Filed electronically with the Securities and Exchange Commission
on September 2, 1999
File No. 811-09085
File No. 333-66385
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933 /_/
Pre-Effective Amendment No. __ /_/
Post-Effective Amendment No. 2 /X/
And/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /_/
Amendment No. 4 /X/
Farmers Investment Trust
------------------------
(Exact Name of Registrant as Specified in Charter)
Two International Place
-----------------------
Boston, Massachusetts 02110-4103
--------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (617) 295-1000
----------------
John Millette
-------------
Scudder Kemper Investments, Inc.
--------------------------------
Two International Place, Boston MA 02110-4103
---------------------------------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
/X/ 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)
/_/ On ____________ pursuant to paragraph (a)(1)
/_/ On ____________ pursuant to paragraph (a)(2) of Rule 485
/_/ On ____________ pursuant to paragraph (a)(3) of Rule 485.
If appropriate, check the following box:
/ / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
<PAGE>
Farmers Mutual Fund
Portfolios
o Income Portfolio
o Income with Growth Portfolio
o Balanced Portfolio
o Growth with Income Portfolio
o Growth Portfolio
Prospectus
September 1, 1999
Offering a broad range of investment opportunities by investing in a select mix
of established mutual funds.
Mutual funds:
o are not FDIC-insured
o have no bank guarantees
o may lose value
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
Contents
3 About The Portfolios
- --------------------------------------------------------------------------------
3 Investment objectives and principal
strategies
4 Principal risks
7 Income Portfolio
9 Income with Growth Portfolio
11 Balanced Portfolio
13 Growth with Income Portfolio
15 Growth Portfolio
17 Underlying funds
17 Investment adviser
19 About Your Investment
- --------------------------------------------------------------------------------
19 Choosing a share class
20 Special features
22 Buying shares
27 Selling and exchanging shares
28 Distributions
29 Taxes
30 Transaction information
<PAGE>
About The Portfolios
Investment objectives and principal strategies
Farmers Mutual Fund Portfolios consist of five professionally managed investment
portfolios -- Income, Income with Growth, Balanced, Growth with Income, and
Growth -- each with a distinct investment objective. Each portfolio attempts to
achieve its objective by allocating its assets among a select group of
underlying funds. The underlying funds fall within three broad categories:
equity funds (domestic and international), bond funds (domestic and
international) and money market funds. The investment objectives and principal
strategies of the portfolios are as follows (investment ranges are expressed in
terms of each portfolio's total assets):
o Income Portfolio seeks a high level of current income by investing
primarily in bond funds, including short- and long-term bond funds,
government bond funds, high yield bond funds and international bond funds.
Long-term bonds typically have an average maturity of greater than ten
years. Short-term bonds typically have an average maturity of less than
three years. The portfolio invests 80-100% in bond funds and 0-20% in a
money market fund, cash or cash equivalents. The portfolio may invest in a
broad mix of bond funds, with holdings of varying maturities and credit
qualities.
o Income with Growth Portfolio seeks current income and, as a secondary
objective, long-term growth of capital, by investing substantially in bond
funds and, to a lesser extent, equity funds. The portfolio invests 60-80%
in bond funds, 20-40% in equity funds and 0-15% in a money market fund,
cash or cash equivalents. The portfolio may invest in a broad mix of bond
funds, with holdings of varying maturities and credit qualities, and equity
funds, including large-cap, small-cap, growth, value and international
funds.
o Balanced Portfolio seeks a balance of current income and long-term growth
of capital by investing predominantly in a mix of equity and bond funds.
The portfolio invests 40-60% in equity funds, 40-60% in bond funds and
0-10% in a money market fund, cash or cash equivalents. At all times the
portfolio will indirectly be invested at least 25% in fixed-income senior
securities. The portfolio may invest in a broad mix of bond funds, with
holdings of varying maturities and credit qualities, and equity funds,
including large-cap, small-cap, growth, value and international funds.
o Growth with Income Portfolio seeks long-term growth of capital and modest
income by investing primarily in equity funds and, to a lesser extent, bond
funds. The portfolio invests 60-80% in equity funds, 20-40% in bond funds
and 0-10% in a money market fund, cash or cash equivalents. The portfolio
may invest in a broad mix of equity funds, including large-cap, small-cap,
growth, value and international funds, and bond funds, with holdings of
varying maturities and credit qualities.
3
<PAGE>
o Growth Portfolio seeks long-term growth of capital through investment
primarily in equity funds. The portfolio invests 95-100% in equity funds
and 0-5% in a money market fund, cash or cash equivalents. The portfolio
may invest in a broad mix of equity funds, including large-cap, small-cap,
growth, value and international funds.
To the extent that a portfolio invests in bond funds, these underlying funds may
invest in investment grade bonds (bonds rated in the four highest ratings
categories by Standard & Poor's Corporation (S&P) (AAA, AAA and BBB) or Moody's
Investors Service, Inc. ("Moody's") (Aaa, Aa, A and Baa) or in bonds that are
not considered investment grade (bonds rated Ba or below by Moody's or BB or
below by S&P). Non-investment grade bonds are higher yielding, higher risk
securities commonly known as "junk bonds." Underlying funds may have the ability
to invest in debt securities rated as low as D.
The primary difference among the portfolios is their asset allocations among the
underlying funds. (See "Underlying funds" for a list of the funds that the
portfolios may invest in.) The portfolio management team for each portfolio
allocates investments (buys and sells shares of the underlying funds) using a
disciplined, proprietary investment approach designed for each portfolio that
incorporates fundamental research and quantitative data. The underlying mutual
funds are selected based on a combination of factors including, track record,
performance and management stability. The portfolio management team also
considers the outlook of the portfolios' investment adviser, Scudder Kemper
Investments, Inc., for the financial markets and the world economies. Each
portfolio may invest in underlying funds that are affiliated or unaffiliated
with the portfolios' investment adviser.
From time to time, each portfolio may invest, without limit, in cash and cash
equivalents for temporary defensive purposes. Because this defensive policy
differs from each portfolio's investment objective, a portfolio may not achieve
its goals during such a defensive period.
Each portfolio's investment objective and policies may be changed without a vote
of shareholders.
Of course, there can be no guarantee that by following its particular investment
strategies, a portfolio will achieve its objective.
Principal risks
Each portfolio's ability to achieve its objective depends on the performance of
the underlying funds in which it invests, as well as the allocation of the
portfolio's assets among the underlying funds. The performance of the underlying
funds, in turn, depends upon the performance of the securities in which they
invest and the skill of their investment advisers.
A portfolio's return and net asset value will go up and down, and it is possible
to lose money invested in a portfolio. The portfolio management team's skill in
choosing the appropriate mix of underlying funds will determine in large part a
portfolio's ability to achieve its objective.
4
<PAGE>
An investment in a portfolio is subject to varying degrees of potential
investment risk. The more aggressive portfolios are intended for investors with
longer investment time horizons and high degrees of risk tolerance. In pursuing
higher investment returns, these portfolios incur greater risks and more
dramatic fluctuations in value. In contrast, the more conservative portfolios
are designed for investors with shorter investment time horizons and low degrees
of risk tolerance.
The Income Portfolio may be suitable for investors with an investment time
horizon of 1-3 years or more. The Income with Growth Portfolio may be suitable
for investors with an investment time horizon of 3-5 years or more. The Balanced
Portfolio may be suitable for investors with an investment time horizon of 3-5
years or more. The Growth with Income Portfolio may be suitable for investors
with an investment time horizon of 5 years or more. The Growth Portfolio may be
suitable for investors with an investment time horizon of 5 years or more.
Because the portfolios invest in underlying funds, each portfolio will
indirectly bear its pro rata share of fees and expenses incurred by the
underlying funds in which it is invested. This may result in total returns that
are lower than if a portfolio had directly invested in the underlying funds'
portfolio securities.
Each portfolio's risks are directly related to the risks of the securities held
by the underlying funds, as well as the proportion of the portfolio's assets
invested in each of the underlying funds. The principal risks of the securities
held by the underlying funds include the following:
Equity investing risk. An investment in the common stock of a company represents
a proportionate ownership interest in that company. Therefore, a fund
participates in the stock market performance of any company in which it holds
stock. Compared to other classes of financial assets, such as bonds or cash
equivalents, common stocks historically have offered a greater potential for
gain on investment. However, the market value of stocks can fluctuate
significantly, reflecting such things as the business performance of the issuing
company, investors' perceptions of the company or the overall stock market and
general economic or financial market movements. Smaller companies are especially
sensitive to these factors, but any company may become valueless.
Income investing risk. The principal risks involved with investments in bonds
include interest rate risk, credit risk and pre-payment risk. Interest rate risk
refers to the likely decline in the value of bonds as interest rates rise.
Generally, longer-term securities are more susceptible than shorter-term
securities to changes in value as a result of interest rate changes. Credit risk
refers to the risk that an issuer of a bond may default with respect to the
payment of principal and interest. The lower a bond is rated, the more it is
considered to be a speculative or risky investment. Pre-payment risk is
associated with pooled debt securities, such as mortgage-backed securities and
asset-backed securities, but may affect other debt securities as well. When the
underlying debt obligations are prepaid ahead of schedule, the return on the
security will be lower than expected. Pre-payment usually increases when
interest rates are falling.
5
<PAGE>
Foreign investing risk. Investing in foreign securities and, to a greater extent
emerging markets, involves risks in addition to those associated with investing
in the U.S. To the extent that investments are denominated in foreign
currencies, adverse changes in the value of foreign currencies may have a
significant negative effect on returns from these investments. Investing in
foreign securities exposes a fund to an increased risk of political and economic
instability.
Other risks of investing in foreign securities include limited information,
higher brokerage costs, different accounting standards and thinner trading
markets as compared to U.S. markets.
Inflation risk. There is a possibility that the rising prices of goods and
services may have the effect of lowering the real value of an underlying fund's
return. This is likely to have a greater impact on the returns of bond funds and
money market funds, which historically have had more modest returns in
comparison to equity funds.
Portfolio management risk. There is a risk that a portfolio or underlying fund
may not achieve its objective because its portfolio management team may not
effectively execute its investment strategies.
6
<PAGE>
Income Portfolio
Past performance
Because this is a new portfolio, it did not have a full calendar year of
performance data to report as of the date of this prospectus.
Fee and expense information
This information is designed to help you understand the fees and expenses that
you may pay if you buy and hold shares of the portfolio. Each class of shares
has a different set of transaction fees, which will vary based on the length of
time you hold shares in the portfolio and the amount of your investment. You
will find details about fee discounts and waivers in the section of this
prospectus entitled "ABOUT YOUR INVESTMENT -- Choosing a share class."
Each class of shares of the portfolio has a single, all-inclusive fee covering
investment management and other operating expenses. This fee rate will not
fluctuate.
Shareholder fees: Fees paid directly from your investment.
Class A Class B
------- -------
Maximum sales charge (load) imposed on purchases 5.00% NONE
(as % of offering price)
Maximum deferred sales charge (load) NONE^(1) 4.00%
Maximum sales charge (load) imposed on reinvested NONE NONE
dividends/distributions
Redemption fee (as % of amount redeemed, if applicable) NONE NONE
Exchange fee NONE NONE
Annual portfolio operating expenses (expenses that are deducted from
portfolio assets):
Class A Class B
------- -------
Management fee 0.75% 0.75%
Distribution (12b-1) and service fees 0.25% 1.00%
Other expenses^(2) 0.00% 0.00%
----- -----
Total annual portfolio operating expenses 1.00% 1.75%
===== =====
- -----------
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% if redeemed within one year of purchase and 0.50% if
redeemed during the second year following purchase.
(2) The management fee includes ordinary operating expenses. See "ABOUT THE
PORTFOLIOS -- Investment adviser" for more information.
Income Portfolio's shareholders will also indirectly bear the portfolio's pro
rata share of fees and expenses charged by the underlying funds in which the
portfolio is invested. The range for the average weighted expense ratio borne by
the portfolio in connection with its investments in the underlying funds is
expected to be 0.44% to 0.95%. This information is provided as a range since the
average assets of the portfolio invested in each of the underlying funds will
fluctuate.
7
<PAGE>
Example
This example is to help you compare the cost of investing in the portfolio with
the cost of investing in other mutual funds.
This example illustrates the impact of the total estimated pro rata fees and
expenses (including both portfolio and underlying fund fees and expenses) on an
account with an initial investment of $10,000, based on the portfolio fees and
operating expenses and the midpoint of the range of expenses expected to be
borne by the portfolio in connection with its investments in the underlying
funds (discussed above). It assumes a 5% annual return, the reinvestment of all
dividends and distributions and "annual portfolio operating expenses" remaining
the same each year.
Fees and expenses if you sold shares at the end of:
Class A Class B
------- -------
1 Year $597 $591
3 Years $802 $881
5 Years $1,025 $1,184
10 Years $1,663 $2,062
Fees and expenses if you did not sell your shares:
Class A Class B
------- -------
1 Year $597 $178
3 Years $802 $551
5 Years $1,025 $949
10 Years $1,663 $2,062
8
<PAGE>
Income with Growth Portfolio
Past performance
Because this is a new portfolio, it did not have a full calendar year of
performance data to report as of the date of this prospectus.
Fee and expense information
This information is designed to help you understand the fees and expenses that
you may pay if you buy and hold shares of the portfolio. Each class of shares
has a different set of transaction fees, which will vary based on the length of
time you hold shares in the portfolio and the amount of your investment. You
will find details about fee discounts and waivers in the section of this
prospectus entitled "ABOUT YOUR INVESTMENT -- Choosing a share class."
Each class of shares of the portfolio has a single, all-inclusive fee covering
investment management and other operating expenses. This fee rate will not
fluctuate.
Shareholder fees: Fees paid directly from your investment.
Class A Class B
------- -------
Maximum sales charge (load) imposed on
purchases (as % of offering price) 5.25% NONE
Maximum deferred sales charge (load) NONE^(1) 4.00%
Maximum sales charge (load) imposed on
reinvested dividends/distributions NONE NONE
Redemption fee (as % of amount redeemed,
if applicable) NONE NONE
Exchange fee NONE NONE
Annual portfolio operating expenses (expenses that are deducted from portfolio
assets):
Class A Class B
------- -------
Management fee 0.75% 0.75%
Distribution (12b-1) and service fees 0.25% 1.00%
Other expenses^(2) 0.00% 0.00%
----- -----
Total annual portfolio operating expenses 1.00% 1.75%
===== =====
- -----------
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% if redeemed within one year of purchase and 0.50% if
redeemed during the second year following purchase.
(2) The management fee includes ordinary operating expenses. See "ABOUT THE
PORTFOLIOS -- Investment adviser" for more information.
9
<PAGE>
Income with Growth Portfolio's shareholders will also indirectly bear the
portfolio's pro rata share of fees and expenses charged by the underlying funds
in which the portfolio is invested. The range for the average weighted expense
ratio borne by the portfolio in connection with its investments in the
underlying funds is expected to be 0.60% to 1.28%. This information is provided
as a range since the average assets of the portfolio invested in each of the
underlying funds will fluctuate.
Example
This example is to help you compare the cost of investing in the portfolio with
the cost of investing in other mutual funds.
This example illustrates the impact of the total estimated pro rata fees and
expenses (including both portfolio and underlying fund fees and expenses) on an
account with an initial investment of $10,000, based on the portfolio fees and
operating expenses and the midpoint of the range of expenses expected to be
borne by the portfolio in connection with its investments in the underlying
funds (discussed above). It assumes a 5% annual return, the reinvestment of all
dividends and distributions and "annual portfolio operating expenses" remaining
the same each year.
Fees and expenses if you sold shares at the end of:
Class A Class B
------- -------
1 Year $622 $591
3 Years $827 $881
5 Years $1,048 $1,184
10 Years $1,685 $2,062
Fees and expenses if you did not sell your shares:
Class A Class B
------- -------
1 Year $622 $178
3 Years $827 $551
5 Years $1,048 $949
10 Years $1,685 $2,062
10
<PAGE>
Balanced Portfolio
Past performance
Because this is a new portfolio, it did not have a full calendar year of
performance data to report as of the date of this prospectus.
Fee and expense information
This information is designed to help you understand the fees and expenses that
you may pay if you buy and hold shares of the portfolio. Each class of shares
has a different set of transaction fees, which will vary based on the length of
time you hold shares in the portfolio and the amount of your investment. You
will find details about fee discounts and waivers in the section of this
prospectus entitled "ABOUT YOUR INVESTMENT -- Choosing a share class."
Each class of shares of the portfolio has a single, all-inclusive fee covering
investment management and other operating expenses. This fee rate will not
fluctuate.
Shareholder fees: Fees paid directly from your investment.
Class A Class B
------- -------
Maximum sales charge (load) imposed on purchases
(as % of offering price) 5.75% NONE
Maximum deferred sales charge (load) NONE(1) 4.00%
Maximum sales charge (load) imposed on reinvested NONE NONE
dividends/distributions
Redemption fee (as % of amount redeemed, NONE NONE
if applicable)
Exchange fee NONE NONE
Annual portfolio operating expenses (expenses that are deducted from portfolio
assets):
Class A Class B
------- -------
Management fee 0.75% 0.75%
Distribution (12b-1) and service fees 0.25% 1.00%
Other expenses(2) 0.00% 0.00%
----- -----
Total annual portfolio operating expenses 1.00% 1.75%
===== =====
- -----------
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% if redeemed within one year of purchase and 0.50% if
redeemed during the second year following purchase.
(2) The management fee includes ordinary operating expenses. See "ABOUT THE
PORTFOLIOS -- Investment adviser" for more information.
Balanced Portfolio's shareholders will also indirectly bear the portfolio's pro
rata share of fees and expenses charged by the underlying funds in which the
portfolio is invested. The range for the average weighted expense ratio borne by
the portfolio in connection with its investments in the underlying funds is
expected to be 0.53% to 1.45%. This information is provided as a range since the
average assets of the portfolio invested in each of the underlying funds will
fluctuate.
11
<PAGE>
Example
This example is to help you compare the cost of investing in the portfolio with
the cost of investing in other mutual funds.
This example illustrates the impact of the total estimated pro rata fees and
expenses (including both portfolio and underlying fund fees and expenses) on an
account with an initial investment of $10,000, based on the portfolio fees and
operating expenses and the midpoint of the range of expenses expected to be
borne by the portfolio in connection with its investments in the underlying
funds (discussed above). It assumes a 5% annual return, the reinvestment of all
dividends and distributions and "annual portfolio operating expenses" remaining
the same each year.
Fees and expenses if you sold shares at the end of:
Class A Class B
------- -------
1 Year $671 $591
3 Years $875 $881
5 Years $1,096 $1,184
10 Years $1,729 $2,062
Fees and expenses if you did not sell your shares:
Class A Class B
------- -------
1 Year $671 $178
3 Years $875 $551
5 Years $1,096 $949
10 Years $1,729 $2,062
12
<PAGE>
Growth with Income Portfolio
Past performance
Because this is a new portfolio, it did not have a full calendar year of
performance data to report as of the date of this prospectus.
Fee and expense information
This information is designed to help you understand the fees and expenses that
you may pay if you buy and hold shares of the portfolio. Each class of shares
has a different set of transaction fees, which will vary based on the length of
time you hold shares in the portfolio and the amount of your investment. You
will find details about fee discounts and waivers in the section of this
prospectus entitled "ABOUT YOUR INVESTMENT -- Choosing a share class."
Each class of shares of the portfolio has a single, all-inclusive fee covering
investment management and other operating expenses. This fee rate will not
fluctuate.
Shareholder fees: Fees paid directly from your investment.
Class A Class B
------- -------
Maximum sales charge (load) imposed on purchases 5.75% NONE
(as % of offering price)
Maximum deferred sales charge (load) NONE^(1) 4.00%
Maximum sales charge (load) imposed on reinvested NONE NONE
dividends/distributions
Redemption fee (as % of amount redeemed, NONE NONE
if applicable)
Exchange fee NONE NONE
Annual portfolio operating expenses (expenses that are deducted from portfolio
assets):
Class A Class B
------- -------
Management fee 0.75% 0.75%
Distribution (12b-1) and service fees 0.25% 1.00%
Other expenses^(2) 0.00% 0.00%
----- -----
Total annual portfolio operating expenses 1.00% 1.75%
===== =====
- -----------
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% if redeemed within one year of purchase and 0.50% if
redeemed during the second year following purchase.
(2) The management fee includes ordinary operating expenses. See "ABOUT THE
PORTFOLIOS -- Investment adviser" for more information.
Growth with Income Portfolio's shareholders will also indirectly bear the
portfolio's pro rata share of fees and expenses charged by the underlying funds
in which the portfolio is invested. The range for the average weighted expense
ratio borne by the portfolio in connection with its investments in the
underlying funds is expected to be 0.59% to 1.61%. This information is provided
as a range since the average assets of the portfolio invested in each of the
underlying funds will fluctuate.
13
<PAGE>
Example
This example is to help you compare the cost of investing in the portfolio with
the cost of investing in other mutual funds.
This example illustrates the impact of the total estimated pro rata fees and
expenses (including both portfolio and underlying fund fees and expenses) on an
account with an initial investment of $10,000, based on the portfolio fees and
operating expenses and the midpoint of the range of expenses expected to be
borne by the portfolio in connection with its investments in the underlying
funds (discussed above). It assumes a 5% annual return, the reinvestment of all
dividends and distributions and "annual portfolio operating expenses" remaining
the same each year.
Fees and expenses if you sold shares at the end of:
Class A Class B
------- -------
1 Year $671 $591
3 Years $875 $881
5 Years $1,096 $1,184
10 Years $1,729 $2,062
Fees and expenses if you did not sell your shares:
Class A Class B
------- -------
1 Year $671 $178
3 Years $875 $551
5 Years $1,096 $949
10 Years $1,729 $2,062
14
<PAGE>
Growth Portfolio
Past performance
Because this is a new portfolio, it did not have a full calendar year of
performance data to report as of the date of this prospectus.
Fee and expense information
This information is designed to help you understand the fees and expenses that
you may pay if you buy and hold shares of the portfolio. Each class of shares
has a different set of transaction fees, which will vary based on the length of
time you hold shares in the portfolio and the amount of your investment. You
will find details about fee discounts and waivers in the section of this
prospectus entitled "ABOUT YOUR INVESTMENT -- Choosing a share class."
Each class of shares of the portfolio has a single, all-inclusive fee covering
investment management and other operating expenses. This fee rate will not
fluctuate.
Shareholder fees: Fees paid directly from your investment.
Class A Class B
------- -------
Maximum sales charge (load) imposed on purchases 5.75% NONE
(as % of offering price)
Maximum deferred sales charge (load) NONE^(1) 4.00%
Maximum sales charge (load) imposed on reinveste NONE NONE
dividends/distributions
Redemption fee (as % of amount redeemed, NONE NONE
if applicable)
Exchange fee NONE NONE
Annual portfolio operating expenses (expenses that are deducted from portfolio
assets):
Class A Class B
------- -------
Management fee 0.75% 0.75%
Distribution (12b-1) and service fees 0.25% 1.00%
Other expenses^(2) 0.00% 0.00%
----- -----
Total annual portfolio operating expenses 1.00% 1.75%
===== =====
- -----------
(1) The redemption of Class A shares purchased at net asset value under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge of 1% if redeemed within one year of purchase and 0.50% if
redeemed during the second year following purchase.
(2) The management fee includes ordinary operating expenses. See "ABOUT THE
PORTFOLIOS -- Investment adviser" for more information.
Growth Portfolio's shareholders will also indirectly bear the portfolio's pro
rata share of fees and expenses charged by the underlying funds in which the
portfolio is invested. The range for the average weighted expense ratio borne by
the portfolio in connection with its investments in the underlying funds is
expected to be 0.73% to 1.78%. This information is provided as a range since the
average assets of the portfolio invested in each of the underlying funds will
fluctuate.
15
<PAGE>
Example
This example is to help you compare the cost of investing in the portfolio with
the cost of investing in other mutual funds.
This example illustrates the impact of the total estimated pro rata fees and
expenses (including both portfolio and underlying fund fees and expenses) on an
account with an initial investment of $10,000, based on the portfolio fees and
operating expenses and the midpoint of the range of expenses expected to be
borne by the portfolio in connection with its investments in the underlying
funds (discussed above). It assumes a 5% annual return, the reinvestment of all
dividends and distributions and "annual portfolio operating expenses" remaining
the same each year.
Fees and expenses if you sold shares at the end of:
Class A Class B
------- -------
1 Year $671 $591
3 Years $875 $881
5 Years $1,096 $1,184
10 Years $1,729 $2,062
Fees and expenses if you did not sell your shares:
Class A Class B
------- -------
1 Year $671 $178
3 Years $875 $551
5 Years $1,096 $949
10 Years $1,729 $2,062
16
<PAGE>
Underlying funds
The portfolios invest in underlying fund shares that do not charge any sales,
service or distribution fees.
The portfolios may invest in, but are not limited to, the following underlying
funds:
Equity funds
o Janus Twenty Fund
o Kemper-Dreman High Return Equity Fund
o Scudder Growth and Income Fund
o Scudder International Fund
o Scudder Small Company Value Fund
o Templeton Developing Markets Trust
Bond funds
o Kemper High Yield Fund
o Kemper U.S. Government Securities Fund
o PIMCO Foreign Bond Fund
o PIMCO Low Duration Fund
o Scudder Income Fund
Money market fund
o Zurich Money Market Fund
Investment adviser
Each portfolio retains the investment management firm of Scudder Kemper
Investments, Inc. (the "Adviser"), Two International Place, Boston,
Massachusetts, to manage the portfolio's daily investment and business affairs
subject to the policies established by the Board of Trustees. The Adviser
actively manages your investment in a portfolio.
Portfolio management
Each portfolio is managed by a team of investment professionals, each of whom
plays an important role in the portfolio's management process. Team members work
together to develop investment strategies and select underlying funds for each
portfolio. They are supported by the Adviser's large staff of economists,
research analysts, traders and other investment specialists who work in the
Adviser's offices across the United States and abroad. The Adviser believes that
its team approach benefits portfolio investors by bringing together many
disciplines and leveraging its extensive resources.
17
<PAGE>
The following investment professionals are associated with each portfolio as
indicated:
Joined the
Name and Title Portfolios Responsibilities and Background
- --------------------------------------------------------------------------------
Philip S. Fortuna 1999 Mr. Fortuna joined the Adviser in
Lead Manager 1986 as a manager of institutional
equity accounts and has oversight
responsibility for the portfolios'
day-to-day management and investment
strategies. In addition to his
portfolio management
responsibilities, Mr. Fortuna is
currently the director of the
Adviser's quantitative group.
Shahram Tajbakhsh 1999 Mr. Tajbakhsh joined the Adviser in
Manager 1996 and has over six years of
industry experience as a lead
project manager, including work in
developing quantitative databases
and quantitative models.
Salvatore J. Bruno 1999 Mr. Bruno joined the Adviser in 1991
Manager and has over seven years of
investment industry experience as a
quantitative services analyst.
- --------------------------------------------------------------------------------
The Adviser pays each portfolio's ordinary operating expenses. The following
expenses are not considered to be ordinary operating expenses of a portfolio:
interest; all taxes or governmental fees payable with respect to the portfolio;
all brokers' commissions and other charges incident to the purchase, sale, or
lending of a portfolio's portfolio securities; all compensation of Trustees
(other than those affiliated with the Adviser) and all expenses incurred in
connection with their service; and non-recurring expenses as may arise,
including the costs of legal proceedings to which a portfolio may be a party and
the expenses the portfolio may incur as a result of its legal obligation to
indemnify its officers and agents; and expenses incurred under the portfolio's
shareholder services and distribution plan.
Year 2000 and euro readiness
Like all mutual funds, the portfolios could be affected by the inability of some
computer systems to recognize the year 2000. Also, because certain underlying
funds invest in foreign securities, a portfolio could be affected by accounting
differences, changes in tax treatment or other issues related to the conversion
of certain European currencies into the euro, which is already underway. The
Adviser has readiness programs designed to address these problems, and is also
researching the readiness of suppliers and business partners as well as issuers
of securities the fund owns. Still, there's some risk that one or both of these
problems could materially affect a portfolio's operations (such as its ability
to calculate net asset value and to handle purchases and redemptions), its
investments, or securities markets in general.
18
<PAGE>
About Your Investment
Choosing a share class
Each portfolio provides investors with the option of purchasing shares in the
following ways:
- --------------------------------------------------------------------------------
Class A Shares Offered at net asset value, subject to a Rule 12b-1
distribution fee, and a maximum sales charge of: 5.00% of
the offering price for the Income Portfolio, 5.25% of the
offering price for the Income with Growth Portfolio and
5.75% of the offering price for Balanced, Growth with
Income, and Growth Portfolios. Reduced sales charges apply
to purchases of $50,000 or more. Class A shares purchased at
net asset value under the Large Order NAV Purchase Privilege
may be subject to a 1% contingent deferred sales charge if
redeemed within one year of purchase and a 0.50% contingent
deferred sales charge if redeemed during the second year
following purchase.
Class B Shares Offered at net asset value, subject to a Rule 12b-1
distribution fee and a contingent deferred sales charge that
declines from 4% to zero on certain redemptions made within
six years of purchase. Class B shares automatically convert
into Class A shares (which have lower ongoing Class B Shares
expenses) six years after purchase.
