0.01% of Global Discovery Portfolio Class A shares;
they owned of record and beneficially 0.25% of the Fund's total outstanding
shares. Providentmutual Life and Annuity Company of America, (1050 Westlakes
Dr., Berwyn, PA 19312) owned of record and beneficially 11.18% of Bond Portfolio
Class A shares, 3.11% of Growth and Income Portfolio Class, 3.11% of
International Portfolio Class A shares and 13.99% of Growth and Income Portfolio
Class A shares; they owned of record and beneficially 1.91% of the Fund's total
outstanding shares. Safeco Life Insurance Companies (15411 N.E. 51st Street,
Redmond, WA 98052), owned of record and beneficially 30.36% of Balanced
Portfolio Class A shares and 6.97% of International Portfolio Class A shares;
they owned of record and beneficially 2.11% of the Fund's total outstanding
shares. Security First Life Insurance Company (11365 West Olympic Blvd., Los
Angeles, CA 90064) owned of record and beneficially 1.86% of International
Portfolio Class A shares; they owned of record and
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beneficially 0.24% of the Fund's outstanding shares. Southwestern Life Insurance
Company (500 North Akard, Dallas, TX 75201) owned of record and beneficially
1.02% of Capital Growth Portfolio Class A shares; they owned of record and
beneficially 0.14% of the Fund's outstanding shares. Union Central Life
Insurance Company (1876 Waycross Road, Cincinnati, OH 45240) owned of record and
beneficially 43.42% of Money Market Portfolio, 7.22% of Capital Growth Portfolio
Class A shares and 16.78% of International Portfolio Class A shares; they owned
of record and beneficially 27.19% of the Fund's total outstanding shares. United
Companies Life Insurance Company (8545 United Plaza Blvd., Baton Rouge, LA
70809) owned of record and beneficially 4.47% of Money Market Portfolio and
1.18% of International Portfolio Class A shares; they owned of record and
beneficially 2.63% of the Fund's outstanding shares. United of Omaha Life
Insurance Company (Mutual of Omaha Plaza, Law Division, 3301 Dodge Street,
Omaha, NE 68131) owned of record and beneficially 0.08% of Money Market
Portfolio, 0.44% of Bond Portfolio Class A shares, 7.36% of International
Portfolio Class B shares, 97.93% of Growth and Income Portfolio Class B shares
and 99.41% of Global Discovery Portfolio Class B shares; they owned of record
and beneficially 1.68% of the Fund's total outstanding shares . USAA Life
Insurance Company (R.A.F.A., F-2-E, 9800 Fredericksburg Rd., San Antonio, TX
78288) owned of record and beneficially 4.19% of Capital Growth Portfolio Class
A shares; they owned of record and beneficially 0.59% of the Fund's outstanding
shares. WM Life Insurance Co. (154211 N.E. 51st Street, Redmond, WA 98052) owned
of record and beneficially 0.18% of Money Market Portfolio, 100.00% of Capital
Growth Portfolio Class B shares and 97.68% of International Portfolio Class B
shares; they owned of record and beneficially 0.12% of the Fund's outstanding
shares. Washington National Life Insurance Company (c/o United Presidential Life
Insurance Co., One Presidential Pkwy., Kokomo, IN 46904) owned of record and
beneficially 0.33% of Money Market Portfolio, 5.17% of Bond Portfolio Class A
shares, 4.05% of Capital Growth Portfolio Class A shares and 1.33% of Growth and
Income Portfolio Class A shares; they owned of record and beneficially 1.30% of
the Fund's outstanding shares. Zurich Kemper Life (320 Park Avenue, 9th Floor,
New York, NY 10022) owned of record and beneficially 1.12% of Bond Portfolio
Class A shares, 0.23% of Capital Growth Portfolio Class A shares and 0.73% of
Growth and Income Portfolio Class A shares; they owned of record and
beneficially 0.14% 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 Money Market Portfolio
would be voted upon only by shareholders of 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.
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PORTFOLIO TRANSACTIONS
Brokerage Commissions
Allocation of brokerage is supervised by the Adviser.
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for a Portfolio is to obtain the most favorable net
results, taking into account such factors as price, commission where applicable,
size of order, difficulty of execution and skill required of the executing
broker/dealer. The Adviser seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through the familiarity of
the Distributor with commissions charged on comparable transactions, as well as
by comparing commissions paid by a Fund to reported commissions paid by others.
The Adviser routinely reviews commission rates, execution and settlement
services performed and makes internal and external comparisons.
The Portfolios' purchases and sales of fixed-income securities are
generally placed by the Adviser with primary market makers for these securities
on a net basis, without any brokerage commission being paid by a Portfolio.
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.
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
broker/dealers who supply brokerage and research services to the Adviser or a
Portfolio. The term "research services" includes advice as to the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities or purchasers or sellers of securities; and
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 , if applicable, for a
Portfolio to pay a brokerage commission in excess of that which another broker
might charge for executing the same transaction on account of execution services
and the receipt of research services. The Adviser has negotiated arrangements,
which are not applicable to most fixed-income transactions, with certain
broker/dealers pursuant to which a broker/dealer will provide research services,
to the Adviser or a Portfolio in exchange for the direction by the Adviser of
brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity security transactions.
The Adviser will not place orders with a broker/dealer on the basis that the
broker/dealer has or has not sold shares of a Portfolio. In effecting
transactions in over-the-counter securities, orders are placed with the
principal market makers for the security being traded unless, after exercising
care, it appears that more favorable results are available elsewhere.
Subject to the foregoing, the Adviser may consider sales of variable life
insurance policies and variable annuity contracts for which a Portfolio is an
investment option as a factor in the selection of firms to execute portfolio
transactions.
To the maximum extent feasible, it is expected that the Adviser will place
orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker/dealer and a subsidiary of the Adviser; the
Distributor will place orders on behalf of the Portfolios with issuers,
underwriters or other brokers and dealers. The Distributor will not receive any
commission, fee or other remuneration from the Portfolios for this service.
Although certain research services from broker/dealers may be useful to a
Portfolio and to the Adviser, it is the opinion of the Adviser that such
information only supplements 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 a Portfolio, and not all such information is used by the
Adviser in connection with a Fund. Conversely, such information provided to the
Adviser by broker/dealers through whom other clients of the Adviser effect
securities transactions may be useful to the Adviser in providing services to a
Portfolio.
The Trustees review, from time to time, whether the recapture for the
benefit of the Portfolios of some portion of the brokerage commissions or
similar fees paid by the Funds on portfolio transactions is legally permissible
and advisable.
71
<PAGE>
In the years ended December 31, 1996 , 1997 and 1998, the Fund paid
brokerage commissions of $2,106,414 , $2,708,797 and $2,643,782, respectively.
In the years ended December 31, 1996, 1997, and 1998, International Portfolio
paid brokerage commissions of $1,403,778 , $2,018,972 and $1,503,177,
respectively, Capital Growth Portfolio paid brokerage commissions of $505,817 ,
$474,905 and $817,834, respectively, and Balanced Portfolio paid brokerage
commissions of $67,828 , $64,496 and $80,289, respectively. Growth and Income
Portfolio paid brokerage commissions of $78,517 , $100,066 and $173,899,
respectively. In the years ended December 31, 1997 and 1998, Global Discovery
Portfolio paid brokerage commissions of $50,358 and $41,583, respectively. In
the year ended December 31, 1998, $1,244,671 of the total brokerage commissions
paid by International Portfolio, $638,480 of the total brokerage commissions
paid by Capital Growth Portfolio, $138,130 of the total brokerage commissions
paid by Growth and Income Portfolio, $68,828 of the total brokerage commissions
paid by Balanced Portfolio, and $30,681 of the total brokerage commissions paid
by 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 $527,150,894 for International
Portfolio (77% of all brokerage transactions), $694,248,935 for Capital Growth
Portfolio (78% of all brokerage transactions), $133,496,599 for Growth and
Income Portfolio (78% of all brokerage transactions), $162,112,979 (77% of all
brokerage transactions) for Balanced Portfolio and $21,317,692 (74% of all
brokerage transactions) for 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% 115.14%
Balanced Portfolio 43.10 74.08
Growth and Income Portfolio 28.41 38.70
Capital Growth Portfolio 41.77 54.73
Global Discovery Portfolio 83.16 54.37
International Portfolio 61.35 70.65
Under the above definition, 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 Portfolios 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.
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.
72
<PAGE>
COUNSEL
The firm of Dechert Price & Rhoads, Ten Post Office Square, Suite 1230,
Boston, Massachusetts 02109, is counsel for the Fund.
ADDITIONAL INFORMATION
The activities of the Fund are supervised by its Trustees, who are elected
by shareholders. Shareholders have one vote for each share held. Fractional
shares have fractional votes.
Portfolio securities of the 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 and transaction charges for this service.
Global Discovery and International Portfolios each 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.
For the year ended December 31, 1996, fees paid pursuant to the agreement
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 (Global
Discovery Portfolio commenced operations on May 1, 1996) and $335,822 for
International Portfolio. For the year ended December 31, 1997, fees paid
pursuant to the agreement 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, fees paid pursuant to the agreement amounted to $32,018 for
Money Market Portfolio, $45,089 for Bond Portfolio, $60,893 for Balanced
Portfolio, $89,604 for Growth and Income Portfolio, $134,186 for Capital Growth
Portfolio, $67,811 for Global Discovery Portfolio and $373,527 for International
Portfolio.
Large Company Growth Portfolio and Small Company Growth Portfolio each
commenced operations on May 1, 1999.
Scudder Service Corporation ("SSC"), P.O. Box 2291, Boston, Massachusetts,
02107-2291, is the transfer and dividend paying agent for the Fund. The Fund
reimburses SSC, or pays directly, for "out-of-pocket" expenses. Such expenses
include, but are not limited to: telephone (portion allocable to servicing
accounts); postage, overnight service or similar services; stationary and
envelopes; shareholder statements, printing and postage; checks, stock supply,
printing and postage; data circuits; lease and maintenance of SAIL and Easy
Access; forms; microfilm and microfiche; and expenses incurred at the specific
direction of the Fund. These expenses will be billed by SSC to the Fund within
the first five (5) business days of each month and will be paid by wire within
five (5) business days of receipt. For the fiscal year ended December 31, 1998,
the Fund reimbursed SSC in the amount $64,348. For the fiscal year ended
December 31, 1997, the Fund reimbursed SSC in the amount of $54,456. For the
fiscal year ended December 31, 1996, the Fund reimbursed SSC in the amount of
$43,385.
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.
73
<PAGE>
The CUSIP number of Money Market Portfolio is 81123R 10 2.
The CUSIP number of Bond Portfolio Class A shares is 81123R 20 1.
The CUSIP number of Bond Portfolio Class B shares is 81123R 83 9.
The CUSIP number of Balanced Portfolio Class A shares is 81123R 40 9.
The CUSIP number of Balanced Portfolio Class B shares is 81123R 81 3.
The CUSIP number of Growth and Income Portfolio Class A shares is 81123R
30 0.
The CUSIP number of Growth and Income Portfolio Class B shares is 81123R
85 4.
The CUSIP number of Capital Growth Portfolio Class A shares is 81123R 77
1.
The CUSIP number of Capital Growth Portfolio Class B shares is 81123R 82
1.
The CUSIP number of Large Company Growth Portfolio Class A shares is
81123R 76 3.
The CUSIP number of Large Company Growth Portfolio Class B shares is
81123R 75 5.
The CUSIP number of Small Company Growth Portfolio Class A shares is
81123R 74 8.
The CUSIP number of Small Company Growth Portfolio Class B shares is
81123R 73 0.
The CUSIP number of Global Discovery Portfolio Class A shares is 81123R 84
7.
The CUSIP number of Global Discovery Portfolio Class B shares is 81123R 78
9.
The CUSIP number of International Portfolio Class A shares is 81123R 50 8.
The CUSIP number of International Portfolio Class B shares is 81123R 79 7.
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
74
<PAGE>
Growth and Income Portfolio
Capital Growth Portfolio
Global Discovery Portfolio
International Portfolio
Large Company Growth Portfolio and Small Company Growth Portfolio each
commenced operations on May 1, 1999.
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.
75
<PAGE>
APPENDIX
Description of Bond Ratings
Moody's Investors Service, Inc.
Aaa: Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds that are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa: Bonds that are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Standard & Poor's Corporation
AAA: Bonds rated AAA are highest grade debt obligations. This rating
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A: Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Bonds rated BB and B are regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
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
- ------- --------
<S> <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.)
(2)(a) Amended and Restated Declaration of Trust dated October 24, 1997 is filed
herein.
(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.
(Previously filed as Exhibit d(1) to Post-Effective Amendment No. 26 to
the Registration Statement.)
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.
(Previously filed as Exhibit d(2) to Post-Effective Amendment No. 26 to
the Registration Statement.)
(3) Investment Management Agreement between the Registrant and Scudder Kemper
Investments, Inc. with respect to the Balanced Portfolio dated December
31, 1997.
(Previously filed as Exhibit d(3) to Post-Effective Amendment No. 26 to
the Registration Statement.)
(4) Investment Management Agreement between the Registrant and Scudder Kemper
Investments, Inc. with respect to the Growth and Income Portfolio dated
December 31, 1997.
(Previously filed as Exhibit d(4) to Post-Effective Amendment No. 26 to
the Registration Statement.)
(5) Investment Management Agreement between the Registrant and Scudder Kemper
Investments, Inc. with respect to the Capital Growth Portfolio dated
December 31, 1997.
(Previously filed as Exhibit d(5) to Post-Effective Amendment No. 26 to
the Registration Statement.)
(6) Investment Management Agreement between the Registrant and Scudder Kemper
Investments, Inc. with respect to the Global Discovery Portfolio dated
December 31, 1997.
(Previously filed as Exhibit d(6) to Post-Effective Amendment No. 26 to
the Registration Statement.)
(7) Investment Management Agreement between the Registrant and Scudder Kemper
Investments, Inc. with respect to the International Portfolio dated
December 31, 1997.
(Previously filed as Exhibit d(7) to Post-Effective Amendment No. 26 to
the Registration Statement.)
(8) Investment Management Agreement between the Registrant and Scudder Kemper
Investments, Inc. with respect to the Money Market Portfolio dated
September 7, 1998.
(Previously filed as Exhibit d(8) to Post-Effective Amendment No. 26 to
the Registration Statement.)
(9) Investment Management Agreement between the Registrant and Scudder Kemper
Investments, Inc. with respect to the Bond Portfolio dated September 7,
1998.
(Previously filed as Exhibit d(9) to Post-Effective Amendment No. 26 to
the Registration Statement.)
