<DOCUMENT>
<TYPE>485APOS
<SEQUENCE>1
<FILENAME>ptc-svs.txt
<DESCRIPTION>485A FILING
<TEXT>
Filed with the Securities and Exchange Commission on February 25, 2005
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. 38 /X/
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /_/
Amendment No. 42 /X/
Scudder Variable Series I
-------------------------
(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
Deutsche Investment Management Americas 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)
/_/ On __________________ pursuant to paragraph (b)
/X/ On May 1, 2005 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
1
<PAGE>
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Scudder Variable Series I
o Money Market Portfolio*
o Bond Portfolio
o Balanced Portfolio
o Growth and Income Portfolio
o Capital Growth Portfolio
o 21st Century Growth Portfolio
o Global Discovery Portfolio
o International Portfolio
o Health Sciences Portfolio
Prospectus
May 1, 2005
Class A Shares
* Money Market Portfolio does not offer separate classes of shares.
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.
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>
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Table of Contents
<TABLE>
<CAPTION>
<S> <C>
How the Portfolios Work Your Investment in the Portfolios
3 Money Market Portfolio 53 Buying and Selling Shares
7 Bond Portfolio 55 How the Portfolios Calculate Share Price
13 Balanced Portfolio 56 Distributions
20 Growth and Income Portfolio 56 Taxes
25 Capital Growth Portfolio
30 21st Century Growth Portfolio
34 Global Discovery Portfolio
39 International Portfolio
44 Health Sciences Portfolio
50 Other Policies and Risks
51 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>
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.
The portfolio pursues its goal by investing exclusively in high quality
short-term securities, as well as repurchase agreements.
While the portfolio's advisor gives priority to earning income and maintaining
the value of the portfolio's principal at $1.00 per share, all money market
instruments, including US government obligations, can change in value when
interest rates change or an issuer's creditworthiness changes.
The portfolio seeks to achieve its goal of current income by investing in high
quality money market securities and maintains a dollar-weighted average maturity
of 90 days or less. The portfolio follows two policies designed to maintain a
stable share price:
o Portfolio securities are denominated in US dollars and generally have
remaining maturities of 397 days (about 13 months) or less at the time of
purchase. The portfolio may also invest in securities that have features that
reduce their maturities to 397 days or less at the time of purchase.
o The portfolio buys US government debt obligations, money market instruments
and other debt obligations that at the time of purchase:
- have received the two highest short-term ratings from two nationally
recognized statistical rating organizations (NRSROs);
- have received the two highest short-term ratings from one NRSRO (if only
one organization rates the security);
- are unrated, but are determined to be of similar quality by the investment
advisor; or
- have no short-term rating, but are rated in one of the top three highest
long-term rating categories, or are determined to be of similar quality by
the advisor.
The portfolio primarily invests in the following types of investments:
The portfolio may invest in high quality, short-term, US dollar denominated
money market instruments paying a fixed, variable or floating interest rate.
These include:
o Debt obligations issued by US and foreign banks, financial institutions,
corporations or other entities, including certificates of deposit, euro-time
deposits, commercial paper (including asset backed commercial paper), and
notes. Securities that do not satisfy the maturity restrictions for a money
market portfolio may be specifically structured so that they are eligible
investments for money market portfolios. For example, some securities have
features which have the effect of shortening the security's maturity.
o US government securities that are issued or guaranteed by the US Treasury, or
by agencies or instrumentalities of the US Government.
o Repurchase agreements, which are agreements to buy securities at one price,
with a simultaneous agreement to sell back the securities at a future date at
an agreed-upon price.
o Asset-backed securities, which are generally participations in a pool of
assets whose payment is derived from the payments generated by the underlying
assets. Payments on the asset-backed security generally consist of interest
and/or principal.
The portfolio may invest up to 10% of its total assets in other money market
mutual funds in accordance with applicable regulations.
Working in conjunction with a credit team, the portfolio managers screen
potential securities and develop a list of those that the portfolio may buy. The
managers, looking for attractive yield and weighing considerations such as
credit quality, economic outlooks and possible interest rate movements, then
decide which securities on this list to buy. The managers may adjust the
portfolio'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.
Although major changes tend to be infrequent, the Board of Trustees could change
the portfolio's investment objective without seeking shareholder approval.
3
<PAGE>
The Main Risks of Investing in the Portfolio
There are several risk factors that could reduce the yield you get from the
portfolio or make it perform less well than other investments.
Interest Rate Risk. Money market instruments, like all debt securities, face the
risk that the securities will decline in value because of changes in interest
rates. Generally, investments subject to interest rate risk will decrease in
value when interest rates rise and increase in value when interest rates
decline. To minimize such price fluctuations, the portfolio limits the
dollar-weighted average maturity of the securities held by the fund to 90 days
or less. Generally, the price of short-term investments fluctuates less than
longer-term bonds. Income earned on floating or variable rate securities will
vary as interest rates decrease or increase.
Credit Risk. A money market instrument's credit quality depends on the issuer's
ability to pay interest on the security and repay the debt: the lower the credit
rating, the greater the risk that the security's issuer will default, or fail to
meet its payment obligations. The credit risk of a security may also depend on
the credit quality of any bank or financial institution that provides credit
enhancement for it. To minimize credit risk, the portfolio only buys high
quality securities with minimal credit risk. Also, the portfolio only buys
securities with remaining maturities of 397 days (approximately 13 months) or
less. This reduces the risk that the issuer's creditworthiness will change, or
that the issuer will default on the principal and interest payments of the
obligation.
Market Risk. Although individual securities may outperform their market, the
entire market may decline as a result of rising interest rates, regulatory
developments or deteriorating economic conditions.
Security Selection Risk. While the portfolio invests in short-term securities,
which by their nature are relatively stable investments, the risk remains that
the securities in which the portfolio invests will not perform as expected. This
could cause the portfolio's returns to lag behind those of similar money market
funds.
Repurchase Agreement Risk. A repurchase agreement exposes the portfolio to the
risk that the party that sells the securities may default on its obligation to
repurchase them. In this circumstance, the portfolio can lose money because:
o it cannot sell the securities at the agreed-upon time and price; or
o the securities lose value before they can be sold.
The portfolio seeks to reduce this risk by monitoring the creditworthiness of
the sellers with whom it enters into repurchase agreements. The portfolio also
monitors the value of the securities to ensure that they are at least equal to
the total amount of the repurchase obligations, including interest and accrued
interest.
Prepayment Risk. When a bond issuer, such as an issuer of asset backed
securities, retains the right to pay off a high yielding bond before it comes
due, the portfolio may have no choice but to reinvest the proceeds at lower
interest rates. Thus, prepayment may reduce the fund's income. It may also
create a capital gains tax liability, because bond issuers usually pay a premium
for the right to pay off bonds early.
Although the portfolio seeks to preserve the value of your investment at $1.00
per share, this share price isn't guaranteed and you could lose money by
investing in the portfolio.
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.
4
<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 portfolio performance has 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:
1995 5.65
1996 5.09
1997 5.25
1998 5.29
1999 4.99
2000 6.21
2001 3.88
2002 1.49
2003 0.82
2004
For the periods included in the bar chart:
Best Quarter: %, Q Worst Quarter: %, Q
2005 Total Return as of March 31: 0.15%
Average Annual Total Returns (%) as of 12/31/2004
1 Year 5 Years 10 Years
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Seven-day effective yield as of December 31, 2004: %
Current performance information may be higher or lower than the performance data
quoted above. For more recent performance information, contact your
participating insurance company.
5
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
portfolio shares. The information in the table does not 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 increase
expenses.
--------------------------------------------------------------------------------
Fee Table
--------------------------------------------------------------------------------
Annual Operating Expenses, deducted from portfolio assets
--------------------------------------------------------------------------------
Management Fee %
--------------------------------------------------------------------------------
Distribution/Service (12b-1) Fee None
--------------------------------------------------------------------------------
Other Expenses
--------------------------------------------------------------------------------
Total Annual Operating Expenses
--------------------------------------------------------------------------------
Based on the costs above, this example helps you compare the expenses of the
portfolio to those of other mutual funds. This example assumes the expenses
above remain the same. It also assumes that you invested $10,000, earned 5%
annual returns, reinvested all dividends and distributions and sold your shares
at the end of each period. This is only an example; actual expenses will be
different.
1 Year 3 Years 5 Years 10 Years
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$ $ $ $
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The Portfolio Managers
A group of investment professionals is responsible for the day-to-day management
of the portfolio. These investment professionals have a broad range of
experience managing money market portfolios.
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, independent registered public accounting firm, whose report, along with the
portfolio's financial statements, is included in the portfolio's annual report
(see "Shareholder reports" on the back cover).
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
Money Market Portfolio
6
<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. Under normal circumstances, the portfolio
invests at least 80% of net assets, plus the amount of any borrowings for
investment purposes, in bonds of any maturity.
The portfolio primarily invests in US dollar-denominated investment grade fixed
income securities, including corporate bonds, US government and agency bonds and
mortgage- and asset-backed securities. A significant portion of the portfolio's
assets may also be allocated among foreign investment grade fixed income
securities, high yield bonds of US and foreign issuers (including high yield
bonds of issuers in countries with new or emerging securities markets), or, to
maintain liquidity, in cash or money market instruments.
The portfolio normally invests at least 65% of total assets in high grade US
bonds (those considered to be in the top three grades of credit quality). The
portfolio may invest up to 25% of its total assets in foreign investment grade
bonds (those considered to be in the top four grades of credit quality).
In addition, the portfolio may also invest up to 20% of total assets in
securities of US and foreign issuers that are below investment grade (rated as
low as the sixth credit grade, ie. grade B, otherwise known as junk bonds),
including investments in US dollar or foreign currency denominated bonds of
issuers located in countries with new or emerging securities markets. The
portfolio considers an emerging securities market to be one where the sovereign
debt issued by the government in local currency terms is rated below investment
grade. Compared to investment grade bonds, junk bonds generally pay higher
yields and have higher volatility and higher risk of default.
The investment advisor employs a team approach to allocate the portfolio's
assets among the various asset classes. The team includes members from the
investment advisor and the sub-advisor. In this prospectus, we refer to both as
part of the investment advisor.
The asset allocation team meets formally on a monthly basis to determine
relative value across asset classes, drawing on input from sector and market
specialists. Once allocation targets for each broad fixed income sector are set,
sector specialists consider the relative value of purchase candidates given the
distinct characteristics of that particular asset class. Company research and
fundamental analysis are used to select the best securities within each asset
class. The techniques used by the sector specialists in evaluating each asset
class include those described below:
US Investment Grade Securities. In selecting these securities for investment,
the investment advisor typically:
o assigns a relative value to each bond, based on creditworthiness, cash flow
and price;
o determines the value of each issue by examining the issuer's credit quality,
debt structure, option value and liquidity risks. The portfolio managers look
to take advantage of any inefficiencies between this value and market trading
price;
o uses credit analysis to determine the issuer's ability to fulfill its
contracts; and
o uses a bottom-up approach which subordinates sector weightings to individual
bonds that the investment advisor believes may add above-market value.
The investment advisor generally sells these securities when they reach their
target price or when there is a negative change in their outlook relative to the
other securities held by the portfolio. Bonds may also be sold to facilitate the
purchase of an issue with more attractive risk/return characteristics.
Foreign Investment Grade Securities and Emerging Markets High Yield Securities.
In selecting these securities for investment, the investment advisor follows a
bottom-up, relative value strategy. The investment advisor looks to purchase
foreign securities that offer incremental value over US Treasuries. The
investment advisor invests in a focused fashion, so that it is not simply
investing in a basket of all non-US fixed income markets, but instead only those
markets that its relative value process has identified as being the most
attractive. The investment advisor sells securities or exchanges currencies when
they meet their target price objectives or when the investment advisor revises
price objectives downward. In selecting emerging market securities, the
investment advisor also considers short-term factors such as market sentiment,
capital flows, and new issue programs.
7
<PAGE>
High Yield Securities (Excluding Emerging Market Sovereign Debt). In selecting
these securities for investment, the investment advisor:
o analyzes economic conditions for improving or undervalued sectors and
industries;
o uses independent credit research and on-site management visits to evaluate
individual issuers' debt service, growth rate, and both downgrade and upgrade
potential;
o assesses new issues versus secondary market opportunities; and
o seeks issues within attractive industry sectors and with strong long-term
fundamentals and improving credits.
The portfolio may lend its investment securities up to 33 1/3% of its total
assets to approved institutional borrowers who need to borrow securities in
order to complete certain transactions.
Although major changes tend to be infrequent, the Board of Trustees could change
the portfolio's investment objective without seeking shareholder approval.
However, the Board will provide shareholders with at least 60 days' notice prior
to making any changes to the portfolio's 80% investment policy.
Other Investments
The portfolio may invest up to 10% of total assets in foreign currency related
investments (e.g., forward foreign currency exchange contracts) for both
non-hedging and hedging purposes.
In addition, the portfolio is permitted, but not required, to use other various
types of derivatives (contracts whose value is based on, for example, indexes,
currencies or securities). The portfolio may use these derivatives in
circumstances where the managers believe they offer an economical means of
gaining exposure to a particular asset class or to keep cash on hand to meet
shareholder redemptions or other needs while maintaining exposure to the market.
The Main Risks of Investing in the Portfolio
There are several risk factors that could reduce the yield you receive from the
portfolio, cause you to lose money or cause the portfolio's performance to trail
that of other investments.
Interest Rate Risk. Generally, fixed income securities will decrease in value
when interest rates rise. The longer the effective maturity of the portfolio's
securities, the more sensitive it will be to interest rate changes. (As a
general rule, a 1% rise in interest rates means a 1% fall in value for every
year of duration.) As interest rates decline, the issuers of securities held by
the portfolio may prepay principal earlier than scheduled, forcing the portfolio
to reinvest in lower yielding securities. Prepayment may reduce the portfolio's
income. As interest rates increase, fewer issuers tend to prepay, which may
extend the average life of fixed income securities and have the effect of
locking in a below-market interest rate, increasing the portfolio's duration and
reducing the value of the security. Because the portfolio may invest in
mortgage-related securities, it is more vulnerable to both of these risks.
Credit Risk. A portfolio purchasing bonds faces the risk that the
creditworthiness of the issuer may decline, causing the value of its bonds to
decline. In addition, an issuer may be unable or unwilling to make timely
payments on the interest and principal on the bonds it has issued. Because the
issuers of high yield bonds (rated below the fourth highest category) may be in
uncertain financial health, the prices of their bonds are generally vulnerable
to bad economic news or even the expectation of bad news, than those of
investment-grade bonds. In some cases, bonds, particularly junk bonds, may
decline in credit quality or go into default.
Market Risk. Deteriorating market conditions might cause a general weakness in
the market that reduces the overall level of securities prices in that market.
Developments in a particular class of bonds or the stock market could also
adversely affect the portfolio by reducing the relative attractiveness of bonds
as an investment. Also, to the extent that the portfolio emphasizes bonds from
any given industry, it could be hurt if that industry does not do well.
Foreign Investment Risk. Foreign markets often exhibit more volatility than
those in the US. Investing in foreign securities involves greater risk than
investing in US securities for various reasons, including:
o Political Risk. Some foreign governments have limited the outflow of profits
to investors abroad, extended diplomatic disputes to include trade and
financial relations, and imposed high taxes on corporate profits.
o Information Risk. Financial reporting standards for companies based in
foreign markets are often less stringent than those applicable to US
companies and may present an incomplete or misleading picture of a foreign
company.
8
<PAGE>
o Liquidity Risk. Securities that trade less can be more difficult or more
costly to buy, or to sell, than more liquid or active securities. This
liquidity risk is a factor of the trading volume of a particular security, as
well as the size and liquidity of the entire local market. On the whole,
foreign markets are smaller and less liquid than the US market. This can make
buying and selling certain securities more difficult and costly. Relatively
small transactions in some instances can have a disproportionately large
effect on the price and supply of securities. In certain situations, it may
become virtually impossible to sell a security in an orderly fashion at a
price that approaches the managers' estimate of its value.
o Regulatory Risk. There is generally less government regulation of foreign
markets, companies and securities dealers than in the US.
o Currency Risk. The portfolio invests in foreign securities denominated in
foreign currencies. To the extent that the portfolio is exposed to non-dollar
currencies, if these currencies decline in value relative to the dollar, it
may reduce gains or increase losses.
Emerging Market Risk. To the extent that the portfolio invests in emerging
markets to enhance overall returns, it may face higher political, information,
and stock market risks. In addition, profound social changes and business
practices that depart from norms in developed countries' economies have hindered
the orderly growth of emerging economies and their stock markets in the past.
High levels of debt tend to make emerging economies heavily reliant on foreign
capital and vulnerable to capital flight.
Derivatives Risk. Risks associated with derivatives include: the risk that the
derivative is not well correlated with the security, index or currency to which
it relates; the risk that derivatives used for risk management may not have the
intended effects and may result in losses or missed opportunities; the risk that
the portfolio will be unable to sell the derivative because of an illiquid
secondary market; the risk that a counterparty is unwilling or unable to meet
its obligation; the risk of interest rate movements and the risk that the
derivatives transaction could expose the portfolio to the effects of leverage,
which could increase a portfolio's exposure to the market and magnify potential
losses. There is no guarantee that derivatives activities will be employed or
that they will work, and their use could cause lower returns or even losses to
the portfolio.
Securities Lending Risk. Any loss in the market price of securities loaned by
the portfolio that occurs during the term of the loan would be borne by the
portfolio and would adversely affect the portfolio's performance. Also, there
may be delays in recovery of securities loaned or even a loss of rights in the
collateral should the borrower of the securities fail financially while the loan
is outstanding. However, loans will be made only to borrowers selected by the
portfolio's delegate after a review of relevant facts and circumstances,
including the creditworthiness of the borrower.
Pricing Risk. At times, market conditions might make it hard to value some
investments. For example, if the portfolio has valued its securities too highly,
you may end up paying too much for portfolio shares when you buy into the
portfolio. If the portfolio underestimates their price, you may not receive the
full market value for your portfolio shares when you sell.
Another factor that could affect performance is:
o the managers could be incorrect in their analysis of industries, companies,
economic trends, the relative attractiveness of different securities or other
matters.
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.
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.
9
<PAGE>
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 18.17
1996 2.82
1997 9.10
1998 6.57
1999 -0.95
2000 10.56
2001 5.75
2002 7.66
2003 5.06
2004
For the periods included in the bar chart:
Best Quarter: %, Q Worst Quarter -%, Q
2005 Total Return as of March 31: %
Average Annual Total Returns (%) as of 12/31/2004
1 Year 5 Years 10 Years
--------------------------------------------------------------------------------
Portfolio -- Class A
Index
--------------------------------------------------------------------------------
Index: Lehman Brothers Aggregate Bond Index is an unmanaged market
value-weighted measure of treasury issues, agency issues, corporate bond issues
and mortgage securities.
Current performance information may be higher or lower than the performance data
quoted above. For more recent performance information, contact your
participating insurance company.
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
portfolio shares. The information in the table does not 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 increase
expenses.
--------------------------------------------------------------------------------
Fee Table Class A
--------------------------------------------------------------------------------
Annual Operating Expenses, deducted from portfolio assets
--------------------------------------------------------------------------------
Management Fee %
--------------------------------------------------------------------------------
Distribution/Service (12b-1) Fee None
--------------------------------------------------------------------------------
Other Expenses
--------------------------------------------------------------------------------
Total Annual Operating Expenses
--------------------------------------------------------------------------------
Based on the costs above, this example helps you compare the expenses of Class A
shares to those of other mutual funds. This example assumes the expenses above
remain the same. It also assumes that you invested $10,000, earned 5% annual
returns, reinvested all dividends and distributions and sold your shares at the
end of each period. This is only an example; actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Class A Shares $ $ $ $
--------------------------------------------------------------------------------
10
<PAGE>
The Portfolio Managers
The portfolio is managed by a team of investment professionals who each play an
important role in the portfolio's management process. This team works for the
advisor or its affiliates and is supported by a large staff of economists,
research analysts, traders and other investment specialists. The advisor or its
affiliates believe(s) its team approach benefits portfolio investors by bringing
together many disciplines and leveraging its extensive resources.
The portfolio is managed by a team of investment professionals who collaborate
to develop and implement the portfolio's investment strategy. The team is led by
six senior portfolio managers who have final authority over all aspects of the
portfolio's investment strategy for their particular sector area of expertise.
Each portfolio manager on the team has authority over all aspects of the
portfolio's investment portfolio, including but not limited to, purchases and
sales of individual securities, portfolio construction techniques, portfolio
risk assessment and the management of daily cash flows in accordance with
portfolio holdings.
The following people handle the day-to-day management of the portfolio:
<TABLE>
<CAPTION>
<S> <C> <C>
Gary W. Bartlett, CFA Thomas J. Flaherty William T. Lissenden
Managing Director of Deutsche Asset Managing Director of Deutsche Asset Director of Deutsche Asset Management
Management and Co-Lead Manager of the Management and Co-Lead Manager of the and Portfolio Manager of the portfolio.
portfolio. portfolio. o Joined Deutsche Asset Management
o Joined Deutsche Asset Management in o Joined Deutsche Asset Management in in 2002 and the portfolio in 2004.
1992 and the portfolio in 2002. 1995 and the portfolio in 2002. o Prior to that, fixed income
o Began investment career in 1982. o Began investment career in 1985. strategist and director of research
o MBA, Drexel University. at Conseco Capital Management,
J. Christopher Gagnier director of fixed income research
Andrew P. Cestone Managing Director of Deutsche Asset and product management at
Managing Director of Deutsche Asset Management and Co-Lead Manager of Prudential Securities, national
Management and Co-Lead Manager of the the portfolio. sales manager for fixed income
portfolio. o Joined Deutsche Asset Management in securities at Prudential Securities
o Joined Deutsche Asset Management in 1997 and the portfolio in 2002. and institutional sales
1998 and the portfolio in 2002. o Prior to that, portfolio manager, professional at several firms
o Prior to that, Investment Analyst, Paine Webber (1984-1997). including Prudential, Goldman Sachs
Phoenix Investment Partners, from o Began investment career in 1979. and Merrill Lynch.
1997 to 1998. o MBA, University of Chicago. o MBA, Baruch College.
o Prior to that, Credit Officer, asset
based lending group, Fleet Bank, from Stephen Ilott Catharine Peppiatt
1995 to 1997. Managing Director of Deutsche Asset Director of Deutsche Asset Management
Management and Portfolio Manager of and Portfolio Manager of the portfolio.
Warren S. Davis the portfolio. o Joined Deutsche Asset Management
Managing Director of Deutsche Asset o Head of Fixed Income in London. in 1993 and the portfolio in 2004.
Management and Co-Lead Manager of o Joined Deutsche Asset Management in o Previously served as director of
the portfolio. 1998. Prior to 1998, managed global Global Fixed Income in London.
o Joined Deutsche Asset Management in fixed income and currency o Portfolio manager and product
1995 and the portfolio in 2002. portfolios on behalf of central manager for Core Plus Fixed
o Began investment career in 1985. banks, corporations and pension Income: Philadelphia.
o MBA, Drexel University. funds at Robert Fleming & Company o MA, Oxford University.
from 1986 to 1997.
Brett Diment o Joined the portfolio in 2004. Bruce Rodio
Managing Director of Deutsche Asset Director of Deutsche Asset Management
Management and Portfolio Manager Paul Lambert and Portfolio Manager of the portfolio.
of the portfolio. Managing Director of Deutsche Asset o Joined Deutsche Asset Management
o Joined Deutsche Asset Management Management and Portfolio Manager of and the portfolio in 2004.
in 1991 and the portfolio in 2002. the portfolio o Portfolio manager and product
o Head of Emerging Market Debt for o Joined Deutsche Asset Management in manager for Core Plus Fixed
London Fixed Income and responsible 2000 and the portfolio in 2004 Income: Philadelphia.
for coordinating research into o Prior to that, ten years experience o Prior to that, fixed income
Continental European markets and as an analyst of international and portfolio specialist at Morgan
managing global fixed income, financial markets at the Bank of Stanley Investment Management, from
balanced and cash-based portfolios: England, at UBS as a Senior 1997 to 2004.
London. Economist and most recently as Head o Began investment career in 1987.
o Began investment career in 1991. of European Currency Strategy at o MBA, Wharton School.
Citibank.
11
<PAGE>
Daniel R. Taylor, CFA Timothy C. Vile, CFA Ian Winship
Managing Director of Deutsche Managing Director of Deutsche Asset Director of Deutsche Asset Management and
Asset Management and Co-Lead Manager of Management and Co-Lead Manager Portfolio Manager of the portfolio.
the portfolio. of the portfolio. o Joined Deutsche Asset Management in
o Joined Deutsche Asset Management o Joined Deutsche Asset Management 1997.
in 1998 and the portfolio in 2002. in 1991 and the portfolio in o Prior to 1997, served as a fixed
o Prior to that, fixed income portfolio 2002. income portfolio manager at Scottish
manager, asset-backed securities o Prior to that, portfolio manager Amicable Investment Managers.
analyst and senior credit analyst, for fixed income portfolios at o Head of Global Interest Rates Team:
CoreStates Investment Advisors, Equitable Capital Management. London.
from 1992 to 1998. o Began investment career in 1984. o Portfolio manager and analyst
specializing in UK and European
markets.
o Joined the portfolio in 2004.
</TABLE>
The portfolio's Statement of Additional Information provides additional
information about the portfolio managers' investments in the portfolio, a
description of their compensation structure and information regarding other
accounts they manage.
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, independent registered public accounting firm, whose report, along with the
portfolio's financial statements, is included in the portfolio's annual report
(see "Shareholder reports" on the back cover).
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
Bond Portfolio -- Class A
12
<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.
The portfolio normally invests approximately 60% of its net assets in common
stocks and other equity securities and approximately 40% of its net assets in
fixed income securities, including lower-quality debt securities. The portfolio
may, however, invest up to 75% of its net assets in equity securities and up to
50% in fixed income securities, based on the portfolio managers' evaluation of
the relative attractiveness of equity securities as compared to fixed income
securities. At all times, the portfolio invests at least 25% of net assets in
fixed-income senior securities. The portfolio may invest in foreign securities
as well as securities of US issuers.
The investment advisor regularly reviews the portfolio's investment allocations
and will vary them to favor asset classes that, in its judgment, provide the
most favorable return outlook consistent with the portfolio's investment
objective. In deciding how to allocate the portfolio's assets, the investment
advisor will evaluate projections of risk, market and economic conditions,
volatility, yields and expected returns.
The advisor follows specific strategies in selecting equity and fixed securities
for the portfolio.
Equity securities in the portfolio generally include "growth" stocks as well as
"value" stocks and normally include stocks of both small and large companies.
Growth Stocks. In choosing these securities, the managers primarily invest in US
companies that they believe offer the potential for sustainable growth of
revenue or earnings and whose market values appear reasonable in light of their
business prospects. The managers focus on high quality growth companies that are
leaders or potential leaders in their respective industries. The managers
conduct in-depth company research, examining, among other factors, relative
growth rates, innovation, regional and global exposure and management.
Value Stocks. When selecting value stocks, these portfolio managers begin by
screening for stocks whose price-to-earnings ratios are below the average for
the S&P 500 Index. The managers then compare a company's stock price to its book
value, cash flow and yield, and analyze individual companies to identify those
that are financially sound and appear to have strong potential for long-term
growth.
Small Company Stocks. In selecting stocks of small companies, a quantitative
stock valuation model compares each company's stock price to the company's
earnings, book value, sales and other measures of performance potential. The
managers also look for factors that may signal a rebound for a company, whether
through a recovery in its markets, a change in business strategy or other
factors.
The managers believe that by combining techniques used by fundamental value
investors with extensive growth and earnings analysis they can minimize
investment style bias and ultimately produce a "pure" stock selection process
that seeks to add value in any market environment. The team also incorporates
technical analysis to capture short-term price changes and evaluate the market's
responsiveness to new information.
Fixed income securities in the portfolio include both investment grade and
lower-quality debt securities, and may include securities of both US and non-US
(including emerging market) issuers.
US Investment Grade Securities. In selecting these securities for investment,
the investment advisor typically:
o assigns a relative value to each bond, based on creditworthiness, cash flow
and price;
o determines the value of each issue by examining the issuer's credit quality,
debt structure, option value and liquidity risks. The portfolio managers look
to take advantage of any inefficiencies between this value and market trading
price;
o uses credit analysis to determine the issuer's ability to fulfill its
contracts; and
o uses a bottom-up approach which subordinates sector weightings to individual
bonds that the advisor believes may add above-market value.
The investment advisor generally sells these securities when they reach their
target price or when there is a negative change in their outlook relative to the
other securities held by the portfolio. Bonds may also be sold to facilitate the
purchase of an issue with more attractive risk/return characteristics.
13
<PAGE>
Foreign Debt Securities. In selecting these securities for investment, the
investment advisor follows a bottom-up, relative value strategy. The advisor
looks to purchase foreign securities that offer incremental value over US
Treasuries. The advisor invests in a focused fashion, so that it is not simply
investing in a basket of all non-US fixed income markets, but instead only those
markets that its relative value process has identified as being the most
attractive. The investment advisor sells securities or exchanges currencies when
they meet their target price objectives or when the investment advisor revises
price objectives downward. In selecting emerging market securities, the
investment advisor also considers short-term factors such as market sentiment,
capital flows, and new issue programs.
High Yield Securities. In selecting these securities for investment, the
investment advisor:
o analyzes economic conditions for improving or undervalued sectors and
industries;
o uses independent credit research and on-site management visits to evaluate
individual issuer's debt service, growth rate, and both downgrade and upgrade
potential;
o assesses new issues versus secondary market opportunities; and
o seeks issues within attractive industry sectors and with strong long-term
fundamentals and improving credits.
The portfolio may lend its investment securities up to 33 1/3% of its total
assets to approved institutional borrowers who need to borrow securities in
order to complete certain transactions.
Although major changes tend to be infrequent, the Board of Trustees could change
the portfolio's investment objective without seeking shareholder approval.
Other Investments
The portfolio's bond investments are primarily in the top four grades of credit
quality. The portfolio could put up to 20% 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 typically will have higher volatility and risk of default. The
portfolio may also invest in foreign securities. The portfolio may also invest
up to 15% of its total assets to buy or sell protection on credit exposure.
The portfolio is permitted, but not required, to use various types of
derivatives (contracts whose value is based on, for example, indexes, currencies
or securities). The portfolio may use derivatives in circumstances where the
managers believe they offer an economical means of gaining exposure to a
particular asset class or to keep cash on hand to meet shareholder redemptions
or other needs while maintaining exposure to the market.
As a temporary defensive measure, the portfolio could shift up to 100% of assets
into investments such as money market securities. This measure could prevent
losses, but, while engaged in a temporary defensive position, a fund will not be
pursuing its investment objective. However, the portfolio managers may choose
not to use these strategies for various reasons, even in very volatile market
conditions.
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 cause the portfolio's performance to trail that of
other investments.
Stock Market Risk. An important factor with this portfolio is how stock markets
perform. When stock prices fall you should expect the value of your investment
to fall as well. Because a stock represents ownership in its issuer, stock
prices can be hurt by poor management, shrinking product demand and other
business risks. These may affect single companies as well as groups of
companies. In addition, movements in financial markets may adversely affect a
stock's price, regardless of how well the company performs. The market as a
whole may not favor the types of investments the portfolio makes and the
portfolio may not be able to get attractive prices for them.
Industry Risk. While the portfolio does not concentrate in any industry, to the
extent that the portfolio has exposure to a given industry or sector, any
factors affecting that industry or sector could affect the value of portfolio
securities. For example, manufacturers of consumer goods could be hurt by a rise
in unemployment, or technology companies could be hurt by such factors as market
saturation, price competition and rapid obsolescence.
Interest Rate Risk. Generally, fixed income securities will decrease in value
when interest rates rise. The longer the effective maturity of the portfolio's
securities, the more sensitive it will be to interest rate changes.(As a general
rule, a 1% rise in interest rates means a 1% fall in value for every year of
duration.) As interest rates decline, the issuers of securities held by the
portfolio may prepay principal earlier than scheduled, forcing the portfolio to
reinvest in lower yielding securities. This prepayment may reduce the
portfolio's income. As interest rates increase, fewer issuers tend to prepay,
which may extend the average life of fixed income securities and have the effect
of locking in a below-market interest rate, increasing the
14
<PAGE>
portfolio's duration and reducing the value of the security. Because the
portfolio may invest in mortgage-related securities, it is more vulnerable to
both of these risks.
Credit Risk. A portfolio purchasing bonds faces the risk that the
creditworthiness of the issuer may decline, causing the value of its bonds to
decline. In addition, an issuer may be unable or unwilling to make timely
payments on the interest and principal on the bonds it has issued. Because the
issuers of high yield bonds (rated below the fourth highest category) may be in
uncertain financial health, the prices of their bonds are generally more
vulnerable to bad economic news or even the expectation of bad news, than those
of investment-grade bonds. In some cases, bonds, particularly junk bonds, may
decline in credit quality or go into default.
Value Investing Risk. As with any investment strategy, the "value" strategy used
in managing the portfolio will, at times, perform better than or worse than
other investment styles and the overall market. If the advisor overestimates the
value or return potential of one or more common stocks, the portfolio may
underperform the general equity market. Value stocks may also be out of favor
for certain periods in relation to growth stocks.
Small Company Capitalization Risk. Small company stocks tend to experience
steeper price fluctuations -- down as well as up -- than the stocks of larger
companies. A shortage of reliable information -- the same information gap that
creates opportunity -- can also pose added risk. Industry-wide reversals may
have a greater impact on small companies, since they lack a large company's
financial resources. Small company stocks are typically less liquid than large
company stocks: when things are going poorly, it is harder to find a buyer for a
small company's shares.
Foreign Investment Risk. To the extent that the portfolio holds the securities
of companies based outside the US, it faces the risks inherent in foreign
investing. Adverse political, economic or social developments could undermine
the value of the portfolio's investments or prevent the portfolio from realizing
their full value. Financial reporting standards for companies based in foreign
markets differ from those in the US. Additionally, foreign securities markets
generally are smaller and less liquid than the US markets. These risks tend to
be greater in emerging markets, so to the extent the fund invests in emerging
markets, it takes on greater risks. Finally, the currency of the country in
which the fund has invested could decline relative to the value of the US
dollar, which would decrease the value of the investment to US investors.
IPO Risk. Securities purchased in initial public offerings (IPOs) may be very
volatile, rising and falling rapidly, often based, among other reasons, on
investor perceptions rather than on economic factors. Additionally, investments
in IPOs may magnify the portfolio's performance if it has a small asset base.
The portfolio is less likely to experience a similar impact on its performance
as its assets grow because it is unlikely that the portfolio will be able to
obtain proportionately larger IPO allocations.
Derivatives Risk. Risks associated with derivatives include: the risk that the
derivative is not well correlated with the security, index or currency to which
it relates; the risk that derivatives used for risk management may not have the
intended effects and may result in losses or missed opportunities; the risk that
the portfolio will be unable to sell the derivative because of an illiquid
secondary market; the risk that a counterparty is unwilling or unable to meet
its obligation; the risk of interest rate movements and the risk that the
derivatives transaction could expose the portfolio to the effects of leverage,
which could increase a portfolio's exposure to the market and magnify potential
losses. There is no guarantee that derivatives activities will be employed or
that they will work, and their use could cause lower returns or even losses to
the portfolio.
Securities Lending Risk. Any loss in the market price of securities loaned by
the portfolio that occurs during the term of the loan would be borne by the
portfolio and would adversely affect the portfolio's performance. Also, there
may be delays in recovery of securities loaned or even a loss of rights in the
collateral should the borrower of the securities fail financially while the loan
is outstanding. However, loans will be made only to borrowers selected by the
portfolio's delegate after a review of relevant facts and circumstances,
including the creditworthiness of the borrower.
Pricing Risk. At times, market conditions might make it hard to value some
investments. For example, if the portfolio has valued its securities too highly,
you may end up paying too much for portfolio shares when you buy into the
portfolio. If the portfolio underestimates their price, you may not receive the
full market value for your portfolio shares when you sell.
Other factors that could affect performance include:
o the managers could be incorrect in their analysis of industries, companies,
economic trends, the relative attractiveness of different securities or other
matters
o foreign stocks tend to be more volatile than their US counterparts, for
reasons such as currency fluctuations and political and economic uncertainty
This portfolio may make sense for investors interested in stock and bond
investments in a single portfolio.
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 three broad-based market indexes
(which, unlike the portfolio, do not have any fees or expenses). The performance
of both the portfolio and the indexes 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 26.67
1996 11.89
1997 24.21
1998 23.19
1999 15.32
2000 -2.02
2001 -6.06
2002 -15.07
2003 17.94
2004
For the periods included in the bar chart:
Best Quarter: %, Q Worst Quarter: %, Q
2005 Total Return as of March 31: %
Average Annual Total Returns (%) as of 12/31/2004
1 Year 5 Years 10 Years
--------------------------------------------------------------------------------
Portfolio -- Class A
Index 1
Index 2
Index 3
--------------------------------------------------------------------------------
Index 1: Standard & Poor's (S&P) 500 Index is a capitalization-weighted index of
500 stocks, designed to measure performance of the broad domestic economy
through changes in the aggregate market value of 500 stocks representing all
major industries.
Index 2: Russell 1000 Growth Index is an unmanaged capitalization-weighted index
containing those securities in the Russell 1000 Index with higher price-to-book
ratios and higher forecasted-growth values.
Index 3: Lehman Brothers Aggregate Bond Index is an unmanaged market
value-weighted measure of treasury issues, agency issues, corporate bond issues
and mortgage securities.
Current performance information may be higher or lower than the performance data
quoted above. For more recent performance information, contact your
participating insurance company.
16
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
portfolio shares. The information in the table does not 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 increase
expenses.
Fee Table Class A
--------------------------------------------------------------------------------
Annual Operating Expenses, deducted from portfolio assets
--------------------------------------------------------------------------------
Management Fee %
--------------------------------------------------------------------------------
Distribution/Service (12b-1) Fee None
--------------------------------------------------------------------------------
Other Expenses
--------------------------------------------------------------------------------
Total Annual Operating Expenses
--------------------------------------------------------------------------------
Based on the costs above, this example helps you compare the expenses of Class A
shares to those of other mutual funds. This example assumes the expenses above
remain the same. It also assumes that you invested $10,000, earned 5% annual
returns, reinvested all dividends and distributions and sold your shares at the
end of each period. This is only an example; actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Class A Shares $ $ $ $
--------------------------------------------------------------------------------
17
<PAGE>
The Portfolio Managers
The portfolio is managed by a team of investment professionals who each play an
important role in the portfolio's management process. This team works for the
advisor or its affiliates and is supported by a large staff of economists,
research analysts, traders and other investment specialists. The advisor or its
affiliates believe(s) its team approach benefits portfolio investors by bringing
together many disciplines and leveraging its extensive resources.
The portfolio is managed by a team of portfolio managers across a range of
investment strategies. The lead portfolio manager is responsible for the
portfolio's overall investment strategy as well as the allocation of assets to
the portfolio management teams of the underlying investment strategies. Each
portfolio manager on the team has authority over all aspects of the portfolio's
investment portfolio for their investment strategy, including but not limited
to, purchases and sales of individual securities, portfolio construction
techniques, portfolio risk assessment and the management of daily cash flows in
accordance with portfolio holdings.
The portfolio is managed by a team of investment professionals who share
responsibility for the portfolio's investment management decisions.
<TABLE>
<CAPTION>
<S> <C> <C>
Julie M. Van Cleave, CFA Andrew P. Cestone Brett Diment
Managing Director of Deutsche Asset Managing Director of Deutsche Asset Managing Director of Deutsche Asset
Management and Portfolio Manager of Management and Portfolio Manager of Management and Portfolio Manager
the portfolio. the portfolio. of the portfolio.
o Joined Deutsche Asset Management o Joined Deutsche Asset Management o Joined Deutsche Asset Management
and the portfolio in 2002. in 1998 and the portfolio in in 1991 and the portfolio in 2004.
o Head of Large Cap Growth o Head of Core Plus Fixed Income. o Head of Emerging Market Debt for
Portfolio Selection Team. o Prior to that, investment London Fixed Income and responsible
o Previous experience includes analyst, Phoenix Investment Continental European markets and
18 years of investment industry Partners, from 1997 to 1998. managing global fixed income,
experience at Mason Street o Prior to that, credit officer, balanced and cash-based portfolios:
Advisors, as Managing Director asset based lending group, Fleet London.
and team leader for the large cap Bank, from 1995 to 1997. o Began investment career in 1991.
investment team.
o MBA, University of Wisconsin -- Arnim S. Holzer
Madison. Director of Deutsche Asset
Management and Portfolio Manager
Thomas F. Sassi of the portfolio.
Managing Director of Deutsche Asset o Joined Deutsche Asset Management
Management and Portfolio Manager of in 1999, having served with the
the portfolio. equity and fixed-income
o Joined Deutsche Asset Management investment committees.
in 1996 and the portfolio in 2004. o Senior Investment Strategist for
o Over 32 years of investment Asset Allocation.
industry experience. o Previous experience includes 18
o MBA, Hofstra University. years of investment industry
experience, including three
J. Christopher Gagnier years managing Emerging Markets
Managing Director of Deutsche Asset Fixed Income, Emerging Markets
Management and Portfolio Manager of Equity and Emerging Markets
the portfolio. balanced accounts at Deltec
o Joined Deutsche Asset Management Asset Management Corporation.
in 1997 and the portfolio in 2002. o Joined the portfolio in 2004.
o Prior to that, portfolio manager, o MBA, Fordham University.
Paine Webber, from 1984 to 1997.
o Began investment career in 1979.
o MBA, University of Chicago.
</TABLE>
The portfolio's Statement of Additional Information provides additional
information about the portfolio managers' investments in the portfolio, a
description of their compensation structure and information regarding other
accounts they manage.
18
<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, independent registered accounting firm, whose report, along with the
portfolio's financial statements, is included in the portfolio's annual report
(see "Shareholder reports" on the back cover).
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
Balanced Portfolio -- Class A
19
<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 US companies.
In choosing stocks for the portfolio, the portfolio managers consider yield and
other valuation and growth factors, meaning that they focus the portfolio's
investments on securities of US 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 different types of securities at different times, while
still maintaining variety in terms of the securities, issuers and economic
sectors represented.
The managers normally will, but are not obligated to, sell a stock if its yield
or growth prospects are believed to be below the benchmark average. The managers
will also sell a stock when the managers believe its fundamental factors have
changed, to manage overall risk of the portfolio, when other investments offer
better opportunities or in the course of adjusting its emphasis on or within a
given industry.
The portfolio may lend its investment securities up to 33 1/3% of its total
assets to approved institutional borrowers who need to borrow securities in
order to complete certain transactions.
Although major changes tend to be infrequent, the Board of Trustees could change
the portfolio's investment objective without seeking shareholder approval.
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.
The portfolio is permitted, but not required, to use various types of
derivatives (contracts whose value is based on, for example, indexes, currencies
or securities). The portfolio may use derivatives in circumstances where the
managers believe they offer an economical means of gaining exposure to a
particular asset class or to keep cash on hand to meet shareholder redemptions
or other needs while maintaining exposure to the market.
As a temporary defensive measure, the portfolio could shift up to 100% of assets
into investments such as money market securities. This measure could prevent
losses, but, while engaged in a temporary defensive position, a fund will not be
pursuing its investment objective. However, the portfolio managers may choose
not to use these strategies for various reasons, even in very volatile market
conditions.
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 cause the portfolio's performance to trail that of
other investments.
Stock Market Risk. As with most stock portfolios, an important factor with this
portfolio is how stock markets perform -- in this case, the large company
portion of the US stock market. When prices of these stocks fall, you should
expect the value of your investment to fall as well. Large company stocks at
times may not perform as well as stocks of smaller or mid-sized 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. In addition, movements
in financial markets may adversely affect a stock's price, regardless of how
well the company performs. The market as a whole may not favor the types of
investments the portfolio makes and the portfolio may not be able to get
attractive prices for them.
Industry Risk. While the portfolio does not concentrate in any industry, to the
extent that the fund has exposure to a given industry or sector, any factors
affecting that industry or sector could affect the value of portfolio
securities. For example, manufacturers of consumer goods could be hurt by a rise
in unemployment, or technology companies could be hurt by such factors as market
saturation, price competition and rapid obsolescence.
IPO Risk. Securities purchased in initial public offerings (IPOs) may be very
volatile, rising and falling rapidly, often based, among other reasons, on
investor perceptions rather than on economic factors. Additionally, investments
in IPOs may magnify the portfolio's performance if it has a small asset base.
The portfolio is less likely to experience a similar impact on its performance
as its assets grow because it is unlikely that the portfolio will be able to
obtain proportionately larger IPO allocations.
20
<PAGE>
Derivatives Risk. Risks associated with derivatives include: the risk that the
derivative is not well correlated with the security, index or currency to which
it relates; the risk that derivatives used for risk management may not have the
intended effects and may result in losses or missed opportunities; the risk that
the portfolio will be unable to sell the derivative because of an illiquid
secondary market; the risk that a counterparty is unwilling or unable to meet
its obligation; the risk of interest rate movements and the risk that the
derivatives transaction could expose the portfolio to the effects of leverage,
which could increase a portfolio's exposure to the market and magnify potential
losses. There is no guarantee that derivatives activities will be employed or
that they will work, and their use could cause lower returns or even losses to
the portfolio.
Securities Lending Risk. Any loss in the market price of securities loaned by
the portfolio that occurs during the term of the loan would be borne by the
portfolio and would adversely affect the portfolio's performance. Also, there
may be delays in recovery of securities loaned or even a loss of rights in the
collateral should the borrower of the securities fail financially while the loan
is outstanding. However, loans will be made only to borrowers selected by the
portfolio's delegate after a review of relevant facts and circumstances,
including the creditworthiness of the borrower.
Pricing Risk. At times, market conditions might make it hard to value some
investments. For example, if the portfolio has valued its securities too highly,
you may end up paying too much for portfolio shares when you buy into the
portfolio. If the portfolio underestimates their price, you may not receive the
full market value for your portfolio shares when you sell.
Another factor that could affect performance is:
o the managers could be incorrect in their analysis of industries, companies,
economic trends, the relative attractiveness of different securities or other
matters
This portfolio may make sense for investors interested in an equity fund to
provide long-term growth and some current income.
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 -11.30
2002 -23.13
2003 26.74
2004
For the periods included in the bar chart:
Best Quarter: %, Q Worst Quarter: %, Q
2005 Total Return as of March 31: %
21
<PAGE>
Average Annual Total Returns (%) as of 12/31/2004
1 Year 5 Year 10 Years
--------------------------------------------------------------------------------
Portfolio -- Class A
Index
--------------------------------------------------------------------------------
Index: Standard & Poor's (S&P) 500 Index is a capitalization-weighted index of
500 stocks, designed to measure performance of the broad domestic economy
through changes in the aggregate market value of 500 stocks representing all
major industries.
Current performance information may be higher or lower than the performance data
quoted above. For more recent performance information, contact your
participating insurance company.
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
portfolio shares. The information in the table does not 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 increase
expenses.
--------------------------------------------------------------------------------
Fee Table Class A
--------------------------------------------------------------------------------
Annual Operating Expenses, deducted from portfolio assets
--------------------------------------------------------------------------------
Management Fee %
--------------------------------------------------------------------------------
Distribution/Service (12b-1) Fee None
--------------------------------------------------------------------------------
Other Expenses
--------------------------------------------------------------------------------
Total Annual Operating Expenses
--------------------------------------------------------------------------------
Based on the costs above, this example helps you compare the expenses of Class A
shares to those of other mutual funds. This example assumes the expenses above
remain the same. It also assumes that you invested $10,000, earned 5% annual
returns, reinvested all dividends and distributions and sold your shares at the
end of each period. This is only an example; actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Class A Shares $ $ $ $
--------------------------------------------------------------------------------
22
<PAGE>
The Portfolio Managers
The portfolio is managed by a team of investment professionals who each play an
important role in the portfolio's management process. This team works for the
advisor or its affiliates and is supported by a large staff of economists,
research analysts, traders and other investment specialists. The advisor or its
affiliates believe(s) its team approach benefits portfolio investors by bringing
together many disciplines and leveraging its extensive resources.
The portfolio is managed by a team of investment professionals who collaborate
to implement the portfolio's investment strategy. The team is led by a lead
portfolio manager who is responsible for developing the portfolio's investment
strategy. Each portfolio manager on the team has authority over all aspects of
the portfolio's investment portfolio, including but not limited to, purchases
and sales of individual securities, portfolio construction techniques, portfolio
risk assessment and the management of daily cash flows in accordance with
portfolio holdings.
The following people handle the day-to-day management of the portfolio:
<TABLE>
<CAPTION>
<S> <C>
Gregory Adams, CFA Andrew Brudenell, CFA
Managing Director of Deutsche Asset Vice President of Deutsche Asset
Management and Lead Portfolio Manager of Management and Portfolio Manager of the
the portfolio. portfolio.
o Joined Deutsche Asset Management in o Joined Deutsche Asset Management in
1999 and the portfolio in 1999. 1997 and the portfolio in 2003.
o Over 17 years of investment industry o Portfolio Manager for US Large Cap
experience. Core Equity: New York.
o Previously managed Chase Vista Growth o MS, London School of Economics.
& Income Fund, Chase Vista Large Cap
Equity Fund, Chase Vista Balanced
Fund and other equity portfolios for
Chase Asset Management.
</TABLE>
The portfolio's Statement of Additional Information provides additional
information about the portfolio managers' investments in the portfolio, a
description of their compensation structure and information regarding other
accounts they manage.
23
<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, independent registered public accounting firm, whose report, along with the
portfolio's financial statements, is included in the annual report (see
"Shareholder reports" on the back cover).
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
Growth and Income Portfolio -- Class A
24
<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 normally invests at least 65% of
total assets in common stocks of US companies. Although the portfolio can invest
in companies of any size, it generally focuses on established companies that are
similar in size to the companies in the Standard & Poor's 500r Composite Stock
Price Index (the "S&P 500 Index") or the Russell 1000r Growth Index (as of
December 31, 2004, the S&P 500 Index and the Russell 1000 Growth Index had
median market capitalizations of $____ billion and $____ billion, respectively).
Although the portfolio may invest in companies of any size, the portfolio
intends to invest primarily in companies whose market capitalizations fall
within the normal range of these indexes.
In choosing stocks, the portfolio managers look for individual companies that
have the potential to display above-average earnings growth compared to other
growth companies and that have strong product lines, effective management and
leadership positions or potential to become leaders within core markets. The
managers also analyze each company's valuation, financial position and other
factors.
