Filed with the Securities and Exchange Commission on April 27, 2000.
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. 29 /X/
And/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /_/
Amendment No. 33 /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) 295-2572
John Millette
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, 2000 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
<PAGE>
Scudder Variable Life Investment Fund
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 21st Century Growth Portfolio
(formerly Small Company Growth Portfolio)
o Global Discovery Portfolio
o International Portfolio
Prospectus
May 1, 2000
These shares 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.
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
How the Portfolios Work Your Investment in the Portfolios
<S> <C>
3 Money Market Portfolio 30 Buying and Selling Shares
6 Bond Portfolio 30 How the Portfolios Calculate Share Price
9 Balanced Portfolio 31 Distributions
12 Growth and Income Portfolio 31 Taxes
15 Capital Growth Portfolio 31 Marketing/Distribution Fees
18 Large Company Growth Portfolio
20 21st Century Growth Portfolio
22 Global Discovery Portfolio
25 International Portfolio
29 Other Policies and Risks
</TABLE>
How the Portfolios Work
These portfolios are designed to serve as investment options for certain
variable annuity contracts and variable life insurance policies. Your investment
in the portfolios is made in conjunction with one of these contracts or
policies. Each portfolio has its own goal and strategy.
Remember that these portfolios are not bank deposits. They're not insured or
guaranteed by the FDIC or any other government agency. Their share prices will
go up and down, so be aware that you could lose money.
Please read this prospectus in conjunction with the prospectus for your variable
life insurance policy or variable annuity contract.
<PAGE>
Money Market Portfolio
Investment Approach
The portfolio seeks to maintain stability of capital and, consistent therewith,
to maintain the liquidity of capital and to provide current income. It does this
by investing exclusively in high quality short-term securities.
The portfolio may buy securities from many types of issuers, including the U.S.
government, banks (both U.S. and foreign), corporations and municipalities.
However, everything the portfolio buys must meet the rules for money market fund
investments (see Money Fund Rules below). In addition, the fund currently
intends to only buy securities that are in the top credit grade for short-term
securities.
Working in conjunction with credit analysts, the portfolio managers screen
potential securities and develop a list of those that the fund may buy. The
managers then decide which securities on this list to buy, looking for
attractive yield and weighing considerations such as credit quality, economic
outlook and possible interest rate movements. The managers may adjust the fund's
exposure to interest rate risk, typically seeking to take advantage of possible
rises in interest rates and to preserve yield when interest rates appear likely
to fall.
Money Fund Rules
To be called a money market fund, a mutual fund must operate within strict
federal rules. Designed to help maintain a stable $1.00 share price, these rules
limit money funds to particular types of securities. Some of the rules:
o individual securities must have remaining maturities of no more than 397
days
o the dollar-weighted average maturity of the fund's holdings cannot exceed
90 days
o all securities must be in the top two credit grades for short-term
securities and be denominated in U.S. dollars
Main Risks to Investors
Money market funds are generally considered to have lower risks than other types
of mutual funds. Even so, there are several risk factors that could reduce the
yield you get from the portfolio or make it perform less well than other
investments. Although the portfolio seeks to preserve the value of your
investment at $1.00 per share, you could lose money by investing in the
portfolio.
As with most money market funds, the most important factor affecting performance
is market interest rates. The fund's yields tend to reflect current interest
rates, which means that when these rates fall, the portfolio's yield generally
falls as well.
A second factor is credit quality. If a portfolio security declines in credit
quality or goes into default, it could hurt the portfolio's performance. To the
extent that the portfolio emphasizes certain sectors of the short-term
securities market, the portfolio increases its exposure to factors affecting
these sectors. For example, banks' repayment abilities could be compromised by
broad economic declines or sharp rises in interest rates. Securities from
foreign banks may have greater credit risk than comparable U.S. securities, for
reasons ranging from political and economic uncertainties to less stringent
banking regulations.
Other factors that could affect performance include:
o the managers could be incorrect in their analysis of interest rate trends,
credit quality or other matters
o securities that rely on outside insurers to raise their credit quality
could fall in price or go into default if the financial condition of the
insurer deteriorates
This portfolio may make sense for investors who are interested in capital
preservation or want a portfolio for the cash portion of an allocation plan.
Money Market Portfolio | 3
<PAGE>
The Portfolio's Track Record
The bar chart shows how the portfolio's returns have varied from year to year,
which may give some idea of risk. The table shows how the portfolio's returns
over different periods average out. All figures on this page assume reinvestment
of dividends and distributions. 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.
As always, past performance is no guarantee of future results.
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
7.83 5.81 3.33 2.54 3.72 5.65 5.09 5.25 5.29 4.99
</TABLE>
2000 Total Return as of March 31: 1.41%
Best Quarter: 1.92%, Q2 1990 Worst Quarter: 0.59%, Q2 1993
Average Annual Total Returns (%) as of 12/31/1999
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
4.99 5.26 4.94
- --------------------------------------------------------------------------------
Seven-day yield as of December 31: 5.65%
The portfolio managers
The following people handle the day-to-day management of the portfolio:
Frank J. Rachwalski, Jr. Geoffrey A. Gibbs
Lead Portfolio Manager o Began investment career in 1994
o Began investment career in 1973 o Joined the adviser in 1996
o Joined the adviser in 1973 o Joined the portfolio team in 1999
o Joined the portfolio team in 1998
Money Market Portfolio | 4
<PAGE>
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance in recent years. The figures in the first part of the table are for
a single share. The total return figures represent the percentage that an
investor in the portfolio would have earned, assuming all dividends and
distributions were reinvested. This information has been audited by
PricewaterhouseCoopers LLP, whose report, along with the portfolio's financial
statements, is included in the annual report, which is 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, 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<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 .049 .052 .051 .050 .055
- ---------------------------------------------------------------------------------------------------
Less distributions from:
- ---------------------------------------------------------------------------------------------------
Net investment income (.049) (.052) (.051) (.050) (.055)
-------------------------------------------
- ---------------------------------------------------------------------------------------------------
Net asset value, end of period $1.000 $1.000 $1.000 $1.000 $1.000
-------------------------------------------
- ---------------------------------------------------------------------------------------------------
Total return (%) 4.99 5.29 5.25 5.09 5.65
- ---------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ---------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 179 148 103 98 80
- ---------------------------------------------------------------------------------------------------
Ratio of expenses (%) .43 .44 .46 .46 .50
- ---------------------------------------------------------------------------------------------------
Ratio of net investment income (%) 4.90 5.17 5.15 4.98 5.51
- ---------------------------------------------------------------------------------------------------
</TABLE>
Money Market Portfolio | 5
<PAGE>
Bond Portfolio
Investment Approach
The portfolio seeks to provide a high level of income consistent with a high
quality portfolio of debt securities. It does this by using a flexible
investment program that emphasizes high-grade bonds. The portfolio invests at
least 65% of its assets in bonds of any maturity.
The portfolio can buy many types of income-producing securities, among them
corporate bonds (historically the backbone of the portfolio), U.S. government
and agency bonds and mortgage- and asset-backed securities. Generally, most are
from U.S. issuers, but bonds of foreign issuers are permitted. The portfolio may
invest up to 20% of its assets in foreign debt securities.
In making their buy and sell decisions, the portfolio managers typically weigh a
number of factors against each other, from economic outlooks and possible
interest rate movements to changes in supply and demand within the bond market.
In choosing individual bonds, the managers use analysis to look for bonds that,
for example, show improving credit.
The managers may favor different types of securities at different times, while
still maintaining variety in terms of the types of securities and issuers
represented.
Although the managers may adjust the portfolio's duration (a measure of
sensitivity to interest rate movements), they generally intend to keep it
between four and six years.
Other Investments
This portfolio normally invests at least 65% of assets in bonds of the top three
grades of credit quality.
The portfolio may invest up to 20% of assets in junk bonds of the fifth and
sixth credit grades (i.e., as low as grade B). Compared to investment-grade
bonds, junk bonds may pay higher yields and have higher volatility and higher
risk of default.
While the portfolio is permitted to use various types of derivatives (contracts
whose value is based on, for example, indices, currencies or securities), the
managers don't intend to use them as principal investments, and might not use
them at all.
Main Risks to Investors
There are several risk factors that could reduce the yield you get from the
portfolio, cause you to lose money or make the portfolio perform less well than
other investments.
As with most bond funds, the most important factor is market interest rates. A
rise in interest rates generally means a fall in bond prices -- and, in turn, a
fall in the value of your investment. (As a general rule, a 1% rise in interest
rates means a 1% fall in value for every year of duration.) An increase in its
duration would make the portfolio more sensitive to this risk.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends, issuers,
industries or other matters
o a bond could decline in credit quality or go into default; this risk is
greater with junk and foreign bonds
o some bonds could be paid off substantially earlier than expected, which
would hurt the portfolio's performance; with mortgage- or asset-backed
securities, any unexpected behavior in interest rates could hurt
performance, increasing the volatility of the portfolio's share price and
yield
o foreign securities may be more volatile than their U.S. counterparts, for
reasons such as currency fluctuations and political and economic
uncertainty
o derivatives could produce disproportionate losses
o at times, it could be hard to value some investments or to get an
attractive price for them
This portfolio is designed for investors who are looking for a relatively high
level of income and can accept a moderate level of risk to their investment.
Bond Portfolio | 6
<PAGE>
The Portfolio's Track Record
The bar chart shows how returns for the portfolio's Class A shares have varied
from year to year, which may give some idea of risk. The table shows average
annual returns for the portfolio and a broad-based market index (which, unlike
the fund, does not have any fees or expenses). All figures on this page assume
reinvestment of dividends and distributions. The performance of both the
portfolio and the index varies over time. 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. As always, past performance is no guarantee of future results.
Annual Total Returns (%) as of 12/31 each year -- Class A shares
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
8.06 17.61 7.01 12.38 -4.79 18.17 2.82 9.10 6.57 -0.95
</TABLE>
2000 Total Return as of March 31: 2.16%
Best Quarter: 6.32%, Q3 1991 Worst Quarter: -3.89%, Q1 1994
Average Annual Total Returns (%) as of 12/31/1999
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Class A -0.95 6.95 7.37
Index -0.84 7.72 7.69
- --------------------------------------------------------------------------------
Index: Lehman Brothers Aggregate Bond Index, an unmanaged index generally
representative of intermediate-term government bonds, investment grade corporate
debt securities and mortgage-backed securities.
The portfolio manager
The following person handles the day-to-day management of the portfolio:
Robert S. Cessine
o Began investment career in 1982
o Joined the adviser in 1993
o Joined the portfolio team in 1999
Bond Portfolio | 7
<PAGE>
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance in recent years. The figures in the first part of the table are for
a single share. The total return figures represent the percentage that an
investor in the portfolio would have earned (or lost), assuming all dividends
and distributions were reinvested. This information has been audited by
PricewaterhouseCoopers LLP, whose report, along with the portfolio's financial
statements, is included in the annual report, which is 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.
Bond Portfolio
Class A
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 6.88 $ 6.87 $ 6.73 $ 7.16 $ 6.48
--------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (a) .42 .43 .44 .41 .44
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions (.48) .01 .15 (.22) .69
--------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations (.06) .44 .59 .19 1.13
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------
From net investment income (.22) (.40) (.43) (.62) (.45)
- ---------------------------------------------------------------------------------------------------------------------------
From net realized gains on investment transactions (.11) (.03) (.02) -- --
--------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.33) (.43) (.45) (.62) (.45)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 6.49 $ 6.88 $ 6.87 $ 6.73 $ 7.16
--------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total return (%) (.95) 6.57 9.10 2.82 18.17
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 94 106 81 66 73
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) .57 .57 .62 .61 .56
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (%) 6.38 6.34 6.55 6.20 6.29
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 86 115 56 85 177
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
Bond Portfolio | 8
<PAGE>
Balanced Portfolio
Investment Approach
The portfolio seeks a balance of growth and income from a diversified portfolio
of equity and fixed-income securities.
In deciding which types of securities to buy and sell, the portfolio managers
first analyze the overall financial climate, including interest rates, capital
flows and inflation, among other factors. They then weigh the relative
attractiveness of stocks compared to bonds and decide on allocations for each.
The portfolio normally invests 50%-75% of net assets in common stocks and other
equities and 25%-50% of net assets in fixed-income securities. At all times the
portfolio will be invested at least 25% of net assets in fixed-income senior
securities.
In selecting stocks, the managers primarily invest in U.S. companies that offer
the potential for sustainable above-average earnings growth and whose market
values appear reasonable in light of their business prospects. The managers
often rely on meetings with senior management teams, government experts and
industry leaders.
In deciding which bonds to buy and sell, the managers review each bond's
fundamentals, comparing yields, credit qualities and maturities. The portfolio
can buy many types of bonds, including corporate bonds, mortgage- and
asset-backed securities and government securities.
The managers may favor different types of securities at different times, while
still maintaining variety in terms of the types of securities and issuers
represented.
Other Investments
The portfolio's bond investments are normally in the top four grades of credit
quality. The portfolio could invest up to 10% of total assets -- although no
more than 20% of its bond assets -- in junk bonds (i.e., grade BB/Ba and below).
Compared to investment-grade bonds, junk bonds may pay higher yields and have
higher volatility and higher risk of default.
While the portfolio is permitted to use various types of derivatives (contracts
whose value is based on, for example, indices, currencies or securities), the
managers don't intend to use them as principal investments, and might not use
them at all.
Main Risks to Investors
There are several risk factors that could hurt the portfolio's performance,
cause you to lose money or make the portfolio perform less well than other
investments.
As with most stock funds, the most important factor with this portfolio is how
stock markets perform. When stock prices fall, you should expect the value of
your investment to fall as well. Because a stock represents ownership in its
issuer, stock prices can be hurt by poor management, shrinking product demand
and other business risks. These may affect single companies as well as groups of
companies.
With the bond portion of the portfolio, the most important factor is market
interest rates. A rise in interest rates generally means a fall in bond prices
and, in turn, a fall in the value of your investment. An increase in the
portfolio's dollar-weighted average maturity could make it more sensitive to
this risk.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
industries, companies, the relative attractiveness of stocks and bonds or
other matters
o to the extent that the portfolio invests for income, it may miss
opportunities in faster-growing stocks
o derivatives could produce disproportionate losses
o at times, it could be it hard to value some investments or to get an
attractive price for them
This portfolio may make sense for investors who are looking for stock and bond
investments in a single portfolio.
Balanced Portfolio | 9
<PAGE>
The Portfolio's Track Record
The bar chart shows how returns for the portfolio's Class A shares have varied
from year to year, which may give some idea of risk. The table shows average
annual returns for the portfolio and broad-based market indices (which, unlike
the fund, do not have any fees or expenses). All figures on this page assume
reinvestment of dividends and distributions. The performance of both the
portfolio and the indices varies over time. 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. As always, past performance is no guarantee of future results.
Annual Total Returns (%) as of 12/31 each year -- Class A shares
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- -------------------------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-1.92 26.93 6.96 7.45 -2.05 26.67 11.89 24.21 23.19 15.32
</TABLE>
2000 Total Return as of March 31: 1.80%
Best Quarter: 15.51%, Q4 1998 Worst Quarter: -10.03%, Q3 1990
Average Annual Total Returns (%) as of 12/31/1999
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Class A 15.32 20.12 13.36
Index A 21.04 28.54 18.20
Index B 11.99 20.07 14.10
- --------------------------------------------------------------------------------
Index A: Standard and Poor's 500 Composite Stock Price Index, an unmanaged
capitalization-weighted index that includes 500 large-cap U.S. stocks.
Index B: Standard and Poor's 500 Composite Stock Price Index (60%), an unmanaged
capitalization-weighted index that includes 500 large-cap U.S. stocks, and
Lehman Brothers Aggregate Bond Index (40%), an unmanaged index generally
representative of intermediate-term government bonds, investment grade corporate
debt securities and mortgage-backed securities.
The portfolio managers
The following people handle the day-to-day management of the portfolio:
Gary A. Langbaum Robert S. Cessine
Lead Portfolio Manager o Began investment career in 1982
o Began investment career in 1970 o Joined the adviser in 1993
o Joined the adviser in 1988 o Joined the portfolio team in 1999
o Joined the portfolio team in 1999
Tracy McCormick
o Began investment career in 1980
o Joined the adviser in 1994
o Joined the portfolio team in 1999
Balanced Portfolio | 10
<PAGE>
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance in recent years. The figures in the first part of the table are for
a single share. The total return figures represent the percentage that an
investor in the portfolio would have earned (or lost), assuming all dividends
and distributions were reinvested. This information has been audited by
PricewaterhouseCoopers LLP, whose report, along with the portfolio's financial
statements, is included in the annual report, which is 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.
Balanced Portfolio
Class A
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $15.21 $13.30 $11.61 $10.95 $ 8.97
--------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (a) .35 .37 .34 .31 .30
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions 1.85 2.56 2.32 .95 2.04
--------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations 2.20 2.93 2.66 1.26 2.34
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (.18) (.36) (.33) (.30) (.30)
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (1.12) (.66) (.64) (.30) (.06)
--------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (1.30) (1.02) (.97) (.60) (.36)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $16.11 $15.21 $13.30 $11.61 $10.95
--------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total return (%) 15.32 23.19 24.21 11.89 26.67
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 199 162 118 88 68
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of operating expenses (%) .55 .56 .57 .60 .65
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 2.36 2.71 2.73 2.82 3.01
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 98 74 43 68 88
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
Balanced Portfolio | 11
<PAGE>
Growth and Income Portfolio
Investment Approach
The portfolio seeks long-term growth of capital, current income and growth of
income. The portfolio pursues its goal by investing at least 65% of total assets
in equities, mainly dividend-paying common stocks, preferred stocks and
securities convertible into common stocks of companies which offer the prospect
for growth of earning while paying higher than average dividends. Although the
portfolio can invest in companies of any size and from any country, it invests
primarily in large U.S. companies. The portfolio may invest up to 25% of its
total assets in foreign securities.
In managing the portfolio, the portfolio management team considers both yield
and other valuation and growth factors, meaning that it focuses the portfolio's
investments on securities of companies whose dividends and earnings prospects
are believed to be attractive relative to the portfolio's benchmark index, the
Standard & Poor's 500 Composite Stock Price Index. The portfolio may sell
securities if their yield or growth prospects are expected to be below the
benchmark average. Typically, companies that meet these criteria are large. The
portfolio invests in dividend-paying and non-dividend paying stocks.
Depending on their outlook, the managers may increase or reduce the portfolio's
exposure to a given industry or company, while still keeping the portfolio's
holdings diversified across industries and companies.
Other Investments
While the portfolio is permitted to use various types of derivatives (contracts
whose value is based on, for example, indices, currencies or securities), the
managers don't intend to use them as principal investments, and might not use
them at all.
Main Risks to Investors
There are several risk factors that could hurt the portfolio's performance,
cause you to lose money or make the fund perform less well than other
investments.
As with most stock funds, the most important factor with this portfolio is how
stock markets perform. When stock prices fall, you should expect the value of
your investment to fall as well. Because a stock represents ownership in its
issuer, stock prices can be hurt by poor management, shrinking product demand
and other business risks. These may affect single companies as well as groups of
companies.
To the extent that the portfolio invests in a given industry or focuses on a
particular size of company, factors affecting that industry or size of company
could affect portfolio securities. For example, a rise in unemployment could
hurt manufacturers of consumer goods, and large company stocks at times may not
perform as well as stocks of smaller companies.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
industries, companies or other matters
o to the extent that the portfolio invests for income, it may miss
opportunities in faster-growing stocks
o foreign stocks tend to be more volatile than their U.S. counterparts, for
reasons such as currency fluctuations and political and economic
uncertainty
o derivatives could produce disproportionate losses
o at times, it could be hard to value some investments or to get an
attractive price for them
This portfolio may make sense for investors who are looking for a relatively
conservative equity fund to provide growth and some current income.
Growth and Income Portfolio | 12
<PAGE>
The Portfolio's Track Record
The bar chart shows how returns for the portfolio's Class A shares have varied
from year to year, which may give some idea of risk. The table shows average
annual returns for the portfolio and a broad-based market index (which, unlike
the fund, does not have any fees or expenses). All figures on this page assume
reinvestment of dividends and distributions. The performance of both the
portfolio and the index varies over time. 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. As always, past performance is no guarantee of future results.
Annual Total Returns (%) as of 12/31 each year -- Class A shares
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
- ----------------------------------------------------------
1995 1996 1997 1998 1999
- ----------------------------------------------------------
31.74 22.17 30.47 7.18 5.80
2000 Total Return as of March 31: 1.09%
Best Quarter: 15.86%, Q2 1997 Worst Quarter: -12.58%, Q3 1998
Average Annual Total Returns (%) as of 12/31/1999
<TABLE>
<CAPTION>
Since Class A Since Class B
1 Year 5 Year Inception* Inception*
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A 5.80 18.95 17.53 --
Class B 5.48 -- -- 13.02
Index 21.04 28.54 25.64 27.36
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Index: Standard and Poor's 500 Composite Stock Price Index is an unmanaged
capitalization-weighted index that includes 500 large-cap U.S. stocks.
* Inception dates are May 2, 1994 for Class A shares and May 1, 1997 for
Class B shares. Index comparisons begin May 1, 1994 for Class A shares and
May 1, 1997 for Class B shares.
The portfolio managers
The following people handle the day-to-day management of the portfolio:
Kathleen T. Millard Gregory Adams
Lead Portfolio Manager o Began investment career in 1987
o Began investment career in 1980 o Joined the adviser in 1999
o Joined the adviser in 1983 o Joined the portfolio team in 1999
o Joined the portfolio team in 1994
Growth and Income Portfolio | 13
<PAGE>
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance in recent years. The figures in the first part of the table are for
a single share. The total return figures represent the percentage that an
investor in the portfolio would have earned (or lost), assuming all dividends
and distributions were reinvested. This information has been audited by
PricewaterhouseCoopers LLP, whose report, along with the portfolio's financial
statements, is included in the annual report, which is 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.
Growth and Income Portfolio
Class A (b)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $11.25 $11.48 $ 9.37 $ 7.98 $ 6.26
--------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (a) .22 .27 .27 .27 .23
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions .46 .54 2.47 1.46 1.72
--------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .68 .81 2.74 1.73 1.95
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (.13) (.25) (.26) (.23) (.19)
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (.84) (.79) (.37) (.11) (.04)
--------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.97) (1.04) (.63) (.34) (.23)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.96 $11.25 $11.48 $ 9.37 $ 7.98
--------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total return (%) 5.80 7.18 30.47 22.17 31.74
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 200 184 157 91 52
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses (%) .55 .56 .58 .66 .75
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 2.01 2.41 2.54 3.14 3.18
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 65 39 28 32 24
- ---------------------------------------------------------------------------------------------------------------------------
Class B
- ---------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997(c)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $11.24 $11.47 $ 9.44
---------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (a) .19 .25 .14
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions .46 .54 2.02
---------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .65 .79 2.16
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (.12) (.23) (.13)
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (.84) (.79) --
---------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.96) (1.02) (.13)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.93 $11.24 $11.47
---------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total return (%) 5.48 6.95 22.89**
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 14 14 7
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses (%) .80 .79 .80*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 1.76 2.20 2.13*
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 65 39 28
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) On May 1, 1997 existing shares were redesignated as Class A shares.
(c) For the period May 1, 1997 (commencement of sale of Class B shares) to
December 31, 1997.
* Annualized
** Not annualized
Growth and Income Portfolio | 14
<PAGE>
Capital Growth Portfolio
Investment Approach
The portfolio seeks to maximize long-term capital growth through a broad and
flexible investment program. The portfolio invests at least 65% of total assets
in common stocks of U.S. companies. Although the portfolio can invest in
companies of any size, it generally focuses on established companies with market
values of $2 billion or more.
In choosing stocks, the portfolio managers look for individual companies that
have competitive positions, prospects for consistent growth, exceptional
management and strong balance sheets.
The managers diversify the portfolio's investments by company as well as by
industry and sector. While emphasizing companies with above-average growth
prospects, the portfolio may also invest in companies whose stock prices appear
reasonably valued in light of potential growth, and preferring to avoid
companies with deteriorating fundamentals. The managers look for securities
which may be undervalued due to factors the managers consider to be of a
temporary nature, such as unfavorable news about a company, industry or the
stock markets in general or as a result of a market decline or poor economic
conditions. The portfolio's flexible investment strategy allows it to invest in
a broadly diversified portfolio of stocks in all sectors of the market,
including companies generating new technologies, improved distribution
techniques or new services or companies that develop natural resources.
The portfolio will normally sell a stock when the managers believe it is too
highly valued, its fundamental qualities have deteriorated or its potential
risks have increased.
Other Investments
The portfolio may invest up to 20% of its net assets in intermediate to
longer-term debt securities. Generally, these securities will be in the top four
grades of credit quality. While the portfolio invests mainly in U.S. stocks, it
could invest up to 25% of total assets in foreign equity securities.
While the portfolio is permitted to use various types of derivatives (contracts
whose value is based on, for example, indices, currencies or securities), the
managers don't intend to use them as principal investments, and might not use
them at all.
Main Risks to Investors
There are several factors that could hurt portfolio performance, cause you to
lose money or make the portfolio perform less well than other investments.
As with most stock funds, the most important factor with this portfolio is how
stock markets perform -- in this case, primarily the large company portion of
the U.S. stock market. When stock prices fall, you should expect the value of
your investment to fall as well. At times, large company stocks may not perform
as well as stocks of smaller companies. Because a stock represents ownership in
its issuer, stock prices can be hurt by poor management, shrinking product
demand and other business risks. These may affect single companies as well as
groups of companies.
To the extent that the portfolio invests in a given industry, any factors
affecting that industry could affect portfolio securities. For example, a rise
in unemployment could hurt manufacturers of consumer goods.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of companies, industries,
risk factors or other matters
o growth stocks may be out of favor for certain periods
o foreign stocks may be more volatile than their U.S. counterparts, for
reasons such as currency fluctuations and political and economic
uncertainty
o derivatives could produce disproportionate losses
o at times, it could be hard to value some investments or to get an
attractive price for them
This portfolio may make sense for investors seeking long-term growth.
Capital Growth Portfolio | 15
<PAGE>
The Portfolio's Track Record
The bar chart shows how returns for the portfolio's Class A shares have varied
from year to year, which may give some idea of risk. The table shows average
annual returns for the portfolio and a broad-based market index (which, unlike
the fund, does not have any fees or expenses). All figures on this page assume
reinvestment of dividends and distributions. The performance of both the
portfolio and the index varies over time. 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. As always, past performance is no guarantee of future results.
