<DOCUMENT>
<TYPE>485BPOS
<SEQUENCE>1
<FILENAME>ptc-vli.txt
<DESCRIPTION>485B FILING FOR SCUDDER VARIABLE SERIES I
<TEXT>
Filed with the Securities and Exchange Commission on April 27, 2001.
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. 31 / X /
And/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
Amendment No. 35 / 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
Zurich Scudder 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, 2001 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 Series I
formerly Scudder Variable Life Investment Fund
o Balanced Portfolio
o Bond Portfolio
o Capital Growth Portfolio
o Global Discovery Portfolio
o Growth and Income Portfolio
o Health Sciences Portfolio
o International Portfolio
o Money Market Portfolio
o 21st Century Growth Portfolio
Prospectus
May 1, 2001
This prospectus should be read in conjunction with the variable life insurance
or variable annuity contract prospectus. 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 Balanced Portfolio 31 Buying and Selling Shares
6 Bond Portfolio 31 How the Portfolios Calculate Share Price
9 Capital Growth Portfolio 32 Distributions
12 Global Discovery Portfolio 32 Taxes
15 Growth and Income Portfolio 32 Marketing and Distribution Fees
18 Health Sciences Portfolio
20 International Portfolio
23 Money Market Portfolio
26 21st Century Growth Portfolio
29 Other Policies and Risks
30 The Investment Advisor
</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, and you could lose money by investing in them.
Please read this prospectus in conjunction with the prospectus for your variable
life insurance policy or variable annuity contract.
<PAGE>
Balanced Portfolio
The Portfolio's Main Investment Strategy
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 may invest up to 10% of total 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 risk of default.
Although the managers are 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.
The Main Risks of Investing in the Portfolio
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 risk 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 risk 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 a bond could decline in credit quality or go into default; this risk is
greater with junk and foreign bonds
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.
3
<PAGE>
Performance
While a portfolio's past performance isn't necessarily a sign of how it will do
in the future, it can be valuable for an investor to know.
The bar chart shows how the returns for the portfolio have varied from year to
year, which may give some idea of risk. The table shows average annual returns
for the portfolio and two broad-based market indices (which, unlike the
portfolio, do not have any fees or expenses). The performance of both the
portfolio and the indices varies over time. All figures on this page assume
reinvestment of dividends and distributions.
This information doesn't reflect charges and fees associated with the 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.
Annual Total Returns (%) as of 12/31 each year -- Balanced Portfolio
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1991 26.93
1992 6.96
1993 7.45
1994 -2.05
1995 26.67
1996 11.89
1997 24.21
1998 23.19
1999 15.32
2000 -2.02
2001 Total Return as of March 31: -6.35%
Best Quarter: 15.51%, Q4 1998 Worst Quarter: -5.95%, Q3 1998
Average Annual Total Returns (%) as of 12/31/2000
1 Year 5 Years 10 Years
--------------------------------------------------------------------------------
Portfolio -2.02 14.10 13.35
Index 1 -9.09 18.31 17.45
Index 2 -0.98 13.76 13.78
--------------------------------------------------------------------------------
Index 1: Standard & Poor's 500 Composite Stock Price Index (S&P 500), an
unmanaged capitalization-weighted index that includes 500 large-cap U.S. stocks.
Index 2: Standard & Poor's 500 Composite Stock Price Index (S&P 500) (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 advisor in 1993
o Joined the advisor 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 advisor in 1994
o Joined the portfolio team in 1999
4
<PAGE>
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance. 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 portfolio's annual report (see "Shareholder reports" on the back cover).
Balanced Portfolio
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $16.11 $15.21 $13.30 $11.61 $10.95
---------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) (a) .34 .35 .37 .34 .31
---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions (.62) 1.85 2.56 2.32 .95
---------------------------------------------------------------------------------------------------------------------------
Total from investment operations (.28) 2.20 2.93 2.66 1.26
---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.28) (.18) (.36) (.33) (.30)
---------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (2.16) (1.12) (.66) (.64) (.30)
---------------------------------------------------------------------------------------------------------------------------
Total distributions (2.44) (1.30) (1.02) (.97) (.60)
---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $13.39 $16.11 $15.21 $13.30 $11.61
---------------------------------------------------------------------------------------------------------------------------
Total Return (%) (2.02) 15.32 23.19 24.21 11.89
---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 190 199 162 118 88
---------------------------------------------------------------------------------------------------------------------------
Ratio of operating expenses (%) .54 .55 .56 .57 .60
---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 2.41 2.36 2.71 2.73 2.82
---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 127 98 74 43 68
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
5
<PAGE>
Bond Portfolio
The Portfolio's Main Investment Strategy
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 may invest in 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 manager typically weighs 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 manager uses analysis to look for bonds that,
for example, show improving credit.
The manager may favor different types of securities at different times, while
still maintaining variety in terms of the types of securities and issuers
represented.
The manager may adjust the portfolio's duration (a measure of sensitivity to
interest rate movements) but generally intends 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 risk of
default.
Although the manager is permitted to use various types of derivatives (contracts
whose value is based on, for example, indices, currencies or securities), the
manager doesn't intend to use them as principal investments and may not use them
at all.
The Main Risks of Investing in the Portfolio
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 risk 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 manager could be wrong in the 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.
6
<PAGE>
Performance
While a portfolio's past performance isn't necessarily a sign of how it will do
in the future, it can be valuable for an investor to know.
The bar chart shows how the returns for the portfolio 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 portfolio,
does not have any fees or expenses). The performance of both the portfolio and
the index varies over time. All figures on this page assume reinvestment of
dividends and distributions.
This information doesn't reflect charges and fees associated with the 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.
Annual Total Returns (%) as of 12/31 each year -- Bond Portfolio
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1991 17.61
1992 7.01
1993 12.38
1994 -4.79
1995 18.17
1996 2.82
1997 9.10
1998 6.57
1999 -0.95
2000 10.56
2001 Total Return as of March 31: 2.95%
Best Quarter: 6.32%, Q3 1991 Worst Quarter: -3.89%, Q1 1994
Average Annual Total Returns (%) as of 12/31/2000
1 Year 5 Years 10 Years
--------------------------------------------------------------------------------
Portfolio 10.56 5.53 7.61
Index 11.63 6.44 7.95
--------------------------------------------------------------------------------
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
Lead Portfolio Manager
o Began investment career in 1982
o Joined the advisor in 1993
o Joined the portfolio team in 1999
7
<PAGE>
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance. 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 portfolio's annual report (see "Shareholder reports" on the back cover).
Bond Portfolio
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $6.49 $6.88 $6.87 $6.73 $7.16
---------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) (a) .42 .42 .43 .44 .41
---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions .23 (.48) .01 .15 (.22)
---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .65 (.06) .44 .59 .19
---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.36) (.22) (.40) (.43) (.62)
---------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions -- (.11) (.03) (.02) --
---------------------------------------------------------------------------------------------------------------------------
Total distributions (.36) (.33) (.43) (.45) (.62)
---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $6.78 $6.49 $6.88 $6.87 $6.73
---------------------------------------------------------------------------------------------------------------------------
Total Return (%) 10.56 (.95) 6.57 9.10 2.82
---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 102 94 106 81 66
---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses (%) .58 .57 .57 .62 .61
---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 6.55 6.38 6.34 6.55 6.20
---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 288 86 115 56 85
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
8
<PAGE>
Capital Growth Portfolio
The Portfolio's Main Investment Strategy
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 $3 billion or more.
In choosing stocks, the portfolio manager looks for individual companies that
have competitive positions, prospects for consistent growth, exceptional
management and strong balance sheets.
The manager diversifies 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. The manager looks for securities
which may be undervalued due to factors the manager considers 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 manager believes 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 (i.e. BBB/Baa and above). The portfolio may also invest
up to 25% of its assets in short-term debt instruments. While the portfolio
invests mainly in U.S. stocks, it could invest up to 25% of total assets in
foreign equity securities.
Although the manager is permitted to use various types of derivatives (contracts
whose value is based on, for example, indices, currencies or securities), the
manager doesn't intend to use them as principal investments and may not use them
at all.
The Main Risks of Investing in the Portfolio
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 risk 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 focuses on 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 manager could be wrong in the 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.
9
<PAGE>
Performance
While a portfolio's past performance isn't necessarily a sign of how it will do
in the future, it can be valuable for an investor to know.
The bar chart shows how the 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 portfolio, does not have any fees or expenses). The performance of
both the portfolio and the index varies over time. All figures on this page
assume reinvestment of dividends and distributions.
This information doesn't reflect charges and fees associated with the 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.
Annual Total Returns (%) as of 12/31 each year -- Class A shares
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1991 39.55
1992 6.42
1993 20.88
1994 -9.67
1995 28.65
1996 20.13
1997 35.76
1998 23.23
1999 35.23
2000 -9.90
2001 Total Return as of March 31: -17.51%
Best Quarter: 25.80%, Q4 1998 Worst Quarter: -15.48%, Q3 1998
Average Annual Total Returns (%) as of 12/31/2000
Since Class B
1 Year Inception* 5 Years 10 Years
--------------------------------------------------------------------------------
Class A -9.90 -- 19.61 17.71
Class B -10.13 16.81 -- --
Index -9.09 14.68 18.31 17.45
--------------------------------------------------------------------------------
Index: Standard & Poor's 500 Composite Stock Price Index (S&P 500) 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 Manager
The following person handles the day-to-day management of the portfolio:
William F. Gadsden
Lead Portfolio Manager
o Began investment career in 1981
o Joined the advisor in 1983
o Joined the portfolio team in 1989
10
<PAGE>
Financial Highlights
These tables are designed to help you understand the portfolio's financial
performance. The figures in the first part of each 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 portfolio's annual report (see "Shareholder reports" on the back cover).
Capital Growth Portfolio -- Class A (b)
The following tables include selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $29.13 $23.95 $20.63 $16.50 $15.08
---------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) (a) .08 .10 .16 .18 .19
---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions (2.63) 7.64 4.46 5.39 2.68
---------------------------------------------------------------------------------------------------------------------------
Total from investment operations (2.55) 7.74 4.62 5.57 2.87
---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.07) (.07) (.17) (.19) (.19)
---------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (3.44) (2.49) (1.13) (1.25) (1.26)
---------------------------------------------------------------------------------------------------------------------------
Total distributions (3.51) (2.56) (1.30) (1.44) (1.45)
---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $23.07 $29.13 $23.95 $20.63 $16.50
---------------------------------------------------------------------------------------------------------------------------
Total Return (%) (9.90) 35.23 23.23 35.76 20.13
---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 1,126 1,254 901 676 440
---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses (%) .49 .49 .50 .51 .53
---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) .30 .43 .75 .96 1.27
---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 55 66 55 42 66
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Capital Growth Portfolio -- Class B
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998 1997(c)
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $29.05 $23.92 $20.61 $17.54
---------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) (a) .01 .04 .11 .08
---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions (2.62) 7.62 4.45 3.08
---------------------------------------------------------------------------------------------------------------------------
Total from investment operations (2.61) 7.66 4.56 3.16
---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income -- (.04) (.12) (.09)
---------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (3.44) (2.49) (1.13) --
---------------------------------------------------------------------------------------------------------------------------
Total distributions (3.44) (2.53) (1.25) (.09)
---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $23.00 $29.05 $23.92 $20.61
---------------------------------------------------------------------------------------------------------------------------
Total Return (%) (10.13) 34.88 22.94 18.00**
---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 1.16 1.28 .83 .55
---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses (%) .74 .74 .75 .75*
---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) .05 .18 .49 .64*
---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 55 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 sales of Class B shares) to
December 31, 1997.
* Annualized
** Not annualized
11
<PAGE>
Global Discovery Portfolio
The Portfolio's Main Investment Strategy
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, it generally
focuses on countries with developed economies (including the U.S.). As of
December 31, 2000, companies in which the portfolio invests had a market
capitalization of between $500 million and $5 billion.
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 generally look for companies that have
above-average potential for sustainable growth of revenue or earnings compared
to 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, seeking to identify stocks that may benefit
from them.
The managers may favor different securities 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 its price is
unlikely to go much higher, its fundamentals have deteriorated, other
investments offer better opportunities or in the course of adjusting its
emphasis on a country.
Other Investments
While the portfolio invests mainly in common stocks of small companies, it may
also invest up to 35% of its total assets in equities of large companies or in
debt securities.
Although the managers are 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
may not use them at all.
The Main Risks of Investing in the Portfolio
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 risk 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. In addition, changing currency rates could add to the
fund's investment losses or reduce its investment gains.
Compared to large company stocks, small and mid-size stocks tend to be more
volatile, in part because these companies tend to be less established 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.
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 a bond could decline in credit quality or go into default; this risk is
greater with foreign bonds
o derivatives could produce disproportionate losses
o at times, market conditions might make it 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.
12
<PAGE>
Performance
While a portfolio's past performance isn't necessarily a sign of how it will do
in the future, it can be valuable for an investor to know.
The bar chart shows how the 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 portfolio, does not have any fees or expenses). The performance of
both the portfolio and the index varies over time. All figures on this page
assume reinvestment of dividends and distributions.
This information doesn't reflect charges and fees associated with the 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.
Annual Total Returns (%) as of 12/31 each year -- Class A shares
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1997 12.38
1998 16.44
1999 65.88
2000 -5.29
2001 Total Return as of March 31: -19.91%
Best Quarter: 40.96%, Q4 1999 Worst Quarter: -17.25%, Q3 1998
Average Annual Total Returns (%) as of 12/31/2000
Since Class B Since Class A
1 Year Inception* Inception*
--------------------------------------------------------------------------------
Class A -5.29 -- 18.07
Class B -5.42 22.08 --
Index -2.28 7.89 7.43
--------------------------------------------------------------------------------
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 31, 1996 for Class A shares and May 31,
1997 for Class B shares.
In the bar 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 advisor in 1996
o Joined the advisor in 1968 o Joined the portfolio team in 1999
o Joined the portfolio team in 1996
13
<PAGE>
Financial Highlights
These tables are designed to help you understand the portfolio's financial
performance. The figures in the first part of each 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 portfolio's annual report (see "Shareholder reports" on the back cover).
Global Discovery Portfolio -- Class A (b)
The following tables include selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998 1997 1996(c)
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $13.18 $8.04 $7.08 $6.33 $6.00(d)
---------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) (a) (.03) (.06) (.03) (.03) (.01)
---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions (.62) 5.30 1.18 .81 .34
---------------------------------------------------------------------------------------------------------------------------
Total from investment operations (.65) 5.24 1.15 .78 .33
---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.11) -- (.12) (.02) --
---------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (.66) (.10) (.07) (.01) --
---------------------------------------------------------------------------------------------------------------------------
Total distributions (.77) (.10) (.19) (.03) --
---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $11.76 $13.18 $8.04 $7.08 $6.33
---------------------------------------------------------------------------------------------------------------------------
Total Return (%) (5.29) 65.88 16.44(e) 12.38(e) 5.50(e)**
---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 159 71 25 18 17
---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.28 1.63 1.79 1.79 2.32*
---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.28 1.63 1.72 1.50 1.50*
---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) (.25) (.66) (.40) (.44) (.13)*
---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 66 70 54 83 50*
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Global Discovery Portfolio -- Class B
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998 1997(f)
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $13.11 $8.01 $7.07 $6.20
---------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) (a) (.07) (.08) (.05) (.04)
---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions (.61) 5.28 1.18 .91
---------------------------------------------------------------------------------------------------------------------------
Total from investment operations (.68) 5.20 1.13 .87
---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.08) -- (.12) --
---------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (.66) (.10) (.07) --
---------------------------------------------------------------------------------------------------------------------------
Total distributions (.74) (.10) (.19) --
---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $11.69 $13.11 $8.01 $7.07
---------------------------------------------------------------------------------------------------------------------------
Total Return (%) (5.42) 65.63 16.18(e)14.03(e)**
---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 11 7 4 2
---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.53 1.88 2.04 2.00*
---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.53 1.88 1.98 1.75*
---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) (.52) (.91) (.69) (.89)*
---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 66 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 sales of Class B shares) to
December 31, 1997.
* Annualized
** Not annualized
14
<PAGE>
Growth and Income Portfolio
The Portfolio's Main Investment Strategy
The portfolio seeks long-term growth of capital, current income and growth of
income. The portfolio invests at least 65% of total assets in equities, mainly
common stocks. 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 choosing stocks for the portfolio, the managers consider both yield and other
valuation and growth factors, meaning that they focus the portfolio's
investments on securities of U.S. companies whose dividend and earnings
prospects are believed to be attractive relative to the portfolio's benchmark
index, the S&P 500. The portfolio may invest in dividend paying and non-dividend
paying stocks.
The managers use bottom-up analysis, looking for companies with strong prospects
for continued growth of capital and earnings.
The managers may favor securities from different industries and companies at
different times, while still maintaining variety in terms of the represented
industries and companies.
The portfolio normally will, but is not obliged to, sell a stock if its yield or
growth prospects are expected to be below the benchmark average. It may also
sell a stock when it reaches a target price or when the managers believe other
investments offer better opportunities.
Other Investments
While most of the portfolio's investments are common stocks, some may be other
types of equities, such as convertible securities and preferred stocks.
Although the managers are 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
may not use them at all.
The Main Risks of Investing in the Portfolio
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 risk 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.
15
<PAGE>
Performance
While a portfolio's past performance isn't necessarily a sign of how it will do
in the future, it can be valuable for an investor to know.
The bar chart shows how the 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 portfolio, does not have any fees or expenses). The performance of
both the portfolio and the index varies over time. All figures on this page
assume reinvestment of dividends and distributions.
This information doesn't reflect charges and fees associated with the 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.
Annual Total Returns (%) as of 12/31 each year -- Class A shares
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1995 31.74
1996 22.17
1997 30.47
1998 7.18
1999 5.80
2000 -2.10
2001 Total Return as of March 31: -10.69%
Best Quarter: 15.86%, Q2 1997 Worst Quarter: -12.58%, Q3 1998
Average Annual Total Returns (%) as of 12/31/2000
<TABLE>
<CAPTION>
Since Class B Since Class A
1 Year 5 Year Inception* Inception*
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A -2.10 12.09 -- 14.37
Class B -2.33 -- 8.62 --
Index -9.09 18.31 16.17 19.69
---------------------------------------------------------------------------------------------------------
</TABLE>
Index: Standard & Poor's 500 Composite Stock Price Index (S&P 500) 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 advisor in 1999
o Joined the advisor in 1983 o Joined the portfolio team in 1999
o Joined the portfolio team in 1994
16
<PAGE>
Financial Highlights
These tables are designed to help you understand the portfolio's financial
performance. The figures in the first part of each 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 (see "Shareholder reports" on the back cover).
Growth and Income Portfolio -- Class A (b)
The following tables include selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.96 $11.25 $11.48 $9.37 $7.98
---------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (a) .11 .22 .27 .27 .27
---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions (.33) .46 .54 2.47 1.46
---------------------------------------------------------------------------------------------------------------------------
Total from investment operations (.22) .68 .81 2.74 1.73
---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
---------------------------------------------------------------------------------------------------------------------------
Net investment income (.15) (.13) (.25) (.26) (.23)
---------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (.21) (.84) (.79) (.37) (.11)
---------------------------------------------------------------------------------------------------------------------------
Total distributions (.36) (.97) (1.04) (.63) (.34)
---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.38 $10.96 $11.25 $11.48 $9.37
---------------------------------------------------------------------------------------------------------------------------
Total Return (%) (2.10) 5.80 7.18 30.47 22.17
---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 185 200 184 157 91
---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses (%) .56 .55 .56 .58 .66
---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 1.06 2.01 2.41 2.54 3.14
---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 65 65 39 28 32
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Growth and Income Portfolio -- Class B
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998 1997(c)
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.93 $11.24 $11.47 $9.44
---------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (a) .09 .19 .25 .14
---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions (.33) .46 .54 2.02
---------------------------------------------------------------------------------------------------------------------------
Total from investment operations (.24) .65 .79 2.16
---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
---------------------------------------------------------------------------------------------------------------------------
Net investment income (.13) (.12) (.23) (.13)
---------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (.21) (.84) (.79) --
---------------------------------------------------------------------------------------------------------------------------
Total distributions (.34) (.96) (1.02) (.13)
---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $10.35 $10.93 $11.24 $11.47
---------------------------------------------------------------------------------------------------------------------------
Total Return (%) (2.33) 5.48 6.95 22.89**
---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 13 14 14 7
---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses (%) .81 .80 .79 .80*
---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) .81 1.76 2.20 2.13*
---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 65 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 sales of Class B shares) to
December 31, 1997.
* Annualized
** Not annualized
17
<PAGE>
Health Sciences Portfolio
The Portfolio's Main Investment Strategy
The portfolio seeks long-term growth of capital by investing at least 80% of
total assets in common stocks of companies in the health care sector. The
portfolio will focus on securities of U.S. companies but may also invest in
foreign companies; the companies may be of any size and commit at least half of
their assets to the health care sector, or derive at least half of their
revenues or net income from that sector. The industries in the health care
sector are pharmaceuticals, biotechnology, medical products and supplies, and
health care services.
In choosing stocks, the portfolio managers use a combination of three analytical
disciplines:
Bottom-up research. The managers look for individual companies with innovative,
cost-effective products and services, new tests or treatments, the ability to
take advantage of demographic trends, and strong management.
Growth orientation. The managers prefer companies that offer the potential for
sustainable above-average earnings growth and whose market value appears
reasonable in light of their business prospects.
Top-down analysis. The managers intend to divide the portfolio's holdings among
the industries in the health care sector, although, depending on their outlook,
they may increase or reduce the portfolio's exposure to a given industry.
The portfolio will normally sell a stock when it reaches a target price, when
its fundamental factors have changed, when the managers believe other
investments offer better opportunities or in the course of adjusting its
emphasis on a given health care industry.
Other Investments
While the fund invests mainly in common stocks, it may also invest up to 20% of
total assets in U.S. Treasury and agency and instrumentality debt securities.
Although the managers are 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
may not use them at all.
The Main Risks of Investing in the Portfolio
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 portfolios, the most important risk 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. The fact that the portfolio
concentrates its investments in the industries of the health care sector
increases this risk, because factors affecting that sector could affect
portfolio performance. For example, health care companies could be hurt by such
factors as rapid product obsolescence and the unpredictability of winning
government approvals.
Similarly, because the portfolio isn't diversified and can invest a larger
percentage of assets in a given company than a diversified portfolio, factors
affecting that company could affect portfolio performance. 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.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of companies, industries,
economic trends, geographical areas, or other matters
o growth stocks may be out of favor for certain periods
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, market conditions might make it hard to value some investments or
to get an attractive price for them
This portfolio may make sense for investors who are comfortable with higher
risks of a portfolio that focuses on an often volatile sector and are interested
in gaining exposure to the health care sector.
18
<PAGE>
Performance
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.
The Portfolio Managers
The following people handle the day-to-day management of the portfolio:
James E. Fenger Sally A. Yanchus
Lead Portfolio Manager o Began investment career in 1992
o Began investment career in 1984 o Joined the advisor in 1997
o Joined the advisor in 1984 o Joined the portfolio team in 2001
o Joined the portfolio team in 2001
Anne Carney
o Began investment career in 1988
o Joined the advisor in 1992
o Joined the portfolio team in 2001
19
<PAGE>
International Portfolio
The Portfolio's Main Investment Strategy
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 intend to divide the portfolio's holdings across industries and
geographical areas, although, depending on their outlook, they may increase or
reduce the portfolio's exposure to a given industry or area.
The portfolio will normally sell a stock when the managers believe its price is
unlikely to go much higher, its fundamentals have deteriorated, other
investments offer better opportunities or in the course of adjusting its
emphasis on a given country.
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.
Although the managers are 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
may not use them at all.
The Main Risks of Investing in the Portfolio
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 risk 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.
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. 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.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of industries, companies,
economic trends, geographical areas or other matters
o derivatives could produce disproportionate losses
o at times, market conditions might make it 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.
20
<PAGE>
Performance
While a portfolio's past performance isn't necessarily a sign of how it will do
in the future, it can be valuable for an investor to know.
The bar chart shows how the 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 portfolio, does not have any fees or expenses). The performance of
both the portfolio and the index varies over time. All figures on this page
assume reinvestment of dividends and distributions.
This information doesn't reflect charges and fees associated with the 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.