The managers will normally sell a stock when they believe its potential risks
have increased, its price is unlikely to go higher, its fundamental factors have
changed, other investments offer better opportunities or in the course of
adjusting the portfolio's emphasis on a given industry.
The portfolio may lend its investment securities up to 33 1/3% of its total
assets to approved institutional borrowers who need to borrow securities in
order to complete certain transactions.
Although major changes tend to be infrequent, the Board of Trustees could change
the portfolio's investment objective without seeking shareholder approval.
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.
The portfolio is permitted, but not required, to use various types of
derivatives (contracts whose value is based on, for example, indexes, currencies
or securities). In particular, the portfolio may use options and covered call
options. The portfolio may use derivatives in circumstances where the managers
believe they offer an economical means of gaining exposure to a particular asset
class or to keep cash on hand to meet shareholder redemptions or other needs
while maintaining exposure to the market.
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 cause the portfolio's performance to trail that of
other investments.
Stock Market Risk. As with most stock portfolios, an important factor with this
portfolio is how stock markets perform -- in this case, the growth portion of
the US stock market. 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. In addition, movements in financial markets may adversely affect a
stock's price, regardless of how well the company performs. The market as a
whole may not favor the types of investments the portfolio makes and the
portfolio may not be able to get attractive prices for them.
Industry Risk. While the portfolio does not concentrate in any industry, to the
extent that the portfolio has exposure to a given industry or sector, any
factors affecting that industry or sector could affect the value of portfolio
securities. For example, manufacturers of consumer goods could be hurt by a rise
in unemployment, or technology companies could be hurt by such factors as market
saturation, price competition and rapid obsolescence.
Growth Investing Risk. Since growth companies usually reinvest a large portion
of earnings in their own businesses, growth stocks may lack the dividends
associated with value stocks that might otherwise cushion their decline in a
falling market. Earnings disappointments in growth stocks often result in sharp
price declines because investors tend to buy these stocks because of their
potential for superior earnings growth. Growth stocks may also be out of favor
for certain periods in relation to value stocks.
IPO Risk. Securities purchased in initial public offerings (IPOs) may be very
volatile, rising and falling rapidly, often based, among other reasons, on
investor perceptions rather than on economic factors. Additionally, investments
in IPOs may magnify the portfolio's performance if it has a small asset base.
The portfolio is less likely to experience a similar impact on its performance
as its assets grow because it is unlikely that the portfolio will be able to
obtain proportionately larger IPO allocations.
25
<PAGE>
Derivatives Risk. Risks associated with derivatives include: the risk that the
derivative is not well correlated with the security, index or currency to which
it relates; the risk that derivatives used for risk management may not have the
intended effects and may result in losses or missed opportunities; the risk that
the portfolio will be unable to sell the derivative because of an illiquid
secondary market; the risk that a counterparty is unwilling or unable to meet
its obligation; the risk of interest rate movements and the risk that the
derivatives transaction could expose the portfolio to the effects of leverage,
which could increase a portfolio's exposure to the market and magnify potential
losses. There is no guarantee that derivatives activities will be employed or
that they will work, and their use could cause lower returns or even losses to
the portfolio.
Securities Lending Risk. Any loss in the market price of securities loaned by
the portfolio that occurs during the term of the loan would be borne by the
portfolio and would adversely affect the portfolio's performance. Also, there
may be delays in recovery of securities loaned or even a loss of rights in the
collateral should the borrower of the securities fail financially while the loan
is outstanding. However, loans will be made only to borrowers selected by the
portfolio's delegate after a review of relevant facts and circumstances,
including the creditworthiness of the borrower.
Pricing Risk. At times, market conditions might make it hard to value some
investments. For example, if the portfolio has valued its securities too highly,
you may end up paying too much for portfolio shares when you buy into the
portfolio. If the portfolio underestimates their price, you may not receive the
full market value for your portfolio shares when you sell.
Another factor that could affect performance is:
o the managers could be incorrect in their analysis of companies, sectors,
economic trends, the relative attractiveness of different securities or other
matters
This portfolio may make sense for investors seeking long-term growth.
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 two broad-based market indexes
(which, unlike the portfolio, do not have any fees or expenses). The performance
of both the portfolio and the indexes 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 28.65
1996 20.13
1997 35.76
1998 23.23
1999 35.23
2000 -9.90
2001 -19.36
2002 -29.18
2003 26.89
2004
For the periods included in the bar chart:
Best Quarter: %, Q Worst Quarter: %, Q
2005 Total Return as of March 31: %
26
<PAGE>
Average Annual Total Returns (%) as of 12/31/2004
1 Year 5 Years 10 Years
--------------------------------------------------------------------------------
Portfolio -- Class A
Index 1
Index 2
--------------------------------------------------------------------------------
Index 1: Standard & Poor's (S&P) 500 Index is a capitalization-weighted index of
500 stocks, designed to measure performance of the broad domestic economy
through changes in the aggregate market value of 500 stocks representing all
major industries.
Index 2: Russell 1000 Growth Index is an unmanaged capitalization-weighted index
containing those securities in the Russell 1000 Index with higher price-to-book
ratios and higher forecasted-growth values.
Current performance information may be higher or lower than the performance data
quoted above. For more recent performance information, contact your
participating insurance company.
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
portfolio shares. The information in the table does not 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 increase
expenses.
Fee Table Class A
--------------------------------------------------------------------------------
Annual Operating Expenses, deducted from portfolio assets
--------------------------------------------------------------------------------
Management Fee %
--------------------------------------------------------------------------------
Distribution/Service (12b-1) Fee None
--------------------------------------------------------------------------------
Other Expenses
--------------------------------------------------------------------------------
Total Annual Operating Expenses
--------------------------------------------------------------------------------
Based on the costs above, this example helps you compare the expenses of Class A
shares to those of other mutual funds. This example assumes the expenses above
remain the same. It also assumes that you invested $10,000, earned 5% annual
returns, reinvested all dividends and distributions and sold your shares at the
end of each period. This is only an example; actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Class A Shares $ $ $ $
--------------------------------------------------------------------------------
27
<PAGE>
The Portfolio Managers
The portfolio is managed by a team of investment professionals who each play an
important role in the portfolio's management process. This team works for the
advisor or its affiliates and is supported by a large staff of economists,
research analysts, traders and other investment specialists. The advisor or its
affiliates believe(s) its team approach benefits portfolio investors by bringing
together many disciplines and leveraging its extensive resources.
The portfolio is managed by a team of investment professionals who collaborate
to implement the portfolio's investment strategy. The team is led by a lead
portfolio manager who is responsible for developing the portfolio's investment
strategy. Each portfolio manager on the team has authority over all aspects of
the portfolio's investment portfolio, including but not limited to, purchases
and sales of individual securities, portfolio construction techniques, portfolio
risk assessment and the management of daily cash flows in accordance with
portfolio holdings.
The following people handle the day-to-day management of the portfolio:
<TABLE>
<CAPTION>
<S> <C>
Julie M. Van Cleave, CFA Jack A. Zehner Thomas J. Schmid, CFA
Managing Director of Deutsche Asset Director of Deutsche Asset Management Director of Deutsche Asset Management
Management and Lead Portfolio Manager and Portfolio Manager of the and Portfolio Manager of
of the portfolio. portfolio. the portfolio.
o Joined Deutsche Asset Management o Joined Deutsche Asset Management o Joined Deutsche Asset Management
and the portfolio in 2002. and the portfolio in 2002. and the portfolio in 2002.
o Head of Large Cap Growth Portfolio o Previous experience includes o Previous experience includes
Selection Team. eight years' investment industry 15 years' investment industry
o Previous experience includes 18 experience at Mason Street experience, most recently as
years' investment industry Advisors where he served most Director -- Common Stock at Mason
experience at Mason Street recently as Director -- Common Street Advisors.
Advisors, most recently serving as Stock. o MBA, University of Chicago.
Managing Director and team leader o MBA, Marquette University.
for the large cap investment team.
o MBA, University of Wisconsin --
Madison.
</TABLE>
The portfolio's Statement of Additional Information provides additional
information about the portfolio managers' investments in the portfolio, a
description of their compensation structure and information regarding other
accounts they manage.
28
<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, independent registered public accounting firm, whose report, along with the
portfolio's financial statements, is included in the portfolio's annual report
(see "Shareholder reports" on the back cover).
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
Capital Growth Portfolio -- Class A
29
<PAGE>
21st Century 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 total assets in common stocks of companies that are similar in
size to those in the Russell 2000 Growth Index (as of December 31, 2004, the
Russell 2000 Growth Index had a median market capitalization of $___ million).
The portfolio intends to invest primarily in companies whose market
capitalizations fall within the normal range of the Index.
Using extensive fundamental and field research, the managers look for companies
that have low debt, exceptional management teams that hold a significant stake
in the company, strong current or potential competitive positioning and
potential annual earnings growth of at least 15%, among other factors. The
managers often find these companies in rapidly changing sectors of the economy,
such as telecommunications, biotechnology and high tech.
The managers generally look for companies that they believe have potential for
sustainable above-average earnings growth and whose market value appears
reasonable in light of their business prospects.
The managers may favor different types of securities from different industries
and companies at different times.
The managers will normally sell a stock when they believe its price is unlikely
to go much higher, its fundamental factors have changed, other investments offer
better opportunities, or in the course of adjusting its emphasis on a given
industry.
Also, as companies in the portfolio exceed the market value of those in the
Russell 2000 Growth Index, the portfolio may continue to hold their stock, but
generally will not add to these holdings.
The portfolio may lend its investment securities up to 33 1/3% of its total
assets to approved institutional borrowers who need to borrow securities in
order to complete certain transactions.
Although major changes tend to be infrequent, the Board of Trustees could change
the portfolio's investment objective without seeking shareholder approval.
Other Investments
The portfolio is permitted, but not required, to use various types of
derivatives (contracts whose value is based on, for example, indexes, currencies
or securities). In particular, the portfolio may use futures and options,
including sales of covered put and call options. The portfolio may use
derivatives in circumstances where the managers believe they offer an economical
means of gaining exposure to a particular asset class or to keep cash on hand to
meet shareholder redemptions or other needs while maintaining exposure to the
market.
As a temporary defensive measure, the portfolio could shift up to 100% of assets
into investments such as money market securities. This measure could prevent
losses, but, while engaged in a temporary defensive position, a fund will not be
pursuing its investment objective. However, the portfolio managers may choose
not to use these strategies for various reasons, even in very volatile market
conditions.
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 cause the portfolio's performance to trail that of
other investments.
Stock Market Risk. As with most stock portfolios, an important factor with this
portfolio is how stock markets perform -- in this case, growth stocks. 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. In addition,
movements in financial markets may adversely affect a stock's price, regardless
of how well the company performs. The market as a whole may not favor the types
of investments the portfolio makes and the portfolio may not be able to get
attractive prices for them.
Growth Investing Risk. Since growth companies usually reinvest a large portion
of earnings in their own businesses, growth stocks may lack the dividends
associated with value stocks that might otherwise cushion their decline in a
falling market. Earnings disappointments in growth stocks often result in sharp
price declines because investors tend to buy these stocks because of their
potential for superior earnings growth. Growth stocks may also be out of favor
for certain periods in relation to value stocks.
30
<PAGE>
Industry Risk. While the portfolio does not concentrate in any industry, to the
extent that the portfolio has exposure to a given industry or sector, any
factors affecting that industry or sector could affect the value of portfolio
securities. For example, manufacturers of consumer goods could be hurt by a rise
in unemployment, or technology companies could be hurt by such factors as market
saturation, price competition and rapid obsolescence.
Small Company Risk. Small company stocks tend to experience steeper price
fluctuations than the stocks of larger companies. A shortage of reliable
information can also pose added risk. Industry-wide reversals may have a greater
impact on small companies, since they lack a large company's financial
resources. Small company stocks are typically less liquid than large company
stocks: when things are going poorly, it is harder to find a buyer for a small
company's shares.
IPO Risk. Securities purchased in initial public offerings (IPOs) may be very
volatile, rising and falling rapidly, often based, among other reasons, on
investor perceptions rather than on economic factors. Additionally, investments
in IPOs may magnify the portfolio's performance if it has a small asset base.
The portfolio is less likely to experience a similar impact on its performance
as its assets grow because it is unlikely that the portfolio will be able to
obtain proportionately larger IPO allocations.
Derivatives Risk. Risks associated with derivatives include: the risk that the
derivative is not well correlated with the security, index or currency to which
it relates; the risk that derivatives used for risk management may not have the
intended effects and may result in losses or missed opportunities; the risk that
the portfolio will be unable to sell the derivative because of an illiquid
secondary market; the risk that a counterparty is unwilling or unable to meet
its obligation; the risk of interest rate movements and the risk that the
derivatives transaction could expose the portfolio to the effects of leverage,
which could increase a portfolio's exposure to the market and magnify potential
losses. There is no guarantee that derivatives activities will be employed or
that they will work, and their use could cause lower returns or even losses to
the portfolio.
Securities Lending Risk. Any loss in the market price of securities loaned by
the portfolio that occurs during the term of the loan would be borne by the
portfolio and would adversely affect the portfolio's performance. Also, there
may be delays in recovery of securities loaned or even a loss of rights in the
collateral should the borrower of the securities fail financially while the loan
is outstanding. However, loans will be made only to borrowers selected by the
portfolio's delegate after a review of relevant facts and circumstances,
including the creditworthiness of the borrower.
Pricing Risk. At times, market conditions might make it hard to value some
investments. For example, if the portfolio has valued its securities too highly,
you may end up paying too much for portfolio shares when you buy into the
portfolio. If the portfolio underestimates their price, you may not receive the
full market value for your portfolio shares when you sell.
Other factors that could affect performance include:
o the managers could be incorrect in their analysis of industries, companies,
economic trends, the relative attractiveness of different securities or other
matters
o foreign stocks tend to be more volatile than their US counterparts, for
reasons such as currency fluctuations and political and economic uncertainty
This portfolio may make sense for long-term investors who can accept the risks
of small-company investing and who are interested in a portfolio that seeks out
tomorrow's leaders.
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.
31
<PAGE>
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 -23.28
2002 -41.25
2003 30.87
2004
For the periods included in the bar chart:
Best Quarter: %, Q Worst Quarter: %, Q
2005 Total Return as of March 31: %
Average Annual Total Returns (%) as of 12/31/2004
1 Year 5 Years 10 Years
--------------------------------------------------------------------------------
Portfolio -- Class A
--------------------------------------------------------------------------------
Index
--------------------------------------------------------------------------------
Index: Russell 2000 Growth Index is an unmanaged capitalization-weighted measure
of 2000 of the smallest capitalized US companies with a higher price-to-book
ratio and higher forecasted growth values.
* Inception: May 3, 1999. Index comparison begins April 30, 1999.
Total returns from inception through 2001 would have been lower if operating
expenses hadn't been reduced.
Current performance information may be higher or lower than the performance data
quoted above. For more recent performance information, contact your
participating insurance company.
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
portfolio shares. The information in the table does not 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 increase
expenses.
Fee Table Class A
--------------------------------------------------------------------------------
Annual Operating Expenses, deducted from portfolio assets
--------------------------------------------------------------------------------
Management Fee %
--------------------------------------------------------------------------------
Distribution/Service (12b-1) Fee None
--------------------------------------------------------------------------------
Other Expenses
--------------------------------------------------------------------------------
Total Annual Operating Expenses*
--------------------------------------------------------------------------------
* [Pursuant to their respective agreements with Scudder Variable Series I,
the investment manager, the underwriter and the accounting agent have
agreed, for the one year period commencing on May 1, 2004, to limit their
respective fees and to reimburse other expenses to the extent necessary to
limit total operating expenses of Class A shares of Scudder 21st Century
Growth Portfolio to 1.50%.]
Based on the costs above, this example helps you compare the expenses of Class A
shares to those of other mutual funds. This example assumes the expenses above
remain the same. It also assumes that you invested $10,000, earned 5% annual
returns, reinvested all dividends and distributions and sold your shares at the
end of each period. This is only an example; actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Class A Shares $ $ $ $
--------------------------------------------------------------------------------
32
<PAGE>
The Portfolio Managers
The portfolio is managed by a team of investment professionals who each play an
important role in the portfolio's management process. This team works for the
advisor or its affiliates and is supported by a large staff of economists,
research analysts, traders and other investment specialists. The advisor or its
affiliates believe(s) its team approach benefits portfolio investors by bringing
together many disciplines and leveraging its extensive resources.
The portfolio is managed by a team of investment professionals who collaborate
to develop and implement the portfolio's investment strategy. Each portfolio
manager on the team has authority over all aspects of the portfolio's investment
portfolio, including but not limited to, purchases and sales of individual
securities, portfolio construction techniques, portfolio risk assessment and the
management of daily cash flows in accordance with portfolio holdings.
The following people handle the day-to-day management of the portfolio:
Samuel A. Dedio Robert S. Janis
Managing Director of Deutsche Asset Managing Director of Deutsche Asset
Management and Co-Lead Portfolio Management and Co-Lead Portfolio Manager
Manager of the portfolio. of the portfolio.
o Joined Deutsche Asset Management o Joined Deutsche Asset Management and
in 1999 after eight years of the portfolio in 2004.
experience, formerly serving as o Previously served as portfolio
analyst at Ernst & Young, LLP, manager for ten years at Credit
Evergreen Asset Management and Suisse Asset Management (or at its
Standard & Poor's Corp. predecessor Warburg Pincus Asset
o Over 13 years of investment Management).
industry experience. o Over 20 years of investment industry
o MS, American University, Kogod experience.
School of Business. o MBA, University of Pennsylvania,
o Joined the portfolio in 2002. Wharton School.
The portfolio's Statement of Additional Information provides additional
information about the portfolio managers' investments in the portfolio, a
description of their compensation structure and information regarding other
accounts they manage.
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, independent registered public accounting firm, whose report, along with the
portfolio's financial statements, is included in the annual report (see
"Shareholder reports" on the back cover).
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
21st Century Growth Portfolio -- Class A
33
<PAGE>
Global Discovery Portfolio
The Portfolio's Main Investment Strategy
The portfolio seeks above-average capital appreciation over the long term. The
portfolio invests at least 65% of total assets in common stocks and other
equities of small companies throughout the world (companies with market values
similar to the smallest 20% of the Citigroup Broad Market Index). While the
portfolio may invest in securities in any country, it generally focuses on
countries with developed economies (including the US). As of December 31, 2004,
companies in which the portfolio invests typically have 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 individual companies with a history of
above-average growth, strong competitive positioning, attractive prices relative
to potential growth, sound financial strength and effective management, among
other factors.
Growth orientation. The managers generally look for companies that they believe
have above-average potential for sustainable growth of revenue or earnings and
whose market value appears reasonable in light of their business prospects.
Analysis of global themes. The managers consider global economic outlooks,
seeking to identify industries and companies that are likely to benefit from
social, political and economic changes.
The managers may focus on the securities of particular issuers, industries,
countries or regions at different times.
The managers will normally sell a stock when they 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 exposure to a given
country.
The portfolio may lend its investment securities up to 33 1/3% of its total
assets to approved institutional borrowers who need to borrow securities in
order to complete certain transactions.
Although major changes tend to be infrequent, the Board of Trustees could change
the portfolio's investment objective without seeking shareholder approval.
Other Investments
The portfolio may invest up to 35% of total assets in common stocks and other
equities of large companies or in debt securities (of which 5% of net assets may
be junk bonds, i.e., grade BB/Ba and below).
The portfolio is permitted, but not required, to use various types of
derivatives (contracts whose value is based on, for example, indexes, currencies
or securities). In particular, the portfolio may use futures and options. To the
extent the portfolio invests in foreign securities, the portfolio may enter into
forward currency exchange contracts and buy and sell currency options to hedge
against currency exchange rate fluctuations. The portfolio may use derivatives
in circumstances where the managers believe they offer an economical means of
gaining exposure to a particular asset class or to keep cash on hand to meet
shareholder redemptions or other needs while maintaining exposure to the market.
As a temporary defensive measure, the portfolio could shift up to 100% of assets
into investments such as money market securities. This measure could prevent
losses, but, while engaged in a temporary defensive position, a fund will not be
pursuing its investment objective. However, the portfolio managers may choose
not to use these strategies for various reasons, even in very volatile market
conditions.
The Main Risks of Investing in the Portfolio
There are several risk factors that could hurt the fund's performance, cause you
to lose money or cause the portfolio's performance to trail that of other
investments.
Stock Market Risk. As with most stock portfolios, an important factor with this
portfolio is how stock markets perform -- in this case US and foreign stock
markets. When US and foreign stock prices fall, you should expect the value of
your investment to fall as well. Compared to large company stocks, small company
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. In
addition, movements in financial markets may adversely affect a stock's price,
regardless of how well the company performs. The market as a whole may not favor
the types of investments the portfolio makes and the portfolio may not be able
to get attractive prices for them.
34
<PAGE>
Foreign Investment Risk. Foreign markets often exhibit more volatility than
those in the US. Investing in foreign securities involves greater risk than
investing in US securities for various reasons, including:
o Political Risk. Some foreign governments have limited the outflow of profits
to investors abroad, extended diplomatic disputes to include trade and
financial relations, and imposed high taxes on corporate profits.
o Information Risk. Financial reporting standards for companies based in
foreign markets are often less stringent than those applicable to US
companies and may present an incomplete or misleading picture of a foreign
company.
o Liquidity Risk. Securities that trade less can be more difficult or more
costly to buy, or to sell, than more liquid or active securities. This
liquidity risk is a factor of the trading volume of a particular security, as
well as the size and liquidity of the entire local market. On the whole,
foreign markets are smaller and less liquid than the US market. This can make
buying and selling certain securities more difficult and costly. Relatively
small transactions in some instances can have a disproportionately large
effect on the price and supply of securities. In certain situations, it may
become virtually impossible to sell a security in an orderly fashion at a
price that approaches the managers' estimate of its value.
o Regulatory Risk. There is generally less government regulation of foreign
markets, companies and securities dealers than in the US.
o Currency Risk. The portfolio invests in foreign securities denominated in
foreign currencies. To the extent that the portfolio is exposed to non-dollar
currencies, if these currencies decline in value relative to the dollar, it
may reduce gains or increase losses.
Emerging Markets Risk. To the extent that the portfolio invests in emerging
markets to enhance overall returns, it may face higher political, information,
and stock market risks. In addition, profound social changes and business
practices that depart from norms in developed countries' economies have hindered
the orderly growth of emerging economies and their stock markets in the past.
High levels of debt tend to make emerging economies heavily reliant on foreign
capital and vulnerable to capital flight.
Pricing Risk. At times, market conditions might make it hard to value some
investments. For example, if the portfolio has valued its securities too highly,
you may end up paying too much for portfolio shares when you buy into the
portfolio. If the portfolio underestimates their price, you may not receive the
full market value for your portfolio shares when you sell.
Small Company Risk. Small company stocks tend to experience steeper price
fluctuations than the stocks of larger companies. A shortage of reliable
information can also pose added risk. Industry-wide reversals may have a greater
impact on small companies, since they lack a large company's financial
resources. Small company stocks are typically less liquid than large company
stocks: when things are going poorly, it is harder to find a buyer for a small
company's shares.
IPO Risk. Securities purchased in initial public offerings (IPOs) may be very
volatile, rising and falling rapidly, often based, among other reasons, on
investor perceptions rather than on economic factors. Additionally, investments
in IPOs may magnify the portfolio's performance if it has a small asset base.
The portfolio is less likely to experience a similar impact on its performance
as its assets grow because it is unlikely that the portfolio will be able to
obtain proportionately larger IPO allocations.
Derivatives Risk. Risks associated with derivatives include: the risk that the
derivative is not well correlated with the security, index or currency to which
it relates; the risk that derivatives used for risk management may not have the
intended effects and may result in losses or missed opportunities; the risk that
the portfolio will be unable to sell the derivative because of an illiquid
secondary market; the risk that a counterparty is unwilling or unable to meet
its obligation; the risk of interest rate movements and the risk that the
derivatives transaction could expose the portfolio to the effects of leverage,
which could increase a portfolio's exposure to the market and magnify potential
losses. There is no guarantee that derivatives activities will be employed or
that they will work, and their use could cause lower returns or even losses to
the portfolio.
Securities Lending Risk. Any loss in the market price of securities loaned by
the portfolio that occurs during the term of the loan would be borne by the
portfolio and would adversely affect the portfolio's performance. Also, there
may be delays in recovery of securities loaned or even a loss of rights in the
collateral should the borrower of the securities fail financially while the loan
is outstanding. However, loans will be made only to borrowers selected by the
portfolio's delegate after a review of relevant facts and circumstances,
including the creditworthiness of the borrower.
Pricing Risk. At times, market conditions might make it hard to value some
investments. For example, if the portfolio has valued its securities too highly,
you may end up paying too much for portfolio shares when you buy into the
portfolio. If the portfolio underestimates their price, you may not receive the
full market value for your portfolio shares when you sell.
35
<PAGE>
Other factors that could affect performance include:
o the managers could be incorrect in their analysis of industries, companies,
economic trends, the relative attractiveness of different securities,
geographical trends or other matters
o growth stocks may be out of favor for certain periods
This portfolio may interest long-term investors interested in diversifying a
large-cap or domestic portfolio of investments.
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 -24.59
2002 -19.89
2003 49.09
2004
For the periods included in the bar chart:
Best Quarter: %, Q Worst Quarter: %, Q
2005 Total Return as of March 31: ___%
Average Annual Total Returns (%) as of 12/31/2004
Since
1 Year 5 Years Inception*
--------------------------------------------------------------------------------
Portfolio -- Class A
Index
--------------------------------------------------------------------------------
Index: Citigroup World Equity Extended Market Index, formerly the Salomon Smith
Barney World Equity Extended Market Index, is an unmanaged small-capitalization
stock universe of 22 countries.
* Inception: May 1, 1996. Index comparison begins April 30, 1996.
Total returns from inception through 1998 would have been lower if operating
expenses hadn't been reduced.
Current performance information may be higher or lower than the performance data
quoted above. For more recent performance information, contact your
participating insurance company.
36
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
portfolio shares. The information in the table does not 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 increase
expenses.
Fee Table Class A
--------------------------------------------------------------------------------
Annual Operating Expenses, deducted from portfolio assets
--------------------------------------------------------------------------------
Management Fee %
--------------------------------------------------------------------------------
Distribution/Service (12b-1) Fee None
--------------------------------------------------------------------------------
Other Expenses
--------------------------------------------------------------------------------
Total Annual Operating Expenses*
--------------------------------------------------------------------------------
* Pursuant to their respective agreements with Scudder Variable Series I, the
investment manager, the underwriter and the accounting agent have agreed,
for the one year period commencing on May 1, 2004, to limit their
respective fees and to reimburse other expenses to the extent necessary to
limit total operating expenses of Class A shares of Scudder Global
Discovery Portfolio to 1.25%.
Based on the costs above, this example helps you compare the expenses of Class A
shares to those of other mutual funds. This example assumes the expenses above
remain the same. It also assumes that you invested $10,000, earned 5% annual
returns, reinvested all dividends and distributions and sold your shares at the
end of each period. This is only an example; actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Class A Shares $ $ $ $
--------------------------------------------------------------------------------
The Portfolio Managers
The portfolio is managed by a team of investment professionals who each play an
important role in the portfolio's management process. This team works for the
advisor or its affiliates and is supported by a large staff of economists,
research analysts, traders and other investment specialists. The advisor or its
affiliates believe(s) its team approach benefits portfolio investors by bringing
together many disciplines and leveraging its extensive resources.
The portfolio is managed by a team of investment professionals who collaborate
to implement the portfolio's investment strategy. The team is led by a lead
portfolio manager who is responsible for developing the portfolio's investment
strategy. Each portfolio manager on the team has authority over all aspects of
the portfolio's investment portfolio, including but not limited to, purchases
and sales of individual securities, portfolio construction techniques, portfolio
risk assessment and the management of daily cash flows in accordance with
portfolio holdings.
The following people handle the day-to-day management of the portfolio:
<TABLE>
<CAPTION>
<S> <C>
Joseph Axtell, CFA Terrence S. Gray, CFA
Director of Deutsche Asset Management and Director of Deutsche Asset Management
Lead Portfolio Manager of the portfolio. and Portfolio Manager of the
o Joined Deutsche Asset Management portfolio.
in 2001 and the portfolio in 2002. o Joined Deutsche Asset Management
o Senior analyst at Merrill Lynch in 1993 and the portfolio in 2003.
Investment Managers for the o Over 12 years of investment
international equity portion of a industry experience.
global balanced portfolio (1996-2001). o Head of global portfolio
o Director, International Research at selection team for Pacific Basin
PCM International (1989-1996). Equity: New York.
o Associate manager, structured debt
and equity group at Prudential
Capital Corporation (1988-1989).
o Analyst at Prudential-Bache Capital
Funding in London (1987-1988).
o Equity analyst in the healthcare
sector at Prudential Equity
Management Associates (1985-1987).
</TABLE>
The portfolio's Statement of Additional Information provides additional
information about the portfolio managers' investments in the portfolio, a
description of their compensation structure and information regarding other
accounts they manage.
37
<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, independent registered public accounting firm, whose report, along with the
portfolio's financial statements, is included in the portfolio's annual report
(see "Shareholder reports" on the back cover).
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
Global Discovery Portfolio -- Class A
38
<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 (equities issued by
foreign-based companies and listed on foreign exchanges.) Although the fund can
invest in companies of any size and from any country (other than the United
States), it invests mainly in common stocks of established companies in
countries with developed economies.
In choosing stocks, the portfolio managers use a combination of two analytical
disciplines:
Bottom-up research. The managers look for individual companies with a history of
above-average growth, strong competitive positioning, attractive prices relative
to potential growth, sound financial strength and effective management, among
other factors.
Top-down analysis. The managers consider the economic outlooks for various
sectors and industries, while looking for those that may benefit from changes in
the overall business environment.
The managers may favor different types of securities from different industries
and companies at different times, while still maintaining variety in terms of
the types of securities, issuers and countries represented.
The managers will normally sell a stock when the managers believe its price is
unlikely to go higher, its fundamentals have deteriorated or other investments
offer better opportunities.
The portfolio may lend its investment securities up to 33 1/3% of its total
assets to approved institutional borrowers who need to borrow securities in
order to complete certain transactions.
Although major changes tend to be infrequent, the Board of Trustees could change
the portfolio's investment objective without seeking shareholder approval.
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 is permitted, but not required, to use
various types of derivatives (contracts whose value is based on, for example,
indexes, currencies or securities). The portfolio may use derivatives in
circumstances where the managers believe they offer an economical means of
gaining exposure to a particular asset class or to keep cash on hand to meet
shareholder redemptions or other needs while maintaining exposure to the market.
For temporary defensive purposes, the portfolio may invest up to 100% of its
assets in Canadian and US government obligations or currencies, securities of
companies incorporated in and having their principal place of business in Canada
or the US or in relatively stable investments, such as money market securities.
In such a case, the portfolio would not be pursuing its investment objective.
However, the portfolio managers may choose not to use these strategies for
various reasons, even in very volatile market conditions.
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 cause the portfolio's performance to trail that of
other investments.
Stock Market Risk. As with most stock portfolios, an important factor with this
portfolio is how stock markets perform -- in this case, foreign markets. When
foreign 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. In
addition, movements in financial markets may adversely affect a stock's price,
regardless of how well the company performs. The market as a whole may not favor
the types of investments the portfolio makes and the portfolio may not be able
to get attractive prices for them.
Foreign Investing Risk. Foreign markets often exhibit more volatility than those
in the US. Investing in foreign securities involves greater risk than investing
in US securities for various reasons, including:
o Political Risk. Some foreign governments have limited the outflow of profits
to investors abroad, extended diplomatic disputes to include trade and
financial relations, and imposed high taxes on corporate profits.
39
<PAGE>
o Information Risk. Financial reporting standards for companies based in
foreign markets are often less stringent than those applicable to US
companies and may present an incomplete or misleading picture of a foreign
company.
o Liquidity Risk. Securities that trade less can be more difficult or more
costly to buy, or to sell, than more liquid or active securities. This
liquidity risk is a factor of the trading volume of a particular security, as
well as the size and liquidity of the entire local market. On the whole,
foreign markets are smaller and less liquid than the US market. This can make
buying and selling certain securities more difficult and costly. Relatively
small transactions in some instances can have a disproportionately large
effect on the price and supply of securities. In certain situations, it may
become virtually impossible to sell a security in an orderly fashion at a
price that approaches the managers' estimate of its value.
o Regulatory Risk. There is generally less government regulation of foreign
markets, companies and securities dealers than in the US.
o Currency Risk. The portfolio invests in foreign securities denominated in
foreign currencies. To the extent that the portfolio is exposed to non-dollar
currencies, if these currencies decline in value relative to the dollar, it
may reduce gains or increase losses.
Emerging Markets Risk. To the extent that the portfolio invests in emerging
markets to enhance overall returns, it may face higher political, information,
and stock market risks. In addition, profound social changes and business
practices that depart from norms in developed countries' economies have hindered
the orderly growth of emerging economies and their stock markets in the past.
High levels of debt tend to make emerging economies heavily reliant on foreign
capital and vulnerable to capital flight.
IPO Risk. Securities purchased in initial public offerings (IPOs) may be very
volatile, rising and falling rapidly, often based, among other reasons, on
investor perceptions rather than on economic factors. Additionally, investments
in IPOs may magnify the portfolio's performance if it has a small asset base.
The portfolio is less likely to experience a similar impact on its performance
as its assets grow because it is unlikely that the portfolio will be able to
obtain proportionately larger IPO allocations.
Derivatives Risk. Risks associated with derivatives include: the risk that the
derivative is not well correlated with the security, index or currency to which
it relates; the risk that derivatives used for risk management may not have the
intended effects and may result in losses or missed opportunities; the risk that
the portfolio will be unable to sell the derivative because of an illiquid
secondary market; the risk that a counterparty is unwilling or unable to meet
its obligation; the risk of interest rate movements and the risk that the
derivatives transaction could expose the portfolio to the effects of leverage,
which could increase a portfolio's exposure to the market and magnify potential
losses. There is no guarantee that derivatives activities will be employed or
that they will work, and their use could cause lower returns or even losses to
the portfolio.
Securities Lending Risk. Any loss in the market price of securities loaned by
the portfolio that occurs during the term of the loan would be borne by the
portfolio and would adversely affect the portfolio's performance. Also, there
may be delays in recovery of securities loaned or even a loss of rights in the
collateral should the borrower of the securities fail financially while the loan
is outstanding. However, loans will be made only to borrowers selected by the
portfolio's delegate after a review of relevant facts and circumstances,
including the creditworthiness of the borrower.
Pricing Risk. At times, market conditions might make it hard to value some
investments. For example, if the portfolio has valued its securities too highly,
you may end up paying too much for portfolio shares when you buy into the
portfolio. If the portfolio underestimates their price, you may not receive the
full market value for your portfolio shares when you sell.
Another factor that could affect performance is:
o the managers could be incorrect in their analysis of industries, companies,
economic trends, the relative attractiveness of different securities,
geographical trends or other matters
This portfolio is designed for investors who are interested in a broadly
diversified international investment with the emphasis on long-term growth of
capital.
40
<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:
1995 11.11
1996 14.78
1997 9.07
1998 18.49
1999 54.51
2000 -21.70
2001 -30.86
2002 -18.37
2003 27.75
2004
For the periods included in the bar chart:
Best Quarter: %, Q Worst Quarter: %, Q
2005 Total Return as of March 31: %
Average Annual Total Returns (%) as of 12/31/2004
1 Year 5 Years 10 Years
--------------------------------------------------------------------------------
Portfolio -- Class A
Index 1
Index 2
--------------------------------------------------------------------------------
Index 1: The MSCI EAFE Index is an unmanaged index that tracks international
stock performance in the 21 developed markets of Europe, Australasia and the Far
East.*
Index 2: Morgan Stanley Capital International (MSCI) Europe, Australasia, the
Far East (EAFE) & Canada Index, an unmanaged capitalization-weighted measure of
stock markets in Europe, Australia, the Far East and Canada.
Current performance information may be higher or lower than the performance data
quoted above. For more recent performance information, contact your
participating insurance company.
* Effective July 1, 2004, the Morgan Stanley Capital International (MSCI)
Europe, Australasia, Far East (EAFE) Index replaced the MSCI EAFE + Canada
Index as the portfolio's benchmark index because the advisor believes it is
more appropriate to measure the portfolio's performance against the MSCI
EAFE Index as it more accurately reflects the portfolio's investment
strategy.
41
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
portfolio shares. The information in the table does not 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 increase
expenses.
Fee Table Class A
--------------------------------------------------------------------------------
Annual Operating Expenses, deducted from portfolio assets
--------------------------------------------------------------------------------
Management Fee %
--------------------------------------------------------------------------------
Distribution/Service (12b-1) Fee None
--------------------------------------------------------------------------------
Other Expenses
--------------------------------------------------------------------------------
Total Annual Operating Expenses
--------------------------------------------------------------------------------
Based on the costs above, this example helps you compare the expenses of Class A
shares to those of other mutual funds. This example assumes the expenses above
remain the same. It also assumes that you invested $10,000, earned 5% annual
returns, reinvested all dividends and distributions and sold your shares at the
end of each period. This is only an example; actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Class A Shares $ $ $ $
--------------------------------------------------------------------------------
The Portfolio Managers
The following people handle the day-to-day management of the portfolio:
Alex Tedder Sangita Uberoi, CFA
Managing Director of Deutsche Asset Director, Deutsche Asset Management
Management and Lead Manager of and Manager of the portfolio.
the portfolio. o Joined Deutsche Asset Management
o Joined Deutsche Asset Management in 1994 and the portfolio in
in 1994 and the portfolio in 2002. 2004.
o Previously, four years of o Portfolio manager for EAFE
experience managing European Equities.
equities and responsible for the o Previous experience includes two
insurance sector at Schroder years in equity research
Investment Management. and investments at Lehman
o Head of International Select Brothers and Smith Barney.
Equity strategy; portfolio manager
and analyst for Core EAFE
strategy: London.
o MA, Freiburg University.
Matthias Knerr, CFA
Director, Deutsche Asset Management
and Manager of the portfolio.
o Joined Deutsche Asset Management
in 1995 and the portfolio in 2004.
o Portfolio manager for EAFE
Equities and Global Equities.
The portfolio's Statement of Additional Information provides additional
information about the portfolio managers' investments in the portfolio, a
description of their compensation structure and information regarding other
accounts they manage.
42
<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 PriecewaterhouseCoopers
LLP, independent registered public accounting firm, whose report, along with the
portfolio's financial statements, is included in the annual report (see
"Shareholder reports" on the back cover).
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
International Portfolio -- Class A
43
<PAGE>
Health Sciences Portfolio
The Portfolio's Main Investment Strategy
Under normal circumstances, the portfolio seeks long-term growth of capital by
investing at least 80% of total assets, plus the amount of any borrowings for
investment purposes, in common stocks of companies in the health care sector.
For purposes of the portfolio's 80% investment policy, to be considered part of
the health care sector, companies must commit at least half of their assets to,
or derive at least half of their revenues or net income from, that sector. The
industries in the health care sector include pharmaceuticals, biotechnology,
medical products and supplies, and health care services. The companies may be of
any size. The portfolio will invest primarily in securities of US companies, but
may invest in foreign companies as well.
In choosing stocks, the portfolio managers use a combination of three analytical
disciplines:
Bottom-up research. The managers look for individual companies with a history of
above-average growth, strong competitive positioning, new tests or treatments,
the ability to take advantage of demographic trends, attractive prices relative
to potential growth, sound financial strength and effective management, among
other factors.
Growth orientation. The managers generally look for companies that they believe
have above-average potential for sustainable growth of revenue or earnings and
whose market value appears reasonable in light of their business prospects.
Top-down analysis. The managers consider the economic outlooks for various
industries within the health care sector while looking for those that may
benefit from changes in the overall business environment.
The managers may favor different types of securities from different industries
and companies within the health care sector at different times.
The managers will normally sell a stock when they believe its price is unlikely
to go higher, its fundamental factors have changed, other investments offer
better opportunities or in the course of adjusting its emphasis on a given
health care industry.
The portfolio may lend its investment securities up to 33 1/3% of its total
assets to approved institutional borrowers who need to borrow securities in
order to complete certain transactions.
Although major changes tend to be infrequent, the Board of Trustees could change
the portfolio's investment objective without seeking shareholder approval.
However, the Board will provide shareholders with at least 60 days' notice prior
to making any changes to the portfolio's 80% investment policy.
Other Investments
While the portfolio invests mainly in common stocks, it may also invest up to
20% of total assets in US Treasury and agency debt securities.
The portfolio is permitted, but not required, to use various types of
derivatives (contracts whose value is based on, for example, indexes, currencies
or securities). In particular, the portfolio may use futures and options,
including sales of covered put and call options. The portfolio may use
derivatives in circumstances where the managers believe they offer an economical
means of gaining exposure to a particular asset class or to keep cash on hand to
meet shareholder redemptions or other needs while maintaining exposure to the
market.
As a temporary defensive measure, the portfolio could shift up to 100% of assets
into investments such as money market securities. This measure could prevent
losses, but, while engaged in a temporary defensive position, a fund will not be
pursuing its investment objective. However, the portfolio managers may choose
not to use these strategies for various reasons, even in very volatile market
conditions.
44
<PAGE>
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 cause the portfolio's performance to trail that of
other investments.
Stock Market Risk. As with most stock funds, an important factor with this
portfolio is how stock markets perform -- in this case, health care stocks. When
prices of these stocks 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. In
addition, movements in financial markets may adversely affect a stock's price,
regardless of how well the company performs. The market as a whole may not favor
the types of investments the portfolio makes and the portfolio may not be able
to get attractive prices for them.
Growth Investing Risk. Since growth companies usually reinvest a large portion
of earnings in their own businesses, growth stocks may lack the dividends
associated with value stocks that might otherwise cushion their decline in a
falling market. Earnings disappointments in growth stocks often result in sharp
price declines because investors tend to buy these stocks because of their
potential for superior earnings growth. Growth stocks may also be out of favor
for certain periods in relation to value stocks.
Concentration Risk. The fact that the portfolio concentrates its investments in
the industries of the health care sector increases stock market 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.
IPO Risk. Securities purchased in initial public offerings (IPOs) may be very
volatile, rising and falling rapidly, often based, among other reasons, on
investor perceptions rather than on economic factors. Additionally, investments
in IPOs may magnify the portfolio's performance if it has a small asset base.
The portfolio is less likely to experience a similar impact on its performance
as its assets grow because it is unlikely that the portfolio will be able to
obtain proportionately larger IPO allocations.
Derivatives Risk. Risks associated with derivatives include: the risk that the
derivative is not well correlated with the security, index or currency to which
it relates; the risk that derivatives used for risk management may not have the
intended effects and may result in losses or missed opportunities; the risk that
the portfolio will be unable to sell the derivative because of an illiquid
secondary market; the risk that a counterparty is unwilling or unable to meet
its obligation; the risk of interest rate movements and the risk that the
derivatives transaction could expose the portfolio to the effects of leverage,
which could increase a portfolio's exposure to the market and magnify potential
losses. There is no guarantee that derivatives activities will be employed or
that they will work, and their use could cause lower returns or even losses to
the portfolio.
Securities Lending Risk. Any loss in the market price of securities loaned by
the portfolio that occurs during the term of the loan would be borne by the
portfolio and would adversely affect the portfolio's performance. Also, there
may be delays in recovery of securities loaned or even a loss of rights in the
collateral should the borrower of the securities fail financially while the loan
is outstanding. However, loans will be made only to borrowers selected by the
portfolio's delegate after a review of relevant facts and circumstances,
including the creditworthiness of the borrower.
Pricing Risk. At times, market conditions might make it hard to value some
investments. For example, if the portfolio has valued its securities too highly,
you may end up paying too much for portfolio shares when you buy into the
portfolio. If the portfolio underestimates their price, you may not receive the
full market value for your portfolio shares when you sell.
Other factors that could affect performance include:
o the managers could be incorrect in their analysis of industries, companies,
economic trends, the relative attractiveness of different sizes of stocks,
geographical trends or other matters
o foreign stocks tend to be more volatile than their US counterparts, for
reasons such as currency fluctuations and political and economic uncertainty
The 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.
45
<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 and one
other relevant index (which, unlike the portfolio, do not have any fees or
expenses). The performance of both the portfolio and the indexes 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:
2002 -23.13
2003 33.70
2004
For the periods included in the bar chart:
Best Quarter: %, Q Worst Quarter: %, Q
2005 Total Return as of March 31: %
Average Annual Total Returns (%) as of 12/31/2004
1 Year Since Inception*
--------------------------------------------------------------------------------
Portfolio -- Class A
Index 1
Index 2
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Index 1: Standard & Poor's (S&P) 500 Index is a capitalization-weighted index of
500 stocks, designed to measure performance of the broad domestic economy
through changes in the aggregate market value of 500 stocks representing all
major industries.
Index 2: Goldman Sachs Healthcare Index is a market capitalization-weighted
index of 114 stocks designed to measure the performance of companies in the
health care sector.
* Inception: May 1, 2001. Index comparisons begin April 30, 2001.
In the bar chart and table, total returns for 2001 would have been lower if
operating expenses hadn't been reduced.
Current performance information may be higher or lower than the performance data
quoted above. For more recent performance information, contact your
participating insurance company.
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How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
portfolio shares. The information in the table does not 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 increase
expenses.
Fee Table Class A
--------------------------------------------------------------------------------
Annual Operating Expenses, deducted from portfolio assets
--------------------------------------------------------------------------------
Management Fee %
--------------------------------------------------------------------------------
Distribution/Service (12b-1) Fee None
--------------------------------------------------------------------------------
Other Expenses
--------------------------------------------------------------------------------
Total Annual Operating Expenses*
--------------------------------------------------------------------------------
* Pursuant to their respective agreements with Scudder Variable Series I, the
investment manager, the underwriter and the accounting agent have agreed,
for the one year period commencing on May 1, 2004, to limit their
respective fees and to reimburse other expenses to the extent necessary to
limit total operating expenses of Class A shares of Scudder Health Sciences
Portfolio to 0.95%.
Based on the costs above, this example helps you compare the expenses of Class A
shares to those of other mutual funds. This example assumes the expenses above
remain the same. It also assumes that you invested $10,000, earned 5% annual
returns, reinvested all dividends and distributions and sold your shares at the
end of each period. This is only an example; actual expenses will be different.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Class A Shares $ $ $ $
--------------------------------------------------------------------------------
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The Portfolio Managers
The portfolio is managed by a team of investment professionals who each play an
important role in the portfolio's management process. This team works for the
advisor or its affiliates and is supported by a large staff of economists,
research analysts, traders and other investment specialists. The advisor or its
affiliates believe(s) its team approach benefits portfolio investors by bringing
together many disciplines and leveraging its extensive resources.
The portfolio is managed by a team of investment professionals who collaborate
to implement the portfolio's investment strategy. The team is led by a lead
portfolio manager who is responsible for developing the portfolio's investment
strategy. Each portfolio manager on the team has authority over all aspects of
the portfolio's investment portfolio, including but not limited to, purchases
and sales of individual securities, portfolio construction techniques, portfolio
risk assessment and the management of daily cash flows in accordance with
portfolio holdings.
The following people handle the day-to-day management of the portfolio:
James Fenger Thomas Bucher, CFA
Managing Director of Deutsche Asset Director of Deutsche Asset
Management and Co-Manager of the Management and Consultant to the
portfolio. portfolio.
o Joined Deutsche Asset Management o Joined Deutsche Asset Management
in 1983 and the portfolio in 2001. in 1995, previously serving as
o Over 20 years of investment analyst for European Chemical,
industry experience. Oil, Steel and Engineering
o MBA, University of Wisconsin. sectors and analyst/portfolio
manager for Eastern European
Leefin Lai, CFA, CPA equity, after one year of
Managing Director of Deutsche Asset experience as a trainee for
Management and Co-Manager of the Deutsche Bank.
portfolio. o Head of global equity research
o Joined Deutsche Asset Management team for health care sector and
in 2001 and the portfolio in 2001, portfolio manager for European
previously serving as an analyst Equity: Frankfurt.
for Salomon Smith Barney and Paine o MA, University of Tuegingen,
Webber and as Vice Germany.
President/analyst for Citigroup o Joined the portfolio in 2002.
Global Asset Management and
Scudder Kemper Investments.
o Over 13 years of investment
industry experience.
o MBA, University of Illinois.
The portfolio's Statement of Additional Information provides additional
information about the portfolio managers' investments in the portfolio, a
description of their compensation structure and information regarding other
accounts they manage.
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<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, independent registered public accounting firm, by whose report, along with
the portfolio's financial statements, is included in the annual report (see
"Shareholder reports" on the back cover).
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
Health Sciences Portfolio -- Class A
49
<PAGE>
Other Policies and Risks
While the previous pages describe the main points of each portfolio's strategy
and risks, there are a few other issues to know about:
o The portfolios may trade securities actively. This could raise transaction
costs and, accordingly, lower performance.
o The advisor measures credit quality at the time it buys securities, using
independent ratings or, for unrated securities, its own credit analysis. If a
security's credit quality declines, the advisor will decide what to do with
the security based on its assessment of what would benefit shareholders most.
For more information
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 of this prospectus tells you how to do this).
Keep in mind that there is no assurance that any portfolio will achieve its
objective.
Each portfolio's complete portfolio holdings as of the end of each calendar
month are posted on www.scudder.com ordinarily on the 15th day of the following
calendar month, or the first business day thereafter. This posted information
generally remains accessible at least until the portfolio files its Form N-CSR
or N-Q with the Securities and Exchange Commission for the period that includes
the date as of which the www.scudder.com information is current (expected to be
at least three months). The portfolios' Statement of Additional Information
includes a description of each portfolio's policies and procedures with respect
to the disclosure of the portfolio's portfolio holdings.
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The Investment Advisor
Scudder Investments is part of Deutsche Asset Management, which is the marketing
name in the US for the asset management activities of Deutsche Bank AG, Deutsche
Investment Management Americas Inc. ("DeIM"), Deutsche Asset Management, Inc.,
Deutsche Asset Management Investment Services Ltd., Deutsche Bank Trust Company
Americas and Scudder Trust Company.
Deutsche Asset Management is a global asset management organization that offers
a wide range of investing expertise and resources, including hundreds of
portfolio managers and analysts and an office network that reaches the world's
major investment centers. This well-resourced global investment platform brings
together a wide variety of experience and investment insight across industries,
regions, asset classes and investing styles.
DeIM is an indirect, wholly owned subsidiary of Deutsche Bank AG. Deutsche Bank
AG is a major global banking institution that is engaged in a wide range of
financial services, including investment management, mutual fund, retail,
private and commercial banking, investment banking and insurance.