Annual Total Returns (%) as of 12/31 each year -- Class A shares
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- -------------------------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-7.47 39.55 6.42 20.88 -9.67 28.65 20.13 35.76 23.23 35.23
</TABLE>
2000 Total Return as of March 31: 3.16%
Best Quarter: 25.80%, Q4 1998 Worst Quarter: -17.29%, Q3 1990
Average Annual Total Returns (%) as of 12/31/1999
Since Class B
1 Year 5 Years 10 Years Inception*
- ----------------------------------------------------------------------------
Class A 35.23 28.45 18.03 --
Class B 34.88 -- -- 28.97
Index 21.04 28.54 18.20 25.47
- ----------------------------------------------------------------------------
Index: Standard and Poor's 500 Composite Stock Price Index is an unmanaged
capitalization-weighted index that includes 500 large-cap U.S. stocks.
* Inception: May 12, 1997. Index comparison begins May 31, 1997.
The portfolio managers
The following people handle the day-to-day management of the portfolio:
William F. Gadsden Bruce F. Beaty
Co-lead Portfolio Manager Co-lead Portfolio Manager
o Began investment career in 1983 o Began investment career in 1982
o Joined the adviser in 1983 o Joined the adviser in 1991
o Joined the portfolio team in 1989 o Joined the portfolio team in 1995
Capital Growth Portfolio | 16
<PAGE>
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance in recent years. The figures in the first part of the table are for
a single share. The total return figures represent the percentage that an
investor in the portfolio would have earned (or lost), assuming all dividends
and distributions were reinvested. This information has been audited by
PricewaterhouseCoopers LLP, whose report, along with the portfolio's financial
statements, is included in the annual report, which is 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.
Capital Growth Portfolio
Class A (b)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $23.95 $20.63 $16.50 $15.08 $12.23
--------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (a) .10 .16 .18 .19 .14
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions 7.64 4.46 5.39 2.68 3.25
--------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations 7.74 4.62 5.57 2.87 3.39
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (.07) (.17) (.19) (.19) (.11)
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (2.49) (1.13) (1.25) (1.26) (.43)
--------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (2.56) (1.30) (1.44) (1.45) (.54)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $29.13 $23.95 $20.63 $16.50 $15.08
--------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total return (%) 35.23 23.23 35.76 20.13 28.65
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 1,254 901 676 440 338
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses (%) .49 .50 .51 .53 .57
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) .43 .75 .96 1.27 1.06
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 66 55 42 66 119
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Class B
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997(c)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $23.92 $20.61 $17.54
---------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (a) .04 .11 .08
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions 7.62 4.45 3.08
---------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations 7.66 4.56 3.16
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (.04) (.12) (.09)
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (2.49) (1.13) --
---------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (2.53) (1.25) (.09)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $29.05 $23.92 $20.61
---------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total return (%) 34.88 22.94 18.00**
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 1.28 .83 .55
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses (%) .74 .75 .75*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) .18 .49 .64*
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 66 55 42
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) On May 12, 1997 existing shares were redesignated as Class A shares.
(c) For the period May 12, 1997 (commencement of sale of Class B shares) to
December 31, 1997.
* Annualized
** Not annualized
Capital Growth Portfolio | 17
<PAGE>
Large Company Growth Portfolio
Investment Approach
The portfolio seeks long-term growth of capital through equity securities of
seasoned, financially strong U.S. growth companies. It does this by investing at
least 65% of its assets in common stocks and other equities of large U.S.
companies (those with a market value of $1 billion or more).
In choosing stocks, the portfolio managers use a combination of three analytical
disciplines:
Bottom-up research. The managers look for individual companies with a history of
above-average growth, strong competitive positioning, attractive prices relative
to potential growth, sound financial strength and effective management, among
other factors.
Growth orientation. The managers generally look for companies with above-average
growth of revenue or earnings relative to the overall market.
Top-down analysis. The managers consider the economic outlooks for various
sectors and industries.
The managers may favor securities from different industries at different times,
while still maintaining variety in terms of the industries represented.
The portfolio will normally sell a stock when its earnings growth appears less
promising, when the company no longer qualifies as a large company, when the
managers believe other investments offer better opportunities or in the course
of adjusting its exposure to a given industry.
Other Investments
While the portfolio is permitted to use various types of derivatives (contracts
whose value is based on, for example, indices, currencies or securities), the
managers don't intend to use them as principal investments, and might not use
them at all.
Main Risks to Investors
There are several factors that could hurt portfolio performance, cause you to
lose money or make the portfolio perform less well than other investments.
As with most stock funds, the most important factor with this portfolio is how
stock markets perform -- in this case, primarily the large company portion of
the U.S. stock market. When large company stock prices fall, you should expect
the value of your investment to fall as well. Large company stocks may be less
risky than shares of smaller companies but at times may not perform as well.
Because a stock represents ownership in its issuer, stock prices can be hurt by
poor management, shrinking product demand and other business risks. These may
affect single companies as well as groups of companies.
To the extent that the portfolio invests in a given industry, any factors
affecting that industry could affect portfolio securities. For example, a rise
in unemployment could hurt manufacturers of consumer goods.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of companies, industries,
company trends or other matters
o growth stocks may be out of favor for certain periods
o derivatives could produce disproportionate losses
o at times, market conditions could make it hard to value some investments or
to get an attractive price for them
Investors with long-term goals who are looking for a portfolio with a
growth-style approach to large-cap investing may want to consider this
portfolio.
The Portfolio's Track Record
Because this is a new portfolio, it did not have a full calendar year of
performance to report as of the date of this prospectus.
Large Company Growth Portfolio | 18
<PAGE>
The portfolio manager
The following person handles the day-to-day management of the portfolio:
Valerie F. Malter
o Began investment career in 1984
o Joined the adviser in 1995
o Joined the portfolio team in 1999
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance in recent years. The figures in the first part of the table are for
a single share. The total return figures represent the percentage that an
investor in the portfolio would have earned (or lost), assuming all dividends
and distributions were reinvested. This information has been audited by
PricewaterhouseCoopers LLP, whose report, along with the portfolio's financial
statements, is included in the annual report, which is 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.
Large Company Growth Portfolio
Class A
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1999(b)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period $6.00(d)
---------
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (a) .00
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions 2.16
---------
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations 2.16
---------
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period 8.16
- ---------------------------------------------------------------------------------------------------------------------------
Total return (%) (c) 36.00**
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of year ($ millions) 6
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses, before expense reductions (%) 3.47*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses, after expense reductions (%) 1.25*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) .09*
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 119*
- ---------------------------------------------------------------------------------------------------------------------------
Class B
- ---------------------------------------------------------------------------------------------------------------------------
1999(b)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $6.00(d)
---------
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (a) .00
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions 2.13
---------
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations 2.13
---------
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period 8.13
- ---------------------------------------------------------------------------------------------------------------------------
Total return (%) (c) 35.50**
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 0
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses, before expense reductions (%) 3.72*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses, after expense reductions (%) 1.50*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) (.16)*
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 119*
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the period May 3, 1999 (commencement of operations) to December 31,
1999.
(c) Total return would have been lower had certain expenses not been reduced.
(d) Original capital.
* Annualized
** Not annualized
Large Company Growth Portfolio | 19
<PAGE>
21st Century Growth Portfolio
formerly called Small Company Growth Portfolio
Investment Approach
The portfolio seeks long-term growth of capital by investing primarily in equity
securities issued by emerging growth companies. The portfolio typically invests
at least 80% of its total assets in common stocks of companies that are similar
in size to those of the Russell 2000 Index (typically less than $2 billion in
total market value).
Using extensive fundamental and field research, the managers look for small
companies that have low debt, exceptional management teams that hold a
significant stake in the company, strong current or potential competitive
positioning and potential annual earnings growth of at least 15%, among other
factors. The managers expect to find these companies in many rapidly changing
sectors of the economy, such as telecommunications, biotechnology and high tech.
The managers invest primarily in companies that offer the potential for
sustainable above-average earnings and whose market value appears reasonable in
light of their business prospects.
The managers may favor securities from different industries and companies at
different times, while still maintaining variety in terms of the industries and
companies represented.
As companies in the portfolio exceed the market value of those in the Russell
2000 Index, the portfolio may continue to hold their stocks, but will generally
not add to these holdings. The portfolio will normally sell a stock when it
reaches a target price, when the managers believe other investments offer better
opportunities or in the course of adjusting its emphasis on a given industry.
Other Investments
While the portfolio is permitted to use various types of derivatives (contracts
whose value is based on, for example, indices, currencies or securities), the
managers don't intend to use them as principal investments, and might not use
them at all.
Main Risks to Investors
There are several factors that could hurt portfolio performance, cause you to
lose money or make the portfolio perform less well than other investments.
As with most stock funds, the most important factor with this portfolio is how
stock markets perform -- in this case, the small company portion of the U.S.
stock market. When small company stock prices fall, you should expect the value
of your investment to fall as well. Small company stocks tend to be more
volatile than stocks of larger companies, in part because small companies tend
to be less established than larger companies and more vulnerable to competitive
challenges and bad economic news. Because a stock represents ownership in its
issuer, stock prices can be hurt by poor management, shrinking product demand
and other business risks. These may affect single companies as well as groups of
companies.
To the extent that the portfolio invests in a given industry, factors affecting
that industry could affect portfolio securities. For example, a rise in
unemployment could hurt manufacturers of consumer goods.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of companies, industries,
economic trends or other matters
o growth stocks may be out of favor for certain periods
o derivatives could produce disproportionate losses
o at times, it could be hard to value some investments or to get an
attractive price for them
This portfolio may appeal to investors who are looking for a fund that seeks out
tomorrow's leaders and who can accept the risks of small-company investing.
The Portfolio's Track Record
Because this is a new portfolio, it did not have a full calendar year of
performance to report as of the date of this prospectus.
21st Century Growth Portfolio | 20
<PAGE>
The portfolio managers
The following people handle the day-to-day management of the portfolio:
Peter Chin Roy C. McKay
Lead Portfolio Manager o Began investment career in 1968
o Began investment career in 1969 o Joined the adviser in 1988
o Joined the adviser in 1973 o Joined the portfolio team in 1999
o Joined the portfolio team in 1999
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance in recent years. The figures in the first part of the table are for
a single share. The total return figures represent the percentage that an
investor in the portfolio would have earned (or lost), assuming all dividends
and distributions were reinvested. This information has been audited by
PricewaterhouseCoopers LLP, whose report, along with the portfolio's financial
statements, is included in the annual report, which is 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.
21st Century Growth Portfolio
formerly called Small Company Growth Portfolio
Class A
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1999(b)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period $6.00(d)
---------
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (a) (.04)
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions 4.59
---------
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations 4.55
---------
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period 10.55
- ---------------------------------------------------------------------------------------------------------------------------
Total return (%) (c) 75.83**
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of year ($ millions) 15
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses, before expense reductions (%) 2.90*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses, after expense reductions (%) 1.50*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) (.95)*
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 61
- ---------------------------------------------------------------------------------------------------------------------------
Class B
- ---------------------------------------------------------------------------------------------------------------------------
1999(b)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $6.00(d)
---------
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (a) (.06)
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions 4.57
---------
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations 4.51
---------
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period 10.51
- ---------------------------------------------------------------------------------------------------------------------------
Total return (%) (c) 75.17**
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 0
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses, before expense reductions (%) 3.15*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses, after expense reductions (%) 1.75*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) (1.20)*
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 61
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the period May 3, 1999 (commencement of operations) to December 31,
1999.
(c) Total return would have been lower had certain expenses not been reduced.
(d) Original capital.
* Annualized
** Not annualized
21st Century Growth Portfolio | 21
<PAGE>
Global Discovery Portfolio
Investment Approach
The portfolio seeks above-average capital appreciation over the long term by
investing primarily in the equity securities of small companies located
throughout the world. The portfolio invests at least 65% of total assets in
common stocks and other equities of small companies (companies with market
values similar to the smallest 20% of the Salomon Brothers Broad Market Index).
While the portfolio may invest in securities in any country, and it generally
focuses on countries with developed economies (including the U.S.), it may
invest in companies based in emerging markets.
In choosing stocks, the portfolio managers use a combination of three analytical
disciplines:
Bottom-up research. The managers look for companies that appear to have
effective management, strong competitive positioning, vigorous research and
development efforts and sound balance sheets.
Growth orientation. The managers prefer companies whose potential for
sustainable revenue and earnings growth is above-average compared to those of
large companies, and whose market value appears reasonable in light of their
business prospects.
Analysis of regional themes. The managers look for significant social, economic,
industrial and demographic changes, with an eye toward identifying countries,
industries and companies that may benefit from these changes.
The managers may favor securities from different countries and industries at
different times, while still maintaining variety in terms of the countries and
industries represented. The portfolio may invest in emerging markets, typically
in the Far East, Latin America and lesser developed countries in Europe as well
as in firms operating in developed economies, such as some of those of the
United States, Japan and Western Europe.
The portfolio will normally sell a stock when the managers believe it has an
excessively large market capitalization, when its fundamental factors have
changed or in adjusting its emphasis on a country or industry.
Other Investments
While the portfolio invests mainly in common stocks of small companies, it may
also invest in equities of large companies or in debt securities.
While the portfolio is permitted to use various types of derivatives (contracts
whose value is based on, for example, indices, currencies or securities), the
managers don't intend to use them as principal investments, and might not use
them at all.
Main Risks to Investors
There are several factors that could hurt portfolio performance, cause you to
lose money or make the portfolio perform less well than other investments.
The most important factor with this portfolio is how U.S. and foreign stock
markets perform -- something that depends on a large number of factors,
including economic, political and demographic trends. When U.S. and foreign
stock prices fall, you should expect the value of your investment to fall as
well.
Foreign stocks tend to be more volatile than their U.S. counterparts, for
reasons ranging from political and economic uncertainties to a higher risk that
essential information may be incomplete or wrong. These risks tend to be greater
in emerging markets. Small and mid-size stocks tend to be more volatile than
stocks of larger companies, in part because small and mid-size companies tend to
be less established than larger companies and the valuation of their stocks
often depends on future expectations. Because a stock represents ownership in
its issuer, stock prices can be hurt by poor management, shrinking product
demand and other business risks. These may affect single companies as well as
groups of companies. In addition, changing currency rates could add to the
fund's investment losses or reduce its investment gains.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
countries, industries, companies or other matters
o growth stocks may be out of favor for certain periods
o derivatives could produce disproportionate losses
o at times, it could be hard to value some investments or to get an
attractive price for them
This portfolio may interest long-term investors who want to diversify a
large-cap or domestic portfolio of investments.
Global Discovery Portfolio | 22
<PAGE>
The Portfolio's Track Record
The bar chart shows how returns for the portfolio's Class A Shares have varied
from year to year, which may give some idea of risk. The table shows average
annual returns for the portfolio and a broad-based market index (which, unlike
the fund, does not have any fees or expenses). All figures on this page assume
reinvestment of dividends and distributions. The performance of both the
portfolio and the index varies over time. 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. As always, past performance is no guarantee of future results.
Annual Total Returns (%) as of 12/31 each year -- Class A shares
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
- -----------------------------------
1997 1998 1999
- -----------------------------------
12.38 16.44 65.88
2000 Total Return as of March 31: 15.71%
Best Quarter: 40.96%, Q4 1999 Worst Quarter: -17.25%, Q3 1998
Average Annual Total Returns (%) as of 12/31/1999
Since Class A Since Class B
1 Year Inception* Inception*
- ----------------------------------------------------------------------------
Class A 65.88 25.34 --
Class B 65.63 -- 34.28
Index 22.34 10.28 12.11
- ----------------------------------------------------------------------------
Index: Salomon Brothers World Equity Extended Market Index, an unmanaged
small-capitalization stock universe of 22 countries.
* Inception dates are May 1, 1996 for Class A shares and May 2, 1997 for Class B
shares. Index comparisons begin May 1, 1996 for Class A shares and May 1, 1997
for Class B shares.
In the chart, total returns for 1997 and 1998 would have been lower if operating
expenses hadn't been reduced.
In the table, total returns from inception through 1998 would have been lower if
operating expenses hadn't been reduced.
The portfolio managers
The following people handle the day-to-day management of the portfolio:
Gerald J. Moran Steven T. Stokes
Lead Portfolio Manager o Began investment career in 1986
o Began investment career in 1968 o Joined the adviser in 1996
o Joined the adviser in 1968 o Joined the portfolio team in 1999
o Joined the portfolio team in 1996
Sewall F. Hodges
o Began investment career in 1986
o Joined the adviser in 1995
o Joined the portfolio team in 1996
Global Discovery Portfolio | 23
<PAGE>
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance in recent years. The figures in the first part of the table are for
a single share. The total return figures represent the percentage that an
investor in the portfolio would have earned (or lost), assuming all dividends
and distributions were reinvested. This information has been audited by
PricewaterhouseCoopers LLP, whose report, along with the portfolio's financial
statements, is included in the annual report, which is 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.
Global Discovery Portfolio
Class A (b)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997 1996(c)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 8.04 $ 7.08 $ 6.33 $6.00(d)
-------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (a) (.06) (.03) (.03) (.01)
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions 5.30 1.18 .81 .34
-------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations 5.24 1.15 .78 .33
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income -- (.12) (.02) --
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (.10) (.07) (.01) --
-------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.10) (.19) (.03) --
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $13.18 $ 8.04 $ 7.08 $ 6.33
-------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total return (%) 65.8 8 16.44(e) 12.38(e) 5.50(e)**
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 71 25 18 17
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses, before expense reductions (%) 1.63 1.79 1.79 2.32*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses, after expense reductions (%) 1.63 1.72 1.50 1.50*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) (.66) (.40) (.44) (.13)*
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 70 54 83 50*
- ---------------------------------------------------------------------------------------------------------------------------
Class B
- ---------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997(f)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 8.01 $ 7.07 $ 6.20
----------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (a) (.08) (.05) (.04)
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions 5.28 1.18 .91
----------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations 5.20 1.13 .87
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income -- (.12) --
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (.10) (.07) --
----------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.10) (.19) --
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $13.11 $ 8.01 $ 7.07
----------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total Return (%) 65.63 16.18(e)14.03(e)**
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 7 4 2
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses, before expense reductions (%) 1.88 1.98 1.75*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses, after expense reductions(%) 1.88 2.04 2.00*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) (.91) (.69) (.89)*
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 70 54 83
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) On May 2, 1997 existing shares were redesignated as Class A shares.
(c) For the period May 1, 1996 (commencement of operations) to December 31,
1996.
(d) Original capital.
(e) Total returns would have been lower had certain expenses not been reduced.
(f) For the period May 2, 1997 (commencement of sale of Class B shares) to
December 31, 1997.
* Annualized
** Not annualized
Global Discovery Portfolio | 24
<PAGE>
International Portfolio
Investment Approach
The portfolio seeks long-term growth of capital primarily through diversified
holdings of marketable foreign equity investments. The portfolio invests
primarily in common stocks of established companies, listed on foreign
exchanges, which the portfolio management team believes have favorable
characteristics. The portfolio will invest in companies in at least three
different countries, excluding the United States.
In choosing stocks, the portfolio managers use a combination of three analytical
disciplines:
Bottom-up research. The managers look for individual companies that have sound
financial strength, good business prospects, strong competitive positioning and
above-average earnings growth, among other factors.
Top-down analysis. The managers consider the economic outlooks for various
countries and geographical regions, favoring countries that they believe have
sound economic conditions and open markets.
Analysis of global themes. The managers look for significant changes in the
business environment, with an eye toward identifying industries that may benefit
from these changes.
The managers may favor securities from different countries and industries at
different times, while still maintaining variety in terms of the countries and
industries represented.
The portfolio will normally sell a stock when the managers believe it has
reached its fair value, its underlying investment theme has matured or the
reasons for originally investing no longer apply.
Other investments
While most of the portfolio's foreign equities are common stocks, some may be
other types of equities, such as convertible securities, preferred stocks and
depositary receipts. The portfolio may also invest in foreign debt securities,
including convertible bonds.
For temporary defensive purposes, the portfolio may invest up to 100% of assets
in Canadian and U.S. government obligations or currencies, or securities of
companies incorporated in and having their principal place of business in Canada
or the U.S. In such a case, the portfolio would not be pursuing its investment
objective.
While the portfolio is permitted to use various types of derivatives (contracts
whose value is based on, for example, indices, currencies or securities), the
managers don't intend to use them as principal investments, and might not use
them at all.
Main Risks to Investors
There are several risk factors that could hurt the portfolio's performance,
cause you to lose money or make the portfolio perform less well than other
investments.
As with most stock funds, the most important factor with this portfolio is how
stock markets perform -- in this case, primarily foreign markets. When foreign
stock prices fall, you should expect the value of your investment to fall as
well. Foreign stocks also tend to be more volatile than their U.S. counterparts,
for reasons ranging from political and economic uncertainties to a higher risk
that essential information may be incomplete or wrong. While developed foreign
markets may be less risky than emerging markets, increasing globalization can
make any market vulnerable to events elsewhere in the world. Because a stock
represents ownership in its issuer, stock prices can be hurt by poor management,
shrinking product demand and other business risks. These may affect single
companies as well as groups of companies.
A second major factor is the fluctuation of currency exchange rates. When the
dollar value of a foreign currency falls, so does the value of any investments
the portfolio owns that are denominated in that currency. This is separate from
market risk, and may add to market losses or reduce market gains.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
geographical areas, industries, companies or other matters
o derivatives could produce disproportionate losses
o at times, it could be hard to value some investments or to get an
attractive price for them
This portfolio was designed for investors who want a broadly diversified
international investment with the emphasis squarely on long-term growth of
capital.
International Portfolio | 25
<PAGE>
The Portfolio's Track Record
The bar chart shows how returns for the portfolio's Class A shares have varied
from year to year, which may give some idea of risk. The table shows average
annual returns for the portfolio and a broad-based market index (which, unlike
the fund, does not have any fees or expenses). All figures on this page assume
reinvestment of dividends and distributions. The performance of both the
portfolio and the index varies over time. 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. As always, past performance is no guarantee of future results.
Annual Total Returns (%) as of 12/31 -- Class A shares
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- -------------------------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-7.65 11.45 -3.08 37.82 -0.85 11.11 14.78 9.07 18.49 54.51
</TABLE>
2000 Total Return as of March 31: -2.21%
Best Quarter: 29.06%, Q4 1999 Worst Quarter: -17.29%, Q3 1990
Average Annual Total Returns (%) as of 12/31/1999
Since Class B
1 Year 5 Years 10 Years Inception*
- -------------------------------------------------------------------------------
Class A 54.51 20.56 13.25 --
Class B 54.13 -- -- 26.53
Index 27.92 13.09 7.09 16.10
- -------------------------------------------------------------------------------
Index: Morgan Stanley Capital International (MSCI) EAFE & Canada Index, an
unmanaged capitalization-weighted measure of stock markets in Europe,
Australasia, the Far East and Canada.
* Inception: May 8, 1997. Index comparison begins May 31, 1997.
The portfolio managers
The following people handle the day-to-day management of the portfolio:
Irene T. Cheng
Lead Portfolio Manager Carol L. Franklin
o Began investment career in 1985 o Began investment career in 1975
o Joined the adviser in 1993 o Joined the adviser in 1981
o Joined the portfolio team in 1997 o Joined the portfolio team in 1998
Nicholas Bratt Marc J. Slendebroek
o Began investment career in 1974 o Began investment career in 1989
o Joined the adviser in 1976 o Joined the adviser in 1994
o Joined the portfolio team in 1987 o Joined the portfolio team in 1999
International Portfolio | 26
<PAGE>
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance in recent years. The figures in the first part of the table are for
a single share. The total return figures represent the percentage that an
investor in the portfolio would have earned (or lost), assuming all dividends
and distributions were reinvested. This information has been audited by
PricewaterhouseCoopers LLP, whose report, along with the portfolio's financial
statements, is included in the annual report, which is 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.
International Portfolio
Class A (b)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $14.56 $14.11 $13.25 $11.82 $10.69
--------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (a) .12(e) .13 .14 .12 .11
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions 7.17 2.29 1.04 1.60 1.07
--------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations 7.29 2.42 1.18 1.72 1.18
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (.02) (.26) (.21) (.29) (.01)
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (1.49) (1.71) (.11) -- (.04)
--------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (1.51) (1.97) (.32) (.29) (.05)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $20.34 $14.56 $14.11 $13.25 $11.82
--------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total return (%) 54.51 18.49 9.07 14.78 11.11
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of year ($ millions) 874 509 427 726 548
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses (%) 1.03 1.04 1.00 1.05 1.08
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) .76 .90 .94 .95 .95
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 86 71 61 33 46
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Class B
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997(c)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $14.51 $14.08 $13.76
----------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (a) .08(e) .10 (.00)(d)
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions 7.14 2.29 .32
----------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations 7.22 2.39 .32
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income -- (.25) --
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (1.49) (1.71) --
----------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (1.49) (1.96) --
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $20.24 $14.51 $14.08
----------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total Return (%) 54.13 18.28 2.33**
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) .69 .37 .35
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses (%) 1.28 1.28 1.24*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) .53 .69 (.00)(d)*
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 86 71 61**
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) On May 8, 1997, existing shares were designated as Class A shares.
(c) For the period May 8, 1997 (commencement of sale of Class B shares) to
December 31, 1997.
(d) Amount shown is less than one half of $.005.
(e) Net investment income per share includes non-recurring dividend income
amounting to $.03 per share.
* Annualized
** Not annualized
International Portfolio | 27
<PAGE>
The Investment Adviser
The investment adviser for these portfolios is Scudder Kemper Investments, Inc.,
345 Park Avenue, New York, NY. Scudder Kemper has more than 80 years of
experience managing mutual funds, and currently has more than $290 billion in
assets under management.
Scudder Kemper takes a team approach to asset management. Scudder Kemper's team
is comprised of investment professionals, economists, research analysts, traders
and other investment specialists, located in offices across the United States
and around the world.
As payment for serving as investment adviser, Scudder Kemper receives a
management fee from each portfolio. Below are the actual rates paid by each
portfolio for the most recent fiscal year, as a percentage of each portfolio's
average daily net assets.
Fund Name Fee Paid
- -------------------------------------------------------------------------
Money Market Portfolio .370%
Bond Portfolio .475%
Balanced Portfolio .475%
Growth and Income Portfolio .475%
Capital Growth Portfolio .460%
Large Company Growth Portfolio 0%*
21st Century Growth Portfolio 0%*
Global Discovery Portfolio .975%
International Portfolio .850%
- -------------------------------------------------------------------------
* The adviser agreed to waive all or a portion of total annual operating
expenses (exclusive of 12b-1 fees) to limit the expenses of the Large Company
Growth Portfolio to 1.25% of average daily net assets. The adviser agreed to
waive all or a portion of total annual operating expenses (exclusive of 12b-1
fees) to limit the expenses of the 21st Century Growth Portfolio to 1.50% of
average daily net assets until April 30, 2000.
By contract, total annual operating expenses for Global Discovery Portfolio are
capped at 1.25% of Class A shares' average daily net assets and 1.50% of Class B
shares' average daily net assets until April 30, 2001.
By contract, total annual operating expenses for Large Company Growth Portfolio
are capped at 1.25% of Class A shares' average daily net assets and 1.50% of
Class B shares' average daily net assets until April 30, 2001.