- --------------------------------------------------------------------------------
When placing purchase orders, investors must specify whether the order is for
Class A or Class B shares. If a class of shares is not specified on the account
application, Class A shares will be purchased for an investor. Each class of
shares represents interests in the same portfolio of investments of a portfolio.
The decision as to which class to choose depends on a number of factors,
including the amount and intended length of the investment. Investors that
qualify for reduced sales charges might consider Class A shares. Investors who
prefer not to pay an initial sales charge and who plan to hold their investment
for more than six years might consider Class B shares. For more information
about these arrangements, please call Farmers Customer Support toll-free at
1-877-327-8899.
Shareholder services and distribution plan
Kemper Distributors, Inc. (the "Distributor"), a subsidiary of the Adviser, is
the principal underwriter and distributor of the portfolios' shares and acts as
agent of the portfolios in the sale of their shares. The Distributor also
provides information and shareholder services for shareholders of each
portfolio. Each portfolio has adopted a shareholder services and distribution
plan under Rule 12b-1 that provides for fees payable as an expense of the Class
A and Class B shares that are used by the Distributor to pay for distribution
and other services provided to shareholders of each such class. The fee is
payable monthly by the portfolio to the Distributor at the annual rate of 0.25%
and 1.00% of average daily net assets attributable to the Class A and Class B
shares of the portfolio, respectively. The Distributor may pay a portion of this
fee to compensate selling firms for sales of Class B shares. The Distributor
compensates selling firms for sales of Class B shares at the time of sale at a
commission rate of 2.93% of the amount of Class B shares sold. Because 12b-1
fees
19
<PAGE>
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. Long-term shareholders may pay more than the economic equivalent of the
maximum initial sales charges permitted by the National Association of
Securities Dealers, although the Distributor believes that it is unlikely, in
the case of Class B shares, because of the automatic conversion feature of those
shares.
The Distributor may engage other firms to provide information and shareholder
services for shareholders of each portfolio. The Distributor may pay each such
firm a service fee at an annual rate of up to 0.25% of net assets of the Class A
and Class B shares maintained and serviced by the firm. Firms to which service
fees may be paid include broker-dealers affiliated with the Distributor.
Special features
Certain programs and privileges are available. Please talk to your agent or call
toll-free 1-877-327-8899 for information about:
Class A Shares -- Combined Purchases. Each portfolio's Class A shares may be
purchased at the rate applicable to the discount bracket attained by combining
concurrent investments in Class A shares of the portfolios.
Class A Shares -- Letter of Intent. The same reduced sales charges for Class A
shares also apply to the aggregate amount of purchases made by any purchaser
within a 24-month period under a written Letter of Intent ("Letter") provided by
the Distributor. The Letter, which imposes no obligation to purchase or sell
additional Class A shares, provides for a price adjustment depending upon the
actual amount purchased within such period.
Class A Shares -- Cumulative Discount. Class A shares of a portfolio may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of a portfolio being purchased, the value of all Class A
shares of the portfolios (computed at the maximum offering price at the time of
the purchase for which the discount is applicable) already owned by the
investor.
Class A Shares -- Large Order NAV Purchase Privilege. Class A shares of the
portfolios may be purchased at net asset value by any purchaser provided that
the amount invested in the portfolios totals at least $1,000,000 including
purchases of Class A shares pursuant to the "Combined Purchases," "Letter of
Intent" and "Cumulative Discount" features described above.
Exchange Privilege -- General. Shareholders of Class A and Class B shares may
exchange their shares for shares of the corresponding class of another
portfolio. Shareholders of either class of shares of a portfolio also may
exchange their shares for shares of Farmers Money Market Portfolio -- Retail
Shares. Shares of a portfolio with a value in excess of $1,000,000 acquired by
exchange from another portfolio may not be exchanged thereafter until they have
been owned for 15 days. For purposes of determining any contingent deferred
sales charge that may be imposed upon the redemption of the shares received on
exchange, amounts exchanged retain their original cost and purchase date. In the
case of an exchange of Class B shares of a
20
<PAGE>
portfolio for Farmers Money Market Portfolio -- Retail Shares, the period during
which the Retail Shares are held is not considered for purposes of calculating
the contingent deferred sales charge applicable to the Class B shares exchanged.
A portfolio may terminate or change the terms of the exchange privilege. In
general, shareholders will receive notice of any material change to the exchange
privilege prior to the change.
Systematic Exchange Privilege. Shareholders may arrange for a specified amount
of shares of a portfolio to be automatically exchanged for shares of another
portfolio. Shares must be of the same class, although shareholders of either
class of a portfolio may automatically exchange their shares for shares of
Farmers Money Market Portfolio -- Retail Shares.
Systematic Withdrawal Plan. Shareholders may arrange for a specified dollar
amount to be paid to a designated payee on a monthly, quarterly, semiannual or
annual basis.
Bank Direct Deposit. Shareholders may arrange for an automatic investment
program. Investments can be made automatically from an account at a bank or
other institution.
Payroll/Government Direct Deposit. All or a portion of a shareholder's net pay
can be automatically invested in a portfolio.
AutoBuy/AutoSell. Shareholders can enroll in a program that permits the transfer
of money to/from an account at a bank or other institution using the Automated
Clearing House System. Shares can be bought or sold using this system.
Retirement Plans. Farmers Mutual Fund Portfolios are available for certain
individual and group retirement plans.
More information about the special features described above are provided in the
portfolios' Statement of Additional Information.
21
<PAGE>
Buying shares
Class A shares
Income Portfolio
Public offering price including sales charge
Sales Charge
Allowed to
Sales Charge as a Sales Charge as a Dealers as a
Percentage Percentage of Percentage of
Amount of Purchase of Offering Price Net Asset Value* Offering Price*
- ------------------ ----------------- ---------------- ---------------
Less than $50,000 5.00% 5.26% 3.30%
$50,000 but less than
$100,000 4.50 4.71 2.93
$100,000 but less than
$250,000 3.50 3.63 2.20
$250,000 but less than
$500,000 2.60 2.67 1.65
$500,000 but less than
$1 million 2.00 2.04 1.28
$1 million and over 0.00** 0.00** ***
- -----------
* Rounded to the nearest one hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales charge
as discussed below.
*** Although investors may not pay a sales charge on purchases of Class A
shares of $1 million and over, the Distributor may compensate selling firms
in connection with such purchases at a rate of up to 0.73% of the amount of
Class A shares purchased.
22
<PAGE>
Income with Growth Portfolio
Public offering price including sales charge
Sales Charge
Allowed to
Sales Charge as a Sales Charge as a Dealers as a
Percentage Percentage of Percentage of
Amount of Purchase of Offering Price Net Asset Value* Offering Price*
- ------------------ ----------------- ---------------- ---------------
Less than $50,000 5.25% 5.54% 3.42%
$50,000 but less than
$100,000 4.50 4.71 2.93
$100,000 but less than
$250,000 3.50 3.63 2.20
$250,000 but less than
$500,000 2.60 2.67 1.65
$500,000 but less than
$1 million 2.00 2.04 1.28
$1 million and over 0.00** 0.00** ***
- -----------
* Rounded to the nearest one hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales charge
as discussed below.
*** Although investors may not pay a sales charge on purchases of Class A
shares of $1 million and over, the Distributor may compensate selling firms
in connection with such purchases at a rate of up to 0.73% of the amount of
Class A shares purchased.
Balanced Portfolio, Growth with Income Portfolio, and Growth Portfolio
Public offering price including sales charge
Sales Charge
Allowed to
Sales Charge as a Sales Charge as a Dealers as a
Percentage Percentage of Percentage of
Amount of Purchase of Offering Price Net Asset Value* Offering Price*
- ------------------ ----------------- ---------------- ---------------
Less than $50,000 5.75% 6.10% 3.79%
$50,000 but less than
$100,000 4.50 4.71 2.93
$100,000 but less than
$250,000 3.50 3.63 2.20
$250,000 but less than
$500,000 2.60 2.67 1.65
$500,000 but less than
$1 million 2.00 2.04 1.28
$1 million and over 0.00** 0.00** ***
- -----------
* Rounded to the nearest one hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales charge
as discussed below.
*** Although investors may not pay a sales charge on purchases of Class A
shares of $1 million and over, the Distributor may compensate selling firms
in connection with such purchases at a rate of up to 0.73% of the amount of
Class A shares purchased.
23
<PAGE>
Dealer concessions
Each portfolio receives the entire net asset value of all its Class A shares
sold. The Distributor retains the sales charge on shares of Class A shares from
which it allows discounts from the applicable public offering price to
investment dealers, which discounts are uniform for all dealers in the United
States and its territories. The normal discount allowed to dealers is set forth
in the above table. Upon notice to all dealers with whom it has sales
agreements, the Distributor may reallow up to the full applicable sales charge,
as shown in the above table, during periods and for transactions specified in
such notice and such reallowances may be based upon attainment of minimum sales
levels. During periods when 90% or more of the sales charge is reallowed, such
dealers may be deemed to be underwriters as that term is defined in the
Securities Act of 1933.
NAV purchases
Class A shares of a portfolio may be purchased at net asset value:
o by shareholders in connection with the investment or reinvestment of income
and capital gain dividends
o by a participant-directed qualified retirement plan or a
participant-directed non-qualified deferred compensation plan or a
participant-directed qualified retirement plan, providing that the
portfolios are accepting such orders
o by any purchaser with Farmers Mutual Fund Portfolios investment totals of
at least $1,000,000
o by officers, trustees, directors, employees (including retirees), certain
independent contractors and sales representatives of a portfolio, its
investment adviser, its principal underwriter or certain affiliated
companies, for themselves or members of their families or any trust,
pension, profit-sharing or other benefit plan for such persons
o by registered representatives and employees of broker-dealers having
selling group agreements with the Distributor or any trust, pension,
profit-sharing or other benefit plan for such persons
o in connection with the acquisition of the assets of or merger or
consolidation with another investment company
24
<PAGE>
Contingent deferred sales charge
A contingent deferred sales charge may be imposed upon redemption of Class A
shares purchased under the Large Order NAV Purchase Privilege as follows: 1% if
they are redeemed within one year of purchase and 0.50% if redeemed during the
second year following purchase. The charge will not be imposed upon redemption
of reinvested dividends or share appreciation. The charge is applied to the
value of the shares redeemed, excluding amounts not subject to the charge. The
contingent deferred sales charge will be waived in the event of:
o redemptions under a portfolio's Systematic Withdrawal Plan at a maximum of
10% per year of the net asset value of the account
o redemption of shares of a shareholder (including a registered joint owner)
who has died
o redemption of shares of a shareholder (including a registered joint owner)
who after purchase of the shares being redeemed becomes totally disabled
(as evidenced by a determination by the federal Social Security
Administration)
o redemptions by a participant-directed qualified retirement plan or a
participant-directed non-qualified deferred compensation plan or a
participant-directed qualified retirement plan, providing that the
portfolios are accepting such orders
o redemptions by employer sponsored employee benefit plans using the
subaccount record keeping system made available through Kemper Service
Company (the "Shareholder Service Agent")
o redemptions of shares whose dealer of record at the time of the investment
notifies the Distributor that the dealer waives the commission applicable
to such Large Order NAV Purchase
Rule 12b-1 fee
0.25%
Exchange privilege
Class A shares may be exchanged for Class A shares of another portfolio or
Farmers Money Market Portfolio -- Retail Shares at their relative net asset
values.
Class A shares purchased under the Large Order NAV Purchase Privilege may be
exchanged for Class A shares of any portfolio or Farmers Money Market Portfolio
- -- Retail Shares without paying any contingent deferred sales charge. If the
Class A shares or Farmers Money Market Portfolio -- Retail Shares received on
exchange are redeemed thereafter, a contingent deferred sales charge may be
imposed.
25
<PAGE>
Class B shares
Public offering price
Net asset value per share without any sales charge at the time of purchase
Contingent deferred sales charge
A contingent deferred sales charge may be imposed upon redemption of Class B
shares. There is no such charge upon redemption of any share appreciation or
reinvested dividends. The charge is computed at the following rates applied to
the value of the shares redeemed excluding amounts not subject to the charge.
- --------------------------------------------------------------------------------
Year of Redemption
After Purchase: First Second Third Fourth Fifth Sixth
- --------------------------------------------------------------------------------
Contingent Deferred
Sales Charge: 4% 3% 3% 2% 2% 1%
- --------------------------------------------------------------------------------
The contingent deferred sales charge will be waived:
o for redemptions to satisfy required minimum distributions after age 70 1/2
from an IRA account (with the maximum amount subject to this waiver being
based only upon the shareholder's IRA accounts)
o for redemptions made pursuant to any IRA systematic withdrawal based on the
shareholder's life expectancy including, but not limited to, substantially
equal periodic payments described in Code Section 72(t)(2)(A)(iv) prior to
age 59 1/2
o in the event of the total disability (as evidenced by a determination by
the federal Social Security Administration) of the shareholder (including a
registered joint owner) occurring after the purchase of the shares being
redeemed
o in the event of the death of the shareholder (including a registered joint
owner)
The contingent deferred sales charge will also be waived in connection with the
following redemptions of shares held by employer sponsored employee benefit
plans maintained on the subaccount record keeping system made available by the
Shareholder Service Agent
o redemptions to satisfy participant loan advances (note that loan repayments
constitute new purchases for purposes of the contingent deferred sales
charge and the conversion privilege)
o redemptions in connection with retirement distributions (limited at any one
time to 10% of the total value of plan assets invested in a portfolio
o redemptions in connection with distributions qualifying under the hardship
provisions of the Code
o redemptions representing returns of excess contributions to such plans
Rule 12b-1 fee
1.00%
26
<PAGE>
Conversion feature
Class B shares of a portfolio will automatically convert to Class A shares of
the same portfolio six years after issuance on the basis of the relative net
asset value per share. Shares purchased through the reinvestment of dividends
and other distributions paid with respect to Class B shares in a shareholder's
portfolio account will be converted to Class A shares on a pro rata basis.
Exchange privilege
Class B shares of a portfolio may be exchanged for Class B shares of another
portfolio or Farmers Money Market Portfolio -- Retail Shares at their relative
net asset values without a contingent deferred sales charge. In the case of an
exchange of Class B shares of a portfolio for Farmers Money Market Portfolio --
Retail Shares, the period during which the Retail Shares are held is not
considered for purposes of calculating the contingent deferred sales charge
applicable to the Class B shares exchanged.
Selling and exchanging shares
Any shareholder may require a portfolio to redeem his or her shares. When shares
are held for the account of a shareholder by the portfolios' transfer agent, the
shareholder may redeem them by sending a written request with signatures
guaranteed to Kemper Service Company, P.O. Box 419453, Kansas City, Missouri
64141. Contact your agent or call toll-free 1-877-327-8899 for more information.
An exchange of shares is the sale of portfolio shares and subsequent purchase of
shares of another portfolio.
Reinvestment privilege
Under certain circumstances, a shareholder who has redeemed Class A shares may
reinvest up to the full amount redeemed at net asset value at the time of the
reinvestment. These reinvested shares will retain their original cost and
purchase date for purposes of the contingent deferred sales charge. Also, a
holder of Class B shares who has redeemed shares may reinvest up to the full
amount redeemed, less any applicable contingent deferred sales charge that may
have been imposed upon the redemption of such shares, at net asset value in
Class A shares. The reinvestment privilege may be terminated or modified at any
time. The reinvestment privilege can be used only once as to any specific shares
and reinvestment must be effected within six months of the redemption.
Signature guarantee
A signature guarantee is required for redemptions over $100,000. You can obtain
a guarantee from most brokerage houses and financial institutions, although not
from a notary public. The portfolios will normally send redemption proceeds
within one business day following the redemption request, but may take up to
seven business days (or longer in the case of shares recently purchased by
check). For more information, please call Farmers Customer Support toll-free at
1-877-327-8899.
27
<PAGE>
Distributions
The Income, Income with Growth, and Balanced Portfolios each intend to
distribute dividends from net investment income quarterly in March, June,
September and December. The Growth with Income Portfolio and the Growth
Portfolio each intend to distribute these dividends annually, in November or
December. Each portfolio intends to distribute net realized capital gains after
utilization of capital loss carryforwards, if any, in November or December. An
additional distribution may be made at a later date, if necessary.
Any dividends or capital gains distributions declared in October, November or
December with a record date in such month and paid during the following January
will be treated by shareholders for federal income tax purposes as if received
on December 31 of the calendar year declared.
A shareholder may choose to receive distributions in cash or have them
reinvested in additional shares of a portfolio. If an investment is in the form
of a retirement plan, all dividends and capital gains distributions must be
reinvested into the shareholder's account. Distributions are generally taxable,
whether received in cash or reinvested. Exchanges among portfolios are also
taxable events.
Dividends are calculated in the same manner, at the same time and on the same
day for each class of shares. The level of income dividends varies from one
class to another based on the class' fees and expenses.
Income and capital gain dividends, if any, of a portfolio will be credited to
shareholder accounts in full and fractional shares of the same class of that
portfolio at net asset value on the reinvestment date, except that, upon written
request to the Shareholder Service Agent, a shareholder may select one of the
following options:
1. To receive income and short-term capital gain dividends in cash and
long-term capital gain dividends in shares of the same class at net asset
value; or
2. To receive income and capital gain dividends in cash.
Any dividends of a portfolio that are reinvested will normally be reinvested in
shares of the same class of that same portfolio. However, by writing to the
Shareholder Service Agent, you may choose to have dividends invested in shares
of the same class of another portfolio, or shares of Farmers Money Market
Portfolio -- Retail Shares, at the net asset value of that class and portfolio.
To use this privilege, you must maintain a minimum account value of $1,000 in
the portfolio distributing the dividends. The portfolios will reinvest dividend
checks (and future dividends) in shares of that same portfolio and class if
checks are returned by the United States Postal Service as undeliverable.
Dividends and other distributions in the aggregate amount of $10 or less are
automatically reinvested in shares of the same portfolio unless you request that
such policy not be applied to your account.
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<PAGE>
Taxes
Dividends representing net investment income and net short-term capital gains,
if any, are taxable to shareholders as ordinary income. Long-term capital gains
distributions, if any, are taxable to individual shareholders at a maximum 20%
capital gains rate, regardless of the length of time shareholders have owned
shares. Any other taxable income distributions are taxable as ordinary income.
Distributions received by a portfolio from an underlying fund generally will be
ordinary income dividends, includable in that portfolio's net investment income,
if paid from the underlying fund's net investment income, short-term capital
gains or other taxable income. Distributions paid from an underlying fund's
long-term capital gains, however, generally will be treated by a portfolio as
long-term capital gains. A portion of dividends from ordinary income may qualify
for the dividends-received deduction for corporations.
Unless your investment is in a tax-deferred account, you may want to avoid
investing a large amount close to the date of a distribution because you may
receive part of your investment back as a taxable distribution.
A sale or exchange of shares is a taxable event and may result in a capital gain
or loss which may be long-term or short-term, generally depending on how long
the shares have been owned.
The portfolios send you detailed tax information about the amount and type of
its distributions by January 31 of the following year.
Each portfolio may be required to withhold U.S. federal income tax at the rate
of 31% of all taxable distributions payable to shareholders who fail to provide
a portfolio with their correct taxpayer identification number or to make
required certifications, or who have been notified by the IRS that they are
subject to backup withholding. Any such withheld amounts may be credited against
the shareholder's U.S. federal income tax liability.
Shareholders may be subject to state, local and foreign taxes on portfolio
distributions and dispositions of portfolio shares. You should consult your tax
advisor regarding the particular consequences of an investment in a portfolio.
29
<PAGE>
Transaction information
Share price
Scudder Fund Accounting Corporation determines the net asset value per share of
each portfolio as of the close of regular trading on the New York Stock
Exchange, normally 4 p.m., eastern time, on each day the New York Stock Exchange
is open for trading. Net asset value per share is calculated by dividing the
value of total assets, less all liabilities, by the total number of shares
outstanding. The assets of each portfolio consist primarily of investments in
the underlying funds, which are valued at their respective net asset values at
the time of computation. In general, the underlying funds value their portfolio
securities using market prices. If market prices are not readily available for a
security or if a security's price is not considered to be market indicative, the
underlying funds may value that security by another method that their Boards or
their delegates believe accurately reflects fair value. In those circumstances
where a security's price is not considered to be market indicative, the
security's valuation may differ from an available market quotation.
The net asset value per share of each portfolio is the value of one share and is
determined separately for each class by dividing the value of a portfolio's net
assets attributable to that class by the number of shares of that class
outstanding. The per share net asset value of the Class B shares of a portfolio
will generally be lower than that of the Class A shares of the portfolio because
of the higher expenses borne by the Class B shares.
To the extent that the underlying funds invest in foreign securities, these
securities may be listed on foreign exchanges that trade on days when the
portfolios do not price their shares. As a result, the net asset value of a
portfolio may change at a time when shareholders are not able to purchase or
redeem shares.
Processing time
All requests to buy and sell shares that are received in good order by the
portfolios' transfer agent by the close of regular trading on the New York Stock
Exchange are executed at the net asset value per share calculated at the close
of regular trading that day (subject to any applicable sales load or contingent
deferred sales charge). Orders received by your Farmers' agent in good order
prior to the determination of net asset value and received by the portfolios'
transfer agent prior to the close of its business day will be confirmed at a
price based on the net asset value effective on that day. If an order is
accompanied by a check drawn on a foreign bank, funds must normally be collected
before shares will be purchased.
Payments for shares you sell will be made in cash as promptly as practicable.
When you place an order to sell shares for which a portfolio may not yet have
received good payment (i.e., purchases by check, Bank Direct Deposit or AutoBuy
purchase), a portfolio may delay transmittal of the proceeds until it has
determined that collected funds have been received for the purchase of such
shares. This may be up to 10 days from receipt by a portfolio of the purchase
amount. The redemption of shares within certain time periods may be subject to
contingent deferred sales charges, as noted above.
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<PAGE>
Purchase restrictions
Purchases and sales should be made for long-term investment purposes only. The
portfolios and the Distributor each reserves the right to reject purchases of
portfolio shares (including exchanges) for any reason, including when there is
evidence of a pattern of frequent purchases and sales made in response to
short-term fluctuations in a portfolio's share price.
Minimum balances
The minimum initial investment for each portfolio is $1,000 and the minimum
subsequent investment is $100. The minimum initial investment for an Individual
Retirement Account is $500 and the minimum subsequent investment is $100. Under
an automatic investment plan, such as Auto Buy, Payroll Direct Deposit or
Government Direct Deposit, the initial investment is $100. These minimum amounts
may be changed at any time in management's discretion. Because of the high cost
of maintaining small accounts, the portfolios may assess a quarterly fee of $9
on an account with a balance below $1,000 for the quarter. The fee will not
apply to accounts enrolled in an automatic investment program, Individual
Retirement Accounts or employer sponsored employee benefit plans using the
subaccount record keeping system made available through the Shareholder Service
Agent.
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<PAGE>
Financial Highlights
The financial highlights table for each portfolio is intended to help you
understand each portfolio's financial performance for the fiscal period
indicated. Certain information reflects financial results for a single portfolio
share. The total return figures represent the rate that a shareholder would have
earned (or lost) on an investment in a portfolio assuming reinvestment of all
dividends and distributions. This information has been audited by
PricewaterhouseCoopers LLP whose report, along with each portfolio's financial
statements, is included in the portfolios' annual report, which is available
upon request by calling your agent or Farmer's Customer Support toll-free at
1-877-327-8899.
Income Portfolio
For the period March 9, 1999
(commencement of operations)
to April 30, 1999(a)
Class A Class B
- --------------------------------------------------------------------------------
Net asset value, beginning of period $12.00 $12.00
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income .11 .12
- --------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions .10 .07
- --------------------------------------------------------------------------------
Total from investment operations .21 .19
- --------------------------------------------------------------------------------
Net asset value, end of period $12.21 $12.19
- --------------------------------------------------------------------------------
Total Return (%) (c) 1.75** 1.58**
- --------------------------------------------------------------------------------
Ratios and Supplemental Data
Net assets, end of period ($ thousands) 103 51
- --------------------------------------------------------------------------------
Ratio of operating expenses to average daily
net assets (%) 1.00* 1.75*
- --------------------------------------------------------------------------------
Ratio of net investment income to average daily
net assets (%) (b) .93** 1.01**
- --------------------------------------------------------------------------------
Portfolio turnover rate (%) -- --
- --------------------------------------------------------------------------------
(a) Based on average shares outstanding during the period.
(b) Due to the short period of operations, these ratios are not indicative of
future earnings.
(c) Total return would have been lower if the investment adviser to some of the
Underlying Funds had not maintained some of the Underlying Funds' expenses.
* Annualized
** Not annualized
32
<PAGE>
Income with Growth Portfolio
For the period March 9, 1999
(commencement of operations)
to April 30, 1999(a)
Class A Class B
- --------------------------------------------------------------------------------
Net asset value, beginning of period $12.00 $12.00
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income .07 .05
- --------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions .26 .27
- --------------------------------------------------------------------------------
Total from investment operations .33 .32
- --------------------------------------------------------------------------------
Net asset value, end of period $12.33 $12.32
- --------------------------------------------------------------------------------
Total Return (%) (c) 2.75** 2.67**
- --------------------------------------------------------------------------------
Ratios and Supplemental Data
Net assets, end of period ($ thousands) 52 58
- --------------------------------------------------------------------------------
Ratio of operating expenses to average daily
net assets (%) 1.00* 1.75*
- --------------------------------------------------------------------------------
Ratio of net investment income to average daily
net assets (%) (b) .55** .44**
- --------------------------------------------------------------------------------
Portfolio turnover rate (%) -- --
- --------------------------------------------------------------------------------
(a) Based on average shares outstanding during the period.
(b) Due to the short period of operations, these ratios are not indicative of
future earnings.
(c) Total return would have been lower if the investment adviser to some of the
Underlying Funds had not maintained some of the Underlying Funds' expenses.
* Annualized
** Not annualized
33
<PAGE>
Balanced Portfolio
For the period March 9, 1999
(commencement of operations)
to April 30, 1999(a)
Class A Class B
- --------------------------------------------------------------------------------
Net asset value, beginning of period $12.00 $12.00
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income .06 .05
- --------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions .39 .38
- --------------------------------------------------------------------------------
Total from investment operations .45 .43
- --------------------------------------------------------------------------------
Net asset value, end of period $12.45 $12.43
- --------------------------------------------------------------------------------
Total Return (%) (c) 3.75** 3.58**
- --------------------------------------------------------------------------------
Ratios and Supplemental Data
Net assets, end of period ($ thousands) 64 68
- --------------------------------------------------------------------------------
Ratio of operating expenses to average daily
net assets (%) 1.00* 1.75*
- --------------------------------------------------------------------------------
Ratio of net investment income to average daily
net assets (%) (b) .52** .40**
- --------------------------------------------------------------------------------
Portfolio turnover rate (%) -- --
- --------------------------------------------------------------------------------
(a) Based on average shares outstanding during the period.
(b) Due to the short period of operations, these ratios are not indicative of
future earnings.
(c) Total return would have been lower if the investment adviser to some of the
Underlying Funds had not maintained some of the Underlying Funds' expenses.
* Annualized
** Not annualized
34
<PAGE>
Growth with Income Portfolio
For the period March 9, 1999
(commencement of operations)
to April 30, 1999(a)
Class A Class B
- --------------------------------------------------------------------------------
Net asset value, beginning of period $12.00 $12.00
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income .04 .04
- --------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment
transactions .59 .57
- --------------------------------------------------------------------------------
Total from investment operations .63 .61
- --------------------------------------------------------------------------------
Net asset value, end of period $12.63 $12.61
- --------------------------------------------------------------------------------
Total Return (%) (c) 5.25** 5.08**
- --------------------------------------------------------------------------------
Ratios and Supplemental Data
Net assets, end of period ($ thousands) 298 55
- --------------------------------------------------------------------------------
Ratio of operating expenses to average daily
net assets (%) 1.00* 1.75*
- --------------------------------------------------------------------------------
Ratio of net investment income to average daily
net assets (%) (b) .37** .31**
- --------------------------------------------------------------------------------
Portfolio turnover rate (%) -- --
- --------------------------------------------------------------------------------
(a) Based on average shares outstanding during the period.
(b) Due to the short period of operations, these ratios are not indicative of
future earnings.
(c) Total return would have been lower if the investment adviser to some of the
Underlying Funds had not maintained some of the Underlying Funds' expenses.
* Annualized
** Not annualized
35
<PAGE>
Growth Portfolio
For the period March 9, 1999
(commencement of operations)
to April 30, 1999(a)
Class A Class B
- --------------------------------------------------------------------------------
Net asset value, beginning of period $12.00 $12.00
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income .01 .01
- --------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investment transactions .79 .78
- --------------------------------------------------------------------------------
Total from investment operations .80 .79
- --------------------------------------------------------------------------------
Net asset value, end of period $12.80 $12.79
- --------------------------------------------------------------------------------
Total Return (%) (c) 6.67** 6.58**
- --------------------------------------------------------------------------------
Ratios and Supplemental Data
Net assets, end of period ($ thousands) 92 55
- --------------------------------------------------------------------------------
Ratio of operating expenses to average daily
net assets (%) 1.00* 1.75*
- --------------------------------------------------------------------------------
Ratio of net investment income to average daily
net assets (%) (b) .12** .06**
- --------------------------------------------------------------------------------
Portfolio turnover rate (%) -- --
- --------------------------------------------------------------------------------
(a) Based on average shares outstanding during the period.