(10) Investment Management Agreement between the Registrant and Scudder Kemper
Investments, Inc. with respect to the Balanced Portfolio dated September
7, 1998.
(Previously filed as Exhibit d(10) to Post-Effective Amendment No. 26 to
the Registration Statement.)
Part C - Page 3
<PAGE>
(11) Investment Management Agreement between the Registrant and Scudder Kemper
Investments, Inc. with respect to the Growth and Income Portfolio dated
September 7, 1998.
(Previously filed as Exhibit d(11) to Post-Effective Amendment No. 26 to
the Registration Statement.)
(12) Investment Management Agreement between the Registrant and Scudder Kemper
Investments, Inc. with respect to the Capital Growth Portfolio dated
September 7, 1998.
(Previously filed as Exhibit d(12) to Post-Effective Amendment No. 26 to
the Registration Statement.)
(13) Investment Management Agreement between the Registrant and Scudder Kemper
Investments, Inc. with respect to the Global Discovery Portfolio dated
September 7, 1998.
(Previously filed as Exhibit d(13) to Post-Effective Amendment No. 26 to
the Registration Statement.)
(14) Investment Management Agreement between the Registrant and Scudder Kemper
Investments, Inc. with respect to the International Portfolio dated
September 7, 1998.
(Previously filed as Exhibit d(14) to Post-Effective Amendment No. 26 to
the Registration Statement.)
(15) Investment Management Agreement between the Registrant and Scudder Kemper
Investments, Inc. with respect to the Large Company Growth Portfolio dated
May 1, 1999 is filed herein.
(16) Investment Management Agreement between the Registrant and Scudder Kemper
Investments, Inc. with respect to the Small Company Growth Portfolio dated
May 1, 1999 is filed herein.
(e) (1) Underwriting Agreement for Class A Shares between the Registrant and
Scudder Investor Services, Inc. dated September 7, 1998.
(Previously filed as Exhibit e(1) to Post-Effective Amendment No. 26 to
the Registration Statement.)
(2) Underwriting Agreement for Class B Shares between the Registrant and
Scudder Investor Services, Inc. dated September 7, 1998.
(Previously filed as Exhibit e(2) to Post-Effective Amendment No. 26 to
the Registration Statement.)
(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.)
Part C - Page 4
<PAGE>
(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.)
(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.)
Part C - Page 5
<PAGE>
(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.
(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.)
Part C - Page 6
<PAGE>
(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.)
(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.)
Part C - Page 7
<PAGE>
(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.)
(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) Opinion of Counsel is filed herein.
(j) Consent of Independent Accountants is filed herein.
(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 are filed herein.
(o) Inapplicable.
</TABLE>
Part C - Page 8
<PAGE>
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.
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
Part C - Page 9
<PAGE>
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.
(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.
Part C - Page 10
<PAGE>
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 ##
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**
Part C - Page 11
<PAGE>
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
</TABLE>
* 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
Item 27. Principal Underwriters.
- -------- -----------------------
(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
Part C - Page 12
<PAGE>
Name and Principal Positions and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
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
Caroline Pearson Clerk Assistant Secretary
Two International Place
Boston, MA 02110
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
Part C - Page 13
<PAGE>
Name and Principal Positions and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
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
</TABLE>
(c)
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Net Underwriting Compensation on
Name of Principal Discounts and Redemptions Brokerage Other
Underwriter Commissions and Repurchases Commissions Compensation
----------- ----------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
Scudder Investor None None None None
Services, Inc.
</TABLE>
Item 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 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.
Part C - Page 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(b) under the Securities Act of 1933 and has duly
caused this amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of Boston and the
Commonwealth of Massachusetts on the 23rd day of April, 1999.
SCUDDER VARIABLE LIFE INVESTMENT FUND
By: /s/William M. Thomas
-----------------------------------
William M. Thomas, President
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 April 23, 1999
Officer)
/s/Daniel Pierce
- --------------------------------------
Daniel Pierce* Vice President and Trustee April 23, 1999
/s/Dr. Kenneth Black, Jr.
- --------------------------------------
Dr. Kenneth Black, Jr.* Trustee April 23, 1999
/s/Dr. Rosita P. Chang
- --------------------------------------
Dr. Rosita P. Chang* Trustee April 23, 1999
/s/Peter B. Freeman
- --------------------------------------
Peter B. Freeman* Trustee April 23, 1999
/s/Dr. J. D. Hammond
- --------------------------------------
Dr. J. D. Hammond* Trustee April 23, 1999
/s/John R. Hebble
- --------------------------------------
John R. Hebble Treasurer (Principal Financial and April 23, 1999
Accounting Officer)
</TABLE>
<PAGE>
*By: /s/Sheldon A. Jones
-----------------------------
Sheldon A. Jones**
** 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 February 12, 1999.
2
<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. 27
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 31
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
SCUDDER VARIABLE LIFE INVESTMENT FUND
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
EXHIBIT INDEX
Exhibit (a)(2)(a)
Exhibit (d)(15)
Exhibit (d)(16)
Exhibit (i)
Exhibit (j)
Exhibit (n)
Exhibit (a)(2)(a)
SCUDDER VARIABLE LIFE INVESTMENT FUND
AMENDED AND RESTATED DECLARATION OF TRUST
DATED OCTOBER 24, 1997
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
ARTICLE I.........................................................................................1
Section 1.1. Name........................................................................1
Section 1.2. Definitions.................................................................1
ARTICLE II........................................................................................3
Section 2.1. General Powers..............................................................3
Section 2.2. Investments.................................................................3
Section 2.3. Legal Title.................................................................5
Section 2.4. Issuance and Repurchase of Shares...........................................5
Section 2.5. Delegation; Committees......................................................6
Section 2.6. Collection and Payment......................................................6
Section 2.7. Expenses....................................................................6
Section 2.8. Manner of Acting; By-laws...................................................6
Section 2.9. Miscellaneous Powers........................................................7
Section 2.10. Principal Transactions.....................................................7
Section 2.11. Number of Trustees.........................................................7
Section 2.12. Election and Term..........................................................7
Section 2.13. Resignation and Removal....................................................8
Section 2.14. Vacancies..................................................................8
Section 2.15. Delegation of Power to Other Trustees......................................9
Section 2.16. Shareholder Vote, etc......................................................9
ARTICLE III.......................................................................................9
Section 3.1. Distribution Contract.......................................................9
Section 3.2. Advisory or Management Contract.............................................9
Section 3.3. Affiliations of Trustees or Officers, Etc..................................10
Section 3.4. Compliance with 1940 Act...................................................10
ARTICLE IV.......................................................................................11
Section 4.1. No Personal Liability of Shareholders, Trustees, Etc.......................11
Section 4.2. Non-Liability of Trustees, Etc.............................................11
Section 4.3. Mandatory Indemnification..................................................11
Section 4.4. No Bond Required of Trustees...............................................13
Section 4.5. No Duty of Investigation; Notice in Trust Instruments, Etc.................13
Section 4.6. Reliance on Experts, Etc...................................................14
ARTICLE V........................................................................................14
Section 5.1. Beneficial Interest........................................................14
<PAGE>
Section 5.2. Rights of Shareholders.....................................................14
Section 5.3. Trust Only.................................................................14
Section 5.4. Issuance of Shares.........................................................15
Section 5.5. Register of Shares.........................................................15
Section 5.6. Transfer of Shares.........................................................15
Section 5.7. Notices, Reports...........................................................16
Section 5.8. Treasury Shares............................................................16
Section 5.9. Voting Powers..............................................................16
Section 5.10. Meetings of Shareholders..................................................17
Section 5.11. Series Designation........................................................17
Section 5.12. Assent to Declaration of Trust............................................19
Section 5.13. Class Designation.........................................................19
ARTICLE VI.......................................................................................20
Section 6.1. Redemption of Shares.......................................................20
Section 6.2. Price......................................................................20
Section 6.3. Payment....................................................................20
Section 6.4. Effect of Suspension of Determination of Net Asset Value...................20
Section 6.5. Repurchase by Agreement....................................................21
Section 6.6. Redemption of Shareholder's Interest.......................................21
Section 6.7. Redemption of Shares in Order to Qualify as Regulated
Investment Company; Disclosure of Holding..............................21
Section 6.8. Reductions in Number of Outstanding Shares Pursuant to Net
Asset Value Formula....................................................22
Section 6.9. Suspension of Right of Redemption..........................................22
ARTICLE VII......................................................................................22
Section 7.1. Net Asset Value............................................................22
Section 7.2. Distributions to Shareholders..............................................23
Section 7.3. Determination of Net Income; Constant Net Asset Value;
Reduction of Outstanding Shares........................................24
Section 7.4. Allocation Between Principal and Income....................................24
Section 7.5. Power to Modify Foregoing Procedures.......................................25
ARTICLE VIII.....................................................................................25
Section 8.1. Duration...................................................................25
Section 8.2. Termination of Trust.......................................................25
Section 8.3. Amendment Procedure........................................................26
Section 8.4. Merger, Consolidation and Sale of Assets...................................26
Section 8.5. Incorporation..............................................................27
ARTICLE IX.......................................................................................27
-ii-
<PAGE>
ARTICLE X........................................................................................27
Section 10.1. Filing....................................................................27
Section 10.2. Governing Law.............................................................28
Section 10.3. Counterparts..............................................................28
Section 10.4. Reliance by Third Parties.................................................28
Section 10.5. Provisions in Conflict with Law or Regulations............................28
</TABLE>
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<PAGE>
AMENDED AND RESTATED DECLARATION OF TRUST
OF
SCUDDER VARIABLE LIFE INVESTMENT FUND
DATED OCTOBER 24, 1997
AMENDED AND RESTATED DECLARATION OF TRUST made October 24, 1997, by the
undersigned Trustees;
WHEREAS, pursuant to a Declaration of Trust dated March 15, 1985, as
amended, the Trustees established a Massachusetts business trust for the
investment and reinvestment of funds contributed thereto, the beneficial
interest in which is divided into transferable shares;
WHEREAS, the Trustees desire to amend and restate said Declaration of
Trust in its entirety;
NOW, THEREFORE, the Trustees restate the Declaration of Trust as
follows:
ARTICLE I
NAME AND DEFINITIONS
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Section 1.1. Name.
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The name of the Trust created hereby is the "Scudder Variable Life
Investment Fund".
Section 1.2. Definitions.
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Wherever they are used herein, the following terms have the following
respective meanings:
(a) "By-laws" means the By-laws referred to in Section 2.8 hereof, as
from time to time amended.
(b) "Class" means the two or more Classes as may be established and
designated from time to time by the Trustees pursuant to Section 5.13 hereof.
(c) The term "Commission" has the meaning given it in the 1940 Act. The
term "Interested Person" has the meaning given it in the 1940 Act, as modified
by any applicable order or orders of the Commission. Except as otherwise defined
by the Trustees in conjunction with the establishment of any series of Shares,
the term "vote of a majority of the Shares outstanding and entitled to vote"
shall have the same meaning as the term "vote of a majority of the outstanding
voting securities" given it in the 1940 Act.
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(d) "Custodian" means any Person other than the Trust who has custody
of any Trust Property as required by Section 17(f) of the 1940 Act, but does not
include a system for the central handling of securities described in said
Section 17(f).
(e) "Declaration" means this Amended and Restated Declaration of Trust
as further amended from time to time. Reference in this Declaration of Trust to
"Declaration," "hereof," "herein," and "hereunder" shall be deemed to refer to
this Declaration rather than exclusively to the article or section in which such
words appear.
(f) "Distributor" means the party, other than the Trust, to the
contract described in Section 3.1 hereof.
(g) "His" shall include the feminine and neuter, as well as the
masculine genders.
(h) "Investment Adviser" means the party, other than the Trust, to the
contract described in Section 3.2 hereof.
(i) "Municipal Bonds" means obligations issued by or on behalf of
states, territories of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, or other issuers, the
interest from which is exempt from regular Federal income tax.
(j) The "1940 Act" means the Investment Company Act of 1940, as amended
from time to time.
(k) "Person" means and includes individuals, corporations,
partnerships, trusts, associations, joint ventures and other entities, whether
or not legal entities, and governments and agencies and political subdivisions
thereof.
(l) "Series" individually or collectively means the two or more Series
as may be established and designated from time to time by the Trustees pursuant
to Section 5.11 hereof. Unless the context otherwise requires, the term "Series"
shall include Classes into which shares of the Trust, or of a Series, may be
divided from time to time.
(m) "Shareholder" means a record owner of Outstanding Shares.
(n) "Shares" means the equal proportionate units of interest into which
the beneficial interest in the Trust shall be divided from time to time,
including the Shares of any and all Series and Classes which may be established
by the Trustees and includes fractions of Shares as well as whole Shares.
"Outstanding Shares" means those Shares shown as of a time and from time to time
on the books of the Trust or its Transfer Agent as then issued and outstanding,
but shall not include Shares which have been redeemed or repurchased by the
Trust and which are at the time held in the Treasury of the Trust.
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(o) "Transfer Agent" means any one or more Persons other than the Trust
who maintains the Shareholder records of the Trust, such as the list of
Shareholders, the number of Shares credited to each account, and the like.
(p) The "Trust" means the Scudder Variable Life Investment Fund.
(q) The "Trust Property" means any and all property, real or personal,
tangible or intangible, which is owned or held by or for the account of the
Trust or the Trustees.
(r) The "Trustees" means the person or persons who has or have signed
this Declaration, so long as he or they shall continue in office in accordance
with the terms hereof, and all other persons who may from time to time be duly
qualified and serving as Trustees in accordance with the provisions of Article
II hereof, and reference herein to a Trustee or the Trustees shall refer to such
person or persons in this capacity or their capacities as trustees hereunder.
ARTICLE II
TRUSTEES
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Section 2.1. General Powers.
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The Trustees shall have exclusive and absolute control over the Trust
Property and over the business of the Trust to the same extent as if the
Trustees were the sole owners of the Trust Property and business in their own
right, but with such powers of delegation as may be permitted by this
Declaration. The Trustees shall have power to conduct the business of the Trust
and carry on its operations in any and all of its branches and maintain offices
both within and without the Commonwealth of Massachusetts, in any and all states
of the United States of America, in the District of Columbia, and in any and all
commonwealths, territories, dependencies, colonies, possessions, agencies or
instrumentalities of the United States of America and of foreign governments,
and to do all such other things and execute all such instruments as they deem
necessary, proper or desirable in order to promote the interests of the Trust
although such things are not herein specifically mentioned. Any determination as
to what is in the interests of the Trust made by the Trustees in good faith
shall be conclusive. In construing the provisions of this Declaration, the
presumption shall be in favor of a grant of power to the Trustees.
The enumeration of any specific power herein shall not be construed as
limiting the aforesaid power. Such powers of the Trustees may be exercised
without order of or resort to any court.