By contract, total annual operating expenses for 21st Century Growth Portfolio
are capped at 1.50% of Class A shares' average daily net assets and 1.75% of
Class B shares' average daily net assets until April 30, 2001.
28
<PAGE>
Other Policies and Risks
While the portfolio-by-portfolio sections on the previous pages describe the
main points of each portfolio's strategy and risks, there are a few other issues
to know about:
o Although major changes tend to be infrequent, a portfolio's Board could
change that portfolio's investment goal without seeking shareholder
approval.
o As a temporary defensive measure, the portfolios (except Bond Portfolio and
Capital Growth Portfolio) could shift up to 100% of their assets into
investments such as money market securities. This could prevent losses, but
would mean that the portfolio was not pursuing its goal.
This prospectus doesn't tell you about every policy or risk of investing in the
portfolios. If you want more information on a portfolio's allowable securities
and investment practices and the characteristics and risks of each one, you may
want to request a copy of the Statement of Additional Information (the back
cover tells you how to do this).
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
Euro conversion
Portfolios that invest in foreign securities could be affected by accounting
differences, changes in tax treatment or other issues related to the conversion
of certain European currencies into the euro, which is already underway. The
adviser is working to address euro-related issues as they occur and has been
assured that other key service providers are taking similar steps. Still,
there's some risk that this problem could materially affect a portfolio's
operation (including its ability to calculate net asset value and to handle
purchases and redemptions), its investments or securities markets in general.
29
<PAGE>
Your Investment in the Portfolios
The information in this section may affect anyone who selects one or more of
these portfolios as an investment option in a variable annuity contract or
variable life insurance policy that offers the portfolios. These contracts and
policies are described in separate prospectuses issued by participating
insurance companies. The fund assumes no responsibility for such prospectuses.
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 12b-1 fees.
Class B shares are offered at net asset value and are subject to 12b-1 fees.
Technically, the shareholders of this fund (which includes the portfolios just
described) are the insurance companies that offer the portfolios as choices for
holders of certain variable annuity contracts or variable life insurance
policies. These insurance companies effectively pass through the ownership of
portfolio shares to their contract and policy holders, and some may pass through
voting rights as well. The separate accounts of the participating insurance
companies place orders to purchase and redeem shares of each portfolio. These
orders reflect the amount of premium payments to be invested, surrender and
transfer requests and other matters.
The portfolios are open for business each day the New York Stock Exchange is
open. Each portfolio calculates its share price every business day, as of the
close of regular trading on the Exchange (typically 4 p.m. eastern time, but
sometimes earlier, as in the case of scheduled half-day trading or unscheduled
suspensions of trading).
Once an order is received by Scudder Service Corporation, and it has determined
that it is a "good order," it will be processed at the next share price
calculated. Since Money Market Portfolio will be investing in instruments that
normally require immediate payment in Federal funds (monies credited to a bank's
account with its regional Federal Reserve Bank), the Portfolio has adopted
certain procedures for the convenience of its shareholders and to ensure that
Money Market Portfolio receives investable funds.
The Portfolios may suspend redemptions or postpone payments when the New York
Stock Exchange is closed or when trading is restricted for any reason or under
emergency circumstances as determined by the Securities and Exchange Commission.
Should any conflict between variable annuity contract and variable life
insurance policy holders arise that would require that 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.
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 Board intends to monitor events in order to identify
any material irreconcilable conflicts that may possibly arise and to determine
what action, if any, should be taken.
How the portfolios calculate share price
For each portfolio in this prospectus, the share price is its net asset value
per share, or NAV. To calculate NAV, each portfolio uses the following equation:
TOTAL ASSETS - TOTAL LIABILITIES
------------------------------------ = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
30
<PAGE>
Except with Money Market Portfolio, we typically use market prices to value
securities. However, when a market price isn't available, or when we have reason
to believe it doesn't represent market realities, we may use fair value methods
approved by the fund's Board. In such a case, a portfolio's value for a security
is likely to be different from quoted market prices. With Money Market
Portfolio, we use amortized cost value (the method used by most money market
funds).
To the extent that a portfolio invests in securities that are traded primarily
in foreign markets, the value of its holdings could change at a time when you
aren't able to buy or sell portfolio shares. This is because some foreign
markets are open on days when the portfolios don't price their shares.
Distributions
Money Market Portfolio intends to declare dividends daily and, shortly after the
first business day of the following month, to pay them out to shareholders. All
other portfolios intend to declare and distribute dividends from their net
investment income, if any, in April. Any of the portfolios may make additional
distributions if necessary.
All distributions will be reinvested in shares of the portfolios unless we are
informed that they should be paid out 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.
Marketing/distribution fees
Scudder Investor Services, Inc., a subsidiary of the investment adviser, is the
fund's distributor.
Scudder Variable Life Investment Fund has adopted a 12b-1 plan for all Class B
shares. Under this plan, each portfolio (except Money Market Portfolio) pays a
fee to the distributor, which in turn remits fees to participating insurance
companies for various costs incurred or paid by these companies in connection
with marketing and distributing 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.
Examples of expenses payable under the plan may include the costs of printing
and mailing materials (such as portfolio prospectuses, shareholder reports,
portfolio advertisements and sales literature), holding seminars and sales
meetings, providing customer service to policyholders and sales compensation.
31
<PAGE>
To Get More Information
Shareholder reports -- These include commentary from each portfolio's management
team about recent market conditions and the effects of a portfolio's strategies
on its performance. For each portfolio, they also have detailed performance
figures, a list of everything the portfolio owns, and the portfolio's financial
statements.
Statements of Additional Information (SAI) -- This tells you more about each
portfolio's features and policies, including additional risk information. The
SAI is incorporated by reference into this document (meaning that it's legally
part of this prospectus).
If you'd like to ask for copies of these documents, or if you're a shareholder
and have questions, please contact Scudder or the SEC (see below). Materials you
get from Scudder are free; those from the SEC involve a copying fee. If you
like, you can look over these materials at the SEC's Public Reference Room in
Washington, DC or request them electronically at [email protected].
Scudder Investor Services, Inc. SEC
Two International Place 450 Fifth Street, N.W.
Boston, MA 02110-4103 Washington, D.C. 20549-6009
Call collect: 1-617-295-1000 1-800-SEC-0330
www.sec.gov
SEC File #
- --------------------------------------------------------------------------------
Scudder Variable Life Investment Fund 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
21ST CENTURY GROWTH PORTFOLIO
GLOBAL DISCOVERY PORTFOLIO
INTERNATIONAL PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
May 1, 2000
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,
2000, 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 Annual Report to Shareholders dated December 31, 1999, is
incorporated by reference and is hereby deemed to be part of this Statement of
Additional Information. The Annual Report may be obtained without charge by
calling 617-295-1000.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES....................................................................................1
Money Market Portfolio.......................................................................................1
Bond Portfolio...............................................................................................2
Balanced Portfolio...........................................................................................3
Growth and Income Portfolio..................................................................................5
Capital Growth Portfolio.....................................................................................6
Large Company Growth Portfolio...............................................................................7
21st Century Growth Portfolio................................................................................8
Global Discovery Portfolio...................................................................................9
International Portfolio.....................................................................................11
Master-feeder Fund Structure................................................................................12
Interfund Lending...........................................................................................12
Special Risk Factors........................................................................................13
POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS.................................................................19
Repurchase Agreements.......................................................................................19
Illiquid Securities.........................................................................................19
Trust Preferred Securities..................................................................................20
Zero Coupon Securities......................................................................................20
Real Estate Investment Trusts...............................................................................21
Mortgage-Backed Securities and Mortgage Pass-Through Securities..........................................22
Collateralized Mortgage Obligations ("CMOs")................................................................23
FHLMC Collateralized Mortgage Obligations...................................................................23
Other Mortgage-Backed Securities............................................................................24
Other Asset-Backed Securities...............................................................................24
Municipal Obligations.......................................................................................25
Convertible Securities......................................................................................25
Depositary Receipts.........................................................................................26
Foreign Securities..........................................................................................27
Indexed Securities..........................................................................................28
When-Issued Securities......................................................................................28
Loans of Portfolio Securities...............................................................................29
Borrowing...................................................................................................29
Options.....................................................................................................29
Securities Index Options....................................................................................31
Futures Contracts...........................................................................................31
Futures on Debt Securities..................................................................................32
Limitations on the Use of Futures Contracts and Options on Futures..........................................33
Foreign Currency Transactions...............................................................................34
Strategic Transactions and Derivatives Applicable to Growth and Income, Large Company Growth, 21st
Century Growth and Global Discovery Portfolios...........................................................37
Debt Securities.............................................................................................43
High Yield, High Risk Securities............................................................................44
Combined Transactions.......................................................................................44
Risks of Specialized Investment Techniques Abroad...........................................................45
Common stocks...............................................................................................45
Reverse Repurchase Agreements...............................................................................45
Investment Company Securities...............................................................................45
INVESTMENT RESTRICTIONS..............................................................................................46
PURCHASES AND REDEMPTIONS............................................................................................48
Investment Adviser..........................................................................................48
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TABLE OF CONTENTS (continued)
Page
AMA InvestmentLink(SM) Program..............................................................................52
Code of Ethics..............................................................................................52
Distributor.................................................................................................52
TRUSTEES AND OFFICERS................................................................................................54
REMUNERATION.........................................................................................................56
Responsibilities of the Board -- Board and Committee Meetings..........................................56
Compensation of Officers and Trustees.......................................................................57
NET ASSET VALUE......................................................................................................57
TAX STATUS...........................................................................................................58
DIVIDENDS AND DISTRIBUTIONS..........................................................................................63
Money Market Portfolio......................................................................................63
Other Portfolios............................................................................................63
PERFORMANCE INFORMATION..............................................................................................64
Money Market Portfolio......................................................................................64
Bond Portfolio..............................................................................................65
All Portfolios..............................................................................................65
Comparison of Portfolio Performance.........................................................................68
Taking a Global Approach....................................................................................69
SHAREHOLDER COMMUNICATIONS...........................................................................................69
ORGANIZATION AND CAPITALIZATION......................................................................................70
General.....................................................................................................70
Shareholder and Trustee Liability...........................................................................74
PORTFOLIO TRANSACTIONS...............................................................................................74
PORTFOLIO TURNOVER...................................................................................................77
EXPERTS..............................................................................................................77
COUNSEL..............................................................................................................77
ADDITIONAL INFORMATION...............................................................................................77
FINANCIAL STATEMENTS.................................................................................................79
</TABLE>
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iii
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APPENDIX
Description of Bond Ratings
Description of Commercial Paper Ratings
iv
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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 of nine
diversified portfolios: Money Market Portfolio, Bond Portfolio, Balanced
Portfolio, Growth and Income Portfolio, Capital Growth Portfolio, Large Company
Growth Portfolio, 21st Century 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
<PAGE>
Adviser. Obligations which are subject to repurchase agreements will be limited
to those of the type 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
2
<PAGE>
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 foreign branches
of U.S. banks. The Portfolio may also enter into repurchase agreements and may
invest in special purpose trust securities ("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, 1999, the average monthly
dollar-weighted market value of the bonds in the Portfolio's portfolio was rated
as follows: 12% Aaa, 11% Aa, 19% A, 13% BBB, 12% BB and 4% B.
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.
3
<PAGE>
The portfolio management team allocates portfolio holdings among equity
and fixed-income securities based on its evaluation of the overall financial
climate, including interest rates, capital flows, inflation and fiscal controls.
It also makes adjustments among industry sectors and, in the case of
fixed-income securities, overall credit quality and duration. The portfolio
invests primarily in the equity and fixed-income securities of U.S. companies.
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 may invest include common stocks, preferred stocks, convertible
securities and warrants.
The portfolio management team focuses on equity securities it regards
as reasonably priced relative to their earnings growth potential. It evaluates a
variety of factors, including historic and projected earnings growth, balance
sheets and stock prices. The portfolio management team follows a disciplined buy
and sell strategy, in which proprietary research gathered from meetings with,
among others, senior management of companies in which the portfolio invests,
government experts and industry leaders plays an important role.
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 senior securities. While the portfolio
has the ability to invest up to 20% of its bond assets (10% of total portfolio
assets) in high yield securities, it normally invests predominantly in corporate
debt securities which are rated in the four highest grades by a nationally
recognized statistical rating service, such as S&P or Moody's. 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 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.
4
<PAGE>
The Portfolio will, on occasion, adjust its mix of investments among
equity securities, bonds, and cash reserves. In reallocating investments, the
Adviser weighs the relative values of different asset classes and expectations
for future returns. In doing so, the Adviser analyzes, on a global basis, the
level and direction of interest rates, capital flows, inflation expectations,
anticipated growth of corporate profits, monetary and fiscal policies around the
world, and other related factors. The Portfolio does not take extreme investment
positions as part of an effort to "time the market." Shifts between stocks and
fixed income investments are expected to occur in generally small increments
within the guidelines adopted in this Statement of Additional Information. The
Portfolio is designed as a conservative, long-term investment program.
While the Portfolio emphasizes U.S. equity and debt securities, it may
invest a portion of its assets in foreign securities, including depositary
receipts. The Portfolio's foreign holdings will meet the criteria applicable to
its domestic investments. The international component of the Portfolio's
investment program is intended to increase diversification, thus reducing risk,
while providing the opportunity for higher returns.
In addition, the Portfolio may invest in securities on a when-issued or
forward delivery basis. The Portfolio may, for hedging purposes, purchase
forward foreign currency exchange contracts and foreign currencies in the form
of bank deposits. The Portfolio may also purchase other foreign money market
instruments including, but not limited to, bankers' acceptances, certificates of
deposit, commercial paper, short-term government obligations and repurchase
agreements.
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").
5
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The Portfolio may, for hedging purposes, purchase forward foreign
currency exchange contracts and foreign currencies in the form of bank deposits.
The Portfolio may also purchase other foreign money market instruments,
including, but not limited to, bankers' acceptances, certificates of deposit,
commercial paper, short-term government obligations and repurchase agreements.
Growth and Income Portfolio cannot guarantee a gain or eliminate the
risk of loss. The net asset value of the Portfolio's shares will increase or
decrease with changes in the market prices of the Portfolio's investments and,
to a lesser extent, changes in foreign currency exchange rates.
Capital Growth Portfolio
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
6
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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
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.
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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.
21st Century Growth Portfolio
21st Century 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.
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
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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.")
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.
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21st Century 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 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
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securities of companies with total available market capitalization greater than
$100 million. Based on this policy, the companies held by the Portfolio
typically will have individual equity market capitalizations of between
approximately $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
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
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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 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.
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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.
Interfund Lending
Interfund Borrowing and Lending Program. The Fund, on behalf of each Portfolio,
has received exemptive relief from the SEC which permits the Portfolios to
participate in an interfund lending program among certain investment companies
advised by the Adviser. The interfund lending program allows the participating
funds to borrow money from and loan money to each other for temporary or
emergency purposes. The program is subject to a number of conditions designed to
ensure fair and equitable treatment of all participating funds, including the
following: (1) no fund may borrow money through the program unless it receives a
more favorable interest rate than a rate approximating the lowest interest rate
at which bank loans would be available to any of the participating funds under a
loan agreement; and (2) no fund may lend money through the program unless it
receives a more favorable return than that available from an investment in
repurchase agreements and, to the extent applicable, money market cash sweep
arrangements. In addition, a fund may participate in the program only if and to
the extent that such participation is consistent with the fund's investment
objectives and policies (for instance, money market funds would normally
participate only as lenders and tax exempt funds only as borrowers). Interfund
loans and borrowings may extend overnight, but could have a maximum duration of
seven days. Loans may be called on one day's notice. A fund may have to borrow
from a bank at a higher interest rate if an interfund loan is called or not
renewed. Any delay in repayment to a lending fund could result in a lost
investment opportunity or additional costs. The program is subject to the
oversight and periodic review of the Boards of the participating funds. To the
extent a Portfolio is actually engaged in borrowing through the interfund
lending program, the Portfolio, as a matter of non-fundamental policy, may not
borrow for other than temporary or emergency purposes (and not for leveraging),
except that a Portfolio (except Money Market Portfolio) may engage in reverse
repurchase agreements and dollar rolls for any purpose.
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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 may decrease the degree to which events in any one country,
including the U.S., will affect an investor's entire investment holdings. In
certain periods 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 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 in foreign countries than in the U.S. It
may be more difficult for a Portfolio's 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 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
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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 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.
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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 governmental 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.
The risk also exists that an emergency situation may arise in one or
more emerging markets as a result of which trading of securities may cease or
may be substantially curtailed and prices for a Portfolio's securities in such
markets may not be readily available. The Fund may suspend redemption of its
shares for any period during which an emergency exists, as determined by the
Securities and Exchange Commission (the "SEC"). Accordingly if a Portfolio
believes that appropriate circumstances exist, it will promptly apply to the SEC
for a determination that an emergency is present. During the period commencing
from a Portfolio's identification of such condition until the date of the SEC
action, the Portfolio's securities in the affected markets will be valued at
fair value determined in good faith by or under the direction of the Fund's
Board of Trustees.
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.
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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.
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.
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The conditions that have given rise to these developments are
changeable, and there is no assurance that reforms will continue or that their
goals will be achieved.
Portugal is a genuinely emerging market which has experienced rapid
growth since the mid-1980s, except for a brief period of stagnation over
1990-91. Portugal's government remains committed to privatization of the
financial system away from one dependent upon the banking system to a more
balanced structure appropriate for the requirements of a modern economy.
Inflation continues to be about three times the EC average.
Economic reforms launched in the 1980s continue to benefit Turkey in
the 1990s. Turkey's economy has grown steadily since the early 1980s, with real
growth in per capita Gross Domestic Product (the "GDP") increasing more than 6%
annually. Agriculture remains the most important economic sector, employing
approximately 55% of the labor force, and accounting for nearly 20% of GDP and
20% of exports. Inflation and interest rates remain high, and a large budget
deficit will continue to cause difficulties in Turkey's substantial
transformation to a dynamic free market economy.
Like many other Western economies, Greece suffered severely from the
global oil price hikes of the 1970s, with annual GDP growth plunging from 8% to
2% in the 1980s, and inflation, unemployment, and budget deficits rising
sharply. The fall of the socialist government in 1989 and the inability of the
conservative opposition to obtain a clear majority have led to business
uncertainty and the continued prospects for flat economic performance. Once
Greece has sorted out its political situation, it will have to face the
challenges posed by the steadily increasing integration of the EC, including the
progressive lowering of trade and investment barriers. Tourism continues as a
major industry, providing a vital offset to a sizable commodity trade deficit.
Securities traded in certain emerging European securities markets may
be subject to risks due to the inexperience of financial intermediaries, the
lack of modern technology and the lack of a sufficient capital base to expand
business operations. Additionally, former Communist regimes of a number of
Eastern European countries had expropriated a large amount of property, the
claims of which have not been entirely settled. There can be no assurance that
the Portfolio's investments in Eastern Europe would not also be expropriated,
nationalized or otherwise confiscated. Finally, any change in leadership or
policies of Eastern European countries, or countries that exercise a significant
influence over those countries, may halt the expansion of or reverse the
liberalization of foreign investment policies now occurring and adversely affect
existing investment opportunities. 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.
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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
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" or "not readily marketable," i.e.,
securities which cannot be sold to the public without
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registration under the Securities Act of 1933 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 these investments. This investment practice, therefore, could
have the effect of increasing the level of illiquidity of a Portfolio. It is a
Portfolio's policy that illiquid securities (including repurchase agreements of
more than seven days duration, certain restricted securities, and other
securities which are not readily marketable) may not constitute, at the time of
purchase, more than 15% of the value of a Portfolio's net assets. The Fund's
Board of Trustees has approved guidelines for use by the Adviser in determining
whether a security is illiquid.
Generally speaking, illiquid or restricted investments may be sold only
to qualified institutional buyers, or in a privately negotiated transaction to a
limited number of purchasers, or in limited quantities after they have been held
for a specified period of time and other conditions are met pursuant to an
exemption from registration. Issuers of restricted securities may not be subject
to the disclosure and other investor protection requirements that would be
applicable if their securities were publicly traded. If adverse market
conditions were to develop during the period between a Portfolio's decision to
sell a restricted or illiquid security and the point at which the Portfolio is
permitted or able to sell such security, the Portfolio might obtain a price less
favorable than the price that prevailed when it decided to sell. Where a
registration statement is required for the resale of restricted securities, the
Fund may be required to bear all or part of the registration expenses. A
Portfolio may be deemed to be an "underwriter" for purposes of the Securities
Act of 1933 when selling restricted securities to the public, and in such event
a 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.
The Adviser will monitor the liquidity of such restricted securities
subject to the supervision of the Board of Trustees. In reaching liquidity
decisions, the Adviser will consider the following factors: (1) the frequency of
trades and quotes for the security, (2) the number of dealers wishing to
purchase or sell the security and the number of their potential purchasers, (3)
dealer undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (i.e. the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer).
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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
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Reserve book-entry record-keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program,
the Portfolio will be able to have its beneficial ownership of zero coupon
securities recorded directly in the book-entry record-keeping system in lieu of
having to hold certificates or other evidences of ownership of the underlying
U.S. Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold in such bundled form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells
itself.
Real Estate Investment Trusts
The Bond, 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. Equity REITs may also
realize capital gains by selling properties that have appreciated in value.
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 capitalizations, which may
tend to increase the volatility of the market prices 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, Global Discovery and Growth and Income Portfolios
may also invest in mortgage-backed securities, which are interests in pools of
mortgage loans, including mortgage loans made by savings and loan institutions,
mortgage bankers, commercial banks, and others. Pools of mortgage loans are
assembled as securities for sale to investors by various governmental,
government-related, and private organizations as further described below. The
Portfolios may also invest in debt securities which are secured with collateral
consisting of mortgage-backed securities (see "Collateralized Mortgage
Obligations"), and in other types of mortgage-related securities.
A decline in interest rates may lead to a faster rate of repayment of
the underlying mortgages, and expose the Portfolios to a lower rate of return
upon reinvestment. To the extent that such mortgage-backed securities are held
by the Portfolios, the prepayment right will tend to limit to some degree the
increase in net asset value of the Portfolios because the value of the
mortgage-backed securities held by the Portfolios may not appreciate as rapidly
as the price of non-callable debt securities.
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When interest rates rise, mortgage prepayment rates tend to decline,
thus lengthening the life of mortgage-related securities and increasing their
volatility, affecting the price volatility of the Fund's shares.
Interests in pools of mortgage-backed securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by repayments of principal resulting
from the sale of the underlying property, refinancing, or foreclosure, net of
fees or costs which may be incurred. Because principal may be prepaid at any
time, mortgage-backed securities may involve significantly greater price and
yield volatility than traditional debt securities. Some mortgage-related
securities such as securities issued by the Government National Mortgage
Association ("GNMA") are described as "modified pass-through." These securities
entitle the holder to receive all interest and principal payments owed on the
mortgage pool, net of certain fees, at the scheduled payment dates regardless of
whether or not the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
GNMA. GNMA is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks, and mortgage bankers) and backed by
pools of FHA-insured or VA-guaranteed mortgages. These guarantees, however, do
not apply to the market value or yield of mortgage-backed securities or to the
value of Portfolio shares. Also, GNMA securities often are purchased at a
premium over the maturity value of the underlying mortgages. This premium is not
guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any governmental
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
governmental 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
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practices of the originators/servicers and poolers, the Adviser determines that
the securities meet the Portfolios' quality standards. Although the market for
such securities is becoming increasingly liquid, securities issued by certain
private organizations may not be readily marketable.
Collateralized Mortgage Obligations ("CMOs")
A CMO is a hybrid between a mortgage-backed bond and a mortgage
pass-through security. Similar to a bond, interest and prepaid principal are
paid, in most cases, semiannually. CMOs may be collateralized by whole mortgage
loans but are more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, FHLMC, or FNMA, and their income
streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments. The prices of certain CMOs,
depending on their structure and the rate of prepayments, can be volatile. Some
CMOs may also not be as liquid as other securities.
In a typical CMO transaction, a corporation issues multiple series,
(e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are
used to purchase mortgages or mortgage pass-through certificates ("Collateral").
The Collateral is pledged to a third party trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on
the Bonds in the order A, B, C, Z. The Series A, B, and C bonds all bear current
interest. Interest on the Series Z Bond is accrued and added to principal and a
like amount is paid as principal on the Series A, B, or C Bond currently being
paid off. When the Series A, B, and C Bonds are paid in full, interest and
principal on the Series Z Bond begins to be paid currently. With some CMOs, the
issuer serves as a conduit to allow loan originators (primarily builders or
savings and loan associations) to borrow against their loan portfolios.
FHLMC Collateralized Mortgage Obligations
FHLMC CMOs are debt obligations of FHLMC issued in multiple classes
having different maturity dates which are secured by the pledge of a pool of
conventional mortgage loans purchased by FHLMC. Unlike FHLMC PCs, payments of
principal and interest on the CMOs are made semiannually, as opposed to monthly.
The amount of principal payable on each semiannual payment date is determined in
accordance with FHLMC's mandatory sinking fund schedule, which, in turn, is
equal to approximately 100% of FHA prepayment experience applied to the mortgage
collateral pool. All sinking fund payments in the CMOs are allocated to the
retirement of the individual classes of bonds in the order of their stated
maturities. Payment of principal on the mortgage loans in the collateral pool in
excess of the amount of FHLMC's minimum sinking fund obligation for any payment
date are paid to the holders of the CMOs as 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.
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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 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
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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.
Convertible Securities
The Bond, Balanced, Growth and Income, Capital Growth, Large Company
Growth, 21st Century 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.
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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, 21st Century 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 and IDRs are
typically issued by foreign banks or trust companies, although they also may be
issued by United States banks or trust companies, and evidence ownership of
underlying securities issued by either a foreign or a United States corporation.
Generally, Depositary Receipts in registered form are designed for use in the
United States securities markets and Depositary Receipts in bearer form are
designed for use in securities markets outside the United States. For purposes
of the Balanced, Growth and Income, Capital Growth and International Portfolios'
investment policies, the Portfolios' investments in ADRs, GDRs and other types
of Depositary Receipts will be deemed to be investments in the underlying
securities. Depositary Receipts other than those denominated in U.S. dollars
will be subject to foreign currency exchange rate risk. Certain Depositary
Receipts may not be listed on an exchange and therefore may be illiquid
securities and subject to a Portfolio's restrictions on investment in illiquid
securities.
Foreign Securities
The Bond, Balanced, Growth and Income, Capital Growth, Large Company
Growth, 21st Century 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
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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 21st Century Growth Portfolio
and International Portfolio may invest without limit, in non-U.S.
dollar-denominated equity securities of foreign issuers. However, 21st Century
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.