(b) Due to the short period of operations, these ratios are not indicative of
future earnings.
(c) Total return would have been lower if the investment adviser to some of the
Underlying Funds had not maintained some of the Underlying Funds' expenses.
* Annualized
** Not annualized
36
<PAGE>
Additional information about the portfolios may be found in the Statement of
Additional Information and in shareholder reports. Shareholder inquiries may be
made by calling the toll-free number listed below. The Statement of Additional
Information contains more detailed information on portfolio investments and
operations. The semiannual and annual shareholder reports contain a discussion
of the market conditions and the investment strategies that significantly
affected the portfolios' performance during the last fiscal year, as well as a
listing of portfolio holdings and financial statements. These and other
portfolio documents may be obtained without charge from the following sources:
- --------------------------------------------------------------------------------
By Telephone 1-877-327-8899
- --------------------------------------------------------------------------------
By Mail Farmers Customer Support
222 Riverside Plaza, 24th Floor
Chicago, IL 60606
or
Public Reference Section,
Securities and Exchange Commission
Washington, D.C. 20549-6009
(a duplication fee is charged)
- --------------------------------------------------------------------------------
In Person Public Reference Room
Securities and Exchange Commission
Washington, D.C.
(Call 1-800-SEC-0330
for more information.)
- --------------------------------------------------------------------------------
By Internet http://www.sec.gov
- --------------------------------------------------------------------------------
The Statement of Additional Information is incorporated by reference into this
prospectus (is legally a part of this prospectus).
Investment Company Act file number:
Farmers Investment Trust 811-09085
<PAGE>
FARMERS MUTUAL FUND PORTFOLIOS
Two International Place
Boston, Massachusetts 02110
Farmers Investment Trust is a professionally managed, open-end
investment company that offers five investment portfolios.
INCOME PORTFOLIO
INCOME WITH GROWTH PORTFOLIO
BALANCED PORTFOLIO
GROWTH WITH INCOME PORTFOLIO
GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
September 1, 1999
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the prospectus of Income Portfolio, Income with
Growth Portfolio, Balanced Portfolio, Growth with Income Portfolio, and Growth
Portfolio dated September 1, 1999. The prospectus may be obtained without charge
by writing to Farmers Customer Support, 222 South Riverside Plaza, 24th Floor,
Chicago, IL 60606 or calling toll-free 1-877-327-8899 and is also available
along with other related materials on the SEC's Internet web site
(http://www.sec.gov).
The Annual Report to Shareholders of the Portfolios dated April 30,
1999 is incorporated by reference and is hereby deemed to be part of this
Statement of Additional Information. The Annual Report to Shareholders may be
obtained without charge by calling 1-877-327-8899.
<PAGE>
TABLE OF CONTENTS
Page
FARMERS MUTUAL FUND PORTFOLIOS INVESTMENT OBJECTIVES AND POLICIES...........1
General Investment Objectives and Policies.........................1
The Underlying Funds...............................................2
Risk Factors of the Underlying Funds...............................6
Investment Restrictions of the Portfolios..........................6
PURCHASE OF SHARES..........................................................7
ADDITIONAL TRANSACTION INFORMATION.........................................15
Share Certificates................................................16
Other Information.................................................16
FEATURES AND SERVICES OFFERED BY THE TRUST.................................17
Reports to Shareholders...........................................17
Transaction Summaries.............................................17
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS..................................17
PERFORMANCE INFORMATION....................................................18
Average Annual Total Return.......................................18
Cumulative Total Return...........................................18
SEC Yield of Income Portfolio.....................................19
Total Return......................................................19
TRUST ORGANIZATION.........................................................19
INVESTMENT ADVISER.........................................................21
Investment Management Fees........................................23
Personal Investments by Employees of the Adviser..................23
TRUSTEES AND OFFICERS......................................................24
REMUNERATION...............................................................25
Responsibilities of the Board -- Board and Committee Meetings.....25
Compensation of Officers and Trustees.............................26
PRINCIPAL UNDERWRITER......................................................26
SHAREHOLDER SERVICES.......................................................27
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT....................28
FUND ACCOUNTING AGENT......................................................28
TAXES......................................................................28
Taxation of the Portfolios and Their Shareholders.................28
Taxation of the Underlying Funds..................................31
PORTFOLIO TRANSACTIONS.....................................................31
Portfolio Turnover................................................31
NET ASSET VALUE............................................................31
ADDITIONAL INFORMATION.....................................................32
Experts...........................................................32
Shareholder Indemnification.......................................32
Other Information.................................................32
FINANCIAL STATEMENTS.......................................................33
GLOSSARY....................................................................1
i
<PAGE>
FARMERS MUTUAL FUND PORTFOLIOS INVESTMENT OBJECTIVES AND POLICIES
General Investment Objectives and Policies
Farmers Investment Trust (the "Trust") is an open-end management
investment company composed of five separate diversified portfolios, the Farmers
Mutual Fund Portfolios (each a "Portfolio," collectively the "Portfolios"),
which invest primarily in existing mutual funds (the "Underlying Funds")
according to well-defined investment objectives. The Portfolios may invest in
money market instruments to provide for redemptions and for temporary or
defensive purposes. The Portfolios may also each borrow money for temporary,
emergency or other purposes, including investment leverage purposes, as
determined by the Trustees. The Investment Company Act of 1940 (the "1940 Act")
requires borrowings to have 300% asset coverage. It is impossible to accurately
predict how long such alternate strategies may be utilized. The Portfolios may
each also enter into reverse repurchase agreements. Each Portfolio offers a
professionally managed, long-term investment program that can serve as a
complete investment program or as a core part of a larger portfolio. Achievement
of each Portfolio's objective cannot be assured.
Descriptions in this Statement of Additional Information of a
particular investment practice or technique in which an Underlying Fund
affiliated with Scudder Kemper Investments, Inc. (the "Adviser") may engage
(such as short selling, hedging, etc.) or a financial instrument in which the
affiliated Underlying Fund may purchase (such as options, forward foreign
currency contracts, etc.) are meant to describe the spectrum of investments that
the Adviser, in its discretion, might, but is not required to, use in managing
an affiliated Underlying Fund's portfolio assets. The Adviser may, in its
discretion, at any time employ such practice, technique or instrument for one or
more funds but not for all funds advised by it. Furthermore, it is possible that
certain types of financial instruments or investment techniques described herein
may not be available, permissible, economically feasible or effective for their
intended purposes in all markets. Certain practices, techniques, or instruments
may not be principal activities of an affiliated Underlying Fund but, to the
extent employed, could from time to time have a material impact on that
affiliated Underlying Fund's performance.
The Portfolios are professionally managed portfolios which allocate
their investments among select Underlying Funds. The Portfolios represent a
range of investment approaches: a conservative investment approach ("Income
Portfolio" and "Income with Growth Portfolio"), a balance of growth and income
("Balanced Portfolio" and "Growth with Income Portfolio") or growth of capital
("Growth Portfolio"). The Portfolios have been created in response to increasing
demand by mutual fund investors for a simple and effective means of structuring
a diversified mutual fund investment program suited to their general needs. As
has been well documented in the financial press, the proliferation of mutual
funds over the last several years has left many investors confused and in search
of a simpler means to manage their investments. Many mutual fund investors
realize the value of diversifying their investments in a number of mutual funds
(e.g., a money market fund for liquidity and price stability, a growth fund for
long-term appreciation, an income fund for current income and relative safety of
principal), but need professional management to decide such questions as which
mutual funds to select, how much of their assets to commit to each fund and when
to reallocate their selections. The Portfolios will allow investors to rely on
the Adviser to determine (within clearly explained parameters) the amount to
invest in each of several Underlying Funds and the timing of such investments.
The investment objectives of the five Portfolios are as follows:
Income Portfolio
The Income Portfolio seeks a high level of current income. The
Portfolio invests primarily in bond funds, including short-and long-term bond
funds, government bond funds, high yield bond funds and international bond
funds. The Portfolio may be suitable for investors with an investment time
horizon of 1-3 years or more.
Income with Growth Portfolio
The Income with Growth Portfolio seeks current income and, as a
secondary objective, long-term growth of capital, by investing substantially in
bond funds and, to a lesser extent, equity funds. The Portfolio may be suitable
for investors with an investment time horizon of 3-5 years or more.
Balanced Portfolio
<PAGE>
The Balanced Portfolio seeks a balance of current income and long-term
growth of capital by investing predominantly in a mix of equity and bond funds.
The Portfolio may be suitable for investors with an investment time horizon of
3-5 years or more.
Growth with Income Portfolio
The Growth with Income Portfolio seeks long-term growth of capital and
modest income by investing primarily in equity funds and, to a lesser extent,
bond funds. The Portfolio may be suitable for investors with an investment time
horizon of 5 years or more.
Growth Portfolio
The Growth Portfolio seeks long-term growth of capital through
investment primarily in growth-oriented equity funds. The Portfolio may be
suitable for investors with an investment time horizon of 5 years or more.
Except as otherwise indicated, each portfolio's investment objective
and policies may be changed without a vote of shareholders.
Additional Information
Each Portfolio will purchase or sell securities to: (a) accommodate
purchases and sales of each Portfolio's shares, (b) change the percentages of
each Portfolio's assets invested in each of the Underlying Funds in response to
changing market conditions, and (c) maintain or modify the allocation of each
Portfolio's assets in accordance with the investment mixes described below.
The portfolio management team for each Portfolio will allocate
Portfolio assets among the Underlying Funds in accordance with predetermined
percentage ranges, based on the Adviser's outlook for the financial markets, the
world's economies and the relative performance potential of the Underlying
Funds. The Underlying Funds have been selected to represent a broad spectrum of
investment options for the Portfolios, subject to the following investment
ranges: Income Portfolio: 80-100% in bond funds, 0% in equity funds and 0-20% in
a money market fund, cash or cash equivalents; Income with Growth Portfolio:
60-80% in bond funds, 20-40% in equity funds and 0-15% in a money market fund,
cash or cash equivalents; Balanced Portfolio: 40-60% in equity funds, 40-60% in
bond funds and 0-10% in a money market fund, cash or cash equivalents; Growth
with Income Portfolio: 60-80% in equity funds, 20-40% in bond funds and 0-10% in
a money market fund, cash or cash equivalents; Growth Portfolio: 95-100% in
equity funds, 0% in bond funds and 0-5% in a money market fund, cash or cash
equivalents.
Rather than investing in individual securities like a traditional
mutual fund, each portfolio seeks to achieve its particular objective by
investing in a carefully selected combination of established, open-end mutual
funds that in turn invest in a wide range of securities. Therefore, an
investment in one of the portfolios may be diversified over hundreds, or even
thousands, of individual securities. The portfolio management team for each
portfolio allocates investments, using a disciplined approach, based on a
proprietary model for asset allocation that incorporates fundamental and
quantitative data. This investment approach incorporates measures of relative
valuation and performance potential as well as the correlation of returns of the
Underlying Funds. In developing these measures, the portfolio management team
will consider the outlook of the Adviser for the financial markets and the world
economies. Each of the Farmers Mutual Fund Portfolios seeks to provide the
investor with long-term returns superior to a comparable risk benchmark,
although there can be no guarantee that these returns will be achieved.
The Underlying Funds
Each Portfolio may invest in Underlying Funds that are affiliated or
unaffiliated with the Adviser. The Portfolios may invest in, but are not limited
to, the following Underlying Funds: Zurich Money Market Fund, Kemper High Yield
Fund, Kemper U.S. Government Securities Fund, PIMCO Low Duration Fund, PIMCO
Foreign Bond Fund, Scudder Income Fund, Janus Twenty Fund, Kemper-Dreman High
Return Equity Fund, Scudder Growth and Income Fund, Scudder International Fund,
Scudder Small Company Value Fund and Templeton Developing Markets Trust.
The Portfolios invest in Underlying Fund shares that, with respect to
the Farmers Mutual Funds Portfolios, do not charge any sales, service or
distribution fees. The following is a description of the investment objectives
and strategies for each of the Underlying Funds:
2
<PAGE>
Zurich Money Market Fund seeks maximum current income to the extent
consistent with stability of principal. The Fund pursues its objective by
investing exclusively in the following types of U.S. Dollar denominated money
market instruments that mature in 12 months or less:
o Obligations of, or guaranteed by, the U.S. Government, its
agencies or instrumentalities.
o Bank certificates of deposit (including time deposits) or
bankers' acceptances limited to domestic banks (including
their foreign branches) and Canadian chartered banks having
total assets in excess of $1 billion.
o Commercial paper obligations rated A-1 or A-2 by Standard &
Poor's Corporation ("S&P") or Prime-1 or Prime-2 by Moody's
Investors Service, Inc. ("Moody's") or issued by companies
with an unsecured debt issue outstanding currently rated Aa by
Moody's or AA by S&P or higher and investments in other
corporate obligations such as publicly traded bonds,
debentures and notes rated Aa by Moody's or AA by S&P or
higher.
o Repurchase agreements of obligations that are suitable for
investment under the categories set forth above.
The Fund may concentrate more than 25% of its assets in bank
certificates of deposit or bankers' acceptances of United States banks in
accordance with its written objective and policies. For temporary defensive
purposes, the Fund may invest up to 100% of its assets in short-term high-grade
debt securities, cash and cash equivalents. Because this defensive policy
differs from the Fund's investment objective, the Fund may not achieve its goals
during a defensive period. Temporary defensive investments may also be taxable.
Kemper High Yield Fund seeks the highest level of current income
obtainable from a diversified portfolio of fixed income securities which the
fund's investment manager considers consistent with reasonable risk. As a
secondary objective, the fund will seek capital gain where consistent with its
primary objective. The fund invests predominantly in high yield, fixed income
securities and foreign securities. The fund anticipates that under normal
circumstances 90% to 100% of its assets will be invested in fixed income
securities. The high yield, fixed income securities in which the fund intends to
invest (commonly referred to as "junk bonds") normally offer a current yield or
yield to maturity that is significantly higher than the yield available from
investment-grade securities (those rated in the four highest categories assigned
by a nationally recognized statistical rating service such as S&P or Moody's.
The characteristics of the securities in the Fund's portfolio, such as the
maturity and the type of issuer, will affect yields and yield differentials,
which vary over time. In seeking to achieve its investment objectives, the Fund
will invest in fixed income securities based on the Fund's investment manager's
analysis without relying on published ratings. The Fund will invest in a
particular security if in the view of the Fund's investment manager the
increased yield offered, regardless of published ratings, is sufficient to
compensate for a reasonable element of assumed risk. Such investments will be
based upon the investment manager's analysis rather than upon published ratings,
achievement of the Fund's goals may depend more upon the abilities of the Fund's
investment manager than would otherwise be the case. For temporary defensive
purposes, the Fund may invest up to 100% of its assets in short-term high-grade
debt securities, cash and cash equivalents. Because this defensive policy
differs from the Fund's investment objective, the Fund may not achieve its goals
during a defensive period.
Kemper U.S. Government Securities Fund seeks high current income,
liquidity and security of principal. The Fund invests in a portfolio of U.S.
Government Securities, and predominantly in Government National Mortgage
Association ("GNMA") securities. The Fund's investment manager focuses on
managing the fund's duration and selecting mortgage securities that are
undervalued in comparison with other sectors of the market. The Fund is designed
for the investor who seeks a higher yield than a money market fund or an insured
bank certificate of deposit and less fluctuation in net asset value than a
longer-term bond fund; unlike money market funds, however, the Fund does not
seek to maintain a stable net asset value and, unlike an insured bank
certificate of deposit, the Fund's shares are not insured. The fund invests up
to 100% in GNMA Certificates of the modified pass-through type. These GNMA
Certificates are debt securities issued by a mortgage banker or other mortgagee
and represent an interest in one or a pool of mortgages insured by the Federal
Housing Administration or guaranteed by the Veterans Administration. GNMA
guarantees the timely payment of monthly installments of principal and interest
on modified pass-through Certificates at the time such payments are due, whether
or not such amounts are collected by the issuer of these Certificates on the
underlying mortgages. The Fund may also invest in other U.S. Government
Securities. There are two broad categories of U.S. Government-related debt
instruments:
o Direct obligations of the U.S. Treasury, including agency
mortgage-backed securities
3
<PAGE>
o Securities issued or guaranteed by U.S. Government agencies or
Government sponsored entities.
These instruments differ primarily in interest rates, the length of
maturities, the nature of the government obligation and the dates of issuance.
U.S. Treasury obligations are backed by the "full faith and credit" of the
United States. In the case of U.S. Government agency obligations, some are
backed by the full faith and credit of the United States and others are backed
only by the rights of the issuer to borrow from the U.S. Government. For
temporary defensive purposes, the Fund may invest up to 100% of its assets in
short-term high-grade debt securities, cash and cash equivalents. Because this
defensive policy differs from the Fund's investment objective, the Fund may not
achieve its goals during a defensive period.
PIMCO Foreign Bond Fund seeks to maximize total return, consistent with
preservation of capital and prudent investment management. The fund invests in a
portfolio of fixed income securities primarily denominated in major foreign
currencies and baskets of foreign currencies (such as the Euro). The fund will
invest its assets in a number of international bond markets so that, under
normal circumstances, the fund will invest at least 85% of its assets in
securities of issuers outside the United States, representing at least three
foreign countries.
PIMCO Low Duration Fund seeks to maximize total return, consistent with
preservation of capital and prudent investment management. The fund invests in a
diversified portfolio of fixed income securities of varying maturities. The
average portfolio duration of the fund will normally vary within a one- to
three-year time frame based on the fund's investment adviser's forecast for
interest rates.
Scudder Income Fund seeks a high level of income, consistent with the
prudent investment of capital, through a flexible investment program emphasizing
high-grade bonds. The Fund invests primarily in a broad range of high-grade,
income-producing securities such as corporate bonds and government securities.
Under normal market conditions, the Fund will invest at least 65% of its assets
in securities rated within the three highest quality rating categories of
Moody's (Aaa, Aa and A) or S&P (AAA, AA and A), or if unrated, in bonds judged
by the Adviser, to be of comparable quality at the time of purchase. The Fund
may invest up to 20% of its assets in debt securities rated lower than Baa 3 or
BBB or, if unrated, of equivalent quality as determined by the Adviser, but will
not purchase bonds rated below B by Moody's or S&P or their equivalent. The Fund
may invest in bonds, notes, zero coupon securities, adjustable rate bonds,
convertible bonds, preferred and convertible preferred securities, U.S.
Government securities, commercial paper, debt securities issued by real estate
investment trusts ("REITs"), mortgage and asset-backed securities and other
money market instruments and illiquid securities such as certain securities
issued in private placements, foreign securities and certificates of deposit
issued by foreign and domestic branches of U.S. banks. It may also invest in
warrants, when-issued or forward delivery securities, indexed securities,
repurchase agreements, reverse repurchase agreements, and may engage in
dollar-roll transactions, securities lending and strategic transactions
including derivatives.
Janus Twenty Fund is a nondiversified fund that seeks long-term growth
of capital by normally concentrating its investments in a core position of 20-30
common stocks. The fund invests in primarily in common stocks of foreign and
domestic companies and may invest to a lesser degree in other types of
securities including preferred stock, warrants, convertible securities and debt
securities. The percentage of the fund's assets invested in common stocks will
vary and the fund may at times hold substantial positions in cash equivalents or
interest bearing securities.
Kemper-Dreman High Return Equity Fund seeks to achieve a high rate of
total return. The fund invests primarily in common stocks of larger, listed
companies with a record of earnings and dividends, low price-earnings ratios,
reasonable returns on equity, and sound finances which appear to have intrinsic
value. The fund generally invests in common stocks that pay relatively high
dividends, i.e. comparable to the dividend yield of Standard & Poor's 500
Composite Stock Price Index. In order to enhance its investment return, the Fund
may sell covered call options, and sell put options on securities it may
acquire. The will earn premium income on the sale of these options. Under normal
market conditions, the Fund will invest at least 65% of its total assets in
equity securities. Equity securities include common stocks, preferred stocks,
securities convertible into or exchangeable for common or preferred stocks,
equity investments in partnerships, joint ventures and other forms of
non-corporate investment and warrants and rights exercisable for equity
securities and equity equivalents. Although the Fund will not invest 25% or more
of its total assets in any one industry, it may, from time to time, invest a
significant percentage of its total assets in one or more market sectors, such
as the financial services sector. The Fund's investment manager considers a
market sector to be comprised of a group of industries. If the Fund invests a
significant percentage of its assets in a market sector, financial, economic,
business and other developments affecting issuers in that sector may have a
greater effect on the Fund than if it had not invested a significant percentage
of its assets in that sector.
4
<PAGE>
Scudder Growth and Income Fund seeks long-term growth of capital,
current income and growth of income. The Fund attempts to achieve its investment
objective by investing primarily in dividend-paying common stocks, preferred
stocks and securities convertible into common stocks of companies with
long-standing records of earnings growth. The Fund may also purchase securities
which do not pay current dividends but which offer prospects for growth of
capital and future income. Convertible securities (which may be current coupon
or zero coupon securities) are bonds, notes, debentures, preferred stocks and
other securities which may be converted or exchanged at a stated or determinable
exchange ratio into underlying shares of common stock. The Fund may also invest
in nonconvertible preferred stocks consistent with its objective. The Fund may
for temporary defensive purposes invest without limit in cash and cash
equivalents. It is impossible to accurately predict how long such alternative
strategies may be utilized. In addition, the Fund may invest in warrants,
foreign securities, real estate investment trusts, illiquid securities, reverse
repurchase agreements, repurchase agreements and may engage in securities
lending and strategic transactions including derivatives.
Scudder International Fund seeks long-term growth of capital primarily
through a diversified portfolio of marketable foreign equity securities. The
Fund invests in companies, wherever organized, which do business primarily
outside the United States. The Fund intends to diversify investments among
several countries and to have represented in the portfolio, in substantial
proportions, business activities in not less than three different countries
other than the U.S. The Fund does not intend to concentrate investments in any
particular industry. The Fund's investments are generally denominated in foreign
currencies. The strength or weakness of the U.S. dollar against these currencies
is responsible for part of the Fund's investment performance. The Fund may
invest up to 20% of its total assets in investment-grade debt securities except
that the Fund may invest up to 5% of its total assets in debt securities which
are rated below investment-grade. The Fund may for temporary defensive purposes
invest without limits in Canadian or U.S. Government obligations or currencies,
or securities of companies incorporated in and having their principal activities
in Canada or the U.S. It is impossible to accurately predict how long such
alternative strategies may be utilized. In addition, the Fund may invest in
warrants, trust preferred securities, fixed-income securities, illiquid
securities, reverse repurchase agreements, repurchase agreements and may engage
in securities lending and strategic transactions including derivatives.
Scudder Small Company Value Fund pursues long-term growth of capital by
seeking out undervalued stocks of small U.S. companies. The Fund's investment
adviser uses a systematic, proprietary investment approach to identify small,
domestic companies that, in the opinion of the Fund's investment adviser, are
selling at prices that do not reflect adequately their long-term investment
potential. These companies are often out of favor or not closely followed by
investors and, as a result, may offer substantial appreciation potential over
time.
In pursuit of long-term growth of capital, the Fund invests, under
normal circumstances, at least 90% of its assets in the common stock of small
U.S. companies. The Fund will invest in securities of companies that are similar
in size to those in the Russell 2000 Index of small stocks. The Fund will sell
securities of companies that have grown in market capitalization above the
maximum of the Russell 2000 Index, as necessary to keep the Fund focused on
smaller companies. The Fund takes a diversified approach to investing in small
capitalization issues. The Fund will typically invest in more than one hundred
and fifty small companies, representing a variety of U.S. industries.
While the Fund invests predominately in common stocks, it can purchase
other types of equity securities including preferred stocks (convertible
securities), rights, warrants and illiquid securities. Securities may be listed
on national exchanges or traded over-the-counter. The Fund may invest up to 20%
of its assets in U.S. Treasury, agency and instrumentality obligations on a
temporary basis, may enter into repurchase agreements and reverse repurchase
agreements and may engage in strategic transactions, using such derivatives
contracts as index options and futures, to increase stock market participation,
enhance liquidity and manage transaction costs. The Fund currently intends to
borrow only for temporary or emergency purposes, such as providing for
redemptions or distributions, and not for investment leverage purposes. For
temporary defensive purposes, the Fund may invest without limit in cash and cash
equivalents when the Fund's Adviser deems such a position advisable in light of
economic or market conditions. It is impossible to accurately predict how long
such alternative strategies may be utilized.
Templeton Development Markets Trust seeks long-term capital
appreciation. The fund tries to achieve its investment goal by investing, under
normal market conditions, at least 65% of its total assets in equity securities
of developing market issuers. The fund will normally invest in at least three
developing market countries. For purposes of the fund's investments, developing
or emerging market countries include those considered such by the World Bank,
the International Finance Corporation, or the United Nations. In addition,
developing market equity securities means those issued by: companies with their
principal securities trading market within a developing market country, as
defined above; or companies that derive 50% or more of their total revenue from
either goods or services produced or sales made
5
<PAGE>
in developing market countries; or companies organized under the laws of, and
with a principal office in, a developing market country.
Risk Factors of the Underlying Funds
In pursuing its investment objectives, each of the Underlying Funds has
adopted a wide range of investment strategies and policies. The Underlying
Funds' risks are determined by the nature of the securities held and the
portfolio management strategies used by their particular investment adviser.
Certain of these policies, with respect to the affiliated Underlying Funds, are
described in the "Glossary" and further information about the Underlying Funds
is contained in the prospectuses of such funds. Because each Portfolio invests
in certain of the Underlying Funds, shareholders of each Portfolio will be
affected by these investment policies in direct proportion to the amount of
assets each Portfolio allocates to the Underlying Funds pursuing such policies.
Investment Restrictions of the Portfolios
The policies set forth below are fundamental policies of each Portfolio
and may not be changed with respect to each of the Portfolios without the
approval of a majority of the outstanding voting securities of the Portfolio. As
used in this Statement of Additional Information, a "majority of the outstanding
voting securities of a Portfolio" means the lesser of (1) 67% or more of the
voting securities present at such meeting, if the holders of more than 50% of
the outstanding voting securities of such Portfolio are present or represented
by proxy; or (2) more than 50% of the outstanding voting securities of such
Portfolio.
Each Portfolio has elected to be classified as a diversified series of
an open-end investment company. In addition, as a matter of fundamental policy,
each Portfolio will not:
(1) borrow money, except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
(2) issue senior securities, except as permitted under the
Investment Company Act of 1940, as amended, and as interpreted
or modified by regulatory authority having jurisdiction, from
time to time;
(3) engage in the business of underwriting securities issued by
others, except to the extent that a Portfolio may be deemed to
be an underwriter in connection with the disposition of
portfolio securities;
(4) concentrate its investments in investment companies, as the
term "concentrate" is used in the Investment Company Act of
1940, as amended and interpreted by regulatory authority
having jurisdiction from time to time; except that each
Portfolio may concentrate in an Underlying Fund. However, each
Underlying Fund in which each Portfolio will invest may
concentrate its investments in a particular industry;
(5) 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;
(6) purchase physical commodities or contracts relating to
physical commodities; or
(7) make loans except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time.
Nonfundamental policies may be changed by the Trustees of the Trust
without shareholder approval. As a matter of nonfundamental policy, each
Portfolio does not currently intend to:
(a) invest in companies for the purpose of exercising management
or control.
(b) (i) borrow money in an amount greater than 5% of its total
assets, except for temporary or emergency purposes and (ii) by
engaging in reverse repurchase agreements, entering into
dollar rolls, or making
6
<PAGE>
other investments or engaging in other transactions which may
be deemed to be borrowings but are consistent with each
Portfolio's investment objective.
Any investment restrictions in this Statement of Additional Information
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, the Portfolios.
PURCHASE OF SHARES
As described in the Portfolios' prospectus, shares of a Portfolio are
sold at their public offering price, which is the net asset value per share of
the Portfolio next determined after an order is received in proper form plus,
with respect to certain purchases of Class A shares, an initial sales charge. An
order for the purchase of shares that is accompanied by a check drawn on a
foreign bank (other than a check drawn on a Canadian bank in U.S. Dollars) will
not be considered in proper form and will not be processed unless and until the
Portfolio determines that it has received payment of the proceeds of the check.
The time required for such a determination will vary and cannot be determined in
advance.
Scheduled variations in or the elimination of the initial sales charge
for purchases of Class A shares or the contingent deferred sales charge for
redemptions of Class B shares by certain classes of persons or through certain
types of transactions as described in the prospectus are provided because of
anticipated economies in sales and sales related efforts.
The conversion of Class B shares to Class A shares may be subject to
the continuing availability of an opinion of counsel or ruling by the Internal
Revenue Service or other assurance acceptable to each Portfolio to the effect
that (a) the assessment of the distribution services fee with respect to Class B
shares and not Class A shares and the assessment of the shareholder services fee
with respect to each Class does not result in the Portfolio's dividends
constituting "preferential dividends" under the Internal Revenue Code, and (b)
that the conversion of Class B shares to Class A shares does not constitute a
taxable event under the Internal Revenue Code. The conversion of Class B shares
to Class A shares may be suspended if such assurance is not available. In that
event, no further conversions of Class B shares would occur, and shares might
continue to be subject to the distribution services fee for an indefinite period
that may extend beyond the proposed conversion date as described in the
prospectus.