Annual Total Returns (%) as of 12/31 -- Class A shares
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1991 11.45
1992 -3.08
1993 37.82
1994 -0.85
1995 11.11
1996 14.78
1997 9.07
1998 18.49
1999 54.51
2000 -21.70
2001 Total Return as of March 31: -16.76%
Best Quarter: 29.06%, Q4 1999 Worst Quarter: -14.77%, Q3 1998
Average Annual Total Returns (%) as of 12/31/2000
<TABLE>
<CAPTION>
Since Class B
1 Year Inception* 5 Years 10 Years
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A -21.70 -- 12.41 11.40
Class B -21.89 10.88 -- --
Index -13.38 6.99 7.52 8.36
-------------------------------------------------------------------------------------------
</TABLE>
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 Carol L. Franklin
Lead Portfolio Manager o Began investment career in 1975
o Began investment career in 1985 o Joined the advisor in 1981
o Joined the advisor in 1993 o Joined the portfolio team in 1998
o Joined the portfolio team in 1997
Marc J. Slendebroek
Nicholas Bratt o Began investment career in 1989
o Began investment career in 1974 o Joined the advisor in 1994
o Joined the advisor in 1976 o Joined the portfolio team in 1999
o Joined the portfolio team in 1987
21
<PAGE>
Financial Highlights
These tables are designed to help you understand the portfolio's financial
performance. The figures in the first part of each 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 (see "Shareholder reports" on the back cover).
International Portfolio -- Class A (b)
The following tables include selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $20.34 $14.56 $14.11 $13.25 $11.82
---------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (a) .08 .12(e) .13 .14 .12
---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions (4.24) 7.17 2.29 1.04 1.60
---------------------------------------------------------------------------------------------------------------------------
Total from investment operations (4.16) 7.29 2.42 1.18 1.72
---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
---------------------------------------------------------------------------------------------------------------------------
Net investment income (.09) (.02) (.26) (.21) (.29)
---------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (1.83) (1.49) (1.71) (.11) --
---------------------------------------------------------------------------------------------------------------------------
Total distributions (1.92) (1.51) (1.97) (.32) (.29)
---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $14.26 $20.34 $14.56 $14.11 $13.25
---------------------------------------------------------------------------------------------------------------------------
Total Return (%) (21.70) 54.51 18.49 9.07 14.78
---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 720 874 509 427 726
---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses (%) .96 1.03 1.04 1.00 1.05
---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) .48 .76 .90 .94 .95
---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 79 86 71 61 33
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
International Portfolio -- Class B
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998 1997(c)
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $20.24 $14.51 $14.08 $13.76
---------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (a) .04 .08(e) .10 (.00)(d)
---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions (4.22) 7.14 2.29 .32
---------------------------------------------------------------------------------------------------------------------------
Total from investment operations (4.18) 7.22 2.39 .32
---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
---------------------------------------------------------------------------------------------------------------------------
Net investment income (.04) -- (.25) --
---------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (1.83) (1.49) (1.71) --
---------------------------------------------------------------------------------------------------------------------------
Total distributions (1.87) (1.49) (1.96) --
---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $14.19 $20.24 $14.51 $14.08
---------------------------------------------------------------------------------------------------------------------------
Total Return (%) (21.89) 54.13 18.28 2.33**
---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) .77 .69 .37 .35
---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses (%) 1.21 1.28 1.28 1.24*
---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) .23 .53 .69 (.00)(d)*
---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 79 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 sales 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
22
<PAGE>
Money Market Portfolio
The Portfolio's Main Investment Strategy
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
The Main Risks of Investing in the Portfolio
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 risk 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 risk 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 wrong 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.
23
<PAGE>
Performance
While a portfolio's past performance isn't necessarily a sign of how it will do
in the future, it can be valuable for an investor to know.
The bar chart shows how the returns for the portfolio have varied from year to
year, which may give some idea of risk. The table shows average annual returns
for the portfolio. The performance of the portfolio varies over time. All
figures on this page assume reinvestment of dividends and distributions.
This information doesn't reflect charges and fees associated with the 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.
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1991 5.81
1992 3.33
1993 2.54
1994 3.72
1995 5.65
1996 5.09
1997 5.25
1998 5.29
1999 4.99
2000 6.21
2001 Total Return as of March 31: 1.37%
Best Quarter: 1.66%, Q1 1991 Worst Quarter: 0.59%, Q2 1993
Average Annual Total Returns (%) as of 12/31/2000
1 Year 5 Years 10 Years
--------------------------------------------------------------------------------
6.21 5.37 4.78
--------------------------------------------------------------------------------
Seven-day yield as of December 31, 2000: 6.66%
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 advisor in 1996
o Joined the advisor in 1973 o Joined the portfolio team in 1999
o Joined the portfolio team in 1998
24
<PAGE>
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance. 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 portfolio's annual report (see "Shareholder reports" on the back cover).
Money Market Portfolio
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------------------
<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 .060 .049 .052 .051 .050
---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
---------------------------------------------------------------------------------------------------------------------------
Net investment income (.060) (.049) (.052) (.051) (.050)
---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $1.000 $1.000 $1.000 $1.000 $1.000
---------------------------------------------------------------------------------------------------------------------------
Total Return (%) 6.21 4.99 5.29 5.25 5.09
---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 121 179 148 103 98
---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses (%) .46 .43 .44 .46 .46
---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (%) 6.00 4.90 5.17 5.15 4.98
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
21st Century Growth Portfolio
formerly Small Company Growth Portfolio
The Portfolio's Main Investment Strategy
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, 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 primarily invest in companies that they believe offer the potential
for sustainable above-average earnings growth and whose market values appear
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
Although the managers are 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
may not use them at all.
The Main Risks of Investing in the Portfolio
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 risk factor with this portfolio is
how stock markets perform -- in this case, the small company portion of the U.S.
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 focuses on a given industry, any factor
affecting that industry could affect the value of portfolio securities. For
example, technology companies could be hurt by such factors as market
saturation, price competition, and rapid obsolescence. In addition, 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, market conditions might make it 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.
26
<PAGE>
Performance
While a portfolio's past performance isn't necessarily a sign of how it will do
in the future, it can be valuable for an investor to know.
The bar chart shows how the 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 portfolio, does not have any fees or expenses). The performance of
both the portfolio and the index varies over time. All figures on this page
assume reinvestment of dividends and distributions.
This information doesn't reflect charges and fees associated with the 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.
Annual Total Returns (%) as of 12/31-- Class A shares
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
2000 -22.39
2001 Total Return as of March 31: -23.77%
Best Quarter: 13.96%, Q1 2000 Worst Quarter: -22.74%, Q4 2000
Average Annual Total Returns (%) as of 12/31/2000
1 Year Since Inception*
--------------------------------------------------------------------------------
Class A -22.39 20.95
Class B -22.79 20.23
Index -22.44 2.23
--------------------------------------------------------------------------------
Index: Russell 2000 Growth Index, an unmanaged capitalization-weighted measure
of approximately 2,000 small U.S. stocks.
* The inception date for Class A and Class B shares is May 3, 1999. Index
comparison begins May 31, 1999.
The total returns in the table and bar chart 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:
Peter Chin Roy C. McKay
Lead Portfolio Manager o Began investment career in 1968
o Began investment career in 1969 o Joined the advisor in 1988
o Joined the advisor in 1973 o Joined the portfolio team in 1999
o Joined the portfolio team in 1999
27
<PAGE>
Financial Highlights
These tables are designed to help you understand the portfolio's financial
performance. The figures in the first part of each 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 (see "Shareholder reports" on the back cover).
21st Century Growth Portfolio -- Class A
The following tables include selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999(b)
------------------------------------------------------------------------------------------
<S> <C> <C>
------------------------------------------------------------------------------------------
Net asset value, beginning of period $10.55 $6.00(d)
------------------------------------------------------------------------------------------
Income (loss) from investment operations:
------------------------------------------------------------------------------------------
Net investment income (loss) (a) (.11) (.04)
------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions (2.20) 4.59
------------------------------------------------------------------------------------------
Total from investment operations (2.31) 4.55
------------------------------------------------------------------------------------------
Less distributions from:
------------------------------------------------------------------------------------------
Net realized gains on investment transactions (.12) --
------------------------------------------------------------------------------------------
Net asset value, end of period $8.12 $10.55
------------------------------------------------------------------------------------------
Total Return (%) (c) (22.39) 75.83**
------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) 26 15
------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.35 2.90*
------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.29 1.50*
------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) (1.06) (.95)*
------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 109 61
------------------------------------------------------------------------------------------
</TABLE>
21st Century Growth Portfolio -- Class B
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Years Ended December 31, 2000 1999(b)
------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $10.51 $6.00(d)
------------------------------------------------------------------------------------------
Income (loss) from investment operations:
------------------------------------------------------------------------------------------
Net investment income (loss) (a) (.13) (.06)
------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions (2.22) 4.57
------------------------------------------------------------------------------------------
Total from investment operations (2.35) 4.51
------------------------------------------------------------------------------------------
Less distributions from:
------------------------------------------------------------------------------------------
Net realized gains on investment transactions (.12) --
------------------------------------------------------------------------------------------
Net asset value, end of period $8.04 $10.51
------------------------------------------------------------------------------------------
Total Return (%) (c) (22.79) 75.17**
------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
------------------------------------------------------------------------------------------
Net assets, end of period ($ millions) --*** --***
------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.60 3.15*
------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.54 1.75*
------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) (1.31) (1.20)*
------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 109 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
*** Net assets less than one million.
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, the Board of Scudder Variable
Series I could change a portfolio's investment objective without seeking
shareholder approval.
o As a temporary defensive measure, each portfolio (except Bond Portfolio and
Capital Growth Portfolio) could shift up to 100% of its assets into
investments such as money market securities. This could prevent losses, but
would mean that the portfolio was not pursuing its goal.
o The portfolios may trade securities actively. This could raise transaction
costs and lower performance.
o The advisor establishes a debt security's credit quality when it buys a
security, using independent ratings, or for unrated securities, its own
credit determination. When ratings don't agree, a portfolio may use the
higher rating. If a security's credit quality falls, the advisor will
determine whether selling it would be in the portfolio's best interest.
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
objective.
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
advisor 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>
The Investment Advisor
The portfolios' investment advisor is Zurich Scudder Investments, Inc., 345 Park
Avenue, New York, NY. The advisor has more than 80 years of experience managing
mutual funds, and currently has more than $370 billion in assets under
management.
The advisor's asset management teams include investment professionals,
economists, research analysts, traders and other investment specialists located
in offices across the United States and around the world.
The advisor 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.
Portfolio Name Fee Paid
--------------------------------------------------------------------------------
Balanced Portfolio 0.475%
Bond Portfolio 0.475%
Capital Growth Portfolio 0.460%
Global Discovery Portfolio* 0.975%
Growth and Income Portfolio 0.475%
International Portfolio 0.820%
Money Market Portfolio 0.370%
21st Century Growth Portfolio** 0.875%
--------------------------------------------------------------------------------
* The advisor waived all or a portion of total annual operating expenses
(excluding 12b-1 fees, if applicable) to limit the expenses of Class A and
Class B of Global Discovery Portfolio to 1.25% and 1.50%, respectively, of
average daily net assets until April 30, 2001.
** The advisor waived all or a portion of total annual operating expenses
(exclusive of 12b-1 fees, if applicable) to limit the expenses of Class A and
B of 21st Century Growth Portfolio to 1.50% and 1.75%, respectively, of
average daily net assets until April 30, 2001.
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, 2002.
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, 2002.
The table below describes the investment management fee rates for Health
Sciences Portfolio, effective May 1, 2001:
Investment Management Fee effective May 1, 2001
Average Daily Net Assets Fee Rate
--------------------------------------------------------------------------------
first $250 million 0.750%
next $750 million 0.725%
next $1.5 billion 0.700%
next $2.5 billion 0.680%
next $2.5 billion 0.650%
next $2.5 billion 0.640%
next $2.5 billion 0.630%
over $12.5 billion 0.620%
--------------------------------------------------------------------------------
30
<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 portfolios assume no responsibility for such
prospectuses.
Buying and Selling Shares
Except for Money Market Portfolio and Health Sciences Portfolios, 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. There is a 1% fee payable to Health Sciences
Portfolio for exchanges or redemptions of shares held for less than one year.
Technically, the shareholders of Scudder Variable Series I (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. Contract owners should look
at their separate account prospectuses for redemption procedures and fees.
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 Investments Service Company, 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.
Scudder Variable Series I 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 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 class of 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
The price at which you sell shares of Health Sciences Portfolio is also the
portfolio's NAV, minus a 1.00% redemption/exchange fee on shares owned less than
one year.
31
<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 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 advisors as to whether such distributions are subject to
federal income tax if they are retained as part of policy reserves.
The preceding is a brief summary of certain of the relevant tax considerations.
Because each shareholder and contract holder's tax situation is unique, it's
always a good idea to ask your tax professional about the tax consequences of
your investments.
Marketing and Distribution Fees
Scudder Investor Services, Inc., a subsidiary of the investment advisor, is the
fund's distributor.
Scudder Variable Series I has adopted a 12b-1 plan for all Class B shares. Under
this plan, each portfolio (except Money Market Portfolio and Health Sciences
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.
32
<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. Shareholder reports are available by calling Scudder at
1-800-778-1482 or a participating insurance company.
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, please contact Scudder or
the SEC (see below). If you are a shareholder and have questions, please contact
Scudder (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
publicinfo@sec.gov.
Scudder Investor Services, Inc. SEC
Two International Place 450 Fifth Street, N.W.
Boston, MA 02110-4103 Washington, D.C. 20549-0102
Call: 1-800-778-1482 1-202-942-8090
www.sec.gov
SEC File #
--------------------------------------------------------------------------------
Scudder Variable Series I 811-4257
--------------------------------------------------------------------------------
<PAGE>
SCUDDER VARIABLE SERIES I
formerly Scudder Variable Life Investment Fund
Two International Place
Boston, Massachusetts 02110-4103
Scudder Variable Series I 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
21ST CENTURY GROWTH PORTFOLIO
GLOBAL DISCOVERY PORTFOLIO
INTERNATIONAL PORTFOLIO
HEALTH SCIENCES PORTFOLIO
--------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
May 1, 2001
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 Series I dated May 1, 2001, 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, 2000, 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.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES....................................................................................1
Money Market Portfolio.......................................................................................1
Bond Portfolio...............................................................................................2
Balanced Portfolio...........................................................................................3
Growth and Income Portfolio..................................................................................5
Capital Growth Portfolio.....................................................................................5
21st Century Growth Portfolio................................................................................6
Global Discovery Portfolio...................................................................................8
International Portfolio.....................................................................................10
Health Sciences Portfolio...................................................................................11
Master-feeder Fund Structure................................................................................12
POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS.................................................................22
Strategic Transactions and Derivatives Applicable to Growth and Income, 21st Century Growth, Global
Discovery and Health Sciences Portfolios....................................................................43
INVESTMENT RESTRICTIONS..............................................................................................53
PURCHASES AND REDEMPTIONS............................................................................................55
Investment Advisor..........................................................................................56
AMA InvestmentLink(SM) Program..............................................................................59
Code of Ethics..............................................................................................59
Distributor.................................................................................................60
TRUSTEES AND OFFICERS................................................................................................62
REMUNERATION.........................................................................................................65
Responsibilities of the Board -- Board and Committee Meetings...............................................65
NET ASSET VALUE......................................................................................................66
TAX STATUS...........................................................................................................67
DIVIDENDS AND DISTRIBUTIONS..........................................................................................71
Money Market Portfolio......................................................................................71
Other Portfolios............................................................................................72
PERFORMANCE INFORMATION..............................................................................................72
Money Market Portfolio......................................................................................73
Bond Portfolio..............................................................................................73
All Portfolios..............................................................................................74
Comparison of Portfolio Performance.........................................................................77
Taking a Global Approach....................................................................................78
SHAREHOLDER COMMUNICATIONS...........................................................................................78
ORGANIZATION AND CAPITALIZATION......................................................................................78
General.....................................................................................................78
PORTFOLIO TURNOVER...................................................................................................85
EXPERTS..............................................................................................................85
COUNSEL..............................................................................................................86
ADDITIONAL INFORMATION...............................................................................................86
FINANCIAL STATEMENTS.................................................................................................88
APPENDIX
Description of Bond Ratings
Description of Commercial Paper Ratings
</TABLE>
i
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INVESTMENT OBJECTIVES AND POLICIES
Scudder Variable Series I (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 eight diversified portfolios: Money Market
Portfolio, Bond Portfolio, Balanced Portfolio, Growth and Income Portfolio,
Capital Growth Portfolio, 21st Century Growth Portfolio, Global Discovery
Portfolio, International Portfolio and one non-diversified portfolio: Health
Sciences 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 and Health Sciences Portfolio, which do 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. There are currently no outstanding Class B shares of Bond
Portfolio and Balanced Portfolio.
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 that 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 Zurich Scudder Investments, Inc. (the "Advisor"), in its
discretion, might, but is not required to, use in managing the Portfolios'
assets. The Advisor 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; variable and floating rate
instruments; 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 Advisor, 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 Advisor 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>
Advisor. 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 Advisor'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 net its assets in bonds
including those of the U.S. Government and its agencies and those of
corporations and other notes and bonds paying high current income. The Portfolio
may also invest in preferred stocks consistent with the Portfolio's objectives.
It will attempt to moderate the effect of market price fluctuation relative to
that of a long-term bond by investing in securities with varying maturities and
making use of futures contracts on debt securities and related options for
hedging purposes.
Bond Portfolio may purchase corporate notes and bonds including issues
convertible into common stock and obligations of municipalities. The Portfolio
may purchase securities of certain mortgage-backed securities. It may purchase
U.S. Government securities and obligations of federal agencies that are not
backed by the full faith and credit of the U.S. Government, such as obligations
of Federal Home Loan Banks, Farm Credit Banks and the Federal Home Loan Mortgage
Corporation. The Portfolio may also purchase obligations of international
agencies such as the International Bank for Reconstruction and Development and
the Inter-American Development Bank. Other eligible investments include foreign
securities, such as non-U.S. dollar-denominated foreign debt securities and U.S.
dollar-denominated foreign debt securities (such as those issued by the Dominion
of Canada and its provinces), including without limitation,
2
<PAGE>
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 net 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
Advisor, to be of comparable quality at the time of purchase. The Portfolio may
invest up to 20% of its net assets in debt securities rated lower than Baa or
BBB or, if unrated, of equivalent quality as determined by the Advisor, 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, 2000, the average monthly
dollar-weighted market value of the bonds in the Portfolio's portfolio was rated
as follows: 7% Aaa, 4% Aa, 20% A, 12% BBB, 6% BB and 2% 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 Portfolio may purchase securities of real
estate investment trusts ("REITs").
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 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.
3
<PAGE>
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 Advisor 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
Advisor. 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 Advisor 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 Advisor will determine whether it is
in the best interest of the Portfolio to retain or dispose of the security.
See the Appendix to this Statement of Additional Information for a more complete
description of the ratings assigned by ratings organizations and their
respective characteristics.
The Portfolio will, on occasion, adjust its mix of investments among equity
securities, bonds, and cash reserves. In reallocating investments, the Advisor
weighs the relative values of different asset classes and expectations for
future returns. In doing so, the Advisor 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
4
<PAGE>
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. 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 Advisor 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 Advisor 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 and non-dividend paying, common stocks. While most
of the portfolio's investments are common stocks, some may be other types of
equities, such as preferred stocks and securities convertible into common
stocks. 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 Advisor 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 Advisor may consider a
security's dividend yield relative to the average dividend yield of the Standard
& Poor's Corporation 500 Composite Stock Price Index (the "S&P 500").
The Portfolio may, for hedging purposes, purchase forward foreign currency
exchange contracts and foreign currencies in the form of bank deposits. The
Portfolio may also purchase other foreign money market instruments, including,
but not limited to, bankers' acceptances, certificates of deposit, commercial
paper, short-term government obligations and repurchase agreements.
Growth and Income Portfolio cannot guarantee a gain or eliminate the risk of
loss. The net asset value of the Portfolio's shares will increase or decrease
with changes in the market prices of the Portfolio's investments and, to a
lesser extent, changes in foreign currency exchange rates.
Capital Growth Portfolio
Capital Growth 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 $3 billion or more. The Portfolio invests in marketable
securities, principally common stocks and, consistent with its objective of
long-term
5
<PAGE>
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 Advisor 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 Advisor. Bonds that are rated Baa by
Moody's or BBB by S&P have some speculative characteristics. The Portfolio's
intermediate to longer-term debt securities may also include those which are
rated below investment grade as long as no more than 5% of its net assets are
invested in such securities. As interest rates fall the prices of debt
securities tend to rise and vice versa. Should the rating of any security held
by the Portfolio be downgraded after the time of purchase, the Advisor 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.
21st Century Growth Portfolio
21st Century Growth Portfolio seeks long-term growth of capital by investing
primarily in equity securities issued by emerging growth companies. The
Portfolio is designed for investors in search of substantial long-term growth
6
<PAGE>
who can accept above-average stock market risk and little or no current income.
On May 1, 2000, the portfolio changed its name from Small Company Growth
Portfolio.
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 total 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 Advisor 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 Advisor 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 Advisor allocates the Portfolio's investments among many companies and
different industries in the U.S. and, where opportunity warrants, abroad as
well. The Advisor seeks companies that, in the Advisor'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 Advisor'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
Advisor 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 Advisor 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 Advisor
to be of equivalent quality. The Portfolio may borrow money for temporary,
emergency or other purposes, including investment leverage purposes, as
determined by the Trustees. The 1940 Act requires borrowings to have 300% asset
coverage. The Portfolio may also engage in reverse repurchase agreements.
In addition, the Portfolio may invest in preferred stocks when management
anticipates that the capital appreciation on such stocks is likely to equal or
exceed that of common stocks over a selected time. The Portfolio may enter into
repurchase agreements and may engage in strategic transactions.
The Portfolio offers participation in the potential growth of emerging growth
companies that may be destined to become leading companies in the next century.
The Portfolio offers the benefit of professional management to identify
investments in emerging growth companies with the greatest potential, in the
Advisor's opinion, to have a profound and positive impact on the lives of
consumers and businesses as we enter the next century. The Advisor 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.
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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 Advisor'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.
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 Advisor 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.
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The Advisor 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 Advisor
believes these factors offer significant opportunity for long-term capital
appreciation. The Advisor evaluates investments for the Portfolio from both a
macroeconomic and microeconomic perspective, using fundamental analysis,
including field research. The Advisor analyzes the growth potential and relative
value of possible investments. When evaluating an individual company, the
Advisor 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 Advisor 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 Advisor 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 Advisor
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
Advisor. The Portfolio may also invest up to 5% of its net assets in debt
securities rated below investment-grade. Securities rated below Baa/BBB are
commonly referred to as "junk bonds." The lower the ratings of such debt
securities, the greater their risks render them like equity securities. The
Portfolio may invest in securities rated D by S&P at the time of purchase, which
may be in default with respect to payment of principal or interest. The
Portfolio may purchase securities of REITs and certain mortgage-backed
securities.
The Portfolio selects its portfolio investments primarily from companies whose
individual equity market capitalizations would place them in the same size range
as companies in approximately the lowest 20% of world market capitalization as
represented by the Salomon Brothers Broad Market Index, an index comprised of
global equity securities of companies with total available market capitalization
greater than $100 million. The companies held by the Portfolio typically will
have individual equity market capitalizations of between approximately $500
million and $5 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.
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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.
Limitations on Holdings of Foreign Securities for Global Discovery Portfolio.
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.
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.
The major portion of the Portfolio's assets consists of equity securities of
established companies listed on recognized foreign exchanges; the Advisor
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 Advisor takes into account such factors as the location of the company's
assets, personnel, sales and earnings. In selecting securities for the
Portfolio, the Advisor seeks to identify companies whose securities prices do
not adequately reflect their established positions in their fields. In analyzing
companies for investment, the Advisor 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.
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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.
International Portfolio cannot guarantee a gain or eliminate the risk of loss.
The net asset value of the shares of the Portfolio will increase or decrease
with changes in the market price of the Portfolio's investments and changes in
foreign currency exchange rates.
Health Sciences Portfolio
The Health Sciences Portfolio's investment objective is to seek long-term growth
of capital by investing at least 80% of total assets in common stocks of
companies in the health care sector. These companies are engaged primarily in
the development, production or distribution of products or services related to
the treatment or prevention of diseases and other medical problems. These
include companies that operate hospitals and other health care facilities;
companies that design, manufacture or sell medical supplies, equipment and
support services; and pharmaceutical firms. The Portfolio may also invest in
companies engaged in medical, diagnostic, biochemical and biotechnological
research and development.