DeIM, which is part of Deutsche Asset Management, is the investment advisor for
each portfolio. Under the supervision of the Board of Trustees, DeIM, with
headquarters at 345 Park Avenue, New York, NY, makes each portfolio's investment
decisions, buys and sells securities for the portfolios and conducts research
that leads to these purchase and sale decisions. DeIM and its predecessors have
more than 80 years of experience managing mutual funds. DeIM provides a full
range of investment advisory services to institutional and retail clients. DeIM
is also responsible for selecting brokers and dealers and for negotiating
brokerage commissions and dealer charges.
The advisor receives a management fee from each portfolio. Below are the actual
rates paid by each portfolio during the most recent fiscal year, as a percentage
of each portfolio's average daily net assets.
Portfolio Name Fee Paid
--------------------------------------------------------------------------------
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 %
--------------------------------------------------------------------------------
Subadvisor for Bond Portfolio, Balanced Portfolio and International Portfolio
Deutsche Asset Management Investment Services Ltd. ("DeAMIS"), One Appold
Street, London, England, an affiliate of the advisor, is the subadvisor to Bond
Portfolio (effective May 1, 2004), Balanced Portfolio (effective October __,
2004) and International Portfolio. DeAMIS provides a full range of international
investment advisory services to institutional and retail clients. DeAMIS is an
indirect, wholly owned subsidiary of Deutsche Bank AG. DeIM compensates DeAMIS
out of the management fee it receives from each portfolio.
For Bond Portfolio and Balanced Portfolio, DeAMIS renders investment advisory
and management services including services related to foreign securities,
foreign currency transactions and related investments with regard to the portion
of the portfolio that is allocated to it by DeIM from time-to-time for
management.
Regulatory and litigation matters
Since at least July 2003, federal, state and industry regulators have been
conducting ongoing inquiries and investigations ("inquiries") into the mutual
fund industry, and have requested information from numerous mutual fund
companies, including Scudder Investments. It is not possible to determine what
the outcome of these inquiries will be or what the effect, if any, would be on
the funds or their advisors. Publicity about mutual fund practices arising from
these industry-wide inquiries serves as the general basis of a number of private
lawsuits against the Scudder portfolios. These lawsuits, which previously have
been reported in the press, involve purported class action and derivative
lawsuits, making various allegations and naming as defendants various persons,
including certain Scudder portfolios, the portfolios' investment advisors and
their affiliates, certain individuals, including in some cases portfolio
Trustees, officers, and other
51
<PAGE>
parties. Each Scudder portfolio's investment advisor has agreed to indemnify the
applicable Scudder portfolios in connection with these lawsuits, or other
lawsuits or regulatory actions that may be filed making allegations similar to
these lawsuits regarding market timing, revenue sharing, fund valuation or other
subjects arising from or related to the pending inquiries. Based on currently
available information, the funds' investment advisors believe the likelihood
that the pending lawsuits will have a material adverse financial impact on a
Scudder portfolio is remote and such actions are not likely to materially affect
their ability to perform under their investment management agreements with the
Scudder portfolios.
52
<PAGE>
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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.
Policies about transactions
Each portfolio, except Money Market Portfolio, offers two classes of shares. The
information in this prospectus applies to Class A shares of each portfolio.
Class A shares are offered at net asset value and are not subject to 12b-1 fees.
Technically, the shareholders of Scudder Variable Series I (which includes the
portfolios just described) are the participating insurance companies (the
"insurance companies") that offer the portfolios as choices for holders of
certain variable annuity contracts or variable life insurance policies (the
"contract(s)") issued or sponsored by the insurance companies. The insurance
companies effectively pass through the ownership of portfolio shares to their
contract owners and some may pass through voting rights as well. The portfolios
do not sell shares directly to the public. The portfolios sell shares only to
separate accounts of insurance companies. As a contract owner, your premium
payments are allocated to a portfolio by the insurance companies in accordance
with your contract. Please see the contract prospectus that accompanies this
prospectus for a detailed explanation of your contract.
Please bear in mind that there are important differences between funds available
to any investor (a "Retail Fund") and those that are only available through
certain financial institutions, such as insurance companies. For example, Retail
Funds, unlike the portfolios, are not sold to insurance company separate
accounts to support investments in variable insurance contracts. In addition,
the investment objectives, policies and strategies of a portfolio, while similar
to those of a Retail Fund, are not identical. Retail Funds may be smaller or
larger than a portfolio and have different expense ratios than the portfolios.
As a result, the performance of a portfolio and a Retail Fund will differ.
Should any conflict between contract owners 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 contract
owners in that portfolio.
The portfolios have a verification process for new insurance company accounts to
help the government fight the funding of terrorism and money laundering
activities. Federal law requires all financial institutions to obtain, verify
and record information that identifies each insurance company that opens an
account. What this means to you: When an insurance company opens an account, the
portfolios will ask for its name, address and other information that will allow
a portfolio to identify the company. This information will be verified to ensure
the identity of all insurance companies opening an account.
For certain insurance companies, a portfolio might request additional
information (for instance, a portfolio would ask for documents such as the
insurance company's articles of incorporation) to help a portfolio verify the
insurance company's identity.
A portfolio will not complete the purchase of any shares for an account until
all information has been provided and the application has been submitted in
"good order." Once the application is determined to be in good order, the
purchase(s) will be effected at the net asset value per share next 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), that portfolio has adopted certain
procedures for the convenience of its shareholders and to ensure that Money
Market Portfolio receives investable funds.
A portfolio may reject a new account application if the insurance company
doesn't provide any required or requested identifying information, or for other
reasons.
53
<PAGE>
The advisor, Scudder Distributors, Inc. and/or their affiliates may pay
additional compensation from their own assets to other persons for selling,
distributing and/or servicing portfolio shares. This compensation may be
significant. You should talk to your insurance company to determine if this
compensation influenced the advisor's recommendation of a portfolio.
Buying and Selling Shares
Each portfolio is 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).
The portfolios continuously sell shares to each insurance company, without a
sales charge, at the net asset value per share next determined after a proper
purchase order is placed with the insurance company. The insurance company
offers contract owners units in its separate accounts which directly correspond
to shares in a portfolio. Each insurance company submits purchase and redemption
orders to a portfolio based on allocation instructions for premium payments,
transfer instructions and surrender or partial withdrawal requests for contract
owners, as set forth in the accompanying prospectus for the contracts. These
orders reflect the amount of premium payments to be invested, surrender and
transfer requests, and other matters. Redemption orders are effected at the next
net asset value per share determined after a proper redemption order is placed
with the insurance company. Contract owners should look at their contract
prospectuses for redemption procedures and fees.
Market Timing Policies and Procedures. Short-term and excessive trading of
portfolio shares may present risks to each portfolio's long-term shareholders,
including potential dilution in the value of portfolio shares, interference with
the efficient management of a portfolio (including losses on the sale of
investments), taxable gains to remaining shareholders and increased brokerage
and administrative costs. These risks may be more pronounced for portfolios
investing in certain securities such as those that trade in foreign markets, are
illiquid or do not otherwise have "readily available market quotations." Certain
investors may seek to employ short-term trading strategies aimed at exploiting
variations in portfolio valuation that arise from the nature of the securities
held by a portfolio (e.g., "time zone arbitrage").
The portfolio discourages short-term and excessive trading. Each portfolio will
take steps to detect and deter short-term and excessive trading pursuant to a
portfolio's policies as described in this prospectus and approved by the Board.
The portfolios' policies include:
o each portfolio reserves the right to reject or cancel a purchase or exchange
order for any reason when, in the opinion of the advisor, there appears to be
a pattern of short-term or excessive trading activity by a shareholder or any
other trading activity deemed harmful or disruptive to a portfolio; and
o for portfolios that invest some portion in foreign securities only -- each
portfolio has adopted certain fair valuation practices reasonably designed to
protect the portfolio from "time zone arbitrage" with respect to its foreign
securities holdings and other trading practices that seek to exploit
variations in portfolio valuation that arise from the nature of the
securities held by a portfolio. (See "How the portfolio calculates share
price" in each portfolio's prospectus.)
o for portfolios that do not invest in foreign securities only -- each
portfolio will continue to use fair value pricing where appropriate under
policies approved by the portfolio's board (see "How the portfolios calculate
share price.")
When a pattern of short-term or excessive trading activity or other trading
activity deemed harmful or disruptive to a portfolio by an investor is detected,
the advisor may determine to prohibit that investor from future purchases in the
portfolios or to limit or terminate the investor's exchange privilege. The
detection of these patterns and the banning of further trading are inherently
subjective and therefore involve some selectivity in their application. The
advisor seeks to make such determinations in a manner consistent with the
interests of each portfolio's long-term shareholders.
There is no assurance that these policies and procedures will be effective in
limiting short-term and excessive trading in all cases. For example, the advisor
may not be able to effectively monitor, detect or limit short-term or excessive
trading by underlying shareholders that occurs through omnibus accounts
maintained by broker-dealers or other financial intermediaries. Depending on the
amount of portfolio shares held in such omnibus accounts (which may represent
most of the portfolio's shares) short-term and/or excessive trading of
portfolio/fund shares could adversely affect long-term shareholders in a
portfolio. It is important to note that shareholders that invest through omnibus
accounts also may be subject to the policies and procedures of their financial
intermediaries with respect to short-term and excessive trading in a portfolio.
Since Money Market Portfolio holds short-term instruments and are intended to
provide liquidity to shareholders, the advisor does not monitor or limit
short-term and excessive trading activity in Money Market Portfolio and,
accordingly, the Board has not approved any policies and procedures designed to
limit this activity. However, the portfolio reserves
54
<PAGE>
the right to and may reject or cancel a purchase or exchange order into a money
market fund for any reason, including if, in the opinion of the advisor, there
appears to be a pattern of short-term and excessive trading by an investor in
other Scudder funds.
Important information about buying and selling shares
o After receiving a contract owner's order, the insurance company buys or sells
shares at the net asset value next calculated on any day a portfolio is open
for business.
o Unless otherwise instructed, a portfolio normally makes payment of the
proceeds from the sale of shares the next business day but always within
seven calendar days.
o The portfolios do not issue share certificates.
o The portfolios reserve the right to reject purchases of shares for any
reason.
o The portfolios reserve the right to withdraw or suspend the offering of
shares at any time.
o The portfolios reserve the right to reject purchases of shares or to suspend
or postpone redemptions at times when the New York Stock Exchange is closed
(other than customary closings), trading is restricted or when an emergency
exists that prevents a portfolio from disposing of its portfolio securities
or pricing its shares.
o The portfolios may refuse, cancel or rescind any purchase order; freeze any
account (meaning the insurance company will not be able to purchase shares in
its account); suspend account services; and/or involuntarily redeem the
account if we think that the account is being used for fraudulent or illegal
purposes by the insurance company; one or more of these actions will be taken
when, at the sole discretion of a portfolio, they are deemed to be in a
portfolio's best interest or when a portfolio is requested or compelled to do
so by governmental authority or by applicable law.
o The portfolios may close and liquidate an account if a portfolio is unable to
verify provided information, or for other reasons; if a portfolio decides to
close the account, the shares will be redeemed at the net asset value per
share next calculated after we determine to close the account; the insurance
company may be subject to gain or loss on the redemption of the portfolio
shares and may incur tax liability.
o A contract owner's purchase order may not be accepted if the sale of
portfolio shares has been suspended or if it is determined that the purchase
would be detrimental to the interests of a portfolio's shareholders.
o Currently, the Board of Trustees of Scudder Variable Series I does not
foresee any disadvantages to contract owners arising from the fact that the
interests of contract owners 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 to receive account information
If you are a contract owner, you should contact your insurance company or the
organization that provides record keeping services for information about your
account.
Please see the contract prospectus that accompanies this prospectus for the
customer service phone number.
How to buy and sell shares
Each insurance company has different provisions about how and when their
contract owners may buy and sell portfolio shares. Each insurance company is
responsible for communicating its contract owners' instructions to a portfolio.
Contract owners should contact their insurance company to effect transactions in
a portfolio.
How the Portfolios Calculate Share Price
To calculate net asset value per share or NAV, each portfolio uses the following
equation:
TOTAL ASSETS - TOTAL LIABILITIES
------------------------------------ = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
The price at which you sell shares for each portfolio is also the NAV.
For Money Market Portfolio, the share price or net asset value per share is
normally $1.00, calculated using amortized cost value (the method used by most
money market funds).
We typically value securities using information furnished by an independent
pricing service or market quotations, where appropriate. However, we may use
methods approved by the portfolios' Board, such as a fair valuation model, which
55
<PAGE>
are intended to reflect fair value when pricing service information or market
quotations are not readily available or when a security's value or a meaningful
portion of the value of the portfolio is believed to have been materially
affected by a significant event, such as a natural disaster, an economic event
like a bankruptcy filing, or a substantial fluctuation in domestic or foreign
markets, that has occurred between the close of the exchange or market on which
the security is principally traded (for example, a foreign exchange or market)
and the close of the New York Stock Exchange. In such a case, a portfolio's
value for a security is likely to be different from the last quoted market price
or pricing service information. In addition, due to the subjective and variable
nature of fair value pricing, it is possible that the value determined for a
particular asset may be materially different from the value realized upon such
asset's sale. It is expected that the greater the percentage of portfolio assets
that is invested in non-US securities, the more extensive will be a portfolio's
use of fair value pricing. This is intended to reduce each portfolio's exposure
to "time zone arbitrage" and other harmful trading practices. (See "Market
Timing Policies and Procedures.")
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 through the contract. This is
because some foreign markets are open on days and at times when the portfolios
don't price their shares.
Distributions
Money Market Portfolio intends to declare its net investment income as a
dividend daily and distribute dividends monthly. All other portfolios intend to
declare and distribute dividends from their net investment income and capital
gains, if any, annually. Any of the portfolios may make additional distributions
if necessary.
All distributions will be reinvested in shares of the portfolios unless we are
informed by an insurance company that they should be paid out in cash. The
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 qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended, and to meet
all requirements necessary to avoid paying any federal income or excise taxes.
Generally, owners of variable annuity and variable life contracts are not taxed
currently on income or gains realized with respect to such contracts. However,
some distributions from such contracts, whether made prior to or during the
annuity payment period, may be taxable at ordinary income tax rates. In
addition, distributions made to an owner who is younger than 59 1/2 may be
subject to a 10% penalty tax. 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.
In order for investors to receive the favorable tax treatment available to
holders of variable annuity and variable life contracts, the separate accounts
underlying such contracts, as well as the funds in which such accounts invest,
must meet certain diversification requirements. Each portfolio intends to comply
with these requirements. If a portfolio or separate account does not meet such
requirements, income allocable to the contracts associated with the separate
account would be taxable currently to the holders of such contracts and income
from prior periods with respect to such contracts also could be taxable.
Portfolio investments in securities of foreign issuers may be subject to
withholding and other taxes at the source, including on dividend or interest
payments. 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, ask your
tax professional about the tax consequences of your investments, including
possible foreign, state or local taxes.
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To Get More Information
Shareholder reports -- These include commentary from each portfolio's management
team about recent market conditions and a portfolio's performance. They also
have detailed performance figures, a list of everything each portfolio owns, and
its financial statements. Shareholders get these reports automatically.
Statement 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).
For a free copy of any of these documents or to request other information about
a portfolio, call (800) 778-1482, or contact Scudder Investments at the address
listed below. These documents and other information about each portfolio are
available from the EDGAR Database on the SEC's Internet site at www.sec.gov. If
you like, you may obtain copies of this information, after paying a copying fee,
by e-mailing a request to publicinfo@sec.gov or by writing the SEC at the
address listed below. You can also review and copy these documents and other
information about each portfolio, including each portfolio's SAI, at the SEC's
Public Reference Room in Washington, D.C. Information on the operation of the
SEC's Public Reference Room may be obtained by calling (202) 942-8090.
Scudder Distributors, Inc. SEC
222 South Riverside Plaza 450 Fifth Street, N.W.
Chicago, IL 60606-5808 Washington, D.C. 20549-0102
(800) 778-1482 (202) 942-8090
www.sec.gov
SEC File #
--------------------------------------------------------------------------------
Scudder Variable Series I 811-4257
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<PAGE>
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Scudder Variable Series I
o Money Market Portfolio*
o Bond Portfolio
o Balanced Portfolio
o Growth and Income Portfolio
o Capital Growth Portfolio
o 21st Century Growth Portfolio
o Global Discovery Portfolio
o International Portfolio
o Health Sciences Portfolio
Prospectus
May 1, 2005
Class B Shares
* Money Market Portfolio does not offer separate classes of shares.
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.
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>
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Table of Contents
How the Portfolios Work Your Investment in the Portfolios
3 Money Market Portfolio 49 Buying and Selling Shares
7 Bond Portfolio 51 How the Portfolios Calculate
Share Price
13 Balanced Portfolio
52 Distributions
19 Growth and Income Portfolio
52 Taxes
23 Capital Growth Portfolio
52 Marketing and Distribution Fees
27 21st Century Growth Portfolio
32 Global Discovery Portfolio
37 International Portfolio
42 Health Sciences Portfolio
47 Other Policies and Risks
47 The Investment Advisor
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>
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.
The portfolio pursues its goal by investing exclusively in high quality
short-term securities, as well as repurchase agreements.
While the portfolio's advisor gives priority to earning income and maintaining
the value of the portfolio's principal at $1.00 per share, all money market
instruments, including US government obligations, can change in value when
interest rates change or an issuer's creditworthiness changes.
The portfolio seeks to achieve its goal of current income by investing in high
quality money market securities and maintains a dollar-weighted average maturity
of 90 days or less. The portfolio follows two policies designed to maintain a
stable share price:
o Portfolio securities are denominated in US dollars and generally have
remaining maturities of 397 days (about 13 months) or less at the time of
purchase. The portfolio may also invest in securities that have features that
reduce their maturities to 397 days or less at the time of purchase.
o The portfolio buys US government debt obligations, money market instruments
and other debt obligations that at the time of purchase:
- have received the two highest short-term ratings from two nationally
recognized statistical rating organizations (NRSROs);
- have received the two highest short-term ratings from one NRSRO (if only
one organization rates the security);
- are unrated, but are determined to be of similar
quality by the investment advisor; or
- have no short-term rating, but are rated in one of the top three highest
long-term rating categories, or are determined to be of similar quality by
the advisor.
The portfolio primarily invests in the following types of investments:
The portfolio may invest in high quality, short-term, US dollar denominated
money market instruments paying a fixed, variable or floating interest rate.
These include:
o Debt obligations issued by US and foreign banks, financial institutions,
corporations or other entities, including certificates of deposit, euro-time
deposits, commercial paper (including asset backed commercial paper), and
notes. Securities that do not satisfy the maturity restrictions for a money
market portfolio may be specifically structured so that they are eligible
investments for money market portfolios. For example, some securities have
features which have the effect of shortening the security's maturity.
o US government securities that are issued or guaranteed by the US Treasury, or
by agencies or instrumentalities of the US Government.
o Repurchase agreements, which are agreements to buy securities at one price,
with a simultaneous agreement to sell back the securities at a future date at
an agreed-upon price.
o Asset-backed securities, which are generally participations in a pool of
assets whose payment is derived from the payments generated by the underlying
assets. Payments on the asset-backed security generally consist of interest
and/or principal.
The portfolio may invest up to 10% of its total assets in other money market
mutual funds in accordance with applicable regulations.
Working in conjunction with a credit team, the portfolio managers screen
potential securities and develop a list of those that the portfolio may buy. The
managers, looking for attractive yield and weighing considerations such as
credit quality, economic outlooks and possible interest rate movements, then
decide which securities on this list to buy. The managers may adjust the
portfolio'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.
Although major changes tend to be infrequent, the Board of Trustees could change
the portfolio's investment objective without seeking shareholder approval.
<PAGE>
3
<PAGE>
The Main Risks of Investing in the Portfolio
There are several risk factors that could reduce the yield you get from the
portfolio or make it perform less well than other investments.
Interest Rate Risk. Money market instruments, like all debt securities, face the
risk that the securities will decline in value because of changes in interest
rates. Generally, investments subject to interest rate risk will decrease in
value when interest rates rise and increase in value when interest rates
decline. To minimize such price fluctuations, the portfolio limits the
dollar-weighted average maturity of the securities held by the portfolio to 90
days or less. Generally, the price of short-term investments fluctuates less
than longer-term bonds. Income earned on floating or variable rate securities
will vary as interest rates decrease or increase.
Credit Risk. A money market instrument's credit quality depends on the issuer's
ability to pay interest on the security and repay the debt: the lower the credit
rating, the greater the risk that the security's issuer will default, or fail to
meet its payment obligations. The credit risk of a security may also depend on
the credit quality of any bank or financial institution that provides credit
enhancement for it. To minimize credit risk, the portfolio only buys high
quality securities with minimal credit risk. Also, the portfolio only buys
securities with remaining maturities of 397 days (approximately 13 months) or
less. This reduces the risk that the issuer's creditworthiness will change, or
that the issuer will default on the principal and interest payments of the
obligation.
Market Risk. Although individual securities may outperform their market, the
entire market may decline as a result of rising interest rates, regulatory
developments or deteriorating economic conditions.
Security Selection Risk. While the portfolio invests in short-term securities,
which by their nature are relatively stable investments, the risk remains that
the securities in which the portfolio invests will not perform as expected. This
could cause the portfolio's returns to lag behind those of similar money market
funds.
Repurchase Agreement Risk. A repurchase agreement exposes the portfolio to the
risk that the party that sells the securities may default on its obligation to
repurchase them. In this circumstance, the portfolio can lose money because:
o it cannot sell the securities at the agreed-upon time
and price; or
o the securities lose value before they can be sold.
The portfolio seeks to reduce this risk by monitoring the creditworthiness of
the sellers with whom it enters into repurchase agreements. The portfolio also
monitors the value of the securities to ensure that they are at least equal to
the total amount of the repurchase obligations, including interest and accrued
interest.
Prepayment Risk. When a bond issuer, such as an issuer of asset backed
securities, retains the right to pay off a high yielding bond before it comes
due, the portfolio may have no choice but to reinvest the proceeds at lower
interest rates. Thus, prepayment may reduce the portfolio's income. It may also
create a capital gains tax liability, because bond issuers usually pay a premium
for the right to pay off bonds early.
Although the portfolio seeks to preserve the value of your investment at $1.00
per share, this share price isn't guaranteed and you could lose money by
investing in the portfolio.
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.
4
<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 portfolio performance has 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:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
5.65 5.09 5.25 5.29 4.99 6.21 3.88 1.49 0.82
-------------------------------------------------------------------------------------------------------------------
</TABLE>
For the periods included in the bar chart:
Best Quarter: %, Q Worst Quarter: %, Q
2005 Total Return as of March 31: %
Average Annual Total Returns (%) as of 12/31/2004
1 Year 5 Years 10 Years
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Seven-day effective yield as of December 31, 2004: %
Current performance information may be higher or lower than the performance data
quoted above. For more recent performance information, contact your
participating insurance company.
5
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may
pay if you buy and hold portfolio shares. The information
in the table does not 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 increase expenses.
Fee Table
--------------------------------------------------------------------------------
Annual Operating Expenses, deducted from portfolio assets
--------------------------------------------------------------------------------
Management Fee %
--------------------------------------------------------------------------------
Distribution/Service (12b-1) Fee None
--------------------------------------------------------------------------------
Other Expenses
--------------------------------------------------------------------------------
Total Annual Operating Expenses
--------------------------------------------------------------------------------
Based on the costs above, this example helps you compare the expenses of the
portfolio to those of other mutual funds. This example assumes the expenses
above remain the same. It also assumes that you invested $10,000, earned 5%
annual returns, reinvested all dividends and distributions and sold your shares
at the end of each period. This is only an example; actual expenses will be
different.
Example 1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
$ $ $ $
--------------------------------------------------------------------------------
Portfolio Managers
A group of investment professionals is responsible for the day-to-day management
of the portfolio. These investment professionals have a broad range of
experience managing money market portfolios.
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, independent registered public accounting firm, whose report, along with the
portfolio's financial statements, is included in the portfolio's annual report
(see "Shareholder reports" on the back cover).
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
Money Market Portfolio
6
<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. Under normal circumstances, the portfolio
invests at least 80% of net assets, plus the amount of any borrowings for
investment purposes, in bonds of any maturity.
The portfolio primarily invests in US dollar-denominated investment grade fixed
income securities, including corporate bonds, US government and agency bonds and
mortgage- and asset-backed securities. A significant portion of the portfolio's
assets may also be allocated among foreign investment grade fixed income
securities, high yield bonds of US and foreign issuers (including high yield
bonds of issuers in countries with new or emerging securities markets), or, to
maintain liquidity, in cash or money market instruments.
The portfolio normally invests at least 65% of total assets in high grade US
bonds (those considered to be in the top three grades of credit quality). The
portfolio may invest up to 25% of its total assets in foreign investment grade
bonds (those considered to be in the top four grades of credit quality).
In addition, the portfolio may also invest up to 20% of total assets in
securities of US and foreign issuers that are below investment grade (rated as
low as the sixth credit grade, ie. grade B, otherwise known as junk bonds),
including investments in US dollar or foreign currency denominated bonds of
issuers located in countries with new or emerging securities markets. The
portfolio considers an emerging securities market to be one where the sovereign
debt issued by the government in local currency terms is rated below investment
grade. Compared to investment grade bonds, junk bonds generally pay higher
yields and have higher volatility and higher risk of default.
The investment advisor employs a team approach to allocate the portfolio's
assets among the various asset classes. The team includes members from the
investment advisor and the sub-advisor. In this prospectus, we refer to both as
part of the investment advisor.
The asset allocation team meets formally on a monthly basis to determine
relative value across asset classes, drawing on input from sector and market
specialists. Once allocation targets for each broad fixed income sector are set,
sector specialists consider the relative value of purchase candidates given the
distinct characteristics of that particular asset class. Company research and
fundamental analysis are used to select the best securities within each asset
class. The techniques used by the sector specialists in evaluating each asset
class include those described below:
US Investment Grade Securities. In selecting these securities for investment,
the investment advisor typically:
o assigns a relative value to each bond, based on creditworthiness, cash flow
and price;
o determines the value of each issue by examining the issuer's credit quality,
debt structure, option value and liquidity risks. The portfolio managers look
to take advantage of any inefficiencies between this value and market trading
price;
o uses credit analysis to determine the issuer's ability
to fulfill its contracts; and
o uses a bottom-up approach which subordinates sector weightings to individual
bonds that the investment advisor believes may add above-market value.
The investment advisor generally sells these securities when they reach their
target price or when there is a negative change in their outlook relative to the
other securities held by the portfolio. Bonds may also be sold to facilitate the
purchase of an issue with more attractive risk/return characteristics.
Foreign Investment Grade Securities and Emerging Markets High Yield Securities.
In selecting these securities for investment, the investment advisor follows a
bottom-up, relative value strategy. The investment advisor looks to purchase
foreign securities that offer incremental value over US Treasuries. The
investment advisor invests in a focused fashion, so that it is not simply
investing in a basket of all non-US fixed income markets, but instead only those
markets that its relative value process has identified as being the most
attractive. The investment advisor sells securities or exchanges currencies when
they meet their target price objectives or when the investment advisor revises
price objectives downward. In selecting emerging market securities, the
investment advisor also considers short-term factors such as market sentiment,
capital flows, and new issue programs.
7
<PAGE>
High Yield Securities (Excluding Emerging Market Sovereign Debt). In selecting
these securities for investment, the investment advisor:
o analyzes economic conditions for improving or undervalued sectors and
industries;
o uses independent credit research and on-site management visits to evaluate
individual issuers' debt service, growth rate, and both downgrade and
upgrade potential;
o assesses new issues versus secondary market opportunities; and
o seeks issues within attractive industry sectors and with strong long-term
fundamentals and improving credits.
The portfolio may lend its investment securities up to 33 1/3% of its total
assets to approved institutional borrowers who need to borrow securities in
order to complete certain transactions.
Although major changes tend to be infrequent, the Board of Trustees could change
the portfolio's investment objective without seeking shareholder approval.
However, the Board will provide shareholders with at least 60 days' notice prior
to making any changes to the portfolio's 80% investment policy.
Other Investments
The portfolio may invest up to 10% of total assets in foreign currency related
investments (e.g., forward foreign currency exchange contracts) for both
non-hedging and hedging purposes.
In addition, the portfolio is permitted, but not required, to use various other
types of derivatives (contracts whose value is based on, for example, indexes,
currencies or securities). The portfolio may use these derivatives in
circumstances where the managers believe they offer an economical means of
gaining exposure to a particular asset class or to keep cash on hand to meet
shareholder redemptions or other needs while maintaining exposure to the market.
The Main Risks of Investing in the Portfolio
There are several risk factors that could reduce the yield you receive from the
portfolio, cause you to lose money or cause the portfolio's performance to trail
that of other investments.
Interest Rate Risk. Generally, fixed income securities will decrease in value
when interest rates rise. The longer the effective maturity of the portfolio's
securities, the more sensitive it will be to interest rate changes. (As a
general rule, a 1% rise in interest rates means a 1% fall in value for every
year of duration.) As interest rates decline, the issuers of securities held by
the portfolio may prepay principal earlier than scheduled, forcing the portfolio
to reinvest in lower yielding securities. Prepayment may reduce the portfolio's
income. As interest rates increase, fewer issuers tend to prepay, which may
extend the average life of fixed income securities and have the effect of
locking in a below-market interest rate, increasing the portfolio's duration and
reducing the value of the security. Because the portfolio may invest in
mortgage-related securities, it is more vulnerable to both of these risks.
Credit Risk. A portfolio purchasing bonds faces the risk that the
creditworthiness of the issuer may decline, causing the value of its bonds to
decline. In addition, an issuer may be unable or unwilling to make timely
payments on the interest and principal on the bonds it has issued. Because the
issuers of high yield bonds (rated below the fourth highest category) may be in
uncertain financial health, the prices of their bonds are generally more
vulnerable to bad economic news or even the expectation of bad news, than those
of investment-grade bonds. In some cases, bonds, particularly junk bonds, may
decline in credit quality or go into default.
Market Risk. Deteriorating market conditions might cause a general weakness in
the market that reduces the overall level of securities prices in that market.
Developments in a particular class of bonds or the stock market could also
adversely affect the portfolio by reducing the relative attractiveness of bonds
as an investment. Also, to the extent that the portfolio emphasizes bonds from
any given industry, it could be hurt if that industry does not do well.
Foreign Investment Risk. Foreign markets often exhibit more volatility than
those in the US. Investing in foreign securities involves greater risk than
investing in US securities for various reasons, including:
o Political Risk. Some foreign governments have limited the outflow of profits
to investors abroad, extended diplomatic disputes to include trade and
financial relations, and imposed high taxes on corporate profits.
o Information Risk. Financial reporting standards for companies based in
foreign markets are often less stringent than those applicable to US
companies and may present an incomplete or misleading picture of a foreign
company.
8
<PAGE>
o Liquidity Risk. Securities that trade less can be more difficult or more
costly to buy, or to sell, than more liquid or active securities. This
liquidity risk is a factor of the trading volume of a particular security, as
well as the size and liquidity of the entire local market. On the whole,
foreign markets are smaller and less liquid than the US market. This can make
buying and selling certain securities more difficult and costly. Relatively
small transactions in some instances can have a disproportionately large
effect on the price and supply of securities. In certain situations, it may
become virtually impossible to sell a security in an orderly fashion at a
price that approaches the managers' estimate of its value.
o Regulatory Risk. There is generally less government regulation of foreign
markets, companies and securities dealers than in the US.
o Currency Risk. The portfolio invests in foreign securities denominated in
foreign currencies. To the extent that the portfolio is exposed to non-dollar
currencies, if these currencies decline in value relative to the dollar, it
may reduce gains or increase losses.
Emerging Market Risk. To the extent that the portfolio does invest in emerging
markets to enhance overall returns, it may face higher political, information,
and stock market risks. In addition, profound social changes and business
practices that depart from norms in developed countries' economies have hindered
the orderly growth of emerging economies and their stock markets in the past.
High levels of debt tend to make emerging economies heavily reliant on foreign
capital and vulnerable to capital flight.
Derivatives Risk. Risks associated with derivatives include: the risk that the
derivative is not well correlated with the security, index or currency to which
it relates; the risk that derivatives used for risk management may not have the
intended effects and may result in losses or missed opportunities; the risk that
the portfolio will be unable to sell the derivative because of an illiquid
secondary market; the risk that a counterparty is unwilling or unable to meet
its obligation; the risk of interest rate movements and the risk that the
derivatives transaction could expose the portfolio to the effects of leverage,
which could increase the portfolio's exposure to the market and magnify
potential losses. There is no guarantee that derivatives activities will be
employed or that they will work, and their use could cause lower returns or even
losses to the portfolio.
Securities Lending Risk. Any loss in the market price of securities loaned by
the portfolio that occurs during the term of the loan would be borne by the
portfolio and would adversely affect the portfolio's performance. Also, there
may be delays in recovery of securities loaned or even a loss of rights in the
collateral should the borrower of the securities fail financially while the loan
is outstanding. However, loans will be made only to borrowers selected by the
portfolio's delegate after a review of relevant facts and circumstances,
including the creditworthiness of the borrower.
Pricing Risk. At times, market conditions might make it hard to value some
investments. For example, if the portfolio has valued its securities too highly,
you may end up paying too much for portfolio shares when you buy into the
portfolio. If the portfolio underestimates their price, you may not receive the
full market value for your portfolio shares when you sell.
Another factor that could affect performance is:
o the managers could be incorrect in their analysis of industries, companies,
economic trends, the relative attractiveness of different securities or other
matters
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.
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 portfolio performance has 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.
In the bar chart and the table, the performance figures for Class B are based on
the historical performance of the portfolio's original share class (Class A),
adjusted to reflect the higher gross total annual operating expenses of Class B.
Class A is offered in a different prospectus.
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 B shares
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
17.88 2.56 8.82 6.30 -1.19 10.28 5.48 7.41 4.81
-------------------------------------------------------------------------------------------------------------------
</TABLE>
For the periods included in the bar chart:
Best Quarter: %, Q Worst Quarter %, Q
2005 Total Return as of March 31: %
Average Annual Total Returns (%) as of 12/31/2004
-
1 Year 5 Years 10 Years
--------------------------------------------------------------------------------
Portfolio -- Class B
Index
--------------------------------------------------------------------------------
Index: Lehman Brothers Aggregate Bond Index is an unmanaged market
value-weighted measure of treasury issues, agency issues, corporate bond issues
and mortgage securities.
Current performance information may be higher or lower than the performance data
quoted above. For more recent performance information, contact your
participating insurance company.
10
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
portfolio shares. The information in the table does not 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 increase
expenses.
Fee Table Class B
-------------------------------------------------------------------------------
Annual Operating Expenses, deducted from portfolio assets
-------------------------------------------------------------------------------
Management Fee %
-------------------------------------------------------------------------------
Distribution/Service (12b-1) Fee
-------------------------------------------------------------------------------
Other Expenses*
-------------------------------------------------------------------------------
Total Annual Operating Expenses
-------------------------------------------------------------------------------
[* Restated to reflect estimated expenses for Class B shares resulting from
new compensation arrangements with participating insurance companies for
recordkeeping services.]
Based on the costs above, this example helps you compare the expenses of the
portfolio to those of other mutual funds. This example assumes the expenses
above remain the same. It also assumes that you invested $10,000, earned 5%
annual returns, reinvested all dividends and distributions and sold your shares
at the end of each period. This is only an example; actual expenses will be
different.
Example 1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Class B shares $ $ $ $
--------------------------------------------------------------------------------
The Portfolio Managers
The portfolio is managed by a team of investment professionals who each play an
important role in the portfolio's management process. This team works for the
advisor or its affiliates and is supported by a large staff of economists,
research analysts, traders and other investment specialists. The advisor or its
affiliates believe(s) its team approach benefits portfolio investors by bringing
together many disciplines and leveraging its extensive resources.
The portfolio is managed by a team of investment professionals who collaborate
to develop and implement the portfolio's investment strategy. The team is led by
six senior portfolio managers who have final authority over all aspects of the
portfolio's investment strategy for their particular sector area of expertise.
Each portfolio manager on the team has authority over all aspects of the
portfolio's investment portfolio, including but not limited to, purchases and
sales of individual securities, portfolio construction techniques, portfolio
risk assessment and the management of daily cash flows in accordance with
portfolio holdings.
11
<PAGE>
The following people handle the day-to-day management of the portfolio:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Gary W. Bartlett, CFA Stephen Ilott Bruce Rodio
Managing Director of Deutsche Asset Managing Director of Deutsche Asset Director of Deutsche Asset
Management and Co-Lead Manager of the Management and Portfolio Manager of Management and Portfolio Manager of
portfolio. the portfolio. the portfolio.
o Joined Deutsche Asset Management o Head of Fixed Income in London. o Joined Deutsche Asset Management
in 1992 and the portfolio in 2002. o Joined Deutsche Asset Management and the portfolio in 2004.
o Began investment career in 1982. in 1998. Prior to 1998, managed o Portfolio manager and product
o MBA, Drexel University. global fixed income and currency manager for Core Plus Fixed
portfolios on behalf of central Income: Philadelphia.
Andrew P. Cestone banks, corporations and pension o Prior to that, fixed income
Managing Director of Deutsche Asset funds at Robert Fleming & portfolio specialist at Morgan
Management and Co-Lead Manager of the Company from 1986 to 1997. Stanley Investment Management,
portfolio. o Joined the portfolio in 2004. from 1997 to 2004.
o Joined Deutsche Asset Management o Began investment career in 1987.
in 1998 and the portfolio in 2002. Paul Lambert o MBA, Wharton School.
o Prior to that, Investment Analyst, Managing Director of Deutsche Asset
Phoenix Investment Partners, from Management and Portfolio Manager of Daniel R. Taylor, CFA
1997 to 1998. the portfolio. Managing Director of Deutsche Asset
o Prior to that, Credit Officer, o Joined Deutsche Asset Management Management and Co-Lead Manager of
asset based lending group, Fleet in 2000 and the portfolio in the portfolio.
Bank, from 1995 to 1997. 2004. o Joined Deutsche Asset Management
o Prior to that, 10 years' in 1998 and the portfolio in
Warren S. Davis experience as an analyst of 2002.
Managing Director of Deutsche Asset international and financial o Prior to that, fixed income
Management and Co-Lead Manager of markets at the Bank of England, portfolio manager, asset-backed
the portfolio. at UBS as a Senior Economist and securities analyst and senior
o Joined Deutsche Asset Management most recently as Head of credit analyst, CoreStates
in 1995 and the portfolio in 2002. European Currency Strategy at Investment Advisors, from 1992
o Began investment career in 1985. Citibank. to 1998.
o MBA, Drexel University.
William T. Lissenden Timothy C. Vile, CFA
Brett Diment Director of Deutsche Asset Managing Director of Deutsche
Managing Director of Deutsche Asset Management and Portfolio Manager of Asset Management and Co-Lead
Management and Portfolio Manager the portfolio. Manager of the portfolio.
of the portfolio. o Joined Deutsche Asset Management o Joined Deutsche Asset Management
o Joined Deutsche Asset Management in 2002 and the portfolio in in 1991 and the portfolio in
in 1991 and the portfolio in 2002. 2004. 2002.
o Head of Emerging Market Debt for o Prior to that, fixed income o Prior to that, portfolio manager
London Fixed Income and strategist and director of for fixed income portfolios at
responsible for coordinating research at Conseco Capital Equitable Capital Management.
research into Continental European Management, director of fixed o Began investment career in 1984.
markets and managing global fixed income research and product
income, balanced and cash-based management at Prudential Ian Winship
portfolios: London. Securities, national sales Director of Deutsche Asset
o Began investment career in 1991. manager for fixed income Management and Portfolio Manager of
securities at Prudential the portfolio.
Thomas J. Flaherty Securities and institutional o Joined Deutsche Asset Management
Managing Director of Deutsche Asset sales professional at several in 1997.
Management and Co-Lead Manager of the firms including Prudential, o Prior to 1997, served as a fixed
portfolio. Goldman Sachs and Merrill Lynch. income portfolio manager at
o Joined Deutsche Asset Management o MBA, Baruch College. Scottish Amicable Investment
in 1995 and the portfolio in 2002. Managers.
o Began investment career in 1985. Catharine Peppiatt o Head of Global Interest Rates
Director of Deutsche Asset Team: London.
J. Christopher Gagnier Management and Portfolio Manager of o Portfolio manager and analyst
Managing Director of Deutsche Asset the portfolio. specializing in UK and European
Management and Co-Lead Manager of o Joined Deutsche Asset Management markets.
the portfolio. in 1993 and the portfolio in o Joined the portfolio in 2004.
o Joined Deutsche Asset Management 2004.
in 1997 and the portfolio in 2002. o Previously served as director of
o Prior to that, portfolio manager, Global Fixed Income in London.
Paine Webber (1984-1997). o Portfolio manager and product
o Began investment career in 1979. manager for Core Plus Fixed
o MBA, University of Chicago. Income: Philadelphia.
o MA, Oxford University.
</TABLE>
The portfolio's Statement of Additional Information provides additional
information about the portfolio managers' investments in the portfolio, a
description of their compensation structure and information regarding other
accounts they manage.
Financial Highlights
As of the portfolio's fiscal year end, there were no Class B shares issued for
the portfolio, therefore financial highlights are not available.
12
<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.
The portfolio normally invests approximately 60% of its net assets in common
stocks and other equity securities and approximately 40% of its net assets in
fixed income securities, including lower-quality debt securities. The portfolio
may, however, invest up to 75% of its net assets in equity securities and up to
50% in fixed income securities, based on the portfolio managers' evaluation of
the relative attractiveness of equity securities as compared to fixed income
securities. At all times, the portfolio invests at least 25% of net assets in
fixed-income senior securities. The portfolio may invest in foreign securities
as well as securities of US issuers.
The investment advisor regularly reviews the portfolio's investment allocations
and will vary them to favor asset classes that, in its judgment, provide the
most favorable return outlook consistent with the portfolio's investment
objective. In deciding how to allocate the portfolio's assets, the investment
advisor will evaluate projections of risk, market and economic conditions,
volatility, yields and expected returns.
The advisor follows specific strategies in selecting equity and fixed securities
for the portfolio.
Equity securities in the portfolio generally include "growth" stocks as well as
"value" stocks and normally include stocks of both small and large companies.
Growth Stocks. In choosing these securities, the managers primarily invest in US
companies that they believe offer the potential for sustainable growth of
revenue or earnings and whose market values appear reasonable in light of their
business prospects. The managers focus on high quality growth companies that are
leaders or potential leaders in their respective industries. The managers
conduct in-depth company research, examining, among other factors, relative
growth rates, innovation, regional and global exposure and management.
Value Stocks. When selecting value stocks, these portfolio managers begin by
screening for stocks whose price-to-earnings ratios are below the average for
the S&P 500 Index. The managers then compare a company's stock price to its book
value, cash flow and yield, and analyze individual companies to identify those
that are financially sound and appear to have strong potential for long-term
growth.
Small Company Stocks. In selecting stocks of small companies, a quantitative
stock valuation model compares each company's stock price to the company's
earnings, book value, sales and other measures of performance potential. The
managers also look for factors that may signal a rebound for a company, whether
through a recovery in its markets, a change in business strategy or other
factors.
The managers believe that by combining techniques used by fundamental value
investors with extensive growth and earnings analysis they can minimize
investment style bias and ultimately produce a "pure" stock selection process
that seeks to add value in any market environment. The team also incorporates
technical analysis to capture short-term price changes and evaluate the market's
responsiveness to new information.
Fixed income securities in the portfolio include both investment grade and
lower-quality debt securities, and may include securities of both US and non-US
(including emerging market) issuers.
US Investment Grade Securities. In selecting these securities for investment,
the investment advisor typically:
o assigns a relative value to each bond, based on creditworthiness, cash flow
and price;
o determines the value of each issue by examining the issuer's credit quality,
debt structure, option value and liquidity risks. The portfolio managers look
to take advantage of any inefficiencies between this value and market trading
price;
o uses credit analysis to determine the issuer's ability to fulfill its
contracts; and
o uses a bottom-up approach which subordinates sector weightings to individual
bonds that the advisor believes may add above-market value.
The investment advisor generally sells these securities when they reach their
target price or when there is a negative change in their outlook relative to the
other securities held by the portfolio. Bonds may also be sold to facilitate the
purchase of an issue with more attractive risk/return characteristics.
13
<PAGE>
Foreign Debt Securities. In selecting these securities for investment, the
investment advisor follows a bottom-up, relative value strategy. The advisor
looks to purchase foreign securities that offer incremental value over US
Treasuries. The advisor invests in a focused fashion, so that it is not simply
investing in a basket of all non-US fixed income markets, but instead only those
markets that its relative value process has identified as being the most
attractive. The investment advisor sells securities or exchanges currencies when
they meet their target price objectives or when the investment advisor revises
price objectives downward. In selecting emerging market securities, the
investment advisor also considers short-term factors such as market sentiment,
capital flows, and new issue programs.
High Yield Securities. In selecting these securities for investment, the
investment advisor:
o analyzes economic conditions for improving or
undervalued sectors and industries;
o uses independent credit research and on-site management visits to evaluate
individual issuer's debt service, growth rate, and both downgrade and upgrade
potential;
o assesses new issues versus secondary market
opportunities; and
o seeks issues within attractive industry sectors and with strong long-term
fundamentals and improving credits.
The portfolio may lend its investment securities up to 33 1/3% of its total
assets to approved institutional borrowers who need to borrow securities in
order to complete certain transactions.
Although major changes tend to be infrequent, the Board of Trustees could change
the portfolio's investment objective without seeking shareholder approval.
Other Investments
The portfolio's bond investments are primarily in the top four grades of credit
quality. The portfolio could put up to 20% 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 typically will have higher volatility and risk of default. The
portfolio may also invest in foreign securities. The portfolio may also invest
up to 15% of its total assets to buy or sell protection on credit exposure.
The portfolio is permitted, but not required, to use various types of
derivatives (contracts whose value is based on, for example, indexes, currencies
or securities). The portfolio may use derivatives in circumstances where the
managers believe they offer an economical means of gaining exposure to a
particular asset class or to keep cash on hand to meet shareholder redemptions
or other needs while maintaining exposure to the market.
As a temporary defensive measure, the portfolio could shift up to 100% of assets
into investments such as money market securities. This measure could prevent
losses, but, while engaged in a temporary defensive position, a fund will not be
pursuing its investment objective. However, the portfolio managers may choose
not to use these strategies for various reasons, even in very volatile market
conditions.
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 cause the portfolio's performance to trail that of
other investments.
Stock Market Risk. An important factor with this portfolio is how stock markets
perform. When stock prices fall, you should expect the value of your investment
to fall as well. Because a stock represents ownership in its issuer, stock
prices can be hurt by poor management, shrinking product demand and other
business risks. These may affect single companies as well as groups of
companies. In addition, movements in financial markets may adversely affect a
stock's price, regardless of how well the company performs. The market as a
whole may not favor the types of investments the portfolio makes and the
portfolio may not be able to get attractive prices for them.
Industry Risk. While the portfolio does not concentrate in any industry, to the
extent that the portfolio has exposure to a given industry or sector, any
factors affecting that industry or sector could affect the value of portfolio
securities. For example, manufacturers of consumer goods could be hurt by a rise
in unemployment, or technology companies could be hurt by such factors as market
saturation, price competition and rapid obsolescence.
Interest Rate Risk. Generally, fixed income securities will decrease in value
when interest rates rise. The longer the effective maturity of the portfolio's
securities, the more sensitive it will be to interest rate changes. (As a
general rule, a 1% rise in interest rates means a 1% fall in value for every
year of duration.) As interest rates decline, the issuers of securities held by
the portfolio may prepay principal earlier than scheduled, forcing the portfolio
to reinvest in lower yielding securities. This prepayment may reduce the
portfolio's income. As interest rates increase, fewer issuers tend to prepay,
which may extend the average life of fixed income securities and have the effect
of locking in a below-market interest rate, increasing the
14
<PAGE>
portfolio's duration and reducing the value of the security. Because the
portfolio may invest in mortgage-related securities, it is more vulnerable to
both of these risks.
Credit Risk. A portfolio purchasing bonds faces the risk that the
creditworthiness of the issuer may decline, causing the value of its bonds to
decline. In addition, an issuer may be unable or unwilling to make timely
payments on the interest and principal on the bonds it has issued. Because the
issuers of high yield bonds (rated below the fourth highest category) may be in
uncertain financial health, the prices of their bonds are generally more
vulnerable to bad economic news or even the expectation of bad news, than those
of investment-grade bonds. In some cases, bonds, particularly junk bonds, may
decline in credit quality or go into default.
Value Investing Risk. As with any investment strategy, the "value" strategy used
in managing the portfolio will, at times, perform better than or worse than
other investment styles and the overall market. If the advisor overestimates the
value or return potential of one or more common stocks, the portfolio may
underperform the general equity market. Value stocks may also be out of favor
for certain periods in relation to growth stocks.
Small Company Capitalization Risk. Small company stocks tend to experience
steeper price fluctuations -- down as well as up -- than the stocks of larger
companies. A shortage of reliable information -- the same information gap that
creates opportunity -- can also pose added risk. Industry-wide reversals may
have a greater impact on small companies, since they lack a large company's
financial resources. Small company stocks are typically less liquid than large
company stocks: when things are going poorly, it is harder to find a buyer for a
small company's shares.
Foreign Investment Risk. To the extent that the portfolio holds the securities
of companies based outside the US, it faces the risks inherent in foreign
investing. Adverse political, economic or social developments could undermine
the value of the portfolio's investments or prevent the portfolio from realizing
their full value. Financial reporting standards for companies based in foreign
markets differ from those in the US. Additionally, foreign securities markets
generally are smaller and less liquid than the US markets. These risks tend to
be greater in emerging markets, so to the extent the fund invests in emerging
markets, it takes on greater risks. Finally, the currency of the country in
which the fund has invested could decline relative to the value of the US
dollar, which would decrease the value of the investment to US investors.
IPO Risk. Securities purchased in initial public offerings (IPOs) may be very
volatile, rising and falling rapidly, often based, among other reasons, on
investor perceptions rather than on economic factors. Additionally, investments
in IPOs may magnify the portfolio's performance if it has a small asset base.
The portfolio is less likely to experience a similar impact on its performance
as its assets grow because it is unlikely that the portfolio will be able to
obtain proportionately larger IPO allocations.