Each Portfolio has authorized certain members of the National
Association of Securities Dealers, Inc. ("NASD"), other than Kemper
Distributors, Inc. ("KDI"), to accept purchase and redemption orders for the
Portfolio's shares. Those brokers may also designate other parties to accept
purchase and redemption orders on the Portfolio's behalf. Orders for purchase or
redemption will be deemed to have been received by the Portfolio when received
by Kemper Service Company ("KSvC," the "Shareholder Service Agent" or the
"Transfer Agent") in good order. Further, if purchases or redemptions of the
Portfolio's shares are arranged and settlement is made at an investor's election
through any other authorized NASD member, that member may, at its discretion,
charge a fee for that service. The Board of Trustees ("Board") of the Portfolios
and KDI each has the right to limit the amount of purchases by, and to refuse to
sell to, any person. The Board and KDI may suspend or terminate the offering of
shares of the Portfolio at any time for any reason.
Checks. A certified check is not necessary, but checks are only accepted subject
to collection at full face value in U.S. funds and must be drawn on, or payable
through, a U.S. bank.
If shares of a Portfolio are purchased by a check which proves to be
uncollectible, the Portfolio reserves the right to cancel the purchase
immediately and the purchaser will be responsible for any loss incurred by the
Portfolio or the principal underwriter by reason of such cancellation. If the
purchaser is a shareholder, the Portfolio shall have the authority, as agent of
the shareholder, to redeem shares in the shareholder's account in order to
reimburse the Portfolio or the principal underwriter for the loss incurred.
Investors whose orders have been canceled may be prohibited or restricted from
placing future orders in any of the Portfolios and their affiliated Underlying
Funds.
Wire Transfer of Federal Funds. To obtain the net asset value determined as of
the close of regular trading on the New York Stock Exchange (the "Exchange") on
a selected day for a Portfolio, your bank must forward federal funds by wire
transfer and provide the required account information so as to be available to a
Portfolio prior to the regular close of trading on the Exchange (normally 4 p.m.
eastern time). The bank sending an investor's federal funds by bank wire may
charge for the service. Presently, the Distributor pays a fee for receipt by the
custodian of "wired funds," but the right to charge investors for this service
is reserved. Banks are closed on certain holidays although the Exchange may be
open. These holidays include: Columbus Day (the 2nd Monday in October) and
Veterans Day (November 11). Investors are
7
<PAGE>
not able to purchase shares by wiring federal funds on such holidays because the
custodian is not open to receive such federal funds on behalf of a Portfolio.
Share Price. Purchases will be filled at the net asset value next computed after
receipt of the application by KSvC in good order plus, with respect to certain
purchases of Class A shares, an initial sales charge. Net asset value per share
normally will be computed as of the close of regular trading on each day the
Exchange is open for trading. Orders received after the close of regular trading
on the Exchange will be executed at the next business day's net asset value. If
the order has been placed by a member of the NASD, other than KDI, it is the
responsibility of that member broker, rather than a Portfolio, to forward the
purchase order to KSvC by the close of regular trading on the Exchange.
Alternative Purchase Arrangements. Class A shares of each Portfolio are sold to
investors subject to an initial sales charge. Class B shares are sold without an
initial sales charge but are subject to higher ongoing expenses than Class A
shares and a contingent deferred sales charge payable upon certain redemptions.
Class B shares automatically convert to Class A shares six years after issuance.
When placing purchase orders, investors must specify whether the order is for
Class A or Class B shares. If a class of shares is not specified on the account
application, Class A shares will be purchased for an investor.
The primary distinctions among the classes of each Portfolio's shares
lie in their initial and contingent deferred sales charge structures and in
their ongoing expenses, including asset-based sales charges in the form of Rule
12b-1 distribution fees. These differences are summarized in the table below.
Each class has distinct advantages and disadvantages for different investors,
and investors may choose the class that best suits their circumstances and
objectives.
<TABLE>
<CAPTION>
Annual 12b-1 Fees
(as a % of average
Sales Charge daily net assets) Other Information
------------ ----------------- -----------------
<S> <C> <C>
Class A Maximum initial sales charge of 5.00% of 0.25% Initial sales charge
the public offering price for Income waived or reduced for
Portfolio, 5.25% of the public offering certain purchases
price for Income with Growth Portfolio
and 5.75% of the public offering price
for Balanced, Growth with Income, and
Growth Portfolios
Class B Maximum contingent deferred sales charge 1.00% Shares automatically
of 4% of redemption proceeds; declines to convert to Class A
zero on certain redemptions made within shares six years after
six years issuance
</TABLE>
The minimum initial investment for each Portfolio is $1,000 and the
minimum subsequent investment is $100. The minimum initial investment for an
Individual Retirement Account is $500 and the minimum subsequent investment is
$50. Under an automatic investment plan, such as Auto Buy, Payroll Direct
Deposit or Government Direct Deposit, the minimum initial and subsequent
investment is $100. These minimum amounts may be changed at any time at
management's discretion.
Each Portfolio receives the entire net asset value of all its Class A
shares sold. KDI, the Portfolios' principal underwriter, retains the sales
charge on sales of Class A shares from which it allows discounts from the
applicable public offering price to investment dealers, which discounts are
uniform for all dealers in the United States and its territories. The normal
discount allowed to dealers is set forth in the above table. Upon notice to all
dealers with whom it has sales agreements, KDI may reallow up to the full
applicable sales charge, as shown in the above table, during periods and for
transactions specified in such notice and such reallowances may be based upon
attainment of minimum sales levels. During periods when 90% or more of the sales
charge is reallowed, such dealers may be deemed to be underwriters as that term
is defined in the Securities Act of 1933.
Class A shares of a Portfolio may be purchased at net asset value by:
(a) shareholders in connection with the investment or reinvestment of income and
capital gains dividends; (b) a participant-directed qualified retirement plan or
a participant-directed non-qualified deferred compensation plan or a
participant-directed qualified retirement plan,
8
<PAGE>
providing that the Portfolios are accepting such orders; (c) any purchaser with
Portfolio investment provided that the amount invested in such Portfolio totals
at least $1,000,000 (the "Large Order NAV Purchase Privilege") including
purchases of Class A shares pursuant to the "Combined Purchases," "Letter of
Intent" and "Cumulative Discount" features described under "Special Features" in
the Portfolios' prospectus, or (d) officers, trustees, directors, employees
(including retirees); certain independent contractors and sales representatives
of a Portfolio, its investment adviser, its principal underwriter or certain
affiliated companies, for themselves or members of their families or any trust,
pension, profit-sharing or other benefit plan for such persons; (e) registered
representatives and employees of broker-dealers having selling group agreements
with the Distributor or any trust, pension, profit-sharing or other benefit plan
for such persons; (f) in connection with the acquisition of the assets of or
merger on consolidation with another investment company.
KDI may in its discretion compensate investment dealers or other
financial services firms in connection with the sale of Class A shares of a
Portfolio at net asset value in accordance with the Large Order NAV Purchase
Privilege up to the following amounts: 1.00% of the net asset value of shares
sold on amounts up to $5 million, 0.50% on the next $45 million and 0.25% on
amounts over $50 million. The commission schedule will be reset on a calendar
year basis for sales of shares pursuant to the Large Order NAV Purchase
Privilege to employer sponsored employee benefit plans using the subaccount
record keeping system made available through KSvC. For purposes of determining
the appropriate commission percentage to be applied to a particular sale, KDI
will consider the cumulative amount invested by the purchaser in the Portfolios
as noted under "Special Features -- Class A Shares -- Combined Purchases" in the
Portfolios' prospectus, including purchases pursuant to the "Combined
Purchases," "Letter of Intent" and "Cumulative Discount" features. The privilege
of purchasing Class A shares of a Portfolio at net asset value under the Large
Order NAV Purchase Privilege is not available if another net asset value
purchase privilege also applies.
The sales charge scale is applicable to purchases made at one time by
any "purchaser" which includes: an individual; or an individual, his or her
spouse and children under the age of 21; or a trustee or other fiduciary of a
single trust estate or single fiduciary account; or an organization exempt from
federal income tax under Section 501(c)(3) or (13) of the Code; or a pension,
profit-sharing or other employee benefit plan whether or not qualified under
Section 401 of the Code; or other organized group of persons whether
incorporated or not, provided the organization has been in existence for at
least six months and has some purpose other than the purchase of redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales charge, all orders from an organized group will have to be
placed through a single investment dealer or other firm and identified as
originating from a qualifying purchaser.
Deferred Sales Charge Alternative -- Class B Shares. Investors choosing the
deferred sales charge alternative may purchase Class B shares at net asset value
per share without any sales charge at the time of purchase. Since Class B shares
are being sold without an initial sales charge, the full amount of the
investor's purchase payment will be invested in Class B shares for his or her
account. A contingent deferred sales charge may be imposed upon redemption of
Class B shares.
KDI compensates firms for sales of Class B shares at the time of sale
at a commission rate of up to 2.93% of the amount of Class B shares sold. KDI is
compensated by each Fund for services as distributor and principal underwriter
for Class B shares.
Class B shares of a Fund will automatically convert to Class A shares
of the same Fund six years after issuance on the basis of the relative net asset
value per share. The purpose of the conversion feature is to relieve holders of
Class B shares from the distribution services fee when they have been
outstanding long enough for KDI to have been compensated for distribution
related expenses. For purposes of conversion to Class A shares, shares purchased
through the reinvestment of dividends and other distributions paid with respect
to Class B shares in a shareholder's Fund account will be converted to Class A
shares on a pro rata basis.
REDEMPTION OR REPURCHASE OF SHARES
General. Any shareholder may require a Portfolio to redeem his or her shares.
Upon receipt by KSvC of a request for redemption, shares of a Portfolio will be
redeemed by the Portfolio at the applicable net asset value per share of such
Portfolio as described in the Portfolios' prospectus. When shares are held for
the account of a shareholder by the Portfolios' transfer agent, the shareholder
may redeem them by sending a written request with signatures guaranteed to
Kemper Service Company, P.O. Box 419453, Kansas City, Missouri 64141. Redemption
requests must be endorsed by the account holder with signatures guaranteed by a
commercial bank, trust company, savings and loan association,
9
<PAGE>
federal savings bank, member firm of a national securities exchange or other
eligible financial institution. The redemption request must be signed exactly as
the account is registered including any special capacity of the registered
owner. Additional documentation may be requested, and a signature guarantee is
normally required, from institutional and fiduciary account holders, such as
corporations, custodians (e.g., under the Uniform Transfers to Minors Act),
executors, administrators, trustees or guardians.
The redemption price for shares of a Portfolio will be the net asset
value per share of that Portfolio next determined following receipt by KSvC of a
properly executed request with any required documents as described above.
Payment for shares redeemed will be made in cash as promptly as practicable but
in no event later than seven days after receipt of a properly executed request.
When a Portfolio is asked to redeem shares for which it may not have yet
received good payment (i.e., purchases by check, AutoBuy or Bank Direct
Deposit), it may delay transmittal of redemption proceeds until it has
determined that collected funds have been received for the purchase of such
shares, which will be up to 10 days from receipt by a Portfolio of the purchase
amount. The redemption within two years of Class A shares purchased at net asset
value under the Large Order NAV Purchase Privilege may be subject to a
contingent deferred sales charge (see "Purchase of Shares"). The redemption of
Class B shares within six years may be subject to a contingent deferred sales
charge (see "Contingent Deferred Sales Charge -- Class B Shares" below).
Because of the high cost of maintaining small accounts, the Portfolios
may assess a quarterly fee of $9 on an account with a balance below $1,000 for
the quarter. The fee will not apply to accounts enrolled in an automatic
investment program, Individual Retirement Accounts or employer sponsored
employee benefit plans using the subaccount record keeping system made available
through the Shareholder Service Agent.
Shareholders can request the following telephone privileges: expedited
wire transfer redemptions and AutoBuy and exchange transactions for individual
and institutional accounts and pre-authorized telephone redemption transactions
for certain institutional accounts. Shareholders may choose these privileges on
the account application or by contacting KSvC for appropriate instructions.
Please note that the telephone exchange privilege is automatic unless the
shareholder refuses it on the account application. A Portfolio or its agents may
be liable for any losses, expenses or costs arising out of fraudulent or
unauthorized telephone requests pursuant to these privileges unless the
Portfolio or its agents reasonably believe, based upon reasonable verification
procedures, that the telephonic instructions are genuine. The shareholder will
bear the risk of loss, including loss resulting from fraudulent or unauthorized
transactions, as long as the reasonable verification procedures are followed.
The verification procedures include recording instructions, requiring certain
identifying information before acting upon instructions and sending written
confirmations.
Telephone Redemptions. If the proceeds of the redemption (prior to the
imposition of any contingent deferred sales charge) are $50,000 or less and the
proceeds are payable to the shareholder of record at the address of record,
normally a telephone request or a written request by any one account holder
without a signature guarantee is sufficient for redemptions by individual or
joint account holders, and trust, executor and guardian account holders
(excluding custodial accounts for gifts and transfers to minors), provided the
trustee, executor or guardian is named in the account registration. Other
institutional account holders and guardian account holders of custodial accounts
for gifts and transfers to minors may exercise this special privilege of
redeeming shares by telephone request or written request without signature
guarantee subject to the same conditions as individual account holders and
subject to the limitations on liability described under "General" above,
provided that this privilege has been pre-authorized by the institutional
account holder or guardian account holder by written instruction to KSvC with
signatures guaranteed. Telephone requests may be made by calling 1-877-327-8899.
Shares purchased by check or through AutoBuy or Bank Direct Deposit may not be
redeemed under this privilege of redeeming shares by telephone request until
such shares have been owned for at least 10 days. This privilege of redeeming
shares by telephone request or by written request without a signature guarantee
and may not be used if the shareholder's account has had an address change
within 30 days of the redemption request. During periods when it is difficult to
contact the Shareholder Service Agent by telephone, it may be difficult to use
the telephone redemption privilege, although investors can still redeem by mail.
The Funds reserve the right to terminate or modify this privilege at any time.
Repurchases (Confirmed Redemptions). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to KDI, which each Portfolio has authorized to act as its agent.
There is no charge by KDI with respect to repurchases; however, dealers or other
firms may charge customary commissions for their services. Dealers and other
financial services firms are obligated to transmit orders promptly. The
repurchase price will be the net asset value of the Portfolio next determined
after receipt of a request by KDI. However, requests for repurchases received by
dealers or other firms prior to the determination of net asset value (see "Net
Asset Value") and received by KDI prior to the close of KDI's business day will
be confirmed at the net asset value effective on that day.
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<PAGE>
The offer to repurchase may be suspended at any time. Requirements as to stock
powers, payments and delay of payments are the same as for redemptions.
Expedited Wire Transfer Redemptions. If the account holder has given
authorization for expedited wire redemption to the account holder's brokerage or
bank account, shares of a Portfolio can be redeemed and proceeds sent by federal
wire transfer to a single previously designated account. Requests received by
KSvC prior to the determination of net asset value will result in shares being
redeemed that day at the net asset value of the Portfolio effective on that day
and normally the proceeds will be sent to the designated account the following
business day. Delivery of the proceeds of a wire redemption request of $250,000
or more may be delayed by the Portfolio for up to seven days if the Adviser
deems it appropriate under then current market conditions. Once authorization is
on file, KSvC will honor requests by telephone at 1-877-327-8899 or in writing,
subject to the limitations on liability described under "General" above. The
Portfolios are not responsible for the efficiency of the federal wire system or
the account holder's financial services firm or bank. The Portfolios currently
do not charge the account holder for wire transfers. The account holder is
responsible for any charges imposed by the account holder's firm or bank. There
is a $1,000 wire redemption minimum (including any contingent deferred sales
charge). To change the designated account to receive wire redemption proceeds,
send a written request to KSvC with signatures guaranteed as described above or
contact the firm through which shares of the Portfolio were purchased. Shares
purchased by check or through AutoBuy or Bank Direct Deposit may not be redeemed
by wire transfer until such shares have been owned for at least 10 days. During
periods when it is difficult to contact the KSvC by telephone, it may be
difficult to use the expedited redemption privilege. The Portfolios reserve the
right to terminate or modify this privilege at any time.
Contingent Deferred Sales Charge -- Large Order NAV Purchase Privilege. A
contingent deferred sales charge may be imposed upon redemption of Class A
shares that are purchased under the Large Order NAV Purchase Privilege as
follows: 1.00% if they are redeemed within one year of purchase and 0.50% if
they are redeemed during the second year following purchase. The charge will not
be imposed upon redemption of reinvested dividends or share appreciation. The
charge is applied to the value of the shares redeemed excluding amounts not
subject to the charge. The contingent deferred sales charge will be waived in
the event of: (a) redemptions by a participant-directed qualified retirement
plan described in Code Section 401(a) or a participant-directed non-qualified
deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district; (b) redemptions by
employer sponsored employee benefit plans using the subaccount record keeping
system made available through the Shareholder Service Agent; (c) redemption of
shares of a shareholder (including a registered joint owner) who has died; (d)
redemption of shares of a shareholder (including a registered joint owner) who
after purchase of the shares being redeemed becomes totally disabled (as
evidenced by a determination by the federal Social Security Administration); (e)
redemptions under a Fund's Systematic Withdrawal Plan at a maximum of 10% per
year of the net asset value of the account; and (f) redemptions of shares whose
dealer of record at the time of the investment notifies KDI that the dealer
waives the commission applicable to such Large Order NAV Purchase.
Contingent Deferred Sales Charge -- Class B Shares. A contingent deferred sales
charge may be imposed upon redemption of Class B shares. There is no such charge
upon redemption of any share appreciation or reinvested dividends on Class B
shares. The charge is computed at the following rates applied to the value of
the shares redeemed excluding amounts not subject to the charge.
Year of Redemption after Purchase Contingent Deferred Sales Charge
--------------------------------- --------------------------------
First 4%
Second 3%
Third 3%
Fourth 2%
Fifth 2%
Sixth 1%
The contingent deferred sales charge will be waived: (a) in the event
of the total disability (as evidenced by a determination by the federal Social
Security Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special Features
- -- Systematic Withdrawal Plan" below) and (d) for redemptions made pursuant to
any IRA systematic withdrawal based on the shareholder's life expectancy
including, but not limited to, substantially equal periodic payments described
in
11
<PAGE>
Internal Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2; and (e) for
redemptions to satisfy required minimum distributions after age 70 1/2 from an
IRA account (with the maximum amount subject to this waiver being based only
upon the shareholder's IRA accounts). The contingent deferred sales charge will
also be waived in connection with the following redemptions of shares held by
employer sponsored employee benefit plans maintained on the subaccount record
keeping system made available by KSvC: (a) redemptions to satisfy participant
loan advances (note that loan repayments constitute new purchases for purposes
of the contingent deferred sales charge and the conversion privilege), (b)
redemptions in connection with retirement distributions (limited at any one time
to 10% of the total value of plan assets invested in a Portfolio), (c)
redemptions in connection with distributions qualifying under the hardship
provisions of the Internal Revenue Code and (d) redemptions representing returns
of excess contributions to such plans.
Contingent Deferred Sales Charge -- General. The following example will
illustrate the operation of the contingent deferred sales charge. Assume that an
investor makes a single purchase of $10,000 of a Portfolio's Class B shares and
that 16 months later the value of the shares has grown by $1,000 through
reinvested dividends and by an additional $1,000 in appreciation to a total of
$12,000. If the investor were then to redeem the entire $12,000 in share value,
the contingent deferred sales charge would be payable only with respect to
$10,000 because neither the $1,000 of reinvested dividends nor the $1,000 of
share appreciation is subject to the charge. The charge would be at the rate of
3% ($300) because it was in the second year after the purchase was made.
The rate of the contingent deferred sales charge is determined by the
length of the period of ownership. Investments are tracked on a monthly basis.
The period of ownership for this purpose begins the first day of the month in
which the order for the investment is received. For example, an investment made
in January, 1999 will be eligible for the second year's charge if redeemed on or
after January 1, 2000. In the event no specific order is requested, the
redemption will be made first from shares representing reinvested dividends and
then from the earliest purchase of shares. KDI receives any contingent deferred
sales charge directly.
Redemption by Mail or Fax. In order to ensure proper authorization before
redeeming shares, the Transfer Agent may request additional documents such as,
but not restricted to, stock powers, trust instruments, certificates of death,
appointments as executor/executrix, certificates of corporate authority and
waivers of tax (required in some states when settling estates).
It is suggested that shareholders holding shares registered in other
than individual names contact the Transfer Agent prior to any redemptions to
ensure that all necessary documents accompany the request. When shares are held
in the name of a corporation, trust, fiduciary agent, attorney or partnership,
the Transfer Agent requires, in addition to the stock power, certified evidence
of authority to sign. These procedures are for the protection of shareholders
and should be followed to ensure prompt payment. Redemption requests must not be
conditional as to date or price of the redemption. Proceeds of a redemption will
be sent within seven (7) days after receipt by the Transfer Agent of a request
for redemption that complies with the above requirements. Delays of more than
seven (7) days of payment for shares tendered for repurchase or redemption may
result, but only until the purchase check has cleared.
The requirements for IRA redemptions are different from those for
regular accounts. For more information, please call Farmers Customer Support
toll-free at 1-877-327-8899.
Reinvestment Privilege. A shareholder who has redeemed Class A shares of a
Portfolio may reinvest up to the full amount redeemed at net asset value at the
time of the reinvestment in Class A shares of another Portfolio. A shareholder
of a Portfolio who redeems Class A shares purchased under the Large Order NAV
Purchase Privilege (see "Purchase of Shares") or Class B shares and incurs a
contingent deferred sales charge may reinvest up to the full amount redeemed at
net asset value at the time of the reinvestment in Class A shares or Class B
shares, as the case may be, of a Portfolio. The amount of any contingent
deferred sales charge also will be reinvested. These reinvested shares will
retain their original cost and purchase date for purposes of the contingent
deferred sales charge. Also, a holder of Class B shares who has redeemed shares
may reinvest up to the full amount redeemed, less any applicable contingent
deferred sales charge that may have been imposed upon the redemption of such
shares, at net asset value in Class A shares of a Portfolio. Purchases through
the reinvestment privilege are subject to the minimum investment requirements
applicable to the shares being purchased. The reinvestment privilege can be used
only once as to any specific shares and reinvestment must be effected within six
months of the redemption. In certain circumstances, shareholders will be
ineligible to take sales charges into account in computing taxable gain or loss
on a redemption if the reinvestment privilege is exercised. (See "Taxes") If a
loss is realized on the redemption of a Portfolio's shares, the reinvestment in
the same Portfolio may be subject to the "wash sale" rules if made within 30
days of the redemption, resulting in a postponement of the recognition of such
loss for federal income tax purposes. The reinvestment privilege may be
terminated or modified at any time.
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SPECIAL FEATURES
Class A Shares -- Combined Purchases. Each Portfolio's Class A shares may be
purchased at the rate applicable to the discount bracket attained by combining
concurrent investments in Class A shares of the Portfolios.
Class A Shares -- Letter of Intent. A written Letter of Intent (the "Letter"),
which imposes no obligation to purchase or sell additional Class A shares,
provides for a price adjustment depending upon the actual amount purchased
within a 24-month period. The Letter provides that the first purchase following
execution of the Letter must be at least 5% of the amount of the intended
purchase, and that 5% of the amount of the intended purchase normally will be
held in escrow in the form of shares pending completion of the intended
purchase. If the total investments under the Letter are less than the intended
amount and thereby qualify only for a higher sales charge than actually paid,
the appropriate number of escrowed shares are redeemed and the proceeds used
toward satisfaction of the obligation to pay the increased sales charge. The
Letter for an employer sponsored employee benefit plan maintained on the
subaccount record keeping system available through KSvC may have special
provisions regarding payment of any increased sales charge resulting from a
failure to complete the intended purchase under the Letter. A shareholder may
include the value (at the maximum offering price) of all shares of such
Portfolios held of record as of the initial purchase date under the Letter as an
"accumulation credit" toward the completion of the Letter, but no price
adjustment will be made on such shares. Only investments in Class A shares of a
Portfolio are included for this privilege.
Class A Shares -- Cumulative Discount. Class A shares of a Portfolio may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of a Portfolio being purchased, the value of all Class A
shares of Farmers Mutual Fund Portfolios (computed at the maximum offering price
at the time of the purchase for which the discount is applicable) already owned
by the investor.
Class A Shares -- Availability of Quantity Discounts. An investor or the
investor's agent must notify KSvC or KDI whenever a quantity discount or reduced
sales charge is applicable to a purchase. Upon such notification, the investor
will receive the lowest applicable sales charge. Quantity discounts described
above may be modified or terminated at any time.
Exchange Privilege. Shareholders of Class A or Class B shares may exchange their
shares for shares of the corresponding class of other Portfolios, or shares of
Farmers Money Market Portfolio - Retail Shares, in accordance with the
provisions below.
Class A Shares. Class A shares of the Portfolios may be exchanged for each other
at their relative net asset values. Class A shares of a Fund purchased under the
Large Order NAV Purchase Privilege may be exchanged for Class A shares of
another Portfolio under the exchange privilege described above without paying
any contingent deferred sales charge at the time of exchange. If the Class A
shares received on exchange are redeemed thereafter, a contingent deferred sales
charge may be imposed in accordance with the foregoing requirements provided
that the shares redeemed will retain their original cost and purchase date for
purposes of the contingent deferred sales charge. In the case of an exchange of
Class A shares of a Portfolio for Farmers Money Market Portfolio - Retail
Shares, the period during which the Retail Shares are held is not considered for
purposes of calculating any contingent deferred sales charge applicable to the
Class A shares exchanged.
Class B Shares. Class B shares of the Portfolios may be exchanged for each other
at their relative net asset values. Class B shares may be exchanged without any
contingent deferred sales charge being imposed at the time of exchange. For
purposes of the contingent deferred sales charge that may be imposed upon the
redemption of the Class B shares received on exchange, amounts exchanged retain
their original cost and purchase date. In the case of an exchange of Class B
shares of a Portfolio for Farmers Money Market Portfolio - Retail Shares, the
period during which the Retail Shares are held is not considered for purposes of
calculating the contingent deferred sales charge applicable to the Class B
shares exchanged.
General. Shares of a Portfolio with a value in excess of $1,000,000 acquired by
exchange from another Portfolio may not be exchanged thereafter until they have
been owned for 15 days (the "15 Day Hold Policy"). For purposes of determining
whether the 15 Day Hold Policy applies to a particular exchange, the value of
the shares to be exchanged shall be computed by aggregating the value of shares
being exchanged for all accounts under common control, direction, or advice,
including without limitation, accounts administered by a financial services firm
offering market timing, asset allocation or similar services. The total value of
shares being exchanged must at least equal the minimum investment requirement of
the Portfolio into which they are being exchanged. Exchanges are made based on
relative dollar values of
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the shares involved in the exchange. For federal income tax purposes, any such
exchange constitutes a sale upon which a gain or loss may be realized, depending
upon whether the value of the shares being exchanged is more or less than the
shareholder's adjusted cost basis of such shares. Exchanges may be accomplished
by a written request to Kemper Service Company, P.O. Box 419453, Kansas City,
Missouri 64141, or by telephone if the shareholder has given authorization
(1-877-327-8899). Once the authorization is on file, KSvC will honor requests by
telephone at 1-877-327-8899, subject to the limitations on liability under
"Redemption or Repurchase of Shares -- General." During periods when it is
difficult to contact the Shareholder Service Agent by telephone, it may be
difficult to use the telephone exchange privilege. The exchange privilege is not
a right and may be suspended, terminated or modified at any time. Except as
otherwise permitted by applicable regulations, 60 days' prior written notice of
any termination or material change will be provided.
Systematic Exchange Privilege. The owner of $1,000 or more of any class of the
shares of a Portfolio may authorize the automatic exchange of a specified amount
($100 minimum) of such shares for shares of the same class of another Portfolio.
If selected, exchanges will be made automatically until the privilege is
terminated by the shareholder or the other Portfolio, although shareholders of
either class of a Portfolio may automatically exchange their shares for shares
of Farmers Money Market Portfolio Retail Shares. Exchanges are subject to the
terms and conditions described above under "Exchange Privilege" except that the
$100 minimum investment requirement for the Portfolio acquired on exchange is
not applicable.