The Portfolio invests in the equity securities of health care companies located
throughout the world. In the opinion of the Advisor, investments in the health
care industry offer potential for significant growth due to favorable
demographic trends, technological advances in the industry, and innovations by
companies in the diagnosis and treatment of illnesses.
Under normal circumstances, the Portfolio will invest at least 80% of its total
assets in common stocks of companies in a group of related industries as
described below. The Portfolio will focus on securities of U.S. companies, but
may invest in foreign companies as well. A security will be considered
appropriate for the Portfolio if at least 50% of its total assets, revenues, or
net income is related to or derived from the industry or industries designated
for the Portfolio. The industries in the health care sector are pharmaceuticals,
biotechnology, medical products and supplies, and health care services. While
the Portfolio invests predominantly in common stocks, the Portfolio may purchase
convertible securities, rights, warrants and illiquid securities. The Portfolio
may enter into repurchase
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agreements and reverse repurchase agreements, and may engage in strategic
transactions, using such derivatives contracts as index options and futures, to
increase stock market participation, enhance liquidity and manage transaction
costs. Securities may be listed on national exchanges or traded
over-the-counter. The Portfolio may invest up to 20% of its total assets in U.S.
Treasury securities, and agency and instrumentality obligations. For temporary
defensive purposes, the Portfolio may invest without limit in cash and cash
equivalents when the Advisor deems such a position advisable in light of
economic or market conditions. It is impossible to predict accurately how long
such alternative strategies may be utilized.
The Portfolio may not borrow money in an amount greater than 5% of its total
assets, except for temporary or emergency purposes, as determined by the
Trustees. The Portfolio may engage up to 5% of its total assets in reverse
repurchase agreements or dollar rolls.
Concentration. The Portfolio "concentrates," for purposes of the Investment
Company Act of 1940 (the "1940 Act"), its assets in securities related to a
particular industry, which means that at least 25% of its net assets will be
invested in these assets at all times. As a result, the Portfolio may be subject
to greater market fluctuation than a fund which has securities representing a
broader range of investment alternatives.
Health Sciences 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.
Master-feeder Fund Structure
At the special meeting of shareholders, a majority of the stockholders of each
Portfolio of the Fund approved a proposal which gives the Fund's Board of
Trustees the discretion with respect to each Portfolio to retain the current
distribution arrangement for the Portfolio while investing in a master fund in a
master/feeder fund structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder fund"), instead
of investing directly in a portfolio of securities, invests most or all of its
investment assets in a separate registered investment company (the "master
fund") with substantially the same investment objective and policies as the
feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
Special Risk Factors
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 Advisor. 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
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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.
Investment of Uninvested Cash Balances. Each Portfolio may have cash balances
that have not been invested in portfolio securities ("Uninvested Cash").
Uninvested Cash may result from a variety of sources, including dividends or
interest received from portfolio securities, unsettled securities transactions,
reserves held for investment strategy purposes, scheduled maturity of
investments, liquidation of investment securities to meet anticipated
redemptions and dividend payments, and new cash received from investors.
Uninvested Cash may be invested directly in money market instruments or other
short-term debt obligations. Pursuant to an Exemptive Order issued by the SEC,
the Portfolio may use Uninvested Cash to purchase shares of affiliated funds
including money market funds, short-term bond funds and Scudder Cash Management
Investment Trust, or one or more future entities for which Zurich Scudder
Investments acts as trustee or investment advisor that operate as cash
management investment vehicles and that are excluded from the definition of
investment company pursuant to section 3(c)(1) or 3(c)(7) of the 1940 Act
(collectively, the "Central Funds") in excess of the limitations of Section
12(d)(1) of the Investment Company Act. Investment by each Portfolio in shares
of the Central Funds will be in accordance with the Portfolio's investment
policies and restrictions as set forth in its registration statement.
Certain of the Central Funds comply with rule 2a-7 under the Act. The other
Central Funds are or will be short-term bond funds that invest in fixed-income
securities and maintain a dollar weighted average maturity of three years or
less. Each of the Central Funds will be managed specifically to maintain a
highly liquid portfolio, and access to them will enhance the Portfolio's ability
to manage Uninvested Cash.
Each Portfolio will invest Uninvested Cash in Central Funds only to the extent
that the Portfolio's aggregate investment in the Central Funds does not exceed
25% of its total assets in shares of the Central Funds. Purchase and sales of
shares of Central Funds are made at net asset value.
Small Company Risk. The Advisor believes that many 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.
IPO risk. Securities issued through an initial public offering (IPO) can
experience an immediate drop in value if the demand for the securities does not
continue to support the offering price. Information about the issuers of IPO
securities is also difficult to acquire since they are new to the market and may
not have lengthy operating histories. The Health Sciences Portfolio may engage
in short-term trading in connection with its IPO investments, which could
produce higher trading costs and adverse tax consequences. The number of
securities issued in an IPO is limited, so it is likely that IPO securities will
represent a smaller component of the Portfolio's portfolio as its assets
increase (and thus have a more limited effect on the Portfolio's performance).
Foreign Securities. The Bond, Balanced, Growth and Income, Capital 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 Advisor. Bond Portfolio
may invest up to 20% of its assets in non-U.S. dollar-denominated foreign debt
securities. Balanced Portfolio may invest up to 20% of its debt securities in
non-U.S. dollar-denominated foreign debt securities,
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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, Global Discovery 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.
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 a
Portfolio's performance. 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 securities markets, while growing in volume of
trading activity, have substantially less volume than the U.S. market, 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 in the U.S. and, at times, volatility of price can be
greater than in the U.S. Fixed commissions on some foreign securities exchanges
and bid to asked spreads in foreign bond markets are generally higher than
commissions or bid to asked spreads on U.S. markets, although the Advisor will
endeavor to achieve the most favorable net results on its portfolio
transactions. There is generally less governmental supervision and regulation of
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 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. Payment for securities without delivery may be required in
certain foreign markets. In addition, with respect to certain foreign countries,
there is the possibility of expropriation or confiscatory taxation, political or
social instability, or diplomatic developments which could affect U.S.
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. The management of a Portfolio
seeks to mitigate the risks associated with the foregoing considerations through
continuous professional management.
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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.
Foreign Currencies. Because investments in foreign securities usually will
involve currencies of foreign countries, and because a Portfolio may hold
foreign currencies and forward contracts, futures contracts and options on
foreign currencies and foreign currency futures contracts, 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 a
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Portfolio may incur costs and experience conversion difficulties and
uncertainties in connection with conversions between various currencies.
Fluctuations in exchange rates may also affect the earning power and asset value
of the foreign entity issuing the security.
The strength or weakness of the U.S. dollar against these currencies is
responsible for part of a Portfolio's investment performance. If the dollar
falls in value relative to the Japanese yen, for example, the dollar value of a
Japanese stock held in the portfolio will rise even though the price of the
stock remains unchanged. Conversely, if the dollar rises in value relative to
the yen, the dollar value of the Japanese stock will fall. Many foreign
currencies have experienced significant devaluation relative to the dollar.
Although a Portfolio values its assets daily in terms of U.S. dollars, it does
not intend to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. It 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 a Portfolio desire
to resell that currency to the dealer. The Portfolio will conduct its foreign
currency exchange transactions either on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market, or through entering
into options or forward or futures contracts to purchase or sell foreign
currencies.
Investing in Emerging Markets. A Portfolio's investments in foreign securities
may be in developed countries or in countries considered by a Portfolio's
Advisor to have developing or "emerging" markets, which involves exposure to
economic structures that are generally less diverse and mature than in the
United States, and to political systems that may be less stable. A developing or
emerging market country can be considered to be a country that is in the initial
stages of its industrialization cycle. Currently, emerging markets generally
include every country in the world other than the United States, Canada, Japan,
Australia, New Zealand, Hong Kong, Singapore and most Western European
countries. Currently, investing in many emerging markets may not be desirable or
feasible because of the lack of adequate custody arrangements for a Portfolio's
assets, overly burdensome repatriation and similar restrictions, the lack of
organized and liquid securities markets, unacceptable political risks or other
reasons. As opportunities to invest in securities in emerging markets develop, a
Portfolio may expand and further broaden the group of emerging markets in which
it invests. In the past, markets of developing or emerging market countries have
been more volatile than the markets of developed countries; however, such
markets often have provided higher rates of return to investors. The Advisor
believes that these characteristics may be expected to continue in the future.
Most emerging securities markets 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 U.S.
Emerging markets also have different clearance and settlement procedures, and in
certain markets there have been times when settlements have not kept 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 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 could result either 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. 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.
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.
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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. A 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 a Portfolio of any
restrictions on investments.
In the course of investment in emerging markets, a Portfolio will be exposed to
the direct or indirect consequences of political, social and economic changes in
one or more emerging markets. While a Portfolio will manage its assets in a
manner that will seek to minimize the exposure to such risks, there can be no
assurance that adverse political, social or economic changes will not cause a
Portfolio to suffer a loss of value in respect of the securities in a
Portfolio's holdings.
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. A Portfolio may suspend redemption of its shares
for any period during which an emergency exists, as determined by the Securities
and Exchange Commission. Accordingly if a Portfolio believes that appropriate
circumstances exist, it will promptly apply to the Securities and Exchange
Commission 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 Securities and Exchange Commission action, a Portfolio's securities in the
affected markets will be valued at fair value determined in good faith by or
under the direction of a Portfolio's Board.
Volume and liquidity in most foreign markets are less than in the U.S., and
securities of many foreign companies are less liquid and more volatile than
securities of comparable U.S. companies. Fixed commissions on foreign securities
exchanges are generally higher than negotiated commissions on U.S. exchanges,
although a Portfolio endeavors to achieve the most favorable net results on its
portfolio transactions. There is generally less government supervision and
regulation of business and industry practices, securities exchanges, brokers,
dealers and listed companies than in the U.S. Mail service between the U.S. and
foreign countries may be slower or less reliable than within the U.S., thus
increasing the risk of delayed settlements of portfolio transactions or loss of
certificates for certificated portfolio securities. In addition, with respect to
certain emerging markets, there is the possibility of expropriation or
confiscatory taxation, political or social instability, or diplomatic
developments which could affect a Portfolio's investments in those countries.
Moreover, individual emerging market 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.
A Portfolio may have limited legal recourse in the event of a default with
respect to certain debt obligations it holds. If the issuer of a fixed-income
security owned by a Portfolio defaults, a Portfolio may incur additional
expenses to seek recovery. Debt obligations issued by emerging market country
governments differ from debt obligations of private entities; remedies from
defaults on debt obligations issued by emerging market governments, unlike those
on private debt, must be pursued in the courts of the defaulting party itself. A
Portfolio's ability to enforce its rights against private issuers may be
limited. The ability to attach assets to enforce a judgment may be limited.
Legal recourse is therefore somewhat diminished. Bankruptcy, moratorium and
other similar laws applicable to private issuers of debt obligations may be
substantially different from those of other countries. The political context,
expressed as an emerging market governmental issuer's willingness to meet the
terms of the debt obligation, for example, is of considerable importance. In
addition, no assurance can be given that the holders of commercial bank debt may
not contest payments to the holders of debt obligations in the event of default
under commercial bank loan agreements.
Income from securities held by a Portfolio could be reduced by a withholding tax
at the source or other taxes imposed by the emerging market countries in which a
Portfolio makes its investments. A Portfolio's net asset value may also be
affected by changes in the rates or methods of taxation applicable to a
Portfolio or to entities in which a Portfolio has invested. The Advisor will
consider the cost of any taxes in determining whether to acquire any particular
investments, but can provide no assurance that the taxes will not be subject to
change.
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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Emerging market governmental issuers are among the largest debtors to commercial
banks, foreign governments, international financial organizations and other
financial institutions. Certain emerging market governmental issuers have not
been able to make payments of interest on or principal of debt obligations as
those payments have come due. Obligations arising from past restructuring
agreements may affect the economic performance and political and social
stability of those issuers.
Governments of many emerging market 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 any
given country. As a result, government actions in the future could have a
significant effect on economic conditions in emerging markets, which in turn,
may adversely affect companies in the private sector, general market conditions
and prices and yields of certain of the securities in a Portfolio's portfolio.
Expropriation, confiscatory taxation, nationalization, political, economic or
social instability or other similar developments have occurred frequently over
the history of certain emerging markets and could adversely affect a Portfolio's
assets should these conditions recur.
The ability of emerging market country governmental issuers to make timely
payments on their obligations is likely to be influenced strongly by the
issuer's balance of payments, including export performance, and its access to
international credits and investments. An emerging market whose exports are
concentrated in a few commodities could be vulnerable to a decline in the
international prices of one or more of those commodities. Increased
protectionism on the part of an emerging market's trading partners could also
adversely affect the country's exports and diminish its trade account surplus,
if any. To the extent that emerging markets receive payment for its exports in
currencies other than dollars or non-emerging market currencies, its ability to
make debt payments denominated in dollars or non-emerging market currencies
could be affected.
Another factor bearing on the ability of emerging market countries to repay debt
obligations is the level of international reserves of the country. Fluctuations
in the level of these reserves affect the amount of foreign exchange readily
available for external debt payments and thus could have a bearing on the
capacity of emerging market countries to make payments on these debt
obligations.
To the extent that an emerging market country cannot generate a trade surplus,
it must depend on continuing loans from foreign governments, multilateral
organizations or private commercial banks, aid payments from foreign governments
and inflows of foreign investment. The access of emerging markets to these forms
of external funding may not be certain, and a withdrawal of external funding
could adversely affect the capacity of emerging market country governmental
issuers to make payments on their obligations. In addition, the cost of
servicing emerging market debt obligations can be affected by a change in
international interest rates since the majority of these obligations carry
interest rates that are adjusted periodically based upon international rates.
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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.
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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.
Some Latin American countries also may have managed currencies, which are not
free floating against the U.S. dollar. In addition, there is risk that certain
Latin American countries may restrict the free conversion of their currencies
into other currencies. Further, certain Latin American currencies may not be
internationally traded. Certain of these currencies have experienced a steep
devaluation relative to the U.S. dollar. Any devaluations in the currencies in
which Portfolio securities are denominated may have a detrimental impact on the
Portfolio's net asset value.
The economies of individual Latin American countries may differ favorably or
unfavorably from the U.S. economy in such respects as the rate of growth of
gross domestic product, the rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. Certain Latin American
countries have experienced high levels of inflation which can have a
debilitating effect on an economy, although some have begun to control inflation
in recent years through prudent economic policies. Furthermore, certain Latin
American countries may impose withholding taxes on dividends payable to a
Portfolio at a higher rate than those imposed by other foreign countries. This
may reduce the Portfolio's investment income available for distribution to
shareholders.
Certain Latin American countries such as Argentina, Brazil and Mexico are among
the world's largest debtors to commercial banks and foreign governments. At
times, certain Latin American countries have declared moratoria on the payment
of principal and/or interest on outstanding debt.
Latin America is a region rich in natural resources such as oil, copper, tin,
silver, iron ore, forestry, fishing, livestock and agriculture. The region has a
large population (roughly 300 million) representing a large domestic market.
Economic growth was strong in the 1960s and 1970s, but slowed dramatically (and
in some instances was negative) in the 1980s as a result of poor economic
policies, higher international interest rates, and the denial of access to new
foreign capital. Although a number of Latin American countries are currently
experiencing lower rates of inflation and higher rates of real growth in gross
domestic product than they have in the past, other Latin American countries
continue to experience significant problems, including high inflation rates and
high interest rates. Capital flight has proven a persistent problem and external
debt has been forcibly restructured. Political turmoil, high inflation, capital
repatriation restrictions and nationalization have further exacerbated
conditions.
Governments of many Latin American countries have exercised and continue to
exercise substantial influence over many aspects of the private sector through
the ownership or control of many companies, including some of the largest in
those countries. As a result, government actions in the future could have a
significant effect on economic conditions which may adversely affect prices of
certain portfolio securities. Expropriation, confiscatory taxation,
nationalization, political, economic or social instability or other similar
developments, such as military coups, have occurred in the past and could also
adversely affect a Portfolio's investments in this region.
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
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notable being a free zone among Mexico, the U.S. and Canada and another zone
among four countries in the southernmost point of Latin America. Currencies are
typically weak, but most are now relatively free floating, and it is not unusual
for the currencies to undergo wide fluctuations in value over short periods of
time due to changes in the market.
Investing in the Pacific Basin. Economies of individual Pacific Basin countries
may differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency, interest rate levels, and balance of payments
position. Of particular importance, most of the economies in this region of the
world are heavily dependent upon exports, particularly to developed countries,
and, accordingly, have been and may continue to be adversely affected by trade
barriers, managed adjustments in relative currency values, and other
protectionist measures imposed or negotiated by the U.S. and other countries
with which they trade. These economies also have been and may continue to be
negatively impacted by economic conditions in the U.S. and other trading
partners, which can lower the demand for goods produced in the Pacific Basin.
With respect to the Peoples Republic of China and other markets in which the
Portfolio may participate, there is the possibility of nationalization,
expropriation or confiscatory taxation, political changes, government
regulation, social instability or diplomatic developments that could adversely
impact a Pacific Basin country or the Portfolio's investment in the debt of that
country.
Foreign companies, including Pacific Basin companies, are not generally subject
to uniform accounting, auditing and financial reporting standards, practices and
disclosure requirements comparable to those applicable to U.S. companies.
Consequently, there may be less publicly available information about such
companies than about U.S. companies. Moreover, there is generally less
government supervision and regulation in the Pacific Basin than in the U.S.
Investing in Europe. Most Eastern European nations, including Hungary, Poland,
Czechoslovakia, and Romania have had centrally planned, socialist economies
since shortly after World War II. A number of their governments, including those
of Hungary, the Czech Republic, and Poland are currently implementing or
considering reforms directed at political and economic liberalization, including
efforts to foster multi-party political systems, decentralize economic planning,
and move toward free market economies. At present, no Eastern European country
has a developed stock market, but Poland, Hungary, and the Czech Republic have
small securities markets in operation. Ethnic and civil conflict currently rage
through the former Yugoslavia. The outcome is uncertain.
Both the European Community (the "EC") and Japan, among others, have made
overtures to establish trading arrangements and assist in the economic
development of the Eastern European nations. A great deal of interest also
surrounds opportunities created by the reunification of East and West Germany.
Following reunification, the Federal Republic of Germany has remained a firm and
reliable member of the EC and numerous other international alliances and
organizations. To reduce inflation caused by the unification of East and West
Germany, Germany has adopted a tight monetary policy which has led to weakened
exports and a reduced domestic demand for goods and services. However, in the
long-term, reunification could prove to be an engine for domestic and
international growth.
The conditions that have given rise to these developments are changeable, and
there is no assurance that reforms will continue or that their goals will be
achieved.
Portugal is a genuinely emerging market which has experienced rapid growth since
the mid-1980s, except for a brief period of stagnation over 1990-91. Portugal's
government remains committed to privatization of the financial system away from
one dependent upon the banking system to a more balanced structure appropriate
for the requirements of a modern economy. Inflation continues to be about three
times the EC average.
Economic reforms launched in the 1980s continue to benefit Turkey in the 1990s.
Turkey's economy has grown steadily since the early 1980s, with real growth in
per capita Gross Domestic Product (the "GDP") increasing more than 6% annually.
Agriculture remains the most important economic sector, employing approximately
55% of the 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.
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Like many other Western economies, Greece suffered severely from the global oil
price hikes of the 1970s, with annual GDP growth plunging from 8% to 2% in the
1980s, and inflation, unemployment, and budget deficits rising sharply. The fall
of the socialist government in 1989 and the inability of the conservative
opposition to obtain a clear majority have led to business uncertainty and the
continued prospects for flat economic performance. Once Greece has sorted out
its political situation, it will have to face the challenges posed by the
steadily increasing integration of the EC, including the progressive lowering of
trade and investment barriers. Tourism continues as a major industry, providing
a vital offset to a sizable commodity trade deficit.
Securities traded in certain emerging European securities markets may be subject
to risks due to the inexperience of financial intermediaries, the lack of modern
technology and the lack of a sufficient capital base to expand business
operations. Additionally, former Communist regimes of a number of Eastern
European countries had expropriated a large amount of property, the claims of
which have not been entirely settled. There can be no assurance that the
Portfolio's investments in Eastern Europe would not also be expropriated,
nationalized or otherwise confiscated. Finally, any change in leadership or
policies of Eastern European countries, or countries that exercise a significant
influence over those countries, may halt the expansion of or reverse the
liberalization of foreign investment policies now occurring and adversely affect
existing investment opportunities.
Global Discovery Portfolio will limit investments in securities of issuers
located in Eastern Europe to 5% of its total assets.
Investing in Africa. Africa is a continent of roughly 50 countries with a total
population of approximately 840 million people. Literacy rates (the percentage
of people who are over 15 years of age and who can read and write) are
relatively low, ranging from 20% to 60%. The primary industries include crude
oil, natural gas, manganese ore, phosphate, bauxite, copper, iron, diamond,
cotton, coffee, cocoa, timber, tobacco, sugar, tourism, and cattle.
Many African countries are fraught with political instability. However, there
has been a trend over the past five years toward democratization. Many countries
are moving from a military style, Marxist, or single party government to a
multi-party system. Still, there remain many countries that do not have a stable
political process. Other countries have been enmeshed in civil wars and border
clashes.
Economically, the Northern Rim countries (including Morocco, Egypt, and Algeria)
and Nigeria, Zimbabwe and South Africa are the wealthier countries on the
continent. The market capitalization of these countries has been growing
recently as more international companies invest in Africa and as local companies
start to list on the exchanges. However, religious and ethnic strife has been a
significant source of instability.
On the other end of the economic spectrum are countries, such as Burkinafaso,
Madagascar, and Malawi, that are considered to be among the poorest or least
developed in the world. These countries are generally landlocked or have poor
natural resources. The economies of many African countries are heavily dependent
on international oil prices. Of all the African industries, oil has been the
most lucrative, accounting for 40% to 60% of many countries' GDP. However,
general decline in oil prices has had an adverse impact on many economies.
Foreign securities such as those purchased by certain Portfolios may be subject
to foreign government taxes which could reduce the yield on such securities,
although a shareholder of the Portfolio may, subject to certain limitations, be
entitled to claim a credit or deduction for U.S. federal income tax purposes for
his or her proportionate share of such foreign taxes paid by a Portfolio. (See
"TAX STATUS.")
POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS
Except as otherwise noted below, the following description of additional
investment policies and techniques and their accompanying risks is applicable to
all of the Portfolios.
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Repurchase Agreements. On behalf of a Portfolio, the Fund may invest in
repurchase agreements pursuant to its investment guidelines. In a repurchase
agreement, the Fund acquires ownership of a security and simultaneously commits
to resell that security to the seller, typically a bank or broker/dealer.
A repurchase agreement provides a means for a Portfolio to earn income on funds
for periods as short as overnight. It is an arrangement under which the
purchaser (i.e., the Portfolio) acquires a security ("Obligation") and the
seller agrees, at the time of sale, to repurchase the Obligation at a specified
time and price. Securities subject to a repurchase agreement are held in a
segregated account and, as described in more detail below, the value of such
securities is kept at least equal to the repurchase price on a daily basis. The
repurchase price may be higher than the purchase price, the difference being
income to a Portfolio, or the purchase and repurchase prices may be the same,
with interest at a stated rate due to a Portfolio together with the repurchase
price upon repurchase. In either case, the income to a Portfolio is unrelated to
the interest rate on the Obligation itself. Obligations will be held by the
custodian or in the Federal Reserve Book Entry System.
It is not clear whether a court would consider the Obligation purchased by a
Portfolio subject to a repurchase agreement as being owned by a Portfolio or as
being collateral for a loan by a Portfolio to the seller. In the event of the
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the Obligation before repurchase of the Obligation under a repurchase
agreement, a 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 a
Portfolio has not perfected a security interest in the Obligation, a 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, a Portfolio
would be at risk of losing some or all of the principal and income involved in
the transaction. As with any unsecured debt Obligation purchased for the
Portfolio, the Fund seeks to reduce 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
Obligation, in which case a Portfolio may incur a loss if the proceeds to a
Portfolio of the sale to a third party are less than the repurchase price.