Derivatives Risk. Risks associated with derivatives include: the risk that the
derivative is not well correlated with the security, index or currency to which
it relates; the risk that derivatives used for risk management may not have the
intended effects and may result in losses or missed opportunities; the risk that
the portfolio will be unable to sell the derivative because of an illiquid
secondary market; the risk that a counterparty is unwilling or unable to meet
its obligation; the risk of interest rate movements and the risk that the
derivatives transaction could expose the portfolio to the effects of leverage,
which could increase the portfolio's exposure to the market and magnify
potential losses. There is no guarantee that derivatives activities will be
employed or that they will work, and their use could cause lower returns or even
losses to the portfolio.
Securities Lending Risk. Any loss in the market price of securities loaned by
the portfolio that occurs during the term of the loan would be borne by the
portfolio and would adversely affect the portfolio's performance. Also, there
may be delays in recovery of securities loaned or even a loss of rights in the
collateral should the borrower of the securities fail financially while the loan
is outstanding. However, loans will be made only to borrowers selected by the
portfolio's delegate after a review of relevant facts and circumstances,
including the creditworthiness of the borrower.
Pricing Risk. At times, market conditions might make it hard to value some
investments. For example, if the portfolio has valued its securities too highly,
you may end up paying too much for portfolio shares when you buy into the
portfolio. If the portfolio underestimates their price, you may not receive the
full market value for your portfolio shares when you sell.
Other factors that could affect performance include:
o the managers could be incorrect in their analysis of industries, companies,
economic trends, the relative attractiveness of different securities or other
matters
o foreign stocks tend to be more volatile than their US counterparts, for
reasons such as currency fluctuations and political and economic uncertainty
This portfolio may make sense for investors interested in stock and bond
investments in a single portfolio.
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 portfolio performance has varied from year to year,
which may give some idea of risk. The table shows average annual returns for the
portfolio and three broad-based market indexes (which, unlike the portfolio, do
not have any fees or expenses). The performance of both the portfolio and the
indexes varies over time. All figures on this page assume reinvestment of
dividends and distributions.
In the bar chart and the table, the performance figures for Class B are based on
the historical performance of the portfolio's original share class (Class A),
adjusted to reflect the higher gross total annual operating expenses of Class B.
Class A is offered in a different prospectus.
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 B shares
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
26.35 11.61 23.90 22.88 15.03 -2.27 -6.29 -15.32 17.69
-------------------------------------------------------------------------------------------------------------------
</TABLE>
For the periods included in the bar chart:
Best Quarter: %, Q Worst Quarter: %, Q
2005 Total Return as of March 31: %
Average Annual Total Returns (%) as of 12/31/2004
1 Year 5 Years 10 Years
--------------------------------------------------------------------------------
Portfolio -- Class B
Index 1
Index 2
Index 3
--------------------------------------------------------------------------------
Index 1: Standard & Poor's (S&P) 500 Index is a capitalization-weighted index of
500 stocks, designed to measure performance of the broad domestic economy
through changes in the aggregate market value of 500 stocks representing all
major industries.
Index 2: Russell 1000 Growth Index is an unmanaged capitalization-weighted index
containing those securities in the Russell 1000 Index with higher price-to-book
ratios and higher forecasted-growth values.
Index 3: Lehman Brothers Aggregate Bond Index is an unmanaged market
value-weighted measure of treasury issues, agency issues, corporate bond issues
and mortgage securities.
Current performance information may be higher or lower than the performance data
quoted above. For more recent performance information, contact your
participating insurance company.
16
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
portfolio shares. The information in the table does not 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 increase
expenses.
Fee Table Class B
--------------------------------------------------------------------------------
Annual Operating Expenses, deducted from portfolio assets
--------------------------------------------------------------------------------
Management Fee %
--------------------------------------------------------------------------------
Distribution/Service (12b-1) Fee
--------------------------------------------------------------------------------
Other Expenses*
--------------------------------------------------------------------------------
Total Annual Operating Expenses
--------------------------------------------------------------------------------
* Restated to reflect estimated expenses for Class B shares resulting from
new compensation arrangements with participating insurance companies for
recordkeeping services.
Based on the costs above, this example helps you compare the expenses of Class B
shares to those of other mutual funds. This example assumes the expenses above
remain the same. It also assumes that you invested $10,000, earned 5% annual
returns, reinvested all dividends and distributions and sold your shares at the
end of each period. This is only an example; actual expenses will be different.
Example 1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Class B shares $ $ $ $
--------------------------------------------------------------------------------
17
<PAGE>
The Portfolio Managers
The portfolio is managed by a team of investment professionals who each play an
important role in the portfolio's management process. This team works for the
advisor or its affiliates and is supported by a large staff of economists,
research analysts, traders and other investment specialists. The advisor or its
affiliates believe(s) its team approach benefits portfolio investors by bringing
together many disciplines and leveraging its extensive resources.
The portfolio is managed by a team of portfolio managers across a range of
investment strategies. The lead portfolio manager is responsible for the
portfolio's overall investment strategy as well as the allocation of assets to
the portfolio management teams of the underlying investment strategies. Each
portfolio manager on the team has authority over all aspects of the portfolio's
investment portfolio for their investment strategy, including but not limited
to, purchases and sales of individual securities, portfolio construction
techniques, portfolio risk assessment and the management of daily cash flows in
accordance with portfolio holdings.
The portfolio is managed by a team of investment professionals who share
responsibility for the portfolio's investment management decisions.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Julie M. Van Cleave, CFA Andrew P. Cestone Brett Diment
Managing Director of Deutsche Asset Managing Director of Deutsche Asset Managing Director of Deutsche Asset
Management and Portfolio Manager of Management and Portfolio Manager of Management and Portfolio Manager
the portfolio. the portfolio. of the portfolio.
o Joined Deutsche Asset Management o Joined Deutsche Asset Management o Joined Deutsche Asset Management
and the portfolio in 2002. in 1998 and the portfolio in in 1991 and the portfolio in 2004.
o Head of Large Cap Growth 2002. o Head of Emerging Market Debt for
Portfolio Selection Team. o Head of Core Plus Fixed Income. London Fixed Income and
o Previous experience includes o Prior to that, investment responsible for coordinating
18 years of investment industry analyst, Phoenix Investment research into Continental
experience at Mason Street Partners, from 1997 to 1998. European markets and managing
Advisors, as Managing Director o Prior to that, credit officer, global fixed income, balanced
and team leader for the large cap asset based lending group, Fleet and cash-based portfolios:
investment team. Bank, from 1995 to 1997. London.
o MBA, University of Wisconsin -- o Began investment career in 1991.
Madison. Arnim S. Holzer
Director of Deutsche Asset
Thomas F. Sassi Management and Portfolio Manager
Managing Director of Deutsche Asset of the portfolio.
Management and Portfolio Manager of o Joined Deutsche Asset Management
the portfolio. in 1999, having served with the
o Joined Deutsche Asset Management equity and fixed-income
in 1996 and the portfolio in 2004. investment committees.
o Over 32 years of investment o Senior Investment Strategist for
industry experience. Asset Allocation.
o MBA, Hofstra University. o Previous experience includes 18
years of investment industry
J. Christopher Gagnier experience, including three
Managing Director of Deutsche Asset years managing Emerging Markets
Management and Portfolio Manager of Fixed Income, Emerging Markets
the portfolio. Equity and Emerging Markets
o Joined Deutsche Asset Management balanced accounts at Deltec
in 1997 and the portfolio in 2002. Asset Management Corporation.
o Prior to that, portfolio manager, o Joined the portfolio in 2004.
Paine Webber, from 1984 to 1997. o MBA, Fordham University.
o Began investment career in 1979.
o MBA, University of Chicago.
</TABLE>
The portfolio's Statement of Additional Information provides additional
information about the portfolio managers' investments in the portfolio, a
description of their compensation structure and information regarding other
accounts they manage.
Financial Highlights
As of the portfolio's fiscal year end, there were no Class B shares issued for
the portfolio, therefore financial highlights are not available.
18
<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 US companies.
In choosing stocks for the portfolio, the portfolio managers consider yield and
other valuation and growth factors, meaning that they focus the portfolio's
investments on securities of US 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 different types of securities at different times, while
still maintaining variety in terms of the securities, issuers and economic
sectors represented.
The managers normally will, but are not obligated to, sell a stock if its yield
or growth prospects are believed to be below the benchmark average. The managers
will also sell a stock when the managers believe its fundamental factors have
changed, to manage overall risk of the portfolio, when other investments offer
better opportunities or in the course of adjusting its emphasis on or within a
given industry.
The portfolio may lend its investment securities up to 33 1/3% of its total
assets to approved institutional borrowers who need to borrow securities in
order to complete certain transactions.
Although major changes tend to be infrequent, the Board of Trustees could change
the portfolio's investment objective without seeking shareholder approval.
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.
The portfolio is permitted, but not required, to use various types of
derivatives (contracts whose value is based on, for example, indexes, currencies
or securities). The portfolio may use derivatives in circumstances where the
managers believe they offer an economical means of gaining exposure to a
particular asset class or to keep cash on hand to meet shareholder redemptions
or other needs while maintaining exposure to the market.
As a temporary defensive measure, the portfolio could shift up to 100% of assets
into investments such as money market securities. This measure could prevent
losses, but, while engaged in a temporary defensive position, a fund will not be
pursuing its investment objective. However, the portfolio managers may choose
not to use these strategies for various reasons, even in very volatile market
conditions.
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 cause the portfolio's performance to trail that of
other investments.
Stock Market Risk. As with most stock portfolios, an important factor with this
portfolio is how stock markets perform -- in this case, the large company
portion of the US stock market. When prices of these stocks fall, you should
expect the value of your investment to fall as well. Large company stocks at
times may not perform as well as stocks of smaller or mid-sized 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. In addition, movements
in financial markets may adversely affect a stock's price, regardless of how
well the company performs. The market as a whole may not favor the types of
investments the portfolio makes and the portfolio may not be able to get
attractive prices for them.
Industry Risk. While the portfolio does not concentrate in any industry, to the
extent that the fund has exposure to a given industry or sector, any factors
affecting that industry or sector could affect the value of portfolio
securities. For example, manufacturers of consumer goods could be hurt by a rise
in unemployment, or technology companies could be hurt by such factors as market
saturation, price competition and rapid obsolescence.
IPO Risk. Securities purchased in initial public offerings (IPOs) may be very
volatile, rising and falling rapidly, often based, among other reasons, on
investor perceptions rather than on economic factors. Additionally, investments
in IPOs may magnify the portfolio's performance if it has a small asset base.
The portfolio is less likely to experience a similar impact on its performance
as its assets grow because it is unlikely that the portfolio will be able to
obtain proportionately larger IPO allocations.
19
<PAGE>
Derivatives Risk. Risks associated with derivatives include: the risk that the
derivative is not well correlated with the security, index or currency to which
it relates; the risk that derivatives used for risk management may not have the
intended effects and may result in losses or missed opportunities; the risk that
the portfolio will be unable to sell the derivative because of an illiquid
secondary market; the risk that a counterparty is unwilling or unable to meet
its obligation; the risk of interest rate movements and the risk that the
derivatives transaction could expose the portfolio to the effects of leverage,
which could increase the portfolio's exposure to the market and magnify
potential losses. There is no guarantee that derivatives activities will be
employed or that they will work, and their use could cause lower returns or even
losses to the portfolio.
Securities Lending Risk. Any loss in the market price of securities loaned by
the portfolio that occurs during the term of the loan would be borne by the
portfolio and would adversely affect the portfolio's performance. Also, there
may be delays in recovery of securities loaned or even a loss of rights in the
collateral should the borrower of the securities fail financially while the loan
is outstanding. However, loans will be made only to borrowers selected by the
portfolio's delegate after a review of relevant facts and circumstances,
including the creditworthiness of the borrower.
Pricing Risk. At times, market conditions might make it hard to value some
investments. For example, if the portfolio has valued its securities too highly,
you may end up paying too much for portfolio shares when you buy into the
portfolio. If the portfolio underestimates their price, you may not receive the
full market value for your portfolio shares when you sell.
Another factor that could affect performance is:
o the managers could be incorrect in their analysis of industries, companies,
economic trends, the relative attractiveness of different securities or other
matters
This portfolio may make sense for investors interested in an equity fund to
provide long-term growth and some current income.
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 annual returns for the portfolio's Class B 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.
The inception date for Class B shares is May 1, 1997. In the bar chart and the
table, the performance figures for Class B before that date are based on the
historical performance of the portfolio's original share class (Class A),
adjusted to reflect the higher gross total annual operating expenses of Class B.
Class A is offered in a different prospectus.
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 B shares
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
31.41 21.86 30.15 6.95 5.48 -2.33 -11.56 -23.40 26.55
-------------------------------------------------------------------------------------------------------------------
</TABLE>
For the periods included in the bar chart:
Best Quarter: ___%, Q_ ____ Worst Quarter: ___%, Q_ ____
2005 Total Return as of March 31: ___%
20
<PAGE>
Average Annual Total Returns (%) as of 12/31/2004
1 Year 5 Years 10 Years
--------------------------------------------------------------------------------
Portfolio -- Class B
Index
--------------------------------------------------------------------------------
Index: Standard & Poor's (S&P) 500 Index is a capitalization-weighted index of
500 stocks, designed to measure performance of the broad domestic economy
through changes in the aggregate market value of 500 stocks representing all
major industries.
Current performance information may be higher or lower than the performance data
quoted above. For more recent performance information, contact your
participating insurance company.
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
portfolio shares. The information in the table does not 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 increase
expenses.
Fee Table Class B
--------------------------------------------------------------------------------
Annual Operating Expenses, deducted from portfolio assets
--------------------------------------------------------------------------------
Management Fee %
--------------------------------------------------------------------------------
Distribution/Service (12b-1) Fee
--------------------------------------------------------------------------------
Other Expenses*
--------------------------------------------------------------------------------
Total Annual Operating Expenses
--------------------------------------------------------------------------------
* Restated to reflect estimated expenses for Class B shares resulting from
new compensation arrangements with participating insurance companies for
recordkeeping services.
Based on the costs above, this example helps you compare the expenses of Class B
shares to those of other mutual funds. This example assumes the expenses above
remain the same. It also assumes that you invested $10,000, earned 5% annual
returns, reinvested all dividends and distributions and sold your shares at the
end of each period. This is only an example; actual expenses will be different.
Example 1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Class B shares $ $ $ $
--------------------------------------------------------------------------------
21
<PAGE>
The Portfolio Managers
The portfolio is managed by a team of investment professionals who each play an
important role in the portfolio's management process. This team works for the
advisor or its affiliates and is supported by a large staff of economists,
research analysts, traders and other investment specialists. The advisor or its
affiliates believe(s) its team approach benefits portfolio investors by bringing
together many disciplines and leveraging its extensive resources.
The portfolio is managed by a team of investment professionals who collaborate
to implement the portfolio's investment strategy. The team is led by a lead
portfolio manager who is responsible for developing the portfolio's investment
strategy. Each portfolio manager on the team has authority over all aspects of
the portfolio's investment portfolio, including but not limited to, purchases
and sales of individual securities, portfolio construction techniques, portfolio
risk assessment and the management of daily cash flows in accordance with
portfolio holdings.
The following people handle the day-to-day management of the portfolio:
Gregory Adams, CFA Andrew Brudenell, CFA
Managing Director of Deutsche Asset Vice President of Deutsche Asset
Management and Lead Portfolio Manager Management and Portfolio Manager
of the portfolio. of the portfolio.
o Joined Deutsche Asset Management o Joined Deutsche Asset
in 1999 and the portfolio in 1999. Management in 1997 and the
o Over 17 years of investment portfolio in 2003.
industry experience. o Portfolio Manager for US
o Previously managed Chase Vista Large Cap Core Equity: New
Growth & Income Fund, Chase Vista York.
Large Cap Equity Fund, Chase Vista o MS, London School of
Balanced Fund and other equity Economics.
portfolios for Chase Asset
Management.
The portfolio's Statement of Additional Information provides additional
information about the portfolio managers' investments in the portfolio, a
description of their compensation structure and information regarding other
accounts they manage.
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, independent registered public accounting firm, whose report, along with the
portfolio's financial statements, is included in the annual report (see
"Shareholder reports" on the back cover).
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
Growth and Income Portfolio -- Class B
22
<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 normally invests at least 65% of
total assets in common stocks of US companies. Although the portfolio can invest
in companies of any size, it generally focuses on established companies that are
similar in size to the companies in the Standard & Poor's 500r Composite Stock
Price Index (the "S&P 500 Index") or the Russell 1000r Growth Index (as of
December 31, 2004, the S&P 500 Index and the Russell 1000 Growth Index had
median market capitalizations of $___ billion and $___ billion, respectively).
Although the portfolio may invest in companies of any size, the portfolio
intends to invest primarily in companies whose market capitalizations fall
within the normal range of these Indexes.
In choosing stocks, the portfolio managers look for individual companies that
have the potential to display above-average earnings growth compared to other
growth companies and that have strong product lines, effective management and
leadership positions or potential to become leaders within core markets. The
managers also analyze each company's valuation, financial position and other
factors.
The managers will normally sell a stock when they believe its potential risks
have increased, its price is unlikely to go higher, its fundamental factors have
changed, other investments offer better opportunities or in the course of
adjusting the portfolio's emphasis on a given industry.
The portfolio may lend its investment securities up to 33 1/3% of its total
assets to approved institutional borrowers who need to borrow securities in
order to complete certain transactions.
Although major changes tend to be infrequent, the Board of Trustees could change
the portfolio's investment objective without seeking shareholder approval.
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.
The portfolio is permitted, but not required, to use various types of
derivatives (contracts whose value is based on, for example, indexes, currencies
or securities). In particular, the portfolio may use options and covered call
options. The portfolio may use derivatives in circumstances where the managers
believe they offer an economical means of gaining exposure to a particular asset
class or to keep cash on hand to meet shareholder redemptions or other needs
while maintaining exposure to the market.
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 cause the portfolio's performance to trail that of
other investments.
Stock Market Risk. As with most stock portfolios, an important factor with this
portfolio is how stock markets perform -- in this case, the growth portion of
the US stock market. 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. In addition, movements in financial markets may adversely affect a
stock's price, regardless of how well the company performs. The market as a
whole may not favor the types of investments the portfolio makes and the
portfolio may not be able to get attractive prices for them.
Industry Risk. While the portfolio does not concentrate in any industry, to the
extent that the portfolio has exposure to a given industry or sector, any
factors affecting that industry or sector could affect the value of portfolio
securities. For example, manufacturers of consumer goods could be hurt by a rise
in unemployment, or technology companies could be hurt by such factors as market
saturation, price competition and rapid obsolescence.
Growth Investing Risk. Since growth companies usually reinvest a large portion
of earnings in their own businesses, growth stocks may lack the dividends
associated with value stocks that might otherwise cushion their decline in a
falling market. Earnings disappointments in growth stocks often result in sharp
price declines because investors tend to buy these stocks because of their
potential for superior earnings growth. Growth stocks may also be out of favor
for certain periods in relation to value stocks.
IPO Risk. Securities purchased in initial public offerings (IPOs) may be very
volatile, rising and falling rapidly, often based, among other reasons, on
investor perceptions rather than on economic factors. Additionally, investments
in IPOs may magnify the portfolio's performance if it has a small asset base.
The portfolio is less likely to experience a similar impact on its performance
as its assets grow because it is unlikely that the portfolio will be able to
obtain proportionately larger IPO allocations.
23
<PAGE>
Derivatives Risk. Risks associated with derivatives include: the risk that the
derivative is not well correlated with the security, index or currency to which
it relates; the risk that derivatives used for risk management may not have the
intended effects and may result in losses or missed opportunities; the risk that
the portfolio will be unable to sell the derivative because of an illiquid
secondary market; the risk that a counterparty is unwilling or unable to meet
its obligation; the risk of interest rate movements and the risk that the
derivatives transaction could expose the portfolio to the effects of leverage,
which could increase the portfolio's exposure to the market and magnify
potential losses. There is no guarantee that derivatives activities will be
employed or that they will work, and their use could cause lower returns or even
losses to the portfolio.
Securities Lending Risk. Any loss in the market price of securities loaned by
the portfolio that occurs during the term of the loan would be borne by the
portfolio and would adversely affect the portfolio's performance. Also, there
may be delays in recovery of securities loaned or even a loss of rights in the
collateral should the borrower of the securities fail financially while the loan
is outstanding. However, loans will be made only to borrowers selected by the
portfolio's delegate after a review of relevant facts and circumstances,
including the creditworthiness of the borrower.
Pricing Risk. At times, market conditions might make it hard to value some
investments. For example, if the portfolio has valued its securities too highly,
you may end up paying too much for portfolio shares when you buy into the
portfolio. If the portfolio underestimates their price, you may not receive the
full market value for your portfolio shares when you sell.
Another factor that could affect performance is:
o the managers could be incorrect in their analysis of companies, sectors,
economic trends, the relative attractiveness of different securities or other
matters
This portfolio may make sense for investors seeking long-term growth.
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 annual returns for the portfolio's Class B shares
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 indexes
(which, unlike the portfolio, do not have any fees or expenses). The performance
of both the portfolio and the indexes varies over time. All figures on this page
assume reinvestment of dividends and distributions.
The inception date for Class B shares is May 12, 1997. In the bar chart and the
table, the performance figures for Class B before that date are based on the
historical performance of the portfolio's original share class (Class A),
adjusted to reflect the higher gross total annual operating expenses of Class B.
Class A is offered in a different prospectus.
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 B shares
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
28.33 19.83 35.45 22.94 34.88 -10.13 -19.64 -29.37 26.51
-------------------------------------------------------------------------------------------------------------------
</TABLE>
For the periods included in the bar chart:
Best Quarter: ___%, Q_ ____ Worst Quarter: ___%, Q_ ____
2005 Total Return as of March 31: ___%
24
<PAGE>
Average Annual Total Returns (%) as of 12/31/2004
1 Year 5 Years 10 Years
--------------------------------------------------------------------------------
Portfolio -- Class B
Index 1
Index 2
--------------------------------------------------------------------------------
Index 1: Standard & Poor's (S&P) 500 Index is a capitalization-weighted index of
500 stocks, designed to measure performance of the broad domestic economy
through changes in the aggregate market value of 500 stocks representing all
major industries.
Index 2: Russell 1000 Growth Index is an unmanaged capitalization-weighted index
containing those securities in the Russell 1000 Index with higher price-to-book
ratios and higher forecasted-growth values.
Current performance information may be higher or lower than the performance data
quoted above. For more recent performance information, contact your
participating insurance company.
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
portfolio shares. The information in the table does not 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 increase
expenses.
Fee Table Class B
--------------------------------------------------------------------------------
Annual Operating Expenses, deducted from portfolio assets
--------------------------------------------------------------------------------
Management Fee %
--------------------------------------------------------------------------------
Distribution/Service (12b-1) Fee
--------------------------------------------------------------------------------
Other Expenses*
--------------------------------------------------------------------------------
Total Annual Operating Expenses
--------------------------------------------------------------------------------
* Restated to reflect estimated expenses for Class B shares resulting from
new compensation arrangements with participating insurance companies for
recordkeeping services.
Based on the costs above, this example helps you compare the expenses of Class B
shares to those of other mutual funds. This example assumes the expenses above
remain the same. It also assumes that you invested $10,000, earned 5% annual
returns, reinvested all dividends and distributions and sold your shares at the
end of each period. This is only an example; actual expenses will be different.
Example 1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Class B shares $ $ $ $
--------------------------------------------------------------------------------
The Portfolio Managers
The portfolio is managed by a team of investment professionals who each play an
important role in the portfolio's management process. This team works for the
advisor or its affiliates and is supported by a large staff of economists,
research analysts, traders and other investment specialists. The advisor or its
affiliates believe(s) its team approach benefits portfolio investors by bringing
together many disciplines and leveraging its extensive resources.
The portfolio is managed by a team of investment professionals who collaborate
to implement the portfolio's investment strategy. The team is led by a lead
portfolio manager who is responsible for developing the portfolio's investment
strategy. Each portfolio manager on the team has authority over all aspects of
the portfolio's investment portfolio, including but not limited to, purchases
and sales of individual securities, portfolio construction techniques, portfolio
risk assessment and the management of daily cash flows in accordance with
portfolio holdings.
25
<PAGE>
The following people handle the day-to-day management of the portfolio:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Julie M. Van Cleave, CFA Jack A. Zehner Thomas J. Schmid, CFA
Managing Director of Deutsche Asset Director of Deutsche Asset Management Director of Deutsche Asset Management
Management and Lead Portfolio Manager and Portfolio Manager of the and Portfolio Manager of
of the portfolio. portfolio. the portfolio.
o Joined Deutsche Asset Management o Joined Deutsche Asset Management o Joined Deutsche Asset Management
and the portfolio in 2002. and the portfolio in 2002. and the portfolio in 2002.
o Head of Large Cap Growth Portfolio o Previous experience includes o Previous experience includes
Selection Team. eight years' investment industry 15 years' investment industry
o Previous experience includes 18 experience at Mason Street experience, most recently as
years' investment industry Advisors where he served most Director -- Common Stock at Mason
experience at Mason Street recently as Director -- Common Street Advisors.
Advisors, most recently serving as Stock. o MBA, University of Chicago.
Managing Director and team leader o MBA, Marquette University.
for the large cap investment team.
o MBA, University of Wisconsin --
Madison.
</TABLE>
The portfolio's Statement of Additional Information provides additional
information about the portfolio managers' investments in the portfolio, a
description of their compensation structure and information regarding other
accounts they manage.
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, independent registered public accounting firm, whose report, along with the
portfolio's financial statements, is included in the portfolio's annual report
(see "Shareholder reports" on the back cover).
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
Capital Growth Portfolio -- Class B
26
<PAGE>
21st Century 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 total assets in common stocks of companies that are similar in
size to those in the Russell 2000 Growth Index (as of December 31, 2004, the
Russell 2000 Growth Index had a median market capitalization of $___ million).
The portfolio intends to invest primarily in companies whose market
capitalizations fall within the normal range of the Index.
Using extensive fundamental and field research, the managers look for companies
that have low debt, exceptional management teams that hold a significant stake
in the company, strong current or potential competitive positioning and
potential annual earnings growth of at least 15%, among other factors. The
managers often find these companies in rapidly changing sectors of the economy,
such as telecommunications, biotechnology and high tech.
The managers generally look for companies that they believe have potential for
sustainable above-average earnings growth and whose market value appears
reasonable in light of their business prospects.
The managers may favor different types of securities from different industries
and companies at different times.
The managers will normally sell a stock when they believe its price is unlikely
to go much higher, its fundamental factors have changed, other investments offer
better opportunities, or in the course of adjusting its emphasis on a given
industry.
Also, as companies in the portfolio exceed the market value of those in the
Russell 2000 Growth Index, the portfolio may continue to hold their stock, but
generally will not add to these holdings.
The portfolio may lend its investment securities up to 33 1/3% of its total
assets to approved institutional borrowers who need to borrow securities in
order to complete certain transactions.
Although major changes tend to be infrequent, the Board of Trustees could change
the portfolio's investment objective without seeking shareholder approval.
Other Investments
The portfolio is permitted, but not required, to use various types of
derivatives (contracts whose value is based on, for example, indexes, currencies
or securities). In particular, the portfolio may use futures and options,
including sales of covered put and call options. The portfolio may use
derivatives in circumstances where the managers believe they offer an economical
means of gaining exposure to a particular asset class or to keep cash on hand to
meet shareholder redemptions or other needs while maintaining exposure to the
market.
As a temporary defensive measure, the portfolio could shift up to 100% of assets
into investments such as money market securities. This measure could prevent
losses, but, while engaged in a temporary defensive position, a fund will not be
pursuing its investment objective. However, the portfolio managers may choose
not to use these strategies for various reasons, even in very volatile market
conditions.
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 cause the portfolio's performance to trail that of
other investments.
Stock Market Risk. As with most stock portfolios, an important factor with this
portfolio is how stock markets perform -- in this case, growth stocks. 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. In addition,
movements in financial markets may adversely affect a stock's price, regardless
of how well the company performs. The market as a whole may not favor the types
of investments the portfolio makes and the portfolio may not be able to get
attractive prices for them.
Growth Investing Risk. Since growth companies usually reinvest a large portion
of earnings in their own businesses, growth stocks may lack the dividends
associated with value stocks that might otherwise cushion their decline in a
falling market. Earnings disappointments in growth stocks often result in sharp
price declines because investors tend to buy these stocks because of their
potential for superior earnings growth. Growth stocks may also be out of favor
for certain periods in relation to value stocks.
27
<PAGE>
Industry Risk. While the portfolio does not concentrate in any industry, to the
extent that the portfolio has exposure to a given industry or sector, any
factors affecting that industry or sector could affect the value of portfolio
securities. For example, manufacturers of consumer goods could be hurt by a rise
in unemployment, or technology companies could be hurt by such factors as market
saturation, price competition and rapid obsolescence.
Small Company Risk. Small company stocks tend to experience steeper price
fluctuations than the stocks of larger companies. A shortage of reliable
information can also pose added risk. Industry-wide reversals may have a greater
impact on small companies, since they lack a large company's financial
resources. Small company stocks are typically less liquid than large company
stocks: when things are going poorly, it is harder to find a buyer for a small
company's shares.
IPO Risk. Securities purchased in initial public offerings (IPOs) may be very
volatile, rising and falling rapidly, often based, among other reasons, on
investor perceptions rather than on economic factors. Additionally, investments
in IPOs may magnify the portfolio's performance if it has a small asset base.
The portfolio is less likely to experience a similar impact on its performance
as its assets grow because it is unlikely that the portfolio will be able to
obtain proportionately larger IPO allocations.
Derivatives Risk. Risks associated with derivatives include: the risk that the
derivative is not well correlated with the security, index or currency to which
it relates; the risk that derivatives used for risk management may not have the
intended effects and may result in losses or missed opportunities; the risk that
the portfolio will be unable to sell the derivative because of an illiquid
secondary market; the risk that a counterparty is unwilling or unable to meet
its obligation; the risk of interest rate movements and the risk that the
derivatives transaction could expose the portfolio to the effects of leverage,
which could increase the portfolio's exposure to the market and magnify
potential losses. There is no guarantee that derivatives activities will be
employed or that they will work, and their use could cause lower returns or even
losses to the portfolio.
Securities Lending Risk. Any loss in the market price of securities loaned by
the portfolio that occurs during the term of the loan would be borne by the
portfolio and would adversely affect the portfolio's performance. Also, there
may be delays in recovery of securities loaned or even a loss of rights in the
collateral should the borrower of the securities fail financially while the loan
is outstanding. However, loans will be made only to borrowers selected by the
portfolio's delegate after a review of relevant facts and circumstances,
including the creditworthiness of the borrower.
Pricing Risk. At times, market conditions might make it hard to value some
investments. For example, if the portfolio has valued its securities too highly,
you may end up paying too much for portfolio shares when you buy into the
portfolio. If the portfolio underestimates their price, you may not receive the
full market value for your portfolio shares when you sell.
Other factors that could affect performance include:
o the managers could be incorrect in their analysis of industries, companies,
economic trends, the relative attractiveness of different securities or other
matters
o foreign stocks tend to be more volatile than their US counterparts, for
reasons such as currency fluctuations and political and economic uncertainty
This portfolio may make sense for long-term investors who can accept the risks
of small-company investing and who are interested in a portfolio that seeks out
tomorrow's leaders.
28
<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 B shares have
varied from year to year, which may give some idea of risk. The table shows
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 B shares
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
-------------------------------------------------------------------
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
-22.79 -23.51 -41.14 30.39
-------------------------------------------------------------------
For the periods included in the bar chart:
Best Quarter: ___%, Q_ ____ Worst Quarter: ___%, Q_ ____
2005 Total Return as of March 31: ___%
Average Annual Total Returns (%) as of 12/31/2004
1 Year 5 Years 10 Years
--------------------------------------------------------------------------------
Portfolio -- Class B
Index
--------------------------------------------------------------------------------
Index: Russell 2000 Growth Index is an unmanaged capitalization-weighted measure
of 2000 of the smallest capitalized US companies with a higher price-to-book
ratio and higher forecasted growth values.
* Inception: May 3, 1999. Index comparison begins April 30, 1999.
Total returns from inception through 2001 would have been lower if operating
expenses hadn't been reduced.
Current performance information may be higher or lower than the performance data
quoted above. For more recent performance information, contact your
participating insurance company.
29
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
portfolio shares. The information in the table does not 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 increase
expenses.
Fee Table Class B
--------------------------------------------------------------------------------
Annual Operating Expenses, deducted from portfolio assets
--------------------------------------------------------------------------------
Management Fee %
--------------------------------------------------------------------------------
Distribution/Service (12b-1) Fee
--------------------------------------------------------------------------------
Other Expenses*
--------------------------------------------------------------------------------
Total Annual Operating Expenses**
--------------------------------------------------------------------------------
* Restated to reflect estimated expenses for Class B shares resulting from
new compensation arrangements with participating insurance companies for
recordkeeping services.
** Pursuant to their respective agreements with Scudder Variable Series I,
the investment manager, the underwriter and the accounting agent have
agreed, for the one year period commencing on May 1, 2004, to limit their
respective fees and to reimburse other expenses to the extent necessary to
limit total operating expenses of Class B shares of Scudder 21st Century
Growth Portfolio to 1.75%.
Based on the costs above, this example helps you compare the expenses of Class B
shares to those of other mutual portfolios. This example assumes the expenses
above remain the same. It also assumes that you invested $10,000, earned 5%
annual returns, reinvested all dividends and distributions and sold your shares
at the end of each period. This is only an example; actual expenses will be
different.
Example 1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Class B shares $ $ $ $
--------------------------------------------------------------------------------
30
<PAGE>
The Portfolio Managers
The portfolio is managed by a team of investment professionals who each play an
important role in the portfolio's management process. This team works for the
advisor or its affiliates and is supported by a large staff of economists,
research analysts, traders and other investment specialists. The advisor or its
affiliates believe(s) its team approach benefits portfolio investors by bringing
together many disciplines and leveraging its extensive resources.
The portfolio is managed by a team of investment professionals who collaborate
to develop and implement the portfolio's investment strategy. Each portfolio
manager on the team has authority over all aspects of the portfolio's investment
portfolio, including but not limited to, purchases and sales of individual
securities, portfolio construction techniques, portfolio risk assessment and the
management of daily cash flows in accordance with portfolio holdings.
The following people handle the day-to-day management of the portfolio:
Samuel A. Dedio Robert S. Janis
Managing Director of Deutsche Asset Managing Director of Deutsche Asset
Management and Co-Lead Portfolio Management and Co-Lead Portfolio
Manager of the portfolio. Manager of the portfolio.
o Joined Deutsche Asset Management o Joined Deutsche Asset Management
in 1999 after eight years of and the portfolio in 2004.
experience, formerly serving as o Previously served as portfolio
analyst at Ernst & Young, LLP, manager for ten years at Credit
Evergreen Asset Management and Suisse Asset Management (or at
Standard & Poor's Corp. its predecessor Warburg Pincus
o MS, American University, Kogod Asset Management).
School of Business. o Over 20 years of investment
o Over 13 years of investment industry experience.
industry experience. o MBA, University of Pennsylvania,
o Joined the portfolio in 2002. Wharton School.
The portfolio's Statement of Additional Information provides additional
information about the portfolio managers' investments in the portfolio, a
description of their compensation structure and information regarding other
accounts they manage.
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, independent registered public accounting firm, whose report, along with the
portfolio's financial statements, is included in the annual report (see
"Shareholder reports" on the back cover).
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
21st Century Growth Portfolio -- Class B
31
<PAGE>
Global Discovery Portfolio
The Portfolio's Main Investment Strategy
The portfolio seeks above-average capital appreciation over the long term. The
portfolio invests at least 65% of total assets in common stocks and other
equities of small companies throughout the world (companies with market values
similar to the smallest 20% of the Citigroup Broad Market Index). While the
portfolio may invest in securities in any country, it generally focuses on
countries with developed economies (including the US). As of December 31, 2004,
companies in which the portfolio invests typically have 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 individual companies with a history of
above-average growth, strong competitive positioning, attractive prices relative
to potential growth, sound financial strength and effective management, among
other factors.
Growth orientation. The managers generally look for companies that they believe
have above-average potential for sustainable growth of revenue or earnings and
whose market value appears reasonable in light of their business prospects.
Analysis of global themes. The managers consider global economic outlooks,
seeking to identify industries and companies that are likely to benefit from
social, political and economic changes.
The managers may focus on the securities of particular issuers, industries,
countries or regions at different times.
The managers will normally sell a stock when they 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 exposure to a given
country.
The portfolio may lend its investment securities up to 33 1/3% of its total
assets to approved institutional borrowers who need to borrow securities in
order to complete certain transactions.
Although major changes tend to be infrequent, the Board of Trustees could change
the portfolio's investment objective without seeking shareholder approval.
Other Investments
The portfolio may invest up to 35% of total assets in common stocks and other
equities of large companies or in debt securities (of which 5% of net assets may
be junk bonds, i.e., grade BB/Ba and below).
The portfolio is permitted, but not required, to use various types of
derivatives (contracts whose value is based on, for example, indexes, currencies
or securities). In particular, the portfolio may use futures and options. To the
extent the portfolio invests in foreign securities, the portfolio may enter into
forward currency exchange contracts and buy and sell currency options to hedge
against currency exchange rate fluctuations. The portfolio may use derivatives
in circumstances where the managers believe they offer an economical means of
gaining exposure to a particular asset class or to keep cash on hand to meet
shareholder redemptions or other needs while maintaining exposure to the market.
As a temporary defensive measure, the portfolio could shift up to 100% of assets
into investments such as money market securities. This measure could prevent
losses, but, while engaged in a temporary defensive position, a fund will not be
pursuing its investment objective. However, the portfolio managers may choose
not to use these strategies for various reasons, even in very volatile market
conditions.
The Main Risks of Investing in the Portfolio
There are several risk factors that could hurt the fund's performance, cause you
to lose money or cause the portfolio's performance to trail that of other
investments.
Stock Market Risk. As with most stock portfolios, an important factor with this
portfolio is how stock markets perform -- in this case US and foreign stock
markets. When US and foreign stock prices fall, you should expect the value of
your investment to fall as well. Compared to large company stocks, small company
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. In
addition, movements in financial markets may adversely affect a stock's price,
regardless of how well the company performs. The market as a whole may not favor
the types of investments the portfolio makes and the portfolio may not be able
to get attractive prices for them.
32
<PAGE>
Foreign Investment Risk. Foreign markets often exhibit more volatility than
those in the US. Investing in foreign securities involves greater risk than
investing in US securities for various reasons, including:
o Political Risk. Some foreign governments have limited the outflow of profits
to investors abroad, extended diplomatic disputes to include trade and
financial relations, and imposed high taxes on corporate profits.
o Information Risk. Financial reporting standards for companies based in
foreign markets are often less stringent than those applicable to US
companies and may present an incomplete or misleading picture of a foreign
company.
o Liquidity Risk. Securities that trade less can be more difficult or more
costly to buy, or to sell, than more liquid or active securities. This
liquidity risk is a factor of the trading volume of a particular security, as
well as the size and liquidity of the entire local market. On the whole,
foreign markets are smaller and less liquid than the US market. This can make
buying and selling certain securities more difficult and costly. Relatively
small transactions in some instances can have a disproportionately large
effect on the price and supply of securities. In certain situations, it may
become virtually impossible to sell a security in an orderly fashion at a
price that approaches the managers' estimate of its value.
o Regulatory Risk. There is generally less government regulation of foreign
markets, companies and securities dealers than in the US.
o Currency Risk. The portfolio invests in foreign securities denominated in
foreign currencies. To the extent that the portfolio is exposed to non-dollar
currencies, if these currencies decline in value relative to the dollar, it
may reduce gains or increase losses.
Emerging Markets Risk. To the extent that the portfolio invests in emerging
markets to enhance overall returns, it may face higher political, information,
and stock market risks. In addition, profound social changes and business
practices that depart from norms in developed countries' economies have hindered
the orderly growth of emerging economies and their stock markets in the past.
High levels of debt tend to make emerging economies heavily reliant on foreign
capital and vulnerable to capital flight.
Pricing Risk. At times, market conditions might make it hard to value some
investments. For example, if the portfolio has valued its securities too highly,
you may end up paying too much for portfolio shares when you buy into the
portfolio. If the portfolio underestimates their price, you may not receive the
full market value for your portfolio shares when you sell.
Small Company Risk. Small company stocks tend to experience steeper price
fluctuations than the stocks of larger companies. A shortage of reliable
information can also pose added risk. Industry-wide reversals may have a greater
impact on small companies, since they lack a large company's financial
resources. Small company stocks are typically less liquid than large company
stocks: when things are going poorly, it is harder to find a buyer for a small
company's shares.
IPO Risk. Securities purchased in initial public offerings (IPOs) may be very
volatile, rising and falling rapidly, often based, among other reasons, on
investor perceptions rather than on economic factors. Additionally, investments
in IPOs may magnify the portfolio's performance if it has a small asset base.
The portfolio is less likely to experience a similar impact on its performance
as its assets grow because it is unlikely that the portfolio will be able to
obtain proportionately larger IPO allocations.
Derivatives Risk. Risks associated with derivatives include: the risk that the
derivative is not well correlated with the security, index or currency to which
it relates; the risk that derivatives used for risk management may not have the
intended effects and may result in losses or missed opportunities; the risk that
the portfolio will be unable to sell the derivative because of an illiquid
secondary market; the risk that a counterparty is unwilling or unable to meet
its obligation; the risk of interest rate movements and the risk that the
derivatives transaction could expose the portfolio to the effects of leverage,
which could increase the portfolio's exposure to the market and magnify
potential losses. There is no guarantee that derivatives activities will be
employed or that they will work, and their use could cause lower returns or even
losses to the portfolio.
Securities Lending Risk. Any loss in the market price of securities loaned by
the portfolio that occurs during the term of the loan would be borne by the
portfolio and would adversely affect the portfolio's performance. Also, there
may be delays in recovery of securities loaned or even a loss of rights in the
collateral should the borrower of the securities fail financially while the loan
is outstanding. However, loans will be made only to borrowers selected by the
portfolio's delegate after a review of relevant facts and circumstances,
including the creditworthiness of the borrower.
Pricing Risk. At times, market conditions might make it hard to value some
investments. For example, if the portfolio has valued its securities too highly,
you may end up paying too much for portfolio shares when you buy into the
portfolio. If the portfolio underestimates their price, you may not receive the
full market value for your portfolio shares when you sell.
33
<PAGE>
Other factors that could affect performance include:
o the managers could be incorrect in their analysis of industries, companies,
economic trends, the relative attractiveness of different securities,
geographical trends or other matters
o growth stocks may be out of favor for certain periods
This portfolio may interest long-term investors interested in diversifying a
large-cap or domestic portfolio of investments.
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 portfolio performance has varied from year to year,
which may give some idea of risk. The table shows 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.
The inception date for Class B shares is May 2, 1997. In the bar chart and the
table, the performance figures for Class B before that date are based on the
historical performance of the portfolio's original share class (Class A),
adjusted to reflect the higher gross total annual operating expenses of Class B.
Class A is offered in a different prospectus.
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 B shares
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
1997 1998 1999 2000 2001 2002 2003 2004
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
12.10 16.18 65.63 -5.42 -24.96 -20.07 48.77
----------------------------------------------------------------------------------------------
</TABLE>
For the periods included in the bar chart:
Best Quarter: ___%, Q_ ____ Worst Quarter: ___%, Q_ ____
2005 Total Return as of March 31: ___%
Average Annual Total Returns (%) as of 12/31/2004
1 Year 5 Years Since Inception*
--------------------------------------------------------------------------------
Portfolio -- Class B
Index
--------------------------------------------------------------------------------
Index: Citigroup World Equity Extended Market Index, formerly the Salmon Smith
Barney World Equity Extended Market Index, is an unmanaged small-capitalization
stock universe of 22 countries.
* Portfolio inception: May 1, 1996. Index comparison begins April 30, 1996.
Total returns from inception through 1998 would have been lower if operating
expenses hadn't been reduced.
Current performance information may be higher or lower than the performance data
quoted above. For more recent performance information, contact your
participating insurance company.
34
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
portfolio shares. The information in the table does not 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 increase
expenses.
Fee Table Class B
--------------------------------------------------------------------------------
Annual Operating Expenses, deducted from portfolio assets
--------------------------------------------------------------------------------
Management Fee %
--------------------------------------------------------------------------------
Distribution/Service (12b-1) Fee
--------------------------------------------------------------------------------
Other Expenses*
--------------------------------------------------------------------------------
Total Annual Operating Expenses**
--------------------------------------------------------------------------------
* Restated to reflect estimated expenses for Class B shares resulting from
new compensation arrangements with participating insurance companies for
recordkeeping services.
** [Pursuant to their respective agreements with Scudder Variable Series I,
the investment manager, the underwriter and the accounting agent have
agreed, for the one year period commencing on May 1, 2004, to limit their
respective fees and to reimburse other expenses to the extent necessary to
limit total operating expenses of Class B shares of Scudder Global
Discovery Portfolio to 1.65%.]
Based on the costs above, this example helps you compare the expenses of Class B
shares to those of other mutual funds. This example assumes the expenses above
remain the same. It also assumes that you invested $10,000, earned 5% annual
returns, reinvested all dividends and distributions and sold your shares at the
end of each period. This is only an example; actual expenses will be different.
Example 1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Class B shares $ $ $ $
--------------------------------------------------------------------------------
The Portfolio Managers
The portfolio is managed by a team of investment professionals who each play an
important role in the portfolio's management process. This team works for the
advisor or its affiliates and is supported by a large staff of economists,
research analysts, traders and other investment specialists. The advisor or its
affiliates believe(s) its team approach benefits portfolio investors by bringing
together many disciplines and leveraging its extensive resources.
The portfolio is managed by a team of investment professionals who collaborate
to implement the portfolio's investment strategy. The team is led by a lead
portfolio manager who is responsible for developing the portfolio's investment
strategy. Each portfolio manager on the team has authority over all aspects of
the portfolio's investment portfolio, including but not limited to, purchases
and sales of individual securities, portfolio construction techniques, portfolio
risk assessment and the management of daily cash flows in accordance with
portfolio holdings.
35
<PAGE>
The following people handle the day-to-day management of the portfolio:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Joseph Axtell, CFA Terrence S. Gray, CFA
Director of Deutsche Asset Management and Director of Deutsche Asset Management
Lead Portfolio Manager of the portfolio. and Portfolio Manager of the
o Joined Deutsche Asset Management portfolio.
in 2001 and the portfolio in 2002. o Joined Deutsche Asset Management
o Senior analyst at Merrill Lynch in 1993 and the portfolio in 2003.
Investment Managers for the o Over 12 years of investment
international equity portion of a industry experience.
global balanced portfolio (1996-2001). o Head of global portfolio
o Director, International Research at selection team for Pacific Basin
PCM International (1989-1996). Equity: New York.
o Associate manager, structured debt
and equity group at Prudential Capital
Corporation (1988-1989).
o Analyst at Prudential-Bache Capital
Funding in London (1987-1988).
o Equity analyst in the healthcare
sector at Prudential Equity Management
Associates (1985-1987).
</TABLE>
The portfolio's Statement of Additional Information provides additional
information about the portfolio managers' investments in the portfolio, a
description of their compensation structure and information regarding other
accounts they manage.
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, independent registered public accounting firm, whose report, along with the
portfolio's financial statements, is included in the portfolio's annual report
(see "Shareholder reports" on the back cover).
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
Global Discovery Portfolio -- Class B
36
<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 (equities issued by
foreign-based companies and listed on foreign exchanges). Although the fund can
invest in companies of any size and from any country (other than the United
States), it invests mainly in common stocks of established companies in
countries with developed economies.
In choosing stocks, the portfolio managers use a combination of two analytical
disciplines:
Bottom-up research. The managers look for individual companies with a history of
above-average growth, strong competitive positioning, attractive prices relative
to potential growth, sound financial strength and effective management, among
other factors.
Top-down analysis. The managers consider the economic outlooks for various
sectors and industries, while looking for those that may benefit from changes in
the overall business environment.
The managers may favor different types of securities from different industries
and companies at different times, while still maintaining variety in terms of
the types of securities, issuers and countries represented.
The managers will normally sell a stock when the managers believe its price is
unlikely to go higher, its fundamentals have deteriorated or other investments
offer better opportunities.
The portfolio may lend its investment securities up to 33 1/3% of its total
assets to approved institutional borrowers who need to borrow securities in
order to complete certain transactions.
Although major changes tend to be infrequent, the Board of Trustees could change
the portfolio's investment objective without seeking shareholder approval.
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 is permitted, but not required, to use
various types of derivatives (contracts whose value is based on, for example,
indexes, currencies or securities). The portfolio may use derivatives in
circumstances where the managers believe they offer an economical means of
gaining exposure to a particular asset class or to keep cash on hand to meet
shareholder redemptions or other needs while maintaining exposure to the market.
For temporary defensive purposes, the portfolio may invest up to 100% of its
assets in Canadian and US government obligations or currencies, securities of
companies incorporated in and having their principal place of business in Canada
or the US or in relatively stable investments, such as money market securities.
In such a case, the portfolio would not be pursuing its investment objective.
However, the portfolio managers may choose not to use these strategies for
various reasons, even in very volatile market conditions.
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 cause the portfolio's performance to trail that of
other investments.
Stock Market Risk. As with most stock portfolios, an important factor with this
portfolio is how stock markets perform -- in this case, foreign markets. When
foreign 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. In
addition, movements in financial markets may adversely affect a stock's price,
regardless of how well the company performs. The market as a whole may not favor
the types of investments the portfolio makes and the portfolio may not be able
to get attractive prices for them.
Foreign Investment Risk. Foreign markets often exhibit more volatility than
those in the US. Investing in foreign securities involves greater risk than
investing in US securities for various reasons, including:
o Political Risk. Some foreign governments have limited the outflow of profits
to investors abroad, extended diplomatic disputes to include trade and
financial relations, and imposed high taxes on corporate profits.
o Information Risk. Financial reporting standards for companies based in
foreign markets are often less stringent than those applicable to US
companies and may present an incomplete or misleading picture of a foreign
company.
37
<PAGE>
o Liquidity Risk. Securities that trade less can be more difficult or more
costly to buy, or to sell, than more liquid or active securities. This
liquidity risk is a factor of the trading volume of a particular security, as
well as the size and liquidity of the entire local market. On the whole,
foreign markets are smaller and less liquid than the US market. This can make
buying and selling certain securities more difficult and costly. Relatively
small transactions in some instances can have a disproportionately large
effect on the price and supply of securities. In certain situations, it may
become virtually impossible to sell a security in an orderly fashion at a
price that approaches the managers' estimate of its value.
o Regulatory Risk. There is generally less government regulation of foreign
markets, companies and securities dealers than in the US.
o Currency Risk. The portfolio invests in foreign securities denominated in
foreign currencies. To the extent that the portfolio is exposed to non-dollar
currencies, if these currencies decline in value relative to the dollar, it
may reduce gains or increase losses.