Section 2.2. Investments.
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The Trustees shall have the power:
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(a) To operate as and carry on the business of an investment company,
and exercise all the powers necessary and appropriate to the conduct of such
operations.
(b) To invest in, hold for investment, or reinvest in, securities,
including shares of open-end investment companies; common and preferred stocks;
warrants; bonds, debentures, bills, time notes and all other evidences of
indebtedness; negotiable or non-negotiable instruments; government securities,
including securities of any state, municipality or other political subdivision
thereof, or any governmental or quasi-governmental agency or instrumentality;
and money market instruments including bank certificates of deposit, finance
paper, commercial paper, bankers acceptances and all kinds of repurchase
agreements, of any corporation, company, trust, association, firm or other
business organization however established, and of any country, state,
municipality or other political subdivision, or any governmental or
quasi-governmental agency or instrumentality.
(c) To acquire (by purchase, subscription or otherwise), to hold, to
trade in and deal in, to acquire any rights or options to purchase or sell, to
sell or otherwise dispose of, to lend, and to pledge any such securities and to
enter into repurchase agreements and forward foreign currency exchange
contracts, to purchase and sell futures contracts on securities, securities
indices and foreign currencies, to purchase or sell options on such contracts,
foreign currency contracts, and foreign currencies and to engage in all types of
hedging and risk management transactions.
(d) To exercise all rights, powers and privileges of ownership or
interest in all securities, repurchase agreements, futures contracts and options
and other assets included in the Trust Property, including the right to vote
thereon and otherwise act with respect thereto and to do all acts for the
preservation, protection, improvement and enhancement in value of all such
assets.
(e) To acquire (by purchase, lease or otherwise) and to hold, use,
maintain, develop and dispose of (by sale or otherwise) any property, real or
personal, including cash, and any interest therein.
(f) To borrow money and in this connection issue notes or other
evidence of indebtedness; to secure borrowings by mortgaging, pledging or
otherwise subjecting as security the Trust Property; to endorse, guarantee, or
undertake the performance of any obligation or engagement of any other Person
and to lend Trust Property.
(g) To aid by further investment any corporation, company, trust,
association or firm, any obligation of or interest in which is included in the
Trust Property or in the affairs of which the Trustees have any direct or
indirect interest; to do all acts and things designed to protect, preserve,
improve or enhance the value of such obligation or interest, and to guarantee or
become surety on any or all of the contracts, stocks, bonds, notes, debentures
and other obligations of any such corporation, company, trust, association or
firm.
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(h) To enter into a plan of distribution and any related agreements
whereby the Trust may finance directly or indirectly any activity which is
primarily intended to result in the sale of Shares.
(i) To invest, through a transfer of cash, securities and other assets
or otherwise, all or a portion of the Trust Property, or to sell all or a
portion of the Trust Property and invest the proceeds of such sales, in another
investment company that is registered under the 1940 Act.
(j) In general to carry on any other business in connection with or
incidental to any of the foregoing powers, to do everything necessary, suitable
or proper for the accomplishment of any purpose or the attainment of any object
or the furtherance of any power hereinbefore set forth, either alone or in
association with others, and to do every other act or thing incidental or
appurtenant to or growing out of or connected with the aforesaid business or
purposes, objects or powers.
The foregoing clauses shall be construed both as objects and powers,
and the foregoing enumeration of specific powers shall not be held to limit or
restrict in any manner the general powers of the Trustees.
The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust, nor shall the Trustees be limited
by any law limiting the investments which may be made by fiduciaries.
Section 2.3. Legal Title.
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Legal title to all the Trust Property, including the property of any
Series of the Trust, shall be vested in the Trustees as joint tenants except
that the Trustees shall have power to cause legal title to any Trust Property to
be held by or in the name of one or more of the Trustees, or in the name of the
Trust, or in the name of any other Person as nominee, on such terms as the
Trustees may determine, provided that the interest of the Trust therein is
deemed appropriately protected. The right, title and interest of the Trustees in
the Trust Property and the property of each Series of the Trust shall vest
automatically in each Person who may hereafter become a Trustee. Upon the
termination of the term of office, resignation, removal or death of a Trustee he
shall automatically cease to have any right, title or interest in any of the
Trust Property or the property of any Series of the Trust, and the right, title
and interest of such Trustee in the Trust Property shall vest automatically in
the remaining Trustees. Such vesting and cessation of title shall be effective
whether or not conveyancing documents have been executed and delivered.
Section 2.4. Issuance and Repurchase of Shares.
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The Trustees shall have the power to issue, sell, repurchase, redeem,
retire, cancel, acquire, hold, resell, reissue, dispose of, transfer, and
otherwise deal in Shares and, subject to the provisions set forth in Articles VI
and VII and Section 5.11 hereof, to apply to any such repurchase, redemption,
retirement, cancellation or acquisition of Shares any funds or property of the
particular series of the Trust with respect to which such Shares are issued,
whether capital or
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surplus or otherwise, to the full extent now or hereafter permitted by the laws
of the Commonwealth of Massachusetts governing business corporations.
Section 2.5. Delegation; Committees.
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The Trustees shall have power to delegate from time to time to such of
their number or to officers, employees or agents of the Trust the doing of such
things and the execution of such instruments either in the name of the Trust or
the names of the Trustees or otherwise as the Trustees may deem expedient, to
the same extent as such delegation is permitted by the 1940 Act.
Section 2.6. Collection and Payment.
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The Trustees shall have power to collect all property due to the Trust;
to pay all claims, including taxes, against the Trust Property; to prosecute,
defend, compromise or abandon any claims relating to the Trust Property; to
foreclose any security interest securing any obligations, by virtue of which any
property is owed to the Trust; and to enter into releases, agreements and other
instruments.
Section 2.7. Expenses.
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The Trustees shall have the power to incur and pay any expenses which
in the opinion of the Trustees are necessary or incidental to carry out any of
the purposes of this Declaration, and to pay reasonable compensation from the
funds of the Trust to themselves as Trustees. The Trustees shall fix the
compensation of all officers, employees and Trustees.
Section 2.8. Manner of Acting; By-laws.
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Except as otherwise provided herein or in the By-laws, any action to be
taken by the Trustees may be taken by a majority of the Trustees present at a
meeting of Trustees (a quorum being present), including any meeting held by
means of a conference telephone circuit or similar communications equipment by
means of which all persons participating in the meeting can hear each other, or
by written consents of the entire number of Trustees then in office. The
Trustees may adopt By-laws not inconsistent with this Declaration to provide for
the conduct of the business of the Trust and may amend or repeal such By-laws to
the extent such power is not reserved to the Shareholders.
Notwithstanding the foregoing provisions of this Section 2.8 and in
addition to such provisions or any other provision of this Declaration or of the
By-laws, the Trustees may by resolution appoint a committee consisting of less
than the whole number of Trustees then in office, which committee may be
empowered to act for and bind the Trustees and the Trust, as if the acts of such
committee were the acts of all the Trustees then in office, with respect to the
institution, prosecution, dismissal, settlement, review or investigation of any
action, suit or proceeding which shall be pending or threatened to be brought
before any court, administrative agency or other adjudicatory body.
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Section 2.9. Miscellaneous Powers.
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Subject to Section 5.11 hereof, the Trustees shall have the power to:
(a) employ or contract with such Persons as the Trustees may deem desirable for
the transaction of the business of the Trust; (b) enter into joint ventures,
partnerships and any other combinations or associations; (c) remove Trustees or
fill vacancies in or add to their number, elect and remove such officers and
appoint and terminate such agents or employees as they consider appropriate, and
appoint from their own number, and terminate, any one or more committees which
may exercise some or all of the power and authority of the Trustees as the
Trustees may determine; (d) purchase, and pay for out of Trust Property,
insurance policies insuring the Shareholders, Trustees, officers, employees,
agents, investment advisers, distributors, selected dealers or independent
contractors of the Trust against all claims arising by reason of holding any
such position or by reason of any action taken or omitted by any such Person in
such capacity, whether or not constituting negligence, or whether or not the
Trust would have the power to indemnify such Person against such liability; (e)
establish pension, profit-sharing, share purchase, and other retirement,
incentive and benefit plans for any Trustees, officers, employees and agents of
the Trust; (f) to the extent permitted by law, indemnify any person with whom
the Trust has dealings, including the Investment Adviser, Distributor, Transfer
Agent and selected dealers, to such extent as the Trustees shall determine; (g)
guarantee indebtedness or contractual obligations of others; (h) determine and
change the fiscal year of the Trust and the method by which its accounts shall
be kept; and (i) adopt a seal for the Trust, but the absence of such seal shall
not impair the validity of any instrument executed on behalf of the Trust.
Section 2.10. Principal Transactions.
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Except in transactions not permitted by the 1940 Act or rules and
regulations adopted by the Commission, the Trustees may, on behalf of the Trust,
buy any securities from or sell any securities to, or lend any assets of the
Trust to, any Trustee or officer of the Trust or any firm of which any such
Trustee or officer is a member acting as principal, or have any such dealings
with the Investment Adviser, Distributor or transfer agent or with any
Interested Person or such Person; and the Trust may employ any such Person, or
firm or company in which such Person is an Interested Person, as broker, dealer,
legal counsel, registrar, transfer agent, dividend disbursing agent or Custodian
upon customary terms.
Section 2.11. Number of Trustees.
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The number of Trustees shall initially be one (1), and thereafter shall
be such number as shall be fixed from time to time by a written instrument
signed by a majority of the Trustees.
Section 2.12. Election and Term.
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Except for the Trustees named herein or appointed to fill vacancies
pursuant to Section 2.14 hereof, the Trustees shall be elected by the
Shareholders owning of record a plurality of the Shares voting at a meeting of
Shareholders. Such a meeting shall be held on a date fixed by the Trustees.
Except in the event of resignation or removals pursuant to Section 2.13 hereof,
each
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Trustee shall hold office until such time as less than a majority of the
Trustees holding office have been elected by Shareholders, and thereafter until
the holding of a Shareholders' meeting as required by the next following
sentence. In such event the Trustees then in office will call a Shareholders'
meeting for the election of Trustees. Except for the foregoing circumstances,
the Trustees shall continue to hold office and may appoint successor Trustees.
Section 2.13. Resignation and Removal.
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Any Trustee may resign his trust (without the need for any prior or
subsequent accounting) by an instrument in writing signed by him and delivered
to the other Trustees and such resignation shall be effective upon such
delivery, or at a later date according to the terms of the instrument. Any of
the Trustees may be removed (provided the aggregate number of Trustees after
such removal shall not be less than one) with cause, by the action of two-thirds
of the remaining Trustees. Any Trustee may be removed at any meeting of
Shareholders by vote of two-thirds of the Outstanding Shares. The Trustees shall
promptly call a meeting of the shareholders for the purpose of voting upon the
question of removal of any such Trustee or Trustees when requested in writing so
to do by the holders of not less than ten percent of the Outstanding Shares and,
in that connection, the Trustees will assist shareholder communications to the
extent provided for in Section 16(c) under the 1940 Act. Upon the resignation or
removal of a Trustee, or his otherwise ceasing to be a Trustee, he shall execute
and deliver such documents as the remaining Trustees shall require for the
purpose of conveying to the Trust or the remaining Trustees any Trust Property
or property of any series of the Trust held in the name of the resigning or
removed Trustee. Upon the incapacity or death of any Trustee, his legal
representative shall execute and deliver on his behalf such documents as the
remaining Trustees shall require as provided in the preceding sentence.
Section 2.14. Vacancies.
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The term of office of a Trustee shall terminate and a vacancy shall
occur in the event of the death, resignation, removal, bankruptcy, adjudicated
incompetence or other incapacity to perform the duties of the office of a
Trustee. No such vacancy shall operate to annul the Declaration or to revoke any
existing agency created pursuant to the terms of the Declaration. In the case of
an existing vacancy, including a vacancy existing by reason of an increase in
the number of Trustees, subject to the provisions of Section 16(a) of the 1940
Act, the remaining Trustees shall fill such vacancy by the appointment of such
other person as they in their discretion shall see fit, made by a written
instrument signed by a majority of the Trustees then in office. Any such
appointment shall not become effective, however, until the person named in the
written instrument of appointment shall have accepted in writing such
appointment and agreed in writing to be bound by the terms of the Declaration.
An appointment of a Trustee may be made in anticipation of a vacancy to occur at
a later date by reason of retirement, resignation or increase in the number of
Trustees, provided that such appointment shall not become effective prior to
such retirement, resignation or increase in the number of Trustees. Whenever a
vacancy in the number of Trustees shall occur, until such vacancy is filled as
provided in this Section 2.14, the Trustees in office, regardless of their
number, shall have all the powers granted
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to the Trustees and shall discharge all the duties imposed upon the Trustees by
the Declaration. A written instrument certifying the existence of such vacancy
signed by a majority of the Trustees in office shall be conclusive evidence of
the existence of such vacancy.
Section 2.15. Delegation of Power to Other Trustees.
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Any Trustee may, by power of attorney, delegate his power for a period
not exceeding six (6) months at any one time to any other Trustee or Trustees;
provided that in no case shall less than two (2) Trustees personally exercise
the powers granted to the Trustees under this Declaration except as herein
otherwise expressly provided.
Section 2.16. Shareholder Vote, etc.
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Not Required. Except to the extent specifically provided to the
contrary in this Declaration, the Trustees may exercise each of the powers
granted to them in this Declaration without the vote, approval or agreement of
the Shareholders, unless such a vote, approval or agreement is required by the
1940 Act or applicable laws of the Commonwealth of Massachusetts.
ARTICLE III
CONTRACTS
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Section 3.1. Distribution Contract.
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The Trustees may in their discretion from time to time enter into an
exclusive or non-exclusive underwriting contract or contracts providing for the
sale of the Shares at a price based on the net asset value of a Share, whereby
the Trustees may either agree to sell the Shares to the other party to the
contract or appoint such other party their sales agent for the Shares, and in
either case on such terms and conditions, if any, as may be prescribed in the
By-laws, and such further terms and conditions as the Trustees may in their
discretion determine not inconsistent with the provisions of this Article III or
of the By-laws; and such contract may also provide for the repurchase of the
Shares by such other party as agent of the Trustees.
Section 3.2. Advisory or Management Contract.
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The Trustees may in their discretion from time to time enter into an
investment advisory or management contract or separate advisory contracts with
respect to one or more Series whereby the other party to such contract shall
undertake to furnish to the Trust such management, investment advisory,
statistical and research facilities and services and such other facilities and
services, if any, and all upon such terms and conditions as the Trustees may in
their discretion determine, including the grant of authority to such other party
to determine what securities shall be purchased or sold by the Trust and what
portion of its assets shall be uninvested, which authority shall include the
power to make changes in the investments of the Trust or any Series.