However, if the market value (including interest) of the Obligation subject to
the repurchase agreement becomes less than the repurchase price (including
interest), a Portfolio will direct the seller of the Obligation to deliver
additional securities so that the market value (including interest) of all
securities subject to the repurchase agreement will equal or exceed the
repurchase price.
Illiquid Securities and Restricted Securities. Each Portfolio may purchase
securities that are subject to legal or contractual restrictions on resale
("restricted securities"). Generally speaking, restricted securities may be sold
(i) only to qualified institutional buyers; (ii) in a privately negotiated
transaction to a limited number of purchasers; (iii) in limited quantities after
they have been held for a specified period of time and other conditions are met
pursuant to an exemption from registration; or (iv) in a public offering for
which a registration statement is in effect under the Securities Act of 1933, as
amended. 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.
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Restricted securities are often illiquid, but they may also be liquid. For
example, restricted securities that are eligible for resale under Rule 144A are
often deemed to be liquid.
The Fund's Board has approved guidelines for use by the Advisor in determining
whether a security is liquid or illiquid. Among the factors the Advisor may
consider in reaching liquidity decisions relating to Rule 144A securities are:
(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 other
potential purchasers; (3) dealer undertakings to make a market in the security;
and (4) the nature of the security and the nature of the market for the security
(i.e., the time needed to dispose of the security, the method of soliciting
offers, and the mechanics of the transfer. Issuers of restricted securities may
not be subject to the disclosure and other investor protection requirement that
would be applicable if their securities were publicly traded. Where a
registration statement is required for the resale of restricted securities, a
Portfolio 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, as amended when selling restricted securities to the public and, in
such event, the Fund may be liable to purchasers of such securities if the
registration statement prepared by the issuer is materially inaccurate or
misleading.
A Portfolio may also purchase securities that are not subject to legal or
contractual restrictions on resale, but that are deemed illiquid. Such
securities may be illiquid, for example, because there is a limited trading
market for them.
A Portfolio may be unable to sell a restricted or illiquid security. In
addition, it may be more difficult to determine a market value for restricted or
illiquid securities. Moreover, 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 a Portfolio is permitted or able to
sell such security, a Portfolio might obtain a price less favorable than the
price that prevailed when it decided to sell. This investment practice,
therefore, could have the effect of increasing the level of illiquidity of a
Portfolio.
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. The effect of owning instruments which do not make
current interest payments is that a fixed yield is earned not only on the
original investment but also, in effect, on all discount accretion during the
life of the obligation. This implicit reinvestment of earnings at the same rate
eliminates the risk of being unable to reinvest distributions at a rate as high
as the implicit yield on the zero coupon bond, but at the same time eliminates
any opportunity to reinvest earnings at higher rates. For this reason, zero
coupon bonds are subject
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to substantially greater price fluctuations during periods of changing market
interest rates than those of comparable securities that pay interest currently,
which fluctuation is greater as the period to maturity is longer. Zero coupon
securities which are convertible into common stock 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, as they usually
are issued with maturities of 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.
Stripped Zero Coupon Securities. 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(TM)") and
Certificate of Accrual on Treasuries ("CATS(TM)"). 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. The Treasury has facilitated transfers of ownership of zero
coupon securities by accounting separately for the beneficial ownership of
particular interest coupons and corpus payments on Treasury securities through
the Federal Reserve book-entry record-keeping system. The Federal Reserve
program as established by the Treasury Department is known as "STRIPS" or
"Separate Trading of Registered Interest and Principal of Securities." Under the
STRIPS program, the Portfolio will be able to have its beneficial ownership of
zero coupon securities recorded directly in the book-entry record-keeping system
in lieu of having to hold certificates or other evidences of ownership of the
underlying U.S. Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured interest
coupons by the holder, the principal or corpus is sold at a deep discount
because the buyer receives only the right to receive a future fixed payment on
the security and does not receive any rights to periodic interest (i.e. 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 ("REITs"). The Bond, Growth and Income. Global
Discovery and Health Sciences 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
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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
Investment Company Act of 1940, as amended. 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. Underlying mortgages may
be of a variety of types, including adjustable rate, conventional 30-year,
graduated payment and 15-year.
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. Mortgage-backed securities are subject to the risk
of prepayment and the risk that the underlying loans will not be repaid. Because
principal may be prepaid at any time, mortgage-backed securities may involve
significantly greater price and yield volatility than traditional debt
securities.
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. 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.
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Government-related guarantors (i.e., not backed by the full faith and credit of
the U.S. Government) include ""Fannie Mae and the Federal Home Loan Mortgage
Corporation ("FHLMC"). Fannie Mae is a government-sponsored corporation owned
entirely by private stockholders. It is subject to general regulation by the
Secretary of Housing and Urban Development. Fannie Mae 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 Fannie Mae are
guaranteed as to timely payment of principal and interest by Fannie Mae 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 practices of the originators/servicers and poolers, the
Advisor 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"). CMOs are hybrids between a
mortgage-backed bond and mortgage pass-through securities. 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
Fannie Mae, 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.
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FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt obligations of
FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are made
semiannually, as opposed to monthly. The amount of principal payable on each
semiannual payment date is determined in accordance with FHLMC's mandatory
sinking fund schedule, which, in turn, is equal to approximately 100% of FHA
prepayment experience applied to the mortgage collateral pool. All sinking fund
payments in the CMOs are allocated to the retirement of the individual classes
of bonds in the order of their stated maturities. Payment of principal on the
mortgage loans in the collateral pool in excess of the amount of FHLMC's minimum
sinking fund obligation for any payment date are paid to the holders of the CMOs
as additional sinking fund payments. Because of the "pass-through" nature of all
principal payments received on the collateral pool in excess of FHLMC's minimum
sinking fund requirement, the rate at which principal of the CMOs is actually
repaid is likely to be such that each class of bonds will be retired in advance
of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage loans during
any semiannual payment period is not sufficient to meet FHLMC's minimum sinking
fund obligation on the next sinking fund payment date, FHLMC agrees to make up
the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the CMOs are identical to
those of FHLMC PCs. FHLMC has the right to substitute collateral in the event of
delinquencies and/or defaults.
Other Mortgage-Backed Securities. The Advisor 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
Advisor, 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 Advisor 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 or in a structure similar to the CMO structure. "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 ""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 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
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which give such debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. There is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities.
Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. To lessen the effect of failures
by obligors on underlying assets to make payments, the securities may contain
elements of credit support which fall into two categories: (i) liquidity
protection, and (ii) protection against losses resulting from ultimate default
by an obligor on the underlying assets. Liquidity protection refers to the
provision of advances, generally by the entity administering the pool of assets,
to ensure that the receipt of payments on the underlying pool occurs in a timely
fashion. Protection against losses results from payment of the insurance
obligations on at least a portion of the assets in the pool. This protection may
be provided through guarantees, policies or letters of credit obtained by the
issuer or sponsor from third parties, through various means of structuring the
transaction or through a combination of such approaches. Bond Portfolio and
Balanced Portfolio will not pay any additional or separate fees for credit
support. The degree of credit support provided for each issue is generally based
on historical information respecting the level of credit risk associated with
the underlying assets. Delinquency or loss in excess of that anticipated, or
failure of the credit support could adversely affect the return on an investment
in such a security.
Bond Portfolio and Balanced Portfolio may also invest in residual interests in
asset-backed securities. In the case of asset-backed securities issued in a
pass-through structure, the cash flow generated by the underlying assets is
applied to make required payments on the securities and to pay related
administrative expenses. The residual interest in an asset-backed security
pass-through structure represents the interest in any excess cash flow remaining
after making the foregoing payments. The amount of residual cash flow resulting
from a particular issue of asset-backed securities will depend on, among other
things, the characteristics of the underlying assets, the coupon rates on the
securities, prevailing interest rates, the amount of administrative expenses and
the actual prepayment experience on the underlying assets. Asset-backed security
residuals not registered under the Securities Act of 1933 may be subject to
certain restrictions on transferability. In addition, there may be no liquid
market for such securities.
The availability of asset-backed securities may be affected by legislative or
regulatory developments. It is possible that such developments may require Bond
Portfolio and Balanced Portfolio to dispose of any then existing holdings of
such securities.
Municipal Obligations. Bond Portfolio and Balanced Portfolio may each invest in
municipal obligations. Municipal obligations are issued by or on behalf of
states, territories and possessions of the United States 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."
Municipal notes are generally used to provide for short-term capital needs and
generally have maturities of one year or less. Municipal notes include: Tax
Anticipation Notes; Revenue Anticipation Notes; Bond Anticipation Notes; and
Construction Loan Notes.
Tax Anticipation Notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. Revenue Anticipation Notes are issued in
expectation of receipt of other types of revenue. Tax Anticipation Notes and
Revenue Anticipation Notes are generally issued in anticipation of various
seasonal revenue such as income, sales, use and business taxes. Bond
Anticipation Notes are sold to provide interim financing and Construction Loan
Notes are sold to provide construction financing. These notes are generally
issued in anticipation of long-term financing in the market. In most cases,
these monies provide for the repayment of the notes. After the projects are
successfully completed and accepted, many projects receive permanent financing
through the FHA under Fannie Mae or GNMA. There are, of course, a number of
other types of notes issued for different purposes and secured differently than
those described above.
Municipal bonds, which meet longer-term capital needs and generally have
maturities of more than one year when issued, have two principal
classifications: "general obligation" bonds and "revenue" bonds.
Issuers of general obligation bonds include states, counties, cities, towns and
regional districts. The proceeds of these obligations are used to fund a wide
range of public projects including the construction or improvement of schools,
highways and roads, water and sewer systems and a variety of other public
purposes. The basic security behind general
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obligation bonds is the issuer's pledge of its full faith, credit, and taxing
power for the payment of principal and interest. The taxes that can be levied
for the payment of debt service may be limited or unlimited as to rate or amount
or special assessments.
The principal security for a revenue bond is generally the net revenues derived
from a particular facility or group of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source. Revenue bonds
have been issued to fund a wide variety of capital projects including: electric,
gas, water and sewer systems; highways, bridges and tunnels; port and airport
facilities; colleges and universities; and hospitals. Although the principal
security behind these bonds varies widely, many provide additional security in
the form of a debt service reserve fund whose monies may also be used to make
principal and interest payments on the issuer's obligations. Housing finance
authorities have a wide range of security including partially or fully-insured,
rent-subsidized and/or collateralized mortgages, and/or the net revenues from
housing or other public projects. In addition to a debt service reserve fund,
some authorities provide further security in the form of a state's ability
(without obligation) to make up deficiencies in the debt reserve fund. Lease
rental bonds issued by a state or local authority for capital projects are
secured by annual lease rental payments from the state or locality to the
authority sufficient to cover debt service on the authority's obligations.
Some issues of municipal bonds are payable from United States Treasury bonds and
notes held in escrow by a trustee, frequently a commercial bank. The interest
and principal on these U.S. Government securities are sufficient to pay all
interest and principal requirements of the municipal securities when due. Some
escrowed Treasury securities are used to retire municipal bonds at their
earliest call date, while others are used to retire municipal bonds at their
maturity.
Securities purchased for a Portfolio may include variable/floating rate
instruments, variable mode instruments, put bonds, and other obligations which
have a specified maturity date but also are payable before maturity after notice
by the holder ("demand obligations"). Demand obligations are considered for 'a
Portfolio's purposes to mature at the demand date.
There are, in addition, a variety of hybrid and special types of municipal
obligations as well as numerous differences in the security of municipal
obligations both within and between the two principal classifications (i.e.,
notes and bonds) discussed above.
An entire issue of municipal securities may be purchased by one or a small
number of institutional investors such as a Portfolio. Thus, such an issue may
not be said to be publicly offered. Unlike the equity securities of operating
companies or mutual funds which must be registered under the Securities Act of
1933 prior to offer and sale unless an exemption from such registration is
available, municipal securities, whether publicly or privately offered, may
nevertheless be readily marketable. A secondary market exists for municipal
securities which have been publicly offered as well as securities which have not
been publicly offered initially but which may nevertheless be readily
marketable. Municipal securities purchased for a Portfolio are subject to the
limitations on holdings of securities which are not readily marketable based on
whether it may be sold in a reasonable time consistent with the customs of the
municipal markets (usually seven days) at a price (or interest rate) which
accurately reflects its recorded value. A Portfolio believes that the quality
standards applicable to their investments enhance marketability. In addition,
stand-by commitments, participation interests and demand obligations also
enhance marketability.
Provisions of the federal bankruptcy statutes relating to the adjustment of
debts of political subdivisions and authorities of states of the United States
provide that, in certain circumstances, such subdivisions or authorities may be
authorized to initiate bankruptcy proceedings without prior notice to or consent
of creditors, which proceedings could result in material and adverse
modification or alteration of the rights of holders of obligations issued by
such subdivisions or authorities.
Litigation challenging the validity under state constitutions of present systems
of financing public education has been initiated or adjudicated in a number of
states, and legislation has been introduced to effect changes in public school
finances in some states. In other instances there has been litigation
challenging the issuance of pollution control revenue bonds or the validity of
their issuance under state or federal law which litigation could ultimately
affect the validity of those Municipal Securities or the tax-free nature of the
interest thereon.
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For the purpose of a Portfolio's investment restrictions, the identification of
the "issuer" of municipal obligations which are not general obligation bonds is
made by the Advisor on the basis of the characteristics of the obligation as
described above, the most significant of which is the source of funds for the
payment of principal and interest on such 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,
21st Century Growth, Global Discovery, International and Health Sciences
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 tends 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 changes, and, therefore,
also tend to follow movements in the general market for equity securities. A
unique feature of convertible securities is that as the market price of the
underlying common stock declines, convertible securities tend to trade
increasingly on a yield basis, and so may not experience market value declines
to the same extent as the underlying common stock. When the market price of the
underlying common stock increases, the prices of the convertible securities tend
to rise as a reflection of the value of the underlying common stock, although
typically not as much as the underlying common stock. While no securities
investments are without risk, investments in convertible securities generally
entail less risk than investments in common stock of the same issuer.
As debt 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. Convertible securities
generally offer lower yields than non-convertible securities of similar quality
because of their conversion or exchange features.
Of course, like all debt 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 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").
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Depositary Receipts. The Balanced, 21st Century Growth, Global Discovery,
International and Health Sciences Portfolios may each invest in sponsored or
unsponsored American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs"), Global Depositary Receipts ("GDRs"), International Depositary Receipts
("IDRs") and other types of Depositary Receipts (which, together with ADRs,
EDRs, GDRs and IDRs are hereinafter referred to as "Depositary Receipts").
Depositary receipts provide indirect investment in securities of foreign
issuers. Prices of unsponsored Depositary Receipts may be more volatile than if
they were sponsored by the issuer of the underlying securities. 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 Depositary Receipts which are bought and sold in the United
States and are typically issued by a bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. GDRs and
IDRs and other types of Depositary Receipts 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 including those denominated in U.S. dollars will
be subject to foreign currency exchange rate risk.' However, by investing in
U.S. dollar-denominated ADRs rather than directly in foreign issuers' stock, the
Fund avoids currency risks during the settlement period. In general, there is a
large, liquid market in the United States for most ADRs. However, certain
Depositary Receipts may not be listed on an exchange and therefore may be
illiquid securities.
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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.
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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. When a Portfolio
purchases such securities, it immediately assumes the risks of ownership,
including the risk of price fluctuation. Failure to deliver a security purchased
on this basis may result in a loss or missed opportunity to make an alternative
investment.
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"'. While such
securities may be sold prior to the settlement date, a Portfolio intends to
purchase them with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time a Portfolio makes the commitment
to purchase a security on this basis, it will record the transaction and reflect
the value of the security in determining its net asset value. The market value
of the securities may be more or less than the purchase price. A Portfolio will
establish a segregated account in which it will maintain cash and liquid
securities equal in value to commitments for such securities.
Lending 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 or other financial institutions, and are required to
be secured continuously by collateral in cash or liquid assets maintained on a
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 or, in connection
with securities trading on foreign markets, within such longer period of time
which coincides with the normal settlement period for purchases and sales of
such securities in such foreign markets. 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 also receive compensation based on
investment collateral. The risks in lending securities, as with other extensions
of secured credit, consist of a possible delay in recovery and a loss of rights
in the collateral should the borrower of the securities fail financially. Loans
may be made only to firms deemed by the Advisor to be of good standing and will
not be made unless, in the judgment of the Advisor, the consideration to be
earned from such loans would justify the risk. 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
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for a premium paid, the right to buy, and the writer the obligation to sell, the
underlying security at the exercise price at any time upon the assignment of an
exercise notice prior to the expiration of the option, regardless of the market
price of the security during the option period. A covered call option is an
option written on a security which is owned by the writer throughout the option
period.
The Fund will write, on behalf of a Portfolio, covered call options both to
reduce the risks associated with certain of its investments and to increase
total investment return. In return for the premium income, the Portfolio will
give up the opportunity to profit from an increase in the market price of the
underlying security above the exercise price so long as its obligations under
the contract continue, except insofar as the premium represents a profit.
Moreover, in writing the option, the Portfolio will retain the risk of loss
should the price of the security decline, which loss the premium is intended to
offset in whole or in part. Unlike the situation in which the Fund owns
securities not subject to a call option, the Fund, in writing call options, must
assume that the call may be exercised at any time prior to the expiration of its
obligations as a writer, and that in such circumstances the net proceeds
realized from the sale of the underlying securities pursuant to the call may be
substantially below the prevailing market price. The Fund may forego the benefit
of appreciation in its Portfolios on securities sold pursuant to call options.
When the Portfolio writes a covered call option, it gives the purchaser of the
option the right to buy the underlying security at the price specified in the
option (the "exercise price") by exercising the option at any time during the
option period, generally ranging up to nine months. Some of the options which
the Fund writes may be of the European type which means they may be exercised
only at a specified time. If the option expires unexercised, the Portfolio will
realize income in an amount equal to the premium received for the written
option. If the option is exercised, a decision over which the Portfolio has no
control, the Portfolio must sell the underlying security to the option holder at
the exercise price. By writing a covered call option, the Portfolio forgoes, in
exchange for the premium less the commission ("net premium"), the opportunity to
profit during the option period from an increase in the market value of the
underlying security above the exercise price.
The Balanced, Capital Growth and International Portfolios may each write covered
call and put options to a limited extent in an attempt to earn additional income
on their portfolios, consistent with their investment objectives. 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
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the option was sold), and the deferred credit related to such option will be
eliminated. If a call option is exercised, the Portfolio will realize a gain or
loss from the sale of the underlying security and the proceeds of the sale will
be increased by the premium originally received. The writing of covered call
options may be deemed to involve the pledge of the securities against which the
option is being written. Securities against which call options are written will
be segregated on the books of the custodian for the Portfolio.
A Portfolio may purchase call options on any securities in which it may invest
in anticipation of an increase in the market value of such securities. The
purchase of a call option would entitle the Portfolio, in exchange for the
premium paid, to purchase a security at a specified price during the option
period. The Portfolio would ordinarily have a gain if the value of the
securities increased above the exercise price sufficiently to cover the premium
and would have a loss if the value of the securities remained at or below the
exercise price during the option period.
The Balanced, Capital Growth and International Portfolios will normally purchase
put options in anticipation of a decline in the market value of securities in
their portfolios ("protective puts") or securities of the type in which they are
permitted to invest. The purchase of a put option would entitle the Portfolio,
in exchange for the premium paid, to sell a security, which may or may not be
held by the Portfolio, at a specified price during the option period. The
purchase of protective puts is designed merely to offset or hedge against a
decline in the market value of the Portfolio's portfolio securities. Put options
may also be purchased by the Portfolio for the purpose of affirmatively
benefiting from a decline in the price of securities which the Portfolio does
not own. The Portfolio would ordinarily recognize a gain if the value of the
securities decreased below the exercise price sufficiently to cover the premium
and would recognize a loss if the value of the securities remained at or above
the exercise price. Gains and losses on the purchase of protective put options
would tend to be offset by countervailing changes in the value of underlying
portfolio securities.
The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded. To the extent that the option
markets close before the markets for the underlying securities, significant
price and rate movements can take place in the underlying securities markets
that cannot be reflected in the option markets. Exchange markets in securities
options are a relatively new and untested concept. It is impossible to 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 Advisor 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 Advisor 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
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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
Advisor believes the option can be closed out.
Futures Contracts. The Fund may, on behalf of the Bond, Balanced and
International Portfolios, purchase and sell futures contracts on debt securities
to hedge against anticipated changes in interest rates that might otherwise have
an adverse effect upon the value of the Portfolio's debt securities. In
addition, the Fund may, on behalf of the Portfolios, purchase and sell
securities index futures to hedge the equity securities of a Portfolio with
regard to market (systematic) risk as distinguished from stock-specific risk.
Each of these six Portfolios may also purchase and write put and call options on
futures contracts of the type which such Portfolio is authorized to enter into
and may engage in related closing transactions. All of such futures on debt
securities, stock index futures and related options will be traded on exchanges
that are licensed and regulated by the Commodity Futures Trading Commission
("CFTC") or on appropriate foreign exchanges, to the extent permitted by law.
Even though at the present time no contracts based on global indices which 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.
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Stock Index Futures. A stock index futures contract does not require the
physical delivery of securities, but merely provides for profits and losses
resulting from changes in the market value of the contract to be credited or
debited at the close of each trading day to the respective accounts of the
parties to the contract. On the contract's expiration date a final cash
settlement occurs and the futures positions are simply closed out. Changes in
the market value of a particular stock index futures contract reflect changes in
the specified index of equity securities on which the future is based. That
index is designed to reflect overall price trends in the market for equity
securities.
Stock index futures may be used to hedge the equity securities of each of the
Balanced, Growth and Income, Capital Growth or International Portfolios with
regard to market (systematic) risk (involving the market's assessment of
over-all economic prospects), as distinguished from stock-specific risk
(involving the market's evaluation of the merits of the issuer of a particular
security). By establishing an appropriate "short" position in stock index
futures, the Fund may seek to protect the value of the equity of a Portfolio's
securities against an overall decline in the market for equity securities.
Alternatively, in anticipation of a generally rising market, the Fund can seek
on behalf of a Portfolio to avoid losing the benefit of apparently low current
prices by establishing a "long" position in stock index futures and later
liquidating that position as particular equity securities are in fact acquired.
To the extent that these hedging strategies are successful, the Portfolio will
be affected to a lesser degree by adverse overall market price movements,
unrelated to the merits of specific portfolio equity securities, than would
otherwise be the case.
Options on Futures. For bona fide hedging purposes, the Fund may also purchase
and write, on behalf of each of the Bond, Balanced, Capital Growth and
International Portfolios, call and put options on futures contracts, which are
traded on exchanges that are licensed and regulated by the CFTC or on any
foreign exchange for the purpose of options 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
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established prices will be subject to the maintenance of a liquid market. A
Portfolio will not purchase or write options on futures contracts unless, in the
Advisor'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.
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
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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.
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
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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.
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
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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, 21st
Century Growth, Global Discovery and Health Sciences Portfolios
Growth and Income Portfolio, 21st Century Growth Portfolio, Global Discovery and
Health Sciences 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, 21st Century Growth Portfolio, Global Discovery Portfolio and Health
Sciences 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 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 Advisor'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 Advisor'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
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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 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.
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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 Advisor 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 Advisor. 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.
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.
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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.
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
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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 Advisor.
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
Advisor considers that the Austrian schilling is correlated to the German
deutschemark (the "D-mark"), a Portfolio holds securities denominated in
schillings and the Advisor believes that the value of schillings will decline
against the U.S. dollar, the Advisor may enter into a commitment or option to
sell D-marks and buy dollars. Currency hedging involves some of the same risks
and considerations as other transactions with similar instruments. Currency
transactions can result in losses to a Portfolio if the currency being hedged
fluctuates in value to a degree or in a direction that is not anticipated.
Further, there is the risk that the perceived correlation between various
currencies may not be present or may not be present during the particular time
that a Portfolio is engaging in proxy hedging. If a Portfolio enters into a
currency hedging transaction, a Portfolio will comply with the asset segregation
requirements described below.
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 Advisor, 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 Advisor's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired
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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 Advisor 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 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 Advisor. 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
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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 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.
Investment-Grade Bonds. Bond, Balanced, Capital Growth, 21st Century Growth,
Global Discovery, Health Sciences and International Portfolios may each 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 Advisor. Moody's considers bonds it rates Baa to have
speculative elements as well as investment-grade characteristics. To the extent
that a Portfolio invests in higher-grade securities, a Portfolio will not be
able to avail itself of opportunities
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for higher income which may be available at lower grades.