Emerging Markets Risk. To the extent that the portfolio invests in emerging
markets to enhance overall returns, it may face higher political, information,
and stock market risks. In addition, profound social changes and business
practices that depart from norms in developed countries' economies have hindered
the orderly growth of emerging economies and their stock markets in the past.
High levels of debt tend to make emerging economies heavily reliant on foreign
capital and vulnerable to capital flight.
IPO Risk. Securities purchased in initial public offerings (IPOs) may be very
volatile, rising and falling rapidly, often based, among other reasons, on
investor perceptions rather than on economic factors. Additionally, investments
in IPOs may magnify the portfolio's performance if it has a small asset base.
The portfolio is less likely to experience a similar impact on its performance
as its assets grow because it is unlikely that the portfolio will be able to
obtain proportionately larger IPO allocations.
Derivatives Risk. Risks associated with derivatives include: the risk that the
derivative is not well correlated with the security, index or currency to which
it relates; the risk that derivatives used for risk management may not have the
intended effects and may result in losses or missed opportunities; the risk that
the portfolio will be unable to sell the derivative because of an illiquid
secondary market; the risk that a counterparty is unwilling or unable to meet
its obligation; the risk of interest rate movements and the risk that the
derivatives transaction could expose the portfolio to the effects of leverage,
which could increase the portfolio's exposure to the market and magnify
potential losses. There is no guarantee that derivatives activities will be
employed or that they will work, and their use could cause lower returns or even
losses to the portfolio.
Securities Lending Risk. Any loss in the market price of securities loaned by
the portfolio that occurs during the term of the loan would be borne by the
portfolio and would adversely affect the portfolio's performance. Also, there
may be delays in recovery of securities loaned or even a loss of rights in the
collateral should the borrower of the securities fail financially while the loan
is outstanding. However, loans will be made only to borrowers selected by the
portfolio's delegate after a review of relevant facts and circumstances,
including the creditworthiness of the borrower.
Pricing Risk. At times, market conditions might make it hard to value some
investments. For example, if the portfolio has valued its securities too highly,
you may end up paying too much for portfolio shares when you buy into the
portfolio. If the portfolio underestimates their price, you may not receive the
full market value for your portfolio shares when you sell.
Another factor that could affect performance is:
o the managers could be incorrect in their analysis of industries, companies,
economic trends, the relative attractiveness of different securities,
geographical trends or other matters
This portfolio is designed for investors who are interested in a broadly
diversified international investment with the emphasis on long-term growth of
capital.
38
<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 portfolio performance has 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.
The inception date for Class B shares is May 8, 1997. In the bar chart and the
table, the performance figures for Class B before that date are based on the
historical performance of the portfolio's original share class (Class A),
adjusted to reflect the higher gross total annual operating expenses of Class B.
Class A is offered in a different prospectus.
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 B shares
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10.84 14.50 8.79 18.28 54.13 -21.89 -30.81 -18.62 27.52
-------------------------------------------------------------------------------------------------------------------
</TABLE>
For the periods included in the bar chart:
Best Quarter: ___%, Q_ ____ Worst Quarter: ___%, Q_ ____
2005 Total Return as of March 31: ___%
Average Annual Total Returns (%) as of 12/31/2004
1 Year 5 Years 10 Years
------------------------------------------------------------------------------
Class B
Index 1
Index 2
------------------------------------------------------------------------------
Index 1: The MSCI EAFE Index is an unmanaged index that tracks international
stock performance in the 21 developed markets of Europe, Australasia and the Far
East.* Index 2: Morgan Stanley Capital International (MSCI) Europe, Australasia,
the Far East (EAFE) & Canada Index is an unmanaged capitalization-weighted
measure of stock markets in Europe, Australia, the Far East and Canada.
Current performance information may be higher or lower than the performance data
quoted above. For more recent performance information, contact your
participating insurance company.
* Effective July 1, 2004, the Morgan Stanley Capital International (MSCI)
Europe, Australasia, Far East (EAFE) Index replaced the MSCI EAFE + Canada
Index as the portfolio's benchmark index because the advisor believes it
is more appropriate to measure the portfolio's performance against the
MSCI EAFE Index as it more accurately reflects the portfolio's investment
strategy.
39
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
portfolio shares. The information in the table does not 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 increase
expenses.
Fee Table Class B
-------------------------------------------------------------------------------
Annual Operating Expenses, deducted from portfolio assets
-------------------------------------------------------------------------------
Management Fee %
-------------------------------------------------------------------------------
Distribution/Service (12b-1) Fee
-------------------------------------------------------------------------------
Other Expenses*
-------------------------------------------------------------------------------
Total Annual Operating Expenses
-------------------------------------------------------------------------------
* Restated to reflect estimated expenses for Class B shares resulting from
new compensation arrangements with participating insurance companies for
recordkeeping services.
Based on the costs above, this example helps you compare the expenses of Class B
shares to those of other mutual funds. This example assumes the expenses above
remain the same. It also assumes that you invested $10,000, earned 5% annual
returns, reinvested all dividends and distributions and sold your shares at the
end of each period. This is only an example; actual expenses will be different.
Example 1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------------------------------
Class B shares $ $ $ $
--------------------------------------------------------------------------------
The Portfolio Managers
The following people handle the day-to-day management of the portfolio:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Alex Tedder Sangita Uberoi, CFA
Managing Director of Deutsche Asset Management and Director, Deutsche Asset Management and Manager of
Lead Manager of the portfolio. the portfolio.
o Joined Deutsche Asset Management in 1994 and o Joined Deutsche Asset Management in 1994 and the
the portfolio in 2002. portfolio in 2004.
o Previously, four years of experience managing o Portfolio manager for EAFE Equities.
European equities and responsible for the o Previous experience includes two years in equity
insurance sector at Schroder Investment research and investments at Lehman Brothers and
Management. Smith Barney.
o Head of International Select Equity strategy;
portfolio manager and analyst for Core EAFE
strategy: London.
o MA, Freiburg University.
Matthias Knerr, CFA
Director, Deutsche Asset Management and Manager
of the portfolio.
o Joined Deutsche Asset Management in 1995 and the
portfolio in 2004.
o Portfolio manager for EAFE Equities and Global
Equities.
</TABLE>
The portfolio's Statement of Additional Information provides additional
information about the portfolio managers' investments in the portfolio, a
description of their compensation structure and information regarding other
accounts they manage.
40
<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, independent registered public accounting firm, whose report, along with the
portfolio's financial statements, is included in the annual report (see
"Shareholder reports" on the back cover).
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
International Portfolio -- Class B
41
<PAGE>
Health Sciences Portfolio
The Portfolio's Main Investment Strategy
Under normal circumstances, the portfolio seeks long-term growth of capital by
investing at least 80% of total assets, plus the amount of any borrowings for
investment purposes, in common stocks of companies in the health care sector.
For purposes of the portfolio's 80% investment policy, to be considered part of
the health care sector, companies must commit at least half of their assets to,
or derive at least half of their revenues or net income from, that sector. The
industries in the health care sector include pharmaceuticals, biotechnology,
medical products and supplies, and health care services. The companies may be of
any size. The portfolio will invest primarily in securities of US companies, but
may invest in foreign companies as well.
In choosing stocks, the portfolio managers use a combination of three analytical
disciplines:
Bottom-up research. The managers look for individual companies with a history of
above-average growth, strong competitive positioning, new tests or treatments,
the ability to take advantage of demographic trends, attractive prices relative
to potential growth, sound financial strength and effective management, among
other factors.
Growth orientation. The managers generally look for companies that they believe
have above-average potential for sustainable growth of revenue or earnings and
whose market value appears reasonable in light of their business prospects.
Top-down analysis. The managers consider the economic outlooks for various
industries within the health care sector while looking for those that may
benefit from changes in the overall business environment.
The managers may favor different types of securities from different industries
and companies within the health care sector at different times.
The managers will normally sell a stock when they believe its price is unlikely
to go higher, its fundamental factors have changed, other investments offer
better opportunities or in the course of adjusting its emphasis on a given
health care industry.
The portfolio may lend its investment securities up to 33 1/3% of its total
assets to approved institutional borrowers who need to borrow securities in
order to complete certain transactions.
Although major changes tend to be infrequent, the Board of Trustees could change
the portfolio's investment objective without seeking shareholder approval.
However, the Board will provide shareholders with at least 60 days' notice prior
to making any changes to the portfolio's 80% investment policy.
Other Investments
While the fund invests mainly in common stocks, it may also invest up to 20% of
total assets in US Treasury and agency debt securities.
The portfolio is permitted, but not required, to use various types of
derivatives (contracts whose value is based on, for example, indexes, currencies
or securities). In particular, the portfolio may use futures and options,
including sales of covered put and call options. The portfolio may use
derivatives in circumstances where the managers believe they offer an economical
means of gaining exposure to a particular asset class or to keep cash on hand to
meet shareholder redemptions or other needs while maintaining exposure to the
market.
As a temporary defensive measure, the portfolio could shift up to 100% of assets
into investments such as money market securities. This measure could prevent
losses, but, while engaged in a temporary defensive position, a fund will not be
pursuing its investment objective. However, the portfolio managers may choose
not to use these strategies for various reasons, even in very volatile market
conditions.
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 cause the portfolio's performance to trail that of
other investments.
Stock Market Risk. As with most stock funds, an important factor with this
portfolio is how stock markets perform -- in this case, health care stocks. When
prices of these stocks 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. In
addition, movements in financial markets may adversely affect a stock's price,
regardless of how well the company performs. The market as a whole may not favor
the types of investments the portfolio makes and the portfolio may not be able
to get attractive prices for them.
42
<PAGE>
Growth Investing Risk. Since growth companies usually reinvest a large portion
of earnings in their own businesses, growth stocks may lack the dividends
associated with value stocks that might otherwise cushion their decline in a
falling market. Earnings disappointments in growth stocks often result in sharp
price declines because investors tend to buy these stocks because of their
potential for superior earnings growth. Growth stocks may also be out of favor
for certain periods in relation to value stocks.
Concentration Risk. The fact that the portfolio concentrates its investments in
the industries of the health care sector increases stock market 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.
IPO Risk. Securities purchased in initial public offerings (IPOs) may be very
volatile, rising and falling rapidly, often based, among other reasons, on
investor perceptions rather than on economic factors. Additionally, investments
in IPOs may magnify the portfolio's performance if it has a small asset base.
The portfolio is less likely to experience a similar impact on its performance
as its assets grow because it is unlikely that the portfolio will be able to
obtain proportionately larger IPO allocations.
Derivatives Risk. Risks associated with derivatives include: the risk that the
derivative is not well correlated with the security, index or currency to which
it relates; the risk that derivatives used for risk management may not have the
intended effects and may result in losses or missed opportunities; the risk that
the portfolio will be unable to sell the derivative because of an illiquid
secondary market; the risk that a counterparty is unwilling or unable to meet
its obligation; the risk of interest rate movements and the risk that the
derivatives transaction could expose the portfolio to the effects of leverage,
which could increase the portfolio's exposure to the market and magnify
potential losses. There is no guarantee that derivatives activities will be
employed or that they will work, and their use could cause lower returns or even
losses to the portfolio.
Securities Lending Risk. Any loss in the market price of securities loaned by
the portfolio that occurs during the term of the loan would be borne by the
portfolio and would adversely affect the portfolio's performance. Also, there
may be delays in recovery of securities loaned or even a loss of rights in the
collateral should the borrower of the securities fail financially while the loan
is outstanding. However, loans will be made only to borrowers selected by the
portfolio's delegate after a review of relevant facts and circumstances,
including the creditworthiness of the borrower.
Pricing Risk. At times, market conditions might make it hard to value some
investments. For example, if the portfolio has valued its securities too highly,
you may end up paying too much for portfolio shares when you buy into the
portfolio. If the portfolio underestimates their price, you may not receive the
full market value for your portfolio shares when you sell.
Other factors that could affect performance include:
o the managers could be incorrect in their analysis of the industries,
companies, economic trends, the relative attractiveness of different sizes of
stocks, geographical trends or other matters
o foreign stocks tend to be more volatile than their US counterparts, for
reasons such as currency fluctuations and political and economic uncertainty
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.
43
<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 portfolio performance has 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 and one other relevant index (which,
unlike the portfolio, do not have any fees or expenses). The performance of both
the portfolio and the indexes varies over time. All figures on this page assume
reinvestment of dividends and distributions.
The inception date for Class B shares is July 1, 2002. In the bar chart and the
table, the performance figures for Class B before that date are based on the
historical performance of the portfolio's original share class (Class A),
adjusted to reflect the higher gross total annual operating expenses of Class B.
Class A is offered in a different prospectus.
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 B shares
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
-------------------------------------------------------------
2002 2003 2004
---- ---- ----
-23.21 33.21
-------------------------------------------------------------
For the periods included in the bar chart:
Best Quarter: ___%, Q_ ____ Worst Quarter: ___%, Q_ ____
2005 Total Return as of March 31: ___%
Average Annual Total Returns (%) as of 12/31/2004
1 Year Since Inception*
--------------------------------------------------------------------------------
Portfolio -- Class B
Index 1
Index 2
--------------------------------------------------------------------------------
Index 1: Standard & Poor's (S&P) 500 Index is a capitalization-weighted index of
500 stocks, designed to measure performance of the broad domestic economy
through changes in the aggregate market value of 500 stocks representing all
major industries.
Index 2: Goldman Sachs Healthcare Index is a market capitalization-weighted
index of 114 stocks designed to measure the performance of companies in the
health care sector.
* Portfolio inception: May 1, 2001. Index comparisons begin April 30, 2001.
In the bar chart and table, total returns for 2001 would have been lower if
operating expenses hadn't been reduced.
Current performance information may be higher or lower than the performance data
quoted above. For more recent performance information, contact your
participating insurance company.
44
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
portfolio shares. The information in the table does not 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 increase
expenses.
Fee Table Class B
--------------------------------------------------------------------------------
Annual Operating Expenses, deducted from portfolio assets
--------------------------------------------------------------------------------
Management Fee %
--------------------------------------------------------------------------------
Distribution/Service (12b-1) Fee
--------------------------------------------------------------------------------
Other Expenses*
--------------------------------------------------------------------------------
Total Annual Operating Expenses**
--------------------------------------------------------------------------------
* Restated to reflect estimated expenses for Class B shares resulting from
new compensation arrangements with participating insurance companies for
recordkeeping services.
** Pursuant to their respective agreements with Scudder
Variable Series I, the investment manager, the
underwriter and the accounting agent have agreed, for
the one year period commencing on May 1, 2004, to
limit their respective fees and to reimburse other
expenses to the extent necessary to limit total
operating expenses of Class B shares of Scudder Health
Sciences Portfolio to 1.35%.
Based on the costs above, this example helps you compare the expenses of Class B
shares to those of other mutual funds. This example assumes the expenses above
remain the same. It also assumes that you invested $10,000, earned 5% annual
returns, reinvested all dividends and distributions and sold your shares at the
end of each period. This is only an example; actual expenses will be different.
Example 1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------------------------------
Class B shares $ $ $ $
-----------------------------------------------------------------------------
The Portfolio Managers
The portfolio is managed by a team of investment professionals who each play an
important role in the portfolio's management process. This team works for the
advisor or its affiliates and is supported by a large staff of economists,
research analysts, traders and other investment specialists. The advisor or its
affiliates believe(s) its team approach benefits portfolio investors by bringing
together many disciplines and leveraging its extensive resources.
The portfolio is managed by a team of investment professionals who collaborate
to implement the portfolio's investment strategy. The team is led by a lead
portfolio manager who is responsible for developing the portfolio's investment
strategy. Each portfolio manager on the team has authority over all aspects of
the portfolio's investment portfolio, including but not limited to, purchases
and sales of individual securities, portfolio construction techniques, portfolio
risk assessment and the management of daily cash flows in accordance with
portfolio holdings.
45
<PAGE>
The following people handle the day-to-day management of the portfolio:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
James Fenger Leefin Lai, CFA, CPA Thomas Bucher, CFA
Managing Director of Deutsche Asset Managing Director of Deutsche Asset Director of Deutsche Asset
Management and Lead Portfolio Manager Management and Portfolio Manager of Management and Consultant to the
of the portfolio. the portfolio. portfolio.
o Joined Deutsche Asset Management o Joined Deutsche Asset Management o Joined Deutsche Asset Management
in 1983 and the portfolio in 2001. in 2001 and the portfolio in in 1995, previously serving as
o Over 20 years of investment 2001, previously serving as an analyst for European Chemical,
industry experience. analyst for Salomon Smith Barney Oil, Steel and Engineering
o MBA, University of Wisconsin. and Paine Webber and as Vice sectors and analyst/portfolio
President/analyst for Citigroup manager for Eastern European
Global Asset Management and equity, after one year of
Scudder Kemper Investments. experience as a trainee for
o Over 13 years of investment Deutsche Bank.
industry experience. o Head of global equity research
o MBA, University of Illinois. team for health care sector and
portfolio manager for European
Equity: Frankfurt.
o MA, University of Tuegingen,
Germany.
o Joined the portfolio in 2002.
</TABLE>
The portfolio's Statement of Additional Information provides additional
information about the portfolio managers' investments in the portfolio, a
description of their compensation structure and information regarding other
accounts they manage.
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, independent registered public accounting firm, whose report, along with the
portfolio's financial statements, is included in the annual report (see
"Shareholder reports" on the back cover).
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
Health Sciences Portfolio -- Class B
46
<PAGE>
Other Policies and Risks
While the previous pages describe the main points of each portfolio's strategy
and risks, there are a few other issues to know about:
o The portfolios may trade securities actively. This could raise transaction
costs and, accordingly, lower performance.
o The advisor measures credit quality at the time it buys securities, using
independent ratings or, for unrated securities, its own credit analysis. If a
security's credit quality declines, the advisor will decide what to do with
the security based on its assessment of what would benefit shareholders most.
For more information
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 of this prospectus tells you how to do this).
Keep in mind that there is no assurance that any portfolio will achieve its
objective.
Each portfolio's complete portfolio holdings as of the end of each calendar
month are posted on www.scudder.com ordinarily on the 15th day of the following
calendar month, or the first business day thereafter. This posted information
generally remains accessible at least until the portfolio files its Form N-CSR
or N-Q with the Securities and Exchange Commission for the period that includes
the date as of which the www.scudder.com information is current (expected to be
at least three months). The portfolios' Statement of Additional Information
includes a description of each portfolio's policies and procedures with respect
to the disclosure of the portfolio's portfolio holdings.
The Investment Advisor
Scudder Investments is part of Deutsche Asset Management, which is the marketing
name in the US for the asset management activities of Deutsche Bank AG, Deutsche
Investment Management Americas Inc. ("DeIM"), Deutsche Asset Management, Inc.,
Deutsche Asset Management Investment Services Ltd., Deutsche Bank Trust Company
Americas and Scudder Trust Company.
Deutsche Asset Management is a global asset management organization that offers
a wide range of investing expertise and resources, including hundreds of
portfolio managers and analysts and an office network that reaches the world's
major investment centers. This well-resourced global investment platform brings
together a wide variety of experience and investment insight across industries,
regions, asset classes and investing styles.
DeIM is an indirect, wholly owned subsidiary of Deutsche Bank AG. Deutsche Bank
AG is a major global banking institution that is engaged in a wide range of
financial services, including investment management, mutual fund, retail,
private and commercial banking, investment banking and insurance.
DeIM, which is part of Deutsche Asset Management, is the investment advisor for
each portfolio. Under the supervision of the Board of Trustees, DeIM, with
headquarters at 345 Park Avenue, New York, NY, makes each portfolio's investment
decisions, buys and sells securities for the portfolios and conducts research
that leads to these purchase and sale decisions. DeIM and its predecessors have
more than 80 years of experience managing mutual funds. The portfolios'
investment advisor provides a full range of investment advisory services to
institutional and retail clients. DeIM is also responsible for selecting brokers
and dealers and for negotiating brokerage commissions and dealer charges.
The advisor receives a management fee from each portfolio. Below are the actual
rates paid by each portfolio during the the most recent fiscal year, as a
percentage of each portfolio's average daily net assets.
Portfolio Name Fee Paid
--------------------------------------------------------------------------------
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 %
--------------------------------------------------------------------------------
47
<PAGE>
Subadvisor for Bond Portfolio, Balanced Portfolio and International Portfolio
Deutsche Asset Management Investment Services Ltd. ("DeAMIS"), One Appold
Street, London, England, an affiliate of the advisor, is the subadvisor to Bond
Portfolio (effective May 1, 2004), Balanced Portfolio (effective October __,
2004) and International Portfolio.
DeAMIS provides a full range of international investment advisory services to
institutional and retail clients. DeAMIS is an indirect, wholly owned subsidiary
of Deutsche Bank AG. DeIM compensates DeAMIS out of the management fee it
receives from each portfolio.
For Bond Portfolio and Balanced Portfolio, DeAMIS renders investment advisory
and management services including services related to foreign securities,
foreign currency transactions and related investments with regard to the portion
of the portfolio that is allocated to it by DeIM from time-to-time for
management.
Regulatory and litigation matters
Since at least July 2003, federal, state and industry regulators have been
conducting ongoing inquiries and investigations ("inquiries") into the mutual
fund industry, and have requested information from numerous mutual fund
companies, including Scudder Investments. It is not possible to determine what
the outcome of these inquiries will be or what the effect, if any, would be on
the funds or their advisors. Publicity about mutual fund practices arising from
these industry-wide inquiries serves as the general basis of a number of private
lawsuits against the Scudder portfolios. These lawsuits, which previously have
been reported in the press, involve purported class action and derivative
lawsuits, making various allegations and naming as defendants various persons,
including certain Scudder portfolios, the portfolios' investment advisors and
their affiliates, certain individuals, including in some cases portfolio
Trustees, officers, and other parties. Each Scudder portfolio's investment
advisor has agreed to indemnify the applicable Scudder portfolios in connection
with these lawsuits, or other lawsuits or regulatory actions that may be filed
making allegations similar to these lawsuits regarding market timing, revenue
sharing, fund valuation or other subjects arising from or related to the pending
inquiries. Based on currently available information, the funds' investment
advisors believe the likelihood that the pending lawsuits will have a material
adverse financial impact on a Scudder portfolio is remote and such actions are
not likely to materially affect their ability to perform under their investment
management agreements with the Scudder portfolios.
48
<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.
Policies about transactions
Each portfolio, except Money Market Portfolio, offers two classes of shares. The
information in this prospectus applies to Class B shares of each portfolio.
Class B shares are offered at net asset value and are subject to a 12b-1 fee.
Technically, the shareholders of Scudder Variable Series I (which includes the
portfolios just described) are the participating insurance companies (the
"insurance companies") that offer the portfolios as choices for holders of
certain variable annuity contracts or variable life insurance policies (the
"contract(s)") issued or sponsored by the insurance companies. The insurance
companies effectively pass through the ownership of portfolio shares to their
contract owners and some may pass through voting rights as well. The portfolios
do not sell shares directly to the public. The portfolios sell shares only to
separate accounts of insurance companies. As a contract owner, your premium
payments are allocated to a portfolio by the insurance companies in accordance
with your contract. Please see the contract prospectus that accompanies this
prospectus for a detailed explanation of your contract.
Please bear in mind that there are important differences between funds available
to any investor (a "Retail Fund") and those that are only available through
certain financial institutions, such as insurance companies. For example, Retail
Funds, unlike the portfolios, are not sold to insurance company separate
accounts to support investments in variable insurance contracts. In addition,
the investment objectives, policies and strategies of a portfolio, while similar
to those of a Retail Fund, are not identical. Retail Funds may be smaller or
larger than a portfolio and have different expense ratios than the portfolios.
As a result, the performance of a portfolio and a Retail Fund will differ.
Should any conflict between contract owners 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 contract
owners in that portfolio.
The portfolios have a verification process for new insurance company accounts to
help the government fight the funding of terrorism and money laundering
activities. Federal law requires all financial institutions to obtain, verify
and record information that identifies each insurance company that opens an
account. What this means to you: When an insurance company opens an account, the
portfolios will ask for its name, address and other information that will allow
a portfolio to identify the company. This information will be verified to ensure
the identity of all insurance companies opening an account.
For certain insurance companies, a portfolio might request additional
information (for instance, a portfolio would ask for documents such as the
insurance company's articles of incorporation) to help a portfolio verify the
insurance company's identity.
A portfolio will not complete the purchase of any shares for an account until
all information has been provided and the application has been submitted in
"good order." Once the application is determined to be in good order, the
purchase(s) will be effected at the net asset value per share next 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), that portfolio has adopted certain
procedures for the convenience of its shareholders and to ensure that Money
Market Portfolio receives investable funds.
A portfolio may reject a new account application if the insurance company
doesn't provide any required or requested identifying information, or for other
reasons.
The advisor, Scudder Distributors, Inc. and/or their affiliates may pay
additional compensation from their own assets to other persons for selling,
distributing and/or servicing portfolio shares. This compensation may be
significant. You should talk to your insurance company to determine if this
compensation influenced the advisor's recommendation of a portfolio.
49
<PAGE>
Buying and Selling Shares
Each portfolio is 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).
The portfolios continuously sell shares to each insurance company, without a
sales charge, at the net asset value per share next determined after a proper
purchase order is placed with the insurance company. The insurance company
offers contract owners units in its separate accounts which directly correspond
to shares in a portfolio. Each insurance company submits purchase and redemption
orders to a portfolio based on allocation instructions for premium payments,
transfer instructions and surrender or partial withdrawal requests for contract
owners, as set forth in the accompanying prospectus for the contracts. These
orders reflect the amount of premium payments to be invested, surrender and
transfer requests, and other matters. Redemption orders are effected at the next
net asset value per share determined after a proper redemption order is placed
with the insurance company. Contract owners should look at their contract
prospectuses for redemption procedures and fees.
Market Timing Policies and Procedures. Short-term and excessive trading of
portfolio shares may present risks to the portfolios' long-term shareholders,
including potential dilution in the value of portfolio shares, interference with
the efficient management of a portfolio (including losses on the sale of
investments), taxable gains to remaining shareholders and increased brokerage
and administrative costs. These risks may be more pronounced for portfolios
investing in certain securities such as those that trade in foreign markets, are
illiquid or do not otherwise have "readily available market quotations." Certain
investors may seek to employ short-term trading strategies aimed at exploiting
variations in portfolio valuation that arise from the nature of the securities
held by a portfolio (e.g., "time zone arbitrage").
The portfolio discourages short-term and excessive trading. Each portfolio will
take steps to detect and deter short-term and excessive trading pursuant to a
portfolio's policies as described in this prospectus and approved by the Board.
The portfolios' policies include:
o each portfolio reserves the right to reject or cancel a purchase or exchange
order for any reason when, in the opinion of the advisor, there appears to be
a pattern of short-term or excessive trading activity by a shareholder or any
other trading activity deemed harmful or disruptive to a portfolio; and
o for portfolios that invest some portion in foreign securities only -- each
portfolio has adopted certain fair valuation practices reasonably designed to
protect the portfolio from "time zone arbitrage" with respect to its foreign
securities holdings and other trading practices that seek to exploit
variations in portfolio valuation that arise from the nature of the
securities held by the portfolio. (See "How the portfolio/fund calculates
share price" in each portfolio's prospectus.)
o for portfolios that do not invest in foreign securities only -- each
portfolio will continue to use fair value pricing where appropriate under
policies approved by the portfolio's board. (See "How the portfolios
calculate share price.")
When a pattern of short-term or excessive trading activity or other trading
activity deemed harmful or disruptive to a portfolio by an investor is detected,
the advisor may determine to prohibit that investor from future purchases in the
portfolios or to limit or terminate the investor's exchange privilege. The
detection of these patterns and the banning of further trading are inherently
subjective and therefore involve some selectivity in their application. The
advisor seeks to make such determinations in a manner consistent with the
interests of the portfolios' long-term shareholders.
There is no assurance that these policies and procedures will be effective in
limiting short-term and excessive trading in all cases. For example, the advisor
may not be able to effectively monitor, detect or limit short-term or excessive
trading by underlying shareholders that occurs through omnibus accounts
maintained by broker-dealers or other financial intermediaries. Depending on the
amount of portfolio shares held in such omnibus accounts (which may represent
most of the portfolio's shares) short-term and/or excessive trading of portfolio
shares could adversely affect long-term shareholders in a portfolio. It is
important to note that shareholders that invest through omnibus accounts also
may be subject to the policies and procedures of their financial intermediaries
with respect to short-term and excessive trading in a portfolio.
Since Money Market Portfolio holds short-term instruments and is intended to
provide liquidity to shareholders, the advisor does not monitor or limit
short-term and excessive trading activity in Money Market Portfolio and,
accordingly, the Board has not approved any policies and procedures designed to
limit this activity. However, the portfolio reserves the right to and may reject
or cancel a purchase or exchange order into a money market fund for any reason,
including if, in the opinion of the advisor, there appears to be a pattern of
short-term and excessive trading by an investor in other Scudder funds.
50
<PAGE>
Important information about buying and selling shares
o After receiving a contract owner's order, the insurance company buys or sells
shares at the net asset value next calculated on any day a portfolio is open
for business.
o Unless otherwise instructed, a portfolio normally makes payment of the
proceeds from the sale of shares the next business day but always within
seven calendar days.
o The portfolios do not issue share certificates.
o The portfolios reserve the right to reject purchases of shares for any
reason.
o The portfolios reserve the right to withdraw or suspend the offering of
shares at any time.
o The portfolios reserve the right to reject purchases of shares or to suspend
or postpone redemptions at times when the New York Stock Exchange is closed
(other than customary closings), trading is restricted or when an emergency
exists that prevents a portfolio from disposing of its portfolio securities
or pricing its shares.
o The portfolios may refuse, cancel or rescind any purchase order; freeze any
account (meaning the insurance company will not be able to purchase shares in
its account); suspend account services; and/or involuntarily redeem the
account if we think that the account is being used for fraudulent or illegal
purposes by the insurance company; one or more of these actions will be taken
when, at the sole discretion of a portfolio, they are deemed to be in a
portfolio's best interest or when a portfolio is requested or compelled to do
so by governmental authority or by applicable law.
o The portfolios may close and liquidate an account if a portfolio is unable to
verify provided information, or for other reasons; if a portfolio decides to
close the account, the shares will be redeemed at the net asset value per
share next calculated after we determine to close the account; the insurance
company may be subject to gain or loss on the redemption of the portfolio
shares and may incur tax liability.
o A contract owner's purchase order may not be accepted if the sale of
portfolio shares has been suspended or if it is determined that the purchase
would be detrimental to the interests of a portfolio's shareholders.
o Currently, the Board of Trustees of Scudder Variable Series I does not
foresee any disadvantages to contract owners arising from the fact that the
interests of contract owners 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 to receive account information
If you are a contract owner, you should contact your insurance company or the
organization that provides record keeping services for information about your
account.
Please see the contract prospectus that accompanies this prospectus for the
customer service phone number.
How to buy and sell shares
Each insurance company has different provisions about how and when their
contract owners may buy and sell portfolio shares. Each insurance company is
responsible for communicating its contract owners' instructions to a portfolio.
Contract owners should contact their insurance company to effect transactions in
a portfolio.
How the Portfolios Calculate Share Price
To calculate net asset value per share or NAV, each portfolio uses the following
equation:
TOTAL ASSETS - TOTAL LIABILITIES
---------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
The price at which you sell shares for each portfolio is also the NAV.
For Money Market Portfolio, the share price or net asset value per share is
normally $1.00, calculated using amortized cost value (the method used by most
money market funds).
We typically value securities using information furnished by an independent
pricing service or market quotations, where appropriate. However, we may use
methods approved by the portfolios' Board, such as a fair valuation model, which
are intended to reflect fair value when pricing service information or market
quotations are not readily available or when a security's value or a meaningful
portion of the value of the portfolio is believed to have been materially
affected by a significant event, such as a natural disaster, an economic event
like a bankruptcy filing, or a substantial fluctuation in
51
<PAGE>
domestic or foreign markets, that has occurred between the close of the exchange
or market on which the security is principally traded (for example, a foreign
exchange or market) and the close of the New York Stock Exchange. In such a
case, each portfolio's value for a security is likely to be different from the
last quoted market price or pricing service information. In addition, due to the
subjective and variable nature of fair value pricing, it is possible that the
value determined for a particular asset may be materially different from the
value realized upon such asset's sale. It is expected that the greater the
percentage of portfolio assets that is invested in non-US securities, the more
extensive will be a portfolio's use of fair value pricing. This is intended to
reduce the portfolio's/fund's exposure to "time zone arbitrage" and other
harmful trading practices. (See "Market Timing Policies and Procedures.")
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 through the contract. This is
because some foreign markets are open on days and at times when the portfolios
don't price their shares.
Distributions
Money Market Portfolio intends to declare its net investment income as a
dividend daily and distribute dividends monthly. All other portfolios intend to
declare and distribute dividends from their net investment income and capital
gains, if any, annually. Any of the portfolios may make additional distributions
if necessary.
All distributions will be reinvested in shares of the portfolios unless we are
informed by an insurance company that they should be paid out in cash. The
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 qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended, and to meet
all requirements necessary to avoid paying any federal income or excise taxes.
Generally, owners of variable annuity and variable life contracts are not taxed
currently on income or gains realized with respect to such contracts. However,
some distributions from such contracts, whether made prior to or during the
annuity payment period, may be taxable at ordinary income tax rates. In
addition, distributions made to an owner who is younger than 59 1/2 may be
subject to a 10% penalty tax. 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.
In order for investors to receive the favorable tax treatment available to
holders of variable annuity and variable life contracts, the separate accounts
underlying such contracts, as well as the funds in which such accounts invest,
must meet certain diversification requirements. Each portfolio intends to comply
with these requirements. If a portfolio or separate account does not meet such
requirements, income allocable to the contracts associated with the separate
account would be taxable currently to the holders of such contracts and income
from prior periods with respect to such contracts also could be taxable.
Portfolio investments in securities of foreign issuers may be subject to
withholding and other taxes at the source, including on dividend or interest
payments. 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, including possible foreign, state or local taxes.
Marketing and Distribution Fees
Scudder Distributors, 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, which does not offer
separate classes of shares) 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 another
affiliated company rather than to the participating insurance company itself.
52
<PAGE>
The plan provides that Scudder Variable Series I, on behalf of each applicable
portfolio, will pay Scudder Distributors, 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.
53
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This page
intentionally
left blank.
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To Get More Information
Shareholder reports -- These include commentary from each portfolio's management
team about recent market conditions and a portfolio's performance. They also
have detailed performance figures, a list of everything each portfolio owns, and
its financial statements. Shareholders get these reports automatically.
Statement 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).
For a free copy of any of these documents or to request other information about
a portfolio, call (800) 778-1482, or contact Scudder Investments at the address
listed below. These documents and other information about each portfolio are
available from the EDGAR Database on the SEC's Internet site at www.sec.gov. If
you like, you may obtain copies of this information, after paying a copying fee,
by e-mailing a request to publicinfo@sec.gov or by writing the SEC at the
address listed below. You can also review and copy these documents and other
information about each portfolio, including each portfolio's SAI, at the SEC's
Public Reference Room in Washington, D.C. Information on the operation of the
SEC's Public Reference Room may be obtained by calling (202) 942-8090.
Scudder Distributors, Inc. SEC
222 South Riverside Plaza 450 Fifth Street, N.W.
Chicago, IL 60606-5808 Washington, D.C. 20549-0102
(800) 778-1482 (202) 942-8090
www.sec.gov
SEC File #
--------------------------------------------------------------------------------
Scudder Variable Series I 811-4257
--------------------------------------------------------------------------------
(05/01/05) SVSI-B
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
May 1, 2005
CLASS A AND B SHARES
SCUDDER VARIABLE SERIES I
Two International Place, Boston, Massachusetts 02110
1-800-778-1482
This combined Statement of Additional Information is not a prospectus. It should
be read in conjunction with the applicable prospectuses of Scudder Variable
Series I (the "Fund") dated May 1, 2005, as amended from time to time. The
prospectuses may be obtained without charge from the Fund by calling the
toll-free number listed above, and is also available along with other related
materials on the Securities and Exchange Commission Internet Web site
(http://www.sec.gov). The prospectus is also available from Participating
Insurance Companies.
Scudder Variable Series I offers a choice of nine portfolios (each a
"Portfolio," collectively, the "Portfolios"), to holders of certain variable
life insurance and variable annuity contracts offered by Participating Insurance
Companies.
The nine portfolios are:
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
<PAGE>
TABLE OF CONTENTS
Page
INVESTMENT RESTRICTIONS.......................................................1
INVESTMENT POLICIES AND TECHNIQUES............................................6
General Investment Policies.............................................6
MANAGEMENT OF THE FUND........................................................51
Investment Advisor......................................................51
Subadvisor -- Bond Portfolio and International Portfolio................56
Subadvisor -- Balanced Portfolio........................................56
Compensation of Portfolio Managers......................................57
FUND SERVICE PROVIDERS........................................................71
Principal Underwriter...................................................71
Transfer Agent..........................................................73
Custodian...............................................................73
Independent Registered Public Account Firm Reports to Shareholders......73
Legal Counsel...........................................................73
Fund Accounting Agent...................................................73
PORTFOLIO TRANSACTIONS........................................................74
PURCHASES AND REDEMPTIONS.....................................................76
DIVIDENDS, CAPITAL GAINS AND TAXES............................................77
NET ASSET VALUE...............................................................79
TRUSTEES AND OFFICERS.........................................................81
SHAREHOLDER COMMUNICATIONS....................................................88
FUND ORGANIZATION.............................................................89
PROXY VOTING GUIDELINES.......................................................91
ADDITIONAL INFORMATION........................................................92
FINANCIAL STATEMENTS..........................................................93
APPENDIX A....................................................................94
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INVESTMENT RESTRICTIONS
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 Investment Company Act of 1940, as amended
(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;
3. For all Portfolios (except Health Sciences Portfolio): concentrate its
investments in a particular industry, as that term is used in the 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;
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; or
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 Board of Trustees of the Fund has voluntarily
adopted policies and restrictions which are observed in the conduct of the
Fund's affairs. These represent intentions of the Board based upon current
circumstances. They differ from fundamental investment policies in that they may
be changed or amended by action of the Board without prior notice to or approval
of shareholders.
As a matter of nonfundamental policy, the Fund currently does not intend on
behalf of the indicated Portfolio(s):
1. For Money Market Portfolio: 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): 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): to
enter into either of reverse repurchase agreements or dollar rolls in an
amount greater than 5% of its total assets;
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4. For all Portfolios (except Money Market Portfolio): 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): 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): to enter into futures
contracts or purchase options thereon, unless immediately after the
purchase, the value of the aggregate initial margin with respect to such
futures contracts entered into on behalf of the Portfolio and the premiums
paid for such options on futures contracts does not exceed 5% of the fair
market value of the Portfolio's total assets; provided that in the case of
an option that is in-the-money at the time of purchase, and in-the-money
amount may be excluded in computing the 5% limit;
7. For all Portfolios (except Money Market Portfolio): to purchase warrants
if as a result, such securities, taken at the lower of cost or market
value, would represent more than 5% of the value of the Portfolio's total
assets (for this purpose, warrants acquired in units or attached to
securities will be deemed to have no value);
8. For all Portfolios (except Money Market Portfolio): to lend portfolio
securities in an amount greater than 33 1/3% of its total assets;
9. For Money Market Portfolio: to lend portfolio securities in an amount
greater than 5% of its total assets; and
10. For Money Market Portfolio: to invest more than 10% of total assets in
non-affiliated registered investment companies.
"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.")
Disclosure of Portfolio Holdings. Each Portfolio's complete portfolio holdings
as of the end of each calendar month are posted on www.scudder.com ordinarily on
the 15th day of the following calendar month, or the first business day
thereafter. This posted information generally remains accessible at least until
a Portfolio files its Form N-CSR or N-Q with the Securities and Exchange
Commission for the period that includes the date as of which the www.scudder.com
information is current (expected to be at least three months). Each Portfolio
does not disseminate nonpublic information about portfolio holdings except in
accordance with policies and procedures adopted by a Portfolio.
Each Portfolio's procedures permit nonpublic portfolio holdings information to
be shared with affiliates of the advisor, subadvisors, custodians, independent
registered public accounting firms, securities lending agents and other service
providers to a Portfolio who require access to this information to fulfill their
duties to a Portfolio, subject to the requirements described below. This
information may also be disclosed to certain mutual fund analysts and rating and
tracking agencies, such as Lipper, or other entities if a Portfolio has a
legitimate business purpose in providing the information sooner than 16 days
after month-end or on a more frequent basis, as applicable, subject to the
requirements described below.
Prior to any disclosure of a Portfolio's nonpublic portfolio holdings
information to the foregoing types of entities or persons, a person authorized
by a Portfolio's Trustees must make a good faith determination in light of the
facts then known that a Portfolio has a legitimate business purpose for
providing the information, that the disclosure is in the best interest of a
Portfolio, and that the recipient assents or otherwise has a duty to keep the
information confidential and agrees not to disclose, trade or make any
investment recommendation based on the information received. Periodic reports
regarding these procedures will be provided to a Portfolio's Trustees.
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Master/feeder Fund Structure
The Fund's Board of Trustees has 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.
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.
Money Market Portfolio purchases US Treasury bills, notes and bonds; obligations
of agencies and instrumentalities of the US 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
US 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 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 US Government. Securities and
instruments in which the Portfolio may invest may be issued by the US
Government, its agencies and instrumentalities, corporations, trusts, banks,
finance companies and other business entities.
Money Market Portfolio may invest in 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 US
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 US 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.
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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.
Bond Portfolio. Bond Portfolio seeks to provide a high level of income
consistent with a high quality portfolio of debt securities.
Balanced Portfolio. Balanced Portfolio seeks a balance of growth and income from
a diversified portfolio of equity and fixed income securities.
The portfolio normally invests between 50% and 75% of its net assets in common
stocks and other equity securities and 25% to 50% of its net assets in
investment grade bonds and other fixed-income 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 US banks. The
Portfolio may also enter into repurchase agreements with respect to US
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 US 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.
The Portfolio may also invest up to 15% of its total assets in credit default
swaps. Credit default swaps are used as a means of "buying" credit protection,
i.e., attempting to mitigate the risk of default or credit quality deterioration
in some portion of the Portfolio's holdings, or "selling" credit protection,
i.e., attempting to gain exposure to an underlying issuer's credit quality
characteristics without directly investing in that issuer. No more than 5% of
the Portfolio's assets may be invested in credit default swaps for the purposes
of buying credit protection. The Portfolio will only sell credit protection with
respect to securities in which it would be authorized to invest directly. The
Portfolio may also borrow up to 5% of the Portfolio's net assets against called
and tendered bonds in the Portfolio. For the risks associated with borrowing,
please see the "Borrowing" subsection of the "Investment Restrictions" section
of this SAI.
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.
Growth and Income Portfolio. Growth and Income Portfolio seeks long-term growth
of capital, current income and growth of income. The portfolio may invest up to
25% of its total assets in foreign securities.
Capital Growth Portfolio. Capital Growth Portfolio seeks to maximize long-term
capital growth through a broad and flexible investment program.
The Portfolio, as a matter of nonfundamental policy, 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). 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. 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. While the portfolio
invests mainly in US stocks, it could invest up to 25% of total assets in
foreign equity securities.
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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.
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.
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, US 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.
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 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 invests 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. The Portfolio will limit investments in securities of issuers
located in Eastern Europe to 5% of its total assets.
International Portfolio. International Portfolio seeks long-term growth of
capital primarily through diversified holdings of marketable foreign equity
investments. The Portfolio typically will invest in companies in at least three
different countries, excluding the United States.
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 US Government obligations or currencies, or securities
of companies incorporated in and having their principal activities in Canada or
the United States.
Health Sciences Portfolio. Under normal circumstances, Health Sciences Portfolio
seeks long-term growth of capital by investing at least 80% of total assets,
plus the amount of any borrowings for investment purposes, in common stocks of
companies in the health care sector. The Portfolio "concentrates," for purposes
of the 1940 Act, its assets in securities related to a particular industry or
group of related industries, which means that at least 25% of its net assets
will be invested in these assets at all times.
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. Health Sciences Portfolio
may invest up to 20% of total assets in debt securities, including bonds of
private issuers. The Portfolio may invest up to 20% of its total assets in US
Treasury securities, and agency and instrumentality obligations.
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Temporary Defensive Policy. For temporary defensive purposes, each Portfolio may
invest, without limit, in cash and cash equivalents, US government securities,
money market instruments and high quality debt securities without equity
features. In such a case, a Portfolio would not be pursuing, and may not
achieve, its investment objective.
INVESTMENT POLICIES AND TECHNIQUES
General Investment Policies
Scudder Variable Series I is an open-end, registered management investment
company established as a Massachusetts business trust. The Fund is a series fund
consisting of nine diversified portfolios: Money Market Portfolio, Bond
Portfolio, Balanced Portfolio, Growth and Income Portfolio, Capital Growth
Portfolio, 21st Century Growth Portfolio, Global Discovery Portfolio, Health
Sciences Portfolio and International Portfolio: (individually or collectively
hereinafter referred to as a "Portfolio" or the "Portfolios"). Additional
portfolios may be created from time to time. The Fund is intended to be the
funding vehicle for variable annuity contracts ("VA contracts") and variable
life insurance policies ("VLI policies") to be offered to the separate accounts
of certain life insurance companies ("Participating Insurance Companies").
Except for Money Market Portfolio, which does not offer separate classes of
shares, two classes of shares of each Portfolio of the Fund are currently
offered through 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 or 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 shareholders. There is no assurance that the objectives of any Portfolio
will be achieved.
Descriptions in this Statement of Additional Information of a particular
investment practice or technique in which a Portfolio may engage (such as short
selling, 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 Deutsche Investment Management
Americas Inc. ("DeIM" or the "Advisor"), in its discretion, might, but is not
required to, use in managing each Portfolio's assets. The Advisor may, in its
discretion, at any time employ such practice, technique or instrument for one or
more Portfolios but not for all investment companies 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.
It is possible that certain investment practices and techniques described below
may not be permissible for a Portfolio based on its investment restrictions, as
described herein, and in the Portfolio's applicable prospectus.
Bank Loans. Balanced Portfolio may invest in bank loans, which are typically
senior debt obligations of borrowers (issuers) and as such, are considered to
hold a senior position in the capital structure of the borrower. These may
include loans which hold the most senior position, that hold an equal ranking
with other senior debt, or loans that are, in the judgment of the Advisor, in
the category of senior debt of the borrower. This capital structure position
generally gives the holders of these loans a priority claim on some or all of
the borrower's assets in the event of a default. In most cases, these loans are
either partially or fully collateralized by the assets of a corporation,
partnership, limited liability company or other business entity, or by cash flow
that the Advisor believes has a market value at the time of acquisition that
equals or exceeds the principal amount of the loan. These loans are often issued
in connection with recapitalizations, acquisitions, leveraged buy-outs and
refinancings. It is important to note that Moody's and S&P generally rate bank
loans a notch or two higher than high yield bonds of the same issuer to reflect
their more senior position. The Portfolio may invest in both fixed- and
floating-rate loans. In addition, bank loans can trade either as an "assignment"
or "participation." When the Portfolio buys an assignment, it is essentially
becoming a party to the bank agreement. The vast majority of all trades are
assignments and would therefore generally represent the preponderance of bank
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loans held by the Portfolio. In certain cases, the Portfolio may buy bank loans
on a participation basis, if for example, the Portfolio did not want to become
party to the bank agreement. However, in all cases, the Portfolio will not
purchase bank loans where Deutsche Bank, or an affiliate, serves as an agent
bank.
Participations and assignments involve credit risk, interest rate risk,
liquidity risk, and the risk of being a lender. If the Portfolio purchases a
participation, it may only be able to enforce its rights through the lender, and
may assume the credit risk of both the lender and the borrower.
Investments in loans through direct assignment of a financial institution's
interests with respect to a loan may involve additional risks. For example, if a
loan is foreclosed, the purchaser could become part owner of any collateral, and
would bear the costs and liabilities associated with owning and disposing of the
collateral. In addition, it is at least conceivable that under emerging legal
theories of lender liability, a purchaser could be held liable as a co-lender.
In the case of loans administered by a bank or other financial institution that
acts as agent for all holders, if assets held by the agent for the benefit of a
purchaser are determined to be subject to the claims of the agent's general
creditors, the purchaser might incur certain costs and delays in realizing
payment on the loan or loan participation and could suffer a loss of principal
or interest.
In the case of loan participations where a bank or other lending institution
serves as financial intermediary between a fund and the borrower, if the
participation does not shift to the portfolio the direct debtor-creditor
relationship with the borrower, SEC interpretations require the portfolio, in
some circumstances, to treat both the lending bank or other lending institution
and the borrower as issuers for purposes of the Portfolio's investment policies.
Treating a financial intermediary as an issuer of indebtedness may restrict the
Portfolio's ability to invest in indebtedness related to a single financial
intermediary, or a group of intermediaries engaged in the same industry, even if
the underlying borrowers represent many different companies and industries.
Borrowing. As a matter of fundamental policy, each Portfolio (except Money
Market Portfolio) will not borrow money, except as permitted under the 1940 Act,
and as interpreted 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.
Asset-Backed Securities. Asset backed securities may include pools of mortgages
("mortgage-backed securities"), loans, receivables or other assets. Payment of
principal and interest may be largely dependent upon the cash flows generated by
the assets backing the securities. For purposes of determining the percentage of
a Portfolio's total assets invested in securities of issuers having their
principal business activities in a particular industry, asset backed securities
will be classified separately. Asset-backed securities present certain risks
that are not presented by mortgage-backed securities. Primarily, these
securities may not have the benefit of any security interest in the related
assets. Credit card receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set off certain amounts owed
on the credit cards, thereby reducing the balance due. There is the possibility
that recoveries on repossessed collateral may not, in some cases, be available
to support payments on these securities. Asset-backed securities are often
backed by a pool of assets representing the obligations of a number of different
parties. To lessen the effect of failures by obligors on underlying assets to
make payments, the securities may contain elements of credit support which fall
into two categories: (i) liquidity protection, and (ii) protection against
losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
results from payment of the insurance obligations on at least a portion of the
assets in the pool. This protection may be provided through guarantees, policies
or letters of credit obtained by the issuer or sponsor from third parties,
through various means of structuring the transaction or through a combination of
such approaches. The Portfolios will not pay any additional or separate fees for
credit support. The degree of credit support provided for each issue is
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generally based on historical information respecting the level of credit risk
associated with the underlying assets. Delinquency or loss in excess of that
anticipated or failure of the credit support could adversely affect the return
on an investment in such a security. The availability of asset-backed securities
may be affected by legislative or regulatory developments. It is possible that
such developments may require the funds to dispose of any then existing holdings
of such securities.