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The Trustees may also employ, or authorize the Investment Adviser to
employ, one or more sub-advisers from time to time to perform such of the acts
and services of the Investment Adviser and upon such terms and conditions as may
be agreed upon between the Investment Adviser and such sub-advisers and approved
by the Trustees. Any reference in this Declaration to the Investment Adviser
shall be deemed to include such sub-advisers unless the context otherwise
requires.
Section 3.3. Affiliations of Trustees or Officers, Etc.
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The fact that:
(i) any of the Shareholders, Trustees or officers of the Trust
is a shareholder, director, officer, partner, trustee, employee,
manager, adviser or distributor of or for any partnership, corporation,
trust, association or other organization or of or for any parent or
affiliate of any organization, with which a contract of the character
described in Sections 3.1 or 3.2 above or for services as Custodian,
Transfer Agent, accounting agent or disbursing agent or for related
services may have been or may hereafter be made, or that any such
organization, or any parent or affiliate thereof, is a Shareholder of
or has an interest in the Trust, or that
(ii) any partnership, corporation, trust, association or other
organization with which a contract of the character described in
Sections 3.1 or 3.2 above or for services as Custodian, Transfer Agent,
accounting agent or disbursing agent or for related services may have
been or may hereafter be made also has any one or more of such
contracts with one or more other partnerships, corporations, trusts,
associations or other organizations, or has other business or
interests, shall not affect the validity of any such contract or
disqualify any Shareholder, Trustee or officer of the Trust from voting
upon or executing the same or create any liability or accountability to
the Trust or its Shareholders.
Section 3.4. Compliance with 1940 Act.
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Any contract entered into pursuant to Sections 3.1 or 3.2 shall be
consistent with and subject to the requirements of Section 15 of the 1940 Act
(including any amendment thereof or other applicable act of Congress hereafter
enacted), as modified by any applicable order or orders of the Commission, with
respect to its continuance in effect, its termination and the method of
authorization and approval of such contract or renewal thereof.
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ARTICLE IV
LIMITATIONS OF LIABILITY OF SHAREHOLDERS,
TRUSTEES AND OTHERS
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Section 4.1. No Personal Liability of Shareholders, Trustees, Etc.
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No Shareholder shall be subject to any personal liability whatsoever to
any Person in connection with Trust Property or the acts, obligations or affairs
of the Trust. No Trustee, officer, employee or agent of the Trust shall be
subject to any personal liability whatsoever to any Person, other than to the
Trust or its Shareholders, in connection with Trust Property or the affairs of
the Trust, 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 Trust Property for satisfaction of
claims of any nature arising in connection with the affairs of the Trust. If any
Shareholder, Trustee, officer, employee, or agent, as such, of the Trust, is
made a party to any suit or proceeding to enforce any such liability of the
Trust, he shall not, on account thereof, be held to any personal liability. The
Trust shall indemnify and hold each Shareholder harmless from and against all
claims and liabilities, to which such Shareholder may become subject by reason
for 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 indemnification and reimbursement required by
the preceding sentence shall be made only out of the assets of the one or more
Series of which the Shareholder who is entitled to indemnification or
reimbursement was a Shareholder at the time the act or event occurred which gave
rise to the claim against or liability of said Shareholder. The rights accruing
to a Shareholder under this Section 4.1 shall not impair any other right to
which such Shareholder may be lawfully entitled, nor shall anything herein
contained restrict the right of the Trust to indemnify or reimburse a
Shareholder in any appropriate situation even though not specifically provided
herein.
Section 4.2. Non-Liability of Trustees, Etc.
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No Trustee, officer, employee or agent of the Trust shall be liable to
the Trust, 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.
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(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 Trust shall be indemnified by the Trust 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
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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, administrative 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 Trust, a Series thereof, or
the Shareholders by reason of a final adjudication by a court or other
body before which a proceeding was brought that he engaged in 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 Trust;
(iii) in the event of a settlement or other disposition not
involving a final adjudication as provided in paragraph (b)(i) or
(b)(ii) 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 Trust, 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 Trust other than Trustees and
officers may be entitled by contract or otherwise under law.
(d) Expenses of preparation and presentation of a defense to any claim,
action, suit or proceeding of the character described in paragraph (a) of this
Section 4.3 may be advanced by the Trust prior to final disposition thereof upon
receipt of an undertaking by or on behalf of the
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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 Trust 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.
Section 4.4. No Bond Required of Trustees.
----------------------------------------------
No Trustee shall be obligated to give any bond or other security for
the performance of any of his duties hereunder.
Section 4.5. No Duty of Investigation; Notice in Trust
-----------------------------------------
Instruments, Etc.
- -----------------
No purchaser, lender, transfer agent or other Person dealing with the
Trustees or any officer, employee or agent of the Trust shall be bound to make
any inquiry concerning the validity of any transaction purporting to be made by
the Trustees or by said officer, employee or agent or be liable for the
application of money or property paid, loaned or delivered to or on the order of
the Trustees or of said officer, employee or agent. Every obligation, contract,
instrument, certificate, Share, other security of the Trust or undertaking, and
every other act or thing whatsoever executed in connection with the Trust shall
be conclusively presumed to have been executed or done by the executors thereof
only in their capacity as Trustees under this Declaration or in their capacity
as officers, employees or agents of the Trust. Every written obligation,
contract, instrument, certificate, Share, other security of the Trust or
undertaking made or issued by the Trustees may recite that the same is executed
or made by them not individually, but as Trustees under the Declaration, and
that the obligations of the Trust under any such instrument are not binding upon
any of the Trustees or Shareholders individually, but bind only the trust
estate, and may contain any further recital which they or he may deem
appropriate, but the omission of such recital shall not operate to bind the
Trustees individually. The Trustees shall at all times maintain insurance for
the protection of the Trust Property, its Shareholders, Trustees, officers,
employees and agents in such amount as the Trustees shall deem adequate to cover
possible tort liability, and such other insurance as the Trustees in their sole
judgment shall deem advisable.
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<PAGE>
Section 4.6. Reliance on Experts, Etc.
------------------------------------------
Each Trustee and officer or employee of the Trust shall, in the
performance of his duties, be fully and completely justified and protected with
regard to any act or any failure to act resulting from reliance in good faith
upon the books of account or other records of the Trust, upon an opinion of
counsel, or upon reports made to the Trust by any of its officers or employees
or by the Investment Adviser, the Distributor, Transfer Agent, selected dealers,
accountants, appraisers or other experts or consultants selected with reasonable
care by the Trustees, officers or employees of the Trust, regardless of whether
such counsel or expert may also be a Trustee.
ARTICLE V
SHARES OF BENEFICIAL INTEREST
-----------------------------
Section 5.1. Beneficial Interest.
- -------------------------------------
The interest of the beneficiaries hereunder shall be divided into
transferable Shares of beneficial interest, all of one class, except as provided
in Section 5.11 and Section 5.13 hereof, par value $.01 per share. The number of
Shares of beneficial interest authorized hereunder is unlimited. All Shares
issued hereunder including, without limitation, Shares issued in connection with
a dividend in Shares or a split of Shares, shall be fully paid and
non-assessable.
Section 5.2. Rights of Shareholders.
----------------------------------------
The ownership of the Trust Property and the property of each Series of
the Trust of every description and the right to conduct any business
herein-before described are vested exclusively in the Trustees, and the
Shareholders shall have no interest therein other than the beneficial interest
conferred by their Shares, and they shall have no right to call for any
partition or division of any property, profits, rights or interests of the Trust
nor can they be called upon to share or assume any losses of the Trust or suffer
an assessment of any kind by virtue of their ownership of Shares. The Shares
shall be personal property giving only the rights specifically set forth in this
Declaration. The Shares shall not entitle the holder to preference, preemptive,
appraisal, conversion or exchange rights, except as the Trustees may determine
with respect to any Series of Shares.
Section 5.3. Trust Only.
----------------------------
It is the intention of the Trustees to create only the relationship of
Trustee and beneficiary between the Trustees and each Shareholder from time to
time. It is not the intention of the Trustees to create a general partnership,
limited partnership, joint stock association, corporation, bailment or any form
of legal relationship other than a trust. Nothing in this Declaration shall be
construed to make the Shareholders, either by themselves or with the Trustees,
partners or members of a joint stock association.
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<PAGE>
Section 5.4. Issuance of Shares.
------------------------------------
The Trustees in their discretion may, from time to time without vote of
the Shareholders, issue Shares, in addition to the then issued and outstanding
Shares and Shares held in the treasury, to such party or parties and for such
amount and type of consideration, including cash or property, at such time or
times and on such terms as the Trustees may deem best, and may in such manner
acquire other assets (including the acquisition of assets subject to, and in
connection with the assumption of liabilities) and businesses. In connection
with any issuance of Shares, the Trustees may issue fractional Shares and Shares
held in the treasury. The Trustees may from time to time divide or combine the
Shares into a greater or lesser number without thereby changing the
proportionate beneficial interests in the Trust. Contributions to the Trust may
be accepted for, and Shares shall be redeemed as, whole Shares and/or 1/1,000ths
of a Share or integral multiples thereof.
Section 5.5. Register of Shares.
------------------------------------
A register shall be kept at the principal office of the Trust or an
office of the Transfer Agent which shall contain the names and addresses of the
Shareholders and the number of Shares held by them respectively and a record of
all transfers thereof. Such register shall be conclusive as to who are the
holders of the Shares and who shall be entitled to receive dividends or
distributions or otherwise to exercise or enjoy the rights of Shareholders. No
Shareholder shall be entitled to receive payment of any dividend or
distribution, nor to have notice given to him as herein or in the By-laws
provided, until he has given his address to the Transfer Agent or such other
officer or agent of the Trustees as shall keep the said register for entry
thereon. It is not contemplated that certificates will be issued for the Shares;
however, the Trustees, in their discretion, may authorize the issuance of share
certificates and promulgate appropriate rules and regulations as to their use.
Section 5.6. Transfer of Shares.
------------------------------------
Except as otherwise provided by the Trustees, shares shall be
transferable on the records of the Trust only by the record holder thereof or by
his agent thereunto duly authorized, upon delivery to the Trustees or the
Transfer Agent of a duly executed instrument of transfer, together with such
evidence of the genuineness of each such execution and authorization and of
other matters as may reasonably be required. Upon such delivery the transfer
shall be recorded on the register of the Trust. Until such record is made, the
Shareholder of record shall be deemed to be the holder of such Shares for all
purposes hereunder and neither the Trustees nor any transfer agent or registrar
nor any officer, employee or agent of the Trust shall be affected by any notice
of the proposed transfer.
Any person becoming entitled to any Shares in consequence of the death,
bankruptcy, or incompetence of any Shareholder, or otherwise by operation of
law, shall be recorded on the register of Shares as the holder of such Shares
upon production of the proper evidence thereof to the Trustees or the Transfer
Agent, but until such record is made, the Shareholder of record shall be deemed
to be the holder of such Shares for all purposes hereunder and neither the
Trustees nor
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<PAGE>
any Transfer Agent or registrar nor any officer or agent of the Trust shall be
affected by any notice of such death, bankruptcy or incompetence, or other
operation of law.
Section 5.7. Notices, Reports.
----------------------------------
Any and all notices to which any Shareholder may be entitled and any
and all communications shall be deemed duly served or given if mailed, postage
prepaid, addressed to any Shareholder of record at his last known address as
recorded on the register of the Trust. A notice of a meeting, an annual report
and any other communication to Shareholders need not be sent to a Shareholder
(i) if an annual report and a proxy statement for two consecutive shareholder
meetings have been mailed to such Shareholder's address and have been returned
as undeliverable, (ii) if all, and at least two, checks (if sent by first class
mail) in payment of dividends on Shares during a twelve-month period have been
mailed to such Shareholder's address and have been returned as undeliverable or
(iii) in any other case in which a proxy statement concerning a meeting of
security holders is not required to be given pursuant to the Commission's proxy
rules as from time to time in effect under the Securities Exchange Act of 1934.
However, delivery of such proxy statements, annual reports and other
communications shall resume if and when such Shareholder delivers or causes to
be delivered to the Trust written notice setting forth such Shareholder's then
current address.
Section 5.8. Treasury Shares.
---------------------------------
Shares held in the treasury shall, until reissued pursuant to Section
5.4, not confer any voting rights on the Trustees, nor shall such Shares be
entitled to any dividends or other distributions declared with respect to the
Shares.
Section 5.9. Voting Powers.
-------------------------------
The Shareholders shall have power to vote only (i) for the election of
Trustees as provided in Section 2.12; (ii) for the removal of Trustees as
provided in Section 2.13; (iii) with respect to any amendment of this
Declaration to the extent and as provided in Section 8.3; (iv) to the same
extent as the stockholders of Massachusetts business corporation as to whether
or not a court action, proceeding or claim should or should not be brought or
maintained derivatively or as a class action on behalf of the Trust or any
Series or Class thereof or the Shareholders (provided, however, that a
Shareholder of a particular Series or Class shall not be entitled to bring a
derivative or class action on behalf of any other Series or Class (or
Shareholder of any other Series or Class) of the Trust); and (v) with respect to
such additional matters relating to the Trust as may be required by this
Declaration, the By-laws or any registration of the Trust as an investment
company under the 1940 Act with the Commission (or any successor agency) or as
the Trustees may consider necessary or desirable. Each whole Share shall be
entitled to one vote as to any matter on which it is entitled to vote and each
fractional Share shall be entitled to a proportionate fractional vote, except
that the Trustees may, in conjunction with the establishment of any Series or
Class of Shares, establish or reserve the right to establish conditions under
which the several Series or Classes shall have separate voting rights or no
voting rights. There shall be no cumulative voting in the election of Trustees.
Until Shares are issued, the Trustees may
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<PAGE>
exercise all rights of Shareholders and may take any action required by law,
this Declaration or the By-laws to be taken by Shareholders. The By-laws may
include further provisions for Shareholders' votes and meetings and related
matters.
Section 5.10. Meetings of Shareholders.
-------------------------------------------
Meetings of Shareholders may be called at any time by the President,
and shall be called by the President and Secretary at the request in writing or
by resolution, of a majority of Trustees, or at the written request of the
holder or holders of ten percent (10%) or more of the total number of Shares
then issued and outstanding of the Trust entitled to vote at such meeting. Any
such request shall state the purpose of the proposed meeting.
Section 5.11. Series Designation.