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. The
Health Sciences may invest up to 20% of total assets in debt securities,
including bonds of private issuers
High Yield, High Risk Bonds. The Bond, Balanced, Capital Growth and Global
Discovery Portfolios may also purchase debt securities which are rated below
investment-grade (commonly referred to as "junk bonds"), that is, rated below
Baa by Moody's or below BBB by S&P and unrated securities judged to be of
equivalent quality as determined by the Advisor. These securities 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 to
principal and income, and may be less liquid, than securities in the higher
rating categories. The lower the ratings of such debt securities, the more their
risks render them like equity securities. Securities rated D may be in default
with respect to payment of principal or interest. 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.
Issuers of such high yielding securities often are highly leveraged and may not
have available to them more traditional methods of financing. Therefore, the
risk associated with acquiring the securities of such issuers generally is
greater than is the case with higher rated securities. For example, during an
economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of high yield securities may experience financial stress.
During such periods, such issuers may not have sufficient revenues to meet their
interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific corporate developments,
or the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss from default by the
issuer is significantly greater for the holders of high yield securities because
such securities are generally unsecured and are often subordinated to other
creditors of the issuer. Prices and yields of high yield securities will
fluctuate over time and, during periods of economic uncertainty, volatility of
high yield securities may adversely 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.
A Portfolio may have difficulty disposing of certain high yield (high risk)
securities because they may have a thin trading market. Because not all dealers
maintain markets in all high yield securities, a Portfolio anticipates that such
securities could be sold only to a limited number of dealers or institutional
investors. The lack of a liquid secondary market may have an adverse effect on
the market price and a Portfolio's ability to dispose of particular issues and
may also make it more difficult for a Portfolio to obtain accurate market
quotations for purposes of valuing a Portfolio's assets. Market quotations
generally are available on many high yield issues only from a limited number of
dealers and may not necessarily represent firm bids of such dealers or prices
for actual sales. 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, and liquidity and
valuation difficulties.
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
generally the policy of the Advisor 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 a
Portfolio's investment objective by investment in such securities may be more
dependent on the Advisor's credit analysis than is the case for higher quality
bonds. Should the rating of a portfolio security be downgraded, the Advisor will
determine whether it is in the best interests of the Fund to retain or dispose
of such security.
Prices for below investment-grade securities may be affected by legislative and
regulatory developments. Also, Congress has from time to time considered
legislation which would restrict or eliminate the corporate tax deduction for
interest
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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 and
multiple interest rate transactions and any combination of futures, options 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.
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Risks of Specialized Investment Techniques Outside the U.S. When conducted
outside the U.S., the above described specialized investment techniques may not
be regulated as effectively 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 on-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.
Short Sales Against the Box. Health Sciences Portfolio may make short sales of
common stocks if, at all times when a short position is open, the Portfolio owns
the stock or owns preferred stocks or debt securities convertible or
exchangeable, without payment of further consideration, into the shares of
common stock sold short. Short sales of this kind are referred to as short sales
"against the box." The portfolio will incur a loss as a result of the short sale
if the price of the security increases between the dates of the short sale and
the date on which the Portfolio replaces the borrowed security. The
broker/dealer that executes a short sale generally invests cash proceeds of the
sale until they are paid to the Portfolio. Arrangements may be made with the
broker/dealer to obtain a portion of the interest earned by the broker on the
investment of short sale proceeds. The Portfolio will segregate the common stock
or convertible or exchangeable preferred stock or debt securities in a special
account with the custodian. The Portfolio will incur transaction costs,
including interest expenses in connection with opening, maintaining, and closing
short sales against the box. Uncertainty regarding the tax effects of short
sales of appreciated investments may limit the extent to which the Portfolio may
enter into short sales against the box.
Common Stocks. Balanced, Growth and Income Portfolio, Capital Growth Portfolio,
21st Century Growth Portfolio, Global Discovery Portfolio, International
Portfolio and Health Sciences Portfolio invest in common stocks. Common stock is
issued by companies to raise cash for business purposes and represents a
proportionate interest in the issuing companies. Therefore, the Portfolios may
participate in the success or failure of any company in which it holds stock.
The market values of common stock can fluctuate significantly, reflecting the
business performance of the issuing company, investor perception and general
economic or financial market movements. Despite the risk of price volatility,
however, common stocks have historically offered a greater potential for
long-term gain on investment, compared to other classes of financial assets such
as bonds or cash equivalents, although there can be no assurance that this will
be true in the future.
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 such securities 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 Advisor 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. Such transactions may
increase fluctuations in the market value of Portfolio assets and its yield.
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
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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.
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 1940 Act, and as
interpreted or modified by regulatory authority having
jurisdiction, from time to time;
(2) issue senior securities, except as permitted under the 1940
Act, and as interpreted or modified by regulatory authority
having jurisdiction, from time to time;
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(3) For all Portfolios (except Health Sciences Portfolio):
concentrate its investments in a particular industry, as that
term is used in 1940 Act, 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 1940 Act, and as
interpreted or modified by regulatory authority having
jurisdiction, from time to time.
Other Investment Policies. The Trustees of the Fund voluntarily adopted policies
and restrictions which are observed in the conduct of the Fund's affairs. These
represent intentions of the Trustees based upon current circumstances. They
differ from fundamental investment policies in that they may be changed or
amended by action of the Trustees without prior notice to or approval of
shareholders.
As a matter of nonfundamental policy, the Fund may not on behalf of the
indicated Portfolio(s):
(1) For Money Market Portfolio: the Portfolio currently does not
intend to borrow money in an amount greater than 5% of its
total assets, except for temporary or emergency purposes;
(2) For all Portfolios (except Money Market Portfolio): the
Portfolio currently does not intend to borrow money in an
amount greater than 5% of its total assets, except (i) for
temporary or emergency purposes and (ii) by engaging in
reverse repurchase agreements, dollar rolls, or other
investments or transactions described in the Portfolio's
registration statement which may be deemed to be borrowings;
(3) For all Portfolios (except Money Market Portfolio and Bond
Portfolio): the Portfolio currently does not intend to enter
into either of reverse repurchase agreements or dollar rolls
in an amount greater than 5% of its total assets;
(4) For all Portfolios (except Money Market Portfolio): the
Portfolio currently does not intend to purchase securities on
margin or make short sales, except (i) short sales against the
box, (ii) in connection with arbitrage transactions, (iii) for
margin deposits in connection with futures contracts, options
or other permitted investments, (iv) that transactions in
futures contracts and options shall not be deemed to
constitute selling securities short, and (v) that the
Portfolio may obtain such short-term credits as may be
necessary for the clearance of securities transactions;
(5) For all Portfolios (except Money Market Portfolio): the
Portfolio currently does not intend to purchase options,
unless the aggregate premiums paid on all such options held by
the Portfolio at any time do not exceed 20% of its total
assets; or sell put options, if as a result, the aggregate
value of the obligations underlying such put options would
exceed 50% of its total assets;
(6) For all Portfolios (except Money Market Portfolio): the
Portfolio currently does not intend to enter into futures
contracts or purchase options thereon, unless immediately
after the purchase, the value of the aggregate initial margin
with respect to such futures contracts entered into on behalf
of the Portfolio and the premiums paid for such options on
futures contracts does not exceed 5% of the fair market value
of the Portfolio's total assets; provided that in the case of
an option that is in-the-money at the time of purchase, and
in-the-money amount may be excluded in computing the 5% limit;
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(7) For all Portfolios (except Money Market Portfolio): the
Portfolio currently does not intend to purchase warrants if as
a result, such securities, taken at the lower of cost or
market value, would represent more than 5% of the value of the
Portfolio's total assets (for this purpose, warrants acquired
in units or attached to securities will be deemed to have no
value); and
(8) Each Portfolio currently does not intend to lend portfolio
securities in an amount greater than 5% of its total assets.
"Value" for the purposes of all investment restrictions shall mean the value
used in determining a Portfolio's net asset value. (See "NET ASSET VALUE.")
PURCHASES AND REDEMPTIONS
The separate accounts of the Participating Insurance Companies purchase and
redeem shares of each Portfolio based on, among other things, the amount of
premium payments to be invested and surrender and transfer requests to be
effected on that day pursuant to variable annuity contracts and variable life
insurance policies but only on days on which the Exchange is open for trading.
Such purchases and redemptions of the shares of each Portfolio are effected at
their respective net asset values per share determined as of the close of
regular trading on the Exchange (normally 4 p.m. eastern time) on that same day
except that, in the case of Money Market Portfolio, purchases will not be
effected until the next determination of net asset value after federal funds
have been made available to the Fund. (See "NET ASSET VALUE.") Payment for
redemptions will be made by State Street Bank and Trust Company or Brown
Brothers Harriman & Co. on behalf of the Fund and the applicable Portfolios
within seven days thereafter. No fee is charged the separate accounts of the
Participating Insurance Companies when they redeem Fund shares.
The Fund may suspend the right of redemption of shares of any Portfolio and may
postpone payment for any period: (i) during which the Exchange is closed other
than customary weekend and holiday closings or during which trading on the
Exchange is restricted; (ii) when the SEC determines that a state of emergency
exists which may make payment or transfer not reasonably practicable, (iii) as
the SEC may by order permit for the protection of the security holders of the
Fund or (iv) at any other time when the Fund may, under applicable laws and
regulations, suspend payment on the redemption of its shares.
Should any conflict between VA contract and VLI policy holders arise which would
require that a substantial amount of net assets be withdrawn from the Fund,
orderly portfolio management could be disrupted to the potential detriment of
such contract and policy holders.
Special Redemption and Exchange Information for Health Sciences Portfolio
In general, shares of the Health Sciences Portfolio may be exchanged or redeemed
at net asset value. However, shares of the Portfolio held for less than one year
are redeemable at a price equal to 99% of the then current net asset value per
share. This 1% discount, referred to in the prospectus and this statement of
additional information as a redemption fee, directly affects the amount a
shareholder who is subject to the discount receives upon exchange or redemption.
It is intended to encourage long-term investment, to avoid transaction and other
expenses caused by early redemptions and to facilitate portfolio management. The
fee is not a deferred sales charge, is not a commission paid to the Adviser or
its subsidiaries, and does not benefit the Adviser in any way. The Portfolio
reserves the right to modify the terms of or terminate this fee at any time.
The redemption discount will not be applied to (a) a redemption of shares of the
Portfolio outstanding for one year or more, (b) shares purchased through certain
retirement plans, including 401(k) plans, 403(b) plans, 457 plans, Keogh
accounts, and Profit Sharing and Money Purchase Pension Plans, (c) a redemption
of reinvestment shares (i.e., shares purchased through the reinvestment of
dividends or capital gains distributions paid by the Portfolio), (d) a
redemption of shares due to the death of the registered shareholder of a
Portfolio account, or, due to the death of all registered shareholders of a
Portfolio account with more than one registered shareholder, (i.e., joint tenant
account), upon receipt by Scudder Investments Service Company of appropriate
written instructions and documentation satisfactory to Scudder Investments
Service Company, or (e) a redemption of shares by the Portfolio upon exercise of
its right to liquidate accounts (i) falling below the minimum account size by
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reason of shareholder redemptions or (ii) when the shareholder has failed to
provide tax identification information. However, if shares are purchased for a
retirement plan account through a broker, financial institution or recordkeeper
maintaining an omnibus account for the shares, such waiver may not apply.
(Before purchasing shares, please check with your account representative
concerning the availability of the fee waiver.) In addition, this waiver does
not apply to IRA and SEP-IRA accounts. For this purpose and without regard to
the shares actually redeemed, shares will be treated as redeemed as follows:
first, reinvestment shares; second, purchased shares held one year or more; and
third, purchased shares held for less than one year. Finally, if a redeeming
shareholder acquires Portfolio shares through a transfer from another
shareholder, applicability of the discount, if any, will be determined by
reference to the date the shares were originally purchased, and not from the
date of transfer between shareholders.
Investment Advisor
Zurich Scudder Investments, Inc. (the "Advisor"), an investment counsel firm,
acts as investment Advisor 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 Advisor 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 Advisor, and
Zurich Kemper Investments, Inc., a Zurich subsidiary, became part of the
Advisor. The Advisor'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. On October 17, 2000, the dual holding company structure of
Zurich Financial Services Group, comprised of Allied Zurich p.l.c. in the United
Kingdom and Zurich Allied A.G. in Switzerland, was unified into a single Swiss
holding company, Zurich Financial Services. On January 1, 2001, Scudder Kemper
Investments Inc. changed its name to Zurich Scudder Investments, Inc.
Founded in 1872, Zurich is a multinational, public corporation organized under
the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (the "Zurich Insurance Group"). Zurich and the Zurich
Insurance Group provide an extensive range of insurance products and services
and have branch offices and subsidiaries in more than 40 countries throughout
the world.
The principal source of the Advisor'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 Advisor maintains a large research department, which conducts continuous
studies of the factors that affect the position of various industries, companies
and individual securities. The Advisor 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
Advisor's clients. However, the Advisor regards this information and material as
an adjunct to its own research activities. The Advisor'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 Advisor 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 Advisor. 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
56
<PAGE>
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 Advisor 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
Advisor 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 Advisor,
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. 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 21st Century Growth Portfolio and Health Sciences Portfolio,
were approved by the Trustees on August 12, 1998, and became effective September
7, 1998. The Investment management agreements for 21st Century Growth Portfolio
and Health Sciences Portfolio are dated May 1, 1999 and May 1, 2001,
respectively. The Agreements will continue in effect until September 30, 2001
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 Advisor 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 Advisor 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 Advisor 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 Advisor 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 Advisor 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 Advisor receives compensation monthly at the following annual rates
from each Portfolio:
57
<PAGE>
<TABLE>
<CAPTION>
% of the average
daily net asset
values of each
Portfolio Portfolio 1998 1999 2000
--------- --------- ---- ---- ----
<S> <C> <C> <C> <C>
Money Market Portfolio 0.370 $486,458 $640,633 $537,218
Bond Portfolio 0.475 439,858 487,063 441,616
Balanced Portfolio 0.475 648,870 856,252 921,724
Growth and Income Portfolio 0.475 874,193 968,354 959,668
Capital Growth Portfolio* 0.460 3,628,132 4,657,834 5,692,473
21st Century Growth Portfolio** 0.875 -- 35,691 204,230
Global Discovery Portfolio+ 0.975 237,980 377,844 1,359,123
International Portfolio*** 0.820 4,168,595 5,064,630 6,655,622
Health Sciences Portfolio++ -- -- -- --
</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 Advisor received compensation at an
annual rate of 0.47% and 0.46% for the fiscal years ended December 31,
1998 and 1999, respectively.
** 21st Century Growth Portfolio commenced operations on May 1, 1999.
Until April 30, 2002, the Advisor has agreed to limit total operating
expenses of 21st Century Growth Portfolio to 1.50%, of average daily
net assets. The portfolio changed its name on May 1, 2000 from Small
Company Growth Portfolio.
*** For any calendar month during which the average daily net assets of
International Portfolio exceed $500,000,000, the fee payable for that
month, with respect to the excess over $500,000,000, is calculated at
an annual rate of 0.725%. As a result, the Advisor received
compensation at an annual rate of 0.85% and 0.87% for the fiscal years
ended December 31, 1999 and 1998, respectively.
+ Until April 30, 1998 and from May 1, 2000 until April 30, 2002, the
Advisor 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.
++ Health Sciences Portfolio commenced operations on May 1, 2001. The
investment management fee for the portfolio is: 0.750% on the first
$250 million, 0.725% on the next $750 million, 0.700% on the next $1.5
billion, 0.680% on f the next $2.5 billion, 0.650% on the next $2.5
billion, 0.640% on the next $2.5 billion, 0.630% on the next $2.5
billion and 0.620% over $12.5 billion.
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 Advisor; 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
Advisor, the Trustees, consistent with the Portfolios' investment management
agreements and underwriting agreement, have approved payments to the Advisor 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 Advisor, for determining the daily net asset
value per share and maintaining the portfolio and general accounting records of
the Portfolios.
58
<PAGE>
Each Agreement identifies the Advisor as the exclusive licensee of the rights to
use and sublicense the names "Scudder," "Zurich Scudder Investments, Inc." and
"Scudder Stevens and Clark, Inc." (together, the "Scudder Marks"). Under this
license, the Fund, with respect to the Portfolios, has the non-exclusive right
to use and sublicense the Scudder name and marks as part of its name, and to use
the Scudder Marks in the Fund's investment products and services.
In reviewing the terms of the Agreements and in discussions with the Advisor
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 Advisor 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 Advisor in
the performance of its duties or from reckless disregard by the Advisor of its
obligations and duties under the Agreements.
Each Participating Insurance Company has agreed with the Advisor to reimburse
the Advisor 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 Advisor from time to time may have transactions
with various banks, including the Fund's custodian bank. It is the Advisor's
opinion that the terms and conditions of those transactions were not influenced
by existing or potential custodial or other Fund relationships.
The Advisor may serve as Advisor 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 the Advisor and its affiliates to the Scudder Family of Funds.
AMA InvestmentLink(SM) Program
Pursuant to an Agreement between the Advisor and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Advisor 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 Advisor with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLink(SM) Program. The Advisor
will also pay AMA Solutions, Inc. a general monthly fee, currently in the amount
of $833. The AMA and AMA Solutions, Inc. are not engaged in the business of
providing investment advice and neither is registered as an investment Advisor
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLink(SM) Program will be a customer of the Advisor (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 Advisor 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 Advisor 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 Advisor'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 Advisor'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
59
<PAGE>
in the investment advisory process. Exceptions to these and other provisions of
the Advisor'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 Advisor, Two International Place, Boston,
Massachusetts 02110-4103. The Fund's underwriting agreement dated May 18, 2000,
will remain in effect until September 30, 2001, and from year to year thereafter
only if its continuance is approved annually by a majority of the Trustees who
are not parties to such agreement or "interested persons" of any such party and
either by vote of a majority of the Trustees or a majority of the outstanding
voting securities of the Fund.
Under the principal underwriting agreement between the Fund and the Distributor,
the Fund is responsible for the payment of all fees and expenses in connection
with the preparation and filing of any registration statement and prospectus
covering the issue and sale of shares, and the registration and qualification of
shares for sale with the SEC in the various states, including registering the
Fund as a broker or dealer. The Fund will also pay the fees and expenses of
preparing, printing and mailing prospectuses annually to existing shareholders
and any notice, proxy statement, report, prospectus or other communication to
shareholders of the Fund, printing and mailing confirmations of purchases of
shares, any issue taxes or any initial transfer taxes, a portion of toll-free
telephone service for shareholders, wiring funds for share purchases and
redemptions (unless paid by the shareholder who initiates the transaction),
printing and postage of business reply envelopes and a portion of the computer
terminals used by both the Fund and the Distributor.
The Distributor will pay for printing and distributing prospectuses or reports
prepared for its use in connection with the offering of the shares to the public
and preparing, printing and mailing any other literature or advertising in
connection with the offering of the shares to the public. The Distributor will
pay all fees and expenses in connection with its qualification and registration
as a broker or dealer under Federal and state laws, a portion of the toll-free
telephone service and of computer terminals, and of any activity which is
primarily intended to result in the sale of shares issued by the Fund, unless a
12b-l Plan is in effect which provides that the Fund shall bear some or all of
such expenses. The Distributor has entered into agreements with broker-dealers
authorized to offer and sell VA contracts and VLI policies on behalf of the
Participating Insurance Companies under which agreements the broker-dealers have
agreed to be responsible for the fees and expenses of any prospectus, statement
of additional information and printed information supplemental thereto of the
Fund distributed in connection with their offer of VA contracts and VLI
policies.
As agent, the Distributor currently offers shares of each Portfolio on a
continuous basis to the separate accounts of Participating Insurance Companies
in all states in which the Portfolio or the Fund may from time to time be
registered or where permitted by applicable law. The underwriting agreement
provides that the Distributor accepts orders for shares at net asset value
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 and Health Sciences Portfolios, 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. 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.
60
<PAGE>
Expenses of the Portfolios and of SIS in connection with the Rule 12b-1 plans
for the Class B shares are set forth below:
------------------------------- ----------------------------
Class B Shares Fiscal Year 2000
-------------- ----------------
------------------------------- ----------------------------
Growth and Income Portfolio $34,180.51
------------------------------- ----------------------------
Global Discovery Portfolio $23,436.99
------------------------------- ----------------------------
International Portfolio $2,048.08
------------------------------- ----------------------------
Capital Growth Portfolio $3,532.63
------------------------------- ----------------------------
The Board considered various factors in connection with its decision as to
whether to approve the Plan, including (a) the nature and causes of the
circumstances which make implementation of the Plan necessary and appropriate;
(b) the way in which the Plan would address those circumstances, including the
nature and potential amount of expenditures; (c) the nature of the anticipated
benefits; (d) the possible benefits of the Plan to any other person relative to
those of the Fund; (e) the effect of the Plan on existing owners of VA contracts
and VLI policies; (f) the merits of possible alternative plans or pricing
structures; (g) competitive conditions in the variable products industry and (h)
the relationship of the Plan to other distribution efforts of the Fund.
Based upon its review of the foregoing factors and the materials presented to
it, and in light of its fiduciary duties under relevant state law and the 1940
Act, the Board determined, in the exercise of its business judgment, that the
Fund's Plan is reasonably likely to benefit the Fund and the VA contract and VLI
policy owners in at least one of several ways. Specifically, the Board concluded
that the Participating Insurance Companies would have less incentive to educate
VA contract and VLI policy owners and sales people concerning the Fund if
expenses associated with such services were not paid for by the Fund. In
addition, the Board determined that the payment of distribution fees to insurers
should motivate them to maintain and enhance the level of services relating to
the Fund provided to VA contract and VLI policy owners, which would, of course,
benefit such VA contract and VLI policy owners. Further, the adoption of the
Plan would likely help to maintain and may lead to an increase in net assets
under management given the distribution financing alternatives available through
the multi-class structure. The Board also took into account expense structures
of other competing products and administrative compensation arrangements between
other funds, their advisers and insurance companies that currently are in use in
the variable products industry. Further, it is anticipated that Plan fees may be
used to educate potential and existing owners of VA contracts and VLI policies
concerning the Fund, the securities markets and related risks. A better educated
investor, in the Distributor's view, is less likely to surrender his or her VA
contract or VLI policy early, thereby avoiding the costs associated with such an
event. Accordingly, the Plan may help the Fund and Participating Insurance
Companies meet investor education needs.
The Board realizes that there is no assurance that the expenditure of Fund
assets to finance distribution of Fund shares will have the anticipated results.
However, the Board believes there is a reasonable likelihood that one or more of
such benefits will result, and since the Board will be in a position to monitor
the distribution expenses of the Fund, it will be able to evaluate the benefit
of such expenditures in deciding whether to continue the Plan.
The Plan and any Rule 12b-1-related agreement that is entered into by the Fund
or the Distributor in connection with the Plan will continue in effect for a
period of more than one year only so long as continuance is specifically
approved at least annually by a vote of a majority of the Fund's Board of
Trustees, and of a majority of the Trustees who are not interested persons (as
defined in the 1940 Act) of the Fund or a Portfolio ("Independent Trustees"),
cast in person at a meeting called for the purpose of voting on the Plan, or the
Rule 12b-1 related agreement, as applicable. In addition, the Plan and any Rule
12b-1 related agreement, may be terminated as to Class B shares of a Portfolio
at any time, without penalty, by vote of a majority of the outstanding Class B
shares of that Portfolio or by vote of a majority of the Independent Trustees.
The Plan also provides that it may not be amended to increase materially the
amount that may be spent for distribution of Class B shares of a Portfolio
without the approval of Class B shareholders of that Portfolio.
61
<PAGE>
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position with
Underwriter, Scudder
Investor Services,
Name, Age and Address Position with Fund Principal Occupation** Inc.