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
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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 generally fixed at the time a commitment to purchase is made, but delivery
and payment for the when-issued or forward delivery securities take place at a
later date. During the period between purchase and settlement, no payment is
made by the Portfolio and no interest accrues to the Portfolio. To the extent
that assets of a Portfolio are held in cash pending the settlement of a purchase
of securities, that Portfolio would earn no income; however, it is the Fund's
intention that each Portfolio will be fully invested to the extent practicable
and subject to the policies stated above. While when-issued or forward delivery
securities may be sold prior to the settlement date, the Portfolio intends to
purchase such securities with the purpose of actually acquiring them unless a
sale appears desirable for investment reasons. At the time the Fund makes the
commitment on behalf of a Portfolio to purchase a security on a when-issued or
forward delivery basis, it will record the transaction and reflect the amount
due and the value of the security in determining the Portfolio's net asset
value. The market value of the when-issued or forward delivery securities may be
more or less than the purchase price payable at settlement date. The Fund does
not believe that a Portfolio's net asset value or income will be adversely
affected by the purchase of securities on a when-issued or forward delivery
basis. Each Portfolio will establish a segregated account in which it will
maintain cash or liquid assets at least equal in value to commitments for
when-issued or forward delivery securities. Such segregated securities either
will mature or, if necessary, be sold on or before the settlement date. A
Portfolio will not enter into such transactions for leverage purposes.
Loans of Portfolio Securities
The Fund may lend the portfolio securities of any Portfolio (other than
Money Market Portfolio). Such loans may be made to registered broker/dealers and
are required to be secured continuously by collateral in cash, U.S. Government
securities, and liquid high grade debt obligations maintained on a
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current basis at an amount at least equal to the market value and accrued
interest of the securities loaned. The Fund has the right to call the loan and
obtain the securities loaned on no more than five days' notice. During the
existence of a loan, the Portfolio will continue to receive the equivalent of
any distributions paid by the issuer on the securities loaned and will also
receive compensation based on investment collateral. As with other extensions of
credit there are risks of delay in recovery or even loss of rights in the
collateral should the borrower of the securities fail financially. However, the
loans will be made only to firms deemed by the Adviser to be in good standing.
The value of the securities loaned will not exceed 5% of the value of the
Portfolio's total assets at the time any loan is made.
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
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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. 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
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of the securities remained at or above the exercise price. Gains and losses on
the purchase of protective put options would tend to be offset by countervailing
changes in the value of underlying portfolio securities.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying securities
markets that cannot be reflected in the option markets. Exchange markets in
securities options are a relatively new and untested concept. It is impossible
to predict the volume of trading that may exist in such options, and there can
be no assurance that viable exchange markets will develop or continue.
The Fund, 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.
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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 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
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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 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
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options on futures contracts unless, in the Adviser's opinion, the market for
such options has sufficient liquidity that the risks associated with such
options transactions are not at unacceptable levels.
Limitations on the Use of Futures Contracts and Options on Futures
All of the futures contracts and options on futures transactions into
which the Fund will enter will be for bona fide hedging or other appropriate
risk management purposes as permitted by CFTC regulations and to the extent
consistent with requirements of the Securities and Exchange Commission (the
"SEC").
To ensure that its futures and options transactions meet this standard,
the Fund will enter into them only for the purposes or with the intent specified
in CFTC regulations, subject to the requirements of the SEC. The Fund will
further seek to assure that fluctuations in the price of the futures contracts
and options on futures that it uses for hedging purposes will be substantially
correlated to fluctuations in the price of the securities held by a Portfolio or
which it expects to purchase, though there can be no assurance that this result
will be achieved. The Fund will sell futures contracts or acquire puts to
protect against a decline in the price of securities that a Portfolio owns. The
Fund will purchase futures contracts or calls on futures contracts to protect a
Portfolio against an increase in the price of securities the Fund intends later
to purchase for the Portfolio before it is in a position to do so.
As evidence of this hedging intent, the Fund expects that on 75% or
more of the occasions on which it purchases a long futures contract or call
option on futures for a Portfolio the Fund will effect the purchase of
securities in the cash market or take delivery as it closes out a Portfolio's
futures position. In particular cases, however, when it is economically
advantageous to the Portfolio, a long futures position may be terminated (or an
option may expire) without the corresponding purchase of securities.
As an alternative to literal compliance with the bona fide hedging
definition, a CFTC definition now permits the Fund to elect to comply with a
different test, under which its long futures positions will not exceed the sum
of (a) cash or cash equivalents segregated for this purpose, (b) cash proceeds
on existing investments due within thirty days and (c) accrued profits on the
particular futures or options positions. However, the Fund will not utilize this
alternative unless it is advised by counsel that to do so is consistent with the
requirements of the SEC.
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.
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Warrants. Each Portfolio (except Money Market Portfolio) may invest in warrants
up to 5% of the value of its total assets. The holder of a warrant has the
right, until the warrant expires, to purchase a given number of shares of a
particular issuer at a specified price. Such investments can provide a greater
potential for profit or loss than an equivalent investment in the underlying
security. Prices of warrants do not necessarily move, however, in tandem with
the prices of the underlying securities and are, therefore, considered
speculative investments. Warrants pay no dividends and confer no rights other
than a purchase option. Thus, if a warrant held by a Portfolio were not
exercised by the date of its expiration, the Portfolio would lose the entire
purchase price of the warrant.
Foreign Currency Transactions
The Bond, Balanced, Growth and Income, 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 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.
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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
"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.
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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, 21st Century Growth and Global Discovery Portfolios
Growth and Income Portfolio, Large Company Growth Portfolio, 21st
Century Growth Portfolio and Global Discovery Portfolio may, but are not
required to, utilize various other investment strategies as described below for
a variety of purposes, such as hedging various market risks, managing the
effective maturity or duration of fixed-income securities in the Fund's
portfolio, or enhancing potential gain. These strategies may be executed through
the use of derivative contracts.
In the course of pursuing these investment strategies, Growth and
Income Portfolio, Large Company Growth Portfolio, 21st Century Growth Portfolio
and Global Discovery Portfolio may purchase and sell exchange-listed and
over-the-counter put and call options on securities, equity and fixed-income
indices and other instruments, purchase and sell futures contracts and options
thereon, enter into various transactions such as swaps, caps, floors, collars,
currency forward contracts, currency futures contracts, currency swaps or
options on currencies, or currency futures and various other currency
transactions (collectively, all the above are called "Strategic Transactions").
In addition, strategic transactions may also include new techniques, instruments
or strategies that are permitted as regulatory changes occur. Strategic
Transactions may be used without limit (subject to certain limitations imposed
by the 1940 Act) to attempt to protect against possible changes in the market
value of securities held in or to be purchased for a Portfolio's portfolio
resulting from securities markets or currency exchange rate fluctuations, to
protect a Portfolio's unrealized gains in the value of its portfolio securities,
to facilitate the sale of such securities for investment purposes, to manage the
effective maturity or duration of fixed-income securities in a Portfolio's
portfolio, or to
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establish a position in the derivatives markets as a substitute for purchasing
or selling particular securities. Some Strategic Transactions may also be used
to enhance potential gain although no more than 5% of the Portfolio's assets
will be committed to Strategic Transactions entered into for non-hedging
purposes. Any or all of these investment techniques may be used at any time and
in any combination, and there is no particular strategy that dictates the use of
one technique rather than another, as use of any Strategic Transaction is a
function of numerous variables including market conditions. The ability of the
Portfolio to utilize these Strategic Transactions successfully will depend on
the Adviser's ability to predict pertinent market movements, which cannot be
assured. Each Portfolio will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. Strategic
Transactions will not be used to alter fundamental investment purposes and
characteristics of a Portfolio, and a Portfolio will segregate assets (or as
provided by applicable regulations, enter into certain offsetting positions) to
cover its obligations under options, futures and swaps to limit leveraging of
the Portfolio.
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 a Portfolio's 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. Each 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 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. Each 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
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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.
Each Portfolio's ability to close out its position as a purchaser or
seller of an OCC or exchange listed put or call option is dependent, in part,
upon the liquidity of the option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (i) insufficient trading
interest in certain options; (ii) restrictions on transactions imposed by an
exchange; (iii) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities
including reaching daily price limits; (iv) interruption of the normal
operations of the OCC or an exchange; (v) inadequacy of the facilities of an
exchange or OCC to handle current trading volume; or (vi) a decision by one or
more exchanges to discontinue the trading of options (or a particular class or
series of options), in which event the relevant market for that option on that
exchange would cease to exist, although outstanding options on that exchange
would generally continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. Each
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 Portfolio at a formula price within
seven days. Each 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. Each 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 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 a Portfolio's
limitation on investing no more than 15% of its net assets in illiquid
securities.
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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.
Each Portfolio may purchase and sell call 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 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 Portfolio 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.
Each 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. Each Portfolio will not sell put options if, as a result,
more than 50% of a Portfolio's total 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. Each Portfolio may enter into 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, and for
duration management, risk management and return enhancement 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.
Each Portfolio's use of 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 for bona fide hedging, risk management (including duration
management) or other portfolio and return enhancement management 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.
Each 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's total assets (taken at current value);
however, in the case of an option that is in-the-money at the time of the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to futures contracts and
options thereon are described below.
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Options on Securities Indices and Other Financial Indices. Each Portfolio also
may purchase and sell call and put options on securities indices and other
financial indices and in so doing can achieve many of the same objectives it
would achieve through the sale or purchase of options on individual securities
or other instruments. Options on securities indices and other financial indices
are similar to options on a security or other instrument except that, rather
than settling by physical delivery of the underlying instrument, they settle by
cash settlement, i.e., an option on an index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is specified). This amount of cash
is equal to the excess of the closing price of the index over the exercise price
of the option, which also may be multiplied by a formula value. The seller of
the option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Currency Transactions. Each Portfolio may engage in currency transactions with
Counterparties primarily in order to hedge, or manage the risk of 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. Each Portfolio may enter into
currency transactions with Counterparties which have received (or the guarantors
of the obligations which have received) a credit rating of A-1 or P-1 by S&P or
Moody's, respectively, or that have an equivalent rating from a NRSRO or (except
for OTC currency options) are determined to be of equivalent credit quality by
the Adviser.
Each Portfolio's dealings in forward currency contracts and other
currency transactions such as futures, options, options on futures and swaps
generally will be limited to hedging involving either specific transactions or
portfolio positions except as described below. Transaction hedging is entering
into a currency transaction with respect to specific assets or liabilities of a
Portfolio, which will generally arise in connection with the purchase or sale of
its portfolio securities or the receipt of income therefrom. Position hedging is
entering into a currency transaction with respect to portfolio security
positions denominated or generally quoted in that currency.
Each Portfolio generally 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.
Each 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, each Portfolio may also engage
in proxy hedging. Proxy hedging is often used when the currency to which a
Portfolio's portfolio is exposed is difficult to hedge or to hedge against the
dollar. Proxy hedging entails entering into a commitment or option to sell a
currency whose changes in value are generally considered to be correlated to a
currency or currencies in which some or all of a Portfolio's portfolio
securities are or are expected to be denominated, in exchange for U.S. dollars.
The amount of the commitment or option would not exceed the value of a
Portfolio's securities denominated in correlated currencies. For example, if the
Adviser considers that the Austrian schilling is correlated to the German
deutschemark (the "D-mark"), 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
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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.
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.
Combined Transactions. Each Portfolio may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
currency transactions (including forward currency contracts) and multiple
interest rate transactions and any combination of futures, options, currency and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of a Portfolio to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which a
Portfolio may enter are interest rate, currency, index and other swaps and the
purchase or sale of related caps, floors and collars. Each 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. Each 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.
Each 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. Inasmuch as a Portfolio
will segregate assets (or enter into offsetting positions) to cover its
obligations under swaps, the Adviser and the Portfolio believe such obligations
do not constitute senior securities under the 1940 Act and, accordingly, will
not treat them as being subject to its borrowing restrictions. Each 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
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A by S&P or Moody's or has an equivalent rating from a 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. Each 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. Each Portfolio might use Eurodollar futures contracts and options
thereon to hedge against changes in LIBOR, to which many interest rate swaps and
fixed income instruments are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in a Portfolio's ability to act upon
economic events occurring in foreign markets during non-business hours in the
U.S., (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the U.S., and (v) lower trading
volume and liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that a Portfolio segregate cash or
liquid assets with its custodian to the extent a Portfolio's 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 assets 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 the
Portfolio to hold the securities subject to the call (or securities convertible
into the needed securities without additional consideration) or to segregate
cash or liquid assets sufficient to purchase and deliver the securities if the
call is exercised. A call option sold by a Portfolio on an index will require
the 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
the 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 assets denominated in that currency equal to the Portfolio's
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 cash or
liquid 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 sells a call option on an index at a time
when the in-the-money amount exceeds the exercise price, the Portfolio will
segregate, until the option expires or is closed out, cash or cash equivalents
equal in value to such excess. OCC issued and exchange listed options sold by a
Portfolio other than those above generally settle
45
<PAGE>
with physical delivery, or with an election of either physical delivery or cash
settlement and a Portfolio will segregate an amount of cash or liquid 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 cash or liquid 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 liquid assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable 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. Each 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 the Portfolio. Moreover, instead of segregating cash or
liquid assets if a Portfolio held a futures or forward contract, it could
purchase a put option on the same futures or forward contract with a strike
price as high or higher than the price of the contract held. Other Strategic
Transactions may also be offset in combinations. If the offsetting transaction
terminates at the time of or after the primary transaction no segregation is
required, but if it terminates prior to such time, cash or liquid 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, 21st Century 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.
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<PAGE>
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
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, 21st Century 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
47
<PAGE>
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 upon 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 Company Securities
Each Portfolio may acquire securities of other investment companies to the
extent consistent with its investment objective and subject to the limitations
of the 1940 Act. Each Portfolio will indirectly bear its proportionate share of
any management fees and other expenses paid by such other investment companies.
For example, a Portfolio may invest in a variety of investment companies which
seek to track the composition and performance of specific indexes or a specific
portion of an index. These index-based investments hold substantially all of
their assets in securities representing their specific index. Accordingly, the
main risk of investing in index-based investments is the same as investing in a
portfolio of equity securities comprising the index. The market prices of
index-based investments will fluctuate in accordance with both changes in the
market value of their underlying portfolio securities and due to supply and
demand for the instruments on the exchanges on which they are traded (which may
result in their trading at a discount or premium to their NAVs). Index-based
investments may not replicate exactly the performance of their specified index
because of transaction costs and because of the temporary unavailability of
certain component securities of the index.
Examples of index-based investments include:
SPDRs(R): SPDRs, an acronym for "Standard & Poor's Depositary Receipts," are
based on the S&P 500 Composite Stock Price Index. They are issued by the SPDR
Trust, a unit investment trust that holds shares of substantially all the
companies in the S&P 500 in substantially the same weighting and seeks to
closely track the price performance and dividend yield of the Index.
MidCap SPDRs(R): MidCap SPDRs are based on the S&P MidCap 400 Index. They are
issued by the MidCap SPDR Trust, a unit investment trust that holds a portfolio
of securities consisting of substantially all of the common stocks in the S&P
MidCap 400 Index in substantially the same weighting and seeks to closely track
the price performance and dividend yield of the Index.
Select Sector SPDRs(R): Select Sector SPDRs are based on a particular sector or
group of industries that are represented by a specified Select Sector Index
within the Standard & Poor's Composite Stock Price Index. They are issued by The
Select Sector SPDR Trust, an open-end management investment company with nine
portfolios that each seeks to closely track the price performance and dividend
yield of a particular Select Sector Index.
DIAMONDS(SM): DIAMONDS are based on the Dow Jones Industrial Average(SM). They
are issued by the DIAMONDS Trust, a unit investment trust that holds a portfolio
of all the component common stocks of the Dow Jones Industrial Average and seeks
to closely track the price performance and dividend yield of the Dow.
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<PAGE>
Nasdaq-100 Shares: Nasdaq-100 Shares are based on the Nasdaq 100 Index. They are
issued by the Nasdaq-100 Trust, a unit investment trust that holds a portfolio
consisting of substantially all of the securities, in substantially the same
weighting, as the component stocks of the Nasdaq-100 Index and seeks to closely
track the price performance and dividend yield of the Index.
WEBs(SM): WEBs, an acronym for "World Equity Benchmark Shares," are based on 17
country-specific Morgan Stanley Capital International Indexes. They are issued
by the WEBs Index Fund, Inc., an open-end management investment company that
seeks to generally correspond to the price and yield performance of a specific
Morgan Stanley Capital International Index.
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;
(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.
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<PAGE>
As a matter of nonfundamental policy, the Fund may not on behalf of the
indicated Portfolio(s):
(1) For Money Market Portfolio: the Portfolio currently does not
intend to borrow money in an amount greater than 5% of its
total assets, except for temporary or emergency purposes;
(2) For all Portfolios (except Money Market Portfolio): the
Portfolio currently does not intend to borrow money in an
amount greater than 5% of its total assets, except (i) for
temporary or emergency purposes and (ii) by engaging in
reverse repurchase agreements, dollar rolls, or other
investments or transactions described in the Portfolio's
registration statement which may be deemed to be borrowings;
(3) For all Portfolios (except Money Market Portfolio and Bond
Portfolio): the Portfolio currently does not intend to enter
into either of reverse repurchase agreements or dollar rolls
in an amount greater than 5% of its total assets;
(4) For all Portfolios (except Money Market Portfolio): the
Portfolio currently does not intend to purchase securities on
margin or make short sales, except (i) short sales against the
box, (ii) in connection with arbitrage transactions, (iii) for
margin deposits in connection with futures contracts, options
or other permitted investments, (iv) that transactions in
futures contracts and options shall not be deemed to
constitute selling securities short, and (v) that the
Portfolio may obtain such short-term credits as may be
necessary for the clearance of securities transactions;
(5) For all Portfolios (except Money Market Portfolio): the
Portfolio currently does not intend to purchase options,
unless the aggregate premiums paid on all such options held by
the Portfolio at any time do not exceed 20% of its total
assets; or sell put options, if as a result, the aggregate
value of the obligations underlying such put options would
exceed 50% of its total assets;
(6) For all Portfolios (except Money Market Portfolio): the
Portfolio currently does not intend to enter into futures
contracts or purchase options thereon, unless immediately
after the purchase, the value of the aggregate initial margin
with respect to such futures contracts entered into on behalf
of the Portfolio and the premiums paid for such options on
futures contracts does not exceed 5% of the fair market value
of the Portfolio's total assets; provided that in the case of
an option that is in-the-money at the time of purchase, and
in-the-money amount may be excluded in computing the 5% limit;
(7) For all Portfolios (except Money Market Portfolio): the
Portfolio currently does not intend to purchase warrants if as
a result, such securities, taken at the lower of cost or
market value, would represent more than 5% of the value of the
Portfolio's total assets (for this purpose, warrants acquired
in units or attached to securities will be deemed to have no
value); 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
50
<PAGE>
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.
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<PAGE>
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 December 31, 1997, Zurich Insurance Company ("Zurich") acquired a
majority interest in the Adviser, and Zurich Kemper Investments, Inc., a Zurich
subsidiary, became part of the Adviser. The Adviser's name changed to Scudder
Kemper Investments, Inc. 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.
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. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations as well as providing investment advice to over 280 open and
closed-end 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 Portfolios may invest, the conclusions
and investment decisions of the Adviser with respect to the Funds are based
primarily on the analyses of its own research department.
Certain investments may be appropriate for a Portfolio and also for
other clients advised by the Adviser. Investment decisions for a fund and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings, availability
of cash for investment and the size of their investments generally. Frequently,
a particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Adviser to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by a fund. Purchase and sale orders for a fund may be combined with
those of other clients of the Adviser in the interest of achieving the most
favorable net results to that fund.
In certain cases, the investments for a Portfolio are managed by the
same individuals who manage one or more other mutual funds advised by the
Adviser, that have similar names, objectives and investment styles. You should
be aware that the Portfolios are likely to differ from these other mutual funds
in size, cash flow pattern and tax matters.
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<PAGE>
Accordingly, the holdings and performance of the Portfolios can be expected to
vary from those of these other mutual funds.
The present investment management agreements (the "Agreements") for all
Portfolios, except Large Company Growth Portfolio and 21st Century Growth
Portfolio, were approved by the Trustees on August 12, 1998, became effective
September 7, 1998, and were approved at a shareholder meeting held on December
15, 1998. Investment management agreements for Large Company Growth Portfolio
and 21st Century Growth Portfolio dated May 1, 1999 were approved by the
Trustees of the Fund on February 11, 1999. The Agreements will continue in
effect until September 30, 2000 and from year to year thereafter only if their
continuance is approved annually by the vote of a majority of those Trustees who
are not parties to such Agreements or interested persons of the Adviser or the
Fund, cast in person at a meeting called for the purpose of voting on such
approval, and either by a vote of the Fund's Trustees or of a majority of the
outstanding voting securities of the respective Fund. The Agreements may be
terminated at any time without payment of penalty by either party on sixty days'
written notice and automatically terminate in the event of their assignment.
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.
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:
<TABLE>
<CAPTION>
% of the average
daily net asset
values of each
Portfolio Portfolio 1997 1998 1999
--------- --------- ---- ---- ----
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<PAGE>
<S> <C> <C> <C> <C>
Money Market Portfolio 0.370% $ 384,554 $ 486,458 $ 640,633
Bond Portfolio 0.475 321,323 439,858 487,063
Balanced Portfolio 0.475 488,616 648,870 856,252
Growth and Income Portfolio 0.475 592,383 874,193 968,354
Capital Growth Portfolio 0.46* 2,691,980 3,628,132 4,657,834
Large Company Growth Portfolio 0.625** -- -- 18,718
21st Century Growth Portfolio 0.875** -- -- 35,691
Global Discovery Portfolio 0.975+ 179,723 237,980 377,844
International Portfolio 0.85*** 6,520,030 4,168,595 5,064,630
</TABLE>
* 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 21st Century Growth
Portfolio each commenced operations on May 1, 1999. Until
April 30, 2001, the Adviser has agreed to limit total
operating expenses of Large Company Growth Portfolio and 21st
Century Growth Portfolio to 1.25% and 1.50%, respectively, of
average daily net assets.
*** For any calendar month during which the average daily net
assets of International Portfolio exceed $500,000,000, the fee
payable for that month, with respect to the excess over
$500,000,000, is calculated at an annual rate of 0.725%. As a
result, the Adviser received compensation at an annual rate of
0.87% for the fiscal year ended December 31, 1998.
+ Until April 30, 1998 and from May 1, 2000 until April 30,
2001, 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
54
<PAGE>
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.
The term Scudder Investments is the designation given to the services
provided by Scudder Kemper Investments, Inc. and its affiliates to the Scudder
Family of Funds.
AMA InvestmentLink(SM) Program
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 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
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<PAGE>
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.
Code of Ethics
The Fund, the Adviser and principal underwriter have each adopted codes
of ethics under rule 17j-1 of the Investment Company Act. Board members,
officers of the Fund and employees of the Adviser and principal underwriter are
permitted to make personal securities transactions, including transactions in
securities that may be purchased or held by the Fund, subject to requirements
and restrictions set forth in the applicable Code of Ethics. The Adviser's Code
of Ethics contains provisions and requirements designed to identify and address
certain conflicts of interest between personal investment activities and the
interests of the Fund. Among other things, the Adviser's Code of Ethics
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
quarterly 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
Adviser's 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, 2000, 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
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<PAGE>
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 July 30, 1999. In connection with its
consideration of the Plan, the Board of Trustees was furnished with drafts of
the Plan and related materials, including information related to the advantages
and disadvantages of Rule 12b-1 plans currently being used in the mutual fund
industry. Legal counsel for the Fund provided additional information, summarized
the provisions of the proposed Plan and discussed the legal and regulatory
considerations in adopting such Plan.
The Board considered various factors in connection with its decision as
to whether to approve the Plan, including (a) the nature and causes of the
circumstances which make implementation of the Plan necessary and appropriate;
(b) the way in which the Plan would address those circumstances, including the
nature and potential amount of expenditures; (c) the nature of the anticipated
benefits; (d) the possible benefits of the Plan to any other person relative to
those of the Fund; (e) the effect of the Plan on existing owners of VA contracts
and VLI policies; (f) the merits of possible alternative plans or pricing
structures; (g) competitive conditions in the variable products industry and (h)
the relationship of the Plan to other distribution efforts of the Fund.
Based upon its review of the foregoing factors and the materials
presented to it, and in light of its fiduciary duties under relevant state law
and the 1940 Act, the Board determined, in the exercise of its business
judgment, that the Fund's Plan is reasonably likely to benefit the Fund and the
VA contract and VLI policy owners in at least one of several ways. Specifically,
the Board concluded that the Participating Insurance Companies would have less
incentive to educate VA contract and VLI policy owners and sales people
concerning the Fund if expenses associated with such services were not paid for
by the Fund. In addition, the Board determined that the payment of distribution
fees to insurers should motivate them to maintain and enhance the level of
services relating to the Fund provided to VA contract and VLI policy owners,
which would, of course, benefit such VA contract and VLI policy owners. Further,
the adoption of the Plan would likely help to maintain and may lead to an
increase in net assets under management given the distribution financing
alternatives available through the multi-class structure. The Board also took
into account expense structures of other competing products and administrative
compensation arrangements between other funds, their advisers and insurance
companies that currently are in use in the variable products industry. Further,
it is anticipated that Plan fees may be used to educate potential and existing
owners of VA contracts and VLI policies concerning the Fund, the securities
markets and related risks. A better educated investor, in the Distributor's
view, is less likely to surrender his or her VA contract or VLI policy early,
thereby avoiding the costs associated with such an event. Accordingly, the Plan
may help the Fund and Participating Insurance Companies meet investor education
needs.
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<PAGE>
The Board realizes that there is no assurance that the expenditure of
Fund assets to finance distribution of Fund shares will have the anticipated
results. However, the Board believes there is a reasonable likelihood that one
or more of such benefits will result, and since the Board will be in a position
to monitor the distribution expenses of the Fund, it will be able to evaluate
the benefit of such expenditures in deciding whether to continue the Plan.
The Plan and any Rule 12b-1-related agreement that is entered into by
the Fund or the Distributor in connection with the Plan will continue in effect
for a period of more than one year only so long as continuance is specifically
approved at least annually by a vote of a majority of the Fund's Board of
Trustees, and of a majority of the Trustees who are not interested persons (as
defined in the 1940 Act) of the Fund or a Portfolio ("Independent Trustees"),
cast in person at a meeting called for the purpose of voting on the Plan, or the
Rule 12b-1 related agreement, as applicable. In addition, the Plan and any Rule
12b-1 related agreement, may be terminated as to Class B shares of a Portfolio
at any time, without penalty, by vote of a majority of the outstanding Class B
shares of that Portfolio or by vote of a majority of the Independent Trustees.
The Plan also provides that it may not be amended to increase materially the
amount that may be spent for distribution of Class B shares of a Portfolio
without the approval of Class B shareholders of that Portfolio.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position with
Underwriter,
Scudder Investor
Name, Age and Address Position with Fund Principal Occupation** Services, Inc.
- --------------------- ------------------ ---------------------- --------------
<S> <C> <C> <C> <C>
William M. Thomas*@+ (38) President Managing Director of Scudder --
Kemper Investments, Inc.