-------------------------------------
The Trustees, in their discretion, may authorize the division of Shares
into two or more Series, and the different Series shall be established and
designated, and the variations in the relative rights and preferences as between
the different Series shall be fixed and determined, by the Trustees; provided,
that all Shares shall be identical except that there may be variations so fixed
and determined between different Series as to investment objective, purchase
price, allocation of expenses, right of redemption, special and relative rights
as to dividends and on liquidation, conversion rights, and conditions under
which the several Series shall have separate voting rights. All references to
Shares in this Declaration shall be deemed to be Shares of any or all Series as
the context may require.
(a) All provisions herein relating to the Trust shall apply equally to
each Series of the Trust except as the context requires otherwise.
(b) The number of authorized Shares and the number of Shares of each
Series that may be issued shall be unlimited. The Trustees may classify or
reclassify any unissued Shares or any Shares previously issued and reacquired of
any Series into one or more Series that may be established and designated from
time to time. The Trustees may hold as treasury Shares (of the same or some
other Series), reissue for such consideration and on such terms as they may
determine, or cancel any Shares of any Series reacquired by the Trust at their
discretion from time to time.
(c) All consideration received by the Trust for the issue or sale of
Shares of a particular Series, together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits, and
proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to that Series for all purposes, subject only to the rights
of creditors of such Series and except as may otherwise be required by
applicable laws, and shall be so recorded upon the books of account of the
Trust. In the event that there are any assets, income, earnings, profits, and
proceeds thereof, funds, or payments which are not readily identifiable as
belonging to any particular Series, the Trustees shall allocate them among any
one or more of the Series established and designated from time to
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<PAGE>
time in such manner and on such basis as they, in their sole discretion, deem
fair and equitable. Each such allocation by the Trustees shall be conclusive and
binding upon the Shareholders of all Series for all purposes.
(d) The assets belonging to each particular Series shall be charged
with the liabilities of the Trust in respect of that Series and with all
expenses, costs, charges and reserves attributable to that Series, and any
general liabilities, expenses, costs, charges or reserves of the Trust which are
not readily identifiable as belonging to any particular Series shall be
allocated and charged by the Trustees to and among any one or more of the Series
established and designated from time to time in such manner and on such basis as
the Trustees in their sole discretion deem fair and equitable. Each allocation
of liabilities, expenses, costs, charges and reserves by the Trustees shall be
conclusive and binding upon the Shareholders of all Series for all purposes. The
Trustees shall have full discretion, to the extent not inconsistent with the
1940 Act, to determine which items are capital; and each such determination and
allocation shall be conclusive and binding upon the Shareholders. The assets of
a particular Series of the Trust shall, under no circumstances, be charged with
liabilities attributable to any other Series of the Trust. All persons extending
credit to, or contracting with or having any claim against a particular Series
of the Trust shall look only to the assets of that particular Series for payment
of such credit, contract or claim. No Shareholder or former Shareholder of any
Series shall have any claim on or right to any assets allocated or belonging to
any other Series.
(e) Each Share of a Series of the Trust shall represent a beneficial
interest in the net assets of such Series. Each holder of Shares of a Series
shall be entitled to receive his pro rata share of distributions of income and
capital gains made with respect to such Series, except as provided in Section
5.13 hereof. Upon redemption of his Shares or indemnification for liabilities
incurred by reason of his being or having been a Shareholder of a Series, such
Shareholder shall be paid solely out of the funds and property of such Series of
the Trust. Upon liquidation or termination of a Series of the Trust,
Shareholders of such Series shall be entitled to receive a pro rata share of the
net assets of such Series, except as provided in Section 5.13 hereof. A
Shareholder of a particular Series of the Trust shall not be entitled to
participate in a derivative or class action on behalf of any other Series or the
Shareholders of any other Series of the Trust.
(f) The establishment and designation of any Series of Shares shall be
effective upon the execution by a majority of the then Trustees of an instrument
setting forth such establishment and designation and the relative rights and
preferences of such Series, or as otherwise provided in such instrument. The
Trustees may by an instrument executed by a majority of their number abolish any
Series and the establishment and designation thereof. Except as otherwise
provided in this Article V, the Trustees shall have the power to determine the
designations, preferences, privileges, limitations and rights, of each class and
Series of Shares. Each instrument referred to in this paragraph shall have the
status of an amendment to this Declaration.
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<PAGE>
Section 5.12. Assent to Declaration of Trust.
-------------------------------------------------
Every Shareholder, by virtue of having become a shareholder, shall be
held to have expressly assented and agreed to the terms hereof and to have
become a party hereto.
Section 5.13. Class Designation.
------------------------------------
The Trustees, in their discretion, may authorize the division of the
Shares of the Trust, or, if any Series be established, the Shares of any Series,
into two or more Classes, and the different Classes shall be established and
designated, and the variations in the relative rights and preferences as between
the different Classes shall be fixed and determined, by the Trustees; provided,
that all Shares of the Trust or of any Series shall be identical to all other
Shares of the Trust or the same Series, as the case may be, except that there
may be variations between different Classes as to allocation of expenses, right
of redemption, special and relative rights as to dividends and on liquidation,
conversion rights, and conditions under which the several Classes shall have
separate voting rights. All references to Shares in this Declaration shall be
deemed to be Shares of any or all Classes as the context may require.
If the Trustees shall divide the Shares of the Trust or any Series into two or
more Classes, the following provisions shall be applicable:
(a) All provisions herein relating to the Trust, or any Series of the
Trust, shall apply equally to each Class of Shares of the Trust or of any Series
of the Trust, except as the context requires otherwise.
(b) The number of Shares of each Class that may be issued shall be
unlimited. The Trustees may classify or reclassify any Shares or any Series of
any Shares into one or more Classes that may be established and designated from
time to time. The Trustees may hold as treasury Shares (of the same or some
other Class), reissue for such consideration and on such terms as they may
determine, or cancel any Shares of any Class reacquired by the Trust at their
discretion from time to time.
(c) Liabilities, expenses, costs, charges and reserves related to the
distribution of, and other identified expenses that should properly be allocated
to, the Shares of a particular Class may be charged to and borne solely by such
Class and the bearing of expenses solely by a Class of Shares may be
appropriately reflected (in a manner determined by the Trustees) and cause
differences in the net asset value attributable to, and the dividend, redemption
and liquidation rights of, the Shares of different classes. Each allocation of
liabilities, expenses, costs, charges and reserves by the Trustees shall be
conclusive and binding upon the Shareholders of all Classes for all purposes.
(d) The establishment and designation of any Class of Shares shall be
effective upon the execution by a majority of the then Trustees of an instrument
setting forth such establishment and designation and the relative rights and
preferences of such Class, or as otherwise provided in such instrument. The
Trustees may, by an instrument executed by a majority of their number,
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<PAGE>
abolish any Class and the establishment and designation thereof. Each instrument
referred to in this paragraph shall have the status of an amendment to this
Declaration.
ARTICLE VI
REDEMPTION AND REPURCHASE OF SHARES
-----------------------------------
Section 6.1. Redemption of Shares.
- --------------------------------------
All Shares of the Trust shall be redeemable, at the redemption price
determined in the manner set out in this Declaration. Redeemed or repurchased
Shares may be resold by the Trust.
The Trust shall redeem the Shares upon the appropriately verified
written application of the record holder thereof (or upon such other form of
request as the Trustees may determine) at such office or agency as may be
designated from time to time for that purpose in the Trust's then effective
registration statement under the Securities Act of 1933. The Trustees may from
time to time specify additional conditions, not inconsistent with the 1940 Act,
regarding the redemption of Shares in the Trust's then effective registration
statement under the Securities Act of 1933.
Section 6.2. Price.
-----------------------
Shares shall be redeemed at their net asset value, which may be reduced
by any redemption fee authorized by the Trustees, determined as set forth in
Section 7.1 hereof as of such time as the Trustees shall have theretofore
prescribed by resolution. In the absence of such resolution, the redemption
price of Shares deposited shall be the net asset value of such Shares next
determined as set forth in Section 7.1 hereof after receipt of such application.
Section 6.3. Payment.
-------------------------
Payment for such Shares shall be made in cash or in property out of the
assets of the relevant Series of the Trust to the Shareholder of record at such
time and in the manner, not inconsistent with the 1940 Act or other applicable
laws, as may be specified from time to time in the Trust's then effective
registration statement under the Securities Act of 1933, subject to the
provisions of Section 6.4 hereof.
Section 6.4. Effect of Suspension of Determination of
----------------------------------------
Net Asset Value.
- ----------------
If, pursuant to Section 6.9 hereof, the Trustees shall declare a
suspension of the determination of net asset value, the rights of Shareholders
(including those who shall have applied for redemption pursuant to Section 6.1
hereof but who shall not yet have received payment) to have Shares redeemed and
paid for by the Trust shall be suspended until the termination of such
suspension is declared. Any record holder who shall have his redemption right so
suspended may, during the period of such suspension, by appropriate written
notice of revocation at the office or agency where application was made, revoke
any application for redemption not honored and withdraw any certificates on
deposit. The redemption price of
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<PAGE>
Shares for which redemption applications have not been revoked shall be the net
asset value of such Shares next determined as set forth in Section 7.1 after the
termination of such suspension, and payment shall be made within seven (7) days
after the date upon which the application was made plus the period after such
application during which the determination of net asset value was suspended.
Section 6.5. Repurchase by Agreement.
-----------------------------------------
The Trust may repurchase Shares directly, or through the Distributor or
another agent designated for the purpose, by agreement with the owner thereof at
a price not exceeding the net asset value per Share determined as of the time
when the purchase or contract of purchase is made or the net asset value as of
any time which may be later determined pursuant to Section 7.1 hereof, provided
payment is not made for the Shares prior to the time as of which such net asset
value is determined.
Section 6.6. Redemption of Shareholder's Interest.
------------------------------------------------------
The Trust shall have the right at any time without prior notice to the
Shareholder to redeem Shares of any Shareholder for their then current net asset
value per Share if
(a) at such time the Shareholder owns Shares having an aggregate net
asset value of less than an amount set from time to time by the Trustees subject
to such terms and conditions as the Trustees may approve, and subject to the
Trust's giving general notice to all Shareholders of its intention to avail
itself of such right, either by publication in the Trust's registration
statement, if any, or by such other means as the Trustees may determine, or
(b) The Trustees believe that it is in the best interest of the Trust
to do so because of prior involvement by the Shareholder in fraudulent acts
relating to securities transactions.
Section 6.7. Redemption of Shares in Order to Qualify as Regulated
----------------------------------------------------------------------
Investment Company; Disclosure of Holding.
- ------------------------------------------
If the Trustees shall, at any time and in good faith, be of the opinion
that direct or indirect ownership of Shares or other securities of the Trust has
or may become concentrated in any Person to an extent which would disqualify any
Series of the Trust as a regulated investment company under the Internal Revenue
Code, then the Trustees shall have the power by lot or other means deemed
equitable by them (i) to call for redemption by any such Person a number, or
principal amount, of Shares or other securities of the Trust sufficient to
maintain or bring the direct or indirect ownership of Shares or other securities
of the Trust into conformity with the requirements for such qualification and
(ii) to refuse to transfer or issue Shares or other securities of the Trust to
any Person whose acquisition of the Shares or other securities of the Trust in
question would result in such disqualification. The redemption shall be effected
at the redemption price and in the manner provided in Section 6.1.
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<PAGE>
The holders of Shares or other securities of the Trust shall upon
demand disclose to the Trustees in writing such information with respect to
direct and indirect ownership of Shares or other securities of the Trust as the
Trustees deem necessary to comply with the provisions of the Internal Revenue
Code, or to comply with the requirements of any other taxing authority.
Section 6.8. Reductions in Number of Outstanding Shares Pursuant to
-----------------------------------------------------------------------
Net Asset Value Formula.
- ------------------------
The Trust may also reduce the number of Outstanding Shares pursuant to
the provisions of Section 7.3.
Section 6.9. Suspension of Right of Redemption.
---------------------------------------------------
The Trust may declare a suspension of the right of redemption or
postpone the date of payment or redemption for the whole or any part of any
period (i) during which the New York Stock Exchange is closed other than
customary week-end and holiday closings, (ii) during which trading on the New
York Stock Exchange is restricted, (iii) during which an emergency exists as a
result of which disposal by the Trust of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Trust fairly
to determine the value of its net assets, or (iv) during any other period when
the Commission may for the protection of Shareholders of the Trust by order
permit suspension of the right of redemption or postponement of the date of
payment or redemption; provided that applicable rules and regulations of the
Commission shall govern as to whether the conditions prescribed in (ii), (iii),
or (iv) exist. Such suspension shall take effect at such time as the Trust shall
specify but not later than the close of business on the business day next
following the declaration of suspension, and thereafter there shall be no right
of redemption or payment on redemption until the Trust shall declare the
suspension at an end, except that the suspension shall terminate in any event on
the first day on which said stock exchange shall have reopened or the period
specified in (ii) or (iii) shall have expired (as to which in the absence of an
official ruling by the Commission, the determination of the Trust shall be
conclusive). In the case of a suspension of the right of redemption, a
Shareholder may either withdraw his request for redemption or receive payment
based on the net asset value existing after the termination of the suspension.
ARTICLE VII
DETERMINATION OF NET ASSET VALUE,
NET INCOME AND DISTRIBUTIONS
----------------------------
Section 7.1. Net Asset Value.
- ---------------------------------
The value of the assets of the Trust or any Series of the Trust shall
be determined by appraisal of the securities of the Trust or allocated to such
Series, such appraisal to be on the basis of such method as shall be deemed to
reflect the fair value thereof, determined in good faith by or under the
direction of the Trustees. From the total value of said assets, there shall be
deducted all indebtedness, interest, taxes, payable or accrued, including
estimated taxes on
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<PAGE>
unrealized book profits, expenses and management charges accrued to the
appraisal date, net income determined and declared as a distribution and all
other items in the nature of liabilities attributable to the Trust or such
Series or Class thereof which shall be deemed appropriate. The net asset value
of a Share shall be determined by dividing the net asset value of the Class, or,
if no Class has been established, of the Series, or, if no Series has been
established, of the Trust, by the number of Shares of that Class, or Series, or
of the Trust, as applicable, outstanding. The net asset value of Shares of the
Trust or any Class or Series of the Trust shall be determined pursuant to the
procedure and methods prescribed or approved by the Trustees in their discretion
and as set forth in the most recent Registration Statement of the Trust as filed
with the Securities and Exchange Commission pursuant to the requirements of the
Securities Act of 1933, as amended, the 1940 Act, as amended, and the Rules
thereunder. The net asset value of the Shares shall be determined at least once
on each business day, as of the close of trading on the New York Stock Exchange
or as of such other time or times as the Trustees shall determine. The power and
duty to make the daily calculations may be delegated by the Trustees to the
Investment Adviser, the Custodian, the Transfer Agent or such other Person as
the Trustees may determine by resolution or by approving a contract which
delegates such duty to another Person. The Trustees may suspend the daily
determination of net asset value to the extent permitted by the 1940 Act.