--------------------- ------------------ ---------------------- ----
<S> <C> <C> <C>
Henry P. Becton, Jr. (57) Trustee President, WGBH Educational None
WGBH Foundation
125 Western Avenue
Allston, MA 02134
Linda C. Coughlin (49)+* Chairperson, Managing Director of Zurich Director and Senior
President and Trustee Scudder Investments, Inc. Vice President
Dawn-Marie Driscoll (54) Trustee Executive Fellow, Center for None
4909 SW 9th Place Business Ethics, Bentley
Cape Coral, FL 33914 College; President, Driscoll
Associates (consulting firm)
Edgar R. Fiedler (72) Trustee Senior Fellow and Economic None
50023 Brogden Counsellor, The Conference
Chapel Hill, NC Board, Inc. (not-for-profit
business research organization)
Keith R. Fox (47) Trustee General Partner, Exeter Group None
10 East 53rd Street of Funds
New York, NY 10022
Joan E. Spero (56) Trustee President, Doris Duke None
Doris Duke Charitable Foundation Charitable Foundation;
650 Fifth Avenue Department of State -
New York, NY 10128 Undersecretary of State for
Economic, Business and
Agricultural Affairs (March
1993 to January 1997)
Jean Gleason Stromberg (57) Trustee Consultant; Director, Financial None
3816 Military Road, NW Institutions Issues, U.S.
Washington, D.C. General Accounting Office
(1996-1997); Partner, Fulbright
& Jaworski (law firm)
(1978-1996)
Jean C. Tempel (58) Trustee Managing Director, First Light None
One Boston Place Capital, LLC (venture capital
23rd Floor firm)
Boston, MA 02108
Steven Zaleznick (46)* Trustee President and CEO, AARP None
601 E. Street, NW Services, Inc.
7th Floor
Washington, D.C. 20004
62
<PAGE>
Position with
Underwriter, Scudder
Investor Services,
Name, Age and Address Position with Fund Principal Occupation** Inc.
--------------------- ------------------ ---------------------- ----
Kathryn L. Quirk (48)++* Vice President and Managing Director of Zurich Director, Senior Vice
Assistant Secretary Scudder Investments, Inc. President, Chief Legal
Officer and Assistant
Clerk
Robert S. Cessine (51)*** Vice President Managing Director of Zurich --
Scudder Investments, Inc.
Irene T. Cheng (46) # Vice President Managing Director of Zurich --
Scudder Investments, Inc.
Peter Chin (59) # Vice President Managing Director of Zurich --
Scudder Investments, Inc.
James E. Fenger (42)*** Vice President Managing Director of Zurich --
Scudder Investments, Inc.
William F. Gadsden (46) # Vice President Managing Director of Zurich --
Scudder Investments, Inc.
Gary A. Langbaum (52) *** Vice President Managing Director of Zurich --
Scudder Investments, Inc.
Valerie F. Malter (42) # Vice President Managing Director of Zurich --
Scudder Investments, Inc.
Kathleen Millard (40) # Vice President Managing Director of Zurich --
Scudder Investments, Inc.
Gerald J. Moran (61) # Vice President Managing Director of Zurich --
Scudder Investments, Inc.
63
<PAGE>
Position with
Underwriter, Scudder
Investor Services,
Name, Age and Address Position with Fund Principal Occupation** Inc.
--------------------- ------------------ ---------------------- ----
Thomas V. Bruns (42)# Vice President Managing Director of Zurich --
Scudder Investments, Inc.
William F. Glavin (42)+ Vice President Managing Director of Zurich Vice President
Scudder Investments, Inc.
James E. Masur (40)+ Vice President Managing Director of Zurich --
Scudder Investments, Inc.
Howard Schneider (43)+ Vice President Managing Director of Zurich Vice President
Scudder Investments, Inc.
Frank J. Rachwalski, Jr.*** (56) Vice President Managing Director of Zurich --
Scudder Investments, Inc.
Brenda Lyons (38) + Assistant Treasurer Senior Vice President of --
Zurich Scudder Investments,
Inc.
John R. Hebble (42) + Treasurer Senior Vice President of --
Zurich Scudder Investments,
Inc.
John Millette (38) + Vice President and Vice President of Zurich --
Secretary Scudder Investments, Inc.
Caroline Pearson (39) + Assistant Secretary Managing Director of Zurich Clerk
Scudder Investments, Inc.;
Associate, Dechert Price &
Rhoads (law firm), 1989-1997
</TABLE>
* Ms. Coughlin and Mr. Zaleznick are considered by the Fund and its
counsel to be Trustees who are an "interested person" of the Advisor 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, Hammond and Ms. Quirk 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
64
<PAGE>
Certain of the Trustees and officers of the Fund also serve in similar
capacities with respect to other Scudder Funds.
As of December 31, 2000, all Trustees and officers of the Fund as a group owned
beneficially (as that term is defined is section 13(d) of the Securities
Exchange Act of 1934) less than 1% of the Fund.
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 Advisor.
These "Independent Trustees" have primary responsibility for assuring that the
Fund is managed in the best interests of its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of the Fund and other operational matters, including policies and
procedures designated to assure compliance with various regulatory requirements.
At least annually, the Independent Trustees review the fees paid to the Advisor
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 Advisor and its affiliates, and
comparative information regarding fees and expenses of competitive funds. They
are assisted in this process by the Fund's independent public accountants and by
independent legal counsel selected by the Independent Trustees.
All of the Independent Trustees serve on the Committee on Independent Trustees,
which nominates Independent Trustees and considers other related matters, and
the Audit Committee, which selects the Fund's independent public accountants and
reviews accounting policies and controls. In addition, Independent Trustees from
time to time have established and served on task forces and subcommittees
focusing on particular matters such as investment, accounting and shareholder
service issues.
Compensation of Officers and Board Members
The Independent Board members receive from the Fund an annual trustee's fee, a
fee for attendance at each board meeting, and a fee for attendance at committee
meetings, as well as reimbursement of expenses incurred for travel to and from
Board Meetings. No additional compensation is paid to any Independent Trustee
for travel time to meetings, attendance at directors' educational seminars or
conferences, service on industry or association committees, participation as
speakers at directors' conferences or service on special trustee task forces or
subcommittees. Independent Trustees do not receive any employee benefits such as
pension or retirement benefits or health insurance. The Independent Trustees
have in the past and may in the future waive a portion of their compensation.
Each Independent Director receives compensation for his or her services, which
includes an annual retainer and an attendance fee for each meeting attended. The
Independent Director who serves as lead director receives additional
compensation for his or her service. No additional compensation is paid to any
Independent Director for travel time to meetings, attendance at director's
educational seminars or conferences, service on industry or association
committees, participation as speakers at directors' conferences or service on
special director task forces or subcommittees. Independent Directors do not
receive any employee benefits such as pension or retirement benefits or health
insurance. Notwithstanding the schedule of fees, the Independent Directors have
in the past and may in the future waive a portion of their compensation.
The Independent Board members also serve in the same capacity for other funds
managed by the Advisor. 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 2000 from the Trust and from all of the Scudder funds as a group.
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<TABLE>
<CAPTION>
Name Scudder Variable Series I^(1^)(2) All Scudder Funds
---- --------------------------------- -----------------
<S> <C> <C>
Henry P. Becton, Jr.*, Trustee $0 $156,219 (72 funds)
Dawn-Marie Driscoll*, Trustee $0 $154,587(72 funds)
Edgar R. Fiedler+*, Trustee $0 $115,814 (71 funds)
Keith R. Fox*, Trustee $0 $174,439 (71 funds)
Joan E. Spero* $0 $170,314 (71 funds)
Jean Gleason Stromberg*, Trustee $0 $97,572 (56 funds)
Jean C. Tempel*, Trustee $0 $149,613 (72 funds)
</TABLE>
* Newly elected trustee, March 29, 2001.
^(1) During year 2000, Scudder Variable Series I consisted of nine
portfolios: Money Market Portfolio, Bond Portfolio, Balanced Portfolio,
Growth and Income Portfolio, Capital Growth Portfolio, 21st Century
Growth Portfolio, Global Discovery Portfolio, International Portfolio
and Large Company Growth Portfolio.
^(2) Health Sciences Portfolio commenced operations on May 1, 2001.
+ Mr. Fiedler's total compensation includes the payment of deferred fees
in the amount of $174,961 accrued, but not received, through the
deferred compensation program.
Members of the Board of Trustees who are employees of the Advisor or its
affiliates receive no direct compensation from the Fund, although they are
compensated as employees of the Advisor, 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 class of each Portfolio of the Fund is
computed as of the close of regular trading on the Exchange on each day the
Exchange is open for trading (the "Value Time"). The Exchange is scheduled to be
closed on the following holidays: New Year's Day, Dr. Martin Luther King, Jr.
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas. Net asset value per share is determined by dividing
the value of the total assets of a Portfolio, less all liabilities, by the total
number of shares outstanding.
The valuation of Money Market Portfolio securities is based upon their amortized
cost, which does not take into account unrealized securities gains or losses.
This method involves initially valuing an instrument at its cost and thereafter
assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. While this method provides certainty in valuation, it may 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
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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 Advisor may calculate the price of
that debt security, subject to limitations established by the Board.
An exchange traded options contract on securities, currencies, futures and other
financial instruments is valued at its most recent sale price on such exchange.
Lacking any sales, the options contract is valued at the Calculated Mean.
Lacking any Calculated Mean, the options contract is valued at the most recent
bid quotation in the case of a purchased options contract, or the most recent
asked quotation in the case of a written options contract. An options contract
on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate.
If a security is traded on more than one exchange, or upon one or more exchanges
and in the over-the-counter market, quotations are taken from the market in
which the security is traded most extensively.
If, in the opinion of the Trust's Valuation Committee, the value of a portfolio
asset as determined in accordance with these procedures does not represent the
fair market value of the portfolio asset, the value of the portfolio asset is
taken to be an amount which, in the opinion of the Valuation Committee,
represents fair market value on the basis of all available information. The
value of other portfolio holdings owned by the Fund is determined in a manner
which, in the discretion of the Valuation Committee most fairly reflects fair
market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in terms of the
currency in which the market quotation used is expressed ("Local Currency"), the
value of these portfolio assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rate on the valuation date.
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
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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
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.
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If the Balanced, Growth and Income, Capital 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, and
International Portfolios may make an election to mark to market their shares of
these foreign investment companies in lieu of being subject to U.S. federal
income taxation. At the end of each taxable year to which the election applies,
a Portfolio would report as ordinary income the amount by which the fair market
value of the foreign company's stock exceeds a Portfolio's adjusted basis in
these shares; any mark to market losses and any loss from an actual disposition
of shares would be deductible as ordinary losses to the extent of any net mark
to market gains included in income in prior years. The effect of the election
would be to treat excess distributions and gain on dispositions as ordinary
income which is not subject to a fund level tax when distributed to shareholders
as a dividend. Alternatively, the Portfolios may elect to include as income and
gain their share of the ordinary earnings and net capital gain of certain
foreign investment companies in lieu of being taxed in the manner described
above.
Equity options (including options on stock and options on narrow-based stock
indexes) and over-the-counter options on debt securities written or purchased by
a Portfolio will be subject to tax under Section 1234 of the Code. In general,
no loss is recognized by a Portfolio upon payment of a premium in connection
with the purchase of a put or call option. The character of any gain or loss
recognized (i.e., long-term or short-term) will generally depend in the case of
a lapse or sale of the option on the Portfolio's holding period for the option
and in the case of an exercise of a put option on the Portfolio's holding period
for the underlying security. The purchase of a put option may constitute a short
sale for federal income tax purposes, causing an adjustment in the holding
period of the underlying security or a substantially identical security of the
Portfolio. If the Portfolio writes a put or call option, no gain is recognized
upon its receipt of a premium. If the option lapses or is closed out, any gain
or loss is treated as a short-term capital gain or loss. If a call option
written by a Portfolio is exercised, the character of the gain or loss depends
on the holding period of the underlying security. The exercise of a put option
written by a Portfolio is not a taxable transaction for the Portfolio.
Many futures contracts, certain foreign currency forward contracts entered into
by a Portfolio and all listed nonequity options written or purchased by the
Portfolio (including options on debt securities, options on futures contracts,
options on securities indexes and options on broad-based stock indexes) will be
governed by Section 1256 of the Code. Absent a tax election to the contrary,
gain or loss attributable to the lapse, exercise or closing out of any such
position generally will be treated as 60% long-term and 40% short-term capital
gain or loss, and on the last trading day of the fiscal year, all outstanding
Section 1256 positions will be marked to market (i.e. treated as if such
positions were closed out at their closing price on such day), with any
resulting gain or loss recognized as 60% long-term and 40% 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
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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. A transaction during the tax year that would otherwise
be a constructive sale may be disregarded if 1) the transaction is closed by the
30th day after the close of the tax year, and 2) the taxpayer holds the
appreciated financial position (without reduction of risk of loss) throughout
the 60-day period following the date of closing of the transaction.
Similarly, if a Portfolio enters into a short sale of property that becomes
substantially worthless, the Portfolio will be required to recognize gain at
that time as though it had closed the short sale. Future regulations may apply
similar treatment to other strategic transactions with respect to property that
becomes substantially worthless.
Under the Code, gains or losses attributable to fluctuations in exchange rates
which occur between the time a Portfolio accrues receivables or liabilities
denominated in a foreign currency and the time the Portfolio actually collects
such receivables or pays such liabilities generally are treated as ordinary
income or ordinary loss. Similarly, on disposition of debt securities
denominated in a foreign currency and on disposition of certain futures
contracts, forward contracts and options, gains or losses attributable to
fluctuations in the value of foreign currency between the date of acquisition of
the security or contract and the date of disposition are also treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"Section 988" gains or losses, may increase or decrease the amount of a
Portfolio's investment company taxable income to be distributed to its
shareholders as ordinary income.
If a Portfolio holds zero coupon securities or other securities which are issued
at a discount, a portion of the difference between the issue price of zero
coupon securities and the face value ("original issue discount") will be treated
as income to the Portfolio each year, even though the Portfolio will not receive
cash interest payments from these securities. This original issue discount
(imputed income) will comprise a part of the investment company taxable income
of the Portfolio which must be distributed to shareholders in order to maintain
the qualification of the Portfolio as a regulated investment company and to
avoid federal income tax at the Portfolio level. In addition, if a Portfolio
invests in certain high-yield original issue discount obligations issued by
corporations, a portion of the original issue discount accruing on the
obligation may be eligible for the deduction for dividends received by
corporations. In such event, dividends of investment company taxable income
received from the Portfolio by its corporate shareholders, to the extent
attributable to such portion of accrued original issue discount, may be eligible
for this deduction for dividends received by corporations if so designated by
the Portfolio in a written notice to shareholders. If a Portfolio acquires a
debt instrument at a market discount, a portion of the gain recognized, if any,
on disposition of such instrument may be treated as ordinary income.
Dividend and interest income received by the Portfolios from sources outside the
U.S. may be subject to withholding and other taxes imposed by such foreign
jurisdictions. Tax conventions between certain countries and the U.S. may reduce
or eliminate these foreign taxes, however, and foreign countries generally do
not impose taxes on capital gains respecting investments by foreign investors.
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
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income other than passive investment-type income. Furthermore, the foreign tax
credit is eliminated with respect to foreign taxes withheld on dividends if the
dividend-paying shares or the shares of the Portfolio are held by the Portfolio
or the shareholder, as the case may be, for less than 16 days (46 days in the
case of preferred shares) during the 30-day period (90-day period for preferred
shares) beginning 15 days (45 days for preferred shares) before the shares
become ex-dividend. In addition, if a Portfolio fails to satisfy these holding
period requirements, it cannot elect under Section 853 to pass through to
shareholders the ability to claim a deduction for the related foreign taxes.
Each Portfolio will be required to report to the Internal Revenue Service all
distributions of investment company taxable income and capital gains as well as
gross proceeds from the redemption or exchange of shares, except in the case of
certain exempt shareholders, which include most corporations. Under the backup
withholding provisions of Section 3406 of the Code, distributions of taxable
income and capital gains and proceeds from the redemption or exchange of the
shares of a regulated investment company may be subject to withholding of
federal income tax at the rate of 31% in the case of non-exempt shareholders who
fail to furnish the investment company with their taxpayer identification
numbers and with required certifications regarding their status under the
federal income tax law. Withholding may also be required if a Portfolio is
notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. Participating Insurance Companies
that are corporations should furnish their taxpayer identification numbers and
certify their status as corporations in order to avoid possible erroneous
application of backup withholding.
Shareholders of the Portfolios may be subject to state and local taxes on
distributions received from such Portfolios and on redemptions of their shares.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution.
The Fund is organized as a Massachusetts business trust, and neither the Fund
nor the Portfolios are liable for any income or franchise tax in the
Commonwealth of Massachusetts providing each Portfolio continues to qualify as a
regulated investment company under Subchapter M of the Code.
The foregoing discussion of U.S. federal income tax law relates solely to the
application of that law to U.S. persons. Each shareholder which is not a U.S.
person should consider the U.S. and foreign tax consequences of ownership of
shares of the Portfolio, including the possibility that such a shareholder may
be subject to a U.S. withholding tax at a rate of 30% (or at a lower rate under
an applicable income tax treaty) on amounts constituting ordinary income
received by it, where such amounts are treated as income from U.S. sources under
the Code.
For further information concerning federal income tax consequences for the
holders of the VA contracts and VLI policies, shareholders should consult the
prospectus used in connection with the issuance of their particular contracts or
policies. Shareholders should consult their tax advisers about the application
of the provisions of tax law described in this statement of additional
information in light of their particular tax situations.
DIVIDENDS AND DISTRIBUTIONS
Money Market Portfolio
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.
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Net investment income of Money Market Portfolio consists of all interest income
accrued on portfolio assets less all expenses of the Portfolio and amortized
market premium. Accreted market discount is included in interest income. The
Portfolio does not anticipate that it will normally realize any long-term
capital gains with respect to its portfolio.
Normally Money Market Portfolio will have a positive net income at the time of
each determination thereof. Net income may be negative if an unexpected
liability must be accrued or a loss realized. If the net income of the Portfolio
determined at any time is a negative amount, the net asset value per share will
be reduced below $1.00 unless one or more of the following steps are taken: the
Trustees have the authority (1) to reduce the number of shares in each
shareholder's account, (2) to offset each shareholder's pro rata portion of
negative net income from the shareholder's accrued dividend account or from
future dividends, or (3) to combine these methods in order to seek to maintain
the net asset value per share at $1.00. The Fund may endeavor to restore the
Portfolio's net asset value per share to $1.00 by not declaring dividends from
net income on subsequent days until restoration, with the result that the net
asset value per share will increase to the extent of positive net income which
is not declared as a dividend.
Should Money Market Portfolio incur or anticipate, with respect to its
portfolio, any unusual or unexpected significant expense or loss which would
affect disproportionately the Portfolio's income for a particular period, the
Trustees would at that time consider whether to adhere to the dividend policy
described above or to revise it in light of the then prevailing circumstances in
order to ameliorate to the extent possible the disproportionate effect of such
expense or loss on then existing shareholders. Such expenses or losses may
nevertheless result in a shareholder's receiving no dividends for the period
during which the shares are held and in receiving upon redemption a price per
share lower than that which was paid. Similarly, should Money Market Portfolio
incur or anticipate any unusual or unexpected significant income, appreciation
or gain which would affect disproportionately the fund's income for a particular
period, the Trustees or the Executive Committee of the Trustees may consider
whether to adhere to the dividend policy described above or to revise it in
light of the then prevailing circumstances in order to ameliorate to the extent
possible the disproportionate effect of such income, appreciation or gain on the
dividend received by existing shareholders. Such actions may reduce the amount
of the daily dividend received by existing shareholders.
Other Portfolios
Each Portfolio, except Money Market Portfolio, intends to follow the practice of
distributing substantially all of its investment company taxable income which
includes any excess of net realized short-term capital gains over net realized
long-term capital losses. A Portfolio may follow the practice of distributing
the entire excess of net realized long-term capital gains over net realized
short-term capital losses. However, a Portfolio may retain all or part of such
gain for reinvestment, after paying the related federal taxes for which
shareholders may then be able to claim a credit against their federal tax
liability. If a Portfolio does not distribute the amount of capital gain and/or
ordinary income required to be distributed by an excise tax provision of the
Code, that Portfolio may be subject to that excise tax.
Each Portfolio, except Money Market Portfolio, intends to distribute investment
company taxable income and any net realized capital gains in April each year.
Additional distributions may be made if necessary.
All distributions will be made in shares of a Portfolio. Both dividends and
capital gain distributions will be reinvested in additional shares of such a
Portfolio unless an election is made on behalf of a separate account to receive
dividends and capital gain distributions in cash.
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:
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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, 2000, was 6.66%.
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, 2000, was 6.88%.
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.
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<PAGE>
Yield for the 30-day period ended December 31, 2000
Bond Portfolio 6.02%
All Portfolios
A. Average Annual Total Return is the average annual compound rate of
return for the periods of one year and five years (or such shorter
periods as may be applicable dating from the commencement of the
Portfolio's operations) all ended on the date of a recent calendar
quarter.
Average annual total return quotations reflect changes in the price of
a Portfolio's shares and assume that all dividends and capital gains
distributions during the respective periods were reinvested in
Portfolio shares. Average annual total return is calculated by finding
the average annual compound rates of return of a hypothetical
investment over such periods, according to the following formula
(average annual total return is then expressed as a percentage):
T = (ERV/P)^1/n - 1
Where:
P = a hypothetical initial investment of $1,000
T = Average Annual Total Return
n = number of years
ERV = ending redeemable value: ERV is the
value, at the end of the applicable
period, of a hypothetical $1,000
investment made at the beginning of the
applicable period.
Average Annual Total Return for periods
ended December 31, 2000 -- Class A Shares*
<TABLE>
<CAPTION>
One Year Five Years Ten Years Life of Class
<S> <C> <C> <C> <C>
Money Market Portfolio 6.21% 5.37% 4.78% --
Bond Portfolio 10.56% 5.53% 7.61% --
Balanced Portfolio -2.02% 14.10% 13.35% --
Growth and Income Portfolio**^(1) -2.10% 12.09% -- 14.37%
Capital Growth Portfolio*** -9.90% 19.61% 17.71% --
Global Discovery Portfolio****^(2)^(3) -5.29% -- -- 18.07%
International Portfolio***** -21.70% 12.41% 11.40% --
21st Century Growth Portfolio^(4) -22.39% -- -- 20.95%
Health Sciences^(5) -- -- -- --
</TABLE>
* As of December 31, 2000, 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 Advisor 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 Advisor had not done so,
average annual total returns would have been lower.
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<PAGE>
^(4) For the period beginning May 3, 1999 (commencement of operations) to
December 31, 1999.
^(5) As this is a new portfolio, no performance information is provided.
Average Annual Total Return for periods ended
December 31, 2000 -- Class B Shares*
One Year Life of Class
Growth and Income Portfolio^(1) -2.33% 8.62%
Capital Growth Portfolio^(2) -10.13% 16.81%
Global Discovery Portfolio^**(3) -5.42% 22.08%
International Portfolio^(4) -21.89% 10.88%
21st Century Growth Portfolio^(5) -22.79% 20.23%
* As of December 31, 2000, Bond and Balanced Portfolios each had not
begun issuing Class B shares.
** Until April 30, 1998, the Advisor 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 Advisor had not done so,
average annual total returns would have been lower.
^(1) The Fund commenced selling Growth and Income Portfolio Class B shares
on May 1, 1997.
^(2) The Fund commenced selling Capital Growth Portfolio Class B shares on
May 12, 1997.
^(3) The Fund commenced selling Global Discovery Portfolio Class B shares on
May 2, 1997.
^(4) The Fund commenced selling International Portfolio Class B shares on
May 8, 1997.
^(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, 2000 -- Class A Shares*
<TABLE>
<CAPTION>
One Year Five Years Ten Years Life of Class
<S> <C> <C> <C> <C>
Money Market Portfolio 6.21% 29.88% 59.56% --
Bond Portfolio 10.56% 30.91% 108.31% --
Balanced Portfolio -2.02% 93.42% 250.09% --
Growth and Income Portfolio**(1) -2.10% 76.95% -- 144.54%
Capital Growth Portfolio*** -9.90% 144.86% 410.85% --
Global Discovery Portfolio****(2)(3) -5.29% -- -- 116.92%
International Portfolio***** -21.70% 79.44% 194.29% --
21st Century Growth Portfolio (4) -22.39% -- -- 37.10%
</TABLE>
75
<PAGE>
* As of December 31, 2000, 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 Advisor 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 Advisor 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
Cumulative Total Return for periods ended December 31, 2000 -- Class B Shares*
One Year Life of Class
Growth and Income Portfolio^(1) -2.33% 35.40%
Capital Growth Portfolio^(2) -10.13% 75.84%
Global Discovery Portfolio^(3) -5.42% 107.54%
International Portfolio^(4) -21.89% 45.70%
21st Century Growth Portfolio^(5) -22.79% 35.76%
* As of December 31, 2000, Bond and Balanced Portfolios each had not
begun issuing Class B shares.