AutoBuy/AutoSell. AutoBuy permits the transfer of money via the Automated
Clearing House System (minimum $100 and maximum $50,000) from a shareholder's
bank, savings and loan, or credit union account to purchase shares in a Fund. By
utilizing AutoSell, shareholders can redeem shares (minimum $100 and maximum
$50,000) from their Portfolio account and transfer the proceeds to their bank,
savings and loan, or credit union checking account. Shares purchased by check or
through AutoBuy or Bank Direct Deposit may not be redeemed under this privilege
until such shares have been owned for at least 10 days. By enrolling in
AutoBuy/AutoSell, the shareholder authorizes the Shareholder Service Agent to
rely upon telephone instructions from any person to transfer the specified
amounts between the shareholder's Portfolio account and the predesignated bank,
savings and loan or credit union account, subject to the limitations on
liability under "Redemption or Repurchase of Shares - General." Once enrolled in
AutoBuy/AutoSell, a shareholder can initiate a transaction by calling Kemper
Service Company toll free at 1-877-327-8899 Monday through Friday, 8:00 a.m. to
3:00 p.m. Chicago time. Shareholders may terminate this privilege by sending
written notice to Kemper Service Company, P.O. Box 419453, Kansas City, Missouri
64141. Termination will become effective as soon as the Shareholder Service
Agent has had a reasonable time to act upon the request. AutoBuy/AutoSell cannot
be used with passbook savings accounts or for tax-deferred plans such as
Individual Retirement Accounts.
Bank Direct Deposit. A shareholder may purchase additional shares of a Portfolio
through an automatic investment program. With the Bank Direct Deposit Purchase
Plan, investments are made automatically (maximum $50,000) from the
shareholder's account at a bank, savings and loan or credit union into the
shareholder's Portfolio account. By enrolling in Bank Direct Deposit, the
shareholder authorizes the Portfolio and its agents to either draw checks or
initiate Automated Clearing House debits against the designated account at a
bank or other financial institution. This privilege may be selected by
completing the appropriate section on the Account Application or by contacting
KSvC for appropriate forms. A shareholder may terminate his or her Plan by
sending written notice to Kemper Service Company, P.O. Box 419453, Kansas City,
Missouri 64141. Termination by a shareholder will become effective within thirty
days after the KSvC has received the request. A Portfolio may immediately
terminate a shareholder's Plan in the event that any item is unpaid by the
shareholder's financial institution. The Portfolios may terminate or modify this
privilege at any time.
Payroll Direct Deposit and Government Direct Deposit. A shareholder may invest
in a Portfolio through Payroll Direct Deposit or Government Direct Deposit.
Under these programs, all or a portion of a shareholder's net pay or government
check is automatically invested in a Portfolio account each payment period. A
shareholder may terminate participation in these programs by giving written
notice to the shareholder's employer or government agency, as appropriate. (A
reasonable time to act is required.) A Portfolio is not responsible for the
efficiency of the employer or government agency making the payment or any
financial institutions transmitting payments.
Systematic Withdrawal Plan. The owner of $50,000 or more of a class of a
Portfolio's shares at the offering price (net asset value plus, in the case of
Class A shares, the initial sales charge) may provide for the payment from the
owner's account of any requested dollar amount to be paid to the owner or a
designated payee monthly, quarterly, semiannually or annually. The $5,000
minimum account size is not applicable to Individual Retirement Accounts. The
minimum periodic payment is $100. The maximum annual rate at which Class B
shares may be redeemed (and Class A shares purchased under the Large Order NAV
Purchase Privilege) under a systematic withdrawal plan is 10% of the net asset
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value of the account. Shares are redeemed so that the payee will receive payment
approximately the first of the month. Any income and capital gain dividends will
be automatically reinvested at net asset value. A sufficient number of full and
fractional shares will be redeemed to make the designated payment. Depending
upon the size of the payments requested and fluctuations in the net asset value
of the shares redeemed, redemptions for the purpose of making such payments may
reduce or even exhaust the account.
The purchase of Class A shares while participating in a systematic
withdrawal plan will ordinarily be disadvantageous to the investor because the
investor will be paying a sales charge on the purchase of shares at the same
time that the investor is redeeming shares upon which a sales charge may have
already been paid. Therefore, a Portfolio will not knowingly permit additional
investments of less than $2,000 if the investor is at the same time making
systematic withdrawals. KDI will waive the contingent deferred sales charge on
redemptions of Class A shares purchased under the Large Order NAV Purchase
Privilege and Class B shares made pursuant to a systematic withdrawal plan. The
right is reserved to amend the systematic withdrawal plan on 30 days' notice.
The plan may be terminated at any time by the investor or the Portfolios.
Tax-Sheltered Retirement Plans. The Shareholder Service Agent provides
retirement plan services and documents and KDI can establish investor accounts
in any of the following types of retirement plans:
[Individual Retirement Accounts ("IRAs") with Investors Fiduciary Trust
Company ("IFTC"), 801 Pennsylvania Avenue, Kansas City, Missouri 64105 as
custodian. This includes Savings Incentive Match Plan for Employees of Small
Employers ("SIMPLE"), IRA accounts and Simplified Employee Pension Plan ("SEP")
IRA accounts and prototype documents.]
[403(b)(7) Custodial Accounts also with IFTC as custodian. This type of
plan is available to employees of most non-profit organizations.]
Prototype money purchase pension and profit-sharing plans may be
adopted by employers. The maximum annual contribution per participant is the
lesser of 25% of compensation or $30,000.
Brochures describing the above plans as well as model defined benefit
plans, target benefit plans, 457 plans, 401(k) plans, SIMPLE 401(k) plans and
materials for establishing them are available from the Shareholder Service Agent
upon request. The brochures for plans with IFTC as custodian describe the
current fees payable to State Street Bank and Trust for its services as
custodian. Investors should consult with their own tax advisers before
establishing a retirement plan.
ADDITIONAL TRANSACTION INFORMATION
General. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of a Portfolio for their clients, and KDI may pay them a transaction fee
up to the level of the discount or commission allowable or payable to dealers,
as described above. Banks are currently prohibited under the Glass-Steagall Act
from providing certain underwriting or distribution services. Banks or other
financial services firms may be subject to various state laws regarding the
services described above and may be required to register as dealers pursuant to
state law. If banking firms were prohibited from acting in any capacity or
providing any of the described services, management would consider what action,
if any, would be appropriate. KDI does not believe that termination of a
relationship with a bank would result in any material adverse consequences to a
Portfolio.
In addition to the payments and allowances KDI may make to firms
described above, KDI may, from time to time, pay or allow to firms a 1%
commission on the amount of shares of a Portfolio sold by the firm under the
following conditions: (i) the purchased shares are held in a IRA account, (ii)
the shares are purchased as a direct "roll over" of a distribution from a
qualified retirement plan account maintained on a participant subaccount record
keeping system provided by KSvC, (iii) the registered representative placing the
trade is a member of ProStar, a group of persons designated by KSvC in
acknowledgment of their dedication to the employee benefit plan area and (iv)
the purchase is not otherwise subject to a commission.
In addition to the discounts or commissions described above, KDI will,
from time to time, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash or other compensation, to firms that sell shares
of the Portfolios. Non-cash compensation includes luxury merchandise and trips
to luxury resorts. In some instances, such discounts, commissions or other
incentives will be offered only to certain firms that sell or are expected
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to sell during specified time periods certain minimum amounts of shares of the
Portfolios or other funds underwritten by KDI.
Orders for the purchase of shares of a Portfolio will be confirmed at a
price based on the net asset value of that Portfolio next determined after
receipt by KDI of the order accompanied by payment. However, orders received by
dealers or other financial services firms prior to the determination of net
asset value (see "Net Asset Value") and received by KDI prior to the close of
its business day will be confirmed at a price based on the net asset value
effective on that day ("trade date"). The Portfolios reserve the right to
determine the net asset value more frequently than once a day if deemed
desirable. Dealers and other financial services firms are obligated to transmit
orders promptly. Collection may take significantly longer for a check drawn on a
foreign bank than for a check drawn on a domestic bank. Therefore, if an order
is accompanied by a check drawn on a foreign bank, funds must normally be
collected before shares will be purchased. See "Purchase and Redemption of
Shares."
The Portfolios reserve the right to withdraw all or any part of the
offering made by this Statement of Additional Information and to reject purchase
orders. Also, from time to time, each Portfolio may temporarily suspend the
offering of any class of its shares to new investors. During the period of such
suspension, persons who are already shareholders of such class of the Portfolio
normally are permitted to continue to purchase additional shares of such class
and to have dividends reinvested.
Shareholders should direct their inquiries to Farmers Customer Support,
222 South Riverside Plaza, 24th Floor, Chicago, IL 60606-5808, 1-877-327-8899 or
to the Farmers' agent from whom they received this Statement of Additional
Information.
Share Certificates
Due to the desire of the Portfolios' management to afford ease of
redemption, certificates will not be issued to indicate ownership in a
Portfolio.
Other Information
The "Tax Identification Number" section of the application must be
completed when opening an account. Applications and purchase orders without a
correct certified tax identification number and certain other certified
information (e.g. from exempt organizations, certification of exempt status)
will be returned to the investor.
The Trust may issue shares of each Portfolio at net asset value in
connection with any merger or consolidation with, or acquisition of the assets
of, any investment company (or series thereof) or personal holding company,
subject to the requirements of the 1940 Act.
Clients, officers or employees of the Adviser or of an affiliated
organization, and members of such clients', officers' or employees' immediate
families, banks and members of the NASD may direct repurchase requests to a
Portfolio through Kemper Distributors, Inc. at 222 South Riverside Plaza,
Chicago, IL 60606-5808 by letter, telegram, TWX, or telephone. A two-part
confirmation will be mailed out promptly after receipt of the repurchase
request. A written request in good order should be sent with a copy of the
invoice to Kemper Service Company, P.O. Box 419453, Kansas City, Missouri 64141.
Failure to deliver shares or required documents (see above) by the settlement
date may result in cancellation of the trade and the shareholder will be
responsible for any loss incurred by a Portfolio or the principal underwriter by
reason of such cancellation. Net losses on such transactions which are not
recovered from the shareholder will be absorbed by the principal underwriter.
Any net gains so resulting will accrue to the Portfolio. For this group,
repurchases will be carried out at the net asset value next computed after such
repurchase requests have been received. The arrangements described in this
paragraph for repurchasing shares are discretionary and may be discontinued at
any time.
If a shareholder redeems all shares in the account after the record
date of a dividend, the shareholder receives in addition to the net asset value
thereof, all declared but unpaid dividends thereon. The value of shares redeemed
or repurchased may be more or less than the shareholder's cost depending on the
net asset value at the time of redemption or repurchase. The Trust does not
impose a redemption or repurchase charge, although a wire charge may be
applicable for redemption proceeds wired to an investor's bank account.
Redemption of shares, including redemptions undertaken to effect an exchange for
shares of another Portfolio, may result in tax consequences (gain or loss) to
the shareholder and the proceeds of such redemptions may be subject to backup
withholding. (See "Taxes.")
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The determination of net asset value and a shareholder's right to
redeem shares and to receive payment may be suspended at times (a) during which
the Exchange is closed, other than customary weekend and holiday closings, (b)
during which trading on the Exchange is restricted for any reason, (c) during
which an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or (d)
during which the SEC by order permits a suspension of the right of redemption or
a postponement of the date of payment or of redemption; provided that applicable
rules and regulations of the SEC (or any succeeding governmental authority)
shall govern as to whether the conditions prescribed in (b), (c) or (d) exist.
FEATURES AND SERVICES OFFERED BY THE TRUST
Reports to Shareholders
The Trust issues shareholders unaudited semiannual financial statements
and annual financial statements audited by independent accountants, including a
list of investments held and statements of assets and liabilities, operations,
changes in net assets and financial highlights. The Trust presently intends to
distribute to shareholders informal quarterly reports during the intervening
quarters, containing a statement of the investments of the portfolios.
Transaction Summaries
Annual summaries of all transactions in each Portfolio account are
available to shareholders. The summaries may be obtained by calling
1-877-327-8899.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Each Portfolio intends to follow the practice of distributing 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. Each
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 income taxes for which the shareholders may then be
asked to claim a credit against their federal income tax liability. (See
"Taxes.")
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, the Portfolio may be subject to that excise tax. (See "Taxes.") In certain
circumstances, a Portfolio may determine that it is in the interest of
shareholders to distribute less than the required amount.
Earnings and profits distributed to shareholders on redemptions of
Portfolio shares may be utilized by a Portfolio, to the extent permissible, as
part of that Portfolio's dividends paid deduction on its federal tax return.
The Income, Income with Growth, and Balanced Portfolios each intend to
distribute investment company taxable income, exclusive of net short-term
capital gains in excess of net long-term capital losses, on a quarterly basis,
and distributions of net short-term and long-term capital gains realized during
the fiscal year will be made in November or December to avoid federal excise
tax, although an additional distribution may be made within three months of its
fiscal year end, if necessary. The Growth with Income Portfolio, and Growth
Portfolio each intend to distribute their investment company taxable income and
any net realized capital gains in November or December to avoid federal excise
tax, although an additional distribution may be made within three months of the
Portfolios' fiscal year end, if necessary.
Both types of distributions will be made in Portfolio shares and
confirmations will be mailed to each shareholder unless a shareholder has
elected to receive cash, in which case a check will be sent. Distributions of
investment company taxable income and net realized capital gains are taxable
(See "Taxes"), whether made in shares or cash.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. The characterization of distributions on such
correspondence may differ from the characterization for federal tax purposes. In
January of each year each Portfolio issues to each shareholder a statement of
the federal income tax status of all distributions in the prior calendar year.
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PERFORMANCE INFORMATION
From time to time, quotations of a Portfolio's performance may be
included in advertisements, sales literature or reports to shareholders or
prospective investors. These performance figures will be calculated in the
following manner:
Average Annual Total Return
Average Annual Total Return is the average annual compound rate of
return for the periods of one year, five years, ten years or for the life of the
Portfolio, all ended on the last day of a recent calendar quarter. Average
annual total return quotations reflect changes in the price of a Portfolio's
shares and assume that all dividends and capital gains distributions during the
respective periods were reinvested in Portfolio shares. Average annual total
return is calculated by finding the average annual compound rates of return of a
hypothetical investment over such periods, according to the following formula
(average annual total return is then expressed as a percentage):
T = (ERV/P)^1/n - 1
Where:
P = a hypothetical initial payment of $1,000
T = Average Annual Total Return
N = Number of years
ERV = Ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.
Average Annual Total Return for period ended April 30, 1999 - Class A shares
Life of Portfolio(1)
Income Portfolio 1.75%
Income with Growth Portfolio 2.75
Balanced Portfolio 3.75
Growth with Income Portfolio 5.25
Growth Portfolio 6.67
(1) For the period beginning March 9, 1999 (commencement of operations)
Average Annual Total Return for period ended April 30, 1999 - Class B shares
Life of Portfolio(1)
Income Portfolio 1.58%
Income with Growth Portfolio 2.67
Balanced Portfolio 3.58
Growth with Income Portfolio 5.08
Growth Portfolio 6.58
(1) For the period beginning March 9, 1999 (commencement of operations)
Cumulative Total Return
Cumulative Total Return is the compound rate of return on a
hypothetical initial investment of $1,000 for a specified period. Cumulative
Total Return quotations reflect changes in the price of a Portfolio's shares and
assume that all dividends and capital gains distributions during the period were
reinvested in Portfolio shares. Cumulative Total Return is calculated by finding
the cumulative rates of return of a hypothetical investment over such periods,
according to the following formula (Cumulative Total Return is then expressed as
a percentage):
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C = (ERV/P) -1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = Ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period.
Cumulative Total Return for period ended April 30, 1999 - Class A shares
Life of Portfolio(1)
Income Portfolio 1.75%
Income with Growth Portfolio 2.75
Balanced Portfolio 3.75
Growth with Income Portfolio 5.25
Growth Portfolio 6.67
(1) For the period beginning March 9, 1999 (commencement of operations)
Cumulative Total Return for period ended April 30, 1999 - Class B shares
Life of Portfolio(1)
Income Portfolio 1.58%
Income with Growth Portfolio 2.67
Balanced Portfolio 3.58
Growth with Income Portfolio 5.08
Growth Portfolio 6.58
(1) For the period beginning March 9, 1999 (commencement of operations)
Total Return
Total Return is the rate of return on an investment for a specified
period of time calculated in the same manner as Cumulative Total Return.
TRUST ORGANIZATION
The Portfolios are portfolios of Farmers Investment Trust (the
"Trust"), a Massachusetts business trust established under a Declaration of
Trust dated October 26, 1998. The Trust offers five portfolios: Income
Portfolio, Income with Growth Portfolio, Balanced Portfolio, Growth with Income
Portfolio, and Growth Portfolio.
The Trust may issue an unlimited number of shares of beneficial
interest in the Portfolios, all having $.01 par value, which may be divided by
the Board of Trustees into classes of shares. The Board of Trustees of the Trust
may authorize the issuance of additional classes and additional Portfolios if
deemed desirable, each with its own investment objective, policies and
restrictions. Since the Trust offers multiple Portfolios, it is known as a
"series company." Shares of a Portfolio have equal noncumulative voting rights
and equal rights with respect to dividends, assets and liquidation of such
Portfolio and are subject to any preferences, rights or privileges of any
classes of shares of the Portfolio. Currently, each Portfolio offers two classes
of shares: Class A and Class B shares. Shares of each Portfolio have equal
noncumulative voting rights except that each Portfolio's Class A and Class B
shares have separate and exclusive voting rights with respect to the Portfolios'
Class A and Class B Rule 12b-1 Plans, respectively. Shares of each class also
have equal rights with respect to dividends, assets and liquidation subject to
any preferences (such as resulting from different Rule 12b-1 distribution fees),
rights or privileges of any classes of shares of a Portfolio. Shares of each
Portfolio are fully paid and nonassessable when issued, are transferable without
restriction and have no preemptive or conversion rights. The Trust is not
required to hold annual shareholder meetings and does not intend to do so.
However, the Trust will hold
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shareholder meetings as required or deemed desirable 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 Fund to the
extent and as provided in the Declaration of Trust; (d) any amendment of the
Declaration of Trust (other than amendments changing the name of the Trust,
establishing a fund, 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 Trust, or any registration of the Trust 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. 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.
Each Trustee serves until the next meeting of shareholders, if any,
called for the purpose of electing trustees and until the election and
qualification of a successor or until such trustee sooner dies, resigns, retires
or is removed by a majority vote of the shares entitled to vote (as described
below) or a majority of the trustees. In accordance with the 1940 Act (a) each
Fund will hold a shareholder meeting for the election of trustees at such time
as less than a majority of the trustees have been elected by shareholders, and
(b) if, as a result of a vacancy on the Board of Trustees, less than two-thirds
of the trustees have been elected by the shareholders, that vacancy will be
filled only by a vote of the shareholders.
Trustees may be removed from office by a vote of the holders of
two-thirds of the outstanding shares at a meeting called for that purpose, which
meeting shall be held upon the written request of the holders of not less than
10% of the outstanding shares. Upon the written request of ten or more
shareholders who have been such for at least six months and who hold shares
constituting at least 1% of the outstanding shares of a Portfolio stating that
such shareholders wish to communicate with the other shareholders for the
purpose of obtaining the signatures necessary to demand a meeting to consider
removal of a trustee, each Portfolio has undertaken to disseminate appropriate
materials at the expense of the requesting shareholders.
The Trust's Declaration of Trust provides that the presence at a
shareholder meeting in person or by proxy of at least 30% of the shares entitled
to vote on a matter shall constitute a quorum. Thus, a meeting of shareholders
of a Portfolio could take place even if less than a majority of the shareholders
were represented on its scheduled date. Shareholders would in such a case be
permitted to take action which does not require a larger vote than a majority of
a quorum, such as the election of trustees and ratification of the selection of
auditors. Some matters requiring a larger vote under the Declaration of Trust,
such as termination or reorganization of a Portfolio and certain amendments of
the Declaration of Trust, would not be effected by this provision; nor would
matters which under the 1940 Act require the vote of a "majority of the
outstanding voting securities" as defined in the 1940 Act.
The Trust's Declaration of Trust specifically authorizes the Board of
Trustees to terminate any Portfolio or class by notice to the shareholders
without shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain circumstances, be held personally liable for obligations of
a Portfolio. The Declaration of Trust, however, disclaims shareholder liability
for acts or obligations of each Portfolio and requires that notice of such
disclaimer be given in each agreement, obligation, or instrument entered into or
executed by a Portfolio or the Trust's Trustees. Moreover, the Declaration of
Trust provides for indemnification out of Portfolio property for all losses and
expenses of any shareholder held personally liable for the obligations of a
Portfolio and each Portfolio will be covered by insurance which the Trustees
consider adequate to cover foreseeable tort claims. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
considered by the Adviser remote and not material, since it is limited to
circumstances in which a disclaimer is inoperative and such Portfolio itself is
unable to meet its obligations. The Trust will vote its shares in each
Underlying Fund in proportion to the vote of all other shareholders of each
respective Underlying Fund.
The Declaration of Trust provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust,
that the Trustees and officers will not be liable for errors of judgment or
mistakes of fact or law, and that the Trust, will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, except if
it is determined in the manner provided in the Declaration of Trust that they
have not acted in good faith in the reasonable belief that their actions were in
the best interests of the Trust. However, nothing in the Declaration of Trust
protects or indemnifies a Trustee or officer against any liability to which he
or she would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, of reckless disregard of duties involved in the conduct of his
or her office.
20
<PAGE>
INVESTMENT ADVISER
Scudder Kemper Investments, Inc., an investment counsel firm, acts as
investment adviser to the Portfolios. This organization, the predecessor of
which is Scudder, Stevens & Clark, Inc. ("Scudder"), is one of the most
experienced investment counsel firms in the U. S. It was established as a
partnership in 1919 and pioneered the practice of providing investment counsel
to individual clients on a fee basis. In 1928 it introduced the first no-load
mutual fund to the public. In 1953 the Adviser introduced Scudder International
Fund, Inc., the first mutual fund available in the U.S. investing
internationally in securities of issuers in several foreign countries. The
predecessor firm reorganized from a partnership to a corporation on June 28,
1985. On June 26, 1997, Scudder entered into an agreement with Zurich Insurance
Company ("Zurich") pursuant to which Scudder and Zurich agreed to form an
alliance. On December 31, 1997, Zurich acquired a majority interest in Scudder,
and Zurich Kemper Investments, Inc., a Zurich subsidiary, became part of
Scudder. Scudder's name has been changed to Scudder Kemper Investments, Inc.
Founded in 1872, Zurich is a multinational, public corporation
organized under the laws of Switzerland. Its home office is located at
Mythenquai 2, 8002 Zurich, Switzerland. Historically, Zurich's earnings have
resulted from its operations as an insurer as well as from its ownership of its
subsidiaries and affiliated companies (the "Zurich Insurance Group"). Zurich and
the Zurich Insurance Group provide an extensive range of insurance products and
services and have branch offices and subsidiaries in more than 40 countries
throughout the world.
The Adviser maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Adviser receives published
reports and statistical compilations from issuers and other sources, as well as
analyses from brokers and dealers who may execute portfolio transactions for the
Adviser's clients. However, the Adviser regards this information and material as
an adjunct to its own research activities. The Adviser's international
investment management team travels the world, researching hundreds of companies.
In selecting the securities in which each Portfolio may invest, the conclusions
and investment decisions of the Adviser with respect to the Portfolios are based
primarily on the analyses of its own research department.
Certain investments may be appropriate for the affiliated Underlying
Funds held by each Portfolio and also for other clients advised by the Adviser.
Investment decisions for the Underlying Funds and other clients are made with a
view to achieving their respective investment objectives and after consideration
of such factors as their current holdings, availability of cash for investment
and the size of their investments generally. Frequently, a particular security
may be bought or sold for only one client or in different amounts and at
different times for more than one but less than all clients. Likewise, a
particular security may be bought for one or more clients when one or more other
clients are selling the security. In addition, purchases or sales of the same
security may be made for two or more clients on the same day. In such event,
such transactions will be allocated among the clients in a manner believed by
the Adviser to be equitable to each. In some cases, this procedure could have an
adverse effect on the price or amount of the securities purchased or sold by the
Underlying Fund. Purchase and sale orders for the Underlying Fund may be
combined with those of other clients of the Adviser in the interest of achieving
the most favorable net results to the Underlying Fund.
For each of the Portfolios, the Investment Management Agreements (the
"Agreements") dated February 16, 1999, were approved by the initial shareholder
of each Portfolio on February 12, 1999, and by the Trustees of the Trust on
February 12, 1999. Each Agreement will continue in effect from year to year
thereafter only if its continuance is approved annually by the vote of a
majority of those Trustees who are not parties to such Agreement or interested
persons of the Adviser or the Trust, cast in person at a meeting called for the
purpose of voting on such approval, and either by a vote of the Trustees or of a
majority of the outstanding voting securities of the Trust. The Agreements may
be terminated at any time without payment of penalty by either party on sixty
days' written notice and automatically terminates in the event of its
assignment.
In certain cases, the investments for the Portfolios are managed by the
same individuals who manage one or more other Underlying Funds advised by the
Adviser that have similar names, objectives and investment styles as the
Portfolios. You should be aware that the Portfolios are likely to differ from
these affiliated Underlying 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 the affiliated Underlying Funds.
On September 7, 1998, the businesses of Zurich (including Zurich's 70%
interest in The Adviser) and the financial services businesses of B.A.T
Industries p.l.c. ("B.A.T") were combined to form a new global insurance and
financial services company known as Zurich Financial Services Group. By way of a
dual holding company structure,
21
<PAGE>
former Zurich shareholders initially owned approximately 57% of Zurich Financial
Services Group, with the balance initially owned by former B.A.T shareholders.
The Adviser regularly provides the Trust with continuing investment
management for the Portfolios consistent with the Portfolios' investment
objectives, policies and restrictions and determines what Underlying Funds shall
be purchased, held or sold and what portion of each Portfolio's assets shall be
held uninvested, subject to the Declaration of Trust, the 1940 Act, the Code,
the Order and to the Portfolios' investment objectives, policies and
restrictions, and subject, further, to such policies and instructions as the
Board of Trustees may from time to time establish.
The Adviser provides each Portfolio with discretionary investment
services. Specifically, the Adviser is responsible for supervising and directing
the investments of each Portfolio in accordance with each Portfolio's investment
objectives, program, and restrictions as provided in the prospectus and this
Statement of Additional Information. The Adviser is also responsible for
effecting all security transactions on behalf of each Portfolio, including the
negotiation of commissions and the allocation of principal business and
portfolio brokerage. However, it should be understood that each Portfolio will
invest their assets almost exclusively in the shares of the Underlying Funds and
such investments will be made without the payment of any commission or other
sales charges. In addition to these services, the Adviser provides the Trust
with certain corporate administrative services, including: maintaining the
corporate existence, corporate records, and registering and qualifying Portfolio
shares under federal and state laws; monitoring the financial accounting, and
administrative functions of each Portfolio; maintaining liaison with the agents
employed by the Trust such as the custodian and transfer agent; assisting the
Trust in the coordination of such agents' activities; and permitting the
Adviser's employees to serve as officers, trustees, and committee members of the
Trust without cost to the Trust.
The Adviser also renders significant administrative services (not
otherwise provided by third parties) necessary for the Portfolios' 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 Trust (such as the Portfolios' transfer agent, pricing agents,
custodian, fund accounting agent and others); preparing and making filings with
the SEC and other regulatory agencies; assisting in the preparation and filing
of the Portfolios' federal, state and local tax returns; preparing and filing
the Portfolios' 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 each Portfolio under
applicable federal and state securities laws; maintaining the Portfolios' books
and records to the extent not otherwise maintained by a third party; assisting
in establishing accounting policies of the Portfolios; assisting in the
resolution of accounting and legal issues; establishing and monitoring the
Portfolios' operating budget; processing the payment of the Portfolios' bills;
assisting each Portfolio in, and otherwise arranging for, the payment of
distributions and dividends and otherwise assisting the Portfolios in the
conduct of their business, subject to the direction and control of the Trustees.
The Adviser pays the compensation and expenses (except those of
attending Board and committee meetings outside New York, New York or Boston,
Massachusetts) of all Trustees, officers and executive employees of the Trust
affiliated with the Adviser and makes available, without expense to the Trust,
the services of such Trustees, officers and employees of the Adviser as may duly
be elected officers of the Trust, subject to their individual consent to serve
and to any limitations imposed by law, and provides the Trust's office space and
facilities.
In reviewing the terms of the Agreements and in discussions with the
Adviser concerning such Agreement, the Trustees of the Fund who are not
"interested persons" of the Adviser are represented by independent counsel.
Dechert Price & Rhoads acts as general counsel for the Trust.
The Agreements provide that the Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Trust in
connection with matters to which the Agreements relate, except a loss resulting
from willful misfeasance, bad faith or gross negligence on the part of the
Adviser in the performance of its duties or from reckless disregard by the
Adviser of its obligations and duties under the Agreements.
The Portfolios' shareholders will also indirectly bear a Portfolio's
pro rata share of fees and expenses charged by the Underlying Funds in which a
Portfolio is invested. The ranges of the average weighted pro rata share of
expenses borne by each Portfolio in connection with its investments in the
Underlying Funds are expected to be as follows: Income Portfolio: 0.44% to
1.04%, Income with Growth Portfolio: 0.45% to 1.38%, Balanced Portfolio: 0.53%
to 1.49%, Growth with Income Portfolio: 0.60% to 1.59% and Growth Portfolio:
0.75% to 1.69%. This information is provided in ranges since the average assets
of a Portfolio invested in each of the Underlying Funds will fluctuate.
22
<PAGE>
The Agreements identify the Adviser as the exclusive licensee of the
rights to use and sublicense the names "Scudder," "Scudder Kemper Investments,
Inc." and "Scudder Stevens and Clark, Inc." (together, the "Scudder Marks").