Section 7.2. Distributions to Shareholders.
-----------------------------------------------
The Trustees shall from time to time distribute ratably among the
Shareholders of the Trust or a Series such proportion of the net profits,
surplus (including paid-in surplus), capital, or assets of the Trust or such
Series held by the Trustees as they may deem proper. Such distributions may be
made in cash or property (including without limitation any type of obligations
of the Trust or such Series or any assets thereof), and the Trustees may
distribute ratably among the Shareholders additional Shares of the Trust or such
Series issuable hereunder in such manner, at such times, and on such terms as
the Trustees may deem proper. Such distributions may be among the Shareholders
of record at the time of declaring a distribution or among the Shareholders of
record at such other date or time or dates or times as the Trustees shall
determine. The Trustees may in their discretion determine that, solely for the
purposes of such distributions, Outstanding Shares shall exclude Shares for
which orders have been placed subsequent to a specified time on the date the
distribution is declared or on the next preceding day if the distribution is
declared as of a day on which Boston banks are not open for business, all as
described in the registration statement under the Securities Act of 1933. The
Trustees may always retain from the net profits such amount as they may deem
necessary to pay the debts or expenses of the Trust or the Series or to meet
obligations of the Trust or the Series, or as they may deem desirable to use in
the conduct of its affairs or to retain for future requirements or extensions of
the business. The Trustees may adopt and offer to Shareholders such dividend
reinvestment plans, cash dividend payout plans or related plans as the Trustees
shall deem appropriate. The above provisions may be modified to the extent
required by a plan adopted by the Trustees to establish Classes of Shares of the
Trust or of a Series.
Inasmuch as the computation of net income and gains for Federal income
tax purposes may vary from the computation thereof on the books, the above
provisions shall be interpreted to
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<PAGE>
give the Trustees the power in their discretion to distribute for any fiscal
year as ordinary dividends and as capital gains distributions, respectively,
additional amounts sufficient to enable the Trust or the Series to avoid or
reduce liability for taxes.
Section 7.3. Determination of Net Income; Constant Net Asset Value;
-----------------------------------------------------------------------
Reduction of Outstanding Shares.
- --------------------------------
Subject to Section 5.11 and Section 5.13 hereof, the net income of the
Trust or any Series shall be determined in such manner as the Trustees shall
provide by resolution. Expenses of the Trust or a Series, including the advisory
or management fee, shall be accrued each day. Such net income may be determined
by or under the direction of the Trustees as of the close of trading on the New
York Stock Exchange on each day on which such Exchange is open or as of such
other time or times as the Trustees shall determine, and, except as provided
herein, all the net income of the Trust or any Series, as so determined, may be
declared as a dividend on the Outstanding Shares of the Trust or such Series.
If, for any reason, the net income of the Trust or any Series, determined at any
time is a negative amount, the Trustees shall have the power with respect to the
Trust or such Series (i) to offset each Shareholder's pro rata share of such
negative amount from the accrued dividend account of such Shareholder, or (ii)
to reduce the number of Outstanding Shares of the Trust or such Series by
reducing the number of Shares in the account of such Shareholder by that number
of full and fractional Shares which represents the amount of such excess
negative net income, or (iii) to cause to be recorded on the books of the Trust
or such Series an asset account in the amount of such negative net income, which
account may be reduced by the amount, provided that the same shall thereupon
become the property of the Trust or such Series with respect to the Trust or
such Series and shall not be paid to any Shareholder, of dividends declared
thereafter upon the Outstanding Shares of the Trust or such Series on the day
such negative net income is experienced, until such asset account is reduced to
zero; or (iv) to combine the methods described in clauses (i) and (ii) and (iii)
of this sentence, in order to cause the net asset value per Share of the Trust
or such Series to remain at a constant amount per Outstanding Share immediately
after each such determination and declaration. The Trustees shall also have the
power to fail to declare a dividend out of net income for the purpose of causing
the net asset value per Share to be increased to a constant amount. The Trustees
shall not be required to adopt, but may at any time adopt, discontinue or amend
the practice of maintaining the net asset value per Share of the Trust or a
Series at a constant amount.
Section 7.4. Allocation Between Principal and Income.
---------------------------------------------------------
The Trustees shall have full discretion to determine whether any cash
or property received shall be treated as income or as principal and whether any
item of expense shall be charged to the income or the principal amount, and
their determination made in good faith shall be conclusive upon the
Shareholders. In the case of stock dividends received, the Trustees shall have
full discretion to determine, in the light of the particular circumstances, how
much if any of the value thereof shall be treated as income, the balance, if
any, to be treated as principal.
- 24 -
<PAGE>
Section 7.5. Power to Modify Foregoing Procedures.
------------------------------------------------------
Notwithstanding any of the foregoing provisions of this Article VII,
the Trustees may prescribe, in their absolute discretion, such other bases and
times for determining the per Share net asset value or net income, or the
declaration and payment of dividends and distributions as they may deem
necessary or desirable.
ARTICLE VIII
DURATION; TERMINATION OF TRUST;
AMENDMENT; MERGERS, ETC.
------------------------
Section 8.1. Duration.
- --------------------------
The Trust shall continue without limitation of time but subject to the
provisions of this Article VIII.
Section 8.2. Termination of Trust.
--------------------------------------
(a) The Trust or any Series of the Trust may be terminated by an
instrument in writing signed by a majority of the Trustees, or by the
affirmative vote of the holders of a majority of the Shares of the Trust or
Series outstanding and entitled to vote at any meeting of Shareholders. Upon the
termination of the Trust or any Series,
(i) the Trust or any Series shall carry on no business except
for the purpose of winding up its affairs;
(ii) the Trustees shall proceed to wind up the affairs of the
Trust or Series and all of the powers of the Trustees under this
Declaration shall continue until the affairs of the Trust or Series
shall have been wound up, including the power to fulfill or discharge
the contracts of the Trust or Series, collect its assets, sell, convey,
assign, exchange, transfer or otherwise dispose of all or any part of
the remaining Trust Property or property of the Series to one or more
persons at public or private sale for consideration which may consist
in whole or in part of cash, securities or other property of any kind,
discharge or pay its liabilities, and do all other acts appropriate to
liquidate its business; and
(iii) after paying or adequately providing for the payment of
all liabilities, and upon receipt of such releases, indemnities and
refunding agreements as they deem necessary for their protection, the
Trustees may distribute the remaining Trust Property or property of the
Series, in cash or in kind or partly each, among the Shareholders of
the Trust or Series according to their respective rights.
(b) After termination of the Trust or any Series and distribution to
the Shareholders as herein provided, a majority of the Trustees shall execute
and lodge among the records of the
- 25 -
<PAGE>
Trust an instrument in writing setting forth the fact of such termination, and
the Trustees shall thereupon be discharged from all further liabilities and
duties hereunder, and the rights and interests of all Shareholders of the Trust
or Series shall thereupon cease.
Section 8.3. Amendment Procedure.
-------------------------------------
(a) This Declaration may be amended by a vote of the holders of a
majority of the Shares outstanding and entitled to vote. Amendments shall be
effective upon the taking of action as provided in this section or at such later
time as shall be specified in the applicable vote or instrument. The Trustees
may also amend this Declaration without the vote or consent of Shareholders if
they deem it necessary to conform this Declaration to the requirements of
applicable federal or state laws or regulations or the requirements of the
regulated investment company provisions of the Internal Revenue Code (including
those provisions of such Code relating to the retention of the exemption from
federal income tax with respect to dividends paid by the Trust out of interest
income received on Municipal Bonds), but the Trustees shall not be liable for
failing so to do. The Trustees may also amend this Declaration without the vote
or consent of Shareholders if they deem it necessary or desirable to change the
name of the Trust, to supply any omission, to cure, correct or supplement any
ambiguous, defective or inconsistent provision hereof, or to make any other
changes in the Declaration which do not materially adversely affect the rights
of Shareholders hereunder.
(b) No amendment may be made under this Section 8.3 which would change
any rights with respect to any Shares of the Trust or Series by reducing the
amount payable thereon upon liquidation of the Trust or Series or by diminishing
or eliminating any voting rights pertaining thereto, except with the vote or
consent of the holders of two-thirds of the Shares of the Trust or Series
outstanding and entitled to vote. Nothing contained in this Declaration shall
permit the amendment of this Declaration to impair the exemption from personal
liability of the Shareholders, Trustees, officers, employees and agents of the
Trust or to permit assessments upon Shareholders.
(c) A certificate signed by a majority of the Trustees setting forth an
amendment and reciting that it was duly adopted by the Shareholders or by the
Trustees as aforesaid or a copy of the Declaration, as amended, and executed by
a majority of the Trustees, shall be conclusive evidence of such amendment when
lodged among the records of the Trust.
Notwithstanding any other provision hereof, until such time as a
Registration Statement under the Securities Act of 1933, as amended, covering
the first public offering of securities of the Trust shall have become
effective, this Declaration may be terminated or amended in any respect by the
affirmative vote of a majority of the Trustees or by an instrument signed by a
majority of the Trustees.
Section 8.4. Merger, Consolidation and Sale of Assets.
----------------------------------------------------------
The Trust or any Series thereof may merge or consolidate with any other
corporation, association, trust or other organization or may sell, lease or
exchange all or substantially all of
- 26 -
<PAGE>
the Trust Property or the property of any Series, including its good will, upon
such terms and conditions and for such consideration when and as authorized by
an instrument in writing signed by a majority of the Trustees.
Section 8.5. Incorporation.
-------------------------------
When authorized by an instrument in writing signed by a majority of the
Trustees, the Trustees may cause to be organized or assist in organizing a
corporation or corporations under the laws of any jurisdiction or any other
trust, partnership, association or other organization to take over all of the
Trust Property or the property of any Series or to carry on any business in
which the Trust or the Series shall directly or indirectly have any interest,
and to sell, convey and transfer the Trust Property or the property of any
Series to any such corporation, trust, association or organization in exchange
for the Shares or securities thereof or otherwise, and to lend money to,
subscribe for the Shares or securities of, and enter into any contracts with any
such corporation, trust, partnership, association or organization, or any
corporation, partnership, trust, association or organization in which the Trust
or the Series holds or is about to acquire shares or any other interest. The
Trustees may also cause a merger or consolidation between the Trust or any
Series or any successor thereto and any such corporation, trust, partnership,
association or other organization if and to the extent permitted by law, as
provided under the law then in effect. Nothing contained herein shall be
construed as requiring approval of Shareholders for the Trustees to organize or
assist in organizing one or more corporations, trusts, partnerships,
associations or other organizations and selling, conveying or transferring a
portion of the Trust Property to such organization or entities.
ARTICLE IX
REPORTS TO SHAREHOLDERS
-----------------------
The Trustees shall at least semi-annually submit to the Shareholders a
written financial report, which may be included in the Trust's prospectus or
statement of additional information, of the transactions of the Trust, including
financial statements which shall at least annually be certified by independent
public accountants.
ARTICLE X
MISCELLANEOUS
-------------
Section 10.1. Filing.
-------------------------
This Declaration and any amendment hereto shall be filed in the office
of the Secretary of the Commonwealth of Massachusetts and in such other places
as may be required under the laws of the Commonwealth of Massachusetts and may
also be filed or recorded in such other places as the Trustees deem appropriate.
Unless the amendment is embodied in an instrument signed by a majority of the
Trustees, each amendment filed shall be accompanied by a certificate signed and
acknowledged by a Trustee stating that such action was duly taken in a manner
provided herein.
- 27 -
<PAGE>
A restated Declaration, integrating into a single instrument all of the
provisions of the Declaration which are then in effect and operative, may be
executed from time to time by a majority of the Trustees and shall, upon filing
with the Secretary of the Commonwealth of Massachusetts, be conclusive evidence
of all amendments contained therein and may hereafter be referred to in lieu of
the original Declaration and the various amendments thereto. The restated
Declaration may include any amendment which the Trustees are empowered to adopt,
whether or not such amendment has been adopted prior to the execution of the
restated Declaration.
Section 10.2. Governing Law.
----------------------------
This Declaration is executed by the Trustees and delivered in the
Commonwealth of Massachusetts and with reference to the internal laws thereof,
and the rights of all parties and the validity and construction of every
provision hereof shall be subject to and construed according to the internal
laws of said State without regard to the choice of law rules thereof.
Section 10.3. Counterparts
------------------------------
This Declaration may be simultaneously executed in several
counterparts, each of which shall be deemed to be an original, and such
counterparts, together, shall constitute one and the same instrument, which
shall be sufficiently evidenced by any such original counterpart.
Section 10.4. Reliance by Third Parties.
--------------------------------------------
Any certificate executed by an individual who, according to the records
of the Trust appears to be a Trustee hereunder, certifying to: (a) the number or
identity of Trustees or Shareholders, (b) the due authorization of the execution
of any instrument or writing, (c) the form of any vote passed at a meeting of
Trustees or Shareholders, (d) the fact that the number of Trustees or
Shareholders present at any meeting or executing any written instrument
satisfies the requirements of this Declaration, (e) the form of any By-laws
adopted by or the identity of any officers elected by the Trustees, or (f) the
existence of any fact or facts which in any manner relate to the affairs of the
Trust, shall be conclusive evidence as to the matters so certified in favor of
any Person dealing with the Trustees and their successors.
Section 10.5. Provisions in Conflict with Law or Regulations.
-----------------------------------------------------------------
The provisions of this Declaration are severable, and if the Trustees
shall determine, with the advice of counsel, that any of such provisions is in
conflict with the 1940 Act, the regulated investment company provisions of the
Internal Revenue Code or with other applicable laws and regulations, the
conflicting provision shall be deemed never to have constituted a part of this
Declaration; provided, however, that such determination shall not affect any of
the remaining provisions of this Declaration or render invalid or improper any
action taken or omitted prior to such determination.
If any provision of this Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision in such
- 28 -
<PAGE>
jurisdiction and shall not in any manner affect such provisions in any other
jurisdiction or any other provision of this Declaration in any jurisdiction.
IN WITNESS WHEREOF, the undersigned has executed this instrument this
_______ day of _______________, 1997.
-----------------------------------
Kenneth Black, Jr.
as Trustee and not Individually
-----------------------------------
Rosita P. Chang
as Trustee and not Individually
------------------------------------
Peter B. Freeman
as Trustee and not Individually
------------------------------------
J.D. Hammond
as Trustee and not Individually
------------------------------------
Daniel Pierce
as Trustee and not Individually
- 29 -
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
County of Suffolk _____________ ____, 1997
Then personally appeared the above-named ___________________ who
acknowledged the foregoing instrument to be his/her free act and deed.