Dr. Kenneth Black, Jr. (75) Trustee Regents' Professor Emeritus, --
Georgia State University Georgia State University
35 Broad Street
11th Floor, Room 1144
Atlanta, GA 30303
Dr. Rosita P. Chang (45) 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@ (67) Trustee Corporate Director and Trustee --
100 Alumni Avenue
Providence, RI 02906
Dr. J. D. Hammond (66) Trustee Dean, Smeal College of --
801 Business Business Administration,
Administration Bldg. Pennsylvania State University
Pennsylvania State University
University Park, PA 16802
58
<PAGE>
Position with
Underwriter,
Scudder Investor
Name, Age and Address Position with Fund Principal Occupation** Services, Inc.
- --------------------- ------------------ ---------------------- --------------
Kathryn L. Quirk (47)++*= Trustee, Vice Managing Director of Scudder Director, Assistant
President and Kemper Investments, Inc. Treasurer and Senior
Assistant Secretary Vice President
Robert S. Cessine (50)*** Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Irene T. Cheng# (45) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Peter Chin# (58) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
William F. Gadsden# (45) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Gary A. Langbaum***(51) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Valerie F. Malter# (41) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Ann McCreary# (43) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Steven M. Meltzer+ (41) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Kathleen Millard# (39) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Gerald J. Moran# (60) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Robert C. Peck## (53) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Frank J. Rachwalski, Jr.*** (55) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Randall K. Zeller# (45) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
59
<PAGE>
Position with
Underwriter,
Scudder Investor
Name, Age and Address Position with Fund Principal Occupation** Services, Inc.
- --------------------- ------------------ ---------------------- --------------
John R. Hebble+ (41) Treasurer Senior Vice President of --
Scudder Kemper Investments,
Inc.
John Millette + (37) Vice President and Vice President of Scudder --
Secretary Kemper Investments, Inc. since
September 1994; previously
employed by the law firm Kaye,
Scholer, Fierman, Haye &
Handler
Caroline Pearson+ (38) Assistant Secretary Senior Vice President of Clerk
Scudder Kemper Investments,
Inc.; Associate, Dechert Price
& Rhoads (law firm), 1989-1997
</TABLE>
* Mr. Thomas and Ms. Quirk are considered by the Fund and its counsel to
be Trustees who are an "interested person" 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 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
## Address: 222 South Riverside Plaza, Chicago, Illinois 60601
Certain of the Trustees and officers of the Fund also serve in similar
capacities with other Scudder Funds.
REMUNERATION
Responsibilities of the Board -- Board and Committee Meetings
The Board of Trustees is responsible for the general oversight of the
Fund's business. A majority of the Board's members are not affiliated with the
Adviser. These "Independent Trustees" have primary responsibility for assuring
that the Fund is managed in the best interests of its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of the Fund and other operational matters, including policies and
procedures designated to assure compliance with various regulatory requirements.
At least annually, the Independent Trustees review the fees paid to the Adviser
and its affiliates for investment advisory services and other administrative and
shareholder services. In this regard, they evaluate, among other things, each
Portfolio's investment performance, the quality and efficiency of the various
other services provided, costs incurred by the Adviser and its affiliates, and
comparative information regarding fees and expenses of competitive
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<PAGE>
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 Fund 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 $32,572 $32,572 (9 funds)
Dr. Rosita P. Chang, Trustee $32,572 $51,072 (29 funds)
Peter B. Freeman, Trustee $21,282 $179,782 (49 funds)
Dr. J.D. Hammond, Trustee $32,572 $51,072 (32 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, 21st Century Growth Portfolio, Global Discovery Portfolio
and International Portfolio.
^(2) Large Company Growth Portfolio and 21st Century 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.
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<PAGE>
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 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.
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<PAGE>
Following the valuations of securities or other portfolio assets in
terms of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these portfolio assets in terms of U.S. dollars is
calculated by converting the Local Currency into U.S. dollars at the prevailing
currency exchange rate on the valuation date.
TAX STATUS
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.
If for any taxable year a Portfolio does not qualify for the special
federal income tax treatment afforded regulated investment companies, all of its
taxable income will be subject to federal income tax at regular corporate rates
(without any deduction for distributions to its shareholders). In such event,
dividend distributions would be taxable to shareholders to the extent of a
Portfolio's earnings and profits, and would be eligible for the
dividends-received deduction in the case of corporate shareholders.
Investment company taxable income of a Portfolio generally is made up
of dividends, interest, certain currency gains and losses and net-short-term
capital gains in excess of net long-term capital losses, less expenses. Net
realized capital gains of a Portfolio for a fiscal year are computed by taking
into account any capital loss carryforward of the Portfolio.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by a Portfolio for reinvestment,
requiring federal income taxes to be paid thereon by the Portfolio, such
Portfolio intends to elect to treat such capital gains as having been
distributed to shareholders. As a result, each shareholder will report such
capital gains as long-term capital gains, will be able to claim its share of
federal income taxes paid by the Portfolio on such gains as a credit against its
own federal income tax liability, and will be entitled to increase the adjusted
tax basis of its shares of the Portfolio by the difference between such reported
gains and its tax credit.
Distributions of investment company taxable income are taxable to
shareholders as ordinary income.
If 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 financed 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 shareholders as
long-term capital gains, regardless of the length of time the shares of the
relevant
63
<PAGE>
Portfolio have been held by such individual shareholders. Such distributions are
not eligible for the dividends-received deduction discussed above. Any loss
realized upon the redemption of shares held at the time of redemption for six
months or less will be treated as a long-term capital loss to the extent of any
amounts treated as distributions of long-term capital gain during such six-month
period.
Distributions of investment company taxable income and net realized
capital gains will be taxable as described above, whether reinvested in
additional shares or in cash. Shareholders electing to receive distributions in
the form of additional shares will have a cost basis for federal income tax
purposes in each share so received equal to the net asset value of a share on
the reinvestment date.
All distributions of investment company taxable income and net realized
capital gain, whether reinvested in additional shares or in cash, must be
reported by each shareholder on its federal income tax return. Dividends
declared in October, November or December with a record date in such a month
will be deemed to have been received by shareholders on December 31 if paid
during January of the following year. Redemptions of shares may result in tax
consequences (gain or loss) to the shareholder and are also subject to these
reporting requirements.
Distributions by a Portfolio (except 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, 21st Century 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, 21st Century 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
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<PAGE>
on the Portfolio's holding period for the underlying security. The purchase of a
put option may constitute a short sale for federal income tax purposes, causing
an adjustment in the holding period of the underlying security or a
substantially identical security of the Portfolio. If the Portfolio writes a put
or call option, no gain is recognized upon its receipt of a premium. If the
option lapses or is closed out, any gain or loss is treated as a short-term
capital gain or loss. If a call option written by a Portfolio is exercised, the
character of the gain or loss depends on the holding period of the underlying
security. The exercise of a put option written by a Portfolio is not a taxable
transaction for the Portfolio.
Many futures contracts, certain foreign currency forward contracts
entered into by a Portfolio and all listed nonequity options written or
purchased by the Portfolio (including options on debt securities, options on
futures contracts, options on securities indexes and options on broad-based
stock indexes) will be governed by Section 1256 of the Code. Absent a tax
election to the contrary, gain or loss attributable to the lapse, exercise or
closing out of any such position generally will be treated as 60% long-term and
40% short-term capital gain or loss, and on the last trading day of the fiscal
year, all outstanding Section 1256 positions will be marked to market (i.e.
treated as if such positions were closed out at their closing price on such
day), with any resulting gain or loss recognized as 60% long-term and 40%
short-term capital gain or loss. Under Section 988 of the Code, discussed below,
foreign currency gain or loss from foreign currency-related forward contracts,
certain futures and options and similar financial instruments entered into or
acquired by a Portfolio will be treated as ordinary income or loss. 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
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<PAGE>
acquisition of the security or contract and the date of disposition are also
treated as ordinary gain or loss. These gains or losses, referred to under the
Code as "Section 988" gains or losses, may increase or decrease the amount of a
Portfolio's investment company taxable income to be distributed to its
shareholders as ordinary income.
If a Portfolio holds zero coupon securities or other securities which
are issued at a discount, a portion of the difference between the issue price of
zero coupon securities and the face value ("original issue discount") will be
treated as income to the Portfolio each year, even though the Portfolio will not
receive cash interest payments from these securities. This original issue
discount (imputed income) will comprise a part of the investment company taxable
income of the Portfolio which must be distributed to shareholders in order to
maintain the qualification of the Portfolio as a regulated investment company
and to avoid federal income tax at the Portfolio level. In addition, if a
Portfolio invests in certain high-yield original issue discount obligations
issued by corporations, a portion of the original issue discount accruing on the
obligation may be eligible for the deduction for dividends received by
corporations. In such event, dividends of investment company taxable income
received from the Portfolio by its corporate shareholders, to the extent
attributable to such portion of accrued original issue discount, may be eligible
for this deduction for dividends received by corporations if so designated by
the Portfolio in a written notice to shareholders. If a Portfolio acquires a
debt instrument at a market discount, a portion of the gain recognized, if any,
on disposition of such instrument may be treated as ordinary income.
Dividend and interest income received by the Portfolios from sources
outside the U.S. may be subject to withholding and other taxes imposed by such
foreign jurisdictions. Tax conventions between certain countries and the U.S.
may reduce or eliminate these foreign taxes, however, and foreign countries
generally do not impose taxes on capital gains respecting investments by foreign
investors. 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.
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<PAGE>
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
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
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<PAGE>
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.
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. The calculation of each Portfolio's performance does not reflect
insurance charges. 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,
1999, was 5.65%.
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, 1999, was 5.81%.
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<PAGE>
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:
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, 1999
Bond Portfolio Class A shares 6.86%
As of December 31, 1999, 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):
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<PAGE>
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, 1999
-- Class A Shares*
<TABLE>
<CAPTION>
One Year Five Years Ten Years Life of Fund
<S> <C> <C> <C> <C>
Money Market Portfolio --
Bond Portfolio -0.95% 6.95% 7.37% --
Balanced Portfolio 15.32% 20.12% 13.36% --
Growth and Income Portfolio** 5.80% 18.95% -- 17.53%(1)
Capital Growth Portfolio*** 35.23% 28.45% 18.03% --
Global Discovery Portfolio**** 65.88% -- -- 25.34%(2)(3)
International Portfolio***** 54.51% 20.56% 13.25% --
Large Company Growth Portfolio -- -- -- 36.00%(4)
21st Century Growth Portfolio -- -- -- 75.83%(4)
</TABLE>
* As of December 31, 1999, Bond and Balanced Portfolios each had not
begun issuing Class B shares.
** On May 1, 1997, existing Growth and Income Portfolio shares were
redesignated as Class A shares.
*** On May 12, 1997, existing Capital Growth Portfolio shares were
redesignated as Class A shares.
**** On May 2, 1997, existing Global Discovery Portfolio shares were
redesignated as Class A shares.
***** On May 8, 1997, existing International Portfolio shares were
redesignated as Class A shares.
(1) For the period beginning May 2, 1994 (commencement of operations).
(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.
(4) For the period beginning May 3, 1999 (commencement of operations) to
December 31, 1999.
Average Annual Total Return for periods ended December 31, 1999
-- Class B Shares*
<TABLE>
<CAPTION>
One Year Five Years Ten Years Life of Fund
<S> <C> <C> <C> <C>
Growth and Income Portfolio 5.48% -- -- 13.02%(1)
Capital Growth Portfolio 34.88% -- -- 28.97%(2)
Global Discovery Portfolio 65.63% -- -- 34.28%(3)**
International Portfolio 54.13% -- -- 26.53%(4)
Large Company Growth Portfolio -- -- -- 35.50%(5)
21st Century Growth Portfolio -- -- -- 75.17%(5)
</TABLE>
* As of December 31, 1999, 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.
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<PAGE>
(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.
(5) For the period beginning May 3, 1999 (commencement of operations) to
December 31, 1999.
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, 1999 -- Class A Shares*
<TABLE>
<CAPTION>
One Year Five Years Ten Years Life of Fund
<S> <C> <C> <C> <C>
Money Market Portfolio --
Bond Portfolio -0.95% 39.92% 103.61% --
Balanced Portfolio 15.32% 150.06% 250.46% --
Growth and Income Portfolio** 5.80% 138.11% -- 149.80%(1)
Capital Growth Portfolio*** 35.23% 249.63% 424.62% --
Global Discovery Portfolio**** 65.88% -- -- 129.02%(2)(3)
International Portfolio***** 54.51% 154.66% 247.10% --
Large Company Growth Portfolio -- -- -- 36.00%(4)
21st Century Growth Portfolio -- -- -- 75.83%(4)
</TABLE>
* As of December 31, 1999, Bond and Balanced Portfolios each had not
begun issuing Class B shares.
** On May 1, 1997, existing Growth and Income Portfolio shares were
redesignated as Class A shares.
*** On May 12, 1997, existing Capital Growth Portfolio shares were
redesignated as Class A shares.
**** On May 2, 1997, existing Global Discovery Portfolio shares were
redesignated as Class A shares.
***** On May 8, 1997, existing International Portfolio shares were
redesignated as Class A shares.
(1) For the period beginning May 2, 1994 (commencement of operations)
(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.
(4) For the period beginning May 3, 1999 (commencement of operations) to
December 31, 1999.
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<PAGE>
Cumulative Total Return for periods ended December 31, 1999 --
Class B Shares*
<TABLE>
<CAPTION>
One Year Five Years Ten Years Life of Fund
<S> <C> <C> <C> <C>
Growth and Income Portfolio 5.48% -- -- 38.63%(1)
Capital Growth Portfolio 34.88% -- -- 95.66%(2)
Global Discovery Portfolio 65.63% -- -- 119.43%(3)**
International Portfolio 54.13% -- -- 86.53%(4)
Large Company Growth Portfolio -- -- -- 35.50%(5)
21st Century Growth Portfolio -- -- -- 75.17%(5)
</TABLE>
* As of December 31, 1999, 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.
(5) For the period beginning May 3, 1999 (commencement of operations) to
December 31, 1999.
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
In connection with communicating its performance to current or
prospective shareholders, the Portfolios 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.
Historical information on the value of the dollar versus foreign
currencies may be used from time to time in advertisements concerning the
Portfolios. Such historical information is not indicative of future fluctuations
in the value of the U.S. dollar against these currencies. In addition, marketing
materials may cite country and economic statistics and historical stock market
performance for any of the countries in which the Portfolios invest.
From time to time, in advertising and marketing literature, the
Portfolio's performance may be compared to the performance of broad groups of
mutual funds with similar investment goals, as tracked by independent
organizations.
From time to time, in marketing and other Portfolio literature,
Trustees and officers of the Portfolios, 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
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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.
Marketing and other Portfolio 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.
Evaluation of Fund performance or other relevant statistical
information made by independent sources may also be used in advertisements
concerning a Portfolio, including reprints of, or selections from, editorials or
articles about a Portfolio.
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.
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Investing beyond the United States can open this world of opportunity,
due partly to the dramatic shift in the balance of world markets. In 1970, the
United States alone accounted for two-thirds of the value of the world's stock
markets. Now, the situation is reversed -- only 35% of global stock market
capitalization resides here. There are companies in Southeast Asia that are
starting to dominate regional activity; there are companies in Europe that are
expanding outside of their traditional markets and taking advantage of faster
growth in Asia and Latin America; other companies throughout the world are
getting out from under state control and restructuring; developing countries
continue to open their doors to foreign investment.
Stocks in many foreign markets can be attractively priced. The global
stock markets do not move in lock step. When the valuations in one market rise,
there are other markets that are less expensive. There is also volatility within
markets in that some sectors may be more expensive while others are depressed in
valuation. A wider set of opportunities can help make it possible to find the
best values available.
International or global investing offers diversification because the
investment is not limited to a single country or economy. In fact, many experts
agree that investment strategies that include both U.S. and non-U.S. investments
strike the best balance between risk and reward.
SHAREHOLDER COMMUNICATIONS
Owners of policies and contracts issued by Participating Insurance
Companies for which shares of one or more Portfolios are the investment vehicle
will receive from the Participating Insurance Companies unaudited semi-annual
financial statements and audited year-end financial statements certified by the
Portfolios' independent public accountants. Each report will show the
investments owned by a Portfolio and the market values thereof as determined by
the Trustees and will provide other information about a Portfolio and its
operations.
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, 21st
Century Growth Portfolio, Global Discovery Portfolio and International
Portfolio.
The Fund 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 Fund may
authorize the issuance of additional classes and additional Portfolios if deemed
desirable, each with its own investment objective, policies and restrictions.
Since the Fund 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 Fund is not required to hold annual
shareholder meetings and does not intend to do so. However, the Fund will hold
special meetings as
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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 Fund or 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 Fund'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 Fund'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 Fund'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 Fund will vote its shares in each Underlying
Fund in proportion to the vote of all other shareholders of each respective
Underlying Fund.
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The Declaration of Trust provides that obligations of the Fund are not
binding upon the Trustees individually but only upon the property of the Fund,
that the Trustees and officers will not be liable for errors of judgment or
mistakes of fact or law, and that the Fund, 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 Fund, 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 Fund. 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.
As of December 31, 1999, American Maturity Life Insurance Company (200 Hopmeadow
Street, Simsbury, CT 06089) owned of record and beneficially 2.69% of Money
Market Portfolio, 9.16% of Bond Portfolio Class A shares, 0.40% of Capital
Growth Portfolio Class A shares and 6.08% of Growth and Income Portfolio Class A
shares; they owned of record and beneficially 2.32% of the Fund's outstanding
shares. Allmerica Life Insurance Company (440 Lincoln Street, Worcester, MA
01653) owned of record and beneficially 3.89% of Capital Growth Portfolio Class
A shares, 3.90% of International Portfolio Class A shares, 19.24% of Growth and
Income Portfolio Class A shares and 29.66% of Global Discovery Portfolio Class A
shares; they owned of record and beneficially 2.64% 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 1.27% of
Bond Portfolio Class A shares, 2.37% of Capital Growth Portfolio Class A shares
and 3.15% of International Portfolio Class A shares; they owned of record and
beneficially 0.80% of the Fund's outstanding shares. Banner Life Insurance
Company of Rockville, MD (1701 Research Blvd., Rockville, MD 20850) owned of
record and beneficially 0.25% of Money Market Portfolio, 0.94% of Bond Portfolio
Class A shares, 1.26% of Capital Growth Portfolio Class A shares, 2.60% of
Balanced Portfolio Class A shares, 0.75% of International Portfolio Class A
shares, 2.50% of Growth and Income Portfolio Class A shares, and 4.59% of Global
Discovery Portfolio Class A shares; they owned of record and beneficially 0.77%
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 1.32% of Money Market Portfolio,
2.50% of Bond Portfolio Class A shares, 1.27% of Capital Growth Portfolio Class
A shares, 5.44% of Balanced Portfolio Class A shares, and 0.60% of International
Portfolio Class A shares; they owned of record and beneficially 1.32% 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 0.15% of
Money Market Portfolio, 0.13% of Bond Portfolio Class A shares, 0.13% of
International Portfolio Class A shares, 3.56% of Growth and Income Portfolio
Class B shares and 1.21% of Global Discovery Portfolio Class B shares; they
owned of record and beneficially 0.12% of the Fund's outstanding shares.
Cova Financial Life Insurance Company (One Tower Lane, Suite 3000, Oakbrook, IL
60181) owned of record and beneficially 0.02% of International Portfolio Class A
shares; they owned of record and beneficially 0% of the Fund's total outstanding
shares. First Great West Life & Annuity Insurance Company (125 Wolf Road,
Albany, NY 12205) owned of record and beneficially 0.01% of Capital Growth
Portfolio Class A shares; they owned of record and beneficially 0% of the Fund's
total outstanding shares.
Fortis Benefits Life Insurance Company (Bank, Sixth and Marquette-MS0063,
Minneapolis, MN 55479) owned of record and beneficially 1.27% of International
Portfolio Class A shares; they owned of record and beneficially 0.17% 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
0.61% of Money Market Portfolio, 0.38% of Bond Portfolio
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Class A shares, 0.19% of Capital Growth Portfolio Class A shares, 1.32% of
Balanced Portfolio Class A shares, 0.15% of International Portfolio Class A
shares, 0.70% of Growth and Income Portfolio Class A shares, 0.76% of Global
Discovery Portfolio Class A shares, 6.75% of Large Company Growth Portfolio
Class A, and 1.66% of 21st Century Growth Portfolio Class A; they owned of
record and beneficially 0.53% of the Fund's outstanding shares.
Great West Life and Annuity (8515 East Orchard Road, Englewood, CO 80111) owned
of record and beneficially 0.19% of Capital Growth Portfolio Class A shares and
0.29% of Growth and Income Portfolio Class A shares; they owned of record and
beneficially 0.04% of the Fund's outstanding shares.
Scudder Horizon Plan (3100 Sanders Road, Suite N4A, Northbrook, IL 60002) owned
of record and beneficially 40.70% of Money Market Portfolio, 22.98% of Bond
Portfolio Class A shares, 17.68% of Capital Growth Portfolio Class A shares,
40.61% of Balanced Portfolio Class A shares, 15.89% of International Portfolio
Class A shares, 47.22% of Growth and Income Portfolio Class A shares, 50.79% of
Global Discovery Portfolio Class A shares, 70.67% of Large Company Growth
Portfolio Class A, and 75.56% of 21st Century Growth Portfolio Class A; they
owned of record and beneficially 33.98% of the Fund's outstanding shares. Kemper
Investors Life Insurance Co. (One Kemper Drive, Long Grove, IL 60049) owned of
record and beneficially 0.02% of Money Market Portfolio, 0.19% of Bond Portfolio
Class A shares, 1.10% of Capital Growth Portfolio Class A shares, 3.16% of
International Portfolio Class A shares, 13.27% of International Portfolio Class
B shares, 5.59% of Growth and Income Portfolio Class A shares, 0.39% of Growth
and Income Portfolio Class B shares and 11.86% of Global Discovery Portfolio
Class A shares; they owned of record and beneficially 1.11% 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 9.92% of
Bond Portfolio Class A shares, 12.53% of Balanced Portfolio Class A shares,
0.21% of International Portfolio Class A shares, 1.22% of Growth and Income
Portfolio Class A shares and 2.32% of Global Discovery Portfolio Class A shares;
they owned of record and beneficially 1.07% 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 33.14% of Bond Portfolio Class A shares, 54.42% of Capital Growth
Portfolio Class A shares and 34.89% of International Portfolio Class A shares;
they owned of record and beneficially 13.53% of the Fund's total outstanding
shares. Paragon Life Insurance Company (100 South Brentwood, St. Louis, MO
63105) owned of record and beneficially 0.41% of Money Market Portfolio, 0.22%
of Bond Portfolio Class A shares, 0.18% of Capital Growth Portfolio Class A
shares, 0.50% of Balanced Portfolio Class A shares, 0.46% of International
Portfolio Class A shares, 0.24% of Growth and Income Portfolio Class A shares,
and 0.03% of Global Discovery Portfolio Class A shares; they owned of record and
beneficially 0.36% of the Fund's total outstanding shares. Provident Mutual Life
and Annuity Company of America, (1050 Westlakes Drive, Berwyn, PA 19312) owned
of record and beneficially 13.82% of Bond Portfolio Class A shares, 3.06% of
International Portfolio Class A shares, 13.12% of Growth and Income Portfolio
Class A shares; they owned of record and beneficially 1.79% of the Fund's total
outstanding shares. Safeco Life Insurance Companies (15411 N.E. 51st Street,
Redmond, WA 98052) owned of record and beneficially 37.00% of Balanced Portfolio
Class A shares and 6.81% of International Portfolio Class A shares; they owned
of record and beneficially 2.35% of the Fund's total outstanding shares.
Scudder Kemper Investments, (Two International Place, Boston, MA 02110), owned
of record and beneficially 22.57% of Large Company Growth Portfolio Class A and
22.78% of 21st Century Growth Portfolio Class A. The Adviser will be the sole
shareholder of Large Company Growth Portfolio Class B and 21st Century Growth
Portfolio Class B until such time as each Portfolio has public shareholders and
therefore may be deemed a controlling person. They owned of record and
beneficially 0.16% of the Fund's outstanding shares. Security First Life
Insurance Company (11365 West Olympic Blvd., Los Angeles, CA 90064) owned of
record and beneficially 2.17% of International Portfolio Class A shares; they
owned of record and beneficially 0.29% of the Fund's outstanding shares.
Southwestern Life Insurance Company (500 North Akard, Dallas, TX 75201) owned of
record and beneficially 0.91% of Capital Growth Portfolio Class A shares; they
owned of record and beneficially 0.12% of the Fund's outstanding shares. Union
Central Life Insurance Company (1876 Waycross Road, Cincinnati, OH 45240) owned
of record and beneficially 47.00% of Money Market Portfolio, 7.73% of Capital
Growth Portfolio Class A shares and 16.21% of International Portfolio Class A
shares; they owned of record and beneficially 29.55% 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 6.37% of
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Money Market Portfolio and 0.99% of International Portfolio Class A shares; they
owned of record and beneficially 3.70% 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 0.13% of Money Market
Portfolio, 0.30% of Bond Portfolio Class A shares, 6.21% of International
Portfolio Class A shares, 96.05% of Growth and Income Portfolio Class B shares
and 98.80% of Global Discovery Portfolio Class B shares; they owned of record
and beneficially 1.48% 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 4.84% of Capital Growth Portfolio Class
A shares; they owned of record and beneficially 0.65% of the Fund's outstanding
shares.
United Investors Life (2001 Third Avenue South, P.O. Box 10207, Birmingham, AL
35202-0207) owned of record and beneficially 2.82% of International Portfolio
Class B shares; they owned of record and beneficially 0.00% of the Fund's
outstanding shares.
WM Life Insurance Co. (154211 N.E. 51st Street, Redmond, WA 98052) owned of
record and beneficially 0.26% of Money Market Portfolio, 100.00% of Capital
Growth Portfolio Class B shares and 83.91% of International Portfolio Class B
shares; they owned of record and beneficially 0.17% 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 0.10% of Money Market Portfolio, 5.07% of Bond Portfolio Class A
shares, 3.52% of Capital Growth Portfolio Class A shares and 1.14% of Growth and
Income Portfolio Class A shares; they owned of record and beneficially 0.83% of
the Fund's outstanding shares. Zurich Kemper Life (320 Park Avenue, 9th Floor,
New York, NY 10022) owned of record and beneficially 0.06% of Capital Growth
Portfolio Class A shares and 2.68% of Growth and Income Portfolio Class A
shares; they owned of record and beneficially 0.16% 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.
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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.
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 Portfolio 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.
79
<PAGE>
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 Portfolio. 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 Portfolios on portfolio transactions is legally
permissible and advisable.