Under this license, the Trust, with respect to the Portfolios, has the
non-exclusive right to use and sublicense the Scudder name and marks as part of
its name, and to use the Scudder Marks in the Trust's investment products and
services.
Investment Management Fees
Each class of shares of a Portfolio has a single, all-inclusive fee
covering investment management and other ordinary operating expenses. This fee
rate will not fluctuate. In contrast, most mutual funds pay a fixed management
fee and absorb operating expenses that vary according to a number of factors.
Each Portfolio pays the Adviser an annual all-inclusive fee of 0.75% of the
average daily net assets of that Portfolio.
The Agreements between each Portfolio and the Adviser provide that the
Adviser will pay each Portfolio's ordinary operating expenses. The following
expenses are not considered to be ordinary operating expenses of a Portfolio:
interest, all taxes or governmental fees payable by or with respect to the
Portfolios to federal, state or other governmental agencies, domestic or
foreign, including stamp or other transfer taxes; all brokers' commissions and
other charges incident to the purchase, sale or lending of the Portfolios'
portfolio securities, all compensation of Trustees, other than those affiliated
with the Adviser, and all expenses (including counsel fees and expenses)
incurred in connection with their service; and such non-recurring expenses that
may arise, including the cost of actions, suits or proceedings to which a
Portfolio is a party and the expenses a Portfolio may incur as a result of its
obligation to provide indemnification to its officers and agents; and expenses
incurred under the Portfolios' shareholder services and distribution plan.
The Adviser also receives management fees from managing the affiliated
Underlying Funds in which each Portfolio invests. Each affiliated Underlying
Fund pays the Adviser a management fee as determined by the Investment
Management Agreement between each Underlying Fund and the Adviser. As manager of
the assets of each affiliated Underlying Fund, the Adviser directs the
investments of an Underlying Fund in accordance with each Underlying Fund's
investment objective, policies and restrictions. The Adviser determines the
securities, instruments and other contracts relating to investments to be
purchased, sold or entered into by an Underlying Fund. If an Underlying Fund's
expenses, exclusive of taxes, interest and extraordinary expenses, exceed
specified limits, such excess up to the amount of the management fee, will be
paid by the Adviser.
Officers and employees of the Adviser from time to time may have
transactions with various banks, including the Portfolios' custodian bank. It is
the Adviser's opinion that the terms and conditions of those transactions which
have occurred were not influenced by existing or potential custodial or other
Trust relationships.
The Adviser may serve as adviser to other funds with investment
objectives and policies similar to those of the Portfolios that may have
different distribution arrangements or expenses, which may affect performance.
None of the officers or Trustees may have dealings with the Trust as
principals in the purchase or sale of securities, except as individual
subscribers to or holders of shares of the Trust.
Personal Investments by Employees of the Adviser
Employees of the Adviser are permitted to make personal securities
transactions, subject to requirements and restrictions set forth in the
Adviser's Code of Ethics. The Code of Ethics contains provisions and
requirements designed to identify and address certain conflicts of interest
between personal investment activities and the interests of investment advisory
clients such as the Portfolios. Among other things, the Code of Ethics, which
generally complies with standards recommended by the Investment Company
Institute's Advisory Group on Personal Investing, prohibits certain types of
transactions absent prior approval, imposes time periods during which personal
transactions may not be made in certain securities, and requires the submission
of duplicate broker confirmations and monthly reporting of securities
transactions. Additional restrictions apply to portfolio managers, traders,
research analysts and others involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
23
<PAGE>
<TABLE>
<CAPTION>
TRUSTEES AND OFFICERS
Position with
Underwriter,
Position Kemper
Name, Age and Address With Trust Principal Occupation** Distributors, Inc.
- --------------------- ---------- ---------------------- ------------------
<S> <C> <C> <C>
Kathryn L. Quirk*# (46) Chairperson of the Managing Director of Scudder Director, Secretary,
Board, Trustee, Kemper Investments, Inc. Chief Legal Officer
Vice President and & Vice President
Assistant Secretary
Paul Secord## (52) President Senior Vice President, Farmers --
Group, Inc.
Dr. Rosita P. Chang (44) Trustee Professor of Finance, University --
PACAP Research Center of Rhode Island
College of Business Administration
University of Rhode Island
7 Lippitt Rd.
Kingston, RI 02881-0802
Edgar R. Fiedler*@ (69) Trustee Senior Fellow and Economic --
50023 Brogden Counsellor, The Conference
Chapel Hill, NC 27514 Board, Inc.
Dr. J. D. Hammond@ (65) Trustee Dean, Smeal College of --
801 Business Administration Building Business Administration,
Pennsylvania State University Pennsylvania State University
University Park, PA 16801
Richard M. Hunt@ (72) Trustee University Marshal and Senior --
University Marshal's Office Lecturer, Harvard University
Wadsworth House
1341 Massachusetts Avenue
Harvard University
Cambridge, MA 02138
Philip S. Fortuna### (41) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Ann M. McCreary# (42) Vice President Managing Director of Scudder --
Kemper Investments, Inc.
John Millette+ (37) Vice President and Assistant Vice President of --
Secretary Scudder Kemper Investments, Inc.
since September 1994; previously
employed by the law firm Kaye,
Scholer, Fierman, Hays & Handler
John R. Hebble+ (41) Treasurer Senior Vice President of Scudder --
Kemper Investments, Inc.
24
<PAGE>
Position with
Underwriter,
Position Kemper
Name, Age and Address With Trust Principal Occupation** Distributors, Inc.
- --------------------- ---------- ---------------------- ------------------
Caroline Pearson+ (37) Assistant Secretary Senior Vice President of --
Scudder Kemper Investments,
Inc.; Associate, Dechert Price &
Rhoads (law firm) 1989 - 1997
Elizabeth C. Werth% (52) Assistant Secretary Vice President of Scudder Vice President
Kemper Investments, Inc.
</TABLE>
* Trustee considered by the Trust and its counsel to be an "interested
person" (as defined in the 1940 Act) of the Trust or of its investment
manager because of their employment by the Investment Manager and, in some
cases, holding offices with the Trust. Although Mr. Fiedler is currently
not an "interested person," he may be deemed to be so in the future by the
Commission because of his prior service as a director of Zurich American
Insurance Company, a subsidiary of Zurich. Mr. Fiedler resigned from that
position in July 1997 and has had no further affiliation with Zurich or any
of its subsidiaries since that date.
** Unless otherwise stated, all officers and Trustees have been associated
with their respective companies for more than five years, but not
necessarily in the same capacity.
@ Messrs. Fiedler and Hunt, and Dr. Hammond are members of the Executive
Committee which may exercise substantially all of the powers of the Board
of Trustees when it is not in session.
# Address: 345 Park Avenue, New York, New York
+ Address: Two International Place, Boston, Massachusetts
## Address: 4680 Wilshire Boulevard, Los Angeles, California
% Address: 222 South Riverside Plaza, Chicago, Illinois
### Address: 101 California Street, Suite 4100, San Francisco, California
On July 31, 1999, all Trustees and officers as a group owned
beneficially (as that term is defined under Section 13(d) of the Securities
Exchange Act) less than 1% of the shares of each Portfolio outstanding on such
date.
To the best of the Trust's knowledge, as of July 31, 1999, no person
owned beneficially more than 5% of any Portfolio's outstanding shares.
REMUNERATION
Responsibilities of the Board -- Board and Committee Meetings
The Board of Trustees is responsible for the general oversight of each
Portfolio's business. A majority of the Board's members are not affiliated with
the Adviser. These "Independent Trustees" have primary responsibility for
assuring that each Portfolio is managed in the best interests of its
shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of each Portfolio and other operational matters, including policies
and procedures designated to assure compliance with various regulatory
requirements. At least annually, the Independent Trustees review the fees paid
to the Adviser and its affiliates for investment advisory services and other
administrative and shareholder services. In this regard, they evaluate, among
other things, each Portfolio's investment performance, the quality and
efficiency of the various other services provided, costs incurred by the Adviser
and its affiliates, and comparative information regarding fees and expenses of
competitive funds. They are assisted in this process by the Portfolios'
independent public accountants and by independent legal counsel selected by the
Independent Trustees.
All of the Independent Trustees serve on the Committee on Independent
Trustees, which nominates Independent Trustees and considers other related
matters, and the Audit Committee, which selects each Portfolio's independent
public accountants and reviews accounting policies and controls.
25
<PAGE>
Compensation of Officers and Trustees
The Independent Trustees will receive the following compensation from
each Portfolio of Farmers Investment Trust: an annual trustee's fee of $2,000; a
fee of $200 for attendance at each board meeting, audit committee meeting, or
other meeting held for the purposes of considering arrangements between the
Trust on behalf of each Fund and the Adviser or any affiliate of the Adviser;
$100 for all other committee meetings and reimbursement of expenses incurred for
travel to and from Board Meetings. No additional compensation will be paid to
any Independent Trustee for travel time to meetings, attendance at trustees'
educational seminars or conferences, service on industry or association
committees, participation as speakers at trustees' conferences or service on
special trustee task forces or subcommittees. Independent Trustees do not
receive any employee benefits such as pension or retirement benefits or health
insurance. Notwithstanding the schedule of fees, the Independent Trustees may
defer or waive a portion of their compensation or other activities.
The Independent Trustees also serve in the same capacity for other
funds managed by the Adviser. These funds differ broadly in type and complexity
and in some cases have substantially different Trustee fee schedules. The
following table shows the aggregate compensation received by each Independent
Trustee during 1998 from the Trust and from all of Scudder funds as a group.
<TABLE>
<CAPTION>
All Funds Advised by Scudder Kemper
-----------------------------------
Farmers Investment Trust^(1)(2) Investments, Inc.^(3)
------------------------------ --------------------
Paid by Paid by Paid by Paid by
Name the Trust the Adviser the Funds the Adviser
- ---- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Dr. Rosita P. Chang, Trustee $0 $0 $46,750 $0 (26 funds)
Edgar R. Fiedler, Trustee $0 $0 $59,855 $2,625 (34 funds)
Dr. J.D. Hammond, Trustee $0 $0 $50,430 $0 (27 funds)
Richard Hunt, Trustee $0 $0 $50,930 $0 (22 funds)
</TABLE>
^(1) The Portfolios commenced operations on March 9, 1999.
^(2) Farmers Investment Trust consists of five Portfolios: Income Portfolio,
Income with Growth Portfolio, Balanced Portfolio, Growth with Income
Portfolio, and Growth Portfolio.
^(3) The Adviser paid the compensation to the Trustees for meetings
associated with the Adviser's alliance with Zurich Insurance Company.
See "Investment Adviser" for additional information.
Members of the Board of Trustees who are employees of the Adviser or
its affiliates receive no direct compensation from the Trust, although they are
compensated as employees of the Adviser, or its affiliates, as a result of which
they may be deemed to participate in fees paid by each Portfolio.
PRINCIPAL UNDERWRITER
Pursuant to a separate shareholder services and distribution agreement
("distribution agreement"), Kemper Distributors, Inc. ("KDI"), 222 South
Riverside Plaza, Chicago, Illinois, 60606, an affiliate of the Adviser, serves
as principal underwriter and distributor for the shares of each Portfolio and
acts as agent of each Portfolio in the continuous offering of its shares. KDI
bears all its expenses of providing services pursuant to the distribution
agreement, including the payment of any commissions. KDI, as principal
underwriter, pays for the printing and distribution of copies thereof used in
connection with the offering of shares to prospective investors. KDI also pays
for supplementary sales literature and advertising costs. KDI provides execution
services for the Portfolios in connection with the Portfolios' purchase of
Underlying Fund shares and will receive compensation of up to 1% of the purchase
price of such shares from the Underlying Funds' underwriters in connection
therewith. In providing execution services, KDI will (a) accept orders from the
Adviser to purchase Underlying Fund shares for the Portfolios; (b) place such
orders with the Underlying Fund's underwriter; (c) confirm the trade, price and
number of Underlying Fund shares purchased by a Portfolio pursuant to such
orders; and (d) assure prompt payment by a Portfolio to the Underlying Fund and
proper completion of such orders.
26
<PAGE>
Shareholder services and distribution plan. Each Portfolio has adopted a
shareholder services and distribution plan under Rule 12b-1 (the "Plan") under
the 1940 Act. Rule 12b-1 regulates the manner in which an investment company
may, directly or indirectly, bear the expenses of distributing its shares. The
Plan provides for fees payable as an expense of the Class A and Class B shares
that are used by KDI to pay for distribution and services for those classes. The
fee is payable monthly by a Portfolio to KDI at an annual rate of 0.25% and
1.00% of average daily net assets attributable to the Class A and Class B shares
of the Portfolio, respectively. KDI may pay a portion of this fee to compensate
selling firms for sales of Class B shares. KDI compensates selling firms for
sales of Class B shares at the time of sale at a commission rate of 2.93% of the
amount of Class B shares sold. 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. Long-term
shareholders may pay more than the economic equivalent of the maximum initial
sales charges permitted by the National Association of Securities Dealers,
although KDI believes that it is unlikely, in the case of Class B shares,
because of the automatic conversion feature of those shares.
KDI may engage other firms to provide information and shareholder
services for shareholders of each Portfolio. KDI may pay each such firm a
service fee at an annual rate of up to 0.25% of net assets of the Class A and
Class B shares maintained and serviced by the firm. Firms to which service fees
may be paid include broker-dealers affiliated with KDI.
If the Plan is terminated in accordance with its terms, the obligation
of a Portfolio to make payments to KDI pursuant to the Plan will cease and the
Portfolio will not be required to make any payments past the termination date.
Thus, there is no legal obligation for the Portfolio to pay any expenses
incurred by KDI in excess of its fees under a Plan, if for any reason the Plan
is terminated in accordance with its terms. Future fees under a Plan may or may
not be sufficient to reimburse KDI for its expenses incurred.
Each distribution agreement and the Plan continues in effect from year
to year so long as such continuance is approved for each class at least annually
by a vote of the Board of Trustees of the Trust, including the Trustees who are
not interested persons of the Trust and who have no direct or indirect financial
interest in the agreement. Each agreement automatically terminates in the event
of its assignment and may be terminated for a class at any time without penalty
by a Portfolio or by KDI upon 60 days' notice. Termination by a Portfolio with
respect to a class may be by vote of a majority of the Board of Trustees, or a
majority of the Trustees who are not interested persons of the Trust and who
have no direct or indirect financial interest in the agreement, or a "majority
of the outstanding voting securities" of the class of the Portfolio, as defined
under the 1940 Act. The agreement may not be amended for a class to increase the
fee to be paid by a Portfolio with respect to such class without approval by a
majority of the outstanding voting securities of such class of the Portfolio and
all material amendments must in any event be approved by the Board of Trustees
in the manner described above with respect to the continuation of the agreement.
The provisions concerning the continuation, amendment and termination of the
distribution agreement are on a Portfolio by Portfolio basis and for each
Portfolio on a class by class basis.
KDI also receives any contingent deferred sales charges for Class B
shares. See "Redemption or Repurchase of Shares--Contingent Deferred Sales
Charge--Class B Shares." For the period ended April 30, 1999, there was no
contingent deferred sales charges incurred by Class B shareholders of each
Portfolio payable to KDI and the distribution fees were as follows:
Portfolio Fee incurred by the Portfolio
Income $53
Income with Growth 54
Balanced 58
Growth with Income 55
Growth 55
SHAREHOLDER SERVICES
Shareholder services are provided to each Portfolio under a shareholder
services agreement ("shareholder services agreement") with KDI. KDI bears all
expenses of providing services pursuant to the shareholder services agreement
between KDI and each Portfolio, including the payment of service fees.
KDI may enter into related arrangements with various broker-dealer
firms and other service or administrative firms ("firms"), that provide services
and facilities for their customers or clients who are investors in the
Portfolios. The firms provide such office space and equipment, telephone
facilities and personnel as is necessary or beneficial for providing information
and services to their clients. Such services and assistance may include, but are
not limited to,
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establishing and maintaining accounts and records, processing purchase and
redemption transactions, account designations and addresses and such other
shareholder services as may be agreed upon from time to time and permitted by
applicable statute, rule or regulation. With respect to Class A shares, KDI may
pay each such firm a service fee, normally payable quarterly, at an annual rate
of up to 0.25% of the net assets in the Portfolios' accounts that it maintains
and services attributable to Class A shares, commencing with the month after
investment. With respect to Class B shares, KDI may advance to firms the
first-year service fee at a rate of up to 0.25% of the purchase price of such
shares. For periods after the first year, KDI currently intends to pay firms a
service fee at a rate of up to 0.25% (calculated monthly and normally paid
quarterly) of the net assets attributable to Class B shares maintained and
serviced by the firm. After the first year, a firm becomes eligible for the
quarterly service fee and the fee continues until terminated by KDI or a
Portfolio. Firms to which service fees may be paid include affiliates of KDI.
During the period ended April 30, 1999, such fees paid to KDI were as
follows:
Portfolio Fee incurred by the Portfolio
Income $46
Income with Growth 36
Balanced 38
Growth with Income 45
Growth 40
KDI also may provide some of the above services and may retain any
portion of the fee under the shareholder services agreement not paid to firms to
compensate itself for shareholder services functions performed for the
Portfolios. Currently, the shareholder services fee payable to KDI is based only
upon Portfolio assets in accounts for which a firm provides shareholder services
and it is intended that KDI will pay all the shareholder services fee that it
receives from a Portfolio to firms in the form of service fees. The effective
shareholder services fee rate to be charged against all assets of a Portfolio
while this procedure is in effect will depend upon the proportion of a
Portfolio's assets that is in accounts for which a firm of record provides
shareholder services.
Certain Board members or officers of the Portfolios are also directors
or officers of Scudder Kemper Investments, Inc. and Kemper Distributors, Inc. as
indicated under "Trustees and Officers."
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, as custodian, has custody of all securities and cash of
each Portfolio. It attends to the collection or principal and income, and
payment for and collection of proceeds of securities bought and sold by each
Portfolio. Pursuant to a services agreement with State Street Bank and Trust
Company, Kemper Service Company, an affiliate of the Adviser, serves as
"Shareholder Service Agent" of each Portfolio, and as such, performs all of the
duties as transfer agent and dividend paying agent. State Street Bank and Trust
Company receives as transfer agent, and pays to Kemper Service Company, annual
account fees of $10.00 ($18.00 for retirement accounts) plus set up charges,
annual fees associated with the contingent deferred sales charges (Class B
only), an asset-based fee of 0.08% and out-of-pocket reimbursement.
FUND ACCOUNTING AGENT
Scudder Fund Accounting Corporation ("SFAC"), Two International Place,
Boston, Massachusetts 02110-4103, a subsidiary of the Adviser, is responsible
for determining the daily net asset value per share of the Portfolios and
maintaining all account records thereto. Currently, SFAC receives no fee for its
services to the Portfolios; however, subject to Board approval, at some time in
the future, SFAC may seek payment for its services under this agreement.
TAXES
Taxation of the Portfolios and their Shareholders
Each Portfolio intends to qualify annually and elects to be treated as
a regulated investment company under Subchapter M of the Internal Revenue Code
(the "Code"). As a regulated investment company, each Portfolio is required to
distribute to its shareholders at least 90 percent of its investment company
taxable income (including net short-term capital gain) and generally is not
subject to federal income tax to the extent that it distributes annually its
investment company taxable income and net realized capital gains in the manner
required under the Code.
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Each Portfolio is subject to a 4% nondeductible excise tax on amounts
required to be but not distributed under a prescribed formula. The formula
requires payment to shareholders during a calendar year of distributions
representing at least 98% of each Portfolio's ordinary income for the calendar
year, at least 98% of the excess of its capital gains over capital losses
(adjusted for certain ordinary losses) realized during the one-year period
ending October 31 during such year, and all ordinary income and capital gains
for prior years that were not previously distributed.
Investment company taxable income generally is made up of dividends,
interest and net short-term capital gains in excess of net long-term capital
losses, less expenses. Net realized capital gains for a fiscal year are computed
by taking into account any capital loss carryforward of a Portfolio. Presently,
each Portfolio has no capital loss carryforwards.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by a Portfolio for reinvestment,
requiring federal income taxes to be paid thereon by the Portfolio, the
Portfolio intends to elect to treat such capital gains as having been
distributed to shareholders. As a result, each shareholder will report such
capital gains as long-term capital gains, will be able to claim a proportionate
share of federal income taxes paid by the Portfolio on such gains as a credit
against the shareholder's federal income tax liability, and will be entitled to
increase the adjusted tax basis of the shareholder's Portfolio shares by the
difference between the shareholder's pro rata share of such gains and the
shareholder's tax credit. If a Portfolio makes such an election, it may not be
treated as having met the excise tax distribution requirement.
Distributions of investment company taxable income are taxable to
shareholders as ordinary income.
To the extent that an Underlying Fund derives dividends from domestic
corporations, a portion of the income distributions of a Portfolio which invests
in that Fund may be eligible for the 70% deduction for dividends received by
corporations. Shareholders will be informed of the portion of dividends which so
qualify. The dividends-received deduction is reduced to the extent the shares
held by Underlying Fund with respect to which the dividends are received are
treated as debt-financed under federal income tax law and is eliminated if
either those shares or the shares of the Underlying Fund or the Portfolio are
deemed to have been held by the Underlying Fund, the Portfolio or the
shareholders, as the case may be, for less than 46 days during the 90-day period
beginning 45 days before the shares become ex-dividend.
Income received by an Underlying Fund from sources within a foreign
country may be subject to withholding and other taxes imposed by that country.
If more than 50% of the value of an Underlying Fund's total assets at the close
of its taxable year consists of stock or securities of foreign corporations, the
Underlying Fund will be eligible and may elect to "pass-through" to its
shareholders, including a Portfolio, the amount of such foreign income and
similar taxes paid by the Underlying Fund. Pursuant to this election, the
Portfolio would be required to include in gross income (in addition to taxable
dividends actually received), its pro rata share of foreign income and similar
taxes and to deduct such amount in computing its taxable income or to use it as
a foreign tax credit against its U.S. federal income taxes, subject to
limitations. A Portfolio, would not, however, be eligible to elect to
"pass-through" to its shareholders the ability to claim a deduction or credit
with respect to foreign income and similar taxes paid by the Underlying Fund.
Properly designated distributions of the excess of net long-term
capital gain over net short-term capital loss are taxable to shareholders as
long-term capital gains, regardless of the length of time the shares of a
Portfolio have been held by such shareholders. Such distributions are not
eligible for the dividends-received deduction. Any loss realized upon the
redemption of shares held at the time of redemption for six months or less will
be treated as a long-term capital loss to the extent of any amounts treated as
distributions of long-term capital gain during such six-month period.
Distributions of investment company taxable income and net realized
capital gains will be taxable as described above, whether received in shares or
in cash. Shareholders electing to receive distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share on the reinvestment
date.
All distributions of investment company taxable income and net realized
capital gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends declared in
October, November or December with a record date in such a month will be deemed
to have been received by shareholders on December 31, if paid during January of
the following year. Redemptions of shares, including exchanges for shares of
another Farmers Mutual Fund Portfolio, may result in tax consequences (gain or
loss) to the shareholder and are also subject to these reporting requirements.
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A qualifying individual may make a deductible IRA contribution of up to
$2,000 or, if less, the amount of the individual's earned income for any taxable
year only if (i) neither the individual nor his or her spouse (unless filing
separate returns) is an active participant in an employer's retirement plan, or
(ii) the individual (and his or her spouse, if applicable) has an adjusted gross
income below a certain level ($40,050 for married individuals filing a joint
return, with a phase-out of the deduction for adjusted gross income between
$40,050 and $50,000; $25,050 for a single individual, with a phase-out for
adjusted gross income between $25,050 and $35,000). However, an individual not
permitted to make a deductible contribution to an IRA for any such taxable year
may nonetheless make nondeductible contributions up to $2,000 to an IRA (up to
$2,000 per individual for married couples if only one spouse has earned income)
for that year. There are special rules for determining how withdrawals are to be
taxed if an IRA contains both deductible and nondeductible amounts. In general,
a proportionate amount of each withdrawal will be deemed to be made from
nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Also, annual contributions may be made to a
spousal IRA even if the spouse has earnings in a given year if the spouse elects
to be treated as having no earnings (for IRA contribution purposes) for the
year.
Distributions by a Portfolio result in a reduction in the net asset
value of the Portfolio's shares. Should a distribution reduce the net asset
value below a shareholder's cost basis, such distribution would nevertheless be
taxable to the shareholder as ordinary income or capital gain as described
above, even though, from an investment standpoint, it may constitute a partial
return of capital. In particular, investors should consider the tax implications
of buying shares just prior to a distribution. The price of shares purchased at
that time includes the amount of the forthcoming distribution. Those purchasing
just prior to a distribution will then receive a partial return of capital upon
the distribution, which will nevertheless be taxable to them.
Upon a redemption, sale or exchange of his or her shares, a shareholder
will realize a taxable gain or loss depending upon his or her basis in the
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands and will be long-term or
short-term, generally, depending upon the shareholder's holding period for the
shares. Any loss realized on a redemption, sale or exchange will be disallowed
to the extent the shares disposed of are replaced (including through
reinvestment of dividends) within a period of 61 days beginning 30 days before
and ending 30 days after the shares are disposed of. In such a case, the basis
of the shares acquired will be adjusted to the reflect the disallowed loss. Any
loss realized by a shareholder on the sale of Portfolio shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of net capital gains received or treated as
having been received by the shareholder with respect to such shares.
In some cases, shareholders will not be permitted to take sales charges
into account for purposes of determining the amount of gain or loss realized on
the disposition of their Portfolio shares. This prohibition generally applies
where (1) the shareholder incurs a sales charge in acquiring shares of a
Portfolio, (2) the shares are disposed of before the 91st day after the date on
which they were acquired, and (3) the shareholder subsequently acquires the
shares of the same or another Portfolio and the otherwise applicable sales
charge is reduced under a "reinvestment right" received upon the initial
purchase of regulated investment company shares. The term "reinvestment right"
means any right to acquire stock of one or more Portfolios without the payment
of a sales charge or with the payment of a reduced sales charge. Sales charges
affected by this rule are treated as if they were incurred with respect to the
shares acquired under the reinvestment right. This provision may be applied to
successive acquisitions of Portfolio shares.
Each Portfolio will be required to report to the Internal Revenue
Service ("IRS") all distributions of investment company taxable income and
capital gains as well as gross proceeds from the redemption or exchange of
Portfolio shares, except in the case of certain exempt shareholders. Under the
backup withholding provisions of Section 3406 of the Code, distributions of
investment company taxable income and capital gains and proceeds from the
redemption or exchange of the shares of a regulated investment company may be
subject to withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the investment company with their
taxpayer identification numbers and with required certifications regarding their
status under the federal income tax law. Withholding may also be required if a
Portfolio is notified by the IRS or a broker that the taxpayer identification
number furnished by the shareholder is incorrect or that the shareholder has
previously failed to report interest or dividend income. If the withholding
provisions are applicable, any such distributions and proceeds, whether taken in
cash or reinvested in additional shares, will be reduced by the amounts required
to be withheld.
Shareholders of a Portfolio may be subject to state and local taxes on
distributions received from the Portfolio and on redemptions of the Portfolio's
shares.
The foregoing discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. persons, i.e., U.S. citizens and
residents and U.S. corporations, partnerships, trusts and estates. Each
shareholder who is
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not a U.S. person should consider the U.S. and foreign tax consequences of
ownership of shares of a Portfolio, including the possibility that such a
shareholder may be subject to a U.S. withholding tax at a rate of 30% (or at a
lower rate under an applicable income tax treaty) on amounts constituting
ordinary income received by him or her, where such amounts are treated as income
from U.S. sources under the Code.
Taxation of the Underlying Funds
Each Underlying Fund intends to qualify annually and elects to be
treated as a regulated investment company under Subchapter M of the Code. In any
year in which an Underlying Fund qualifies as a regulated investment company and
timely distributes all of its taxable income, the Fund generally will not pay
any federal income or excise tax.
Distributions of an Underlying Fund's investment company taxable income
are taxable as ordinary income to a Portfolio which invests in the Fund.
Distributions of the excess of an Underlying Fund's net long-term capital gain
over its net short-term capital loss, which are properly designated as "capital
gain dividends," are taxable as long-term capital gain to a Portfolio which
invests in the Fund, regardless of how long the Portfolio held the Fund's
shares, and are not eligible for the corporate dividends-received deduction.
Upon the sale or other disposition by a Portfolio of shares of an Underlying
Fund, the Portfolio generally will realize a capital gain or loss which will be
long-term or short-term, generally depending upon the Portfolio's holding period
for the shares.
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.
PORTFOLIO TRANSACTIONS
Portfolio Turnover
Each Portfolio's average annual portfolio turnover rate is the ratio of
the lesser of sales or purchases to the monthly average value of the portfolio
securities owned during the year, excluding all securities with maturities or
expiration dates at the time of acquisition of one year or less. Purchases and
sales are made for each Portfolio whenever necessary, in management's opinion,
to meet that Portfolio's objective.
The payment of a Portfolio's expenses is subject to the investment
management agreements and certain provisions mentioned in the Agreements with
the Adviser.