Before me,
------------------------------
Notary Public
My commission expires: __________
- 30 -
Exhibit (d)(15)
Scudder Variable Life Investment Fund
Two International Place
Boston, Massachusetts 02110
May 1, 1999
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
Investment Management Agreement
Large Company 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 Large Company 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 12, 1999 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
4
<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 0.625 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.
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
Large Company Growth Portfolio
By: /s/William M. Thomas
-------------------------------
William M. Thomas, President
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By: /s/Daniel Pierce
-------------------------------
Daniel Pierce, Managing Director
7
Exhibit (d)(16)
Scudder Variable Life Investment Fund
Two International Place
Boston, Massachusetts 02110
May 1, 1999
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
Investment Management Agreement
Small Company 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 Small Company 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 12, 1999 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
2
<PAGE>
in accordance with the requirements set forth in this section 3, you shall be
entitled to receive and act upon advice of counsel to the Fund or counsel to
you. You shall also make available to the Fund promptly upon request all of the
Portfolio's investment records and ledgers as are necessary to assist the Fund
in complying with the requirements of the 1940 Act and other applicable laws. To
the extent required by law, you shall furnish to regulatory authorities having
the requisite authority any information or reports in connection with the
services provided pursuant to this Agreement which may be requested in order to
ascertain whether the operations of the Fund are being conducted in a manner
consistent with applicable laws and regulations.
You shall determine the securities, instruments, investments,
currencies, repurchase agreements, futures, options and other contracts relating
to investments to be purchased, sold or entered into by the Portfolio and place
orders with broker-dealers, foreign currency dealers, futures commission
merchants or others pursuant to your determinations and all in accordance with
Portfolio policies as expressed in the Registration Statement. You shall
determine what portion of the Portfolio's portfolio shall be invested in
securities and other assets and what portion, if any, should be held uninvested.
You shall furnish to the Fund's Board of Trustees periodic reports on
the investment performance of the Portfolio and on the performance of your
obligations pursuant to this Agreement, and you shall supply such additional
reports and information as the Fund's officers or Board of Trustees shall
reasonably request.
4. Administrative Services. In addition to the portfolio management
services specified above in section 3, you shall furnish at your expense for the
use of the Portfolio such office space and facilities in the United States as
the Portfolio may require for its reasonable needs, and you (or one or more of
your affiliates designated by you) shall render to the Fund administrative
services on behalf of the Portfolio necessary for operating as an open-end
investment company and not provided by persons not parties to this Agreement
including, but not limited to, preparing reports to and meeting materials for
the Fund's Board of Trustees and reports and notices to Portfolio shareholders;
supervising, negotiating contractual arrangements with, to the extent
appropriate, and monitoring the performance of, accounting agents, custodians,
depositories, transfer agents and pricing agents, accountants, attorneys,
printers, underwriters, brokers and dealers, insurers and other persons in any
capacity deemed to be necessary or desirable to Portfolio operations; preparing
and making filings with the Securities and Exchange Commission (the "SEC") and
other regulatory and self-regulatory organizations, including, but not limited
to, preliminary and definitive proxy materials, post-effective amendments to the
Registration Statement, semi-annual reports on Form N-SAR and notices pursuant
to Rule 24f-2 under the 1940 Act; overseeing the tabulation of proxies by the
Portfolio's transfer agent; assisting in the preparation and filing of the
Portfolio's federal, state and local tax returns; preparing and filing the
Portfolio's federal excise tax return pursuant to Section 4982 of the Code;
providing assistance with investor and public relations matters; monitoring the
valuation of portfolio securities and the calculation of net asset value;
monitoring the registration of Shares of the Portfolio under applicable federal
and state securities laws; maintaining or causing to be maintained for the
Portfolio all books, records and reports and any other information required
under the 1940 Act, to the extent that such books, records and reports and other
information are not maintained by the Portfolio's custodian or other agents of
the Portfolio; assisting in establishing the accounting policies of the
Portfolio; assisting in the resolution of accounting issues that may arise with
respect to the Portfolio's operations and consulting with the Portfolio's
independent accountants, legal counsel and the Portfolio's other agents as
necessary in connection therewith; establishing and monitoring the Portfolio's
operating expense budgets; reviewing the Portfolio's bills; processing the
payment of bills that have been approved by an authorized person; assisting the
Portfolio in determining the amount of dividends and distributions available to
be paid by the Portfolio to its 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
4
<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 0.875 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.
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
Small Company Growth Portfolio
By: /s/William M. Thomas
--------------------------------
William M. Thomas, President
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By: /s/Daniel Pierce
--------------------------------
Daniel Pierce, Managing Director
7
Exhibit (i)
[OBJECT OMITTED]
April 29, 1999
Scudder Variable Life Investment Fund
Two International Place
Boston, Massachusetts 02110
Re: Post-Effective Amendment No. 27 to the Registration Statement on Form
N-1A (SEC File No. 2-96461)
Ladies and Gentlemen:
Scudder Variable Life Investment Fund (the "Trust") is a trust
created under a written Declaration of Trust dated March 15, 1985. The
Declaration of Trust, as amended from time to time, is referred to as the
"Declaration of Trust." The beneficial interest under the Declaration of Trust
is represented by transferable shares without par value ("Shares"). The Trustees
have the powers set forth in the Declaration of Trust, subject to the terms,
provisions and conditions therein provided.
We are of the opinion that all legal requirements have been
complied with in the creation of the Trust and that said Declaration of Trust is
legal and valid.
Under Article V, Section 5.4 of the Declaration of Trust, the
Trustees are empowered, in their discretion, from time to time, to issue Shares
for such amount and type of consideration, at such time or times and on such
terms as the Trustees may deem best. Under Article V, Section 5.1, it is
provided that the number of Shares authorized to be issued under the Declaration
of Trust is unlimited. Under Article V, Section 5.11, the Trustees may authorize
the division of Shares into two or more series. By written instruments, the
Trustees have from time to time established various series of the Trust. The
Shares are currently divided into nine series (the "Portfolios").
<PAGE>
Scudder Variable Life Investment Fund
April 29, 1999
Page 2
By votes adopted on November 14, 1997, November 13, 1998 and
February 11, 1999 (for two Funds only), the Trustees of the Trust authorized the
President, any Vice President, the Secretary and the Treasurer, from time to
time, to determine the appropriate number of Shares to be registered, to
register with the Securities and Exchange Commission, and to issue and sell to
the public, such Shares.
We understand that you are about to file with the Securities
and Exchange Commission, on Form N-1A, Post Effective Amendment No. 27 to the
Trust's Registration Statement (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), in connection with
the continuous offering of the Shares of each Portfolio. We understand that our
opinion is required to be filed as an exhibit to the Registration Statement.
We are of the opinion that all necessary Trust action
precedent to the issue of the Shares of all Portfolios has been duly taken, and
that all such Shares may be legally and validly issued for cash, and when sold
will be fully paid and non-assessable by the Trust upon receipt by the Trust or
its agent of consideration for such Shares in accordance with the terms in the
Registration Statement, subject to compliance with the Securities Act, the
Investment Company Act of 1940, as amended, and applicable state laws regulating
the sale of securities.
We consent to your filing this opinion with the Securities and
Exchange Commission as an Exhibit to Post-Effective Amendment No. 27 to the
Registration Statement.
Very truly yours,
/s/DECHERT PRICE & RHOADS
DECHERT PRICE & RHOADS
Exhibit (j)
[LOGO]
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference into the Prospectus and
Statement of Additional Information constituting the Post-Effective Amendment
No. 27 to the Registration Statement on Form N-1A (the "Registration Statement")
of Scudder Variable Life Investment Fund, of our report dated February 11, 1999,
on the financial statements and financial highlights appearing in the December
31, 1998 Annual Report to the Shareholders of Scudder Variable Life Investment
Fund, which is also incorporated by reference into the Registration Statement.
We further consent to the references to our Firm under the headings "Financial
Highlights," in the Prospectus and "Experts" in the Statement of Additional
Information.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 28, 1999
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Scudder
V.L. Money Market Portfolio Annual Report for the fiscal year ended 12/31/98 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME> Scudder V.L. Money Market Portfolio
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<INVESTMENTS-AT-COST> 147,083,014
<INVESTMENTS-AT-VALUE> 147,083,014
<RECEIVABLES> 1,379,282
<ASSETS-OTHER> 5,008
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 148,467,304
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 314,875
<TOTAL-LIABILITIES> 314,875
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 148,152,429
<SHARES-COMMON-STOCK> 148,152,429
<SHARES-COMMON-PRIOR> 102,576,377
<ACCUMULATED-NII-CURRENT> (0)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 148,152,429
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,380,286
<OTHER-INCOME> 0
<EXPENSES-NET> 580,806
<NET-INVESTMENT-INCOME> 6,799,480
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 6,799,480
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6,799,480)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 376,936,553
<NUMBER-OF-SHARES-REDEEMED> (338,159,816)
<SHARES-REINVESTED> 6,799,315
<NET-CHANGE-IN-ASSETS> 45,576,052
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (4,318)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 486,458
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 580,806
<AVERAGE-NET-ASSETS> 131,391,311
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.05)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.44
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Scudder
V.L. Bond Portfolio Annual Report for the fiscal year ended 12/31/98 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 2
<NAME> Scudder V.L. Bond Portfolio
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 103,855,354
<INVESTMENTS-AT-VALUE> 104,506,328
<RECEIVABLES> 2,045,051
<ASSETS-OTHER> 653
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 106,552,032
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 127,441
<TOTAL-LIABILITIES> 127,441
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 102,592,329
<SHARES-COMMON-STOCK> 15,463,236
<SHARES-COMMON-PRIOR> 11,852,430
<ACCUMULATED-NII-CURRENT> 1,781,274
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,400,014
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 650,974
<NET-ASSETS> 106,424,591
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,399,646
<OTHER-INCOME> 0
<EXPENSES-NET> 526,797
<NET-INVESTMENT-INCOME> 5,872,849
<REALIZED-GAINS-CURRENT> 1,549,350
<APPREC-INCREASE-CURRENT> (1,599,146)
<NET-CHANGE-FROM-OPS> 5,823,053
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,348,241)
<DISTRIBUTIONS-OF-GAINS> (295,455)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 51,946,542
<NUMBER-OF-SHARES-REDEEMED> (32,732,036)
<SHARES-REINVESTED> 5,643,696
<NET-CHANGE-IN-ASSETS> 25,037,559
<ACCUMULATED-NII-PRIOR> 1,252,060
<ACCUMULATED-GAINS-PRIOR> 145,455
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 439,858
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 526,797
<AVERAGE-NET-ASSETS> 92,656,287
<PER-SHARE-NAV-BEGIN> 6.87
<PER-SHARE-NII> 0.43
<PER-SHARE-GAIN-APPREC> 0.01
<PER-SHARE-DIVIDEND> (0.40)
<PER-SHARE-DISTRIBUTIONS> (0.03)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 6.88
<EXPENSE-RATIO> 0.57
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Scudder
V.L. Capital Growth Portfolio Core Fund Annual Report for the fiscal year ended
12/31/98 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<SERIES>
<NUMBER> 3
<NAME> SCUDDER V.L. CAPITAL GROWTH PORTFOLIO - CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 649,906,616
<INVESTMENTS-AT-VALUE> 901,009,380
<RECEIVABLES> 1,028,216
<ASSETS-OTHER> 3,129
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 902,040,725
<PAYABLE-FOR-SECURITIES> 154,442
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 547,776
<TOTAL-LIABILITIES> 702,218
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 554,961,098
<SHARES-COMMON-STOCK> 37,591,894
<SHARES-COMMON-PRIOR> 32,750,652
<ACCUMULATED-NII-CURRENT> 1,303,149
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 93,971,208
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 251,103,052
<NET-ASSETS> 901,338,507
<DIVIDEND-INCOME> 7,784,320
<INTEREST-INCOME> 1,956,948
<OTHER-INCOME> 0
<EXPENSES-NET> 3,913,732
<NET-INVESTMENT-INCOME> 5,827,536
<REALIZED-GAINS-CURRENT> 94,147,425
<APPREC-INCREASE-CURRENT> 60,345,461
<NET-CHANGE-FROM-OPS> 160,320,422
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,931,987)
<DISTRIBUTIONS-OF-GAINS> (37,496,910)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 221,448,528
<NUMBER-OF-SHARES-REDEEMED> (156,849,029)
<SHARES-REINVESTED> 43,428,896
<NET-CHANGE-IN-ASSETS> 108,028,395
<ACCUMULATED-NII-PRIOR> 1,414,095