Asset-Indexed Securities. Health Sciences Portfolio may purchase asset-indexed
securities which are debt securities usually issued by companies in precious
metals related businesses such as mining, the principal amount, redemption
terms, or interest rates of which are related to the market price of a specified
precious metal. The Portfolio will only enter into transactions in publicly
traded asset-indexed securities. Market prices of asset-indexed securities will
relate primarily to changes in the market prices of the precious metals to which
the securities are indexed rather than to changes in market rates of interest.
However, there may not be a perfect correlation between the price movements of
the asset-indexed securities and the underlying precious metals. Asset-indexed
securities typically bear interest or pay dividends at below market rates (and
in certain cases at nominal rates). The Portfolio may purchase asset-indexed
securities to the extent permitted by law.
Bank and Savings and Loan Obligations. These obligations include negotiable
certificates of deposit, bankers' acceptances, deposit notes, fixed time
deposits or other short-term bank obligations. Certificates of deposit are
negotiable certificates evidencing the obligations of a bank to repay funds
deposited with it for a specified period of time. The Portfolios may invest in
certificates of deposit of large domestic banks and their foreign branches,
large US regulated subsidiaries of large foreign banks (i.e., banks which at the
time of their most recent annual financial statements show total assets in
excess of $1 billion), and of smaller banks as described below. Although the
Portfolios recognize that the size of a bank is important, this fact alone is
not necessarily indicative of its creditworthiness.
Certificates of Deposit and Bankers' Acceptances. Certificates of deposit are
receipts issued by a depository institution in exchange for the deposit of
funds. The issuer agrees to pay the amount deposited plus interest to the bearer
of the receipt on the date specified on the certificate. The certificate usually
can be traded in the secondary market prior to maturity. Bankers' acceptances
typically arise from short-term credit arrangements designed to enable
businesses to obtain funds to finance commercial transactions. Generally, an
acceptance is a time draft drawn on a bank by an exporter or an importer to
obtain a stated amount of funds to pay for specific merchandise. The draft is
then "accepted" by a bank that, in effect, unconditionally guarantees to pay the
face value of the instrument on its maturity date. The acceptance may then be
held by the accepting bank as an earning asset or it may be sold in the
secondary market at the going rate of discount for a specific maturity. Although
maturities for acceptances can be as long as 270 days, most acceptances have
maturities of six months or less.
Banker's acceptances are credit instruments evidencing the obligations of a bank
to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity.
Time deposits are non-negotiable deposits maintained in a banking institution
for a specified period of time at a stated interest rate. Time deposits which
may be held by a Portfolio will not benefit from insurance from the Bank
Insurance Fund or the Savings Association Insurance Fund administered by the
Federal Deposit Insurance Corporation. Fixed time deposits may be withdrawn on
demand by the investor, but may be subject to early withdrawal penalties that
vary with market conditions and the remaining maturity of the obligation. Fixed
time deposits subject to withdrawal penalties maturing in more than seven
calendar days are subject to a fund's limitation on investments in illiquid
securities.
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
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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.
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.
Commercial Paper. Commercial paper consists of short-term, unsecured promissory
notes issued to finance short-term credit needs. The commercial paper purchased
by a fund will consist only of direct obligations issued by domestic and foreign
entities.
Common Stocks. Balanced Portfolio, 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.
Convertible Securities. Bond Portfolio, Balanced Portfolio, Growth and Income
Portfolio, Capital Growth Portfolio, 21st Century Growth Portfolio, Global
Discovery Portfolio, International Portfolio and Health Sciences Portfolio 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 a Portfolio may invest include fixed-income
or zero coupon debt securities which may be converted or exchanged at a stated
or determinable exchange ratio into underlying shares of common stock. 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
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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").
Corporate Obligations. Investment in corporate debt obligations involves credit
and interest rate risk. The value of fixed-income investments will fluctuate
with changes in interest rates and bond market conditions, tending to rise as
interest rates decline and to decline as interest rates rise. Corporate debt
obligations generally offer less current yield than securities of lower quality,
but lower-quality securities generally have less liquidity, greater credit and
market risk, and as a result, more price volatility. Longer-term bonds are,
however, generally more volatile than bonds with shorter maturities.
Depositary Receipts. 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 are 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 US dollars will
be subject to foreign currency exchange rate risk. However, by investing in US
dollar-denominated ADRs rather than directly in foreign issuers' stock, a
Portfolio 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.
Dollar Roll Transactions. Dollar roll transactions consist of the sale by a
Portfolio to a bank or broker/dealer (the "counterparty") of GNMA certificates
or other mortgage-backed securities together with a commitment to purchase from
the counterparty similar, but not identical, securities at a future date, at the
same price. The counterparty receives all principal and interest payments,
including prepayments, made on the security while it is the holder. A Portfolio
receives a fee from the counterparty as consideration for entering into the
commitment to purchase. Dollar rolls may be renewed over a period of several
months with a different purchase and repurchase price fixed and a cash
settlement made at each renewal without physical delivery of securities.
Moreover, the transaction may be preceded by a firm commitment agreement
pursuant to which a Portfolio agrees to buy a security on a future date.
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Each Portfolio will segregate cash, US Government securities or other liquid
assets in an amount sufficient to meet their purchase obligations under the
transactions. The Portfolios will also maintain asset coverage of at least 300%
for all outstanding firm commitments, dollar rolls and other borrowings.
Dollar rolls may be treated for purposes of the of 1940 Act, as amended, as
borrowings of each Portfolio because they involve the sale of a security coupled
with an agreement to repurchase. A dollar roll involves costs to the Portfolio.
For example, while a Portfolio receives a fee as consideration for agreeing to
repurchase the security, the Fund forgoes the right to receive all principal and
interest payments while the counterparty holds the security. These payments to
the counterparty may exceed the fee received by the Portfolio, thereby
effectively charging the Portfolio interest on its borrowing. Further, although
a Portfolio can estimate the amount of expected principal prepayment over the
term of the dollar roll, a variation in the actual amount of prepayment could
increase or decrease the cost of the Portfolio's borrowing.
The entry into dollar rolls involves potential risks of loss that are different
from those related to the securities underlying the transactions. For example,
if the counterparty becomes insolvent, a Portfolio's right to purchase from the
counterparty might be restricted. Additionally, the value of such securities may
change adversely before a Fund is able to purchase them. Similarly, a Portfolio
may be required to purchase securities in connection with a dollar roll at a
higher price than may otherwise be available on the open market. Since, as noted
above, the counterparty is required to deliver a similar, but not identical
security to a Portfolio, the security that the Portfolio is required to buy
under the dollar roll may be worth less than an identical security. Finally,
there can be no assurance that each Portfolio's use of the cash that it receives
from a dollar roll will provide a return that exceeds borrowing costs.
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 US dollars, the conversion rates may be artificial to
the actual market values and may be adverse to the Portfolio.
Eurodollar Instruments. Each Portfolio may make investments in Eurodollar
instruments. Eurodollar instruments are US 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.
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Eurodollar Obligations. Eurodollar bank obligations are US dollar-denominated
certificates of deposit and time deposits issued outside the US capital markets
by foreign branches of US banks and US branches of foreign banks. Eurodollar
obligations are subject to the same risks that pertain to domestic issues,
notably credit risk, market risk and liquidity risk. Additionally, Eurodollar
obligations are subject to certain sovereign risks.
FHLMC Collateralized Mortgage Obligations. Federal Home Loan Mortgage
Corporation ("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.
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 US dollars may be affected favorably or
unfavorably by changes in foreign currency exchange rates and exchange control
regulations, and a 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 US 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.
Although a Portfolio values its assets daily in terms of US dollars, it does not
intend to convert its holdings of foreign currencies into US 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 typically 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.
Foreign Currency Transactions. Bond Portfolio, Balanced Portfolio, Capital
Growth Portfolio and International Portfolio 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.
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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 US 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
US dollars, they do not intend to convert their holdings of foreign currencies
into US 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 Commodity
Futures Trading Commission ("CFTC"), such as the Chicago Mercantile Exchange.
Futures contracts involve brokerage costs, which may vary from less than 1% to
2.5% of the contract price, and require parties to the contract to make "margin"
deposits to secure performance of the contract. International Portfolio would
also be required to segregate assets to cover contracts that would require it to
purchase foreign currencies. International Portfolio would enter into futures
contracts solely for hedging or other appropriate risk management purposes as
defined in CFTC regulations.
Forward contracts differ from foreign currency futures contracts in certain
respects. For example, the maturity date of a forward contract may be any fixed
number of days from the date of the contract agreed upon by the parties, rather
than a predetermined date in a given month, and they may be in any amounts
agreed upon by the parties rather than predetermined amounts. Also, forward
contracts are traded directly between currency traders so that no intermediary
is required. A forward contract generally requires no margin or other deposit.
Upon the maturity of a forward or foreign currency futures contract a Portfolio
may either accept or make delivery of the currency specified in the contract or,
at or prior to maturity, enter into a closing purchase transaction involving the
purchase or sale of an offsetting contract. Closing purchase transactions with
respect to forward contracts are usually effected with the currency trader who
is a party to the original forward contract. Closing purchase transactions with
respect to futures contracts are effected on a commodities exchange; a clearing
corporation associated with the exchange assumes responsibility for closing out
such contracts.
A Portfolio may enter into forward contracts and foreign currency futures
contracts under certain circumstances. When a Portfolio enters into a contract
for the purchase or sale of a security denominated in a foreign currency, or
when a Portfolio anticipates the receipt in a foreign currency of dividends or
interest payments on such a security which it holds, the Portfolio may desire to
"lock in" the US dollar price of the security or the US 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 US 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.
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Additionally, when management of a Portfolio believes that the currency of a
particular foreign country may suffer a substantial decline against the US
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 (each a "Custodian"), will
place cash or liquid securities into a segregated account of the Portfolio in an
amount equal to the value of the Portfolio's total assets committed to the
consummation of forward contracts (or the Portfolio's forward contracts will be
otherwise covered consistent with applicable regulatory policies) and foreign
currency futures contracts that require the Portfolio to purchase foreign
currencies. If the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account on a daily
basis so that the value of the account will equal the amount of the Portfolio's
commitments with respect to such contracts.
The Portfolios generally will not enter into a forward or foreign currency
futures contract with a term of greater than one year. It also should be
realized that this method of protecting the value of a Portfolio's securities
against a decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities. It simply establishes a rate of
exchange which the Portfolio can achieve at some future point in time.
While the Portfolios will enter into forward and, in the case of International
Portfolio, foreign currency futures contracts and foreign currency options to
reduce currency exchange rate risks, transactions in such contracts involve
certain other risks. Thus, while a Portfolio may benefit from such transactions,
unanticipated changes in currency prices may result in a poorer overall
performance for the Portfolio than if it had not engaged in any such
transaction. Moreover, there may be imperfect correlation between the value of
the Portfolio's holdings of securities denominated in a particular currency and
forward or futures contracts entered into by the Portfolio. Such imperfect
correlation may prevent the Portfolio from achieving a complete hedge or expose
the Portfolio to risk of foreign exchange loss.
International Portfolio may purchase options on foreign currencies for hedging
purposes in a manner similar to that of transactions in forward contracts. For
example, a decline in the dollar value of a foreign currency in which portfolio
securities are denominated will reduce the dollar value of such securities, even
if their value in the foreign currency remains constant. In order to protect
against such decreases in the value of portfolio securities, the Portfolio may
purchase put options on the foreign currency. If the value of the currency
declines, the Portfolio will have the right to sell such currency for a fixed
amount of dollars which exceeds the market value of such currency. This would
result in a gain that may offset, in whole or in part, the negative effect of
currency depreciation on the value of the Portfolio's securities denominated in
that currency.
Conversely, if a rise in the dollar value of a currency is projected for those
securities to be acquired, thereby increasing the cost of such securities,
International Portfolio may purchase call options on such currency. If the value
of such currency increased, the purchase of such call options would enable the
Portfolio to purchase currency for a fixed amount of dollars which is less than
the market value of such currency. Such a purchase would result in a gain that
may offset, at least partially, the effect of any currency related increase in
the price of securities the Portfolio intends to acquire. As in the case of
other types of options transactions, however, the benefit the Portfolio derives
from purchasing foreign currency options will be reduced by the amount of the
premium and related transaction costs. In addition, if currency exchange rates
do not move in the direction or to the extent anticipated, the Portfolio could
sustain losses on transactions in foreign currency options which would deprive
it of a portion or all of the benefits of advantageous changes in such rates.
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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.
Foreign Fixed Income Securities. Since most foreign fixed income securities are
not rated, a Portfolio will invest in foreign fixed income securities based on
the Advisor's analysis without relying on published ratings. Since such
investments will be based upon the Advisor's analysis rather than upon published
ratings, achievement of a Portfolio's goals may depend more upon the abilities
of the Advisor than would otherwise be the case.
The value of the foreign fixed income securities held by a Portfolio, and thus
the net asset value of a Portfolio's shares, generally will fluctuate with (a)
changes in the perceived creditworthiness of the issuers of those securities,
(b) movements in interest rates, and (c) changes in the relative values of the
currencies in which a Portfolio's investments in fixed income securities are
denominated with respect to the US Dollar. The extent of the fluctuation will
depend on various factors, such as the average maturity of a Portfolio's
investments in foreign fixed income securities, and the extent to which a
Portfolio hedges its interest rate, credit and currency exchange rate risks. A
longer average maturity generally is associated with a higher level of
volatility in the market value of such securities in response to changes in
market conditions.
Investments in sovereign debt, including Brady Bonds (Brady Bonds are debt
securities issued under a plan implemented to allow debtor nations to
restructure their outstanding commercial bank indebtedness), involve special
risks. Foreign governmental issuers of debt or the governmental authorities that
control the repayment of the debt may be unable or unwilling to repay principal
or pay interest when due. In the event of default, there may be limited or no
legal recourse in that, generally, remedies for defaults must be pursued in the
courts of the defaulting party. Political conditions, especially a sovereign
entity's willingness to meet the terms of its fixed income securities, are of
considerable significance. Also, there can be no assurance that the holders of
commercial bank loans to the same sovereign entity may not contest payments to
the holders of sovereign debt in the event of default under commercial bank loan
agreements. In addition, there is no bankruptcy proceeding with respect to
sovereign debt on which a sovereign has defaulted, and a Portfolio may be unable
to collect all or any part of its investment in a particular issue. Foreign
investment in certain sovereign debt is restricted or controlled to varying
degrees, including requiring governmental approval for the repatriation of
income, capital or proceeds of sales by foreign investors. These restrictions or
controls may at times limit or preclude foreign investment in certain sovereign
debt or increase the costs and expenses of a Portfolio.
Sovereign debt of emerging market governmental issuers is to be considered
speculative. 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. There is a history of defaults with
respect to commercial bank loans by public and private entities issuing
sovereign debt. All or a portion of the interest payments and/or principal
repayment with respect to sovereign debt may be uncollateralized. Obligations
arising from past restructuring agreements may affect the economic performance
and political and social stability of those issuers.
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.
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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.
Foreign Investment. Bond Portfolio, Balanced Portfolio, Growth and Income
Portfolio, Capital Growth Portfolio, 21st Century Growth Portfolio, Global
Discovery Portfolio and International Portfolio may each invest, except as
applicable to debt securities generally, in US 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 25% of its assets in non-US
dollar-denominated foreign debt securities. Balanced Portfolio may invest up to
20% of its debt securities in non-US dollar-denominated foreign debt securities,
and may invest up to 25% of its equity securities in non-US dollar-denominated
foreign equity securities. Growth and Income Portfolio may invest up to 25% of
its assets in non-US 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-US 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.
Foreign Securities. Foreign securities are normally denominated and traded in
foreign currencies. As a result, the value of the fund's foreign investments and
the value of its shares may be affected favorably or unfavorably by changes in
currency exchange rates relative to the US dollar. There may be less information
publicly available about a foreign issuer than about a US issuer, and foreign
issuers may not be subject to accounting, auditing and financial reporting
standards and practices comparable to those in the US. The securities of some
foreign issuers are less liquid and at times more volatile than securities of
comparable US issuers. Foreign brokerage commissions and other fees are also
generally higher than in the US. Foreign settlement procedures and trade
regulations may involve certain risks (such as delay in payment or delivery of
securities or in the recovery of the fund's assets held abroad) and expenses not
present in the settlement of investments in US markets. Payment for securities
without delivery may be required in certain foreign markets.
In addition, foreign securities may be subject to the risk of nationalization or
expropriation of assets, imposition of currency exchange controls or
restrictions on the repatriation of foreign currency, confiscatory taxation,
political or financial instability and diplomatic developments which could
affect the value of the fund's investments in certain foreign countries.
Governments of many 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 these
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. There is also generally less government
supervision and regulation of stock exchanges, brokers, and listed companies
than in the US. Dividends or interest on, or proceeds from the sale of, foreign
securities may be subject to foreign withholding taxes, and special US tax
considerations may apply. Moreover, foreign economies may differ favorably or
unfavorably from the US economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position.
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Legal remedies available to investors in certain foreign countries may be more
limited than those available with respect to investments in the US or in other
foreign countries. The laws of some foreign countries may limit the fund's
ability to invest in securities of certain issuers organized under the laws of
those foreign countries.
Of particular importance, many foreign countries 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 US and other countries with which they trade. These economies also have
been and may continue to be negatively impacted by economic conditions in the US
and other trading partners, which can lower the demand for goods produced in
those countries.
The risks described above, including the risks of nationalization or
expropriation of assets, typically are increased in connection with investments
in "emerging markets." For example, political and economic structures in these
countries may be in their infancy and developing rapidly, and such countries may
lack the social, political and economic stability characteristic of more
developed countries (including amplified risk of war and terrorism). Certain of
these countries have in the past failed to recognize private property rights and
have at times nationalized and expropriated the assets of private companies.
Investments in emerging markets may be considered speculative.
The currencies of certain emerging market countries have experienced
devaluations relative to the US dollar, and future devaluations may adversely
affect the value of assets denominated in such currencies. In addition, currency
hedging techniques may be unavailable in certain emerging market countries. Many
emerging market countries have experienced substantial, and in some periods
extremely high, rates of inflation or deflation for many years, and future
inflation may adversely affect the economies and securities markets of such
countries.
In addition, unanticipated political or social developments may affect the value
of investments in emerging markets and the availability of additional
investments in these markets. Any change in the leadership or politics of
emerging market countries, or the 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. The small size, limited trading volume and
relative inexperience of the securities markets in these countries may make
investments in securities traded in emerging markets illiquid and more volatile
than investments in securities traded in more developed countries. For example,
limited market size may cause prices to be unduly influenced by traders who
control large positions. In addition, the fund may be required to establish
special custodial or other arrangements before making investments in securities
traded in emerging markets. There may be little financial or accounting
information available with respect to issuers of emerging market securities, and
it may be difficult as a result to assess the value of prospects of an
investment in such securities.
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 fund's securities in such markets may
not be readily available. A fund may suspend redemption of its shares for any
period during which an emergency exists, as determined by the SEC. Accordingly
if a fund believes that appropriate circumstances exist, it will promptly apply
to the SEC for a determination that an emergency is present. During the period
commencing from a fund's identification of such condition until the date of the
SEC action, a fund's securities in the affected markets will be valued at fair
value determined in good faith by or under the direction of a fund's Board.
Certain of the foregoing risks may also apply to some extent to securities of US
issuers that are denominated in foreign currencies or that are traded in foreign
markets, or securities of US issuers having significant foreign operations.
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Futures Contracts. The Fund may, on behalf of Bond Portfolio, Balanced Portfolio
and International Portfolio, 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 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 "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 US stock indices which may be used
to hedge US 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.
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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.
High Yield/High Risk Bonds. Bond Portfolio, Balanced Portfolio, Capital Growth
Portfolio and Global Discovery Portfolio 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.
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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 payments in these securities and regulate corporate restructurings.
Such legislation may significantly depress the prices of outstanding securities
of this type.
Illiquid Securities and Restricted Securities. A 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.
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.
A Portfolio'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, a Portfolio 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.
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.
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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 US 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.
Interfund Borrowing and Lending Program. The Fund, on behalf of each Portfolio,
has received exemptive relief from the Securities and Exchange Commission
("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 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 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 Net Asset Value
("NAVs"). Index-based investments may not replicate exactly the performance of
their specified index because of transaction costs and because of the temporary
unavailability of certain component securities of the index.
Examples of index-based investments include:
SPDRs(R): SPDRs, an acronym for "Standard & Poor's Depositary Receipts," are
based on the S&P 500. 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.
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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 S&P 500. 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-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 for higher income which may be available
at lower grades.
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,
each Portfolio may use Uninvested Cash to purchase shares of affiliated funds
including money market funds, short-term bond funds and Scudder Cash Management
QP Trust and Scudder Trust Company, or one or more future entities for which
Deutsche Asset Management 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 1940 Act. Investment by a 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 a 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.
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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 US federal income tax purposes for
his or her proportionate share of such foreign taxes paid by a Portfolio. (See
"Dividends, Capital Gains and Taxes.")
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 involve 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 US 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 US.
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
therefore 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, particularly in emerging markets, are generally higher than
costs associated with transactions in US securities. Such transactions may also
involve additional costs for the purchase or sale of foreign currency.
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Certain emerging markets require prior governmental approval of investments by
foreign persons, limit the amount of investment by foreign persons in a
particular company, limit the investment by foreign persons only to a specific
class of securities of a company that may have less advantageous rights than the
classes available for purchase by domiciliaries of the countries and/or impose
additional taxes on foreign investors. Certain emerging markets may also
restrict investment opportunities in issuers in industries deemed important to
national interest.
Certain emerging markets may require governmental approval for the repatriation
of investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging market's
balance of payments or for other reasons, a country could impose temporary
restrictions on foreign capital remittances. 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 US, and
securities of many foreign companies are less liquid and more volatile than
securities of comparable US companies. Fixed commissions on foreign securities
exchanges are generally higher than negotiated commissions on US 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 US. Mail service between the US and
foreign countries may be slower or less reliable than within the US, 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 US 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.
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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.
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.
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.
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Both the European Community (the "EC") and Japan, among others, have made
overtures to establish trading arrangements and assist in the economic
development of the Eastern European nations. A great deal of interest also
surrounds opportunities created by the reunification of East and West Germany.
Following reunification, the Federal Republic of Germany has remained a firm and
reliable member of the EC and numerous other international alliances and
organizations. To reduce inflation caused by the unification of East and West
Germany, Germany has adopted a tight monetary policy which has led to weakened
exports and a reduced domestic demand for goods and services. However, in the
long-term, reunification could prove to be an engine for domestic and
international growth.
The conditions that have given rise to these developments are changeable, and
there is no assurance that reforms will continue or that their goals will be
achieved.
Portugal is a genuinely emerging market which has experienced rapid growth since
the mid-1980s, except for a brief period of stagnation over 1990-91. Portugal's
government remains committed to privatization of the financial system away from
one dependent upon the banking system to a more balanced structure appropriate
for the requirements of a modern economy. Inflation continues to be about three
times the EC average.
Economic reforms launched in the 1980s continue to benefit Turkey in the 1990s.
Turkey's economy has grown steadily since the early 1980s, with real growth in
per capita Gross Domestic Product (the "GDP") increasing more than 6% annually.
Agriculture remains the most important economic sector, employing approximately
55% of the labor force, and accounting for nearly 20% of GDP and 20% of exports.
Inflation and interest rates remain high, and a large budget deficit will
continue to cause difficulties in Turkey's substantial transformation to a
dynamic free market economy.
Like many other Western economies, Greece suffered severely from the global oil
price hikes of the 1970s, with annual GDP growth plunging from 8% to 2% in the
1980s, and inflation, unemployment, and budget deficits rising sharply. The fall
of the socialist government in 1989 and the inability of the conservative
opposition to obtain a clear majority have led to business uncertainty and the
continued prospects for flat economic performance. Once Greece has sorted out
its political situation, it will have to face the challenges posed by the
steadily increasing integration of the EC, including the progressive lowering of
trade and investment barriers. Tourism continues as a major industry, providing
a vital offset to a sizable commodity trade deficit.
Securities traded in certain emerging European securities markets may be subject
to risks due to the inexperience of financial intermediaries, the lack of modern
technology and the lack of a sufficient capital base to expand 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 Latin America. Investing in securities of Latin American issuers
may entail risks relating to the potential political and economic instability of
certain Latin American countries and the risks of expropriation,
nationalization, confiscation or the imposition of restrictions on foreign
investment and on repatriation of capital invested. In the event of
expropriation, nationalization or other confiscation by any country, the
Portfolio could lose its entire investment in any such country.
The securities markets of Latin American countries are substantially smaller,
less developed, less liquid and more volatile than the major securities markets
in the US. Disclosure and regulatory standards are in many respects less
stringent than US standards. Furthermore, there is a lower level of monitoring
and regulation of the markets and the activities of investors in such markets.
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The limited size of many Latin American securities markets and limited trading
volume in the securities of Latin American 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 US 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 US 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 US 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.
Investing in the Pacific Basin. Economies of individual Pacific Basin countries
may differ favorably or unfavorably from the US 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 US and other countries with
which they trade. These economies also have been and may continue to be
negatively impacted by economic conditions in the US 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 US companies.
Consequently, there may be less publicly available information about such
companies than about US companies. Moreover, there is generally less government
supervision and regulation in the Pacific Basin than in the US.
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).
Lending of Portfolio Securities. Each Portfolio (except Money Market Portfolio)
may lend its investment securities to approved institutional borrowers who need
to borrow securities in order to complete certain transactions, such as covering
short sales, avoiding failures to deliver securities or completing arbitrage
operations. By lending its investment securities, a portfolio attempts to
increase its net investment income through the receipt of interest on the loan.
Any gain or loss in the market price of the securities loaned that might occur
during the term of the loan would belong to a portfolio. A portfolio may lend
its investment securities so long as the terms, structure and the aggregate
amount of such loans are not inconsistent with the 1940 Act or the rules and
regulations or interpretations of the SEC thereunder, which currently require
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that (a) the borrower pledge and maintain with the portfolio collateral
consisting of liquid, unencumbered assets having a value at all times not less
than 100% of the value of the securities loaned, (b) the borrower add to such
collateral whenever the price of the securities loaned rises (i.e., the borrower
"marks to the market" on a daily basis), (c) the loan be made subject to
termination by a portfolio at any time, and (d) a portfolio receives reasonable
interest on the loan (which may include the portfolio investing any cash
collateral in interest bearing short-term investments), and distributions on the
loaned securities and any increase in their market value. There may be risks of
delay in recovery of the securities or even loss of rights in the collateral
should the borrower of the securities fail financially. However, loans will be
made only to borrowers selected by a portfolio's delegate after a commercially
reasonable review of relevant facts and circumstances, including the
creditworthiness of the borrower.
At the present time, the staff of the SEC does not object if an investment
company pays reasonable negotiated fees in connection with loaned securities, so
long as such fees are set forth in a written contract and approved by the
investment company's Board of Trustees. In addition, voting rights may pass with
the loaned securities, but if a material event occurs affecting an investment on
loan, the loan must be called and the securities voted. Pursuant to an exemptive
order granted by the SEC, cash collateral received by a portfolio may be
invested in a money market fund managed by the Advisor (or one of its
affiliates).
Letters of Credit. Municipal obligations, including certificates of
participation, commercial paper and other short-term obligations, may be backed
by an irrevocable letter of credit of a bank which assumes the obligation for
payment of principal and interest in the event of default by the issuer. Only
banks which, in the opinion of the Advisor, are of investment quality comparable
to other permitted investments of the Fund may be used for letter of credit
backed investments.
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 "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.
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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.
Maintenance of $1.00 Net Asset Value, Credit Quality and Portfolio Maturity.
Money Market Portfolio effects sales, redemptions and repurchases at the net
asset value per share, normally $1.00. In fulfillment of their responsibilities
under Rule 2a-7 of the 1940 Act, the Fund's Board has approved policies
established by the Fund's Advisor reasonably calculated to prevent the Fund's
net asset value per share from deviating from $1.00 except under unusual or
extraordinary circumstances and the Fund's Board will periodically review the
Advisor's operations under such policies at regularly scheduled Board meetings.
Those policies include a weekly monitoring by the Advisor of unrealized gains
and losses in the Fund's portfolio, and when necessary, in an effort to avoid
deviation, taking corrective action, such as adjusting the maturity of the
portfolio, or, if possible, realizing gains or losses to offset in part
unrealized losses or gains. The result of those policies may be that the yield
on shares of the Fund will be lower than would be the case if the policies were
not in effect. Such policies also provide for certain action to be taken with
respect to portfolio securities which experience a downgrade in rating or suffer
a default.
Micro-Cap Company Risk. While, historically, micro-capitalization company stocks
have outperformed the stocks of large companies, the former have customarily
involved more investment risk as well. There can be no assurance that this will
continue to be true in the future. Micro-capitalization 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 micro-capitalization 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 micro-capitalization companies normally have fewer shares
outstanding and these shares trade less frequently than large companies, it may
be more difficult for a fund to buy and sell significant amounts of such shares
without an unfavorable impact on prevailing market prices.
Some of the companies in which a fund 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 micro-capitalization 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, a fund
may need to discount the securities from recent prices or dispose of the
securities over a long period of time.
Mortgage-Backed Securities and Mortgage Pass-Through Securities. Bond Portfolio,
Balanced Portfolio, Global Discovery Portfolio and Growth and Income Portfolio
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.
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A decline in interest rates will often 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
"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 US Government corporation within the Department of
Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the US Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks, and mortgage bankers) and backed by
pools of FHA-insured or VA-guaranteed mortgages. These guarantees, however, do
not apply to the market value or yield of mortgage-backed securities or to the
value of Portfolio shares. Also, GNMA securities often are purchased at a
premium over the maturity value of the underlying mortgages. This premium is not
guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., not backed by the full faith and credit of
the US Government) include Fannie Mae and the "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 US Government.
FHLMC is a corporate instrumentality of the US 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 US 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.
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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.
Mortgage Dollar Rolls. Bond Portfolio and Balanced Portfolio may enter into
mortgage dollar rolls in which the Portfolio sells mortgage-backed securities
for delivery in the current month and simultaneously contracts to repurchase
similar, but not identical, securities on a fixed date. The Portfolio receives
compensation as consideration for entering into the commitment to repurchase.
The compensation is paid in the form of a fee which is recorded as deferred
income and amortized to income over the roll period, or alternatively, a lower
price for the security upon its repurchase. Mortgage dollar rolls may be renewed
with a new sale and repurchase price and a cash settlement made at each renewal
without physical delivery of the securities subject to the contract.
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 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
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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 US 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.
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.
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Participation Interests. A Portfolio may purchase from financial institutions
participation interests in securities in which a Portfolio may invest. A
participation interest gives a Portfolio an undivided interest in the security
in the proportion that a Portfolio's participation interest bears to the
principal amount of the security. These instruments may have fixed, floating or
variable interest rates, with remaining maturities of 397 days or less. If the
participation interest is unrated, or has been given a rating below that which
is permissible for purchase by a Portfolio, the participation interest will be
backed by an irrevocable letter of credit or guarantee of a bank, or the payment
obligation otherwise will be collateralized by US Government securities, or, in
the case of unrated participation interest, determined by the Advisor to be of
comparable quality to those instruments in which a Portfolio may invest. For
certain participation interests, a Portfolio will have the right to demand
payment, on not more than seven days' notice, for all or any part of a
Portfolio's participation interests in the security, plus accrued interest. As
to these instruments, a Portfolio generally intends to exercise its right to
demand payment only upon a default under the terms of the security.
Privatized Enterprises. Investments in foreign securities may include securities
issued by enterprises that have undergone or are currently undergoing
privatization. The governments of certain foreign countries have, to varying
degrees, embarked on privatization programs contemplating the sale of all or
part of their interests in state enterprises. A Portfolio's investments in the
securities of privatized enterprises may include privately negotiated
investments in a government or state-owned or controlled company or enterprise
that has not yet conducted an initial equity offering, investments in the
initial offering of equity securities of a state enterprise or former state
enterprise and investments in the securities of a state enterprise following its
initial equity offering.
In certain jurisdictions, the ability of foreign entities, such as a Portfolio,
to participate in privatizations may be limited by local law, or the price or
terms on which a Portfolio may be able to participate may be less advantageous
than for local investors. Moreover, there can be no assurance that governments
that have embarked on privatization programs will continue to divest their
ownership of state enterprises, that proposed privatizations will be successful
or that governments will not re-nationalize enterprises that have been
privatized.
In the case of the enterprises in which a Portfolio may invest, large blocks of
the stock of those enterprises may be held by a small group of stockholders,
even after the initial equity offerings by those enterprises. The sale of some
portion or all of those blocks could have an adverse effect on the price of the
stock of any such enterprise.
Prior to making an initial equity offering, most state enterprises or former
state enterprises go through an internal reorganization of management. Such
reorganizations are made in an attempt to better enable these enterprises to
compete in the private sector. However, certain reorganizations could result in
a management team that does not function as well as an enterprise's prior
management and may have a negative effect on such enterprise. In addition, the
privatization of an enterprise by its government may occur over a number of
years, with the government continuing to hold a controlling position in the
enterprise even after the initial equity offering for the enterprise.
Prior to privatization, most of the state enterprises in which a Portfolio may
invest enjoy the protection of and receive preferential treatment from the
respective sovereigns that own or control them. After making an initial equity
offering, these enterprises may no longer have such protection or receive such
preferential treatment and may become subject to market competition from which
they were previously protected. Some of these enterprises may not be able to
operate effectively in a competitive market and may suffer losses or experience
bankruptcy due to such competition.
Options. The Fund may, on behalf of each of the Bond, Balanced, Capital Growth
and International Portfolios, write covered call options on the portfolio
securities of such Portfolio in an attempt to enhance investment performance. A
call option is a contract generally having a duration of nine months or less
which gives the purchaser of the option, in return for a premium paid, the right
to buy, and the writer the obligation to sell, the underlying security at the
exercise price at any time upon the assignment of an exercise notice prior to
the expiration of the option, regardless of the market price of the security
during the option period. A covered call option is an option written on a
security which is owned by the writer throughout the option period. (See
"Strategic Transactions and Derivatives.")
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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.
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 US Treasury obligations, high-grade debt
securities or cash equal in value to the exercise price of the put option, will
have purchased a put option with a higher exercise price that will expire no
earlier than the put option written or will have used some combination of these
two methods. The Fund on behalf of each Portfolio, will only write put options
involving securities for which a determination is made that it wishes to acquire
the securities at the exercise price at the time the option is written.
A Portfolio may terminate its obligation as a writer of a call or put option by
purchasing an option with the same exercise price and expiration date as the
option previously written. This transaction is called a "closing purchase
transaction."
When a Portfolio writes an option, an amount equal to the net premium received
by the Portfolio is included in the liability section of the Portfolio Statement
of Assets and Liabilities as a deferred credit. The amount of the deferred
credit will be subsequently marked to market to reflect the current market value
of the option written. The current market value of a traded option is the last
sale price or, in the absence of a sale, the mean between the closing bid and
asked price. If an option expires on its stipulated expiration date or if the
Portfolio enters into a closing purchase transaction, the Portfolio will realize
a gain (or loss if the cost of a closing purchase transaction exceeds the
premium received when the option was sold), and the deferred credit related to
such option will be eliminated. If a call option is exercised, the Portfolio
will realize a gain or loss from the sale of the underlying security and the
proceeds of the sale will be increased by the premium originally received. The
writing of covered call options may be deemed to involve the pledge of the
securities against which the option is being written. Securities against which
call options are written will be segregated on the books of the custodian for
the Portfolio.
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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.
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.
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. (See "Strategic Transactions and
Derivatives.")
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.
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Options on futures can be used by a Portfolio to hedge substantially the same
risks as might be addressed by the direct purchase or sale of the underlying
futures contracts. If the Portfolio purchases an option on a futures contract,
it may obtain benefits similar to those that would result if it held the futures
position itself. But in contrast to a futures transaction, in which only
transaction costs are involved, benefits received in an option transaction will
be reduced by the amount of the premium paid as well as by transaction costs. In
the event of an adverse market movement, however, the Portfolio will not be
subject to a risk of loss on the option transaction beyond the price of the
premium it paid plus its transaction costs, and may consequently benefit from a
favorable movement in the value of its portfolio securities that would have been
more completely offset if the hedge had been effected through the use of
futures.
If a Portfolio writes options on futures contracts, the Portfolio will receive a
premium but will assume a risk of adverse movement in the price of the
underlying futures contract comparable to that involved in holding a futures
position. If the option is not exercised, the Portfolio will gain the amount of
the premium, which may partially offset unfavorable changes in the value of
securities held in or to be acquired for the Portfolio. If the option is
exercised, the Portfolio will incur a loss in the option transaction, which will
be reduced by the amount of the premium it has received, but which may partially
offset favorable changes in the value of its portfolio securities.
While the holder or writer of an option on a futures contract may normally
terminate its position by selling or purchasing an offsetting option of the same
series, the Portfolio's ability to establish and close out options positions at
fairly established prices will be subject to the maintenance of a liquid market.
A Portfolio will not purchase or write options on futures contracts unless, in
the Advisor's opinion, the market for such options has sufficient liquidity that
the risks associated with such options transactions are not at unacceptable
levels.
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 Receivables(SM) ("CARS(SM)"). CARS(SM)
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
CARS(SM) are passed through monthly to certificate holders, and are guaranteed
up to certain amounts and for a certain time period by a letter of credit issued
by a financial institution unaffiliated with the trustee or originator of the
trust. An investor's return on CARS(SM) may be affected by early prepayment of
principal on the underlying vehicle sales contracts. If the letter of credit is
exhausted, the trust may be prevented from realizing the full amount due on a
sales contract because of state law requirements and restrictions relating to
foreclosure sales of vehicles and the obtaining of deficiency judgments
following such sales or because of depreciation, damage or loss of a vehicle,
the application of federal and state bankruptcy and insolvency laws, or other
factors. As a result, certificate holders may experience delays in payments or
losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security interest in the related assets. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. There is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. To lessen the effect of failures
by obligors on underlying assets to make payments, the securities may contain
elements of credit support which fall into two categories: (i) liquidity
protection, and (ii) protection against losses resulting from ultimate default
by an obligor on the underlying assets. Liquidity protection refers to the
provision of advances, generally by the entity administering the pool of assets,
to ensure that the receipt of payments on the underlying pool occurs in a timely
fashion. Protection against losses results from payment of the insurance
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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.
Real Estate Investment Trusts ("REITs"). Bond Portfolio, Growth and Income
Portfolio, Global Discovery Portfolio and Health Sciences Portfolio may each
invest in REITs. REITs are sometimes informally categorized as equity REITs,
mortgage REITs and hybrid REITs. Investment in REITs may subject a Portfolio to
risks associated with the direct ownership of real estate, such as decreases in
real estate values, overbuilding, increased competition and other risks related
to local or general economic conditions, increases in operating costs and
property taxes, changes in zoning laws, casualty or condemnation losses,
possible environmental liabilities, regulatory limitations on rent and
fluctuations in rental income. Equity REITs generally experience these risks
directly through fee or leasehold interests, whereas mortgage REITs generally
experience these risks indirectly through mortgage interests, unless the
mortgage REIT forecloses on the underlying real estate. Equity REITs may also
realize capital gains by selling properties that have appreciated in value.
Changes in interest rates may also affect the value of a Portfolio's investment
in REITs. For instance, during periods of declining interest rates, certain
mortgage REITs may hold mortgages that the mortgagors elect to prepay, which
prepayment may diminish the yield on securities issued by those REITs.
Certain REITs have relatively small market capitalizations, which may tend to
increase the volatility of the market prices of their securities. Furthermore,
REITs are dependent upon specialized management skills, have limited
diversification and are, therefore, subject to risks inherent in operating and
financing a limited number of projects. REITs are also subject to heavy cash
flow dependency, defaults by borrowers and the possibility of failing to qualify
for tax-free pass-through of income under the Internal Revenue Code of 1986, as
amended, and to maintain exemption from the registration requirements of the
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.
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.
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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.
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.
Section 4(2) Paper. Subject to its investment objectives and policies, the Fund,
on behalf of the Money Market Portfolio, may invest in commercial paper issued
by major corporations under the Securities Act of 1933 in reliance on the
exemption from registration afforded by Section 3(a)(3) thereof. Such commercial
paper may be issued only to finance current transactions and must mature in nine
months or less. Trading of such commercial paper is conducted primarily by
institutional investors through investment dealers, and individual investor
participation in the commercial paper market is very limited. The Fund also may
invest in commercial paper issued in reliance on the so-called "private
placement" exemption from registration afforded by Section 4(2) of the
Securities Act of 1933 ("Section 4(2) paper"). Section 4(2) paper is restricted
as to disposition under the federal securities laws, and generally is sold to
institutional investors such as the Fund who agree that they are purchasing the
paper for investment and not with a view to public distribution. Any resale by
the purchaser must be in an exempt transaction. Section 4(2) paper normally is
resold to other institutional investors like the Fund through or with the
assistance of the issuer or investment dealers who make a market in the Section
4(2) paper, thus providing liquidity. The Advisor considers the legally
restricted but readily saleable Section 4(2) paper to be liquid; however,
pursuant to procedures approved by the Fund's Board, if a particular investment
in Section 4(2) paper is not determined to be liquid, that investment will be
included within the limitation of the Fund on illiquid securities. The Advisor
monitors the liquidity of its investments in Section 4(2) paper on a continuing
basis.
Securities Backed by Guarantees. On behalf of the Money Market Portfolio, the
Fund may invest in securities backed by guarantees from banks, insurance
companies and other financial institutions. A money market fund's ability to
maintain a stable share price may depend upon such guarantees, which are not
supported by federal deposit insurance. Consequently, changes in the credit
quality of these institutions could have an adverse impact on securities they
have guaranteed or backed, which could cause losses to a Fund and affect its
share price.
Securities Index Options. Bond Portfolio, Balanced Portfolio, Capital Growth
Portfolio and International Portfolio 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. (See "Strategic Transactions and Derivatives.")
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Unlike a securities option, which gives the holder the right to purchase or sell
a specified security at a specified price, an option on a securities index gives
the holder the right to receive a cash "exercise settlement amount" equal to (i)
the difference between the exercise price of the option and the value of the
underlying securities index on the exercise date, multiplied by (ii) a fixed
"index multiplier." In exchange for undertaking the obligation to make such cash
payment, the writer of the securities index option receives a premium.
A securities index fluctuates with changes in the market values of the
securities so included. Some securities index options are based on a broad
market index such as the S&P 500 or the NYSE Composite Index, or a narrower
market index such as the S&P 100. Indices are also based on an industry or
market segment such as the AMEX Oil and Gas Index or the Computer and Business
Equipment Index. Options on securities indexes are currently traded on exchanges
including the Chicago Board Options Exchange, Philadelphia Exchange, New York
Stock Exchange, and American Stock Exchange.
The effectiveness of hedging through the purchase of securities index options
will depend upon the extent to which price movements in the portion of the
securities portfolio being hedged correlate with price movements in the selected
securities index. Perfect correlation is not possible because the securities
holdings of a Portfolio will not exactly match the composition of the securities
indexes on which options are written. In addition, the purchase of securities
index options involves essentially the same risks as the purchase of options on
futures contracts. The principal risk is that the premium and transactions costs
paid by a Portfolio in purchasing an option will be lost as a result of
unanticipated movements in prices of the securities comprising the securities
index on which the option is written. Options on securities indexes also entail
the risk that a liquid secondary market to close out the option will not exist,
although a Portfolio will generally only purchase or write such an option if the
Advisor believes the option can be closed out.
Securities with Put Rights. On behalf of Money Market Portfolio, the Fund may
enter into put transactions with respect to obligations held in its portfolio
with broker/dealers pursuant to a rule under the 1940 Act and with commercial
banks.
The right of the Portfolio to exercise a put is unconditional and unqualified. A
put is not transferable by the Portfolios, although the Portfolio may sell the
underlying securities to a third party at any time. If necessary and advisable,
the Portfolio may pay for certain puts either separately in cash or by paying a
higher price for portfolio securities that are acquired subject to such a put
(thus reducing the yield to maturity otherwise available for the same
securities). The Portfolio expects, however, that puts generally will be
available without the payment of any direct or indirect consideration.
The Portfolio may enter into puts only with banks or broker/dealers that, in the
opinion of the Advisor, present minimal credit risks. The ability of the
Portfolio to exercise a put will depend on the ability of the bank or
broker/dealer to pay for the underlying securities at the time the put is
exercised. In the event that a bank or broker/dealer should default on its
obligation to repurchase an underlying security, the Portfolio might be unable
to recover all or a portion of any loss sustained from having to sell the
security elsewhere.
The Portfolio intends to enter into puts solely to maintain liquidity and does
not intend to exercise its rights thereunder for trading purposes. The puts will
only be for periods of substantially less than the life of the underlying
security. The acquisition of a put will not affect the valuation by the
Portfolio of the underlying security. The actual put will be valued at zero in
determining net asset value of the Portfolio. Where the Portfolio pays directly
or indirectly for a put, its cost will be reflected in realized gain or loss
when the put is exercised or expires. If the value of the underlying security
increases, the potential for unrealized or realized gain is reduced by the cost
of the put. The maturity of an obligation purchased by the Portfolio will not be
considered shortened by any put to which such obligation is subject.
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Short Sales Against the Box. Balanced Portfolio and Health Sciences Portfolio
may make short sales of common stocks if, at all times when a short position is
open, a 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." Each 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 a 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 a 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. Each Portfolio will segregate the common
stock or convertible or exchangeable preferred stock or debt securities in a
special account with the custodian. Each 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 a Portfolio may
enter into short sales against the box.
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.
Sovereign Debt. Investment in sovereign debt can involve a high degree of risk.
The governmental entity that controls the repayment of sovereign debt may not be
able or willing to repay the principal and/or interest when due in accordance
with the terms of such debt. A governmental entity's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the
governmental entity's policy toward the International Monetary Fund, and the
political constraints to which a governmental entity may be subject.
Governmental entities may also be dependent on expected disbursements from
foreign governments, multilateral agencies and others abroad to reduce principal
and interest arrearages on their debt. The commitment on the part of these
governments, agencies and others to make such disbursements may be conditioned
on a governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties commitments to lend funds to the governmental entity, which may further
impair such debtor's ability or willingness to service its debts in a timely
manner. Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt may be requested to participate in the rescheduling of
such debt and to extend further loans to governmental entities. There is no
bankruptcy proceeding by which sovereign debt on which governmental entities
have defaulted may be collected in whole or in part.
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.
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Stock index futures may be used to hedge the equity securities of each of
Balanced, Growth and Income, Capital Growth or International Portfolios with
regard to market (systematic) risk (involving the market's assessment of overall
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. (See "Strategic Transactions and Derivatives.")
Stripped Zero Coupon Securities. Zero coupon securities include securities
issued directly by the US Treasury, and US 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 US 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 US 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 US Treasury securities.
When US 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.
Third Party Puts. On behalf of the Money Market Portfolio, the Fund may purchase
long-term fixed rate bonds that have been coupled with an option granted by a
third party financial institution allowing a fund at specified intervals (not
exceeding 397 calendar days) to tender (or "put") the bonds to the institution
and receive the face value thereof (plus accrued interest). These third party
puts are available in several different forms, may be represented by custodial
receipts or trust certificates and may be combined with other features such as
interest rate swaps. A fund receives a short-term rate of interest (which is
periodically reset), and the interest rate differential between that rate and
the fixed rate on the bond is retained by the financial institution. The
financial institution granting the option does not provide credit enhancement,
and in the event that there is a default in the payment of principal or
interest, or downgrading of a bond or a loss of the bond's tax-exempt status,
the put option will terminate automatically, the risk to a Portfolio will be
that of holding such a long-term bond and the weighted average maturity of a
fund's portfolio would be adversely affected.
These bonds coupled with puts may present the same tax issues as are associated
with Stand-By Commitments. As with any Stand-By Commitments acquired by a
Portfolio, a fund intends to take the position that it is the owner of any
municipal obligation acquired subject to a third-party put, and that tax-exempt
interest earned with respect to such municipal obligations will be tax-exempt in
its hands. There is no assurance that the Internal Revenue Service will agree
with such position in any particular case. Additionally, the federal income tax
treatment of certain other aspects of these investments, including the treatment
of tender fees and swap payments, in relation to various regulated investment
company tax provisions is unclear. However, the Advisor seeks to manage a fund's
portfolio in a manner designed to minimize any adverse impact from these
investments.
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Supranational Entities. Supranational entities are international organizations
designated or supported by governmental entities to promote economic
reconstruction or development and international banking institutions and related
government agencies. Examples include the International Bank for Reconstruction
and Development (the World Bank), the European Coal and Steel Community, The
Asian Development Bank and the InterAmerican Development Bank. Obligations of
supranational entities are backed by the guarantee of one or more foreign
governmental parties which sponsor the entity.
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.
US Government Securities. There are two broad categories of US
Government-related debt instruments: (a) direct obligations of the US Treasury,
and (b) securities issued or guaranteed by US Government agencies.
Examples of direct obligations of the US Treasury are Treasury Bills, Notes,
Bonds and other debt securities issued by the US Treasury. These instruments are
backed by the "full faith and credit" of the United States. They differ
primarily in interest rates, the length of maturities and the dates of issuance.
Treasury bills have original maturities of one year or less. Treasury notes have
original maturities of one to ten years and Treasury bonds generally have
original maturities of greater than ten years.
Some agency securities are backed by the full faith and credit of the United
States (such as Maritime Administration Title XI Ship Financing Bonds and Agency
for International Development Housing Guarantee Program Bonds) and others are
backed only by the rights of the issuer to borrow from the US Treasury (such as
Federal Home Loan Bank Bonds and Federal National Mortgage Association Bonds),
while still others, such as the securities of the Federal Farm Credit Bank, are
supported only by the credit of the issuer. With respect to securities supported
only by the credit of the issuing agency or by an additional line of credit with
the US Treasury, there is no guarantee that the US Government will provide
support to such agencies and such securities may involve risk of loss of
principal and interest.
US Government Securities may include "zero coupon" securities that have been
stripped by the US Government of their unmatured interest coupons and
collateralized obligations issued or guaranteed by a US Government agency or
instrumentality.
Interest rates on US Government obligations may be fixed or variable. Interest
rates on variable rate obligations are adjusted at regular intervals, at least
annually, according to a formula reflecting then current specified standard
rates, such as 91-day US Treasury bill rates. These adjustments generally tend
to reduce fluctuations in the market value of the securities.