The table below sets forth the average annual portfolio turnover rate
for each of the affiliated Underlying Funds' most recent fiscal period:
Affiliated Underlying Fund Portfolio Turnover Rate^(1)
- -------------------------- ---------------------------
Zurich Money Market Fund n/a^(2)
Kemper High Yield Fund 92.0%
Kemper U.S. Government Securities Fund 150.0%
Scudder Income Fund 61.9%
Kemper-Dreman High Return Equity Fund 5.0%
Scudder Growth and Income Fund 22.2%
Scudder International Fund 55.7%
Scudder Small Company Value Fund 22.6%
- ------------------------------
^(1) As of each affiliated Underlying Fund's most recent fiscal reporting
period.
^(2) Zurich Money Market Fund is a money market fund.
NET ASSET VALUE
The net asset value per share of each Portfolio is the value of one
share and is determined separately for each class by dividing the value of the
Portfolio's net assets attributable to that class by the number of shares of
that class outstanding. The per share net asset value of the Class B shares of
each Portfolio will generally be lower than that of the Class A shares of that
Portfolio because of the higher expenses borne by the Class B shares. The net
asset value of shares of each Portfolio is computed as of the close of regular
trading on the Exchange on each day the Exchange is open for
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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.
The net asset value of each Underlying Fund is determined based upon
the nature of the securities as set forth in the prospectus and statement of
additional information of such Underlying Fund. Shares of each Underlying Fund
in which a Portfolio may invest are valued at the net asset value per share of
each Underlying Fund as of the close of regular trading on the Exchange on each
day the Exchange is open for trading. The net asset value per share of the
Underlying Funds will be calculated and reported to a Portfolio by each
Underlying Fund's accounting agent. Short-term securities with a remaining
maturity of sixty days or less are valued by the amortized cost method.
If, in the opinion of a Portfolio's Valuation Committee, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio asset is taken to be an amount which, in the opinion of the Valuation
Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by a Portfolio
determined in a manner which, in the discretion of the Valuation Committee most
fairly reflects fair market value of the property on the valuation date.
ADDITIONAL INFORMATION
Experts
The Financial Statements of the Portfolios in this Statement of
Additional Information have been so included in reliance on the report of
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts 02110,
independent accountants, and given on the authority of that firm as experts in
accounting and auditing. PricewaterhouseCoopers LLP is responsible for
performing annual audits of the financial statements and financial highlights of
each Portfolio in accordance with generally accepted auditing standards, and the
preparation of federal tax returns.
Shareholder Indemnification
The Trust is an organization of the type commonly known as a
Massachusetts business trust. Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the Trust. The Declaration of Trust contains an express
disclaimer of shareholder liability in connection with the Portfolios' property
or the acts, obligations or affairs of the Trust. The Declaration of Trust also
provides for indemnification out of the Portfolios' property of any shareholder
held personally liable for the claims and liabilities which a shareholder may
become subject by reason of being or having been a shareholder. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which a Portfolio itself would be unable to meet its
obligations.
Other Information
Many of the investment changes in a Portfolio will be made at prices
different from those prevailing at the time they may be reflected in a regular
report to shareholders of the Portfolio. These transactions will reflect
investment decisions made by the Adviser in light of the objective and policies
of the Portfolio, and other factors such as its other portfolio holdings and tax
considerations, and should not be construed as recommendations for similar
action by other investors.
The name Farmers Investment Trust is the designation of the Trustees
for the time being under a Declaration of Trust dated October 26, 1998, as
amended from time to time, and all persons dealing with a Portfolio must look
solely to the property of the Portfolio for the enforcement of any claims
against the Portfolio as neither the Trustees, officers, agents or shareholders
assume any personal liability for obligations entered into on behalf of the
Portfolio. No series of the Trust shall be liable for the obligations of any
other series. Upon the initial purchase of shares, the shareholder agrees to be
bound by the Trust's Declaration of Trust, as amended from time to time. The
Declaration of Trust is on file at the Massachusetts Secretary of State's Office
in Boston, Massachusetts.
The CUSIP number of Income Portfolio Class A shares is 309622-10-8.
The CUSIP number of Income Portfolio Class B shares is 309622-20-7.
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The CUSIP number of Income with Growth Portfolio Class A shares is
309622-30-6.
The CUSIP number of Income with Growth Portfolio Class B shares is
309622-40-5.
The CUSIP number of Balanced Portfolio Class A shares is 309622-50-4.
The CUSIP number of Balanced Portfolio Class B shares is 309622-60-3.
The CUSIP number of Growth with Income Portfolio Class A shares is
309622-87-6.
The CUSIP number of Growth with Income Portfolio Class B shares is
309622-88-4.
The CUSIP number of Growth Portfolio Class A shares is 309622-70-2.
The CUSIP number of Growth Portfolio Class B shares is 309622-80-1.
Each Portfolio has a fiscal year end of April 30.
The firm of Dechert Price & Rhoads is counsel to the Trust.
The Portfolios, or the Adviser (including any affiliate of the
Adviser), or both, may pay unaffiliated third parties for providing
recordkeeping and other administrative services with respect to accounts of
participants in retirement plans or other beneficial owners of Fund shares whose
interests are held in an omnibus account.
The Portfolios' prospectus and this Statement of Additional Information
omit certain information contained in the Registration Statement which the Trust
has filed with the SEC under the Securities Act of 1933 and reference is hereby
made to the Registration Statement for further information with respect to the
Portfolios and the securities offered hereby. This Registration Statement and
its amendments are available for inspection by the public at the SEC in
Washington, D.C.
FINANCIAL STATEMENTS
The financial statements, including the investment portfolio, of each
Portfolio together with the Report of Independent Accountants, Financial
Highlights and notes to financial statements in the Annual Reports to the
Shareholders of the Portfolios dated April 30, 1999, are incorporated herein by
reference and are hereby deemed to be a part of this Statement of Additional
Information.
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GLOSSARY
Descriptions in this Statement of Additional Information of a
particular investment practice or technique in which an affiliated Underlying
Fund may engage (such as short selling, hedging, etc.) or a financial instrument
which an Underlying Fund may purchase (such as options, forward foreign currency
contracts, etc.) are meant to describe the spectrum of investments that the
Adviser, in its discretion, might, but is not required to, use in managing an
Underlying Fund's portfolio assets. The Adviser may, in its discretion, at any
time employ such practice, technique or instrument for one or more Underlying
Funds but not for all Underlying Funds advised by it. Furthermore, it is
possible that certain types of financial instruments or investment techniques
described herein may not be available, permissible, economically feasible or
effective for their intended purposes in all markets. Certain practices,
techniques, or instruments may not be principal activities of an Underlying Fund
but, to the extent employed, could from time to time have a material impact on
an Underlying Fund's performance.
Prospective investors should consider that certain affiliated
Underlying Funds may engage in the following investment practices:
Common stocks. Under normal circumstances, certain Underlying Funds invest
primarily in common stocks. Common stock is issued by companies to raise cash
for business purposes and represents a proportionate interest in the issuing
companies. Therefore, an Underlying Fund may participate in the success or
failure of any company in which it holds stock. The market values of common
stock can fluctuate significantly, reflecting the business performance of the
issuing company, investor perception and general economic or financial market
movements. Smaller companies are especially sensitive to these factors and may
even become valueless. Despite the risk of price volatility, however, common
stocks also offer the a greater potential for gain on investment, compared to
other classes of financial assets such as bonds or cash equivalents.
Convertible Securities. Certain Underlying Funds may 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 an Underlying Fund may invest are
either 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
debt securities and convertible preferred stocks, until converted, have general
characteristics similar to both debt and equity securities. Although to a lesser
extent than with debt securities generally, the market value of convertible
securities tend to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. In addition, because of the conversion or
exchange feature, the market value of convertible securities typically changes
as the market value of the underlying common stocks changes, and, therefore,
also tends to follow movements in the general market for equity securities. A
unique feature of convertible securities is that as the market price of the
underlying common stock declines, convertible securities tend to trade
increasingly on a yield basis, and so may not experience market value declines
to the same extent as the underlying common stock. When the market price of the
underlying common stock increases, the prices of the convertible securities tend
to rise as a reflection of the value of the underlying common stock, 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. 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 generally offer lower yields than
non-convertible securities of similar quality because of their conversion or
exchange features.
Small Company Risk. The Adviser believes that small companies often have sales
and earnings growth rates which exceed those of larger companies, and that such
growth rates may in turn be reflected in more rapid share price appreciation
over time. However, investing in smaller company stocks involves greater risk
than is customarily associated with investing in larger, more established
companies. For example, smaller companies can have limited product lines,
markets, or financial and managerial resources. Smaller companies may also be
dependent on one or a few key persons, and may be more susceptible to losses and
risks of bankruptcy. Also, the securities of the smaller
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companies in which certain Underlying Funds may invest, 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.
Investing in emerging growth companies. The investment risk associated with
emerging growth companies is higher than that normally associated with larger,
older companies due to the greater business risks of small size, the relative
age of the company, limited product lines, distribution channels and financial
and managerial resources. Further, there is typically less publicly available
information concerning smaller companies than for larger, more established ones.
The securities of small companies are often traded over-the-counter and
may not be traded in the volumes typical on a national securities exchange.
Consequently, in order to sell this type of holding, an Underlying Fund may need
to discount the securities from recent prices or dispose of the securities over
a long period of time. The prices of this type of security may be more volatile
than those of larger companies which are often traded on a national securities
exchange.
Investments Involving Above-Average Risk. Certain Underlying Funds may purchase
securities involving above-average risk. For example, an Underlying Fund has
invested from time to time in relatively new companies but is limited by a
non-fundamental policy that it may not invest more than 5% of its total assets
in companies that, with their predecessors, have been in continuous operation
for less than three years. The Underlying Fund's portfolio may also include the
securities of small or little-known companies, commonly referred to as emerging
growth companies, that the Adviser believes have above-average earnings growth
potential and/or may receive greater market recognition. Both factors are
believed to offer significant opportunity for capital appreciation. Investment
risk is higher than that normally associated with larger, older companies due to
the higher business risks associated with small size, frequently narrow product
lines and relative immaturity. To help reduce risk, the Underlying Fund
allocates its investments among many companies and different industries.
The securities of such companies are often traded only over-the-counter
and may not be traded in the volume typical of trading on a national securities
exchange. As a result, the disposition by the Underlying Fund of holdings of
such securities may require the Underlying Fund to offer a discount from recent
prices or to make many small sales over a lengthy period of time. Such
securities may be subject to more abrupt or erratic market movements than those
typically encountered on national securities exchanges.
Debt securities. In general, the prices of debt securities rise when interest
rates fall, and vice versa. This effect is usually more pronounced for longer
term debt securities.
The debt securities in which certain of the Underlying Funds may invest
are rated, or determined by the Adviser to be the equivalent of those rated, by
two nationally recognized statistical rating organizations, Moody's and S&P.
High quality securities are those rated in the two highest categories by Moody's
(Aaa or Aa) or S&P (AAA or AA). High-grade securities are those rated in the
three highest categories by Moody's (Aaa, Aa, or A) or by S&P (AAA, AA, or A).
Investment-grade securities are those rated in the four highest categories by
Moody's (Aaa, Aa, A, or Baa) or by S&P (AAA, AA, A or BBB).
Certain Underlying Funds may invest in debt securities which are rated
below investment-grade; that is, rated below Baa by Moody's or BBB by S&P
(commonly referred to as "junk bonds"). The lower the ratings of such debt
securities, the greater their risks render them like equity securities. Moody's
considers bonds it rates Baa to have speculative elements as well as
investment-grade characteristics. Certain Underlying Funds may also make a
portion of their below investment-grade investments in securities which are
rated D by S&P or, if unrated, are of equivalent quality. Securities rated D may
be in default with respect to payment of principal or interest. Information
regarding the ratings of debt securities and the identity of those Underlying
Funds that can invest in investment-grade or below investment-grade debt
securities may be found in this Statement of Additional Information.
To the extent an Underlying Fund invests in high-grade securities, it
will be unable to avail itself of opportunities for higher income which may be
available with lower grade investments. Conversely, although some lower-grade
securities have produced higher yields in the past than the investment-grade
securities, lower-grade securities are considered to be predominantly
speculative and, therefore, carry greater risk.
Municipal Obligations. Certain Underlying Funds may acquire municipal
obligations when, due to disparities in the debt securities markets, the
anticipated total return on such obligations is higher than that on taxable
obligations. The
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Underlying Fund has no current intention of purchasing tax-exempt municipal
obligations that would amount to greater than 5% of the Underlying Fund's total
assets.
Municipal obligations are issued by or on behalf of states,
territories, and possessions of the U.S., and their political subdivisions,
agencies, and instrumentalities, and the District of Columbia to obtain funds
for various public purposes. The interest on these obligations is generally
exempt from federal income tax in the hands of most investors. The two principal
classifications of municipal obligations are "notes" and "bonds." The return on
municipal obligations is ordinarily lower than that of taxable obligations.
Zero Coupon Securities. Certain Underlying Funds may invest in zero coupon
securities, which pay no cash income and are sold at substantial discounts from
their value at maturity. When held to maturity, their entire income, which
consists of accretion of discount, comes from the difference between the issue
price and their value at maturity. Zero coupon securities are subject to greater
market value fluctuations from changing interest rates than debt obligations of
comparable maturities which make current distributions of interest (cash). Zero
coupon convertible securities offer the opportunity for capital appreciation (or
depreciation) as increases (or decreases) in market value of such securities
closely follow the movements in the market value of the underlying common stock.
Zero coupon convertible securities generally are expected to be less volatile
than the underlying common stocks because zero coupon convertible securities are
usually issued with shorter maturities (15 years or less) and with options
and/or redemption features exercisable by the holder of the obligation entitling
the holder to redeem the obligation and receive a defined cash payment.
Zero coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of securities firms and
banks have stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" ("TIGRS") and Certificate of Accrual on Treasuries
("CATS"). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates or other evidences of ownership of the U.S.
Treasury securities has stated that for federal tax and securities purposes, in
their opinion purchasers of such certificates, such as an Underlying Fund, most
likely will be deemed to be the beneficial holder of the underlying U.S.
government securities.
The Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupons and corpus payments on Treasury securities through the Federal
Reserve book-entry record-keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program,
the Fund will be able to have its beneficial ownership of zero coupon securities
recorded directly in the book-entry record-keeping system in lieu of having to
hold certificates or other evidences of ownership of the underlying U.S.
Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold in such bundled form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells
itself. (See "TAXES.")
Brady Bonds. Certain Underlying Funds may invest in Brady Bonds, which are
securities created through the exchange of existing commercial bank loans to
public and private entities in certain emerging markets for new bonds in
connection with debt restructurings under a debt restructuring plan introduced
by former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Plan debt restructurings have been implemented to date in Mexico, Uruguay,
Venezuela, Costa Rica, Argentina, Nigeria, and the Philippines.
Brady Bonds have been issued fairly recently, and for that reason do
not have a long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (but primarily the dollar)
and are actively traded in over-the-counter secondary markets.
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Dollar-denominated, collateralized Brady Bonds, which may be fixed rate
bonds or floating rate bonds, are generally collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on these Brady Bonds generally are collateralized by
cash or securities in an amount that, in the case of fixed rate bonds, is equal
to at least one year of rolling interest payments or, in the case of floating
rate bonds, initially is equal to at least one year's rolling interest payments
based on the applicable interest rate at that time and is adjusted at regular
intervals thereafter. Brady Bonds are often viewed as having three or four
valuation components: the collateralized repayment of principal at final
maturity; the collateralized interest payments; the uncollateralized interest
payments; and any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In light of the
residual risk of Brady Bonds and the history of defaults of countries issuing
Brady Bonds, with respect to commercial bank loans by public and private
entities, investments in Brady Bonds may be viewed as speculative. Over $82
billion in Brady Bonds have been issued by countries in Africa and Latin
America, with 90% of these Brady Bonds being denominated in U.S. dollars.
High Yield, High Risk Securities. Below investment grade securities (rated Ba
and lower by Moody's and BB and lower by S&P) or unrated securities of
equivalent quality (commonly referred to as "junk bonds"), in which certain
Underlying Funds may invest, carry a high degree of risk (including the
possibility of default or bankruptcy of the issuers of such securities),
generally involve greater volatility of price and risk of principal and income,
and may be less liquid, than securities in the higher rating categories and are
considered speculative. The lower the ratings of such debt securities, the
greater their risks render them like equity securities. See the Appendix to this
combined Statement of Additional Information for a more complete description of
the ratings assigned by ratings organizations and their respective
characteristics.
Economic downturns have in the past, and could in the future, disrupted
the high yield market and impaired the ability of issuers to repay principal and
interest. Also, an increase in interest rates would likely have a greater
adverse impact on the value of such obligations than on comparable higher
quality debt securities. During an economic downturn or period of rising
interest rates, highly leveraged issues may experience financial stress which
would adversely affect their ability to service their principal and interest
payment obligations. 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 an Underlying Fund's net asset value. In
addition, investments in high yield zero coupon or pay-in-kind bonds, rather
than income-bearing high yield securities, may be more speculative and may be
subject to greater fluctuations in value due to changes in interest rates.
The trading market for high yield securities may be thin to the extent
that there is no established retail secondary market or because of a decline in
the value of such securities. A thin trading market may limit the ability of an
Underlying Fund to accurately value high yield securities in the Underlying
Fund's portfolio and to dispose of those securities. Adverse publicity and
investor perceptions may decrease the values and liquidity of high yield
securities. These securities may also involve special registration
responsibilities, liabilities and costs. Lower rated and unrated securities are
especially subject to adverse changes in general economic conditions, to changes
in the financial condition of their issuers, and to price fluctuation in
response to changes in interest rates. During periods of economic downturn or
rising interest rates, issuers of these instruments may experience financial
stress that could adversely affect their ability to make payments of principal
and interest and increase the possibility of default.
Credit quality in the high yield securities market can change suddenly
and unexpectedly, and even recently issued credit ratings may not fully reflect
the actual risks posed by a particular high-yield security. For these reasons,
it is the policy of the Adviser not to rely exclusively on ratings issued by
established credit rating agencies, but to supplement such ratings with its own
independent and on-going review of credit quality. The achievement of an
Underlying Fund's investment objective by investment in such securities may be
more dependent on the Adviser's credit analysis than is the case for higher
quality bonds. Should the rating of a portfolio security be downgraded, the
Adviser will determine whether it is in the best interests of the Underlying
Fund to retain or dispose of such security.
Prices for below investment-grade securities may be affected by
legislative and regulatory developments. For example, new federal rules require
savings and loan institutions to gradually reduce their holdings of this type of
security. Also, Congress has from time to time considered legislation which
would restrict or eliminate the corporate tax deduction for interest payments in
these securities and regulate corporate restructurings. Such legislation may
significantly depress the prices of outstanding securities of this type.
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
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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 towards 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.
Mortgage-Backed Securities and Mortgage Pass-Through Securities. Certain
Underlying Funds 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. An Underlying Fund may also invest in debt securities which are secured
with collateral consisting of mortgage-backed securities (see "Collateralized
Mortgage Obligations"), and in other types of mortgage-related securities.
A decline in interest rates may lead to a faster rate of repayment of
the underlying mortgages, and expose an Underlying Fund to a lower rate of
return upon reinvestment. To the extent that such mortgage-backed securities are
held by an Underlying Fund, the prepayment right will tend to limit to some
degree the increase in net asset value of the Underlying Fund because the value
of the mortgage-backed securities held by the Underlying Fund may not appreciate
as rapidly as the price of non-callable 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 Underlying Fund's shares.
Interests in pools of mortgage-backed securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by repayments of principal resulting
from the sale of the underlying property, refinancing, or foreclosure, net of
fees or costs which may be incurred. Because principal may be prepaid at any
time, mortgage-backed securities may involve significantly greater price and
yield volatility than traditional debt securities. Some mortgage-related
securities such as securities issued by the Government National Mortgage
Association ("GNMA") are described as "modified pass-through." These securities
entitle the holder to receive all interest and principal payments owed on the
mortgage pool, net of certain fees, at the scheduled payment dates regardless of
whether or not the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
GNMA. GNMA is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S. Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks, and mortgage bankers) and backed by
pools of FHA-insured or VA-guaranteed mortgages. These guarantees, however, do
not apply to the market value or yield of mortgage-backed securities or to the
value of Underlying Fund shares. Also, GNMA securities often are purchased at a
premium over the maturity value of the underlying mortgages.
This premium is not guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any governmental
agency) mortgages from a list of approved seller/servicers which include state
and federally-chartered savings and loan associations, mutual savings banks,
commercial banks, credit unions, and mortgage bankers. Pass-
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through securities issued by FNMA are guaranteed as to timely payment of
principal and interest by FNMA but are not backed by the full faith and credit
of the U.S. Government.
FHLMC is a corporate instrumentality of the U.S. Government and was
created by Congress in 1970 for the purpose of increasing the availability of
mortgage credit for residential housing. Its stock is owned by the twelve
Federal Home Loan Banks. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal, but PCs are not backed by the full faith and credit of the U.S.
Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers, and other secondary market issuers also
create pass-through pools of conventional mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
governmental and government-related pools because there are no direct or
indirect government or agency guarantees of payments. However, timely payment of
interest and principal of these pools may be supported by various forms of
insurance or guarantees, including individual loan, title, pool and hazard
insurance, and letters of credit. The insurance and guarantees are issued by
governmental entities, private insurers, and the mortgage poolers. Such
insurance and guarantees and the creditworthiness of the issuers thereof will be
considered in determining whether a mortgage-related security meets an
Underlying Fund's 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. An Underlying Fund may buy
mortgage-related securities without insurance or guarantees, if through an
examination of the loan experience and practices of the originators/servicers
and poolers, the Adviser determines that the securities meet the Underlying
Fund's quality standards. Although the market for such securities is becoming
increasingly liquid, securities issued by certain private organizations may not
be readily marketable.
Collateralized Mortgage Obligations ("CMOs"). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal are paid, in most cases, semiannually. CMOs may
be collateralized by whole mortgage loans but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments. The prices of certain CMOs,
depending on their structure and the rate of prepayments, can be volatile. Some
CMOs may not be as liquid as other securities.
In a typical CMO transaction, a corporation issues multiple series,
(e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are
used to purchase mortgages or mortgage pass-through certificates ("Collateral").
The Collateral is pledged to a third party trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on
the Bonds in the order A, B, C, Z. The Series A, B, and C bonds all bear current
interest. Interest on the Series Z Bond is accrued and added to principal and a
like amount is paid as principal on the Series A, B, or C Bond currently being
paid off. When the Series A, B, and C Bonds are paid in full, interest and
principal on the Series Z Bond begins to be paid currently. With some CMOs, the
issuer serves as a conduit to allow loan originators (primarily builders or
savings and loan associations) to borrow against their loan portfolios.
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt obligations of
FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are made
semiannually, as opposed to monthly. The amount of principal payable on each
semiannual payment date is determined in accordance with FHLMC's mandatory
sinking fund schedule, which, in turn, is equal to approximately 100% of FHA
prepayment experience applied to the mortgage collateral pool. All sinking fund
payments in the CMOs are allocated to the retirement of the individual classes
of bonds in the order of their stated maturities. Payment of principal on the
mortgage loans in the collateral pool in excess of the amount of FHLMC's minimum
sinking fund obligation for any payment date are paid to the holders of the CMOs
as additional sinking fund payments. Because of the "pass-through" nature of all
principal payments received on the collateral pool in excess of FHLMC's minimum
sinking fund requirement, the rate at
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which principal of the CMOs is actually repaid is likely to be such that each
class of bonds will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage
loans during any semiannual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.
Other Mortgage-Backed Securities. The Adviser expects that governmental,
government-related, or private entities may create mortgage loan pools and other
mortgage-related securities offering mortgage pass-through and
mortgage-collateralized investments in addition to those described above. The
mortgages underlying these securities may include alternative mortgage
instruments, that is, mortgage instruments whose principal or interest payments
may vary or whose terms to maturity may differ from customary long-term fixed
rate mortgages. An Underlying Fund will not purchase mortgage-backed securities
or any other assets which, in the opinion of the Adviser, are illiquid if, as a
result, more than 10% of the value of the Underlying Fund's total assets will be
illiquid. As new types of mortgage-related securities are developed and offered
to investors, the Adviser will, consistent with the Underlying Fund's investment
objective, policies, and quality standards, consider making investments in such
new types of mortgage-related securities.
Other Asset-Backed Securities. The securitization techniques used to develop
mortgaged-backed securities are now being applied to a broad range of assets.
Through the use of trusts and special purpose corporations, various types of
assets, including automobile loans, computer leases and credit card receivables,
are being securitized in pass-through structures similar to the mortgage
pass-through structures described above or in a structure similar to the CMO
structure. Consistent with an Underlying Fund's investment objectives and
policies, the Underlying Fund may invest in these and other types of
asset-backed securities that may be developed in the future. In general, the
collateral supporting these securities is of shorter maturity than mortgage
loans and is less likely to experience substantial prepayments with interest
rate fluctuations.
Several types of asset-backed securities have already been offered to
investors, including Certificates for Automobile ReceivablesSM ("CARSSM").
CARSSM represent undivided fractional interests in a trust ("Trust") whose
assets consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARSSM are passed through monthly to certificate holders, and
are guaranteed up to certain amounts and for a certain time period by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the Trust. An investor's return on CARSSM may be affected by early
prepayment of principal on the underlying vehicle sales contracts. If the letter
of credit is exhausted, the trust may be prevented from realizing the full
amount due on a sales contract because of state law requirements and
restrictions relating to foreclosure sales of vehicles and the obtaining of
deficiency judgments following such sales or because of depreciation, damage to
or loss of a vehicle, the application of federal and state bankruptcy and
insolvency laws, or other factors. As a result, certificate holders may
experience delays in payments or losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security interest in the related assets. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. There is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection, and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
results from payment of the insurance obligations on at least a portion of the
assets in the pool. This protection may be provided through guarantees, policies
or letters of credit obtained by the issuer or sponsor from third parties,
through various means of structuring the transaction or through a combination of
such approaches. An Underlying Fund 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
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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.
An Underlying Fund 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 and would be subject to the Underlying
Fund's restriction on illiquid securities. In addition, there may be no liquid
market for such securities.
The availability of asset-backed securities may be affected by
legislative or regulatory developments. It is possible that such developments
may require the Underlying Fund to dispose of any then existing holdings of such
securities.
Illiquid Securities. Underlying Funds may purchase securities other than in the
open market. While such purchases may often offer attractive opportunities for
investment not otherwise available on the open market, the securities so
purchased are often "restricted securities" or "not readily marketable," i.e.,
securities which cannot be sold to the public without registration under the
Securities Act of 1933, as amended (the "1933 Act"), or the availability of an
exemption from registration (such as Rule 144A) or because they are subject to
other legal or contractual delays in or restrictions on resale. The absence of a
trading market can make it difficult to ascertain a market value for these
investments and there is a risk that an Underlying Fund may not be able to
dispose of them at an advantageous time or price. This investment practice,
therefore, could have the effect of increasing the level of illiquidity of a
Fund. It is a Fund's policy that illiquid securities (including repurchase
agreements of more than seven days duration, certain restricted securities, and
other securities which are not readily marketable) may not constitute, at the
time of purchase, more than 15% of the value of the Underlying Fund's net
assets. Each Corporation/Trust's Board of Directors/Trustees has approved
guidelines for use by the Adviser in determining whether a security is illiquid.
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 1933 Act. Issuers of restricted
securities may not be subject to the disclosure and other investor protection
requirements that would be applicable if their securities were publicly traded.
If adverse market conditions were to develop during the period between a
Underlying Fund's decision to sell a restricted or illiquid security and the
point at which the Underlying Fund is permitted or able to sell such security,
the Underlying Fund might obtain a price less favorable than the price that
prevailed when it decided to sell. Where a registration statement is required
for the resale of restricted securities, a Underlying Fund may be required to
bear all or part of the registration expenses. A Underlying Fund may be deemed
to be an "underwriter" for purposes of the 1933 Act when selling restricted
securities to the public and, in such event, the Underlying Fund may be liable
to purchasers of such securities if the registration statement prepared by the
issuer is materially inaccurate or misleading.
Since it is not possible to predict with assurance that the market for
securities eligible for resale under Rule 144A will continue to be liquid, the
Adviser will monitor such restricted securities subject to the supervision of
the Board of Trustees/Directors. Among the factors the Adviser 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).
Repurchase Agreements. Certain Underlying Funds may enter into repurchase
agreements with member banks of the Federal Reserve System, any foreign bank, if
the repurchase agreement is fully secured by government securities of the
particular foreign jurisdiction, or with any domestic or foreign broker/dealer
which is recognized as a reporting government securities dealer if the
creditworthiness of the bank or broker/dealer has been determined by the Adviser
to be at least as high as that of other obligations the relevant Underlying Fund
may purchase, or to be at least equal to that of issuers of commercial paper
rated within the two highest grades assigned by Moody's or S&P.