In the years ended December 31, 1997, 1998 and 1999, the Fund paid
brokerage commissions of $2,708,797, $2,616,782 and $3,617,581, respectively. In
the years ended December 31, 1997, 1998 and 1999, International Portfolio paid
brokerage commissions of $2,018,972, $1,503,177 and $2,053,261, respectively,
Capital Growth Portfolio paid brokerage commissions of $474,905, $817,834 and
$1,028,932, respectively, and Balanced Portfolio paid brokerage commissions of
$64,496, $80,289 and $190,595, respectively. Growth and Income Portfolio paid
brokerage commissions of $100,066, $173,899 and $264,947, respectively. For the
period from May 1, 1999 (commencement of operations) to December 31, 1999, Large
Company Growth Portfolio and 21st Century Growth Portfolio paid brokerage
commissions of $4,673 and $3,856, respectively. In the years ended December 31,
1997, 1998 and 1999, Global Discovery Portfolio paid brokerage commissions of
$50,358 and $41,583 and $71,317, 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.
In the year ended December 31, 1999, $1,808,985 of the total brokerage
commissions paid by International Portfolio, $898,961 of the total brokerage
commissions paid by Capital Growth Portfolio, $227,881 of the total brokerage
commissions paid by Growth and Income Portfolio, $158,350 of the total brokerage
commissions paid by Balanced Portfolio, and $53,982 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. For the period from May 1, 1999 (commencement of
operations) to December 31, 1999, $1,665 and $1,384 of the total brokerage
commissions paid by Large Company Growth Portfolio and 21st Century Growth
Portfolio, respectively, 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 $877,044,401 for International
Portfolio (86% of all brokerage transactions), $1,146,840,647 for Capital Growth
Portfolio (87% of all brokerage transactions), $215,867,917 for Growth and
Income Portfolio (83% of all brokerage transactions), $273,229,695 (78% of all
brokerage transactions) for Balanced Portfolio, $45,867,763 (69% of all
brokerage transactions) for Global Discovery Portfolio, $3,997,920 (41% of all
brokerage transactions) for Large Company Growth Portfolio and $12,817,052 (84%
of all brokerage transactions) for 21st Century Growth 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.
80
<PAGE>
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.
81
<PAGE>
PORTFOLIO TURNOVER
The average annual portfolio turnover rate for each Portfolio, i.e. the
ratio of the lesser of annual sales or purchases to the monthly average value of
the portfolio (excluding from both the numerator and the denominator securities
with maturities at the time of acquisition of one year or less), for the years
ended December 31, 1998 and 1999, respectively, was:
December 31,
1998 1999
---- ----
Bond Portfolio 115% 86%
Balanced Portfolio 74 98
Growth and Income Portfolio 38 65
Capital Growth Portfolio 54 66
Global Discovery Portfolio 54 70
International Portfolio 70 86
Large Company Growth Portfolio N/A* 119
21st Century Growth Portfolio N/A* 61
* Commenced operations on May 3, 1999.
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.
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 21st Century 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.
82
<PAGE>
Bond Portfolio, Balanced Portfolio, Growth and Income Portfolio, Capital Growth,
Large Company Growth and 21st Century 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, 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.
For the year ended December 31, 1999, fees paid pursuant to the agreement
amounted to $39,133 for Money Market Portfolio, $37,615 for Bond Portfolio,
$67,097 for Balanced Portfolio, $80,118 for Growth and Income Portfolio,
$155,167 for Capital Growth Portfolio, $72,667 for Global Discovery Portfolio,
$353,062 for International Portfolio. For the period from May 1, 1999
(commencement of operations) to December 31, 1999, fees paid pursuant to the
agreement amounted to $28,560 for Large Company Growth Portfolio and $33,923 for
21st Century Growth Portfolio.
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. SSC receives a fee of $0 per account for its
services to 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, 1999,
the Fund reimbursed SSC in the amount of $0. For the fiscal year ended December
31, 1998, the Fund reimbursed SSC in the amount $0. For the fiscal year ended
December 31, 1997, the Fund reimbursed SSC in the amount of $0.
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.
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.
83
<PAGE>
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 21st Century Growth Portfolio Class A shares is
81123R 74 8.
The CUSIP number of 21st Century 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
Growth and Income Portfolio
Capital Growth Portfolio
Large Company Growth Portfolio
21st Century Growth Portfolio
Global Discovery Portfolio
International Portfolio
84
<PAGE>
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, 1999, and are hereby deemed to be
part of this Statement of Additional Information.
85
<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>
<TABLE>
<CAPTION>
SCUDDER VARIABLE LIFE INVESTMENT FUND
PART C. OTHER INFORMATION
Item 23. Exhibits
- -------- --------
<S> <C> <C>
(a) (1) Declaration of Trust of the Registrant dated March 15, 1985.
(Previously filed as Exhibit 1(a) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(2) Amendment to the Declaration of Trust dated March 10, 1988.
(Previously filed as Exhibit 1(b) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(2)(a) Amended and Restated Declaration of Trust dated October 24, 1997 is
incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement filed on April 30, 1999.
(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.
<PAGE>
(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.)
(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.)
<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 incorporated by reference to Post-Effective Amendment No.
27 to the Registration Statement filed on April 30, 1999.
(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 incorporated by reference to Post-Effective Amendment No.
27 to the Registration Statement filed on April 30, 1999.
(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.)
<PAGE>
(5) Participating Contract and Policy Agreement between Scudder Investor
Services, Inc. and Aetna Life Insurance and Annuity Company dated April
27, 1992.
(Previously filed as Exhibit 6(d) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(6) Participating Contract and Policy Agreement between Scudder Investor
Services, Inc. and PNMR Securities, Inc. dated December 1, 1992.
(Previously filed as Exhibit 6(e) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(f) Inapplicable.
(g) (1) Custodian Contract between the Registrant and State Street Bank and Trust
Company.
(Previously filed as Exhibit 8(a) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(2) Custodian Agreement between the Registrant and Brown Brothers Harriman &
Co. dated April 29, 1996.
(Previously filed as Exhibit 8(a)(2) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(3) Fee schedule for Exhibit (g)(2).
(Previously filed as Exhibit 8(b)(1) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(h) (1) Transfer, Dividend Disbursing and Plan Agency Agreement between the
Registrant and State Street Bank and Trust Company dated July 12, 1985.
(Previously filed as Exhibit 9(a)(1) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(2) Fee schedule for Exhibit (h)(1).
(Previously filed as Exhibit 9(a)(2)(i) to Post-Effective Amendment No. 23
to the Registration Statement.)
(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.)
<PAGE>
(7) Participation Agreement between the Registrant and Safeco Life Insurance
Companies dated December 31, 1992.
(Previously filed as Exhibit 9(c)(7) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(8) First Amendment to the Fund Participation Agreement between AEtna Life
Insurance and Annuity Company and the Fund dated February 19, 1993.
(Previously filed as Exhibit 9(c)(10) to Post-Effective Amendment No. 23
to the Registration Statement.)
(9) Second Amendment to the Fund Participation Agreement between AEtna Life
Insurance and Annuity Company and the Fund dated August 13, 1993.
(Previously filed as Exhibit 9(c)(11) to Post-Effective Amendment No. 23
to the Registration Statement.)
(10) First Amendment to the Participation Agreement between Mutual of America
Life Insurance Company, The American Life Insurance Company of New York
and the Fund dated August 13, 1993.
(Previously filed as Exhibit 9(c)(12) to Post-Effective Amendment No. 23
to the Registration Statement.)
(11) First Amendment to the Participation Agreement between The Union Central
Life Insurance Company and the Fund dated September 30, 1993.
(Previously filed as Exhibit 9(c)(13) to Post-Effective Amendment No. 23
to the Registration Statement.)
(12) Participation Agreement between the Registrant and American Life Assurance
Corporation dated May 3, 1993.
(Previously filed as Exhibit 9(c)(14) to Post-Effective Amendment No. 16
to this Registration Statement.)
(13) Participation Agreement between the Registrant and AUSA Life Insurance
Company, Inc. dated October 21, 1993.
(Previously filed as Exhibit 9(c)(15) to Post-Effective Amendment No. 16
to this Registration Statement.)
(14) Participation Agreement between the Registrant and Banner Life Insurance
Company dated January 18, 1995.
(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.)
<PAGE>
(18) Participation Agreement between the Registrant and Mutual of America Life
Insurance Company dated December 30, 1988.
(Previously filed as Exhibit 9(c)(21) to Post-Effective Amendment No. 16
to this Registration Statement.)
(19) First Amendment to Participation Agreement between the Registrant and
Mutual of America Life Insurance Company dated August 13, 1993.
(Previously filed as Exhibit 9(c)(22) to Post-Effective Amendment No. 16
to this Registration Statement.)
(20) Participation Agreement between the Registrant and Mutual of America Life
Insurance Company dated December 30, 1988.
(Previously filed as Exhibit 9(c)(23) to Post-Effective Amendment No. 16
to this Registration Statement.)
(21) First Amendment to Participation Agreement between the Registrant and
Mutual of America Life Insurance Company dated August 13, 1993.
(Previously filed as Exhibit 9(c)(24) to Post-Effective Amendment No. 16
to this Registration Statement.)
(22) Participation Agreement between the Registrant and Mutual of America Life
Insurance Company dated December 30, 1993.
(Previously filed as Exhibit 9(c)(25) to Post-Effective Amendment No. 16
to this Registration Statement.)
(23) Participation Agreement between the Registrant and Paragon Life Insurance
Company dated April 30, 1993.
(Previously filed as Exhibit 9(c)(26) to Post-Effective Amendment No. 16
to this Registration Statement.)
(24) Participation Agreement between the Registrant and Provident Mutual Life
Insurance Company of Philadelphia dated July 21, 1993.
(Previously filed as Exhibit 9(c)(27) to Post-Effective Amendment No. 16
to this Registration Statement.)
(25) Participation Agreement between the Registrant and United of Omaha Life
Insurance Company dated May 15, 1994.
(Previously filed as Exhibit 9(c)(28) to Post-Effective Amendment No. 16
to this Registration Statement.)
(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.)
<PAGE>
(29) Accounting Services Agreement between the Registrant and Scudder Fund
Distributors, Inc. dated August 1, 1989.
(Previously filed as Exhibit 9(d)(1) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(30) Fund Accounting Services Agreement between the Registrant, on behalf of
the Money Market Portfolio, and Scudder Fund Accounting Corporation dated
October 1, 1994.
(Previously filed as Exhibit 9(e)(1) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(31) Fund Accounting Services Agreement between the Registrant, on behalf of
the Bond Portfolio, and Scudder Fund Accounting Corporation dated October
1, 1994.
(Previously filed as Exhibit 9(e)(2) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(32) Fund Accounting Services Agreement between the Registrant, on behalf of
the Balanced Portfolio, and Scudder Fund Accounting Corporation dated
October 1, 1994.
(Previously filed as Exhibit 9(e)(3) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(33) Fund Accounting Services Agreement between the Registrant, on behalf of
the Growth and Income Portfolio, and Scudder Fund Accounting Corporation
dated October 1, 1994.
(Previously filed as Exhibit 9(e)(4) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(34) Fund Accounting Services Agreement between the Registrant, on behalf of
the Capital Growth Portfolio, and Scudder Fund Accounting Corporation
dated October 1, 1994.
(Previously filed as Exhibit 9(e)(5) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(35) Fund Accounting Services Agreement between the Registrant, on behalf of
the International Portfolio, and Scudder Fund Accounting Corporation dated
October 1, 1994.
(Previously filed as Exhibit 9(e)(6) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(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.)
(37) Fund Accounting Services Agreement between the Registrant, on behalf of
the Small Company Growth Portfolio, and Scudder Fund Accounting
Corporation dated May 1, 1999 is filed herein.
(38) Fund Accounting Services Agreement between the Registrant, on behalf of
the Large Company Growth Portfolio, and Scudder Fund Accounting
Corporation dated May 1, 1999 is filed herein.
(i) Opinion and Consent of Counsel is filed herein.
(j) Consent of Independent Accountants is filed herein.
<PAGE>
(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) Plan Pursuant to Rule 18f-3 under the Investment Company Act of 1940.
(Previously filed as Exhibit
(o) to Post-Effective Amendment No. 28 to the Registration Statement.)
(p) Code of Ethics is filed herein.
</TABLE>
Item 24. Persons Controlled by or under Common Control with Registrant
- -------- -------------------------------------------------------------
Inapplicable.
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:
<PAGE>
(i) every person who is, or has been, a
Trustee or officer of the Fund
shall be indemnified by the Fund to
the fullest extent permitted by law
against all liability and against
all expenses reasonably incurred or
paid by him in connection with any
claim, action, suit or proceeding
in which he becomes involved as a
party or otherwise by virtue of his
being or having been a Trustee or
officer and against amounts paid or
incurred by him in the settlement
thereof;
(ii) the words "claim," "action,"
"suit," or "proceeding" shall apply
to all claims, actions, suits or
proceedings (civil, criminal, or
other, including appeals), actual
or threatened; and the words
"liability" and "expenses" shall
include, without limitation,
attorneys' fees, costs, judgments,
amounts paid in settlement, fines,
penalties and other liabilities.
(b) No indemnification shall be provided
hereunder to a Trustee or officer:
(i) against any liability to the Fund or
the Shareholders by reason of
willful misfeasance, bad faith,
gross negligence or reckless
disregard of the duties involved in
the conduct of his office;
(ii) with respect to any matter as to
which he shall have been finally
adjudicated not to have acted in
good faith in the reasonable belief
that his action was in the best
interest of the Fund;
(iii) in the event of a settlement or
other disposition not involving a
final adjudication as provided in
paragraph (b)(i) resulting in a
payment by a Trustee or officer,
unless there has been a
determination that such Trustee or
officer did not engage in willful
misfeasance, bad faith, gross
negligence or reckless disregard of
the duties involved in the conduct
of his office;
(A) by the court or other body
approving the settlement or
other disposition; or
(B) based upon a review of readily
available facts (as opposed to a
full trial-type inquiry) by (x)
vote of a majority of the
Disinterested Trustees acting on
the matter (provided that a
majority of the Disinterested
Trustees then in office act on
the matter) or (y) written
opinion of independent legal
counsel.
(c) The rights of indemnification herein
provided may be insured against by policies
maintained by the Fund, shall be severable,
shall not affect any other rights to which
any Trustee or officer may now or hereafter
be entitled, shall continue as to a person
who has ceased to be such Trustee or officer
and shall inure to the benefit of the heirs,
executors, administrators and assigns of
such a person. Nothing contained herein
shall affect any rights to indemnification
to which personnel of the Fund other than
Trustees and officers may be entitled by
contract or otherwise under law.
(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
<PAGE>
(ii) a majority of the Disinterested
Trustees acting on the matter
(provided that a majority of the
Disinterested Trustees act on the
matter) or an independent legal
counsel in a written opinion shall
determine, based upon a review of
readily available facts (as opposed
to a full trial-type inquiry), that
there is reason to believe that the
recipient ultimately will be found
entitled to indemnification.
As used in this Section 4.3, a "Disinterested
Trustee" is one who is not (i) an "Interested Person"
of the Trust (including anyone who has been exempted
from being an "Interested Person" by any rule,
regulation or order of the Commission), or (ii)
involved in the claim, action, suit or proceeding.
Item 26. Business or Other Connections of Investment Adviser
- -------- ---------------------------------------------------
Scudder Kemper Investments, Inc. has stockholders and
employees who are denominated officers but do not as such have
corporation-wide responsibilities. Such persons are not
considered officers for the purpose of this Item 26.
<TABLE>
<CAPTION>
Business and Other Connections of Board
Name of Directors of Registrant's Adviser
---- ------------------------------------
<S> <C>
Lynn S. Birdsong Director and Vice President, Scudder Kemper Investments, Inc.**
Chairman of the Board, Scudder, Stevens & Clark (Luxembourg) S.A.#
Director, Scudder Investments (UK) Ltd. Ooo
Chairman of the Board, Scudder Investments Asia, Ltd. @
Chairman of the Board, Scudder Investments Japan, Inc.&
Senior Vice President, Scudder Investor Services, Inc.**
Director, Scudder Trust (Cayman) Ltd. Xxx
Director, Scudder, Stevens & Clark Australia @@
Director, Korea Bond Fund Management Co., Ltd.+
William H. Bolinder Director, Scudder Kemper Investments, Inc.**
Member Group Executive Board, Zurich Financial Services, Inc. ##
Chairman, Zurich-American Insurance Company o
Nick Bratt Director and Vice President, Scudder Kemper Investments, Inc.**
Vice President, Scudder MAXXUM Company***
Vice President, Scudder, Stevens & Clark Corporation**
Vice President, Scudder, Stevens & Clark Overseas Corporation oo
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, 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
Edmond D. Villani Director, President and Chief Executive Officer, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc.###
President and Director, Scudder, Stevens & Clark Overseas Corporationoo
President and Director, Scudder, Stevens & Clark Corporation**
Director, Scudder Realty Advisors, Inc.x
<PAGE>
Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy of Luxembourg
Director, Scudder Investments (UK) Ltd. Ooo
Director, Scudder Investments Japan, Inc.&
Director, Scudder Kemper Holdings (UK) Ltd. Ooo
President and Director, Zurich Investment Management, Inc. Xx
</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
Ooo 1 South Place 5th floor, London EC2M 2ZS England
@ One Exchange Square 29th Floor, Hong Kong
& Kamiyachyo Mori Building, 12F1, 4-3-20, Toranomon, Minato-ku,
Tokyo 105-0001
@@ Level 3, 5 Blue Street North Sydney, NSW 2060
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>
(1) (2) (3)
Name and Principal Position 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
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
<PAGE>
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
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
John R. Hebble Assistant Treasurer Treasurer
Two International Place
Boston, MA 02110
James J. McGovern Chief Financial Officer and Treasurer None
345 Park Avenue
New York, NY 10154
Lorie C. O'Malley Vice President None
Two International Place
Boston, MA 02110
Caroline Pearson Clerk Assistant Secretary
Two International Place
Boston, MA 02110
Kathryn L. Quirk Director, Senior Vice President, Chief Trustee, Vice President
345 Park Avenue Legal Officer and Assistant Clerk and Assistant Secretary
New York, NY 10154
Robert A. Rudell Director and Vice President None
Two International Place
Boston, MA 02110
William M. Thomas Vice President President
Two International Place
Boston, MA 02110
Benjamin Thorndike 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>
<PAGE>
(c)
<TABLE>
(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.
<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 27th day of April, 2000.
SCUDDER VARIABLE LIFE INVESTMENT FUND
By: /s/John Millette
John Millette, Secretary
Pursuant to the requirements of the Securities Act of 1933, this
amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/William M. Thomas
- --------------------------------------
William M. Thomas* President (Principal Executive April 27, 2000
Officer)
/s/Kenneth Black, Jr.
- --------------------------------------
Dr. Kenneth Black, Jr.* Trustee April 27, 2000
/s/Rosita P. Chang
- --------------------------------------
Dr. Rosita P. Chang* Trustee April 27, 2000
/s/Peter B. Freeman
- --------------------------------------
Peter B. Freeman* Trustee April 27, 2000
/s/J.D. Hammond
- --------------------------------------
Dr. J. D. Hammond* Trustee April 27, 2000
/s/Kathryn L. Quirk
- --------------------------------------
Kathryn L. Quirk* Trustee, Vice President and Assistant April 27, 2000
Secretary
/s/John R. Hebble
- --------------------------------------
John R. Hebble Treasurer (Principal Financial and April 27, 2000
Accounting Officer)
</TABLE>
<PAGE>
*By: /s/John Millette
John Millette**
** Attorney-in-fact pursuant to the powers of attorney
filed with Post-Effective Amendment No. 28 to the
Registration Statement filed on February 14, 2000.
<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. 29
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 33
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
SCUDDER VARIABLE LIFE INVESTMENT FUND
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
EXHIBIT INDEX
Exhibit (h)(37)
Exhibit (h)(38)
Exhibit (i)
Exhibit (j)
Exhibit (p)
Exhibit(h)(37)
FUND ACCOUNTING SERVICES AGREEMENT
THIS AGREEMENT is made on the 1st day of May, 1999 between Scudder Variable Life
Investment Fund (the "Fund"), on behalf of Small Company Growth Portfolio
(hereinafter called the "Portfolio"), a registered open-end management
investment company with its principal place of business in Boston, Massachusetts
and Scudder Fund Accounting Corporation, with its principal place of business in
Boston, Massachusetts (hereinafter called "FUND ACCOUNTING").
WHEREAS, the Portfolio has need for certain accounting services which FUND
ACCOUNTING is willing and able to provide;
NOW THEREFORE in consideration of the mutual promises herein made, the Fund and
FUND ACCOUNTING agree as follows:
Section 1. Duties of FUND ACCOUNTING - General
FUND ACCOUNTING is authorized to act under the terms of this Agreement
as the Portfolio's fund accounting agent, and as such FUND ACCOUNTING
shall:
a. Maintain and preserve all accounts, books, financial records
and other documents as are required of the Fund under Section
31 of the Investment Company Act of 1940 (the "1940 Act") and
Rules 31a-1, 31a-2 and 31a-3 thereunder, applicable federal
and state laws and any other law or administrative rules or
procedures which may be applicable to the Fund on behalf of
the Portfolio, other than those accounts, books and financial
records required to be maintained by the Fund's custodian or
transfer agent and/or books and records maintained by all
other service providers necessary for the Fund to conduct its
business as a registered [open/closed] -end management
investment company. All such books and records shall be the
property of the Fund and shall at all times during regular
business hours be open for inspection by, and shall be
surrendered promptly upon request of, duly authorized officers
of the Fund. All such books and records shall at all times
during regular business hours be open for inspection, upon
request of duly authorized officers of the Fund, by employees
or agents of the Fund and employees and agents of the
Securities and Exchange Commission.
b. Record the current day's trading activity and such other
proper bookkeeping entries as are necessary for determining
that day's net asset value and net income.
c. Render statements or copies of records as from time to time
are reasonably requested by the Fund.
d. Facilitate audits of accounts by the Fund's independent public
accountants or by any other auditors employed or engaged by
the Fund or by any regulatory body with jurisdiction over the
Fund.
e. Compute the Portfolio's net asset value per share, and, if
applicable, its public offering price and/or its daily
dividend rates and money market yields, in accordance with
Section 3 of the Agreement and notify the Fund and such other
persons as the Fund may reasonably request of the net asset
value per share, the public offering price and/or its daily
dividend rates and money market yields.
Section 2. Valuation of Securities
Securities shall be valued in accordance with (a) the Fund's
Registration Statement, as amended or supplemented from time to time
(hereinafter referred to as the "Registration Statement"); (b) the
resolutions of the Board of Trustees of the Fund at the time in force
and applicable, as they may from time to time be delivered to FUND
ACCOUNTING, and (c) Proper Instructions from such officers of the Fund
or other persons as are from time to time authorized by the Board of
Trustees of the Fund to give instructions with respect to computation
and determination of the net asset value. FUND ACCOUNTING may use one
or more external pricing services, including broker-dealers, provided
that an appropriate officer of the Fund shall have approved such use in
advance.
<PAGE>
Section 3. Computation of Net Asset Value, Public Offering Price, Daily Dividend
Rates and Yields
FUND ACCOUNTING shall compute the Portfolio's net asset value,
including net income, in a manner consistent with the specific
provisions of the Registration Statement. Such computation shall be
made as of the time or times specified in the Registration Statement.
FUND ACCOUNTING shall compute the daily dividend rates and money market
yields, if applicable, in accordance with the methodology set forth in
the Registration Statement.
Section 4. FUND ACCOUNTING's Reliance on Instructions and Advice
In maintaining the Portfolio's books of account and making the
necessary computations FUND ACCOUNTING shall be entitled to receive,
and may rely upon, information furnished it by means of Proper
Instructions, including but not limited to:
a. The manner and amount of accrual of expenses to be recorded on
the books of the Portfolio;
b. The source of quotations to be used for such securities as may
not be available through FUND ACCOUNTING's normal pricing
services;
c. The value to be assigned to any asset for which no price
quotations are readily available;
d. If applicable, the manner of computation of the public
offering price and such other computations as may be
necessary;
e. Transactions in portfolio securities;
f. Transactions in shares of beneficial interest.
FUND ACCOUNTING shall be entitled to receive, and shall be entitled to
rely upon, as conclusive proof of any fact or matter required to be
ascertained by it hereunder, a certificate, letter or other instrument
signed by an authorized officer of the Fund or any other person
authorized by the Fund's Board of Trustees.
FUND ACCOUNTING shall be entitled to receive and act upon advice of
Counsel (which may be Counsel for the Fund) at the reasonable expense
of the Portfolio and shall be without liability for any action taken or
thing done in good faith in reliance upon such advice.
FUND ACCOUNTING shall be entitled to receive, and may rely upon,
information received from the Transfer Agent.
Section 5. Proper Instructions
"Proper Instructions" as used herein means any certificate, letter or
other instrument or telephone call reasonably believed by FUND
ACCOUNTING to be genuine and to have been properly made or signed by
any authorized officer of the Fund or person certified to FUND
ACCOUNTING as being authorized by the Board of Trustees. The Fund, on
behalf of the Portfolio, shall cause oral instructions to be confirmed
in writing. Proper Instructions may include communications effected
directly between electro-mechanical or electronic devices as from time
to time agreed to by an authorized officer of the Fund and FUND
ACCOUNTING.
The Fund, on behalf of the Portfolio, agrees to furnish to the
appropriate person(s) within FUND ACCOUNTING a copy of the Registration
Statement as in effect from time to time. FUND ACCOUNTING may
conclusively rely on the Fund's most recently delivered Registration
Statement for all purposes under this Agreement and shall not be liable
to the Portfolio or the Fund in acting in reliance thereon.
2
<PAGE>
Section 6. Standard of Care and Indemnification
FUND ACCOUNTING shall exercise reasonable care and diligence in the
performance of its duties hereunder. The Fund agrees that FUND
ACCOUNTING shall not be liable under this Agreement for any error of
judgment or mistake of law made in good faith and consistent with the
foregoing standard of care, provided that nothing in this Agreement
shall be deemed to protect or purport to protect FUND ACCOUNTING
against any liability to the Fund, the Portfolio or its shareholders to
which FUND ACCOUNTING would otherwise be subject by reason of willful
misfeasance, bad faith or negligence in the performance of its duties,
or by reason of its reckless disregard of its obligations and duties
hereunder.
The Fund agrees, on behalf of the Portfolio, to indemnify and hold
harmless FUND ACCOUNTING and its employees, agents and nominees from
all taxes, charges, expenses, assessments, claims and liabilities
(including reasonable attorneys' fees) incurred or assessed against
them in connection with the performance of this Agreement, except such
as may arise from their own negligent action, negligent failure to act
or willful misconduct. The foregoing notwithstanding, FUND ACCOUNTING
will in no event be liable for any loss resulting from the acts,
omissions, lack of financial responsibility, or failure to perform the
obligations of any person or organization designated by the Fund to be
the authorized agent of the Portfolio as a party to any transactions.
FUND ACCOUNTING's responsibility for damage or loss with respect to the
Portfolio's records arising from fire, flood, Acts of God, military
power, war, insurrection or nuclear fission, fusion or radioactivity
shall be limited to the use of FUND ACCOUNTING's best efforts to
recover the Portfolio's records determined to be lost, missing or
destroyed.