** Until April 30, 1998, the Advisor 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 Advisor 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.
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<PAGE>
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 addition, the amount of assets that the Advisor 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.
77
<PAGE>
Taking a Global Approach
Many U.S. investors limit their holdings to U.S. securities because they assume
that international or global investing is too risky. While there are risks
connected with investing overseas, it's important to remember that no investment
-- even in blue-chip domestic securities -- is entirely risk free. Looking
outside U.S. borders, an investor today can find opportunities that mirror
domestic investments -- everything from large, stable multinational companies to
start-ups in emerging markets. To determine the level of risk with which you are
comfortable, and the potential for reward you're seeking over the long term, you
need to review the type of investment, the world markets, and your time horizon.
The U.S. is unusual in that it has a very broad economy that is well represented
in the stock market. However, many countries around the world are not only
undergoing a revolution in how their economies operate, but also in terms of the
role their stock markets play in financing activities. There is vibrant change
throughout the global economy and all of this represents potential investment
opportunity.
Investing beyond the United States can open this world of opportunity, due
partly to the dramatic shift in the balance of world markets. In 1970, the
United States alone accounted for two-thirds of the value of the world's stock
markets. Now, the situation is reversed -- only 35% of global stock market
capitalization resides here. There are companies in Southeast Asia that are
starting to dominate regional activity; there are companies in Europe that are
expanding outside of their traditional markets and taking advantage of faster
growth in Asia and Latin America; other companies throughout the world are
getting out from under state control and restructuring; developing countries
continue to open their doors to foreign investment.
Stocks in many foreign markets can be attractively priced. The global stock
markets do not move in lock step. When the valuations in one market rise, there
are other markets that are less expensive. There is also volatility within
markets in that some sectors may be more expensive while others are depressed in
valuation. A wider set of opportunities can help make it possible to find the
best values available.
International or global investing offers diversification because the investment
is not limited to a single country or economy. In fact, many experts agree that
investment strategies that include both U.S. and non-U.S. investments strike the
best balance between risk and reward.
SHAREHOLDER COMMUNICATIONS
Owners of policies and contracts issued by Participating Insurance Companies for
which shares of one or more Portfolios are the investment vehicle will receive
from the Participating Insurance Companies unaudited semi-annual financial
statements and audited year-end financial statements certified by the
Portfolios' independent public accountants. Each report will show the
investments owned by a Portfolio and the market values thereof as determined by
the Trustees and will provide other information about a Portfolio and its
operations.
Participating Insurance Companies with inquiries regarding the Fund or its
Portfolios may call the Fund's underwriter, Scudder Investor Services, Inc., at
1-800-778-1482 or write Scudder Investor Services, Inc., Two International
Place, Boston, Massachusetts 02110-4103.
ORGANIZATION AND CAPITALIZATION
General
The Portfolios are portfolios of Scudder Variable Series I, a Massachusetts
business trust established under an amended and restated Declaration of Trust
dated October 24, 1997, 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, 21st Century Growth Portfolio,
Global Discovery Portfolio, International Portfolio and Health Sciences
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,
78
<PAGE>
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 and Health Sciences Portfolio, which do 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 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 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 will vote
its shares in each Underlying Fund in proportion to the vote of all other
shareholders of each respective Underlying Fund.
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.
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<PAGE>
Shareholder and Trustee Liability
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 Advisor 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. It is possible that a Portfolio might become
liable for a misstatement regarding another Portfolio. The Trustees of the Fund
have considered this and approved the use of a combined Statement of Additional
Information for the Portfolios.
The Declaration of Trust 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, 2000, American Maturity Life Insurance Company (200 Hopmeadow
Street, Simsbury, CT 06089) owned of record and beneficially 3.61% of Money
Market Portfolio, 8.20% of Bond Portfolio Class A shares, 0.42% of Capital
Growth Portfolio Class A shares and 5.54% of Growth and Income Portfolio Class A
shares; they owned of record and beneficially 2.36% of the Fund's outstanding
shares. Allmerica Life Insurance Company (440 Lincoln Street, Worcester, MA
01653) owned of record and beneficially 5.47% of Capital Growth Portfolio Class
A shares, 6.45% of International Portfolio Class A shares, 22.74% of Growth and
Income Portfolio Class A shares, 39.47% of Global Discovery Portfolio Class A
shares and 16.28% of 21st Century Portfolio Class A shares; they owned of record
and beneficially 5.51% 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 0.02% of
Bond Portfolio Class A shares, 0.04% of Capital Growth Portfolio Class A shares
and 0.02% of International Portfolio Class A shares; they owned of record and
beneficially 0.01% of the Fund's outstanding shares. Banner Life Insurance
Company of Rockville, MD (1701 Research Blvd., Rockville, MD 20850) owned of
record and beneficially 0.24% of Money Market Portfolio, 0.64% of Bond Portfolio
Class A shares, 1.03% of Capital Growth Portfolio Class A shares, 2.03% of
Balanced Portfolio Class A shares, 0.57% of International Portfolio Class A
shares, 2.07% of Growth and Income Portfolio Class A shares, and 1.67% of Global
Discovery Portfolio Class A shares; they owned of record and beneficially 0.72%
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 0.74% of Money Market Portfolio,
2.28% of Bond Portfolio Class A shares, 1.31% of Capital Growth Portfolio Class
A shares, 4.88% of Balanced Portfolio Class A shares, and 0.45% of International
Portfolio Class A shares; they owned of record and beneficially 0.97% 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
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<PAGE>
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 0.33% of Money Market Portfolio, 0.12% of Bond Portfolio Class A
shares, 0.14% of International Portfolio Class A shares, 3.75% of Growth and
Income Portfolio Class B shares and 1.38% of Global Discovery Portfolio Class B
shares; they owned of record and beneficially 0.19% of the Fund's outstanding
shares.
Cova Financial Life Insurance Company (One Tower Lane, Suite 3000, Oakbrook, IL
60181) owned of record and beneficially 0.40% of International Portfolio Class A
shares; they owned of record and beneficially 0.07% 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 0.02% of Capital Growth
Portfolio Class A shares, 0.06% of Growth and Income Portfolio Class A shares;
they owned of record and beneficially 0.01% 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 1.00% of International
Portfolio Class A shares; they owned of record and beneficially 0.18% 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
3.24% of Money Market Portfolio, 0.91% of Bond Portfolio Class A shares, 0.31%
of Capital Growth Portfolio Class A shares, 1.99% of Balanced Portfolio Class A
shares, 0.23% of International Portfolio Class A shares, 0.99% of Growth and
Income Portfolio Class A shares, 1.13% of Global Discovery Portfolio Class A
shares, and 5.71% 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 0.40% of Capital Growth Portfolio Class A shares and
0.92% of Growth and Income Portfolio Class A shares; they owned of record and
beneficially 0.13% of the Fund's outstanding shares.
Scudder Horizon Plan (3100 Sanders Road, Suite N4A, Northbrook, IL 60002) owned
of record and beneficially 66.55% of Money Market Portfolio, 20.16% of Bond
Portfolio Class A shares, 16.23% of Capital Growth Portfolio Class A shares,
36.54% of Balanced Portfolio Class A shares, 12.44% of International Portfolio
Class A shares, 38.45% of Growth and Income Portfolio Class A shares, 22.73% of
Global Discovery Portfolio Class A shares, and 51.16% of 21st Century Growth
Portfolio Class A; they owned of record and beneficially 40.16% of the Fund's
outstanding shares. Kemper Investors Life Insurance Co. (One Kemper Drive, Long
Grove, IL 60049) owned of record and beneficially 0.12% of Money Market
Portfolio, 1.33% of Bond Portfolio Class A shares, 2.44% of Capital Growth
Portfolio Class A shares, 8.18% of International Portfolio Class A shares,
24.48% of International Portfolio Class B shares, 13.16% of Growth and Income
Portfolio Class A shares, 0.56% of Growth and Income Portfolio Class B shares
and 31.31% of Global Discovery Portfolio Class A shares; they owned of record
and beneficially 4.45% 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 11.33% of Bond Portfolio Class A shares, 14.06% of
Balanced Portfolio Class A shares, 0.69% of International Portfolio Class A
shares, 24.48% of International Portfolio Class B shares, 13.16% of Growth and
Income Portfolio Class A shares, 0.56% of Growth and Income Portfolio Class B
shares, and 31.31% of Global Discovery Portfolio Class A shares; they owned of
record and beneficially 1.70% of the Fund's total outstanding shares. Mutual of
America Life Insurance Company of New York (320 Park Ave., 6th Fl., New York, NY
10022, a New York corporation), owned of record and beneficially 37.26% of Bond
Portfolio Class A shares, 54.95% of Capital Growth Portfolio Class A shares and
33.87% of International Portfolio Class A shares; they owned of record and
beneficially 17.22% of the Fund's total outstanding shares. Paragon Life
Insurance Company (100 South Brentwood, St. Louis, MO 63105) owned of record and
beneficially 0.70% of Money Market Portfolio, 0.23% of Bond Portfolio Class A
shares, 0.18% of Capital Growth Portfolio Class A shares, 0.49% of Balanced
Portfolio Class A shares, 0.55% of International Portfolio Class A shares, 0.26%
of Growth and Income Portfolio Class A shares, and 0.06% of Global Discovery
Portfolio Class A shares; they owned of record and beneficially 0.48% 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 12.66% of Bond Portfolio Class A shares, 3.51% of International
Portfolio Class A shares, 11.79% of Growth and Income Portfolio Class A shares;
they owned of record and beneficially 2.01% of the Fund's total outstanding
shares. Safeco Life Insurance Companies (15411 N.E. 51st Street, Redmond, WA
98052) owned of record and beneficially 39.98% of Balanced Portfolio
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Class A shares and 6.55% of International Portfolio Class A shares; they owned
of record and beneficially 3.13% of the Fund's total outstanding shares.
Zurich Scudder Investments, (Two International Place, Boston, MA 02110), owned
of record and beneficially 10.38% of 21st Century Growth Portfolio Class A. The
Advisor will be the sole shareholder of 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 0.18% of the
Fund's outstanding shares. Security First Life Insurance Company (11365 West
Olympic Blvd., Los Angeles, CA 90064) owned of record and beneficially 2.94% of
International Portfolio Class A shares; they owned of record and beneficially
0.52% of the Fund's outstanding shares. Southwestern Life Insurance Company (500
North Akard, Dallas, TX 75201) owned of record and beneficially 0.82% of Capital
Growth Portfolio Class A shares; they owned of record and beneficially 0.14% of
the Fund's outstanding shares. Union Central Life Insurance Company (1876
Waycross Road, Cincinnati, OH 45240) owned of record and beneficially 19.31% of
Money Market Portfolio, 7.73% of Capital Growth Portfolio Class A shares and
15.13% of International Portfolio Class A shares; they owned of record and
beneficially 12.12% of the Fund's total outstanding shares. United Companies
Life Insurance Company (8545 United Plaza Blvd., Baton Rouge, LA 70809) owned of
record and beneficially 4.22% of Money Market Portfolio and 0.69% of
International Portfolio Class A shares; they owned of record and beneficially
1.90% 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 0.12% of Money Market Portfolio, 0.28% of Bond
Portfolio Class A shares, 5.72% of International Portfolio Class A shares,
95.705% of Growth and Income Portfolio Class B shares and 98.63% of Global
Discovery Portfolio Class B shares; they owned of record and beneficially 1.80%
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 0.93% 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 4.86% 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 0.32% of Money Market Portfolio, 100.00% of Capital
Growth Portfolio Class B shares and 70.67% 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 0.25% of Money Market Portfolio, 4.16% of Bond Portfolio Class A
shares, 3.09% of Capital Growth Portfolio Class A shares and 1.05% of Growth and
Income Portfolio Class A shares; they owned of record and beneficially 0.91% of
the Fund's outstanding shares. Zurich Kemper Life (320 Park Avenue, 9th Floor,
New York, NY 10022) owned of record and beneficially 0.07% of Capital Growth
Portfolio Class A shares and 0.04% of Balanced Portfolio Class A shares; they
owned of record and beneficially 0.09% 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.
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PORTFOLIO TRANSACTIONS
Brokerage Commissions
Allocation of brokerage is supervised by the Advisor.
The primary objective of the Advisor 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 Advisor 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 Advisor 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 Advisor 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 Advisor's practice to place such orders with
broker/dealers who supply brokerage and research services to the Advisor 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
Advisor 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 Advisor 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 Advisor or a Portfolio in exchange for the direction by the Advisor of
brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity security transactions.
The Advisor may 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.
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Subject to the foregoing, the Advisor 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 Advisor will place
orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker/dealer and a subsidiary of the Advisor; the
Distributor will place orders on behalf of the Portfolios with issuers,
underwriters or other brokers and dealers. The Distributor will not receive any
commission, fee or other remuneration from the Portfolios for this service.
Although certain research services from broker/dealers may be useful to a
Portfolio and to the Advisor, it is the opinion of the Advisor that such
information only supplements the Advisor's own research effort since the
information must still be analyzed, weighed, and reviewed by the Advisor's
staff. Such information may be useful to the Advisor in providing services to
clients other than a Portfolio, and not all such information is used by the
Advisor in connection with a Portfolio. Conversely, such information provided to
the Advisor by broker/dealers through whom other clients of the Advisor effect
securities transactions may be useful to the Advisor 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, 1998, 1999 and 2000 the Fund paid brokerage
commissions of $2,616,782, $3,617,581 and $3,786,283, respectively. In the years
ended December 31, 1998, 1999 and 2000, International Portfolio paid brokerage
commissions of $1,503,177, $2,053,261, and $2,229,792 respectively, Capital
Growth Portfolio paid brokerage commissions of $817,834, $1,028,932 and
$898,425, respectively, and Balanced Portfolio paid brokerage commissions of
$80,289, $190,595 and $174,391, respectively. Growth and Income Portfolio paid
brokerage commissions of $173,899, $264,947, and $231,122, respectively. For the
period from May 1, 1999 (commencement of operations) to December 31, 1999, 21st
Century Growth Portfolio paid brokerage commissions of $3,856. In the year
ending December 31, 2000, 21st Century Growth Portfolio paid brokerage
commissions of $14,336. In the years ended December 31, 1998, 1999 and 2000,
Global Discovery Portfolio paid brokerage commissions of $41,583, $71,317 and
$238,217, respectively.
In the year ended December 31, 2000, $1,412,820 of the total brokerage
commissions paid by International Portfolio, $444,791 of the total brokerage
commissions paid by Capital Growth Portfolio, $141,684 of the total brokerage
commissions paid by Growth and Income Portfolio, $111,855 of the total brokerage
commissions paid by Balanced Portfolio, $128,375 of the total brokerage
commissions paid by Global Discovery Portfolio, and $7,130 of the total
brokerage commissions paid by 21st Century Growth 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 Advisor.
The amount of such transactions aggregated $786,735786 for International
Portfolio (62% of all brokerage transactions), $643,757,609 for Capital Growth
Portfolio (48% of all brokerage transactions), $159,301,598 for Growth and
Income Portfolio (60% of all brokerage transactions), $282,649,657 (56% of all
brokerage transactions) for Balanced Portfolio, $126,114,839 (46% of all
brokerage transactions) for Global Discovery Portfolio $20,737,248 (32% 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.
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The Trustees will periodically review whether the recapture for the benefit of
the Fund of some portion of the brokerage commissions or similar fees paid by
the Fund on portfolio transactions is legally permissible and advisable. No
recapture arrangements are currently in effect.
PORTFOLIO TURNOVER
The average annual portfolio turnover rate for each Portfolio, i.e. the ratio of
the lesser of annual sales or purchases to the monthly average value of the
portfolio (excluding from both the numerator and the denominator securities with
maturities at the time of acquisition of one year or less), for the years ended
December 31, 1999 and 2000, respectively, was:
December 31, 1999 December 31, 2000
(%) (%)
Bond Portfolio 86 288
Balanced Portfolio 98 127
Growth and Income Portfolio 65 65
Capital Growth Portfolio 66 55
Global Discovery Portfolio 70 66
International Portfolio 86 79
21st Century Growth Portfolio 61 109
Health Sciences Portfolio N/A* N/A*
* Commenced operations May 1, 2001
Investors' perceptions regarding the U.S. economy changed significantly over the
course of 2000. Evidence began to emerge suggesting that the Federal Reserve's
series of interest rate increases was beginning to have its effect. The interest
rate increases, higher energy prices and a sharply declining stock market were
signs that the U.S. market had cooled significantly. The volatile economic year
led some portfolios to trade securities more actively than the previous year.
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, 160 Federal Street,
Boston, Massachusetts
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02110, independent accountants, and given on the authority of that firm as
experts in accounting and auditing. PricewaterhouseCoopers, LLP audits the
financial statements of the Fund and provides other audit, tax, and related
services.
COUNSEL
The law firm of Dechert, 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, Health Sciences 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 Advisor, computes net asset value
for the Portfolios. Money Market Portfolio pays SFAC an annual fee equal to
0.020% of the first $150 million of average daily net assets, 0.0060% of such
assets in excess of $150 million and 0.0035% of such assets in excess of $1
billion, plus holding and transaction charges for this service. Bond Portfolio,
Balanced Portfolio, Growth and Income Portfolio, Capital Growth, Health Sciences
Portfolio 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, 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 $33,923 for 21st Century Growth
Portfolio. For the year ended December 31, 2000, fees paid pursuant to the
agreement amounted to $36,600 for Money Market Portfolio, $39,342 for Bond
Portfolio, $67,360 for Balanced Portfolio, $73,430 for Growth and Income
Portfolio, $163,280 for Capital Growth Portfolio, $169,756 for Global Discovery
Portfolio, $536,976 for International Portfolio and $54,067 for 21st Century
Growth Portfolio.
Prior to May 1, 2001, the transfer agent was Scudder Service Corporation
("SSC"). As of May 1, 2001 Scudder Investments Service Company ("SISC"), 811
Main Street, Kansas City, Missouri 64105-2005, is the transfer and dividend
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paying agent for the Fund. The Fund reimburses SISC, 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. SISC receives a fee of
$0 per account for its services to the Fund. These expenses will be billed by
SISC 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 years
ended December 31, 2000, 1999 and 1998, the Fund reimbursed SSC in the amount of
$0 for all three years.
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 Advisor
(including any affiliate of the Advisor), 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.
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 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.
The CUSIP number of Health Sciences Portfolio is 81123R 72 2.
Each Portfolio has a December 31 fiscal year end.
The name "Scudder Variable Series I" is the designation of the Trustees for the
time being under an amended and restated Declaration of Trust dated October 24,
1997, 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
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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 Series I are comprised of the
following:
Money Market Portfolio
Balanced Portfolio
Bond Portfolio
Growth and Income Portfolio
Capital Growth Portfolio
21st Century Growth Portfolio
Global Discovery Portfolio
International Portfolio
The financial statements, including the investment portfolios of Scudder
Variable Series I, 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, 2000, and are hereby deemed to be part of this Statement
of Additional Information.
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APPENDIX
Description of Bond Ratings
Moody's Investors Service, Inc.
Aaa: Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa: Bonds that are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Standard & Poor's Corporation
AAA: Bonds rated AAA are highest grade debt obligations. This rating indicates
an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality obligations. Capacity to pay
principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A: Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Bonds rated BB and B are regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
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.
<PAGE>
B: Bonds rated B have a greater vulnerability to default but currently have the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or
BB-rating.
Description of Commercial Paper Ratings
Moody's Investors Service, Inc.
P-1: Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year. The designation "Prime-1" or "P-1" indicates the highest
quality repayment capacity of the rated issue.
Standard & Poor's Corporation
A-1: Standard & Poor's Commercial Paper ratings are current assessments of the
likelihood of timely payment of debt considered short-term in the relevant
market. The A-1 designation indicates the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
PART C. OTHER INFORMATION
<TABLE>
<CAPTION>
Item 23. Exhibits
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<S> <C> <C>
(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.)
(9) Certificate of Amendment of Declaration of Trust, with respect to name
change to Scudder Variable Series I to be filed by amendment.
(10) Amended and Restated Establishment and Designation of Series of Shares of
Beneficial Interest, without Par Value, dated February 22, 2001 is filed herein.
(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
<PAGE>
(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.)
(3) Amendment to the By-Laws of the Registrant dated November 9, 2000 is
incorporated by reference to Post-Effective Amendment No. 30 to the
Registration Statement filed on February 16, 2001.
(c) Inapplicable.
(d) (1) Investment Management Agreement between the Registrant and Scudder Kemper
Investments, Inc. with respect to the Money Market Portfolio dated
December 31, 1997.
(Previously filed as Exhibit d(1) to Post-Effective Amendment No. 26 to
the Registration Statement.)
(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.)
3
<PAGE>
(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.)
(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.
(17) Investment Management Agreement between the Registrant and Zurich Scudder
Investments, Inc. with respect to the Health Sciences Portfolio dated May
1, 2001 is filed herein.
4
<PAGE>
(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) Amended Underwriting Agreement between the Registrant and Scudder Investor
Services, Inc., dated May 18, 2000 is incorporated by reference to
Post-Effective Amendment No. 30 to the Registration Statement filed on
February 16, 2001.
(4) 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.)
(5) 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.)
(6) 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.)
(7) 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) Amendment to Custodian Contract between the Registrant and State Street Bank
and Trust Company is incorporated by reference to Post-Effective Amendment No.
30 to the Registration Statement filed on February 16, 2001.
(3) 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.)
5
<PAGE>
(4) Fee schedule for Exhibit (g)(2).
(Previously filed as Exhibit 8(b)(1) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(5) Revised Fee Schedule for Exhibit (g)(2) is incorporated by reference to
Post-Effective Amendment No. 30 to the Registration Statement filed on
February 16, 2001.
(h) (1) Transfer, Dividend Disbursing and Plan Agency Agreement between the
Registrant and State Street Bank and Trust Company dated July 12, 1985.
(Previously filed as Exhibit 9(a)(1) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(2) Fee schedule for Exhibit (h)(1).
(Previously filed as Exhibit 9(a)(2)(i) to Post-Effective Amendment No. 23
to the Registration Statement.)
(3) Transfer Agency and Service Agreement between the Registrant and Scudder
Service Corporation dated April 6, 1992.
(Previously filed as Exhibit 9(a)(3) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(4) Amendment to Participation Agreement between the Registrant and Charter
National Life Insurance Company dated June 30, 1991.
(Previously filed as Exhibit 9(c)(4) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(5) Participation Agreement between the Registrant and The Union Central Life
Insurance Company dated February 18, 1992.
(Previously filed as Exhibit 9(c)(5) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(6) Participation Agreement between the Registrant and AEtna Life Insurance
and Annuity Company dated April 27, 1992.
(Previously filed as Exhibit 9(c)(6) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(7) Participation Agreement between the Registrant and Safeco Life Insurance
Companies dated December 31, 1992.
(Previously filed as Exhibit 9(c)(7) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(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.)
6
<PAGE>
(10) First Amendment to the Participation Agreement between Mutual of America
Life Insurance Company, The American Life Insurance Company of New York and the
Fund dated August 13, 1993.
(Previously filed as Exhibit 9(c)(12) to Post-Effective Amendment No. 23 to the
Registration Statement.)
(11) First Amendment to the Participation Agreement between The Union Central
Life Insurance Company and the Fund dated September 30, 1993.
(Previously filed as Exhibit 9(c)(13) to Post-Effective Amendment No. 23
to the Registration Statement.)
(12) Participation Agreement between the Registrant and American Life Assurance
Corporation dated May 3, 1993.
(Previously filed as Exhibit 9(c)(14) to Post-Effective Amendment No. 16
to this Registration Statement.)
(13) Participation Agreement between the Registrant and AUSA Life Insurance
Company, Inc. dated October 21, 1993.
(Previously filed as Exhibit 9(c)(15) to Post-Effective Amendment No. 16
to this Registration Statement.)
(14) Participation Agreement between the Registrant and Banner Life Insurance
Company dated January 18, 1995.
(Previously filed as Exhibit 9(c)(17) to Post-Effective Amendment No. 16
to this Registration Statement.)
(15) Participation Agreement between the Registrant and Fortis Benefits
Insurance Company dated June 1, 1994.
(Previously filed as Exhibit 9(c)(18) to Post-Effective Amendment No. 16
to this Registration Statement.)
(16) Participation Agreement between the Registrant and Lincoln Benefit Life
Company dated December 30, 1993.