<ACCUMULATED-GAINS-PRIOR> 37,349,214
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,628,132
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,913,732
<AVERAGE-NET-ASSETS> 778,004,138
<PER-SHARE-NAV-BEGIN> 20.63
<PER-SHARE-NII> 0.16
<PER-SHARE-GAIN-APPREC> 4.46
<PER-SHARE-DIVIDEND> (0.17)
<PER-SHARE-DISTRIBUTIONS> (1.13)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 23.95
<EXPENSE-RATIO> 0.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Scudder
V.L. Capital Growth Portfolio Core Fund Annual Report for the fiscal year ended
12/31/98 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<SERIES>
<NUMBER> 32
<NAME> SCUDDER V.L. CAPITAL GROWTH PORTFOLIO - CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 649,906,616
<INVESTMENTS-AT-VALUE> 901,009,380
<RECEIVABLES> 1,028,216
<ASSETS-OTHER> 3,129
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 902,040,725
<PAYABLE-FOR-SECURITIES> 154,442
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 547,776
<TOTAL-LIABILITIES> 702,218
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 554,961,098
<SHARES-COMMON-STOCK> 34,617
<SHARES-COMMON-PRIOR> 26,545
<ACCUMULATED-NII-CURRENT> 1,303,149
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 93,971,208
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 251,103,052
<NET-ASSETS> 901,338,507
<DIVIDEND-INCOME> 7,784,320
<INTEREST-INCOME> 1,956,948
<OTHER-INCOME> 0
<EXPENSES-NET> 3,913,732
<NET-INVESTMENT-INCOME> 5,827,536
<REALIZED-GAINS-CURRENT> 94,147,425
<APPREC-INCREASE-CURRENT> 60,345,461
<NET-CHANGE-FROM-OPS> 160,320,422
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,769)
<DISTRIBUTIONS-OF-GAINS> (31,248)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 449,018
<NUMBER-OF-SHARES-REDEEMED> (348,013)
<SHARES-REINVESTED> 35,017
<NET-CHANGE-IN-ASSETS> 136,022
<ACCUMULATED-NII-PRIOR> 1,414,095
<ACCUMULATED-GAINS-PRIOR> 37,349,214
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,628,132
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,913,732
<AVERAGE-NET-ASSETS> 694,790
<PER-SHARE-NAV-BEGIN> 20.61
<PER-SHARE-NII> 0.11
<PER-SHARE-GAIN-APPREC> 4.45
<PER-SHARE-DIVIDEND> (0.12)
<PER-SHARE-DISTRIBUTIONS> (1.13)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 23.92
<EXPENSE-RATIO> 0.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Scudder
V.L. Balanced Portfolio Annual Report for the fiscal year ended 12/31/98 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 4
<NAME> Scudder V.L. Balanced Portfolio
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 123,561,541
<INVESTMENTS-AT-VALUE> 159,363,805
<RECEIVABLES> 2,442,396
<ASSETS-OTHER> 732
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 161,806,933
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 174,984
<TOTAL-LIABILITIES> 174,984
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 112,025,935
<SHARES-COMMON-STOCK> 10,629,925
<SHARES-COMMON-PRIOR> 8,902,042
<ACCUMULATED-NII-CURRENT> 1,005,263
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 12,798,487
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 35,802,264
<NET-ASSETS> 161,631,949
<DIVIDEND-INCOME> 703,676
<INTEREST-INCOME> 3,762,804
<OTHER-INCOME> 0
<EXPENSES-NET> 760,267
<NET-INVESTMENT-INCOME> 3,706,213
<REALIZED-GAINS-CURRENT> 12,882,748
<APPREC-INCREASE-CURRENT> 12,183,268
<NET-CHANGE-FROM-OPS> 28,772,229
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,532,592)
<DISTRIBUTIONS-OF-GAINS> (6,021,605)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 36,814,365
<NUMBER-OF-SHARES-REDEEMED> (22,327,861)
<SHARES-REINVESTED> 9,554,198
<NET-CHANGE-IN-ASSETS> 43,258,734
<ACCUMULATED-NII-PRIOR> 811,442
<ACCUMULATED-GAINS-PRIOR> 5,933,762
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 648,870
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 760,267
<AVERAGE-NET-ASSETS> 136,646,606
<PER-SHARE-NAV-BEGIN> 13.30
<PER-SHARE-NII> 0.37
<PER-SHARE-GAIN-APPREC> 2.56
<PER-SHARE-DIVIDEND> (0.36)
<PER-SHARE-DISTRIBUTIONS> (0.66)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 15.21
<EXPENSE-RATIO> 0.56
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Scudder
V.L. Global Discovery Portfolio Core Fund Annual Report for the fiscal year
ended 12/31/98 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<SERIES>
<NUMBER> 5
<NAME> SCUDDER V.L. GLOBAL DISCOVERY PORTFOLIO - CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 24,336,696
<INVESTMENTS-AT-VALUE> 30,082,288
<RECEIVABLES> 247,475
<ASSETS-OTHER> 125
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 30,329,888
<PAYABLE-FOR-SECURITIES> 694,480
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 132,379
<TOTAL-LIABILITIES> 826,859
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 23,634,905
<SHARES-COMMON-STOCK> 3,172,540
<SHARES-COMMON-PRIOR> 2,526,754
<ACCUMULATED-NII-CURRENT> 899
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 121,099
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,746,126
<NET-ASSETS> 29,503,029
<DIVIDEND-INCOME> 215,047
<INTEREST-INCOME> 107,564
<OTHER-INCOME> 0
<EXPENSES-NET> 428,622
<NET-INVESTMENT-INCOME> (106,011)
<REALIZED-GAINS-CURRENT> 514,766
<APPREC-INCREASE-CURRENT> 3,279,878
<NET-CHANGE-FROM-OPS> 3,688,633
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (312,453)
<DISTRIBUTIONS-OF-GAINS> (182,265)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 18,978,160
<NUMBER-OF-SHARES-REDEEMED> (14,676,750)
<SHARES-REINVESTED> 494,718
<NET-CHANGE-IN-ASSETS> 4,796,128
<ACCUMULATED-NII-PRIOR> 348,103
<ACCUMULATED-GAINS-PRIOR> (235,671)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 237,980
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 445,106
<AVERAGE-NET-ASSETS> 21,133,739
<PER-SHARE-NAV-BEGIN> 7.08
<PER-SHARE-NII> (0.03)
<PER-SHARE-GAIN-APPREC> 1.18
<PER-SHARE-DIVIDEND> (0.12)
<PER-SHARE-DISTRIBUTIONS> (0.07)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 8.04
<EXPENSE-RATIO> 1.72
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Scudder
V.L. Global Discovery Portfolio Core Fund Annual Report for the fiscal year
ended 12/31/98 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<SERIES>
<NUMBER> 52
<NAME> SCUDDER V.L. GLOBAL DISCOVERY PORTFOLIO - CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 24,336,696
<INVESTMENTS-AT-VALUE> 30,082,288
<RECEIVABLES> 247,475
<ASSETS-OTHER> 125
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 30,329,888
<PAYABLE-FOR-SECURITIES> 694,480
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 132,379
<TOTAL-LIABILITIES> 826,859
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 23,634,905
<SHARES-COMMON-STOCK> 500,409
<SHARES-COMMON-PRIOR> 314,140
<ACCUMULATED-NII-CURRENT> 899
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 121,099
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,746,126
<NET-ASSETS> 29,503,029
<DIVIDEND-INCOME> 215,047
<INTEREST-INCOME> 107,564
<OTHER-INCOME> 0
<EXPENSES-NET> 428,622
<NET-INVESTMENT-INCOME> (106,011)
<REALIZED-GAINS-CURRENT> 514,766
<APPREC-INCREASE-CURRENT> 3,279,878
<NET-CHANGE-FROM-OPS> 3,688,633
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (41,745)
<DISTRIBUTIONS-OF-GAINS> (24,351)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,431,156
<NUMBER-OF-SHARES-REDEEMED> (1,033,311)
<SHARES-REINVESTED> 66,096
<NET-CHANGE-IN-ASSETS> 1,463,941
<ACCUMULATED-NII-PRIOR> 348,103
<ACCUMULATED-GAINS-PRIOR> (235,671)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 237,980
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 445,106
<AVERAGE-NET-ASSETS> 3,279,570
<PER-SHARE-NAV-BEGIN> 7.07
<PER-SHARE-NII> (0.05)
<PER-SHARE-GAIN-APPREC> 1.18
<PER-SHARE-DIVIDEND> (0.12)
<PER-SHARE-DISTRIBUTIONS> (0.07)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 8.01
<EXPENSE-RATIO> 1.98
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Scudder
V.L. International Portfolio Core Fund Annual Report for the fiscal year ended
12/31/98 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<SERIES>
<NUMBER> 6
<NAME> SCUDDER V.L. INTERNATIONAL PORTFOLIO CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 420,112,935
<INVESTMENTS-AT-VALUE> 511,592,781
<RECEIVABLES> 2,590,785
<ASSETS-OTHER> 4,966
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 514,188,532
<PAYABLE-FOR-SECURITIES> 642,554
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,354,460
<TOTAL-LIABILITIES> 4,997,014
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 364,867,233
<SHARES-COMMON-STOCK> 34,950,563
<SHARES-COMMON-PRIOR> 30,264,570
<ACCUMULATED-NII-CURRENT> 2,705,077
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 52,424,028
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 89,195,180
<NET-ASSETS> 509,191,518
<DIVIDEND-INCOME> 7,756,698
<INTEREST-INCOME> 1,575,336
<OTHER-INCOME> 0
<EXPENSES-NET> 5,014,620
<NET-INVESTMENT-INCOME> 4,317,414
<REALIZED-GAINS-CURRENT> 51,917,934
<APPREC-INCREASE-CURRENT> 24,787,072
<NET-CHANGE-FROM-OPS> 81,022,420
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (7,697,972)
<DISTRIBUTIONS-OF-GAINS> (50,628,971)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 821,855,468
<NUMBER-OF-SHARES-REDEEMED> (820,883,462)
<SHARES-REINVESTED> 58,326,944
<NET-CHANGE-IN-ASSETS> 59,298,950
<ACCUMULATED-NII-PRIOR> 7,228,444
<ACCUMULATED-GAINS-PRIOR> 49,739,061
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,168,595
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,014,620
<AVERAGE-NET-ASSETS> 480,368,594
<PER-SHARE-NAV-BEGIN> 14.11
<PER-SHARE-NII> 0.13
<PER-SHARE-GAIN-APPREC> 2.29
<PER-SHARE-DIVIDEND> (0.26)
<PER-SHARE-DISTRIBUTIONS> (1.71)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 14.56
<EXPENSE-RATIO> 1.04
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Scudder
V.L. International Portfolio Core Fund Annual Report for the fiscal year ended
12/31/98 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<SERIES>
<NUMBER> 62
<NAME> SCUDDER V.L. INTERNATIONAL PORTFOLIO CORE FUND CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 420,112,935
<INVESTMENTS-AT-VALUE> 511,592,781
<RECEIVABLES> 2,590,785
<ASSETS-OTHER> 4,966
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 514,188,532
<PAYABLE-FOR-SECURITIES> 642,554
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,354,460
<TOTAL-LIABILITIES> 4,997,014
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 364,867,233
<SHARES-COMMON-STOCK> 25,342
<SHARES-COMMON-PRIOR> 24,670
<ACCUMULATED-NII-CURRENT> 2,705,077
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 52,424,028
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 89,195,180
<NET-ASSETS> 509,191,518
<DIVIDEND-INCOME> 7,756,698
<INTEREST-INCOME> 1,575,336
<OTHER-INCOME> 0
<EXPENSES-NET> 5,014,620
<NET-INVESTMENT-INCOME> 4,317,414
<REALIZED-GAINS-CURRENT> 51,917,934
<APPREC-INCREASE-CURRENT> 24,787,072
<NET-CHANGE-FROM-OPS> 81,022,420
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6,202)
<DISTRIBUTIONS-OF-GAINS> (42,421)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 34,594
<NUMBER-OF-SHARES-REDEEMED> (75,383)
<SHARES-REINVESTED> 48,623
<NET-CHANGE-IN-ASSETS> 7,834
<ACCUMULATED-NII-PRIOR> 7,228,444
<ACCUMULATED-GAINS-PRIOR> 49,739,061
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,168,595
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,014,620
<AVERAGE-NET-ASSETS> 385,856
<PER-SHARE-NAV-BEGIN> 14.08
<PER-SHARE-NII> 0.10
<PER-SHARE-GAIN-APPREC> 2.29
<PER-SHARE-DIVIDEND> (0.25)
<PER-SHARE-DISTRIBUTIONS> (1.71)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 14.51
<EXPENSE-RATIO> 1.28
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Scudder
Variable Life - Growth & Income Annual Report for the fiscal year ended 12/31/98
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 8
<NAME> Scudder Variable Life - Growth & Income - CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 173,290,491
<INVESTMENTS-AT-VALUE> 198,626,477
<RECEIVABLES> 630,027
<ASSETS-OTHER> 534
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 199,257,038
<PAYABLE-FOR-SECURITIES> 148,440
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 380,600
<TOTAL-LIABILITIES> 529,040
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 157,951,701
<SHARES-COMMON-STOCK> 16,394,977
<SHARES-COMMON-PRIOR> 13,656,612
<ACCUMULATED-NII-CURRENT> 1,276,374
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 14,163,871
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 25,336,052
<NET-ASSETS> 198,727,998
<DIVIDEND-INCOME> 5,128,483
<INTEREST-INCOME> 342,362
<OTHER-INCOME> 0
<EXPENSES-NET> 1,061,953
<NET-INVESTMENT-INCOME> 4,408,892
<REALIZED-GAINS-CURRENT> 14,139,726
<APPREC-INCREASE-CURRENT> (7,231,709)
<NET-CHANGE-FROM-OPS> 11,316,909
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,753,510)
<DISTRIBUTIONS-OF-GAINS> (10,931,939)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 75,991,394
<NUMBER-OF-SHARES-REDEEMED> (59,210,902)
<SHARES-REINVESTED> 14,685,449
<NET-CHANGE-IN-ASSETS> 31,465,941
<ACCUMULATED-NII-PRIOR> 927,946
<ACCUMULATED-GAINS-PRIOR> 11,421,161
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 874,193
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,061,953
<AVERAGE-NET-ASSETS> 172,146,049
<PER-SHARE-NAV-BEGIN> 11.48
<PER-SHARE-NII> 0.27
<PER-SHARE-GAIN-APPREC> 0.54
<PER-SHARE-DIVIDEND> (0.25)
<PER-SHARE-DISTRIBUTIONS> (0.79)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.25
<EXPENSE-RATIO> 0.56
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Scudder
Variable Life - Growth & Income Annual Report for the fiscal year ended 12/31/98
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 82
<NAME> Scudder Variable Life - Growth & Income - CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 173,290,491
<INVESTMENTS-AT-VALUE> 198,626,477
<RECEIVABLES> 630,027
<ASSETS-OTHER> 534
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 199,257,038
<PAYABLE-FOR-SECURITIES> 148,440
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 380,600
<TOTAL-LIABILITIES> 529,040
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 157,951,701
<SHARES-COMMON-STOCK> 1,267,444
<SHARES-COMMON-PRIOR> 593,475
<ACCUMULATED-NII-CURRENT> 1,276,374
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 14,163,871
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 25,336,052
<NET-ASSETS> 198,727,998
<DIVIDEND-INCOME> 5,128,483
<INTEREST-INCOME> 342,362
<OTHER-INCOME> 0
<EXPENSES-NET> 1,061,953
<NET-INVESTMENT-INCOME> 4,408,892
<REALIZED-GAINS-CURRENT> 14,139,726
<APPREC-INCREASE-CURRENT> (7,231,709)
<NET-CHANGE-FROM-OPS> 11,316,909
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (233,817)
<DISTRIBUTIONS-OF-GAINS> (570,394)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9,860,282
<NUMBER-OF-SHARES-REDEEMED> (2,833,290)
<SHARES-REINVESTED> 804,210
<NET-CHANGE-IN-ASSETS> 7,831,202
<ACCUMULATED-NII-PRIOR> 927,946
<ACCUMULATED-GAINS-PRIOR> 11,421,161
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 874,193
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,061,953
<AVERAGE-NET-ASSETS> 11,961,780
<PER-SHARE-NAV-BEGIN> 11.47
<PER-SHARE-NII> 0.25
<PER-SHARE-GAIN-APPREC> 0.54
<PER-SHARE-DIVIDEND> (0.23)
<PER-SHARE-DISTRIBUTIONS> (0.79)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.24
<EXPENSE-RATIO> 0.79
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