Section 7. Compensation and FUND ACCOUNTING Expenses
FUND ACCOUNTING shall be paid as compensation for its services pursuant
to this Agreement such compensation as may from time to time be agreed
upon in writing by the two parties. FUND ACCOUNTING shall be entitled
to recover its reasonable telephone, courier or delivery service, and
all other reasonable out-of-pocket, expenses as incurred, including,
without limitation, reasonable attorneys' fees and reasonable fees for
pricing services.
Section 8. Amendment and Termination
This Agreement shall continue in full force and effect until terminated
as hereinafter provided, may be amended at any time by mutual agreement
of the parties hereto and may be terminated by an instrument in writing
delivered or mailed to the other party. Such termination shall take
effect not sooner than ninety (90) days after the date of delivery or
mailing of such notice of termination. Any termination date is to be no
earlier than four months from the effective date hereof. Upon
termination, FUND ACCOUNTING will turn over to the Fund or its designee
and cease to retain in FUND ACCOUNTING files, records of the
calculations of net asset value and all other records pertaining to its
services hereunder; provided, however, FUND ACCOUNTING in its
discretion may make and retain copies of any and all such records and
documents which it determines appropriate or for its protection.
Section 9. Services Not Exclusive
FUND ACCOUNTING's services pursuant to this Agreement are not to be
deemed to be exclusive, and it is understood that FUND ACCOUNTING may
perform fund accounting services for others. In acting under this
Agreement, FUND ACCOUNTING shall be an independent contractor and not
an agent of the Fund or the Portfolio.
3
<PAGE>
Section 10. Limitation of Liability for Claims
The Fund's Declaration of Trust, dated March 15, 1985, as amended to
date (the "Declaration"), a copy of which, together with all amendments
thereto, is on file in the Office of the Secretary of State of the
Commonwealth of Massachusetts, provides that the name "Scudder Variable
Life Investment Fund" refers to the Trustees under the Declaration
collectively as trustees and not as individuals or personally, and that
no shareholder of the Fund or the Portfolio, or Trustee/Director,
officer, employee or agent of the Fund shall be subject to claims
against or obligations of the Trust or of the Portfolio to any extent
whatsoever, but that the Trust estate only shall be liable.
FUND ACCOUNTING is expressly put on notice of the limitation of
liability as set forth in the Declaration and FUND ACCOUNTING agrees
that the obligations assumed by the Fund and/or the Portfolio under
this Agreement shall be limited in all cases to the Portfolio and its
assets, and FUND ACCOUNTING shall not seek satisfaction of any such
obligation from the shareholders or any shareholder of the Fund or the
Portfolio or any other series of the Fund, or from any
Trustee/Director, officer, employee or agent of the Fund. FUND
ACCOUNTING understands that the rights and obligations of the Portfolio
under the Declaration are separate and distinct from those of any and
all other series of the Fund.
Section 11. Notices
Any notice shall be sufficiently given when delivered or mailed to the
other party at the address of such party set forth below or to such
other person or at such other address as such party may from time to
time specify in writing to the other party.
If to FUND ACCOUNTING: Scudder Fund Accounting Corporation
Two International Place
Boston, Massachusetts 02110
Attn: Vice President
If to the Fund - Portfolio: Scudder Variable Life Investment Fund
Two International Place
Boston, Massachusetts 02110
Attn: President, Secretary or Treasurer
Section 12. Miscellaneous
This Agreement may not be assigned by FUND ACCOUNTING without the
consent of the Fund as authorized or approved by resolution of its
Board of Trustees.
In connection with the operation of this Agreement, the Fund and FUND
ACCOUNTING may agree from time to time on such provisions interpretive
of or in addition to the provisions of this Agreement as in their joint
opinions may be consistent with this Agreement. Any such interpretive
or additional provisions shall be in writing, signed by both parties
and annexed hereto, but no such provisions shall be deemed to be an
amendment of this Agreement.
This Agreement shall be governed and construed in accordance with the
laws of the Commonwealth of Massachusetts.
This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
This Agreement constitutes the entire agreement between the parties
concerning the subject matter hereof, and supersedes any and all prior
understandings.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their respective officers thereunto duly authorized and its seal to be
hereunder affixed as of the date first written above.
SCUDDER VARIABLE LIFE INVESTMENT FUND,
on behalf of Small Company Growth Portfolio
By:/s/William Thomas
-----------------
President
SCUDDER FUND ACCOUNTING CORPORATION
By:/s/John R. Hebble
-----------------
Vice President
5
Exhibit(h)(38)
FUND ACCOUNTING SERVICES AGREEMENT
THIS AGREEMENT is made on the 1st day of May, 1999 between Scudder Variable Life
Investment Fund (the "Fund"), on behalf of Large Company Growth Portfolio
(hereinafter called the "Portfolio"), a registered open-end management
investment company with its principal place of business in Boston, Massachusetts
and Scudder Fund Accounting Corporation, with its principal place of business in
Boston, Massachusetts (hereinafter called "FUND ACCOUNTING").
WHEREAS, the Portfolio has need for certain accounting services which FUND
ACCOUNTING is willing and able to provide;
NOW THEREFORE in consideration of the mutual promises herein made, the Fund and
FUND ACCOUNTING agree as follows:
Section 1. Duties of FUND ACCOUNTING - General
FUND ACCOUNTING is authorized to act under the terms of this Agreement
as the Portfolio's fund accounting agent, and as such FUND ACCOUNTING
shall:
a. Maintain and preserve all accounts, books, financial records
and other documents as are required of the Fund under Section
31 of the Investment Company Act of 1940 (the "1940 Act") and
Rules 31a-1, 31a-2 and 31a-3 thereunder, applicable federal
and state laws and any other law or administrative rules or
procedures which may be applicable to the Fund on behalf of
the Portfolio, other than those accounts, books and financial
records required to be maintained by the Fund's custodian or
transfer agent and/or books and records maintained by all
other service providers necessary for the Fund to conduct its
business as a registered [open/closed] -end management
investment company. All such books and records shall be the
property of the Fund and shall at all times during regular
business hours be open for inspection by, and shall be
surrendered promptly upon request of, duly authorized officers
of the Fund. All such books and records shall at all times
during regular business hours be open for inspection, upon
request of duly authorized officers of the Fund, by employees
or agents of the Fund and employees and agents of the
Securities and Exchange Commission.
b. Record the current day's trading activity and such other
proper bookkeeping entries as are necessary for determining
that day's net asset value and net income.
c. Render statements or copies of records as from time to time
are reasonably requested by the Fund.
d. Facilitate audits of accounts by the Fund's independent public
accountants or by any other auditors employed or engaged by
the Fund or by any regulatory body with jurisdiction over the
Fund.
e. Compute the Portfolio's net asset value per share, and, if
applicable, its public offering price and/or its daily
dividend rates and money market yields, in accordance with
Section 3 of the Agreement and notify the Fund and such other
persons as the Fund may reasonably request of the net asset
value per share, the public offering price and/or its daily
dividend rates and money market yields.
Section 2. Valuation of Securities
Securities shall be valued in accordance with (a) the Fund's
Registration Statement, as amended or supplemented from time to time
(hereinafter referred to as the "Registration Statement"); (b) the
resolutions of the Board of Trustees of the Fund at the time in force
and applicable, as they may from time to time be delivered to FUND
ACCOUNTING, and (c) Proper Instructions from such officers of the Fund
or other persons as are from time to time authorized by the Board of
Trustees of the Fund to give instructions with respect to computation
and determination of the net asset value. FUND ACCOUNTING may use one
or more external pricing services, including broker-dealers, provided
that an appropriate officer of the Fund shall have approved such use in
advance.
<PAGE>
Section 3. Computation of Net Asset Value, Public Offering Price, Daily Dividend
Rates and Yields
FUND ACCOUNTING shall compute the Portfolio's net asset value,
including net income, in a manner consistent with the specific
provisions of the Registration Statement. Such computation shall be
made as of the time or times specified in the Registration Statement.
FUND ACCOUNTING shall compute the daily dividend rates and money market
yields, if applicable, in accordance with the methodology set forth in
the Registration Statement.
Section 4. FUND ACCOUNTING's Reliance on Instructions and Advice
In maintaining the Portfolio's books of account and making the
necessary computations FUND ACCOUNTING shall be entitled to receive,
and may rely upon, information furnished it by means of Proper
Instructions, including but not limited to:
a. The manner and amount of accrual of expenses to be recorded on
the books of the Portfolio;
b. The source of quotations to be used for such securities as may
not be available through FUND ACCOUNTING's normal pricing
services;
c. The value to be assigned to any asset for which no price
quotations are readily available;
d. If applicable, the manner of computation of the public
offering price and such other computations as may be
necessary;
e. Transactions in portfolio securities;
f. Transactions in shares of beneficial interest.
FUND ACCOUNTING shall be entitled to receive, and shall be entitled to
rely upon, as conclusive proof of any fact or matter required to be
ascertained by it hereunder, a certificate, letter or other instrument
signed by an authorized officer of the Fund or any other person
authorized by the Fund's Board of Trustees.
FUND ACCOUNTING shall be entitled to receive and act upon advice of
Counsel (which may be Counsel for the Fund) at the reasonable expense
of the Portfolio and shall be without liability for any action taken or
thing done in good faith in reliance upon such advice.
FUND ACCOUNTING shall be entitled to receive, and may rely upon,
information received from the Transfer Agent.
Section 5. Proper Instructions
"Proper Instructions" as used herein means any certificate, letter or
other instrument or telephone call reasonably believed by FUND
ACCOUNTING to be genuine and to have been properly made or signed by
any authorized officer of the Fund or person certified to FUND
ACCOUNTING as being authorized by the Board of Trustees. The Fund, on
behalf of the Portfolio, shall cause oral instructions to be confirmed
in writing. Proper Instructions may include communications effected
directly between electro-mechanical or electronic devices as from time
to time agreed to by an authorized officer of the Fund and FUND
ACCOUNTING.
The Fund, on behalf of the Portfolio, agrees to furnish to the
appropriate person(s) within FUND ACCOUNTING a copy of the Registration
Statement as in effect from time to time. FUND ACCOUNTING may
conclusively rely on the Fund's most recently delivered Registration
Statement for all purposes under this Agreement and shall not be liable
to the Portfolio or the Fund in acting in reliance thereon.
2
<PAGE>
Section 6. Standard of Care and Indemnification
FUND ACCOUNTING shall exercise reasonable care and diligence in the
performance of its duties hereunder. The Fund agrees that FUND
ACCOUNTING shall not be liable under this Agreement for any error of
judgment or mistake of law made in good faith and consistent with the
foregoing standard of care, provided that nothing in this Agreement
shall be deemed to protect or purport to protect FUND ACCOUNTING
against any liability to the Fund, the Portfolio or its shareholders to
which FUND ACCOUNTING would otherwise be subject by reason of willful
misfeasance, bad faith or negligence in the performance of its duties,
or by reason of its reckless disregard of its obligations and duties
hereunder.
The Fund agrees, on behalf of the Portfolio, to indemnify and hold
harmless FUND ACCOUNTING and its employees, agents and nominees from
all taxes, charges, expenses, assessments, claims and liabilities
(including reasonable attorneys' fees) incurred or assessed against
them in connection with the performance of this Agreement, except such
as may arise from their own negligent action, negligent failure to act
or willful misconduct. The foregoing notwithstanding, FUND ACCOUNTING
will in no event be liable for any loss resulting from the acts,
omissions, lack of financial responsibility, or failure to perform the
obligations of any person or organization designated by the Fund to be
the authorized agent of the Portfolio as a party to any transactions.
FUND ACCOUNTING's responsibility for damage or loss with respect to the
Portfolio's records arising from fire, flood, Acts of God, military
power, war, insurrection or nuclear fission, fusion or radioactivity
shall be limited to the use of FUND ACCOUNTING's best efforts to
recover the Portfolio's records determined to be lost, missing or
destroyed.
Section 7. Compensation and FUND ACCOUNTING Expenses
FUND ACCOUNTING shall be paid as compensation for its services pursuant
to this Agreement such compensation as may from time to time be agreed
upon in writing by the two parties. FUND ACCOUNTING shall be entitled
to recover its reasonable telephone, courier or delivery service, and
all other reasonable out-of-pocket, expenses as incurred, including,
without limitation, reasonable attorneys' fees and reasonable fees for
pricing services.
Section 8. Amendment and Termination
This Agreement shall continue in full force and effect until terminated
as hereinafter provided, may be amended at any time by mutual agreement
of the parties hereto and may be terminated by an instrument in writing
delivered or mailed to the other party. Such termination shall take
effect not sooner than ninety (90) days after the date of delivery or
mailing of such notice of termination. Any termination date is to be no
earlier than four months from the effective date hereof. Upon
termination, FUND ACCOUNTING will turn over to the Fund or its designee
and cease to retain in FUND ACCOUNTING files, records of the
calculations of net asset value and all other records pertaining to its
services hereunder; provided, however, FUND ACCOUNTING in its
discretion may make and retain copies of any and all such records and
documents which it determines appropriate or for its protection.
Section 9. Services Not Exclusive
FUND ACCOUNTING's services pursuant to this Agreement are not to be
deemed to be exclusive, and it is understood that FUND ACCOUNTING may
perform fund accounting services for others. In acting under this
Agreement, FUND ACCOUNTING shall be an independent contractor and not
an agent of the Fund or the Portfolio.
3
<PAGE>
Section 10. Limitation of Liability for Claims
The Fund's Declaration of Trust, dated March 15, 1985, as amended to
date (the "Declaration"), a copy of which, together with all amendments
thereto, is on file in the Office of the Secretary of State of the
Commonwealth of Massachusetts, provides that the name "Scudder Variable
Life Investment Fund" refers to the Trustees under the Declaration
collectively as trustees and not as individuals or personally, and that
no shareholder of the Fund or the Portfolio, or Trustee/Director,
officer, employee or agent of the Fund shall be subject to claims
against or obligations of the Trust or of the Portfolio to any extent
whatsoever, but that the Trust estate only shall be liable.
FUND ACCOUNTING is expressly put on notice of the limitation of
liability as set forth in the Declaration and FUND ACCOUNTING agrees
that the obligations assumed by the Fund and/or the Portfolio under
this Agreement shall be limited in all cases to the Portfolio and its
assets, and FUND ACCOUNTING shall not seek satisfaction of any such
obligation from the shareholders or any shareholder of the Fund or the
Portfolio or any other series of the Fund, or from any
Trustee/Director, officer, employee or agent of the Fund. FUND
ACCOUNTING understands that the rights and obligations of the Portfolio
under the Declaration are separate and distinct from those of any and
all other series of the Fund.
Section 11. Notices
Any notice shall be sufficiently given when delivered or mailed to the
other party at the address of such party set forth below or to such
other person or at such other address as such party may from time to
time specify in writing to the other party.
If to FUND ACCOUNTING: Scudder Fund Accounting Corporation
Two International Place
Boston, Massachusetts 02110
Attn: Vice President
If to the Fund-Portfolio: Scudder Variable Life Investment Fund
Two International Place
Boston, Massachusetts 02110
Attn: President, Secretary or Treasurer
Section 12. Miscellaneous
This Agreement may not be assigned by FUND ACCOUNTING without the
consent of the Fund as authorized or approved by resolution of its
Board of Trustees.
In connection with the operation of this Agreement, the Fund and FUND
ACCOUNTING may agree from time to time on such provisions interpretive
of or in addition to the provisions of this Agreement as in their joint
opinions may be consistent with this Agreement. Any such interpretive
or additional provisions shall be in writing, signed by both parties
and annexed hereto, but no such provisions shall be deemed to be an
amendment of this Agreement.
This Agreement shall be governed and construed in accordance with the
laws of the Commonwealth of Massachusetts.
This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
This Agreement constitutes the entire agreement between the parties
concerning the subject matter hereof, and supersedes any and all prior
understandings.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their respective officers thereunto duly authorized and its seal to be
hereunder affixed as of the date first written above.
SCUDDER VARIABLE LIFE INVESTMENT FUND,
on behalf of Large Company Growth Portfolio
By:/s/William Thomas
-----------------
President
SCUDDER FUND ACCOUNTING CORPORATION
By:/s/John R. Hebble
-----------------
Vice President
5
Exhibit (i)
[DECHERT PRICE & RHOADS LETTERHEAD]
April 12, 2000
Scudder Variable Life Investment Fund
Two International Place
Boston, Massachusetts 02110
Re: Post-Effective Amendment No. 29 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
<PAGE>
to time established various series of the Trust. The Shares are currently
divided into nine series (the "Portfolios").
By votes adopted on November 13, 1998, February 11, 1999 (for two Funds
only) and November 11, 1999, 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. 29 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. 29 to the Registration
Statement.
Very truly yours
/s/Dechert Price & Rhoads
Exhibit (j)
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. 29 to the Registration Statement on Form N-1A (the "Registration Statement")
of Scudder Variable Life Investment Fund, of our report dated February 11, 2000,
on the financial statements and financial highlights appearing in the December
31, 1999 Annual Report to the Shareholders of Scudder Variable Life Investment
Fund, which are also incorporated by reference into the Registration Statement.
We further consent to the references to our Firm under the heading "Financial
Highlights," in the Prospectus and "Experts" in the Statement of Additional
Information.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 10, 2000
Exhibit 23(p)
SCUDDER KEMPER INVESTMENTS, INC.
CODE OF ETHICS
- --------------------------------------------------------------------------------
Preamble
We will at all times conduct ourselves with integrity and distinction, putting
first the interests of our clients.
From the time of our Firm's inception, we have looked on our obligations to our
clients as fiduciary in nature. Our relationships were to be unencumbered in
fact or appearance by conflicts of interest, and the needs of our clients thus
represented a benchmark for assessing our own business decisions.
We believe and have always believed that our own long-term business interests
are best served by strict adherence to these principles. They are reflected in
the following internal policies and prescriptions and are implicit in the
judgment that our responsibilities exceed in scope and depth the literal
restrictions imposed by law on investor behavior (e.g., the prohibition on use
of inside information.).
The rules set forth in this Code have been adopted by Scudder Kemper
Investments, Inc. ("Scudder Kemper") and certain of its subsidiaries (the
"Covered Companies"), including Scudder Investor Services, Inc., Kemper
Distributors, Inc., Scudder Financial Services, Inc., Kemper Service
Corporation, Scudder Service Corporation, Scudder Trust Company, Scudder Fund
Accounting Corporation, and by Scudder Kemper-sponsored investment companies as
their codes of ethics applicable to Scudder Kemper-affiliated personnel.
Part 1: Conflicts of Interest
This Code does not attempt to spell out all possible cases of conflicts of
interest and we believe that members of the organization should be conscious
that areas other than personal investment transactions may involve conflicts of
interest. One such area would be accepting favors from brokers or other vendors
or service providers. We are a natural object of cultivation by firms wishing to
do business with us and it is possible that this consideration could impair our
objectivity.
A conflict of interest could also occur in securities which have a thin market
or are being purchased or sold in volume by any client or clients. Likewise, the
purchase of stocks or bonds in anticipation of (1) an upwards change to "Buy" in
the price rating, (2) their being added to the Investment Universe with a "Buy"
rating, or (3) their being purchased by a large account or group of accounts
would clearly be in conflict with our clients' interest.
Other examples of such conflicts would include the purchase or sale of a
security by a member of the organization prior to initiating a similar
recommendation to a client. Analysts occupy a particularly visible position. It
follows that analysts should be particularly careful to avoid the appearance of
"jumping the gun" before recommending a change in the rating on one of the
stocks for which he or she is responsible.
<PAGE>
Accordingly, all personnel are required to adhere to the following rules
governing their investment activities. These rules cannot cover all situations
which may involve a possible conflict of interest. If an employee becomes aware
of a personal interest that is, or might be, in conflict with the interest of a
client, that person should disclose the potential conflict to the Legal
Department for appropriate consideration, before any transaction is executed.
We are anxious to give every member of the Firm reasonable freedom with respect
to his/her own and family's investment activities. Furthermore, we believe that
we will be stronger and our product better if the members of the organization
have a personal interest in investing and the courage of their convictions with
respect to investment decisions. At the same time, in a profession such as ours,
it is possible to abuse the trust which has been placed in us and there could be
conflicts of interest between our clients and our personal investment
activities. In many cases such conflicts might be somewhat theoretical. On the
other hand, in a matter of this nature we must be almost as careful of
appearances as we are of the actual facts.
Our underlying philosophy has always been to avoid conflicts of interest
wherever possible and, where they unavoidably occur, to resolve them in favor of
the client. When a conflict does occur, an individual in an investment counsel
organization must recognize that the client's interests supercede the interests
of the Firm's employees and those of any members of the person's family whom he
or she may advise. This condition inevitably places some restriction on freedom
of investment for members of the organization and their families.
When any member of the organization thinks it possible that a personal
transaction can be misinterpreted as involving a conflict of interest, that
person is encouraged to write a short explanatory memorandum and attach it to
the confidential quarterly Personal Transaction Report (Form 1). Such a
memorandum should, of course, briefly document any discussion with and approval
by the Legal Department.
Personal Transaction Reports are reviewed by designees of the Ethics Committee,
who are responsible for determining whether violations have occurred, giving the
person involved an opportunity to supply additional information, and
recommending appropriate follow-up action including disciplinary measures for
late reports or other infractions.
Part 2: Personal Investments
Definitions
a. Access Person includes employees who have access to timely
information relating to investment management activities,
research and/or client portfolio holdings.
b. Affiliated person letter (407 letter) is a letter from the
compliance department on behalf of Scudder Kemper Investments,
Inc. authorizing an employee to open a brokerage account and
providing for the direction of duplicate trade confirmations
and account statements to the compliance department. All
access persons must apply for an affiliated person letter for
each personal account prior to making any personal trades for
the account. Employees who
2
<PAGE>
are not deemed access persons will receive an affiliated
person letter on request, but such letter will NOT require the
direction of duplicate trade confirmations and account
statements.
c. Beneficial Interest. You will be considered to have a
Beneficial Interest in any investment that is (whether
directly or indirectly) held by you, or by others for your
benefit (such as custodians, trustees, executors, etc.); held
by you as a trustee for members of your immediate family
(spouse, children, stepchildren, grandchildren, parents,
stepparents, grandparents, siblings, parents-in-law,
children-in-law, siblings-in-law); and held in the name of
your spouse, or minor children (including custodians under the
Uniform Gifts to Minors Act) or any relative of yours or of
your spouse (including an adult child) who is sharing your
home, whether or not you supervise such investments. You will
also be considered to have a Beneficial Interest in any
investment as to which you have a contract, understanding,
relationship, agreement or other arrangement that gives you,
or any person described above, a present or future benefit
substantially equivalent to an ownership interest in that
investment. For example, you would be considered to have a
Beneficial Interest in the following:
o an investment held by a trust of which you are the
settlor, if you have the power to revoke the trust
without obtaining the consent of all the
beneficiaries;
o an investment held by any partnership in which you
are a partner;
o an investment held by an investment club of which you
are a member;
o an investment held by a personal holding company
controlled by you alone or jointly with others.
If you have any question as to whether you have a Beneficial Interest in an
investment, you should review it with the Legal Department.
d. Covered Company is defined in the Preamble on page 1.
e. Derivative includes options, futures contracts, options on
futures contracts, swaps, caps and the like, where the
underlying instrument is a Security, a securities index, a
financial indicator, or a precious metal.
f. Employees includes all employees of each of the Covered
Companies who do not fall within the definition of Access
Person, Investment Personnel or Portfolio Manager.
g. Initial Public Offering shall include initial offerings in
equities.
h. Investment Personnel are traders, analysts, and other
employees who work directly with Portfolio Managers in an
assistant capacity, as well as those who in the course of
their job regularly receive access to client trading activity
(this
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would generally include members of the Investment Operations
and Mutual Fund Accounting groups). As those responsible for
providing information or advice to Portfolio Managers or
otherwise helping to execute or implement the Portfolio
Managers' recommendations, Investment Personnel occupy a
comparably sensitive position, and thus additional rules
outlined herein apply to such individuals.
i. Personal Account means an account through which an employee of
a Covered Company has a Beneficial Interest in any Security or
Derivative.
j. Personal Transaction means an investment transaction in a
Security or Derivative in which an employee of a Covered
Company has a Beneficial Interest.
k. Portfolio Managers are those employees of a Covered Company
entrusted with the direct responsibility and authority to make
investment decisions affecting a client. PIC Consultants are
included in this definition. In their capacities as
fiduciaries, Portfolio Managers occupy a more sensitive
position than many members of the Scudder Kemper organization
because they are originating transactions for their clients.
l. Private Placement is defined as an offering of a security,
which is being acquired in connection with an offering not
being made to "the public" but to a limited number of
investors and which has been deemed not to require
registration with the SEC.
m. Reportable Transaction includes any transaction in a Security
or Derivative; provided that Reportable Transaction does not
include any transaction in (i) direct obligations of the US
Government, or (ii) open-end investment companies for which
none of the Advisers serves as investment adviser.
n. Security includes without limitation stocks, bonds,
debentures, notes, bills and any interest commonly known as a
security, and all rights or contracts to purchase or sell a
security.
o. Scudder Kemper Funds means each registered investment company
to which an Adviser renders advisory services, other than
funds sponsored by an organization unaffiliated with Scudder
Kemper.
p. Waiver from preclearance exempts certain accounts from the
preclearance requirements. An access person may receive a
certificate of waiver from preclearance under the following
circumstances:
i. Account under the exclusive discretion of an access
person's spouse, where the spouse is employed by an
investment firm where the spouse is subject to
comparable preclearance requirements;
ii. The account is under the exclusive discretion of an
outside money manager; or
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iii. Any other situation where a waiver of preclearance is
appropriate.
A certificate of waiver from preclearance is available at the discretion of the
Ethics Committee. All accounts receiving a certificate of waiver from
preclearance must apply for a 407 letter. Transactions occurring in accounts
which have obtained a waiver from preclearance are not exempt from the quarterly
reporting requirement.
Specific Rules and Restrictions Applicable to all Employees
The following rules and restrictions are applicable to all Employees (including
Access Persons, Investment Personnel and Portfolio Managers):
a. Every Employee must file by the seventh day of the month
following the end of each quarter with the individual
designated by the Ethics Committee a confidential Personal
Transaction Report for the immediately preceding quarter (Form
1: Quarterly Personal Transaction Report). Each report must
set forth every Reportable Transaction for any Personal
Account in which the Employee has any Beneficial Interest.