(Previously filed as Exhibit 9(c)(19) to Post-Effective Amendment No. 16
to this Registration Statement.)
(17) Participation Agreement between the Registrant and Charter National Life
Insurance Company dated September 3, 1993.
(Previously filed as Exhibit 9(c)(20)to Post-Effective Amendment No. 16 to
this Registration Statement.)
(18) Participation Agreement between the Registrant and Mutual of America Life
Insurance Company dated December 30, 1988.
(Previously filed as Exhibit 9(c)(21) to Post-Effective Amendment No. 16
to this Registration Statement.)
(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.)
7
<PAGE>
(21) First Amendment to Participation Agreement between the Registrant and
Mutual of America Life Insurance Company dated August 13, 1993.
(Previously filed as Exhibit 9(c)(24) to Post-Effective Amendment No. 16
to this Registration Statement.)
(22) Participation Agreement between the Registrant and Mutual of America Life
Insurance Company dated December 30, 1993.
(Previously filed as Exhibit 9(c)(25) to Post-Effective Amendment No. 16
to this Registration Statement.)
(23) Participation Agreement between the Registrant and Paragon Life Insurance
Company dated April 30, 1993.
(Previously filed as Exhibit 9(c)(26) to Post-Effective Amendment No. 16
to this Registration Statement.)
(24) Participation Agreement between the Registrant and Provident Mutual Life
Insurance Company of Philadelphia dated July 21, 1993.
(Previously filed as Exhibit 9(c)(27) to Post-Effective Amendment No. 16
to this Registration Statement.)
(25) Participation Agreement between the Registrant and United of Omaha Life
Insurance Company dated May 15, 1994.
(Previously filed as Exhibit 9(c)(28) to Post-Effective Amendment No. 16
to this Registration Statement.)
(26) First Amendment to the Participation Agreement between the Registrant and
United of Omaha Life Insurance Company dated January 23, 1995.
(Previously filed as Exhibit 9(c)(29) to Post-Effective Amendment No. 16
to this Registration Statement.)
(27) Participation Agreement between the Registrant and USAA Life Insurance
Company dated February 3, 1995.
(Previously filed as Exhibit 9(c)(30) to Post-Effective Amendment No. 16
to this Registration Statement.)
(28) Amendment to the Participation Agreement, the Reimbursement Agreement and
the Participating Contract and Policy Agreement dated February 3, 1995.
(Previously filed as Exhibit 9(c)(31) to Post-Effective Amendment No. 16
to this Registration Statement.)
(29) Accounting Services Agreement between the Registrant and Scudder Fund
Distributors, Inc. dated August 1, 1989.
(Previously filed as Exhibit 9(d)(1) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(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.)
8
<PAGE>
(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.
(Incorporated by reference to Post-Effective Amendment No. 29 to the
Registration Statement.)
(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. (Incorporated by reference to Post-Effective Amendment No. 29 to
the Registration Statement.)
(39) Fund Accounting Services Agreement between the Registrant, on behalf of
Health Sciences Portfolio, and Scudder Fund Accounting Corporation dated May 1,
2001to be filed by amendment.
(i) Opinion and Consent of Counsel is filed herein.
(j) Consent of Independent Accountants is filed herein.
9
<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) (1) 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.)
(2) Amended and Restated Plan Pursuant to
Rule 18f-3 under the Investment
Company Act of 1940 is filed herein.
(p) (1) Code of Ethics of Scudder Kemper Investments, Inc., and Scudder Investors
Services, Inc.
(Incorporated by reference to Post-Effective Amendment No. 29 to the
Registration Statement.)
(2) Code of Ethics of the Fund (Incorporated by reference to Post-Effective
Amendment No. 30 to the Registration Statement filed on February 16, 2001.)
</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
10
<PAGE>
right of the Fund to indemnify or reimburse a Shareholder in
any appropriate situation even though not specifically
provided herein.
Section 4.2. Non-Liability of Trustees, etc. No Trustee,
officer, employee or agent of the Fund shall be liable to
the Fund, its Shareholders, or to any Shareholder, Trustee,
officer, employee, or agent thereof for any action or
failure to act (including without limitation the failure to
compel in any way any former or acting Trustee to redress
any breach of trust) except for his own bad faith, willful
misfeasance, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
Section 4.3 Mandatory Indemnification. (a) Subject to the
exceptions and limitations contained in paragraph (b) below:
(i) every person who is, or has been, a
Trustee or officer of the Fund shall
be indemnified by the Fund to the
fullest extent permitted by law
against all liability and against
all expenses reasonably incurred or
paid by him in connection with any
claim, action, suit or proceeding in
which he becomes involved as a party
or otherwise by virtue of his being
or having been a Trustee or officer
and against amounts paid or incurred
by him in the settlement thereof;
(ii) the words "claim," "action," "suit,"
or "proceeding" shall apply to all
claims, actions, suits or
proceedings (civil, criminal, or
other, including appeals), actual or
threatened; and the words
"liability" and "expenses" shall
include, without limitation,
attorneys' fees, costs, judgments,
amounts paid in settlement, fines,
penalties and other liabilities.
(b) No indemnification shall be provided
hereunder to a Trustee or officer:
(i) against any liability to the Fund or
the Shareholders by reason of
willful misfeasance, bad faith,
gross negligence or reckless
disregard ofthe 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
11
<PAGE>
of the heirs, executors, administrators and
assigns of such a person. Nothing contained
herein shall affect any rights to
indemnification to which personnel of the
Fund other than Trustees and officers may be
entitled by contract or otherwise under law.
(d) Expenses of preparation and presentation of
a defense to any claim, action, suit, or
proceeding of the character described in
paragraph (a) of this Section 4.3 shall be
advanced by the Fund prior to final
disposition thereof upon receipt of an
undertaking by or on behalf of the
recipient, to repay such amount if it is
ultimately determined that he is not
entitled to indemnification under this
Section 4.3, provided that either:
(i) such undertaking is secured by a
surety bond or some other
appropriate security provided by the
recipient, or the Fund shall be
insured against losses arising out
of any such advances; or
(ii) a majority of the Disinterested
Trustees acting on the matter
(provided that a majority of the
Disinterested Trustees act on the
matter) or an independent legal
counsel in a written opinion shall
determine, based upon a review of
readily available facts (as opposed
to a full trial-type inquiry), that
there is reason to believe that the
recipient ultimately will be found
entitled to indemnification.
As used in this Section 4.3, a "Disinterested
Trustee" is one who is not (i) an "Interested Person"
of the Trust (including anyone who has been exempted
from being an "Interested Person" by any rule,
regulation or order of the Commission), or (ii)
involved in the claim, action, suit or proceeding.
Item 26. Business or Other Connections of Investment Adviser
-------- ---------------------------------------------------
Zurich Scudder 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, Zurich Scudder Investments, Inc.**
Director and Chairman, Scudder Investments (Luxembourg) S.A.#
Director, Scudder Investments (U.K.) Ltd. oo
Director and Chairman of the Board, Scudder Investments Asia, Ltd. ooo
Director and Chairman, Scudder Investments Japan, Inc. +
Senior Vice President, Scudder Investor Services, Inc.
Director and Chairman, Scudder Trust (Cayman) Ltd. @@@
Director, Scudder, Stevens & Clark Australia x
Director and Vice President, Zurich Investment Management, Inc. xx
Director and President, Scudder, Stevens & Clark Corporation **
Director and President, Scudder , Stevens & Clark Overseas Corporation o
Director, Scudder Threadneedle International Ltd.
Director, Korea Bond Fund Management Co., Ltd. @@
Nicholas Bratt Director and Vice President, Zurich Scudder Investments, Inc.**
Vice President, Scudder, Stevens & Clark Corporation **
Vice President, Scudder, Stevens & Clark Overseas Corporation o
12
<PAGE>
Laurence W. Cheng Director, Zurich Scudder Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland ##
Director, ZKI Holding Corporation xx
Martin Feinsteim Director, Zurich Scudder Investments, Inc.**
Steven Gluckstern Director, Chairman of the Board, Zurich Scudder Investments, Inc. **
Gunther Gose Director, Zurich Scudder Investments, Inc.**
CFO, Member Group Executive Board, Zurich Financial Services, Inc. ##
CEO/Branch Offices, Zurich Life Insurance Company ##
Harold D. Kahn Treasurer and Chief Financial Officer, Zurich Scudder Investments, Inc.**
Kathryn L. Quirk Chief Legal Officer, Chief Compliance Officer and Secretary, Zurich Scudder
Investments, Inc.**
Director, Vice President, Chief Legal Officer and Secretary, Kemper Distributors,
Inc.
Director and Secretary, Kemper Service Company
Director, Senior Vice President, Chief Legal Officer & Assistant Clerk, Scudder
Investor Services, Inc.
Director, Vice President & Secretary, Scudder Fund Accounting Corporation*
Director, Vice President & Secretary, Scudder Realty Holdings Corporation*
Director & Assistant Clerk, Scudder Service Corporation*
Director and Secretary, SFA, Inc.*
Vice President, Director & Assistant Secretary, Scudder Precious Metals, Inc.***
Director, Scudder, Stevens & Clark Japan, Inc. ###
Director, Vice President and Secretary, Scudder, Stevens & Clark of Canada, Ltd.***
Director, Vice President and Secretary, Scudder Canada Investor Services Limited***
Director, Vice President and Secretary, Scudder Realty Advisers, Inc. @
Director and Secretary, Scudder, Stevens & Clark Corporation**
Director and Secretary, Scudder, Stevens & Clark Overseas Corporation o
Director, Vice President and Secretary, Scudder Defined Contribution Services,
Inc.**
Director, Vice President and Secretary, Scudder Capital
Asset Corporation** Director, Vice President and
Secretary, Scudder Capital Stock Corporation** Director,
Vice President and Secretary, Scudder Capital Planning
Corporation** Director, Vice President and Secretary, SS&C
Investment Corporation** Director, Vice President and
Secretary, SIS Investment Corporation** Director, Vice
President and Secretary, SRV Investment Corporation**
Director, Vice President, Chief Legal Officer and
Secretary, Scudder Financial
Services, Inc.*
Director, Korea Bond Fund Management Co., Ltd. @@
Director, Scudder Threadneedle International Ltd.
Director, Chairman of the Board and Secretary, Scudder Investments Canada, Ltd.
Director, Scudder Investments Japan, Inc. +
Director and Secretary, Scudder Kemper Holdings (UK) Ltd. oo
Director and Secretary, Zurich Investment Management, Inc. xx
13
<PAGE>
Farhan Sharaff Chief Investment Officer, Zurich Scudder Investments, Inc.**
Edmond D. Villani Director, President and Chief Executive Officer, Zurich Scudder Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc. ###
President and Director, Scudder, Stevens & Clark Overseas Corporation o
President and Director, Scudder, Stevens & Clark Corporation**
Director, Scudder Realty Advisors, Inc. @
Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy of
Luxembourg
Director, Scudder Threadneedle International Ltd.
Director, Scudder Investments Japan, Inc. +
Director, Scudder Kemper Holdings (UK) Ltd. oo
President and Director, Zurich Investment Management, Inc. xx
Director and Deputy Chairman, Scudder Investment Holdings Ltd.
</TABLE>
* Two International Place, Boston, MA
@ 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
@@@ Grand Cayman, Cayman Islands, British West Indies
o 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
xx 222 S. Riverside, Chicago, IL
xxx 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
One South Place, 5th Floor, London EC2M 2ZS England
ooo One Exchange Square, 29th Floor, Hong Kong
+ Kamiyachyo Mori Building, 12F1, 4-3-20, Toranomon, Minato-ku, Tokyo
105-0001
x Level 3, Five 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.
14
<PAGE>
<TABLE>
<CAPTION>
(1) (2) (3)
Scudder Investor Services, Inc.
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 10154-0010
Ann P. Burbank Vice President None
Two International Place
Boston, MA 02110-4103
Mark S. Casady President, Director and Assistant None
Two International Place Treasurer
Boston, MA 02110-4103
Linda C. Coughlin Director and Senior Vice President Trustee and President
Two International Place
Boston, MA 02110-4103
Scott B. David Vice President None
Two International Place
Boston, MA 02110-4103
Richard W. Desmond Vice President None
345 Park Avenue
New York, NY 10154-0010
William F. Glavin Vice President Vice President
Two International Place
Boston, MA 02110-4103
Robert J. Guerin Vice President None
Two International Place
Boston, MA 02110-4103
John R. Hebble Assistant Treasurer Treasurer
Two International Place
Boston, MA 02110-4103
James J. McGovern Chief Financial Officer and Treasurer None
345 Park Avenue
New York, NY 10154-0010
Kimberly S. Nassar Vice President None
Two International Place
Boston, MA 02110-4103
Gloria S. Nelund Vice President None
345 Park Avenue
New York, NY 10154-0010
Lorie C. O'Malley Vice President None
Two International Place
Boston, MA 02110-4103
15
<PAGE>
Scudder Investor Services, Inc.
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
Caroline Pearson Clerk Assistant Secretary
Two International Place
Boston, MA 02110-4103
Kevin G. Poole Vice President None
Two International Place
Boston, MA 02110-4103
Kathryn L. Quirk Director, Senior Vice President, Chief Vice President and
345 Park Avenue Legal Officer and Assistant Clerk Assistant Secretary
New York, NY 10154-0010
Howard S. Schneider Vice President Vice President
Two International Place
Boston, MA 02110-4103
Linda J. Wondrack Vice President and Chief Compliance None
Two International Place Officer
Boston, MA 02110-4103
</TABLE>
(c)
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Net Underwriting Compensation on
Name of Principal Discounts and Redemptions Brokerage
Underwriter Commissions and Repurchases Commissions Other Compensation
----------- ----------- --------------- ----------- ------------------
<S> <C> <C> <C> <C>
Scudder Investor None None None None
Services, Inc.
</TABLE>
Item 28. Location of Accounts and Records.
-------- ---------------------------------
Certain accounts, books and other documents required to be
maintained by Section 31(a) of the 1940 Act and the Rules
promulgated thereunder are maintained by Zurich Scudder
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.
16
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this amendment to its Registration
Statement pursuant to Rule 485(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 15th day of April, 2001.
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>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Henry P. Becton, Jr.
--------------------------------------
Henry P. Becton, Jr.* Trustee April 15, 2001
/s/ Linda Coughlin
--------------------------------------
Linda Coughlin Trustee and President (Chief April 15, 2001
Executive Officer)
/s/ Dawn-Marie Driscoll
--------------------------------------
Dawn-Marie Driscoll* Trustee April 15, 2001
/s/ Edgar R. Fiedler
--------------------------------------
Edgar R. Fiedler* Trustee April 15, 2001
/s/ Keith R. Fox
--------------------------------------
Keith R. Fox* Trustee April 15, 2001
/s/ Joan E. Spero Trustee April 15, 2001
--------------------------------------
Joan E. Spero*
/s/ Jean Gleason Stromberg Trustee April 15, 2001
--------------------------------------
Jean Gleason Stromberg*
/s/ Jean C. Tempel Trustee April 15, 2001
--------------------------------------
Jean C. Tempel*
/s/ Steven Zaleznick Trustee April 15, 2001
--------------------------------------
Steven Zaleznick*
<PAGE>
/s/ John R. Hebble
--------------------------------------
John R. Hebble Treasurer (Principal Financial and April 15, 2001
Accounting Officer)
</TABLE>
*By: /s/ John Millette
-----------------
John Millette, Secretary**
** Attorney-in-fact pursuant to the powers of attorney filed herein.
2
<PAGE>
POWER OF ATTORNEY
Scudder Variable Series I
Pursuant to the requirements of the Securities Act of 1933, this Power of
Attorney has been signed below by the following persons in the capacities and on
the dates indicated. By so signing, the undersigned in his/her capacity as
trustee or officer, or both, as the case may be of the Registrant, does hereby
appoint John Millette and Caroline Pearson and each of them, severally, or if
more than one acts, a majority of them, his/her true and lawful attorney and
agent to execute in his/her name, place and stead (in such capacity) any and all
amendments to the Registration Statement and any post-effective amendments
thereto and all instruments necessary or desirable in connection therewith, to
attest the seal of the Registrant thereon and to file the same with the
Securities and Exchange Commission. Each of said attorneys and agents shall have
power to act with or without the other and have full power and authority to do
and perform in the name and on behalf of the undersigned, in any and all
capacities, every act whatsoever necessary or advisable to be done in the
premises as fully and to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and approving the act of said attorneys and
agents and each of them.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Dawn-Marie Driscoll
-----------------------
Dawn-Marie Driscoll Trustee April 9, 2001
</TABLE>
<PAGE>
POWER OF ATTORNEY
Scudder Variable Series I
Pursuant to the requirements of the Securities Act of 1933, this Power of
Attorney has been signed below by the following persons in the capacities and on
the dates indicated. By so signing, the undersigned in his/her capacity as
trustee or officer, or both, as the case may be of the Registrant, does hereby
appoint John Millette and Caroline Pearson and each of them, severally, or if
more than one acts, a majority of them, his/her true and lawful attorney and
agent to execute in his/her name, place and stead (in such capacity) any and all
amendments to the Registration Statement and any post-effective amendments
thereto and all instruments necessary or desirable in connection therewith, to
attest the seal of the Registrant thereon and to file the same with the
Securities and Exchange Commission. Each of said attorneys and agents shall have
power to act with or without the other and have full power and authority to do
and perform in the name and on behalf of the undersigned, in any and all
capacities, every act whatsoever necessary or advisable to be done in the
premises as fully and to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and approving the act of said attorneys and
agents and each of them.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Henry P. Becton, Jr.
------------------------
Henry P. Becton, Jr. Trustee April 9, 2001
</TABLE>
2
<PAGE>
POWER OF ATTORNEY
Scudder Variable Series I
Pursuant to the requirements of the Securities Act of 1933, this Power of
Attorney has been signed below by the following persons in the capacities and on
the dates indicated. By so signing, the undersigned in his/her capacity as
trustee or officer, or both, as the case may be of the Registrant, does hereby
appoint John Millette and Caroline Pearson and each of them, severally, or if
more than one acts, a majority of them, his/her true and lawful attorney and
agent to execute in his/her name, place and stead (in such capacity) any and all
amendments to the Registration Statement and any post-effective amendments
thereto and all instruments necessary or desirable in connection therewith, to
attest the seal of the Registrant thereon and to file the same with the
Securities and Exchange Commission. Each of said attorneys and agents shall have
power to act with or without the other and have full power and authority to do
and perform in the name and on behalf of the undersigned, in any and all
capacities, every act whatsoever necessary or advisable to be done in the
premises as fully and to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and approving the act of said attorneys and
agents and each of them.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Edgar R. Fiedler
--------------------
Edgar R. Fiedler Trustee April 9, 2001
</TABLE>
3
<PAGE>
POWER OF ATTORNEY
Scudder Variable Series I
Pursuant to the requirements of the Securities Act of 1933, this Power of
Attorney has been signed below by the following persons in the capacities and on
the dates indicated. By so signing, the undersigned in his/her capacity as
trustee or officer, or both, as the case may be of the Registrant, does hereby
appoint John Millette and Caroline Pearson and each of them, severally, or if
more than one acts, a majority of them, his/her true and lawful attorney and
agent to execute in his/her name, place and stead (in such capacity) any and all
amendments to the Registration Statement and any post-effective amendments
thereto and all instruments necessary or desirable in connection therewith, to
attest the seal of the Registrant thereon and to file the same with the
Securities and Exchange Commission. Each of said attorneys and agents shall have
power to act with or without the other and have full power and authority to do
and perform in the name and on behalf of the undersigned, in any and all
capacities, every act whatsoever necessary or advisable to be done in the
premises as fully and to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and approving the act of said attorneys and
agents and each of them.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Keith R. Fox
----------------
Keith R. Fox Trustee April 9, 2001
</TABLE>
4
<PAGE>
POWER OF ATTORNEY
Scudder Variable Series I
Pursuant to the requirements of the Securities Act of 1933, this Power of
Attorney has been signed below by the following persons in the capacities and on
the dates indicated. By so signing, the undersigned in his/her capacity as
trustee or officer, or both, as the case may be of the Registrant, does hereby
appoint John Millette and Caroline Pearson and each of them, severally, or if
more than one acts, a majority of them, his/her true and lawful attorney and
agent to execute in his/her name, place and stead (in such capacity) any and all
amendments to the Registration Statement and any post-effective amendments
thereto and all instruments necessary or desirable in connection therewith, to
attest the seal of the Registrant thereon and to file the same with the
Securities and Exchange Commission. Each of said attorneys and agents shall have
power to act with or without the other and have full power and authority to do
and perform in the name and on behalf of the undersigned, in any and all
capacities, every act whatsoever necessary or advisable to be done in the
premises as fully and to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and approving the act of said attorneys and
agents and each of them.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Joan E. Spero
-----------------
Joan E. Spero Trustee April 9, 2001
</TABLE>
5
<PAGE>
POWER OF ATTORNEY
Scudder Variable Series I
Pursuant to the requirements of the Securities Act of 1933, this Power of
Attorney has been signed below by the following persons in the capacities and on
the dates indicated. By so signing, the undersigned in his/her capacity as
trustee or officer, or both, as the case may be of the Registrant, does hereby
appoint John Millette and Caroline Pearson and each of them, severally, or if
more than one acts, a majority of them, his/her true and lawful attorney and
agent to execute in his/her name, place and stead (in such capacity) any and all
amendments to the Registration Statement and any post-effective amendments
thereto and all instruments necessary or desirable in connection therewith, to
attest the seal of the Registrant thereon and to file the same with the
Securities and Exchange Commission. Each of said attorneys and agents shall have
power to act with or without the other and have full power and authority to do
and perform in the name and on behalf of the undersigned, in any and all
capacities, every act whatsoever necessary or advisable to be done in the
premises as fully and to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and approving the act of said attorneys and
agents and each of them.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Jean Gleason Stromberg
--------------------------
Jean Gleason Stromberg Trustee April 9, 2001
</TABLE>
6
<PAGE>
POWER OF ATTORNEY
Scudder Variable Series I
Pursuant to the requirements of the Securities Act of 1933, this Power of
Attorney has been signed below by the following persons in the capacities and on
the dates indicated. By so signing, the undersigned in his/her capacity as
trustee or officer, or both, as the case may be of the Registrant, does hereby
appoint John Millette and Caroline Pearson and each of them, severally, or if
more than one acts, a majority of them, his/her true and lawful attorney and
agent to execute in his/her name, place and stead (in such capacity) any and all
amendments to the Registration Statement and any post-effective amendments
thereto and all instruments necessary or desirable in connection therewith, to
attest the seal of the Registrant thereon and to file the same with the
Securities and Exchange Commission. Each of said attorneys and agents shall have
power to act with or without the other and have full power and authority to do
and perform in the name and on behalf of the undersigned, in any and all
capacities, every act whatsoever necessary or advisable to be done in the
premises as fully and to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and approving the act of said attorneys and
agents and each of them.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Jean C. Tempel
------------------
Jean C. Tempel Trustee April 9, 2001
</TABLE>
7
<PAGE>
POWER OF ATTORNEY
Scudder Variable Series I
Pursuant to the requirements of the Securities Act of 1933, this Power of
Attorney has been signed below by the following persons in the capacities and on
the dates indicated. By so signing, the undersigned in his/her capacity as
trustee or officer, or both, as the case may be of the Registrant, does hereby
appoint John Millette and Caroline Pearson and each of them, severally, or if
more than one acts, a majority of them, his/her true and lawful attorney and
agent to execute in his/her name, place and stead (in such capacity) any and all
amendments to the Registration Statement and any post-effective amendments
thereto and all instruments necessary or desirable in connection therewith, to
attest the seal of the Registrant thereon and to file the same with the
Securities and Exchange Commission. Each of said attorneys and agents shall have
power to act with or without the other and have full power and authority to do
and perform in the name and on behalf of the undersigned, in any and all
capacities, every act whatsoever necessary or advisable to be done in the
premises as fully and to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and approving the act of said attorneys and
agents and each of them.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Steven Zaleznick
--------------------
Steven Zaleznick Trustee April 9, 2001
</TABLE>
8
<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. 31
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 35
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
SCUDDER VARIABLE LIFE INVESTMENT FUND
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
EXHIBIT INDEX
Exhibit (a)(10)
Exhibit(d)(17)
Exhibit i
Exhibit j
Exhibit (n)(2)
2
</TEXT>
</DOCUMENT>