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The government guarantee of the US Government Securities in a Portfolio's
portfolio does not guarantee the net asset value of the shares of a fund. There
are market risks inherent in all investments in securities and the value of an
investment in a fund will fluctuate over time. Normally, the value of
investments in US Government Securities varies inversely with changes in
interest rates. For example, as interest rates rise the value of investments in
US Government Securities will tend to decline, and as interest rates fall the
value of a fund's investments will tend to increase. In addition, the potential
for appreciation in the event of a decline in interest rates may be limited or
negated by increased principal prepayments with respect to certain
Mortgage-Backed Securities, such as GNMA Certificates. Prepayments of high
interest rate Mortgage-Backed Securities during times of declining interest
rates will tend to lower the return of a fund and may even result in losses to a
fund if some securities were acquired at a premium. Moreover, during periods of
rising interest rates, prepayments of Mortgage-Backed Securities may decline,
resulting in the extension of a Portfolio's average portfolio maturity. As a
result, a Portfolio's portfolio may experience greater volatility during periods
of rising interest rates than under normal market conditions.
Variable Rate Securities. Balanced Portfolio and Money Market Portfolio, may
invest in Variable Rate Securities, instruments having rates of interest that
are adjusted periodically or that "float" continuously according to formulae
intended to minimize fluctuation in values of the instruments. The interest rate
of Variable Rate Securities ordinarily is determined by reference to or is a
percentage of an objective standard such as a bank's prime rate, the 90-day US
Treasury Bill rate, or the rate of return on commercial paper or bank
certificates of deposit. Generally, the changes in the interest rate on Variable
Rate Securities reduce the fluctuation in the market value of such securities.
Accordingly, as interest rates decrease or increase, the potential for capital
appreciation or depreciation is less than for fixed-rate obligations. Some
Variable Rate Demand Securities ("Variable Rate Demand Securities") have a
demand feature entitling the purchaser to resell the securities at an amount
approximately equal to amortized cost or the principal amount thereof plus
accrued interest. As is the case for other Variable Rate Securities, the
interest rate on Variable Rate Demand Securities varies according to some
objective standard intended to minimize fluctuation in the values of the
instruments. Each Portfolio determines the maturity of Variable Rate Securities
in accordance with Rule 2a-7, which allows a Portfolio to consider certain of
such instruments as having maturities shorter than the maturity date on the face
of the instrument.
Warrants. Each Portfolio (except Money Market Portfolio) may invest in warrants
up to 5% of the value of its total assets. The holder of a warrant has the
right, until the warrant expires, to purchase a given number of shares of a
particular issuer at a specified price. Such investments can provide a greater
potential for profit or loss than an equivalent investment in the underlying
security. Prices of warrants do not necessarily move, however, in tandem with
the prices of the underlying securities and are, therefore, considered
speculative investments. Warrants pay no dividends and confer no rights other
than a purchase option. Thus, if a warrant held by a Portfolio were not
exercised by the date of its expiration, the Portfolio would lose the entire
purchase price of the warrant.
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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.
Zero Coupon Securities. 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 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.
Strategic Transactions and Derivatives. Applicable to Bond, Growth and Income,
21st Century Growth, Global Discovery and Health Sciences Portfolios.
Bond Portfolio, Growth and Income Portfolio, 21st Century Growth Portfolio,
Global Discovery Portfolio 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, Bond, 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
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also be used to enhance potential gain although no more than 5% of the
Portfolio's assets (10% for Bond Portfolio) will be committed to Strategic
Transactions entered into for non-hedging purposes. Any or all of these
investment techniques may be used at any time and in any combination, and there
is no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of a Portfolio to utilize these
Strategic Transactions successfully will depend on the 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 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.
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With certain exceptions, OCC issued and exchange listed options generally settle
by physical delivery of the underlying security or currency, although in the
future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
Each Portfolio's ability to close out its position as a purchaser or seller of
an OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that may not 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 US
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.
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Each Portfolio may purchase and sell call options on securities including US
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 US 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 US
Treasury and agency securities, mortgage-backed securities, foreign sovereign
debt, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments (whether or not it holds the above
securities in its portfolio), and on securities indices, currencies and futures
contracts other than futures on individual corporate debt and individual equity
securities. Each Portfolio will not sell put options if, as a result, more than
50% of a Portfolio's total assets would be required to be segregated to cover
its potential obligations under such put options other than those with respect
to futures and options thereon. In selling put options, there is a risk that a
Portfolio may be required to buy the underlying security at a disadvantageous
price above the market price.
General Characteristics of Futures. Each Portfolio may enter into futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate, currency or equity market changes, and for
duration management, risk management and return enhancement purposes. Futures
are generally bought and sold on the commodities exchanges where they are listed
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by a Portfolio, as seller, to deliver
to the buyer the specific type of financial instrument called for in the
contract at a specific future time for a specified price (or, with respect to
index futures and Eurodollar instruments, the net cash amount). Options on
futures contracts are similar to options on securities except that an option on
a futures contract gives the purchaser the right in return for the premium paid
to assume a position in a futures contract and obligates the seller to deliver
such position.
The portfolios have claimed exclusion from the definition of the term "commodity
pool operator" adopted by the CFTC and the National Futures Association, which
regulate trading in the futures markets. Therefore, the Portfolios are not
subject to commodity pool operator registration and regulation under the
Commodity Exchange Act. Futures and options on futures may be entered into for
bona fide hedging, risk management (including duration management) or other
portfolio and return enhancement management purposes to the extent consistent
with the exclusion from commodity pool operator registration. 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 marked 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
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cash settlement, i.e., an option on an index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is specified). This amount of cash
is equal to the excess of the closing price of the index over the exercise price
of the option, which also may be multiplied by a formula value. The seller of
the option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Currency Transactions. Each Portfolio may engage in currency transactions with
Counterparties primarily in order to hedge, or manage the risk of the value of
portfolio holdings denominated in particular currencies against fluctuations in
relative value. Currency transactions include forward currency contracts,
exchange listed currency futures, exchange listed and OTC options on currencies,
and currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional difference among two or more currencies and operates similarly to an
interest rate swap, which is described below. Each Portfolio may enter into
currency transactions with Counterparties which have received (or the guarantors
of the obligations which have received) a credit rating of A-1 or P-1 by S&P or
Moody's, respectively, or that have an equivalent rating from a NRSRO or (except
for OTC currency options) are determined to be of equivalent credit quality by
the 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 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 US 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 US 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.
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Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to a Portfolio if it is unable to deliver or receive currency or funds
in settlement of obligations and could also cause hedges it has entered into to
be rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
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 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 currency, and other types of 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. A credit default swap is a
contract between a buyer and a seller of protection against a pre-defined credit
event. The buyer of protection pays the seller a fixed, regular fee. The seller
of protection provides the buyer with a contingent exchange that occurs upon a
credit event.
Swaps have special risks associated including possible default by the
counterparty to the transaction, illiquidity and, where swaps are used for
hedges, the risk that the use of a swap could result in losses greater than if
the swap had not been employed. Whether the use of swap agreements will be
successful in furthering its investment objective will depend on the Advisor's
ability to correctly predict whether certain types of investments are likely to
produce greater returns than other investments. Certain swap agreements may be
considered to be illiquid because they are two party contracts and because they
may have terms of greater than seven days. Moreover, a Portfolio bears the risk
of loss of the amount expected to be received under a swap agreement in the
event of the default or bankruptcy of a swap agreement counterparty.
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Risks of Strategic Transactions Outside the US. When conducted outside the US,
Strategic Transactions may not be regulated as rigorously as in the US, 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 US 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
US, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the US, and (v) lower trading volume
and liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that a Portfolio segregate cash or
liquid assets with its custodian to the extent a Portfolio's obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
a Portfolio to pay or deliver securities or assets must be covered at all times
by the securities, instruments or currency required to be delivered, or, subject
to any regulatory restrictions, an amount of cash or liquid assets at least
equal to the current amount of the obligation must be segregated with the
custodian. The segregated assets cannot be sold or transferred unless equivalent
assets are substituted in their place or it is no longer necessary to segregate
them. For example, a call option written by a Portfolio will require the
Portfolio to hold the securities subject to the call (or securities convertible
into the needed securities without additional consideration) or to segregate
cash or liquid assets sufficient to purchase and deliver the securities if the
call is exercised. A call option sold by a Portfolio on an index will require
the Portfolio to own portfolio securities which correlate with the index or to
segregate cash or liquid assets equal to the excess of the index value over the
exercise price on a current basis. A put option written by a Portfolio requires
the Portfolio to segregate cash or liquid assets equal to the exercise price.
Except when a Portfolio enters into a forward contract for the purchase or sale
of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates a Portfolio to buy or sell
currency will generally require a Portfolio to hold an amount of that currency
or liquid assets denominated in that currency equal to the Portfolio's
obligations or to segregate cash or liquid assets equal to the amount of a
Portfolio's obligation.
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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.
Risks of Specialized Investment Techniques Outside the US. When conducted
outside the US, the above described specialized investment techniques may not be
regulated as effectively as in the US; 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 US 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 US; (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
US; and (v) lower trading volume and liquidity.
MANAGEMENT OF THE FUND
Investment Advisor
Deutsche Investment Management Americas Inc. ("DeIM" or the "Advisor"), which is
part of Deutsche Asset Management (DeAM), is the investment advisor for each
Portfolio. Under the supervision of the Board of Trustees of the Fund, DeIM,
with headquarters at 345 Park Avenue, New York, New York, makes the Portfolios'
investment decisions, buys and sells securities for each Portfolio and conducts
research that leads to these purchase and sale decisions. DeIM and its
predecessors have more than 80 years of experience managing mutual funds. DeIM
provides a full range of investment advisory services to institutional and
retail clients. The Fund's investment advisor is also responsible for selecting
brokers and dealers and for negotiating brokerage commissions and dealer
charges.
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Deutsche Asset Management is the marketing name in the US for the asset
management activities of Deutsche Bank AG, DeIM, Deutsche Asset Management Inc.,
Deutsche Asset Management Investment Services Ltd., Deutsche Bank Trust Company
Americas and Scudder Trust Company. Deutsche Asset Management is a global asset
management organization that offers a wide range of investing expertise and
resources, including hundreds of portfolio managers and analysts and an office
network that reaches the world's major investment centers. This well-resourced
global investment platform brings together a wide variety of experience and
investment insight, across industries, regions, asset classes and investing
styles. DeIM is an indirect, wholly owned subsidiary of Deutsche Bank AG.
Deutsche Bank AG is a major global banking institution that is engaged in a wide
range of financial services, including investment management, mutual fund,
retail, private and commercial banking, investment banking and insurance.
DeIM, together with its predecessors, is one of the most experienced investment
counseling firms in the US. 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 Scudder introduced Scudder International Fund, Inc., the first mutual
fund available in the US investing internationally in securities of issuers in
several foreign countries. The predecessor firm to DeIM, Zurich Scudder
Investments, Inc. ("Scudder"), reorganized from a partnership to a corporation
on June 28, 1985. On December 31, 1997, Zurich Insurance Company ("Zurich")
acquired a majority interest in Scudder, and Zurich Kemper Investments, Inc., a
Zurich subsidiary, became part of Scudder. Scudder's name changed to Scudder
Kemper Investments, Inc. On January 1, 2001, the Advisor changed its name from
Scudder Kemper Investments, Inc. to Zurich Scudder Investments, Inc. On April 5,
2002, 100% of Scudder, not including certain UK operations (known as
Threadneedle Investments), was acquired by Deutsche Bank AG.
The Advisor or a subadvisor manages each Portfolio's daily investment and
business affairs subject to the policies established by the Board of Trustees.
Pursuant to an investment management agreement with each Portfolio (each an
"Agreement," and collectively, the Agreements"), the Advisor acts as each
Portfolio's investment advisor, manages its investments, administers its
business affairs, furnishes office facilities and equipment, provides clerical
and administrative services and permits its officers and employees to serve
without compensation as trustees or officers of one or both funds if elected to
such positions. To the extent permissible by law, the Advisor may appoint
certain of its affiliates as sub-advisors to perform certain of the Advisor's
duties.
The Advisor provides investment counsel for many individuals and institutions,
including insurance companies, industrial corporations, and financial and
banking organizations, as well as providing investment advice to open- and
closed-end SEC registered 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 Portfolios are based
primarily on the analyses of its own research department.
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.
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
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or more other clients are selling the security. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the 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 Portfolio. Purchase and sale orders for a Portfolio may be combined
with those of other clients of the Advisor in the interest of achieving the most
favorable net results to that Portfolio.
Each Portfolio is managed by a team of investment professionals who each play an
important role in a Portfolio's management process. Team members work together
to develop investment strategies and select securities for a Portfolio. This
team works for the Advisor or its affiliates and is supported by a large staff
of economists, research analysts, traders and other investment specialists. The
Advisor or its affiliates believe(s) its team approach benefits Portfolio
investors by bringing together many disciplines and leveraging its extensive
resources. Team members with primary responsibility for management of the
Portfolios, as well as team members who have other ongoing management
responsibilities for each Portfolio, are identified in each Portfolio's
prospectus, as of the date of the Portfolio's prospectus. Composition of the
team may change over time, and Portfolio shareholders and investors will be
notified of changes affecting individuals with primary Portfolio management
responsibility.
The current Agreements for all Portfolios, each dated April 5, 2002, were last
renewed by the Trustees on August 10, 2004. Each Agreement had an initial term
ending September 30, 2002 and continues in effect until September 30, 2005 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 Portfolio. 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.
Under the Agreements, the Advisor also 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 their business, subject to the direction and
control of the Trustees.
Pursuant to a sub-accounting and administrator agreement among the Advisor, SFAC
and State Street Bank and Trust Company ("SSB"), the Advisor has delegated
certain administrative functions to SSB under the fund's investment management
agreements. The costs and expenses of such delegation are borne by the Advisor,
not by the Fund.
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For its investment management services, the Advisor receives compensation
monthly at the following annual rates, and received the amounts for the years as
indicated, from each Portfolio:
<TABLE>
<CAPTION>
% of the average daily
net asset values of
Portfolio each Portfolio 2004 2003 2002
--------- -------------- ---- ---- ----
<S> <C> <C> <C> <C>
Money Market Portfolio 0.370% $314,670 $449,733
Bond Portfolio 0.475% 867,690 755,776
Balanced Portfolio 0.475% 643,415 716,548
Growth and Income Portfolio 0.475% 730,659 808,530
Capital Growth Portfolio* 2,927,691 3,274,898
21st Century Growth Portfolio** 0.875% 367,279 343,247
Global Discovery Portfolio*** 0.975% 1,456,437 1,401,011
International Portfolio+ 3,810,737 4,282,369
Health Sciences Portfolio++ 662,973 520,626
</TABLE>
* The investment management fee for the Capital Growth Portfolio is
calculated according to the following schedule: 0.475% of average daily
net assets on the first $500 million, 0.450% of average daily net assets
on the next $500 million and 0.425% of average daily net assets in excess
of $1 billion. As a result, the Advisor received compensation at an annual
rate of 0.47%, 0.47% and ____% for the fiscal years ended December 31,
2002, 2003 and 2004, respectively.
** Until April 30, 2005, the Advisor has agreed to limit total operating
expenses of 21st Century Growth Portfolio to 1.50%, of average daily net
assets for Class A and 1.75% of average daily net assets for Class B.
*** Until April 30, 2005, the Advisor agreed to waive all or a portion of its
management fee to limit the expenses of Global Discovery Portfolio to
1.25% of average daily net assets for Class A and 1.65% of average daily
net assets for Class B.
+ The investment management fee for International Portfolio is calculated
according to the following schedule: 0.875% of average daily net assets on
the first $500 million and 0.725% of average daily net assets in excess of
$500 million. As a result, the Advisor received compensation at an annual
rate of 0.87%, 0.875% and ____% for the fiscal years ended December 31,
2002, 2003 and 2004, respectively.
++ Health Sciences Portfolio commenced operations on May 1, 2001. The
investment management fee for the Health Sciences Portfolio is calculated
according to the following schedule: 0.750% of average daily net assets on
the first $250 million, 0.725% of average daily net assets on the next
$750 million, 0.700% of average daily net assets on the next $1.5 billion,
0.680% of average daily net assets on the next $2.5 billion, 0.650% of
average daily net assets on the next $2.5 billion, 0.640% of average daily
net assets on the next $2.5 billion, 0.630% of average daily net assets on
the next $2.5 billion and 0.620% of average daily net assets over $12.5
billion. The Advisor received compensation equivalent to an annual
effective rate of 0.56% during the fiscal year 2001 and during this period
the Advisor waived $23,371. The Advisor received compensation at an annual
rate of 0.75% for each of the fiscal years ended December 31, 2002 and
2003. Until April 30, 2005, the Advisor has agreed to maintain the
expenses, excluding 12b-1 fees, to 0.95% of average daily net assets for
Class A and 1.35% of average daily net assets for Class B.
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. 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.
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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.
In reviewing the terms of the Agreements and in discussions with the Advisor
concerning the Agreements, Independent Trustees (as defined in the 1940 Act) 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 Officers and Trustees of the Fund may have dealings with the Fund as
principals in the purchase or sale of securities, except as individual
subscribers to or holders of shares of the Fund.
The Agreement identifies the Advisor as the exclusive licensee of the rights to
use and sublicense the names "Scudder," "Scudder Investments" and "Scudder,
Stevens and Clark, Inc." (together, the "Scudder Marks"). Under this license,
the Trust, with respect to the fund, 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 Trust's investment products and services.
The term "Scudder Investments" is the designation given to the services provided
by the Advisor and its affiliates to the Scudder Family of Funds.
Board Considerations in Connection with Annual Renewal of Investment Management
Agreements for Scudder Variable Series I Fund and the Sub-Advisory Agreements
for Bond Portfolio, Balanced Portfolio and International Portfolio[TO BE
UPDATED]
As noted above, the Board of Trustees of Scudder Variable Series I approved the
continuation of each Portfolio's current agreement in August 2003. In connection
with their deliberations, the Trustees considered such information and factors
as they believed, in light of the legal advice furnished to them by their
independent legal counsel and their own business judgment, to be relevant to the
interests of the shareholders of the Portfolios. The factors considered by the
Trustees included, among others, the nature, quality and extent of services
provided by the Advisor to the Portfolios; investment performance, the
Portfolios themselves and relative to appropriate peer groups and market
indices; investment management fees, expense ratios and asset sizes of the
Portfolios themselves and relative to appropriate peer groups; the Advisor's
profitability from managing the Portfolios and other investment companies
managed by the Advisor before marketing expenses paid by the Advisor; possible
economies of scale; and possible financial and other benefits to the Advisor
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from serving as investment adviser and from affiliates of the Advisor providing
various services to the Portfolios. In assessing the possible financial and
other benefits to the Advisor and its affiliates, the benefits considered by the
Trustees included research services available to the Advisor by reason of
brokerage business generated by the Portfolios. The Trustees approved the
subadvisory agreements for International Portfolio, Bond Portfolio and Balanced
Portfolio on August 12, 2003, April 12, 2004 and ________, 2004, respectively.
The Trustees requested and received extensive information from the Advisor in
connection with their consideration of the factors cited above. The Trustees met
privately with their independent legal counsel on several occasions to review
this information, and requested and received additional information on a range
of topics. In conducting their review, the Trustees also considered the
Advisor's recent acquisition by Deutsche Bank AG, including the possible effects
of this transaction and the resulting organizational changes on the utility of
certain historic information regarding the Portfolios and the Advisor. To the
extent they deemed them relevant, the Trustees also considered the extensive
materials they had requested and received in connection with their consideration
of that acquisition of the Advisor. The Independent Trustees also considered
similar factors regarding the subadvisor for Bond Portfolio, Balanced Portfolio
and International Portfolio, to the extent applicable.
Subadvisor -- Bond Portfolio and International Portfolio
Deutsche Asset Management Investment Services Ltd. ("DeAMIS"), One Appold
Street, London, England, an affiliate of the Advisor, is the subadvisor for Bond
Portfolio and International Portfolio and is responsible for managing each
Portfolio's assets. DeAMIS provides a full range of international investment
advisory services to institutional and retail clients. The Advisor compensates
DeAMIS out of the management fee it receives from each portfolio.
Effective August 5, 2003 the Advisor pays DeAMIS for its services a sub-advisory
fee rate, payable monthly at the annual rate of 0.438% of International
Portfolio's average weekly net assets. The Advisor pays DeAMIS for its services
a sub-advisory fee rate, payable monthly at the annual rate of 0.50% of Bond
Portfolio's average weekly net assets.
The sub-advisory agreements provide that DeAMIS will not be liable for any error
of judgment or mistake of law or for any loss suffered by a Portfolio in
connection with matters to which the sub-advisory agreements relate, except a
loss resulting from willful misconduct, bad faith or gross negligence on the
part of DeAMIS in the performance of its duties or from reckless disregard by
DeAMIS of its obligations and duties under the sub-advisory agreement.
The sub-advisory agreements were first approved on April 12, 2004 and June 11,
2002 for Bond Portfolio and International Portfolio, respectively, and continue
in effect from year to year thereafter, but only as long as such continuance is
specifically approved at least annually (a) by a majority of the Trustees of the
Fund who are not parties to such agreement or interested persons of any such
party except in their capacity as Trustees of the Fund, and (b) by the
shareholders or the Board of Trustees of the Fund. The continuation of
International Portfolio's and Bond Portfolio's sub-advisory agreements were
approved on August 10, 2004. The sub-advisory agreement may be terminated at any
time upon 60 days' written notice by the Advisor or by the Board of Trustees of
the Fund or by vote of a majority of the outstanding voting securities of the
Portfolios, and will terminate automatically upon assignment or upon termination
of the Portfolios' investment management agreement.
Subadvisor -- Balanced Portfolio
Effective October 26, 2004, Deutsche Asset Management Investment Services
Limited ("DeAMIS"), One Appold Street, London, England, an affiliate of the
Advisor, is the subadvisor for Balanced Portfolio. DeAMIS serves as subadvisor
pursuant to the terms of a Research and Advisory Agreement between it and the
Advisor.
Under the terms of the Research and Advisory Agreement, DeAMIS manages the
investment and reinvestment of the Portfolio's portfolio and will provide such
investment advice, research and assistance as the Advisor may, from time to
time, reasonably request.
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The Advisor pays DeAMIS for its services a subadvisory fee, payable monthly, at
the annual rate of 0.50% of the Advisory Fee for Balanced Portfolio.
The Research and Advisory Agreement provides that DeAMIS will not be liable for
any error of judgment or mistake of law or for any loss suffered by the
Portfolio in connection with matters to which the Research and Advisory
Agreement relates, except a loss resulting from willful misconduct, bad faith or
gross negligence on the part of DeAMIS in the performance of its duties or from
reckless disregard by DeAMIS of its obligations and duties under the Research
and Advisory Agreement.
The Research and Advisory Agreement for Balanced Portfolio remains in effect
until September 30, 2005 unless sooner terminated or not annually approved as
described below. Notwithstanding the foregoing, the Research and Advisory
Agreement shall continue in effect until September 30, 2005 and year to year
thereafter, but only as long as such continuance is specifically approved at
least annually (a) by a majority of the Trustees of the Trust who are not
parties to such agreement or interested persons of any such party except in
their capacity as Trustees of the Trust, and (b) by the shareholders or the
Trustees of the Trust. The Research and Advisory Agreement may be terminated at
any time upon 60 days' notice by the Advisor or by the Board of Trustees of the
Trust or by majority vote of the outstanding shares of the Portfolio, and will
terminate automatically upon assignment or upon termination of the Portfolio's
investment management agreement.
Compensation of Portfolio Managers [TO BE UPDATED]
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 in connection with these arrangements. 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.
Codes of Ethics
The Fund, Advisor and subadvisor, as applicable, and the Fund's principal
underwriter have each adopted codes of ethics under rule 17j-1 of the 1940 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
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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 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.
FUND SERVICE PROVIDERS
Principal Underwriter
Pursuant to an underwriting agreement dated September 30, 2002, Scudder
Distributors, Inc., 222 South Riverside Plaza, Chicago, Illinois 60606 (the
"Distributor"), an affiliate of the Advisor, is the principal underwriter for
the Class A and Class B shares of each Portfolio.
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
Distributor 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, except
with respect to Class B shares, for which a 12b-l Plan is in effect which
provides that the Fund shall bear some or all of the distribution related
expenses attributable to such shares. 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.
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 a 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 commitment to
acquire shares of any Portfolio.
Each Portfolio has adopted a distribution plan under Rule 12b-1 (the "Plan")
that provides for fees payable as an expense of the Class B shares. Under the
plan, Scudder Variable Series I may make quarterly payments to the distributor
as reimbursement for distribution and shareholder servicing related expenses
incurred or paid by the distributor or a 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 .25% of the average
daily net assets of Class B shares during that quarterly period. The fee is
payable by the Fund, on behalf of each Portfolio, of up to 0.25% of the average
daily 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.
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Expenses of the Portfolios and of the Distributor in connection with the Rule
12b-1 plan for the Class B shares are set forth below:
Class B Shares* Fiscal Year 2003 Fiscal Year 2004
--------------- ---------------- ----------------
Growth and Income Portfolio $27,480
Capital Growth Portfolio $18,025
21st Century Growth Portfolio $6,246
Global Discovery Portfolio $19,924
International Portfolio $35,650
Health Sciences Portfolio $12,477
* Bond Portfolio and Balanced Portfolio do not have any outstanding Class B
shares.
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.
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 and who have no financial
interest in the operation of the Plan ("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.
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Transfer Agent
Scudder Investments Service Company ("SISC"), 811 Main Street, Kansas City,
Missouri 64105-2005, is the transfer and dividend 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 no fee 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.
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.
Pursuant to a sub-transfer agency agreement between SISC and DST Systems, Inc.
("DST"), SISC has delegated certain transfer agent and dividend paying agent
functions to DST. The costs and expenses of such delegation are borne by SISC,
not by the Funds.
Custodian
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.
Independent Registered Public Account Firm Reports to Shareholders
The Financial Highlights of the Portfolios included in the Fund's prospectuses
and the Financial Statements incorporated by reference into this Statement of
Additional Information have been so included or incorporated by reference in
reliance on the report of PricewaterhouseCoopers LLP, 125 High Street, Boston,
Massachusetts 02110, independent registered public accounting firm, 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. Shareholders will receive
annual audited financial statements and semiannual unaudited financial
statements.
Legal Counsel
The law firm of Ropes & Gray LLP, One International Place, Boston, Massachusetts
02110, is counsel for the Fund and its Independent Trustees.
Fund Accounting Agent
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
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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
Portfolios. 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.
Pursuant to a sub-administration and sub-accounting agreement among the Advisor,
SFAC and SSB, SFAC has delegated certain fund accounting functions to SSB under
each Portfolio's fund accounting agreement. The costs and expenses of such
delegation are borne by SFAC, not by the Portfolios.
The table below shows the fees paid to SFAC for the last three fiscal years.
Portfolio Fiscal 2004 Fiscal 2003 Fiscal 2002
--------- ----------- ----------- -----------
Money Market Portfolio $30,276 $28,979
Bond Portfolio $78,258 $59,250
Balanced Portfolio $59,616 $57,366
Growth and Income Portfolio $68,392 $69,585
Capital Growth Portfolio $108,362 $116,650
21st Century Growth Portfolio $44,980 $42,245
Global Discovery Portfolio $125,625 $142,659
International Portfolio $326,304 $353,261
Health Sciences Portfolio $47,373 $57,322
PORTFOLIO TRANSACTIONS
The Advisor is generally responsible for placing the orders for the purchase and
sale of portfolio securities, including the allocation of brokerage. With
respect to those portfolios/funds for which a sub-investment advisor manages the
portfolio's/fund's investments, references in this section to the "Advisor"
should be read to mean the Sub-Advisor.
The policy of the Advisor in placing orders for the purchase and sale of
securities for the portfolios/funds is to seek best execution, taking into
account such factors, among others, as price; commission (where applicable); the
broker-dealer's ability to ensure that securities will be delivered on
settlement date; the willingness of the broker-dealer to commit its capital and
purchase a thinly traded security for its own inventory; whether the
broker-dealer specializes in block orders or large program trades; the
broker-dealer's knowledge of the market and the security; the broker-dealer's
ability to maintain confidentiality; the financial condition of the
broker-dealer; and whether the broker-dealer has the infrastructure and
operational capabilities to execute and settle the trade. The Advisor seeks to
evaluate the overall reasonableness of brokerage commissions with commissions
charged on comparable transactions and compares the brokerage commissions (if
any) paid by the portfolios/funds to reported commissions paid by others. The
Advisor routinely reviews commission rates, execution and settlement services
performed and makes internal and external comparisons.
Commission rates on transactions in equity securities on U.S. securities
exchanges are subject to negotiation. Commission rates on transactions in equity
securities on foreign securities exchanges are generally fixed. Purchases and
sales of fixed-income securities and other over-the-counter securities are
effected on a net basis, without the payment of brokerage commissions.
Transactions in fixed income and other over-the-counter securities are generally
placed by the Advisor with the principal market makers for these securities
unless the Advisor reasonably believes more favorable results are available
elsewhere. Transactions with dealers serving as market makers reflect the spread
between the bid and asked prices. Purchases of underwritten issues will include
an underwriting fee paid to the underwriter. Money market instruments are
normally purchased in principal transactions directly from the issuer or from an
underwriter or market maker.
It is likely that the broker-dealers selected based on the considerations
described in this section will include firms that also sell shares of the
portfolios/funds to their customers. However, the Advisor does not consider
sales of shares of the portfolios/funds as a factor in the selection of
broker-dealers to execute portfolio transactions for the portfolios/funds and,
accordingly, has implemented policies and procedures reasonably designed to
prevent its traders from considering sales of shares of the portfolios/funds as
a factor in the selection of broker-dealers to execute portfolio transactions
for the portfolios/funds.
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The Advisor is permitted by Section 28(e) of the Securities Exchange Act of
1934, as amended ("1934 Act"), when placing portfolio transactions for a
portfolio/fund, to cause the portfolio/fund to pay brokerage commissions in
excess of that which another broker-dealer might charge for executing the same
transaction in order to obtain research and brokerage services. The Advisor,
however, does not as a matter of policy execute transactions with broker-dealers
for the portfolio/fund in order to obtain research from such broker-dealers that
is prepared by third parties (i.e., "third party research"). However, the
Advisor may from time to time, in reliance on Section 28(e) of the 1934 Act,
obtain proprietary research prepared by the executing broker-dealer in
connection with a transaction or transactions through that broker-dealer (i.e.,
"proprietary research"). Consistent with the Advisor's policy regarding best
execution, where more than one broker is believed to be capable of providing
best execution for a particular trade, the Advisor may take into consideration
the receipt of proprietary research in selecting the broker-dealer to execute
the trade. Proprietary research provided by broker-dealers may include, but is
not limited to, information on the economy, industries, groups of securities,
individual companies, statistical information, accounting and tax law
interpretations, political developments, legal developments affecting portfolio
securities, technical market action, pricing and appraisal services, credit
analysis, risk measurement analysis, performance analysis and measurement and
analysis of corporate responsibility issues. Proprietary research is typically
received in the form of written reports, telephone contacts and personal
meetings with security analysts, but may also be provided in the form of access
to various computer software and associated hardware, and meetings arranged with
corporate and industry representatives.
In reliance on Section 28(e) of the 1934 Act, the Advisor may also select
broker-dealers and obtain from them brokerage services in the form of software
and/or hardware that is used in connection with executing trades. Typically,
this computer software and/or hardware is used by the Advisor to facilitate
trading activity with those broker-dealers.
Proprietary research and brokerage services received from a broker-dealer chosen
to execute a particular trade may be useful to the Advisor in providing services
to clients other than the portfolio/fund making the trade, and not all such
information is used by the Advisor in connection with such portfolio/fund.
Conversely, such information provided to the Advisor by broker-dealers through
which other clients of the Advisor effect securities transactions may be useful
to the Advisor in providing services to the portfolio/fund.
The Advisor will monitor regulatory developments and market practice in the use
of client commissions to obtain research and brokerage services, whether
proprietary or third party.
Investment decisions for each portfolio/fund and for other investment accounts
managed by the Advisor are made independently of each other in light of
differing conditions. However, the same investment decision may be made for two
or more of such accounts. In such cases, simultaneous transactions are
inevitable. To the extent permitted by law, the Advisor may aggregate the
securities to be sold or purchased for a portfolio/fund with those to be sold or
purchased for other accounts in executing transactions. Purchases or sales are
then averaged as to price and commission and allocated as to amount in a manner
deemed equitable to each account. While in some cases this practice could have a
detrimental effect on the price paid or received by, or on the size of the
position obtained or disposed of for, the portfolio/fund, in other cases it is
believed that the ability to engage in volume transactions will be beneficial to
the portfolio/fund.
Deutsche Bank AG or one of its affiliates (or in the case of a sub-adviser, the
sub-adviser or one of its affiliates) may act as a broker for the
portfolios/funds and receive brokerage commissions or other transaction-related
compensation from the funds in the purchase and sale of securities, options or
futures contracts when, in the judgment of the Advisor, and in accordance with
procedures approved by the portfolios'/funds' Boards, the affiliated broker will
be able to obtain a price and execution at least as favorable as those obtained
from other qualified brokers and if, in the transaction, the affiliated broker
charges the portfolio/fund a rate consistent with that charged to comparable
unaffiliated customers in similar transactions.
The table below shows total brokerage commissions paid by each Portfolio then
existing for the last three fiscal years as applicable and, for the most recent
fiscal year, the percentage thereof that was allocated to firms based upon
research information provided.
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<TABLE>
<CAPTION>
Allocated to Firms
Based on
Research in
Portfolio Fiscal 2002 Fiscal 2003 Fiscal 2004 Fiscal 2004
--------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Money Market Portfolio $0 $0
Bond Portfolio $0 $0
Balanced Portfolio $146,093 $28,854
Growth And Income Portfolio $293,418 $141,538
Capital Growth Portfolio $351,893 $186,147
21st Century Growth Portfolio $115,527 $214,675
Global Discovery Portfolio $225,802 $209,722
International Portfolio $1,852,650 $1,586,007
Health Sciences Portfolio* $107,097 $160,579
</TABLE>
* Commenced operations May 1, 2001
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
Portfolio turnover rate is defined by the SEC as the ratio of the lesser of
sales or purchases to the monthly average value of securities owned during the
year, excluding all securities whose remaining maturities at the time of
acquisition were one year or less. Higher levels of activity by a Portfolio
result in higher transaction costs and may also result in taxes on realized
capital gains to be borne by a Portfolio's shareholders. Purchases and sales are
made whenever necessary, in the Advisor's discretion, to meet a Portfolio's
objective.
Portfolio turnover rates for the two most recent fiscal periods are as follows:
12/31/03 12/31/04
-------- --------
Bond Portfolio 242%
Balanced Portfolio 99%
Growth and Income Portfolio 37%
Capital Growth Portfolio 13%
Global Discovery Portfolio 41%
International Portfolio 119%
21st Century Growth Portfolio 113%
Health Sciences Portfolio* 64%
Higher levels of activity by a Portfolio result in higher transaction costs and
may also result in taxes on realized capital gains to be borne by the
Portfolio's shareholders. Purchases and sales are made whenever necessary, in
the Advisor's discretion, to meet a Portfolio's objective. Under the above
definition, Money Market Portfolio will have no portfolio turnover.
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
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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., as applicable, 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.
DIVIDENDS, CAPITAL GAINS AND TAXES
Money Market Portfolio
The net investment income of Money Market Portfolio is determined as of the
close of regular trading on the Exchange (normally 4 p.m. Eastern time) on each
day on which the Exchange is open for business. All of the net income so
determined normally will be declared as a dividend to shareholders of record as
of the close of regular trading on such Exchange after the purchase and
redemption of shares. Unless the business day before a weekend or holiday is the
last day of an accounting period, the dividend declared on that day will include
an amount in respect of the Portfolio's income for the subsequent non-business
day or days. No daily dividend will include any amount of net income in respect
of a subsequent semi-annual accounting period. Dividends commence on the next
business day after the date of purchase. Dividends will be invested in
additional shares of the Portfolio at the net asset value per share, normally
$1.00, determined as of the first business day of each month unless payment of
the dividend in cash has been requested.
Net investment income of Money Market Portfolio consists of all interest income
accrued on portfolio assets less all expenses of the Portfolio and amortized
market premium. Accredited 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
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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.
All Portfolios (except Money Market Portfolio)
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.
Each Portfolio of the Fund has elected to be treated as a regulated investment
company (a "RIC") under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). In order to qualify for the special tax treatment accorded
RICs and their shareholders, each Portfolio must, among other things, (a) derive
at least 90% of its gross income from dividends, interest, payments with respect
to certain securities loans, and gains from the sale or other disposition of
stock, securities and foreign currencies, or other income (including but not
limited to gains from options, futures, or forward contracts) derived with
respect to its business of investing in such stock, securities, or currencies;
(b) diversify its holdings so that, at the end of each quarter of its taxable
year, (i) at least 50% of the market value of the Portfolio's assets consists of
cash and cash items, US government securities, securities of other RICs, and
other securities limited in respect of any one issuer to a value not greater
than 5% of the value of the Portfolio's total assets and not more than 10% of
the outstanding voting securities of such issuer, and (ii) not more than 25% of
the value of its total assets is invested in the securities (other than those of
the US Government or other RICs) of any one issuer or of two or more issuers
which the fund controls and which are engaged in the same, similar, or related
trades or businesses; and (c) distribute to its shareholders with respect to
each taxable year at least 90% of the sum of its taxable net investment income,
its net tax-exempt income (if any), and, the excess, if any, of net short-term
capital gains over net long-term capital losses for such year. To the extent
each Portfolio qualifies for treatment as a RIC, it will not be subject to
federal income tax on income paid to its shareholders in the form of dividends
or capital gain distributions. Such qualification does not involve governmental
supervision or management of investment practices or policy.
If for any taxable year a Portfolio does not qualify for the special federal
income tax treatment afforded RICs, all of its taxable income will be subject to
federal income tax at regular corporate rates. In addition, the fund could be
required to recognize unrealized gains, pay substantial taxes and interest and
make substantial distributions before requalifying as a RIC that is accorded
special tax treatment.
Section 817(h) of the Code requires that the investments of a segregated asset
account (a "Separate Account") of an insurance company be "adequately
diversified" as provided therein or in accordance with US Treasury Regulations
in order for the account to serve as the basis for VA contracts or VLI policies.
Each Portfolio intends to comply with applicable requirements so that the
Portfolio's investments are "adequately diversified" for this purpose. Section
817(h) and the US Treasury Regulations thereunder provide the manner in which a
segregated asset account will treat investments in a RIC for purposes of the
diversification requirements. If a Portfolio satisfies certain conditions, a
Separate Account owning shares of the Portfolio will be treated as owning
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multiple investments consisting of the Separate Account's proportionate share of
each of the assets of the Portfolio. Each Portfolio intends to satisfy these
conditions so that the shares of the Portfolio owned by a segregated asset
account of an insurance company depositor will be treated as multiple
investments. If, however, a Portfolio is not "adequately diversified" within the
meaning of Section 817(h) of the Code, the VA contracts and VLI policies
supported by the Portfolio may not be treated as annuity or life insurance
contracts, as the case may be, for any period (or subsequent period) during
which the Portfolio is not "adequately diversified."
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 US federal income tax law relates solely to the
application of that law to US persons. Each shareholder which is not a US person
should consider the US and foreign tax consequences of ownership of shares of
the Portfolio, including the possibility that such a shareholder may be subject
to a US 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 US 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.
NET ASSET VALUE
The net asset value of each Portfolio is computed as of the close of regular
trading on the New York Stock Exchange (the "Exchange") on each day the Exchange
is open for regular trading (the "Value Time"). The Exchange is scheduled to be
closed on the following holidays: New Year's Day, Dr. Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas, and on the preceding Friday or subsequent Monday
when one of these holidays falls on a Saturday or Sunday, respectively. Net
asset value per share is determined separately for each class of shares by
dividing the net asset value of such class, which is the value of the total
assets of each Portfolio attributable to the shares of that class, less all
liabilities attributable to that class, by the total number of shares of that
class outstanding. The per share net asset value may be lower for certain
classes of each Portfolio because of higher expenses borne by these classes.
An equity security is valued at its most recent sale price on the security's
primary exchange or OTC market as of the Value Time. Lacking any sales, the
security is valued at the calculated mean between the most recent bid quotation
and the most recent asked quotation (the "Calculated Mean") on such exchange or
OTC market as of the Value Time. If it is not possible to determine the
Calculated Mean, the security is valued at the most recent bid quotation on such
exchange or OTC market as of the Value Time. In the case of certain foreign
exchanges or OTC markets, the closing price reported by the exchange or OTC
market (which may sometimes be referred to as the "official close" or the
"official closing price" or other similar term) will be considered the most
recent sale price.
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Debt securities are valued as follows. Money market instruments purchased with
an original or remaining maturity of 60 days or less, maturing at par, are
valued at amortized cost. Other money market instruments are valued based on
information obtained from an approved pricing agent or, if such information is
not readily available, by using matrix pricing techniques (formula driven
calculations based primarily on current market yields). Bank loans are valued at
prices supplied by an approved pricing agent (which are intended to reflect the
mean between the bid and asked prices), if available, and otherwise at the mean
of the most recent bid and asked quotations or evaluated prices, as applicable,
based on quotations or evaluated prices obtained from one or more
broker-dealers. Privately placed debt securities, other than Rule 144A debt
securities, initially are valued at cost and thereafter based on all relevant
factors including type of security, size of holding and restrictions on
disposition. Municipal debt securities are valued at prices supplied by an
approved pricing agent (which are intended to reflect the mean between the bid
and asked prices), if available, and otherwise at the average of the means based
on the most recent bid and asked quotations or evaluated prices obtained from
two broker-dealers. Other debt securities are valued at prices supplied by an
approved pricing agent, if available, and otherwise at the most recent bid
quotation or evaluated price, as applicable, obtained from one or more
broker-dealers. If it is not possible to value a particular debt security
pursuant to the above methods, the security is valued on the basis of factors
including (but not limited to) maturity, coupon, creditworthiness, currency
denomination, and the movement of the market in which the security is normally
traded.
An exchange-traded option contract on securities, currencies and other financial
instruments is valued at its most recent sale price on such exchange. Lacking
any sales, the option contract is valued at the Calculated Mean. If it is not
possible to determine the Calculated Mean, the option contract is valued at the
most recent bid quotation in the case of a purchased option contract or the most
recent asked quotation in the case of a written option contract, in each case as
of the Value Time. An option contract on securities, currencies and other
financial instruments traded in the OTC market is valued at the evaluated price
provided by the broker-dealer with which it was traded. Futures contracts (and
options thereon) are valued at the most recent settlement price, if available,
on the exchange on which they are traded most extensively. With the exception of
stock index futures contracts which trade on the Chicago Mercantile Exchange,
closing settlement times are prior to the close of trading on the New York Stock
Exchange. For stock index futures contracts which trade on the Chicago
Mercantile Exchange, closing settlement prices are normally available at
approximately 4:20 Eastern time. If no settlement price is available, the last
trade price on such exchange will be used.
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 US dollars is calculated by
converting the Local Currency into US dollars at the prevailing currency
exchange rate on the valuation date.
If market quotations for a portfolio asset are not readily available or the
value of a portfolio asset as determined in accordance with Board approved
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 Fund's Pricing Committee (or, in some cases, the Board's Valuation
Committee), represents fair market value. The value of other portfolio holdings
owned by the Fund is determined in a manner which is intended to fairly reflect
the fair market value of the asset on the valuation date, based on valuation
procedures adopted by the Fund's Board and overseen primarily by the Fund's
Pricing Committee.
For Money Market Portfolio. The net asset value of shares of the Portfolio is
calculated at 4:00 p.m. Eastern time or the close of business on each day the
New York Stock Exchange (the "Exchange") is open for trading. The Exchange is
scheduled to be closed on the following holidays: New Year's Day, Dr. Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving and Christmas, and on the preceding Friday or
subsequent Monday when one of these holidays falls on a Saturday or Sunday,
respectively.
Money Market Portfolio values its portfolio instruments at amortized cost, which
does not take into account unrealized capital gains or losses. This involves
initially valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price the
Portfolio would receive if it sold the instrument. Calculations are made to
80
<PAGE>
compare the value of the Portfolio's investments valued at amortized cost with
market values. Market valuations are obtained by using actual quotations
provided by market makers, estimates of market value, or values obtained from
yield data relating to classes of money market instruments published by
reputable sources at the mean between the bid and asked prices for the
instruments. If a deviation of 1/2 of 1% or more were to occur between the net
asset value per share calculated by reference to market values and the
Portfolio's $1.00 per share net asset value, or if there were any other
deviation that the Board of Trustees of the Fund believed would result in a
material dilution to shareholders or purchasers, the Board of Trustees would
promptly consider what action, if any, should be initiated. If a the Portfolio's
net asset value per share (computed using market values) declined, or were
expected to decline, below $1.00 (computed using amortized cost), the Board of
Trustees of the Fund might temporarily reduce or suspend dividend payments in an
effort to maintain the net asset value at $1.00 per share. As a result of such
reduction or suspension of dividends or other action by the Board of Trustees,
an investor would receive less income during a given period than if such a
reduction or suspension had not taken place. Such action could result in
investors receiving no dividend for the period during which they hold their
shares and receiving, upon redemption, a price per share lower than that which
they paid. On the other hand, if the Portfolio's net asset value per share
(computed using market values) were to increase, or were anticipated to increase
above $1.00 (computed using amortized cost), the Board of Trustees might
supplement dividends in an effort to maintain the net asset value at $1.00 per
share. Redemption orders received in connection with the administration of
checkwriting programs by certain dealers or other financial services firms prior
to the determination of the Portfolio's net asset value also may be processed on
a confirmed basis in accordance with the procedures established by SDI.
TRUSTEES AND OFFICERS
Scudder Variable Series I
The following table presents certain information regarding the Trustees and
Officers of the Trust as of May 1, 2005 Each Trustee's year of birth is set
forth in parentheses after his or her name. Unless otherwise noted, (i) each
Trustee has engaged in the principal occupation(s) noted in the table for at
least the most recent five years, although not necessarily in the same capacity,
and (ii) the address of each Trustee is c/o Dawn-Marie Driscoll, PO Box 100176,
Cape Coral, FL 33904. Unless otherwise indicated, the address of each Officer is
Two International Place, Boston, MA 02110. The term of office for each Trustee
is until the next meeting of shareholders 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 as provided in the governing
documents of the Trust. Because the Fund does not hold an annual meeting of
shareholders, each Trustee will hold office for an indeterminate period. The
Trustees of the Trust may also serve in similar capacities with other funds in
the fund complex.
Independent Trustees
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Number of
Name, Year of Birth, Position(s) Funds in Fund
Held with the Trust and Length Principal Occupation(s) During Past 5 Years and Complex
of Time Served(1) Other Directorships Held Overseen
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Dawn-Marie Driscoll (1946) President, Driscoll Associates (consulting firm); 46
Chairman since 2004 and Trustee, Executive Fellow, Center for Business Ethics, Bentley
1987-present College; formerly, Partner, Palmer & Dodge (1988-1990);
Vice President of Corporate Affairs and General Counsel,
Filene's (1978-1988). Directorships: Advisory Board,
Center for Business Ethics, Bentley
College; Board of Governors, Investment
Company Institute; Member, Executive
Committee of the Independent Directors
Council of the Investment Company
Institute.
-------------------------------------------------------------------------------------------------------------------
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Number of
Name, Year of Birth, Position(s) Funds in Fund
Held with the Trust and Length Principal Occupation(s) During Past 5 Years and Complex
of Time Served(1) Other Directorships Held Overseen
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Henry P. Becton, Jr. (1943) President, WGBH Educational Foundation. Directorships: 46
Trustee, 1990-present Becton Dickinson and Company (medical technology
company); Belo Corporation (media company); Concord
Academy; Boston Museum of Science; Public Radio
International. Former Directorships: American Public
Television; New England Aquarium; Mass. Corporation for
Educational Telecommunications; Committee for Economic
Development; Public Broadcasting Service
-------------------------------------------------------------------------------------------------------------------
Keith R. Fox (1954) Managing Partner, Exeter Capital Partners (private equity 46
Trustee, 1996-present funds). Directorships: Facts on File (school and library
publisher); Progressive Holding Corporation (kitchen
importer and distributor); Cloverleaf Transportation Inc.
(trucking); K-Media, Inc. (broadcasting); Natural
History, Inc. (magazine publisher); National Association
of Small Business Investment Companies (trade association)
-------------------------------------------------------------------------------------------------------------------
Louis E. Levy (1932) Retired. Formerly, Chairman of the Quality Control 46
Trustee, 2002-present Inquiry Committee, American Institute of Certified Public
Accountants (1992-1998); Partner, KPMG LLP (1958-1990).
Directorships: Household International (banking and
finance) (1992-2004); ISI Family of Funds (registered
investment companies; 4 funds overseen) (1992-present)
-------------------------------------------------------------------------------------------------------------------
Jean Gleason Stromberg (1943) Retired. Formerly, Consultant (1997-2001); Director, US 46
Trustee, 1999-present General Accounting Office (1996-1997); Partner, Fulbright
& Jaworski, L.L.P. (law firm) (1978-1996).
Directorships: The William and Flora Hewlett Foundation;
Service Source, Inc.
-------------------------------------------------------------------------------------------------------------------
Jean C. Tempel (1943) Managing Partner, First Light Capital (venture capital 46
Trustee, 1994-present group) (2000-present); formerly, Special Limited Partner,
TL Ventures (venture capital fund) (1996-1998); General
Partner, TL Ventures (1994-1996); President and Chief
Operating Officer, Safeguard Scientifics, Inc. (public
technology business incubator company) (1991-1993).
Directorships: Sonesta International Hotels, Inc.;
Aberdeen Group (technology research); United Way of Mass.