In filing the reports for accounts within these rules please
note:
i. You must file a report every quarter whether or not
there were any Reportable Transactions. All
Reportable Transactions should be listed if possible
on a single form. For every Security listed on the
report, the information called for in each column
must be completed by all reporting individuals.
ii. Reports must show sales, purchases, or other
acquisitions, or dispositions, including gifts,
exercise of conversion rights and the exercise or
sale of subscription rights. Approved Personal
Transaction Preclearance Forms must be attached for
all applicable transactions. Reinvestment of
dividends (but not additional share purchases)
through dividend reinvestment plans of publicly held
companies need be indicated only on the line provided
above PURCHASES on the reverse side of the report.
iii. Quarterly reports on family and other accounts that
are fee-paying firm clients need merely list the
Scudder Kemper account number under Item #1 on Page 1
of the report; these securities transactions do not
have to be itemized.
iv. Employees may not purchase securities issued as part
of an initial public offering until three business
days after the public offering date (i.e., the
settlement date), and then only at the prevailing
market price. In addition, employees may not
participate in new issues of municipal bonds until a
CUSIP number has been identified.
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b. Employees are not permitted to serve on the boards of publicly
traded companies unless such service is approved in advance by
the Ethics Committee or its designee on the basis that it
would be consistent with the interests of the Firm. In the
case of Investment Personnel service on the board of a public
company must be consistent with the interests of the Fund with
which the Investment Personnel is associated as well as the
shareholders of such Fund, and the Investment Personnel must
be isolated from participating in investment decisions
relating to that company. See Part 7: Fiduciary and Corporate
Activities for further detail on the approval process.
c. For purposes of this Code, a prohibition or requirement
applicable to any given person applies also to transactions in
securities for any of that person's Personal Accounts,
including transactions executed by that person's spouse or
relatives living in that person's household, unless such
account is specifically exempted from such requirement by the
Ethics Committee or its designee.
d. Employees may not purchase or sell securities on the
Restricted List absent a special exception from the Legal
Department. Employees may not disclose the identities of
issuers on the Restricted List to others outside the firm.
Please See Part 3: Insider Trading, which is incorporated by
reference.
Specific Rules and Restrictions Applicable to all Access Persons
a. Access Persons are subject to each of the foregoing rules and
restrictions applicable to Employees.
b. Access Persons may not purchase or sell a "private placement"
security without the prior written approval of the Ethics
Committee or its designee and, in the case of Portfolio
Managers and research analysts, the additional approval of
their departmental reviewer (see Form 3: Special Preclearance
Form). Typically, a purchase of a private placement will not
be approved where any part of the offering is being acquired
by a client.
c. All Access Persons must disclose promptly to the Ethics
Committee or its designee the existence of any Personal
Account and must direct their brokers to supply duplicate
confirmations of all Reportable Transactions and copies of
periodic statements for all such accounts to an individual
designated by the Ethics Committee. (Use Form 5: Affiliated
Persons Letter.) These confirmations will be used to check for
conflicts of interest by comparing the information on the
confirmations against the Firm's pre-clearance records (see
sub-section (f) below) and quarterly Personal Transaction
Reports.
d. All Access Persons are required to "pre-clear" their personal
transactions with the Ethics Committee's designee. (Use Form
2: Preclearance Form.) If circumstances are such that the Firm
lacks the ability to preclear a particular transaction,
permission to execute that transaction will not be granted.
Submissions for request of trade approval must be submitted no
later than 3:30pm. If preclearance is granted, the Access
Person has until the end of the day preclearance is granted to
execute his or her trade. After such time the
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Access Person must obtain preclearance again. (Limit orders
which have been precleared and placed within this time limit
need not be precleared on subsequent days so long as the terms
of the order are not changed.) Prior approval is not required
for the exercise of rights, the rounding out of fractional
shares and receipt of stock dividends or stock splits.
Similarly, prior approval is not required for transactions in
shares of registered open-end investment companies (except in
the case of a Portfolio Manager who wishes to purchase or sell
shares of his/her Fund when the Fund is other than a money
market fund) and U.S. Government securities transactions.
e. Access Persons may not purchase any Security where the
investment rating is upgraded to "Buy" (or any Security added
to the Investment Universe with a "Buy" rating until two weeks
after the date of the rating change or addition. (See SP&P
#31-5 regarding Price Rating System.)
f. Access Persons may not sell any Security where the investment
rating is downgraded to "Unattractive" until two weeks after
the date of the rating change.
g. Access Persons may not purchase securities that are added to
the PIC Universe until two weeks after the date of the
addition.
h. In the event that an Access Person desires to trade less than
$10,000 of a Security that has a market capitalization of at
least $5 billion, pre-clearance will be granted absent special
circumstances. (However, please note that even trades falling
within this de minimus exception must be pre-cleared with the
Ethics Committee or its designee.)
i. No Access Person will receive approval to execute a securities
transaction when any client has a pending "buy" or "sell"
order in that same (or a related) Security until that order is
executed or withdrawn. Examples of related securities include
options, warrants, rights, convertible securities and American
Depository Receipts, each of which is considered "related" to
the Security into which it can be converted or exchanged.
j. Within 10 days of the commencement of employment (or within 10
days of obtaining Access Person status) all Access Persons
must disclose all holdings of securities and/or derivatives in
which they have a Beneficial Interest (and indicate which of
those holdings are private placements). Access Persons must
file an initial report even if they have no holdings. Holdings
in direct obligations of the U.S. Government and mutual (i.e.,
open-end) funds other than Scudder Kemper Funds need not be
listed.
k. Access Persons shall submit an Annual Statement of Securities
Holdings as part of the annual ethics questionnaire. The
Annual Statement of Securities Holdings shall only include
holdings that are not received by the Legal Department in the
form of duplicate statements.
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Specific Rules and Restrictions Applicable to Investment Personnel
a. Investment Personnel are subject to each of the foregoing
rules and restrictions applicable to Employees and Access
Persons.
b. Investment Personnel are prohibited from profiting from the
buying and selling, or selling and buying, of the same (or
related) securities within a 60 calendar-day period.
c. Investment Personnel who hold a privately placed Security of
an issuer whose securities are being considered for purchase
by a client must disclose to their departmental reviewer that
preexisting interest where they are involved in the
consideration of the investment by the client (using Form 3:
Special Transaction Preclearance Form). The client's purchase
of such securities must be approved by the relevant
departmental reviewer.
d. Research analysts are required to obtain special preclearance
(using Form 3: Special Transaction Preclearance Form) and
approval from their supervisor prior to purchasing or selling
a Security in an industry or country he or she follows.
Specific Rules and Restrictions Applicable to Portfolio Managers
a. Portfolio Managers are subject to each of the foregoing rules
and restrictions applicable to Employees, Access Persons and
Investment Personnel.
b. Portfolio Managers may not buy or sell a Security within seven
calendar days before and after a portfolio that he or she
manages trades in that Security.
c. When a Portfolio Manager wants to sell from his or her
Personal Account securities held by his or her clients, the
Portfolio Manager must receive prior written approval from the
Ethics Committee or its designee (Using Form 3) before acting
for the Personal Account. The Portfolio Manager must explain
his or her reasons for selling the securities.
d. When a Portfolio Manager wants to purchase for a Personal
Account a Security eligible for purchase by one of his or her
clients, the Portfolio Manager must receive prior written
approval from the Ethics Committee or its designee (Using Form
3) before acting for the Personal Account. The Portfolio
Manager must explain his or her reasons for purchasing the
securities.
e. A Portfolio Manager may not engage in short sales other than
"short sales against the box" for which both Regular and
Special Preclearance are required.
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General
a. Apart from these specific rules, purchases and sales should be
arranged in such a way as to avoid any conflict with clients
in order to implement the intent of this Code. Any attempt by
an employee to do indirectly what this Code is meant to
prohibit will be deemed a direct violation of the Code. If
there is any doubt whether you may be in conflict with
clients, particularly with respect to securities with thin
markets, you should check before buying or selling with the
Ethics Committee or its designee.
b. Hardship exceptions may be granted, in the sole discretion of
the Ethics Committee or its designee, with respect to certain
provisions of this Code in rare instances where unique
circumstances exist.
c. The Ethics Committee or its designee, on behalf of the Firm,
will report annually to each Scudder Kemper Fund's board of
directors concerning existing procedures and any material
changes to those procedures as well as any instances requiring
significant remedial action during the past year which relate
to that Fund.
d. Access Persons are permitted to maintain Margin Accounts.
Nonetheless, sales by Access Persons pursuant to margin calls
must be precleared in accordance with standard preclearance
procedures.
Excessive Trading
The firm believes that it is appropriate for its members to participate in the
public securities markets as part of their overall personal investment programs.
As in other areas, however, this should be done in a way that creates no
potential conflicts with the interests of our clients or our firm. Further, it
is important that members recognize that otherwise appropriate trading, if
excessive (measured in terms of frequency, complexity of trading programs or
numbers of trades), or if conducted during work-time or using firm resources,
can give rise to conflicts of a different category such as by distracting time,
focus, and energy from our efforts on behalf of our clients or by exceeding a
reasonable standard of firm accommodation of members' basic personal needs.
Accordingly, personal trading rising to such dimension as to create this
possibility is not consistent with the Code of Ethics, should be avoided, and
will not be approved. This provision is consistent with Group policies and by
Zurich Basics, which sets out the Group's core values and basic principles.
Disgorgement; Other Penalties
Any profits realized from a transaction that was not precleared or from a
transaction that otherwise violates a provision of this Code will be disgorged
to an appropriate charity. The Ethics Committee, in its discretion, may waive
disgorgement in exceptional circumstances. The Ethics Committee also reserves
the right to impose other penalties for violations of the Code, including
requiring reversal of a trade, fines, suspension of trading privileges and,
under the most serious of violations, termination of employment.
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Part 3: Insider Trading
I. Introduction
Employees may not transact in a security while in possession of material,
nonpublic information relating to the issuer of the security. This prohibition
applies to trading on behalf of client accounts and personal accounts. In
addition, employees may not convey material, nonpublic information about public
traded issuers to others outside the company.
SP&P 16 -11B sets forth the company policy on Insider Trading, and is
incorporated into the Code of Ethics by reference.
II. General guidelines
Employees may not transact in a security, on behalf of a client account or a
personal account, while in possession of material, nonpublic information
concerning the issuer of the security.
a. Employees who receive information which they believe may be
material and nonpublic are required to contact the Legal
Department immediately. In such circumstances, employees
should not share the information with other employees,
including supervisors. Employees may not share material,
nonpublic information with others outside the firm.
b. Employees may not purchase or sell securities on the
Restricted List absent a special exception from the Legal
Department. Employees may not disclose the identities of
issuers on the Restricted List to others outside the firm.
c. Employees may not solicit material, nonpublic information from
officers, directors or employees of public issuers.
d. Employees may not knowingly transact in securities prior to
trades made on behalf of clients, or prior to the publication
of research relating to the security.
e. Employees may not cause nonpublic information about a security
to be passed across a firewall.
III. Definitions
Material information is information that a reasonable investor would find
relevant to making an investment decision. Any information which if announced to
the public, would likely cause a change in the price of a security, is likely to
be material.
The following types of information are likely to be material: earnings, mergers
and acquisitions, dividends and special dividends, product developments,
licenses, changes in management, major litigation or regulatory action, and/or
actions by prominent investors.
Nonpublic information is information that has not been disclosed to the public.
Information available in newspapers, magazines, radio, television, and/or news
services is generally public information.
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Restricted List is a document disseminated by the Legal Department setting forth
securities which employees may not buy and/or sell for personal and client
accounts.
A firewall is a procedure designed to prevent the misuse of material, nonpublic
information received by the firm in the course of its business. Employees with
questions concerning firewall procedures and their applicability should contact
the Legal Department for further guidance. SP&P 16 -11C sets forth the company
policy on Firewall Procedures, and is incorporated into the Code of Ethics by
reference.
Part 4: Confidentiality
Our obligation as fiduciaries to act at all times in our clients' best interests
requires that we share information concerning our clients -- including
particularly information concerning their identities, holdings and account
transactions -- with those outside the Firm only on a "need to know" basis.
Accordingly, no member of the organization may discuss with, or otherwise inform
others of, the identity of any client, or any actual or contemplated transaction
for the account of a client, except in the performance of employment duties or
in an official capacity and then only for the benefit of the client, and in no
event for a direct or indirect personal benefit.
Part 5: Proprietary Rights of the Firm
When a member of the organization leaves the firm, for whatever reason, certain
business principles and procedures should be observed. Some are obvious and
inherent in the basic ethical relationship between any person and his or her
firm. In our case, there are many additional constraints as a result of our
being a confidential fiduciary in a field involving special ethical, regulatory
and professional considerations.
By way of background, the firm does not wish to deter any individuals from
furthering their careers, if they think their situation can be improved with
another firm. But if any member of the organization does move on to another
firm, he or she does so subject to those constraints.
The collective efforts of everyone at Scudder Kemper have contributed over a
period of years to what our firm is today. This includes our recognized
reputation as professional investors with a high sense of personal integrity and
ethics. Many persons have contributed to the investment product we offer and
have participated in the development of our roster of existing and prospective
clients. The central principle is that the client has retained the firm, not any
individual. Members of the firm should also understand that our clients and our
employees are central to the value of the firm. Accordingly, for at least six
quarters after the departure (unless a longer period has been agreed to),
departing members of the firm may not solicit clients to retain, or other firm
employees to join, another investment management firm.
Any member of the organization must recognize that these elements of our
business are the property of the firm and its clients. In addition, the firm has
certain obligations not to disclose the confidential and proprietary information
of third party suppliers. None of such materials
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or information may be removed from the firm or used in any way outside of
Scudder Kemper either during or after association with the firm.
In brief, the actions of anyone in the organization or of any departing member
of the organization are expected to be consistent with the spirit and intent of
this memorandum which reasserts the fact that no one of us can take away, use or
otherwise make available to a third party what belongs to the firm or its
supplier.
For example, the following items are representative of the property of the firm
or its suppliers and are not to be removed whether they are original documents,
copies, tapes or reproductions of any kind:
o Names, addresses, telephone numbers and other client contact
and correspondence procedures.
o Records and files of our clients' accounts including the
computer database.
o Account operational procedures and instructions.
o Asset listings for clients and prospects including cost
prices, dates of acquisition and the like.
o All firm research memoranda, procedures and files, including
drafts thereof, as well as procedures, notes or tapes of
research interviews, discussions, annual reports and company
releases, brokers' reports, outside consultants' reports and
any other material pertaining to investments.
o All operating memoranda such as Standard Policy and Procedures
memoranda, operations manuals, procedures and memoranda, and
compliance checklists, manuals, procedures and memoranda.
o All computer software programs, databases and related
documentation pertaining to account or research operations,
procedures or controls including access to and use of such
programs.
o Presentation materials (including drafts, memoranda and other
materials related thereto) prepared for marketing purposes or
client meetings, including computer software programs and
documentation of third party suppliers.
o All information pertaining to investment counsel and fund
prospects including lists and contact logs.
o Account performance data for all accounts which have been or
are under the supervision of the firm.
o Internal analyses, management information reports and
worksheets such as marketing and business plans, profit margin
studies, and compensation reviews.
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These examples are only illustrative and not intended as all inclusive. In
addition, you are reminded of our long and strong tradition of confidentiality
with respect to client affairs and the confidential information of third party
suppliers and the representations we make to our clients and our suppliers in
this regard.
In order to maintain the professional nature of the firm, we have an obligation
to protect vigorously the rights of our clients and the firm. The firm may
enforce these rights pursuant to appropriate judicial proceedings.
Alternatively, the firm, in its discretion, may initiate proceedings before the
American Arbitration Association in order to resolve any controversy or claim it
may have arising out of or relating to this policy, or breach of it, and
judgment on an award rendered by the arbitrator may be entered in any court
having jurisdiction.
Part 6: Gifts and Entertainment
I. Overview
It is appropriate for employees to maintain friendly but professional
relationships with persons with whom Scudder Kemper conducts its business. These
business counterparts may include persons who are associated with Scudder
Kemper's vendors, contractors, providers of service, and members of the
investment community. It is appropriate for employees to give and/or receive
gifts, business meals and/or entertainment from such business counterparts,
provided that they are not excessive in value or frequency. The good judgment of
our employees and their supervisors is of paramount importance in ensuring
compliance with this provision.
SP&P 16-11A sets forth the company policy on Gifts and Entertainment, and is
incorporated into the Code of Ethics by reference.
II. General Guidelines
a. Employees may not accept gifts that are excessive in value or
frequency.
b. The following types of transactions should be approved by a
supervisor using Form 6 (The Scudder Kemper Gift Form; See
Section III):
i. Gifts valued in excess of $100;
ii. Business meals valued in excess of $200; and
iii. Entertainment valued in excess of $300.
c. Invitations which involve the payment of substantial expenses
generally should be avoided (See SP&P 16-2A). Under most
circumstances lodging and transportation charges should be
considered the obligation of Scudder Kemper.
d. The frequency of invitations should also be taken into
account, especially entertainment. Employees generally should
not accept more than three invitations a year from any single
individual, group or organization, subject to
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approval from a supervisor.
e. When analysts and product leaders accept broker invitations to
research and investment meetings, an effort should be made to
use firms on our "Approved List" or those which are bona fide
candidates for the list. It is not good business practice to
accept assistance and invitations from firms with which we are
not likely to do business.
f. Employees may not accept gifts of cash. Employees may not
accept gifts of favorable rates on financial transactions such
as loans or brokerage commissions.
III. Reporting and Supervision
As described above, gifts valued at over $100 and the other items outlined in
II(b) hereof, must be approved by a supervisor. The supervisor must have a
corporate title of Managing Director or Senior Vice President, and must be in
the same department as the employee receiving the gift. The Scudder Kemper Gift
Form (Form 6) must be completed within ten days of receipt of the gift.
Completed gift forms are sent to Carol Beckett, at 345 Park Avenue, NY, NY
10154. In addition, gifts subject to Form 6 must be reported on the Quarterly
Personal Transaction Report.
Part 7: Fiduciary and Corporate Activities
In many fiduciary and corporate activities, members of the organization are, or
will become, engaged in responsible duties involving the expenditure of time and
the application of information and experience which properly belong to the firm
or are derived from the Scudder Kemper relationship. With certain exceptions
referred to below, any compensation or profits from these activities are,
accordingly, considered to be Scudder Kemper's income.
The Ethics Committee must give written approval to all existing or prospective
relationships and activities as described below, and no new relationship should
be initiated without written authorization on Form 7: Request For Approval of
Fiduciary, Corporate or Other Outside Activity. In those instances when approval
of a prospective fiduciary relationship, e.g., executor or trustee, has been
given and the individual subsequently is in a position to qualify and act in the
fiduciary capacity, that person is required to reapply for approval if the
character of the activity changes. The same procedures should be followed as
those for the approval of any fiduciary activity except that reference should be
made to the earlier obtained approval under "Salient Facts" on the approval
form.
Executorships
The duties of an executor are often arduous, time consuming and, to a
considerable extent, foreign to our business. As a general rule, Scudder Kemper
wishes to discourage acceptance of executorships by members of the organization.
However, business considerations or family relationships may make it desirable
to accept executorships under certain wills. In these instances follow the
procedures set forth in SP&P #16-15, Acting As Executor Under A Client's Will.
In all cases, it is necessary for the individual to have the written
authorization
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of the firm to act as an executor.
When members of the organization accept executorships under clients' wills, the
organization has consistently held to the belief that these individuals are
acting for Scudder Kemper and that fees received for executors' services
rendered while associated with the firm are exclusively Scudder Kemper income.
In such instances, the firm will indemnify the individual, and the individual
will be required at the time of qualifying as executor to make a written
assignment to the firm of any executor's fees due under such executorship.
Copies of this assignment and Scudder Kemper's authorization to act as executor
are to be filed in the client's file.
Generally speaking, it is not desirable for members of the organization to
accept executorships under the wills of non-clients. Normally, however,
authorization will be given in the case of executorships for members of an
individual's immediate family assuming that arrangements for the anticipated
work load can be made without undue interference with the individual's
responsibilities to Scudder Kemper. (For example, this may require the
employment of an agent to handle the large amount of detail which is usually
involved.) In such a case, the firm would expect the individual to retain the
commission. There may be other exceptions which will be determined by the facts
of each case. All such existing or prospective relationships should be reported
in writing.
Trusteeships
It is often desirable for members of the organization to act individually as
trustees for clients' trusts. Such relationships are not inconsistent with the
nature of our business. As a general rule, Scudder Kemper does not accept
trustee's commissions where it acts as investment counsel. As in the case of
executorships, all trusteeships must have the written approval of the firm.
It is our standard practice to indemnify those individuals who act as trustees
for clients' trusts at the request of the firm. In this connection, the
individual member of the organization acting as a trustee will be asked to agree
not to claim or accept trustee's commissions for acting. This applies to trusts
which employ Scudder Kemper as investment counsel or those which are invested in
one or more of the Funds administered by Scudder Kemper.
It is recognized that individuals may be asked to serve as trustees of trusts
which do not employ Scudder Kemper. As in the case of executorships, the firm
will normally authorize individuals to act as trustees for trusts of their
immediate family. Other non-client trusteeships can conflict with our clients'
interests so that acceptance of such trusteeships will be authorized only in
unusual circumstances.
Custodianships for Minors
It is expected that most custodianships will be for minors of an individual's
immediate family. These will be considered as automatically authorized and do
not require written approval of the firm. However, the written approval of
Scudder Kemper is required for all other custodianships for minors.
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Directorships and Consultant Positions in Business Corporations
Occasionally, members of the organization are asked to serve as directors or
consultants in business organizations. As a general policy, Scudder Kemper
considers it inadvisable for such individuals to serve in these capacities. No
such position may be accepted without the written authorization of the Ethics
Committee or its designee. In the exceptional instances where such authorization
is granted, the fees or other income resulting from such a relationship are to
be turned over to Scudder Kemper (unless the firm decides otherwise) to
compensate it for the resources made available. Scudder Kemper reserves the
right to require that any member of the organization relinquish any outside
business connection when it believes that such connection is unduly time
consuming or conflicts with the interests of the firm or its clients.
Public and Charitable Positions
Scudder Kemper has consistently encouraged members of the organization to take
part in community activities and to take an active role in public and charitable
organizations. The firm expects that when accepting such duties, members of the
organization will consider possible conflicts of interest with our business as
well as the demands that such positions make upon their time. Several examples
of possible conflicts might be helpful.
When agreeing to serve in a public or charitable position, a member of the
organization should clarify in advance in writing that he or she will not
provide free continuous investment advice and management. This should be made
particularly clear where Investment Committee responsibilities are considered.
Serving without compensation on the Investment Committee of a charity which
might appropriately employ Scudder Kemper would ordinarily not be in our best
interest and prior written approval is required.
Another example of a possible conflict which should be avoided arises when a
charity is involved in fund raising. Our work gives us access to detailed
knowledge of each client's capacity to contribute and is compounded by the close
relationship which should exist between consultant and client. For any member of
the organization in the course of a charitable solicitation to take advantage of
this confidential relationship -- or even to seem to do so -- would be
unprofessional. Even under the best circumstances, the solicitation of a client
by a member of the organization is awkward and discouraged.
Members of the organization should also make it clear in writing to the public
or charitable organization that they will not participate in any search or
selection process for a future investment adviser. It is expected that the
participation of a member of the Scudder Kemper organization in a charitable
organization will not preclude the firm from being a candidate for employment as
investment counsel to that organization.
Outside Activities
The foregoing does not cover all situations in which a member of the
organization may be in a position to realize financial gain which should be
treated as belonging to Scudder Kemper. It is expected that opportunities for
substantial compensation or profit from sources outside of the firm may, for
example, be offered to a member of the organization by reason of his association
with the firm or because of his investment and financial skill or experience.
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Scudder Kemper reserves the right to decide if such compensation or profit
should be accepted and, if accepted, whether or not it should be turned over to
Scudder Kemper. All such cases must be reported promptly in writing for Ethics
Committee review and before they are operative.
New Employees
It is desirable that any fiduciary or corporate activities of a prospective
employee be reviewed by Scudder Kemper prior to the conclusion of arrangements
for employment. However, if such activities have not been reported prior to
employment, they should be reported in writing as promptly as possible
thereafter. It is recognized that there may be justification for treating such
activities which ante-date the individual's association with the firm on a
different basis than might otherwise apply. However, Scudder Kemper reserves the
right to make what it considers an appropriate determination in each case. It
also reserves the right to require that any employee give up any fiduciary or
corporate activity which it finds in conflict with the best interests of the
firm or any of its clients.
Written Approval
Where written approval is required, Form 7 should be filed with the Ethics
Committee. A separate form should be filed for each trust, executorship and the
like. Note that once an activity has been approved, no additional requests for
approval need be filed unless the character of the activity changes, e.g., if a
member of the organization has obtained approval to be named as a prospective
executor or trustee, that individual should submit a new request to qualify and
serve in this capacity by resubmitting a new Form 7 for review.
Part 8: External Communications
In our sales, marketing, client reporting and corporate communications
activities, the Firm's products, services, capabilities, and past and potential
accomplishments must be presented fairly, accurately and clearly. All marketing
materials must be reviewed by the Global Compliance Group in accordance with
SP&P #12-7. All press interviews must be cleared in advance by Public Relations.
Reports to clients, including client account valuation and performance data,
must be fair.
Part 9: Reporting Apparent Violations
Scudder Kemper believes that maintaining a strong compliance culture is in the
best interest of the firm and its clients, in that it helps both to maintain
client and employee confidence, and to avoid the costs (both reputational and
monetary) associated with compliance violations. While reducing compliance
violations to a minimum is our goal, realistically speaking, violations may
occur from time to time in an organization as large as ours. When violations
occur, it is important that they be dealt with immediately by the appropriate
members of the organization. We encourage all Scudder Kemper employees to report
apparent compliance violations to the Legal Department. Violations that go
unreported have the potential to cause far more damage than violations that are
taken care of immediately upon discovery.
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It is extremely important that apparent compliance violations be reported
through the appropriate channels. The Legal Department should be contacted in
all cases except cases involving potential violations of Human Resources
policies, which should be reported directly to Human Resources. While resolving
apparent compliance violations should virtually always involve the management of
the business unit involved, it is not necessarily appropriate (nor is it
required) that an employee report apparent violations to his or her manager, as
well as to the Legal Department.
Reports of apparent compliance violations will be treated confidentially to the
fullest extent possible. In no event will the firm tolerate retaliation against
persons who report apparent compliance violations. We realize that employees may
lack the training to distinguish actual from apparent compliance violations, and
accordingly, the fact that a reported incident proves, after investigation, not
to have involved a compliance violation will not result in any sanction against
the reporter, provided that the report was made in good faith.
Part 10: Condition of Employment or Service
Compliance with the Code of Ethics is a condition of employment or continued
affiliation with Scudder Kemper and the Scudder Kemper Funds, and conduct not in
accordance shall constitute grounds for actions including termination of
employment or removal from office.
Employees must certify annually that they have read and agree to comply in all
respects with this Code of Ethics and that they have disclosed or reported all
personal transactions it requires to be disclosed or reported. (See Form 4:
Annual Acknowledgement of Obligations Under Code of Ethics). In addition, each
year every member of the organization is required to file with the Legal
Department a complete list of all fiduciary, corporate, and other relationships
of the nature described in Part 7 above. The report is titled Form 8: Annual
Review of Personal Activities and is attached to this memorandum.
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