Bay; The Commonwealth Institute (supports women
entrepreneurs). Trusteeships: Connecticut College, Vice
Chair of Board, Chair, Finance Committee; Northeastern
University, Vice Chair of Finance Committee, Chair, Funds
and Endowment Committee
-------------------------------------------------------------------------------------------------------------------
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Number of
Name, Year of Birth, Position(s) Funds in Fund
Held with the Trust and Length Principal Occupation(s) During Past 5 Years and Complex
of Time Served(1) Other Directorships Held Overseen
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Carl W. Vogt (1936) Senior Partner, Fulbright & Jaworski, L.L.P (law firm); 46
Trustee, 2002-present formerly, President (interim) of Williams College
(1999-2000); President, certain funds in
the Deutsche Asset Management Family of
Funds (formerly, Flag Investors Family of
Funds) (registered investment companies)
(1999-2000). Directorships: Yellow
Corporation (trucking); American Science &
Engineering (x-ray detection equipment);
ISI Family of Funds (registered investment
companies; 4 funds overseen); National
Railroad Passenger Corporation (Amtrak);
formerly, Chairman and Member, National
Transportation Safety Board
-------------------------------------------------------------------------------------------------------------------
</TABLE>
Officers(2)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Number of
Name, Year of Birth, Position(s) Funds in Fund
Held with the Trust and Length Principal Occupation(s) During Past 5 Years and Complex
of Time Served(1) Other Directorships Held Overseen
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Julian F. Sluyters(3) (1960) Managing Director, Deutsche Asset Management (since May n/a
President and Chief Executive 2004); President and Chief Executive Officer of The
Officer, 2004-present Germany Fund, Inc., The New Germany Fund, Inc., The
Central Europe and Russia Fund, Inc., The Brazil Fund,
Inc., The Korea Fund, Inc., Scudder Global High Income
Fund, Inc., Scudder New Asia Fund, Inc. (since May 2004)
and Scudder Global Commodities Stock Fund, Inc. (since
July 2004); President and Chief Executive Officer, UBS
Fund Services (2001-2003); Chief Administrative Officer
(1998-2001) and Senior Vice President and Director of
Mutual Fund Operations (1991 to 1998) UBS Global Asset
Management
-------------------------------------------------------------------------------------------------------------------
John Millette (1962) Director, Deutsche Asset Management n/a
Vice President and Secretary,
1999-present
-------------------------------------------------------------------------------------------------------------------
Kenneth Murphy (1963) Vice President, Deutsche Asset Management (2000-present); n/a
Vice President, 2002-present formerly, Director, John Hancock Signature Services
(1992-2000)
-------------------------------------------------------------------------------------------------------------------
Paul H. Schubert(3) (1963) Managing Director, Deutsche Asset Management (since July
Chief Financial Officer, 2004); formerly, Executive Director, Head of Mutual Fund
2004-present Services and Treasurer for UBS Family of Funds
(1998-2004); Vice President and Director of Mutual Fund
Finance at UBS Global Asset Management (1994-1998)
-------------------------------------------------------------------------------------------------------------------
Charles A. Rizzo (1957) Managing Director, Deutsche Asset Management (since April n/a
Treasurer, 2002-present 2004); formerly, Director, Deutsche Asset Management
(April 2000-March 2004); Vice President and Department
Head, BT Alex. Brown Incorporated (now Deutsche Bank
Securities Inc.) (1998-1999); Senior Manager, Coopers &
Lybrand L.L.P. (now PricewaterhouseCoopers LLP)
(1993-1998)
-------------------------------------------------------------------------------------------------------------------
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Number of
Name, Year of Birth, Position(s) Funds in Fund
Held with the Trust and Length Principal Occupation(s) During Past 5 Years and Complex
of Time Served(1) Other Directorships Held Overseen
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Lisa Hertz(3) (1970) Assistant Vice President, Deutsche Asset Management n/a
Assistant Secretary, 2003-present
-------------------------------------------------------------------------------------------------------------------
Daniel O. Hirsch(4) (1954) Managing Director, Deutsche Asset Management n/a
Assistant Secretary, 2002-present (2002-present); formerly, Director, Deutsche Asset
Management (1999-2002); Principal, BT Alex. Brown
Incorporated (now Deutsche Bank Securities Inc.)
(1998-1999); Assistant General Counsel, United States
Securities and Exchange Commission (1993-1998); Director,
Deutsche Global Funds Ltd. (2002-2004)
-------------------------------------------------------------------------------------------------------------------
Caroline Pearson (1962) Managing Director, Deutsche Asset Management n/a
Assistant Secretary, 1997-present
-------------------------------------------------------------------------------------------------------------------
Bruce A. Rosenblum(4) (1960) Director, Deutsche Asset Management n/a
Vice President and Assistant
Secretary 2004-present
-------------------------------------------------------------------------------------------------------------------
Kevin M. Gay (1959) Vice President, Deutsche Asset Management n/a
Assistant Treasurer, 2004-present
-------------------------------------------------------------------------------------------------------------------
Salvatore Schiavone (1965) Director, Deutsche Asset Management n/a
Assistant Treasurer, 2003-present
-------------------------------------------------------------------------------------------------------------------
Kathleen Sullivan D'Eramo Director, Deutsche Asset Management n/a
(1957)
Assistant Treasurer, 2003-present
-------------------------------------------------------------------------------------------------------------------
Philip Gallo(3) (1962) Managing Director, Deutsche Asset Management n/a
Chief Compliance Officer (2003-present); formerly, Co-Head of Goldman Sachs Asset
2004-present Management Legal (1994-2003)
-------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Length of time served represents the date that each Trustee was first
elected to the common board of Trustees which oversees a number of
investment companies, including the fund, managed by the Advisor. For the
officers of the Trust, the length of time served represents the date that
each officer was first elected to serve as an officer of any fund overseen
by the aforementioned common board of Trustees.
(2) As a result of their respective positions held with the Advisor, these
individuals are considered "interested persons" of the Advisor within the
meaning of the 1940 Act. Interested persons receive no compensation from
the Funds.
(3) Address: 345 Park Avenue, New York, New York 10154.
(4) Address: One South Street, Baltimore, Maryland 21202.
Officer's Role with Principal Underwriter: Scudder Distributors, Inc.
Caroline Pearson: Secretary
Trustees' Responsibilities. The primary responsibility of the Board of Trustees
is to represent the interests of the Fund's shareholders and to provide
oversight of the management of the Fund. Currently, seven of the Board's members
are "Independent Trustees;" that is, they are not "interested persons" (as
defined in the 1940 Act) of the Trust or the Advisor.
The Trustees meet multiple times during the year to review the investment
performance of the Fund and other operational matters, including policies and
procedures designed to assure compliance with regulatory and other requirements.
In 2004, the Trustees conducted over 40 meetings to deal with fund issues
(including regular and special board and committee meetings). These meetings
were held over the course of 23 different days. In addition, various Trustees
84
<PAGE>
participated as members of the Board's Valuation Committee throughout the year.
Furthermore, the Independent Trustees review the fees paid to the Advisor and
its affiliates for investment advisory services and other administrative and
shareholder services. The Trustees have adopted specific policies and guidelines
that, among other things, seek to further enhance the effectiveness of the
Independent Trustees in performing their duties. Many of these are similar to
those suggested in the Investment Company Institute's 1999 Report of the
Advisory Group on Best Practices for Fund Directors. For example, the
Independent Trustees select independent legal counsel to work with them in
reviewing fees, advisory and other contracts and overseeing fund matters. The
Trustees are also assisted in this regard by the Fund's independent public
accountants and other independent experts retained from time to time for this
purpose. The Independent Trustees regularly meet privately with their counsel
and other advisors. In addition, the Independent Trustees from time to time have
appointed task forces and subcommittees from their members to focus on
particular matters such as investment, accounting and shareholders servicing
issues.
For a discussion of the factors considered by the Board in connection with its
most recent approval of the continuation of the Fund's management contracts,
please refer to "Management of the Funds -- Board Considerations in Connection
with Annual Renewal of Investment Management Agreements."
Board Committees. The Board oversees a number of investment companies managed by
the Advisor. Information shown below represents meetings held on behalf of all
such funds. The common Board has the following standing committees:
Audit Committee: The Audit Committee makes recommendations regarding the
selection of independent registered public accounting firms for the Fund,
reviews the independence of such firm, reviews the scope of audit and internal
controls, considers and reports to the Board on matters relating to the Fund's
accounting and financial reporting practices, and performs such other tasks as
the full Board deems necessary or appropriate. The Audit Committee receives
annual representations from the independent registered public accounting firm as
to their independence. The members of the Audit Committee are Louis E. Levy
(Chair), Keith R. Fox, Jean Gleason Stromberg and Jean C. Tempel. The Audit
Committee held seven meetings during the calendar year 2004.
Nominating/Corporate Governance Committee: The Nominating/Corporate Governance
Committee (i) selects and nominates candidates to serve as Independent
Trustees*; (ii) oversees all other fund governance-related matters, including
Board compensation practices, retirement policies, self-evaluations of
effectiveness and allocations of assignments and functions of committees of the
Board. The members of the Nominating/Corporate Governance Committee are Henry P.
Becton, Jr., Dawn-Marie Driscoll (Chair), Keith R. Fox, Louis E. Levy, Jean
Gleason Stromberg, Jean C. Tempel and Carl W. Vogt. The Nominating/Corporate
Governance Committee (previously known as the Committee on Independent Trustees)
held seven meetings during the calendar year 2004.
Valuation Committee: The Valuation Committee oversees fund valuation matters,
reviews Valuation Procedures adopted by the Board, determines fair value of the
Fund's securities as needed in accordance with the Valuation Procedures when
actual market values are unavailable and performs such other tasks as the full
Board deems necessary. The members of the Valuation Committee are Keith R. Fox,
and Jean C. Tempel. The Valuation Committee held six meetings on behalf of
Global Discovery Portfolio, two meetings for Growth and Income Portfolio, three
meetings for Health Sciences Portfolio, five meetings for International
Portfolio and one meeting for each of Bond Portfolio, Balanced Portfolio, Money
Market Portfolio, Capital Growth Portfolio, and 21st Century Growth Portfolio
during the calendar year 2004.
Investment Oversight Committee: The Board has established two Investment
Oversight Committees, one focusing on funds primarily investing in equity
securities (the "Equity Oversight Committee") and one focusing on funds
primarily investing in fixed income securities (the "Fixed Income Oversight
Committee"). These Committees meet regularly with fund portfolio managers and
other investment personnel to review the relevant funds' investment strategies
and investment performance. The members of the Equity Oversight Committee are
Henry P. Becton, Jr. (Chair), Jean C. Tempel and Carl W. Vogt. The members of
the Fixed Income Oversight Committee are Dawn-Marie Driscoll, Keith R. Fox,
Louis E. Levy and Jean Gleason Stromberg (Chair). Each Investment Oversight
Committee held four meetings during the calendar year 2004.
85
<PAGE>
Marketing/Shareholder Service Committee: The Marketing/Shareholder Service
Committee oversees (i) the quality, costs and types of shareholder services
provided to the Funds and their shareholders, and (ii) the distribution-related
services provided to the Fund and their shareholders. The members of the
Shareholder Servicing and Distribution Committee are Carl W. Vogt and Jean
Gleason Stromberg. The Marketing/Shareholder Service Committee (previously known
as the Shareholder Servicing and Distribution Committee) held four meetings
during the calendar year 2004.
Legal/Regulatory/Compliance Committee: The Legal/Regulatory/Compliance Committee
oversees (i) the significant legal affairs of the Fund, including the handling
of pending or threatened litigation or regulatory action involving the Fund, and
(ii) general compliance matters relating to the Fund. The members of the
Legal/Regulatory/Compliance Committee are Henry P. Becton, Jr., Dawn-Marie
Driscoll and Carl Vogt. This committee met eight times in 2004.
Expense/Operations Committee: The Expense/Operations Committee (i) monitors the
Fund's total operating expense levels, (ii) oversees the provision of
administrative services to the Funds, including the Fund's custody, fund
accounting and insurance arrangements, and (iii) reviews the Fund's investment
advisers' brokerage practices, including the implementation of related policies.
The members of the Expense/Operations Committee are Henry P. Becton, Jr.,
Dawn-Marie Driscoll, Keith R. Fox, Louis E. Levy and Jean Tempel. This committee
was established on October 12, 2004 and met one time in 2004.
* Fund Shareholders may also submit nominees that will be considered by the
committee when a Board vacancy occurs. Submissions should be mailed to:
c/o Dawn-Marie Driscoll, PO Box 100176, Cape Coral, FL 33904.
Remuneration. Each Independent Trustee receives compensation from the Fund for
his or her services, which includes an annual retainer and an attendance fee for
each meeting attended. 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
director task forces or subcommittees. Independent Trustees do not receive any
employee benefits such as pension or retirement benefits or health insurance.
Members of the Board of Trustees who are officers, directors, employees or
stockholders 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, and as a result may be deemed to participate in fees paid by the
Fund. The following table shows compensation received by each Trustee from the
Fund and aggregate compensation from all of the funds in the fund complex during
the calendar year 2004.
<TABLE>
<CAPTION>
Pension or Retirement Total Compensation
Name of Compensation from Benefits Accrued as Part of Paid to Trustee from the
Trustee Scudder Variable Series I Fund Expenses Fund Complex (3)(4)(5)
------- ------------------------- ------------- ----------------------
To be updated
<S> <C> <C> <C>
Henry P. Becton, Jr. $ $0 $159,500
Dawn-Marie Driscoll(1) $ $0 $208,016
Keith R. Fox $ $0 $220,620
Louis E. Levy(2) $ $0 $163,000
Jean Gleason Stromberg $ $0 $153,500
Jean C. Tempel $ $0 $191,000
Carl W. Vogt $ $0 $168,500
</TABLE>
(1) Includes $14,896 in annual retainer fees in Ms. Driscoll's role as
Chairman of the Board.
(2) In addition to these payments, Mr. Levy received payments in accordance
with his prior Deferred Payment Plan in the amount of $38,100
(representing amounts earned in prior years and gain or interest thereon)
from funds existing prior to the Deutsche Bank purchase of Scudder
Investments.
86
<PAGE>
(3) For each Trustee, total compensation includes compensation for service on
the boards of 18 trusts/corporations comprised of 49 funds/portfolios.
Each Trustee currently serves on the boards of 18 DeAM trusts/corporations
comprised of 46 funds/portfolios.
(4) Aggregate compensation reflects amounts paid to the Trustees for special
meetings of ad hoc committees of the Boston Board in connection with the
possible consolidation of the various Scudder Fund Boards and with respect
to legal and regulatory matters. Such amounts totaled $3,000 for Mr.
Becton, $34,120 for Ms. Driscoll, $36,620 for Mr. Fox, $11,500 for Mr.
Levy, $9,500 for Ms. Tempel and $17,000 for Mr. Vogt. These meeting fees
were borne by the Funds.
(5) Aggregate compensation also reflects amounts paid to the Trustees for
special meetings of ad hoc committees of the Boston Board in connection
with reviewing the Funds' shareholder servicing arrangements. Such amounts
totaled $2,500 for Ms. Driscoll and $31,000 for Mr. Fox and Ms Tempel.
Also, included are amounts paid to the Trustees for special meetings to
consider fund mergers. These amounts totaled $5,000 for Mr. Becton and Ms
Driscoll, $4,000 for Mr. Fox and $3,000 for Ms. Stromberg. The Funds were
reimbursed by the Advisor for these meeting fees.
Trustee Fund Ownership of Independent and Interested Trustees
The following sets forth ranges of Trustee beneficial share ownership as of
December 31, 2004.
<TABLE>
<CAPTION>
Aggregate Dollar Range of
Dollar Range of Securities Owned in All Funds
Name of Securities Owned in in the Fund Complex
Trustee Scudder Variable Series I Overseen by Trustee
------- ------------------------- -------------------
To be updated
<S> <C> <C>
Henry P. Becton, Jr. [$/None] Over $100,000
Dawn-Marie Driscoll [$/None] Over $100,000
Keith R. Fox [$/None] Over $100,000
Louis E. Levy [$/None] Over $100,000
Jean Gleason Stromberg [$/None] Over $100,000
Jean C. Tempel [$/None] Over $100,000
Carl W. Vogt [$/None] $10,001-$50,000
</TABLE>
Securities Beneficially Owned
As of [Date within 30 days of filing], 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 each class of the Fund.
To the best of the Fund's knowledge, as of [Date within 30 days of filing], no
person owned of record or beneficially 5% or more of any class of the Fund's
outstanding shares, [except as noted below].
Ownership in Securities of the Advisor and Related Companies
As reported to the Fund, the information in the following table reflects
ownership by the Independent Trustees and their immediate family members of
certain securities as of December 31, 2004. An immediate family member can be a
spouse, children residing in the same household including step and adoptive
children and any dependents. The securities represent ownership in an investment
advisor or principal underwriter of the Fund and any persons (other than a
registered investment company) directly or indirectly controlling, controlled
by, or under common control with an investment advisor or principal underwriter
of the Fund (including Deutsche Bank AG).
87
<PAGE>
<TABLE>
<CAPTION>
Value of Percent of
Owner and Securities on Class on an
Independent Relationship to Title of an Aggregate Aggregate
Trustee Trustee Company Class Basis Basis
------- ------- ------- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Henry P. Becton, Jr. None
Dawn-Marie Driscoll None
Keith R. Fox None
Louis E. Levy None
Jean Gleason Stromberg None
Jean C. Tempel None
Carl W. Vogt None
</TABLE>
Agreement to Indemnify Independent Directors/Trustees for Certain Expenses
In connection with litigation or regulatory action related to possible improper
market timing or other improper trading activity or possible improper marketing
and sales activity in the Funds, each Fund's investment advisor has agreed,
subject to applicable law and regulation, to indemnify and hold harmless the
applicable Funds against any and all loss, damage, liability and expense,
arising from market timing or marketing and sales matters alleged in any
enforcement actions brought by governmental authorities involving or potentially
affecting the Funds or the investment advisor ("Enforcement Actions") or that
are the basis for private actions brought by shareholders of the Funds against
the Funds, their directors and officers, the Funds' investment advisor and/or
certain other parties ("Private Litigation"), or any proceedings or actions that
may be threatened or commenced in the future by any person (including
governmental authorities), arising from or similar to the matters alleged in the
Enforcement Actions or Private Litigation. In recognition of its undertaking to
indemnify the applicable Funds and in light of the rebuttable presumption
generally afforded to independent directors/trustees of investment companies
that they have not engaged in disabling conduct, each Fund's investment advisor
has also agreed, subject to applicable law and regulation, to indemnify the
applicable Funds' Independent Trustees against certain liabilities the
Independent Trustees may incur from the matters alleged in any Enforcement
Actions or Private Litigation or arising from or similar to the matters alleged
in the Enforcement Actions or Private Litigation, and advance expenses that may
be incurred by the Independent Trustees in connection with any Enforcement
Actions or Private Litigation. The applicable investment advisor is not,
however, required to provide indemnification and advancement of expenses: (1)
with respect to any proceeding or action with respect to which the applicable
Fund's Board determines that the Independent Trustee ultimately would not be
entitled to indemnification or (2) for any liability of the Independent Trustee
to the Funds or their shareholders to which the Independent Trustee would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the Independent Trustee's duties as a
director or trustee of the Funds as determined in a final adjudication in such
action or proceeding. The estimated amount of any expenses that may be advanced
to the Independent Trustees or indemnity that may be payable under the indemnity
agreements is currently unknown. These agreements by each Fund's investment
advisor will survive the termination of the investment management agreements
between the applicable investment advisor and the Funds.
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.
88
<PAGE>
Participating Insurance Companies with inquiries regarding the Fund or its
Portfolios may call the Fund's underwriter, Scudder Distributors, Inc., at
1-800-778-1482 or write Scudder Distributors, Inc., 222 South Riverside Plaza,
Chicago, IL 60606-5808.
FUND ORGANIZATION
General
The Portfolios are series 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, policies and restrictions.
Since the Fund offers multiple Portfolios, it is known as a "series company."
Shares of a Portfolio have equal noncumulative voting rights and equal rights
with respect to dividends, assets and liquidation of such Portfolio and are
subject to any preferences, rights or privileges of any classes of shares of the
Portfolio. Currently, each Portfolio (except Money Market Portfolio, which does
not offer separate classes of shares) offers two classes of shares: Class A and
Class B shares. Shares of each Portfolio have equal noncumulative voting rights
except that each Portfolio's Class A and Class B shares have separate and
exclusive voting rights with respect to the Portfolios' Class A and Class B Rule
12b-1 Plans, respectively. Shares of each class also have equal rights with
respect to dividends, assets and liquidation subject to any preferences (such as
resulting from different Rule 12b-1 distribution fees), rights or privileges of
any classes of shares of a Portfolio. Shares of each Portfolio are fully paid
and nonassessable when issued, are transferable without restriction and have no
preemptive or conversion rights. The Fund is not required to hold annual
shareholder meetings and does not intend to do so. However, the Fund will hold
special meetings as 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.
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.
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) the 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.
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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.
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 thereof. 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.
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.
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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.
PROXY VOTING GUIDELINES
The Fund has delegated proxy voting responsibilities to its investment advisor,
subject to the Board's general oversight. The Fund has delegated proxy voting to
the Advisor with the direction that proxies should be voted consistent with the
Fund's best economic interests. The Advisor has adopted its own Proxy Voting
Policies and Procedures ("Policies"), and Proxy Voting Guidelines ("Guidelines")
for this purpose. The Policies address, among other things, conflicts of
interest that may arise between the interests of the Fund, and the interests of
the Advisor and its affiliates, including the Fund's principal underwriter. The
Guidelines set forth the Advisor's general position on various proposals, such
as:
o Shareholder Rights -- The Advisor generally votes against proposals that
restrict shareholder rights.
o Corporate Governance -- The Advisor generally votes for confidential and
cumulative voting and against supermajority voting requirements for
charter and bylaw amendments.
o Anti-Takeover Matters -- The Advisor generally votes for proposals that
require shareholder ratification of poison pills or that request boards to
redeem poison pills, and votes against the adoption of poison pills if
they are submitted for shareholder ratification. The Advisor generally
votes for fair price proposals.
o Compensation Matters -- The Advisor generally votes for executive cash
compensation proposals, unless they are unreasonably excessive. The
Advisor generally votes against stock option plans that do not meet the
Advisor's criteria.
o Routine Matters -- The Advisor generally votes for the ratification of
auditors, procedural matters related to the annual meeting and changes in
company name, and against bundled proposals and adjournment.
The general provisions described above do not apply to investment companies. The
Advisor generally votes proxies solicited by investment companies in accordance
with the recommendations of an independent third party, except for proxies
solicited by or with respect to investment companies for which the Advisor or an
affiliate serves as investment advisor or principal underwriter ("affiliated
investment companies"). The Advisor votes affiliated investment company proxies
in the same proportion as the vote of the investment company's other
shareholders (sometimes called "mirror" or "echo" voting). Master fund proxies
solicited from feeder funds are voted in accordance with applicable requirements
of the Investment Company Act of 1940.
Although the Guidelines set forth the Advisor's general voting positions on
various proposals, the Advisor may, consistent with the Fund's best interests,
determine under some circumstances to vote contrary to those positions.
The Guidelines on a particular issue may or may not reflect the view of
individual members of the Board or of a majority of the Board. In addition, the
Guidelines may reflect a voting position that differs from the actual practices
of the public companies within the Deutsche Bank organization or of the
investment companies for which the Advisor or an affiliate serves as investment
advisor or sponsor.
The Advisor may consider the views of a portfolio company's management in
deciding how to vote a proxy or in establishing general voting positions for the
Guidelines, but management's views are not determinative.
As mentioned above, the Policies describe the way in which the Advisor resolves
conflicts of interest. To resolve conflicts, the advisor, under normal
circumstances, votes proxies in accordance with its Guidelines. If the Advisor
departs from the Guidelines with respect to a particular proxy or if the
Guidelines do not specifically address a certain proxy proposal, a proxy voting
committee established by the advisor will vote the proxy. Before voting any such
proxy, however, the Advisor's conflicts review committee will conduct an
investigation to determine whether any potential conflicts of interest exist in
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connection with the particular proxy proposal. If the conflicts review committee
determines that the Advisor has a material conflict of interest, or certain
individuals on the proxy voting committee should be recused from participating
in a particular proxy vote, it will inform the proxy voting committee. If
notified that the Advisor has a material conflict, or fewer than three voting
members are eligible to participate in the proxy vote, typically the Advisor
will engage an independent third party to vote the proxy or follow the proxy
voting recommendations of an independent third party.
Under certain circumstances, the Advisor may not be able to vote proxies or the
Advisor may find that the expected economic costs from voting outweigh the
benefits associated with voting. For example, the Advisor may not vote proxies
on certain foreign securities due to local restrictions or customs. The Advisor
generally does not vote proxies on securities subject to share blocking
restrictions.
You may obtain information about how a fund voted proxies related to its
portfolio securities during the 12-month period ended June 30 by visiting the
Securities and Exchange Commission's Web site at www.sec.gov or by visiting our
Web site at: scudder.com for all other classes (type "proxy voting" in the
search field).
ADDITIONAL INFORMATION
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 8 54.
The CUSIP number of Growth and Income Portfolio Class B shares is 81123R 77 1.
The CUSIP number of Capital Growth Portfolio Class A shares is 81123R 30 0.
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 Class A shares is 81123R 72 2.
The CUSIP number of Health Sciences Portfolio Class B shares is 81123R 71 4.
Each Portfolio has a December 31 fiscal year end.
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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 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.
Each Portfolio, through its combined Prospectuses and combined Statement of
Additional Information, offers only its own share classes, yet it is possible
that one Portfolio might become liable for a misstatement regarding the other
Portfolio. The Trustees have considered this, and have approved the use of the
Prospectus and Statement of Additional Information.
The Fund's prospectuses 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
Health Sciences Portfolio
The financial statements, including the investment portfolios of Scudder
Variable Series I, together with the Report of Independent Auditors, 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, 2004, and are hereby deemed to be part of this Statement of
Additional Information.
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APPENDIX A
BOND AND COMMERCIAL PAPER RATINGS
Set forth below are descriptions of ratings which represent opinions as to the
quality of the securities. It should be emphasized, however, that ratings are
relative and subjective and are not absolute standards of quality.
MOODY'S INVESTORS SERVICE, INC. -- CORPORATE BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the highest 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 which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper -medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal 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 which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safe-guarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B are considered speculative and 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.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are highly speculative.
Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, typically are in
default and can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Note: Moody's appends numerical modifiers 1, 2 and 3 to each generic rating
classification from Aa through Caa in its corporate bond rating system. The
modifier 1 indicates that the issue ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
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MOODY'S INVESTORS SERVICE, INC. -- SHORT-TERM RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to honor
short-term financial obligations. Ratings may be assigned to issuers, short-term
programs or to individual short-term debt instruments. Such obligations
generally have an original maturity not exceeding thirteen months, unless
explicitly noted. Issuers rated Prime-1 or P-1 (or supporting institutions) have
a superior ability for repayment of short-term debt obligations. Prime-1 or P-1
repayment ability will often be evidenced by many of the following
characteristics:
o Leading market positions in well established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
o Well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 or P-2 (or supporting institutions) have a strong ability
for repayment of short-term debt obligations. This will normally be evidenced by
many of the characteristics cited above but to a lesser degree. Earnings trends
and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
STANDARD & POOR'S RATINGS SERVICES -- CORPORATE BOND RATINGS
INVESTMENT GRADE
AAA: Debt rated AAA has the highest rating assigned by S&P's to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB: Debt rated BBB has an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories.
SPECULATIVE GRADE
Debt rated BB, B, CCC, CC, and C has significant speculative characteristics
with respect to capacity to pay interest and repay principal. BB indicates the
least degree of speculation and C the highest. While such debt will likely have
some quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
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The BB rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
The B rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BB or BB- rating.
CCC: Debt rated CCC has a current vulnerability to default, and is dependent
upon favorable business, financial, and economic conditions to meet timely
payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
The CCC rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied B or B- rating.
CC: Debt rated CC has a current high vulnerability to default, and is dependent
upon favorable business, financial, and economic conditions to meet timely
payment of interest and repayment of principal.
The rating CC is also applied to debt subordinated to senior debt which is
assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
C1: The Rating C1 is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
R: Debt rated 'R' is under regulatory supervision owing to its financial
condition. During the pendency of the regulatory supervision, the regulators may
have the power to favor one class of obligations over others or pay some
obligations and not others.
N.R.: Bonds may lack a S&P's rating because no public rating has been requested,
because there is insufficient information on which to base a rating, or because
S&P's does not rate a particular type of obligation as a matter of policy.
STANDARD & POOR'S RATINGS SERVICES -- SHORT-TERM RATINGS
S&P's commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
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A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issues carrying this designation have adequate capacity for timely payment.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the issuer to meet its financial commitments.
FITCH INVESTORS SERVICE, INC. -- BOND RATINGS
INVESTMENT GRADE
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Bonds rated in the AAA and AA categories
are not significantly vulnerable to foreseeable events.
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of good credit quality. The
obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore, impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
SPECULATIVE GRADE
BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business or financial alternatives may be available which could assist the
obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD and D: Bonds are in default of interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds, and D represents
the lowest potential for recovery.
Plus (+) or Minus (-): The ratings from AA to CC may be appended by the addition
of a plus or minus sign to denote the relative status within the rating
category.
NR: Indicates that Fitch Rating does not publicly rate the specific issue.
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FITCH INVESTORS SERVICE, INC. -- SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest capacity for timely payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect a capacity
for timely payment only slightly less than issues rated F-1+.
F-2: Good Credit Quality. Issues assigned this rating have a satisfactory
capacity for timely payment, but the margin of safety is not as great as the
F-1+ and F-1 categories.
F-3: Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the capacity for timely payment is adequate; however, near-term
adverse changes could cause these securities to be rated below investment grade.
B: Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
C: High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
D: Default. Denotes actual or imminent payment default.
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SCUDDER VARIABLE SERIES I
PART C. OTHER INFORMATION
<TABLE>
<CAPTION>
Item 23. Exhibits
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<S> <C> <C>
(a) (1) 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.
(2) 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.)
(3) 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.)
(4) 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.)
(5) Redesignation of Series.
(Previously filed as Exhibit 1(g) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(6) Abolition of Series.
(Previously filed as Exhibit 1(h) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(7) 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.)
(8) Certificate of Amendment of Declaration of Trust, with respect to name
change to Scudder Variable Series I is incorporated by reference to
Post-Effective Amendment No. 32 to the Registration Statement.
(9) Amended and Restated Establishment and Designation of Series of Shares of
Beneficial Interest, without Par Value, dated February 22, 2001.
(Previously filed as Exhibit (a)(10) to Post-Effective Amendment No. 31 to
the Registration Statement.)
(10) Establishment and Designation of Classes of Shares of Beneficial Interest,
$.01 Par Value, on behalf of Health Sciences Portfolio, dated January 9,
2002 is incorporated by reference to Post-Effective Amendment No. 35 to
the Registration Statement filed on April 30, 2003.
(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.)
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(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.
(4) Amendment to the By-Laws of the Registrant dated December 10, 2002 is
incorporated by reference to Post-Effective Amendment No. 35 to the
Registration Statement filed on April 30, 2003.
(5) Amendment to the By-Laws of the Registrant dated October 14, 2003 is
incorporated by reference to Post-Effective Amendment No. 36 to the
Registration Statement filed on March 2, 2004.
(c) Inapplicable.
(d) (1) Investment Management Agreement between the Registrant and Deutsche
Investment Management Americas Inc. with respect to the Money Market
Portfolio is incorporated by reference to Post-Effective Amendment No. 33
to the Registration Statement filed on April 30, 2002.
(2) Investment Management Agreement between the Registrant and Deutsche
Investment Management Americas Inc. with respect to the Bond Portfolio is
incorporated by reference to Post-Effective Amendment No. 33 to the
Registration Statement filed on April 30, 2002.
(3) Investment Management Agreement between the Registrant and Deutsche
Investment Management Americas Inc. with respect to the Balanced Portfolio
is incorporated by reference to Post-Effective Amendment No. 33 to the
Registration Statement filed on April 30, 2002.
(4) Investment Management Agreement between the Registrant and Deutsche
Investment Management Americas Inc. with respect to the Growth and Income
Portfolio is incorporated by reference to Post-Effective Amendment No. 33
to the Registration Statement filed on April 30, 2002.
(5) Investment Management Agreement between the Registrant and Deutsche
Investment Management Americas Inc. with respect to the Capital Growth
Portfolio is incorporated by reference to Post-Effective Amendment No. 33
to the Registration Statement filed on April 30, 2002.
(6) Investment Management Agreement between the Registrant and Deutsche
Investment Management Americas Inc. with respect to the 21st Century
Growth Portfolio is incorporated by reference to Post-Effective Amendment
No. 33 to the Registration Statement filed on April 30, 2002.
(7) Investment Management Agreement between the Registrant and Deutsche
Investment Management Americas Inc. with respect to the Global Discovery
Portfolio is incorporated by reference to Post-Effective Amendment No. 33
to the Registration Statement filed on April 30, 2002.
(8) Investment Management Agreement between the Registrant and Deutsche
Investment Management Americas Inc. with respect to the International
Portfolio is incorporated by reference to Post-Effective Amendment No. 33
to the Registration Statement filed on April 30, 2002.
3
<PAGE>
(9) Investment Management Agreement between the Registrant and Deutsche
Investment Management Americas Inc. with respect to the Health Sciences
Portfolio is incorporated by reference to Post-Effective Amendment No. 33
to the Registration Statement filed on April 30, 2002.
(e) (1) Underwriting Agreement between the Registrant and Scudder Investor
Services, Inc., is incorporated by reference to Post-Effective Amendment
No. 33 to the Registration Statement as filed on April 30, 2002.
(2) Underwriting Agreement between the Registrant and Scudder Distributors,
Inc. dated September 30, 2002 is incorporated by reference to
Post-Effective Amendment No. 35 to the Registration Statement filed on
April 30, 2003.
(3) Participating Contract and Policy Agreement between Scudder Investor
Services, Inc. and Participating Insurance Companies.
(Previously filed as Exhibit 6(b) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(4) Participating Contract and Policy Agreement between Scudder Investor
Services, Inc. and Carillon Investments, Inc. dated February 18, 1992.
(Previously filed as Exhibit 6(c) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(5) Participating Contract and Policy Agreement between Scudder Investor
Services, Inc. and Aetna Life Insurance and Annuity Company dated
April 27, 1992.
(Previously filed as Exhibit 6(d) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(6) Participating Contract and Policy Agreement between Scudder Investor
Services, Inc. and PNMR Securities, Inc. dated December 1, 1992.
(Previously filed as Exhibit 6(e) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(f) Inapplicable.
(g) (1) Custodian Contract between the Registrant and State Street Bank and Trust
Company.
(Previously filed as Exhibit 8(a) to Post-Effective Amendment No. 23 to
the Registration Statement.)
(2) Amendment to Custodian Contract between the Registrant and State Street
Bank and Trust Company. (Previously filed as Exhibit (g)(2) to
Post-Effective Amendment No. 30 to the Registration Statement.)
(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.)
(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.
4
<PAGE>
(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.)
(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.)
5
<PAGE>
(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.)
(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.)
6
<PAGE>
(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.)
(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.)
7
<PAGE>
(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, 2001 is incorporated by reference to Post-Effective Amendment
No. 35 to the Registration Statement filed on April 30, 2003.
(40) Form of Letter of Indemnity to the Scudder Funds dated October __,
2004 is filed herein.
(41) Form of Letter of Indemnity to the Scudder Funds dated October __,
2004 is filed herein.
(42) Form of Letter of Indemnity to the Independent Trustees dated
October __, 2004 is filed herein.
(i) Opinion and Consent of Counsel is incorporated by reference to
Post-Effective Amendment No. 34 to the Registration Statement.
(j) Consent of Independent Registered Public Accounting Firm to be filed by
amendment.
(k) Inapplicable.
(l) Inapplicable.
(m) Master Distribution Plan for Class B shares pursuant to Rule 12b-1 dated
February 9, 1996.
(Previously filed as Exhibit 15(a) to Post-Effective Amendment No. 23 to
the Registration Statement.)
8
<PAGE>
(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. (Previously filed as Exhibit (n)(2) to
Post-Effective Amendment No. 31 to the Registration Statement.)
(3) Plan Pursuant to Rule 18f-3 under the Investment Company Act of 1940, as
amended March 1, 2002 is incorporated by reference to Post-Effective
Amendment No. 35 to the Registration Statement filed on April 30, 2003.
(4) Master Distribution Plan for Class B shares pursuant to Rule 12b-1, as
amended September 30, 2002 is incorporated by reference to Post-Effective
Amendment No. 35 to the Registration Statement filed on April 30, 2003.
(p) (1) Code of Ethics of Scudder Funds, dated April 5, 2002 is incorporated by
reference to Post-Effective Amendment No. 35 to the Registration Statement
filed on April 30, 2003.
(2) Code of Ethics of Deutsche Asset Management effective February 1, 2004 is
incorporated by reference to Post-Effective Amendment No. 37 to the
Registration Statement filed on April 30, 2004.
(3) Code of Ethics for Deutsche Asset Management Investment Services Limited
dated March 1, 2001 is incorporated by reference to Post-Effective
Amendment No. 37 to the Registration Statement filed on April 30, 2004.
(4) Code of Ethics for Deutsche Asset Management - U.S., effective January 1,
2005 is filed herein.
</TABLE>
Item 24. Persons Controlled by or under Common Control with Registrant
-------- -------------------------------------------------------------
Inapplicable.
Item 25. Indemnification
-------- ---------------
A policy of insurance covering the Advisor, its subsidiaries
including Scudder Distributors, Inc., and all of the
registered investment companies advised by the Advisor 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
9
<PAGE>
such Shareholder for all legal and other expenses
reasonably incurred by him in connection with any
such claim or liability. The rights accruing to a
Shareholder under this Section 4.l shall not exclude
any other right to which such Shareholder may be
lawfully entitled, nor shall anything herein
contained restrict the right of the Fund to indemnify
or reimburse a Shareholder in any appropriate
situation even though not specifically provided
herein.
Section 4.2. Non-Liability of Trustees, etc. No
Trustee, officer, employee or agent of the Fund shall
be liable to the Fund, its Shareholders, or to any
Shareholder, Trustee, officer, employee, or agent
thereof for any action or failure to act (including
without limitation the failure to compel in any way
any former or acting Trustee to redress any breach of
trust) except for his own bad faith, willful
misfeasance, gross negligence or reckless disregard
of the duties involved in the conduct of his office.
Section 4.3 Mandatory Indemnification. (a) Subject to
the exceptions and limitations contained in paragraph
(b) below:
(i) every person who is, or has been, a
Trustee or officer of the Fund shall
be indemnified by the Fund to the
fullest extent permitted by law
against all liability and against
all expenses reasonably incurred or
paid by him in connection with any
claim, action, suit or proceeding in
which he becomes involved as a party
or otherwise by virtue of his being
or having been a Trustee or officer
and against amounts paid or incurred
by him in the settlement thereof;
(ii) the words "claim," "action," "suit,"
or "proceeding" shall apply to all
claims, actions, suits or
proceedings (civil, criminal, or
other, including appeals), actual or
threatened; and the words
"liability" and "expenses" shall
include, without limitation,
attorneys' fees, costs, judgments,
amounts paid in settlement, fines,
penalties and other liabilities.
(b) No indemnification shall be provided hereunder to
a Trustee or officer:
(i) against any liability to the Fund or
the Shareholders by reason of
willful misfeasance, bad faith,
gross negligence or reckless
disregard of the duties involved in
the conduct of his office;
(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
10
<PAGE>
who has ceased to be such Trustee or officer
and shall inure to the benefit of the heirs,
executors, administrators and assigns of
such a person. Nothing contained herein
shall affect any rights to indemnification
to which personnel of the Fund other than
Trustees and officers may be entitled by
contract or otherwise under law.
(d) Expenses of preparation and presentation of
a defense to any claim, action, suit, or
proceeding of the character described in
paragraph (a) of this Section 4.3 shall be
advanced by the Fund prior to final
disposition thereof upon receipt of an
undertaking by or on behalf of the
recipient, to repay such amount if it is
ultimately determined that he is not
entitled to indemnification under this
Section 4.3, provided that either:
(i) such undertaking is secured by a
surety bond or some other
appropriate security provided by the
recipient, or the Fund shall be
insured against losses arising out
of any such advances; or
(ii) a majority of the Disinterested
Trustees acting on the matter
(provided that a majority of the
Disinterested Trustees act on the
matter) or an independent legal
counsel in a written opinion shall
determine, based upon a review of
readily available facts (as opposed
to a full trial-type inquiry), that
there is reason to believe that the
recipient ultimately will be found
entitled to indemnification.
As used in this Section 4.3, a "Disinterested
Trustee" is one who is not (i) an "Interested Person"
of the Trust (including anyone who has been exempted
from being an "Interested Person" by any rule,
regulation or order of the Commission), or (ii)
involved in the claim, action, suit or proceeding.
On April 5, 2002, Zurich Scudder Investments, Inc.
("Scudder"), the investment adviser, now known as Deutsche
Investment Management Americas Inc., was acquired by Deutsche
Bank AG, not including certain U.K. Operations (the
"Transaction"). In connection with the Trustees' evaluation of
the Transaction, Deutsche Bank agreed to indemnify, defend and
hold harmless Registrant and the trustees who were not
"interested persons" of Scudder, Deutsche Bank or Registrant
(the "Independent Trustees") for and against any liability and
claims and expenses based upon or arising from, whether in
whole or in part, or directly or indirectly, any untrue
statement or alleged untrue statement of a material fact made
to the Independent Trustees by Deutsche Bank in connection
with the Independent Trustees' consideration of the
Transaction, or any omission or alleged omission of a material
fact necessary in order to make statements made, in light of
the circumstances under which they were made, not misleading.
Deutsche Investment Management Americas, Inc. (hereafter,
"DeIM"), the investment advisor, has agreed, subject to
applicable law and regulation, to indemnify and hold harmless
the Registrant against any loss, damage, liability and
expense, including, without limitation, the advancement and
payment, as incurred, of reasonable fees and expenses of
counsel (including counsel to the Registrant and counsel to
the Independent Trustees) and consultants, whether retained by
the Registrant or the Independent Trustees, and other
customary costs and expenses incurred by the Registrant in
connection with any litigation or regulatory action related to
possible improper market timing or other improper trading
activity or possible improper marketing and sales activity in
the Registrant ("Private Litigation and Enforcement Actions").
In the event that this indemnification is unavailable to the
Registrant for any reason, then DeIM has agreed to contribute
to the amount paid or payable by the Registrant as a result of
any loss, damage, liability or expense in such proportion as
is appropriate to reflect the relative fault of DeIM and the
Registrant with respect to the matters which resulted in such
loss, damage, liability or expense, as well as any other
relevant equitable considerations; provided, that if no final
determination is made in such action or proceeding as to the
relative fault of DeIM and the Registrant, then DeIM shall pay
the entire amount of such loss, damage, liability or expense.
11
<PAGE>
In recognition of its undertaking to indemnify the Registrant,
and in light of the rebuttable presumption generally afforded
to non-interested board members of an investment company that
they have not engaged in disabling conduct, DeIM has also
agreed, subject to applicable law and regulation, to indemnify
and hold harmless each of the Independent Trustees against any
and all loss, damage, liability and expense, including without
limitation the advancement and payment as incurred of
reasonable fees and expenses of counsel and consultants, and
other customary costs and expenses incurred by the Independent
Trustees, arising from the matters alleged in any Private
Litigation and Enforcement Actions or matters arising from or
similar in subject matter to the matters alleged in the
Private Litigation and Enforcement Actions (collectively,
"Covered Matters"), including without limitation:
1. all reasonable legal and other expenses incurred
by the Independent Trustees in connection with the
Private Litigation and Enforcement Actions, and any
actions that may be threatened or commenced in the
future by any person (including any governmental
authority), arising from or similar to the matters
alleged in the Private Litigation and Enforcement
Actions, including without limitation expenses
related to the defense of, service as a witness in,
or monitoring of such proceedings or actions;
2. all liabilities and reasonable legal and other
expenses incurred by any Independent Trustee in
connection with any judgment resulting from, or
settlement of, any such proceeding, action or matter;
3. any loss or reasonable legal and other expenses
incurred by any Independent Trustee as a result of
the denial of, or dispute about, any insurance claim
under, or actual or purported rescission or
termination of, any policy of insurance arranged by
DeIM (or by a representative of DeIM acting as such,
acting as a representative of the Registrant or of
the Independent Trustees or acting otherwise) for the
benefit of the Independent Trustee, to the extent
that such denial, dispute or rescission is based in
whole or in part upon any alleged misrepresentation
made in the application for such policy or any other
alleged improper conduct on the part of DeIM, any of
its corporate affiliates, or any of their directors,
officers or employees;
4. any loss or reasonable legal and other expenses
incurred by any Independent Trustee, whether or not
such loss or expense is incurred with respect to a
Covered Matter, which is otherwise covered under the
terms of any specified policy of insurance, but for
which the Independent Trustee is unable to obtain
advancement of expenses or indemnification under that
policy of insurance, due to the exhaustion of policy
limits which is due in whole or in part to DeIM or
any affiliate thereof having received advancement of
expenses or indemnification under that policy for or
with respect to any Covered Matter; provided, that
the total amount that DeIM will be obligated to pay
under this provision for all loss or expense shall
not exceed the amount that DeIM and any of its
affiliates actually receive under that policy of
insurance for or with respect to any and all Covered
Matters; and
5. all liabilities and reasonable legal and other
expenses incurred by any Independent Trustee in
connection with any proceeding or action to enforce
his or her rights under the agreement, unless DeIM
prevails on the merits of any such dispute in a
final, nonappealable court order.
DeIM is not required to pay costs or expenses or provide
indemnification to or for any individual Independent Trustee
(i) with respect to any particular proceeding or action as to
which the Board of the Registrant has determined that such
Independent Trustee ultimately would not be entitled to
indemnification with respect thereto, or (ii) for any
liability of the Independent Trustee to the Registrant or its
shareholders to which such Independent Trustee would otherwise
be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the Independent Trustee's
duties as a Trustee of the Registrant as determined in a final
adjudication in such proceeding or action. In addition, to the
extent that DeIM has paid costs or expenses under the
agreement to any individual Independent Trustee with respect
to a particular proceeding or action, and there is a final
adjudication in such proceeding or action of the Independent
Trustee's liability to the Registrant or its shareholders by
reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the Independent
12
<PAGE>
Trustee's duties as a Trustee of the Registrant, such
Independent Trustee has undertaken to repay such costs or
expenses to DeIM.
Item 26. Business or Other Connections of Investment Advisor
-------- ---------------------------------------------------
During the last two fiscal years, no director or officer of
Deutsche Investment Management Americas Inc., the investment
advisor, has engaged in any other business, profession,
vocation or employment of a substantial nature other than that
of the business of investment management and, through
affiliates, investment banking.
Item 27. Principal Underwriters
-------- ----------------------
(a)
Scudder Distributors, Inc. acts as principal underwriter of the
Registrant's shares and acts as principal underwriter for registered
open-end management investment companies other funds managed by
Deutsche Investment Management Americas Inc., Deutsche Asset Management
Inc. and Investment Company Capital Corp.
(b)
Information on the officers and directors of Scudder Distributors,
Inc., principal underwriter for the Registrant, is set forth below. The
principal business address is 222 South Riverside Plaza, Chicago,
Illinois 60606.
<TABLE>
<CAPTION>
(1) (2) (3)
Scudder Distributors, Inc.
Name and Principal Positions and Offices with Positions and
Business Address Scudder Distributors, Inc. Offices with Registrant
---------------- -------------------------- -----------------------
<S> <C> <C>
Thomas F. Eggers Chief Executive Officer, Chairman and None
1325 Avenue of the Americas Director
New York, NY 10019
Vincent J. Esposito Vice President and Director None
60 Wall Street
New York, NY 10005
Michael L. Gallagher President and Director None
222 South Riverside Plaza
Chicago, IL 60606
Ralph Mattone Chief Financial Officer and Treasurer None
60 Wall St.
New York, NY 10005
Michael Volo Chief Operating Officer and Vice None
1325 Avenue of the Americas President
New York, NY 10019
Caroline Pearson Secretary Assistant Secretary
Two International Place
Boston, MA 02110-4103
Donna M. White Chief Compliance Officer None
1251 Avenue of the Americas
New York, NY 10020
13
<PAGE>
(1) (2) (3)
Scudder Distributors, Inc.
Name and Principal Positions and Offices with Positions and
Business Address Scudder Distributors, Inc. Offices with Registrant
---------------- -------------------------- -----------------------
David Edlin Vice President None
222 South Riverside Plaza
Chicago, IL 60606
Robert Froelich Vice President None
222 South Riverside Plaza
Chicago, IL 60606
M. Patrick Donovan Vice President & Anti-Money Laundering None
Two International Place Compliance Officer
Boston, MA 02110-4103
Thomas Winnick Vice President None
1325 Avenue of the Americas
New York, NY 10019
Philip J. Collora Assistant Secretary None
222 South Riverside Plaza
Chicago, IL 60606
</TABLE>
(c) Not applicable
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 the Advisor, 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, or DST Systems, Inc., the sub-transfer agent at
127 West 10th Street, Kansas City, Missouri 64105.
Item 29. Management Services
-------- -------------------
Inapplicable.
Item 30. Undertakings
-------- ------------
Inapplicable.
14
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of New York and the State of New York on the 16th day of
February 2005.
SCUDDER VARIABLE SERIES I
By: /s/Julian F. Sluyters
------------------------
Julian F. Sluyters
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective 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/Julian F. Sluyters
-------------------------------------
Julian F. Sluyters Chief Executive Officer February 16, 2005
/s/Dawn-Marie Driscoll
-------------------------------------
Dawn-Marie Driscoll* Chairman and Trustee February 16, 2005
/s/Paul Schubert
-------------------------------------
Paul Schubert Chief Financial Officer February 16, 2005
/s/Henry P. Becton, Jr.
-------------------------------------
Henry P. Becton, Jr.* Trustee February 16, 2005
/s/Keith R. Fox
-------------------------------------
Keith R. Fox* Trustee February 16, 2005
/s/Louis E. Levy
-------------------------------------
Louis E. Levy* Trustee February 16, 2005
/s/Jean Gleason Stromberg
-------------------------------------
Jean Gleason Stromberg* Trustee February 16, 2005
/s/Jean C. Tempel
-------------------------------------
Jean C. Tempel* Trustee February 16, 2005
/s/Carl W. Vogt
-------------------------------------
Carl W. Vogt* Trustee February 16, 2005
</TABLE>
*By: /s/Caroline Pearson
---------------------------
Caroline Pearson**
Assistant Secretary
** Attorney-in-fact pursuant to the powers of attorney as contained in
and incorporated by reference to Post-Effective Amendment No. 31 to
the Registration Statement, as filed on April 27, 2001 and
Post-Effective Amendment No. 34 to the Registration Statement, as
filed on February 27, 2003.
<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. 38
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 42
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
SCUDDER VARIABLE SERIES I
15
<PAGE>
SCUDDER VARIABLE SERIES I
EXHIBIT INDEX
(h) (40)
(h) (41)
(h) (42)
(p) (4)
16
</TEXT>
</DOCUMENT>