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A repurchase agreement provides a means for an Underlying Fund to earn
income on assets for periods as short as overnight. It is an arrangement under
which the purchaser (i.e., the Underlying Fund) 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 the value of such securities 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 the
Underlying Fund, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to the Underlying Fund together with the
repurchase price upon repurchase. In either case, the income to the Underlying
Fund 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.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a
loan from an Underlying Fund to the seller of the Obligation subject to the
repurchase agreement and is therefore subject to that Underlying Fund's
investment restriction applicable to loans. It is not clear whether a court
would consider the Obligation purchased by an Underlying Fund subject to a
repurchase agreement as being owned by the Underlying Fund or as being
collateral for a loan by the Underlying Fund 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, an Underlying Fund may encounter delay and incur costs before being
able to sell the security. Delays may involve loss of interest or decline in
price of the Obligation. If the court characterizes the transaction as a loan
and the Underlying Fund has not perfected a security interest in the Obligation,
the Underlying Fund may be required to return the Obligation to the seller's
estate and be treated as an unsecured creditor of the seller. As an unsecured
creditor, the Underlying Fund would be at risk of losing some or all of the
principal and income involved in the transaction. As with any unsecured debt
instrument purchased for the Underlying Fund, the Adviser seeks to minimize the
risk of loss through repurchase agreements by analyzing the creditworthiness of
the obligor, in this case the seller of the Obligation. Apart from the risk of
bankruptcy or insolvency proceedings, there is also the risk that the seller may
fail to repurchase the Obligation, in which case the particular Underlying Fund
may incur a loss if the proceeds to the Underlying Fund of the sale to a third
party are less than the repurchase price. However, if the market value of the
Obligation subject to the repurchase agreement becomes less than the repurchase
price (including interest), the Underlying Fund will direct the seller of the
Obligation to deliver additional securities so that the market value of all
securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that an Underlying Fund will be unsuccessful in
seeking to impose on the seller a contractual obligation to deliver additional
securities.
Repurchase Commitments. Certain Underlying Funds may enter into repurchase
commitments with any party deemed creditworthy by the Adviser, including foreign
banks and broker/dealers, if the transaction is entered into for investment
purposes and the counterparty's creditworthiness is at least equal to that of
issuers of securities which an Underlying Fund may purchase. Such transactions
may not provide the Underlying Fund with collateral marked-to-market during the
term of the commitment.
Reverse Repurchase Agreements. The Underlying Fund may enter into "reverse
repurchase agreements," which are repurchase agreements in which the Fund, as
the seller of the securities, agrees to repurchase them at an agreed upon time
and price. The Fund maintains a segregated account in connection with
outstanding reverse repurchase agreements. The Fund will enter into reverse
repurchase agreements only when the Adviser believes that the interest income to
be earned from the investment of the proceeds of the transaction will be greater
than the interest expense of the transaction.
Strategic Transactions and Derivatives. Certain Underlying Funds 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 an Underlying
Fund's portfolio, or enhancing potential gain. These strategies may be executed
through the use of derivative contracts. Such strategies are generally accepted
as part of modern portfolio management and are regularly utilized by many mutual
funds and other institutional investors.
In the course of pursuing these investment strategies, the Underlying
Fund 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
interest rate transactions such as swaps, caps, floors or collars, 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.") Strategic Transactions may be used to attempt to
protect against possible changes in the market value of securities held in or to
be purchased for the Underlying Fund's portfolio resulting from securities
markets or currency exchange rate fluctuations, to protect the Underlying Fund'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 the Underlying Fund's
portfolio, or to establish a position in the derivatives markets as a substitute
for purchasing or selling particular securities.
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Some Strategic Transactions may also be used to enhance potential gain although
no more than 5% of the Underlying Fund's assets will be committed to Strategic
Transactions entered into for non-hedging purposes. Any or all of these
investment techniques may be used at any time and there is no particular
strategy that dictates the use of one technique rather than another, as use of
any Strategic Transaction is a function of numerous variables including market
conditions. The ability of the Underlying Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Underlying Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions will not be used
to alter the fundamental purposes and characteristics of the Underlying Fund and
each Underlying Fund 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 Underlying Fund.
Strategic Transactions have risks associated with them including
possible default by the other party to the transaction, illiquidity and, to the
extent the Adviser's view as to certain market movements is incorrect, the risk
that the use of such Strategic Transactions could result in losses greater than
if they had not been used. Use of put and call options may result in losses to
the Underlying Fund, force the sale or purchase of portfolio securities at
inopportune times or for prices higher than (in the case of put options) or
lower than (in the case of call options) current market values, limit the amount
of appreciation the Underlying Fund can realize on its investments or cause the
Underlying Fund to hold a security it might otherwise sell. The use of currency
transactions can result in the Underlying Fund incurring losses as a result of a
number of factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Underlying Fund creates the possibility that losses on the hedging instrument
may be greater than gains in the value of the Underlying Fund'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, the Underlying Fund 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 Underlying Fund 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, an Underlying Fund'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 an Underlying Fund 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. An Underlying Fund's purchase of a
call option on a security, financial future, index, currency or other instrument
might be intended to protect an Underlying Fund 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. An Underlying Fund is authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as an example, but is also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which the
option is "in-the-money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the
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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.
An Underlying Fund's ability to close out its position as a purchaser
or seller of an OCC or exchange listed put or call option is dependent, in part,
upon the liquidity of the option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (i) insufficient trading
interest in certain options; (ii) restrictions on transactions imposed by an
exchange; (iii) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities
including reaching daily price limits; (iv) interruption of the normal
operations of the OCC or an exchange; (v) inadequacy of the facilities of an
exchange or OCC to handle current trading volume; or (vi) a decision by one or
more exchanges to discontinue the trading of options (or a particular class or
series of options), in which event the relevant market for that option on that
exchange would cease to exist, although outstanding options on that exchange
would generally continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all of the terms of
an OTC option, including such terms as method of settlement, term, exercise
price, premium, guarantees and security, are set by negotiation of the parties.
An Underlying Fund will only sell OTC options (other than OTC currency options)
that are subject to a buy-back provision permitting the Underlying Fund to
require the Counterparty to sell the option back to the Underlying Fund at a
formula price within seven days. An Underlying Fund expects generally to enter
into OTC options that have cash settlement provisions, although an Underlying
Fund 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 an Underlying Fund or fails to make a
cash settlement payment due in accordance with the terms of that option, an
Underlying Fund will lose any premium it paid for the option as well as any
anticipated benefit of the transaction. Accordingly, the Adviser must assess the
creditworthiness of each such Counterparty or any guarantor or credit
enhancement of the Counterparty's credit to determine the likelihood that the
terms of the OTC option will be satisfied. An Underlying Fund will engage in OTC
option transactions only with U.S. government securities dealers recognized by
the Federal Reserve Bank of New York as "primary dealers" or broker/dealers,
domestic or foreign banks or other financial institutions which have received
(or the guarantors of the obligation of which have received) a short-term credit
rating of A-1 from S&P or P-1 from Moody's or an equivalent rating from any
nationally recognized statistical rating organization ("NRSRO") or, in the case
of OTC currency transactions, are determined to be of equivalent credit quality
by the Adviser. The staff of the SEC currently takes the position that OTC
options purchased by an Underlying Fund, and portfolio securities "covering" the
amount of an Underlying Fund'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 an Underlying Fund's limitation on investing no more than 15%
of its assets in illiquid securities.
If an Underlying Fund 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 an Underlying Fund's income. The sale of put options
can also provide income.
An Underlying Fund may purchase and sell call options on securities
including U.S. Treasury and agency securities, mortgage-backed securities,
corporate debt securities, equity securities (including convertible securities)
and Eurodollar instruments that are traded on U.S. and foreign securities
exchanges and in the over-the-counter markets, and on securities indices,
currencies and futures contracts. All calls sold by an Underlying Fund must be
"covered" (i.e., an Underlying Fund 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 an Underlying Fund will
receive the option premium to help protect it against loss, a call sold by an
Underlying Fund exposes an Underlying Fund 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 an Underlying Fund to hold a
security or instrument which it might otherwise have sold.
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An Underlying Fund may purchase and sell put options on securities
including U.S. Treasury and agency securities, mortgage-backed securities,
foreign sovereign debt, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments (whether or not it holds the
above securities in its portfolio), and on securities indices, currencies and
futures contracts other than futures on individual corporate debt and individual
equity securities. An Underlying Fund will not sell put options if, as a result,
more than 50% of the Underlying Fund's 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 an Underlying Fund may be required to buy the underlying security at a
disadvantageous price above the market price.
General Characteristics of Futures. Certain Underlying Funds 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, for 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 an Underlying Fund, as
seller, to deliver to the buyer the specific type of 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.
An Underlying Fund's use of futures and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the Commodity Futures Trading Commission and will
be entered into for bona fide hedging, risk management (including duration
management) or other portfolio management and return enhancement purposes.
Typically, maintaining a futures contract or selling an option thereon requires
an Underlying Fund to deposit with a financial intermediary as security for its
obligations an amount of cash or other specified assets (initial margin) which
initially is typically 1% to 10% of the face amount of the contract (but may be
higher in some circumstances). Additional cash or assets (variation margin) may
be required to be deposited thereafter on a daily basis as the mark to market
value of the contract fluctuates. The purchase of an option on financial futures
involves payment of a premium for the option without any further obligation on
the part of an Underlying Fund. If an Underlying Fund 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.
An Underlying Fund will not enter into a futures contract or related
option (except for closing transactions) if, immediately thereafter, the sum of
the amount of its initial margin and premiums on open futures contracts and
options thereon would exceed 5% of the Underlying Fund'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.
Warrants. The Underlying Fund 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 to be speculative
investments. Warrants pay no dividends and confer no rights other than a
purchase option. Thus, if a warrant held by an Underlying Fund were not
exercised by the date of its expiration, the Underlying Fund would lose the
entire purchase price of the warrant.
Options on Securities Indices and Other Financial Indices. Certain Underlying
Funds also may purchase and sell call and put options on securities indices and
other financial indices and in so doing can achieve many of the same objectives
it would achieve through the sale or purchase of options on individual
securities or other instruments. Options on securities indices and other
financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, they settle by cash settlement, i.e., an option on an index gives
the holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of the index upon which the option is based exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option (except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the excess of the closing price of
the index over the exercise price of the option, which also may be multiplied by
a formula value. The seller of the option is obligated, in return for the
premium received, to make delivery of this amount. The gain or loss on an option
on an index depends on price movements in the instruments making up the market,
market
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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. Certain Underlying Funds 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. An Underlying Fund
may enter into currency transactions with Counterparties which have received (or
the guarantors of the obligations of which have received) a credit rating of A-1
or P-1 by S&P or Moody's, respectively, or that have an equivalent rating from
an NRSRO or are determined to be of equivalent credit quality by the Adviser.
An Underlying Fund'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. Transaction hedging is entering into a currency transaction
with respect to specific assets or liabilities of an Underlying Fund, which will
generally be used in connection with the purchase or sale of its portfolio
securities or the receipt of income therefrom. Position hedging is entering into
a currency transaction with respect to portfolio security positions denominated
or generally quoted in that currency.
An Underlying Fund 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.
An Underlying Fund 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 an Underlying Fund has or
in which an Underlying Fund expects to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, an Underlying Fund may also
engage in proxy hedging. Proxy hedging is often used when the currency to which
an Underlying Fund's portfolio is exposed is difficult to hedge or to hedge
against the dollar. Proxy hedging entails entering into a forward contract to
sell a currency whose changes in value are generally considered to be linked to
a currency or currencies in which some or all of an Underlying Fund's portfolio
securities are or are expected to be denominated, and to buy U.S. dollars. The
amount of the contract would not exceed the value of an Underlying Fund's
securities denominated in linked currencies. For example, if the Adviser
considers that the Austrian schilling is linked to the German deutschemark (the
"D-mark"), an Underlying Fund holds securities denominated in schillings and the
Adviser believes that the value of schillings will decline against the U.S.
dollar, the Adviser may enter into a contract 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 an Underlying Fund 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 linkage between various currencies may not be present or may
not be present during the particular time that an Underlying Fund is engaging in
proxy hedging. If an Underlying Fund enters into a currency hedging transaction,
an Underlying Fund will comply with the asset segregation requirements described
below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to an Underlying Fund 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.
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Combined Transactions. Certain Underlying Funds may enter into multiple
transactions, including multiple options transactions, multiple futures
transactions, multiple currency transactions (including forward currency
contracts) and multiple interest rate transactions and any combination of
futures, options, currency and interest rate transactions ("component"
transactions), instead of a single Strategic Transaction, as part of a single or
combined strategy when, in the opinion of the Adviser, it is in the best
interests of an Underlying Fund to do so. A combined transaction will usually
contain elements of risk that are present in each of its component transactions.
Although combined transactions are normally entered into based on the Adviser's
judgment that the combined strategies will reduce risk or otherwise more
effectively achieve the desired portfolio management goal, it is possible that
the combination will instead increase such risks or hinder achievement of the
portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which
certain Underlying Funds may enter are interest rate, currency, index and other
swaps and the purchase or sale of related caps, floors and collars. An
Underlying Fund 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 an Underlying Fund
anticipates purchasing at a later date. An Underlying Fund will not sell
interest rate caps or floors where it does not own securities or other
instruments providing the income stream an Underlying Fund may be obligated to
pay. Interest rate swaps involve the exchange by an Underlying Fund 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.
An Underlying Fund will usually enter into swaps on a net basis, i.e.,
the two payment streams are netted out in a cash settlement on the payment date
or dates specified in the instrument, with the Underlying Fund receiving or
paying, as the case may be, only the net amount of the two payments. Inasmuch as
each Underlying Fund will segregate assets (or enter into offsetting positions)
to cover its obligations under swaps, the Adviser and an Underlying Fund believe
such obligations do not constitute senior securities under the 1940 Act and,
accordingly, will not treat them as being subject to its borrowing restrictions.
An Underlying Fund will not enter into any swap, cap, floor or collar
transaction unless, at the time of entering into such transaction, the unsecured
long-term debt of the Counterparty, combined with any credit enhancements, is
rated at least A by S&P or Moody's or has an equivalent rating from another
NRSRO or is determined to be of equivalent credit quality by the Adviser. If
there is a default by the Counterparty, an Underlying Fund may have contractual
remedies pursuant to the agreements related to the transaction. The swap market
has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments. Certain Underlying Funds may make investments in
Eurodollar instruments. Eurodollar instruments are U.S. dollar-denominated
futures contracts or options thereon which are linked to the London Interbank
Offered Rate ("LIBOR"), although foreign currency-denominated instruments are
available from time to time. Eurodollar futures contracts enable purchasers to
obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate
for borrowings. An Underlying Fund might use Eurodollar futures contracts and
options thereon to hedge against changes in LIBOR, to which many interest rate
swaps and fixed income instruments are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in an Underlying Fund's ability to act upon
economic events occurring in foreign markets during non-business hours in the
U.S., (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the U.S., and (v) lower trading
volume and liquidity.
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Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that an Underlying Fund segregate liquid
assets with its custodian to the extent the Underlying Fund'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
the Underlying Fund 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
securities at least equal to the current amount of the obligation must be
segregated with the custodian. The segregated assets cannot be sold or
transferred unless equivalent assets are substituted in their place or it is no
longer necessary to segregate them. For example, a call option written by an
Underlying Fund will require the Underlying Fund to hold the securities subject
to the call (or securities convertible into the needed securities without
additional consideration) or to segregate liquid securities sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by an Underlying Fund on an index will require an Underlying Fund to own
portfolio securities which correlate with the index or to segregate liquid
assets equal to the excess of the index value over the exercise price on a
current basis. A put option written by an Underlying Fund requires an Underlying
Fund to segregate liquid assets equal to the exercise price.
Except when an Underlying Fund enters into a forward contract for the
purchase or sale of a security denominated in a particular currency, which
requires no segregation, a currency contract which obligates the Underlying Fund
to buy or sell currency will generally require the Underlying Fund to hold an
amount of that currency or liquid securities denominated in that currency equal
to the Underlying Fund's obligations or to segregate liquid assets equal to the
amount of an Underlying Fund's obligation.
OTC options entered into by an Underlying Fund, 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 an Underlying Fund sells these instruments it will only segregate
an amount of assets equal to its accrued net obligations, as there is no
requirement for payment or delivery of amounts in excess of the net amount.
These amounts will equal 100% of the exercise price in the case of a non
cash-settled put, the same as an OCC guaranteed listed option sold by an
Underlying Fund, 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 an Underlying Fund
sells a call option on an index at a time when the in-the-money amount exceeds
the exercise price, an Underlying Fund 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 an Underlying Fund other than those
above generally settle with physical delivery, or with an election of either
physical delivery or cash settlement and, in connection with such options, an
Underlying Fund will segregate an amount of assets equal to the full value of
the option. OTC options settling with physical delivery, or with an election of
either physical delivery or cash settlement will be treated the same as other
options settling with physical delivery.
In the case of a futures contract or an option thereon, an Underlying
Fund must deposit initial margin and possible daily variation margin in addition
to segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash or liquid assets.
With respect to swaps, an Underlying Fund 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
securities having a value equal to the accrued excess. Caps, floors and collars
require segregation of assets with a value equal to an Underlying Fund's net
obligation, if any.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. An Underlying Fund 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, an Underlying Fund 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 Underlying Fund. Moreover, if an Underlying
Fund held a futures or forward contract instead of segregating assets, it could
purchase a put option on the same futures or forward contract with a strike
price as high or higher than the price of the contract held. Other Strategic
Transactions may also be offset in combinations. If the offsetting transaction
terminates at the time of or after the primary transaction no segregation is
required, but if it terminates prior to such time, assets equal to any remaining
obligation would need to be segregated.
Dollar Roll Transactions. Certain Underlying Funds may enter into "dollar roll"
transactions, which consist of the sale by an Underlying Fund to a bank or
broker/dealers (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
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the security while it is the holder. The Underlying Fund 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 the Underlying Fund
agrees to buy a security on a future date.
An Underlying Fund will not use such transactions for leveraging
purposes and, accordingly, will segregate cash or liquid assets in an amount
sufficient to meet its purchase obligations under the transactions. An
Underlying Fund will also maintain asset coverage of at least 300% for all
outstanding firm commitments, dollar rolls and other borrowings.
Dollar rolls are treated for purposes of the 1940 Act as borrowings by
an Underlying Fund because they involve the sale of a security coupled with an
agreement to repurchase. Like all borrowings, a dollar roll involves costs to
the Underlying Fund. For example, while the Underlying Fund receives a fee as
consideration for agreeing to repurchase the security, the Underlying 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 Underlying Fund, thereby effectively charging the
Underlying Fund interest on its borrowing. Further, although the Underlying Fund
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 Underlying Fund'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, an Underlying Fund's right to
purchase from the counterparty might be restricted. Additionally, the value of
such securities may change adversely before the Underlying Fund is able to
purchase them. Similarly, the Underlying Fund 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 the Underlying
Fund, the security that the Underlying Fund is required to buy under the dollar
roll may be worth less than an identical security. Finally, there can be no
assurance that an Underlying Fund's use of the cash that it receives from a
dollar roll will provide a return that exceeds borrowing costs.
The Directors/Trustees of the Underlying Funds have adopted guidelines
to ensure that those securities received are substantially identical to those
sold. To reduce the risk of default, an Underlying Fund will engage in such
transactions only with counterparties selected pursuant to such guidelines.
Indexed Securities. Certain Underlying Funds may invest in indexed securities,
the value of which is linked to currencies, interest rates, commodities, indices
or other financial indicators ("reference instruments"). Most indexed securities
have maturities of three years or less.
Indexed securities differ from other types of debt securities in which
an Underlying Fund may invest in several respects. First, the interest rate or,
unlike other debt securities, the principal amount payable at maturity of an
indexed security may vary based on changes in one or more specified reference
instruments, such as an interest rate compared with a fixed interest rate or the
currency exchange rates between two currencies (neither of which need be the
currency in which the instrument is denominated). The reference instrument need
not be related to the terms of the indexed security. For example, the principal
amount of a U.S. dollar denominated indexed security may vary based on the
exchange rate of two foreign currencies. An indexed security may be positively
or negatively indexed; that is, its value may increase or decrease if the value
of the reference instrument increases. Further, the change in the principal
amount payable or the interest rate of an indexed security may be a multiple of
the percentage change (positive or negative) in the value of the underlying
reference instrument(s).
Investment in indexed securities involves certain risks. In addition to
the credit risk of the security's issuer and the normal risks of price changes
in response to changes in interest rates, the principal amount of indexed
securities may decrease as a result of changes in the value of reference
instruments. Further, in the case of certain indexed securities in which the
interest rate is linked to a reference instrument, the interest rate may be
reduced to zero, and any further declines in the value of the security may then
reduce the principal amount payable on maturity. Finally, indexed securities may
be more volatile than the reference instruments underlying the indexed
securities.
When-Issued Securities. Certain Underlying Funds may purchase securities on a
"when-issued" or "forward delivery" basis for payment and delivery at a later
date. The price of such securities, which is generally expressed in yield terms,
is generally fixed at the time the commitment to purchase is made, but delivery
and payment for the when-issued or
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forward delivery securities takes place at a later date. During the period
between purchase and settlement, no payment is made by an Underlying Fund to the
issuer and no interest on the when-issued or forward delivery securities accrues
to the Underlying Fund. To the extent that assets of the Underlying Fund are
held in cash pending the settlement of a purchase of securities, the Underlying
Fund will earn no income; however, it is the Underlying Fund's intention to be
fully invested to the extent practicable and subject to the policies stated
above. While when-issued or forward delivery securities may be sold prior to the
settlement date, the Underlying Fund intends to purchase such securities with
the purpose of actually acquiring them unless a sale appears desirable for
investment reasons. At the time the Underlying Fund makes the commitment to
purchase a security on a when-issued or forward delivery basis, it will record
the transaction and reflect the value of the security in determining its net
asset value. At the time of settlement, the market value of the when-issued or
forward delivery securities may be more or less than the purchase price. The
Underlying Fund does not believe that its net asset value or income will be
adversely affected by its purchase of securities on a when-issued or forward
delivery basis.
Short Sales Against the Box. Certain Underlying Funds may make short sales of
common stocks if, at all times when a short position is open, an Underlying Fund
owns the stock or owns preferred stocks or debt securities convertible or
exchangeable, without payment of further consideration, into the shares of
common stock sold short. Short sales of this kind are referred to as short sales
"against the box." The broker/dealer that executes a short sale generally
invests cash proceeds of the sale until they are paid to the Underlying Fund.
Arrangements may be made with the broker/dealer to obtain a portion of the
interest earned by the broker on the investment of short sale proceeds. The
Underlying Fund will segregate the common stock or convertible or exchangeable
preferred stock or debt securities in a special account with the Custodian.
Foreign Securities. Certain Underlying Funds may invest in foreign securities.
The Adviser believes that diversification of assets on an international basis
may decrease the degree to which events in any one country, including the U.S.,
will affect an investor's entire investment holdings. In certain periods since
World War II, many leading foreign economies and foreign stock market indices
have grown more rapidly than the U.S. economy and leading U.S. stock market
indices, although there can be no assurance that this will be true in the
future. Investors should recognize that investing in foreign securities involves
certain special considerations, including those set forth below, which are not
typically associated with investing in U.S. securities and which may favorably
or unfavorably affect an Underlying Fund's performance. As foreign companies are
not generally subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to domestic
companies, there may be less publicly available information about a foreign
company than about a domestic company. Many foreign securities markets, while
growing in volume of trading activity, have substantially less volume than the
U.S. market, and securities of some foreign issuers are less liquid and more
volatile than securities of domestic issuers. Similarly, volume and liquidity in
most foreign bond markets is less than in the U.S. and, at times, volatility of
price can be greater than in the U.S. Fixed commissions on some foreign
securities exchanges and bid to asked spreads in foreign bond markets are
generally higher than commissions or bid to asked spreads on U.S. markets,
although an Underlying Fund will endeavor to achieve the most favorable net
results on its portfolio transactions. There is generally less governmental
supervision and regulation of securities exchanges, brokers and listed companies
in most foreign countries than in the U.S. It may be more difficult for an
Underlying Fund's agents to keep currently informed about corporate actions in
foreign countries which may affect the prices of portfolio securities.
Communications between the U.S. and foreign countries may be less reliable than
within the U.S., thus increasing the risk of delayed settlements of portfolio
transactions or loss of certificates for portfolio securities. Payment for
securities without delivery may be required in certain foreign markets. In
addition, with respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect U.S. investments in those countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position. The management of an Underlying Fund seeks to mitigate the
risks associated with the foregoing considerations through continuous
professional management.
Foreign Currencies. Because investments in foreign securities usually will
involve currencies of foreign countries, and because certain Underlying Funds
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 such Underlying Fund as measured in U.S. dollars may be affected
favorably or unfavorably by changes in foreign currency exchange rates and
exchange control regulations, and the Underlying Fund may incur costs in
connection with conversions between various currencies. Although an Underlying
Fund values its assets daily in terms of U.S. dollars, it does not intend to
convert its holdings of foreign currencies into U.S. dollars on a daily basis.
It will do so from time to time, and investors should be aware of the costs of
currency conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various
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currencies. Thus, a dealer may offer to sell a foreign currency to an Underlying
Fund at one rate, while offering a lesser rate of exchange should the Underlying
Fund desire to resell that currency to the dealer. An Underlying Fund will
conduct its foreign currency exchange transactions either on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market, or
through entering into options or forward or futures contracts to purchase or
sell foreign currencies.
Investing in Emerging Markets. Most emerging securities markets in which certain
Underlying Funds may invest, may have substantially less volume and are subject
to less governmental supervision than U.S. securities markets. Securities of
many issuers in emerging markets may be less liquid and more volatile than
securities of comparable domestic issuers. In addition, there is less regulation
of securities exchanges, securities dealers, and listed and unlisted companies
in emerging markets than in the United States.
Emerging markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions. Delays in
settlement could result in temporary periods when a portion of the assets of an
Underlying Fund is uninvested and no cash is earned thereon. The inability of an
Underlying Fund to make intended security purchases due to settlement problems
could cause the Underlying Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result either in losses to the Underlying Fund due to subsequent declines in
value of the portfolio security or, if the Underlying Fund has entered into a
contract to sell the security, could result in possible liability to the
purchaser. Costs associated with transactions in foreign securities are
generally higher than costs associated with transactions in U.S. securities.
Such transactions also involve additional costs for the purchase or sale of
foreign currency.
Foreign investment in certain emerging market debt obligations is
restricted or controlled to varying degrees. These restrictions or controls may
at times limit or preclude foreign investment in certain emerging markets debt
obligations and increase the costs and expenses of an Underlying Fund. 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. An Underlying Fund
could be adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
to the Underlying Fund of any restrictions on investments.
In the course of investment in emerging market debt obligations, an
Underlying Fund will be exposed to the direct or indirect consequences of
political, social and economic changes in one or more emerging markets.
Political changes in emerging market countries may affect the willingness of an
emerging market country's governmental issuer to make or provide for timely
payments of its obligations. The country's economic status, as reflected in,
among other things, its inflation rate, the amount of its external debt and its
gross domestic product, also affects its ability to honor its obligations. While
an Underlying Fund will manage its assets in a manner that will seek to minimize
the exposure to such risks, and will further reduce risk by owning the bonds of
many issuers, there can be no assurance that adverse political, social or
economic changes will not cause the Underlying Fund to suffer a loss of value in
respect of the securities in the Underlying Fund's portfolio.
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 an Underlying Fund's securities in
such markets may not be readily available. The Trust/Corporation may suspend
redemption of its shares for any period during which an emergency exists, as
determined by the Securities and Exchange Commission (the "Commission").
Accordingly if the Underlying Fund believes that appropriate circumstances
exist, it will promptly apply to the Commission for a determination that an
emergency is present. During the period commencing from the Underlying Fund's
identification of such condition until the date of Commission action, the
Underlying Fund's securities in the affected markets will be valued at fair
value determined in good faith by or under the direction of the Board of
Trustees/Directors of the Trust/Corporation.
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Volume and liquidity in most foreign bond markets are less than in the
United States and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Fixed commissions on
foreign securities exchanges are generally higher than negotiated commissions on
U.S. exchanges, although an Underlying Fund endeavors to achieve the most
favorable net results on its portfolio transactions. There is generally less
governmental supervision and regulation of business and industry practices,
securities exchanges, brokers, dealers and listed companies than in the United
States. Mail service between the United States and foreign countries may be
slower or less reliable than within the United States, thus increasing the risk
of delayed settlements of portfolio transactions or loss of certificates for
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 the Underlying
Fund's investments in those countries. Moreover, individual emerging market
economies may differ favorably or unfavorably from the U.S. economy in such
respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position. The
chart below sets forth the risk ratings of selected emerging market countries'
sovereign debt securities.
Sovereign Risk Ratings for Selected Emerging Market Countries as of 1/15/98
(Source: J.P. Morgan Securities, Inc., Emerging Markets Research)
Country Moody's Standard & Poor's
------- ------- -----------------
Chile Baa1 A-
Turkey B1 B
Mexico Ba2 BB
Czech Republic Baa1 A
Hungary Baa3 BBB-
Colombia Baa3 BBB-
Venezuela Ba2 B+
Morocco NR NR
Argentina Ba3 BB
Brazil B1 BB-
Poland Baa3 BBB-
Ivory Coast NR NR
An Underlying Fund 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 the Underlying Fund defaults, the Underlying Fund
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. The Underlying Fund'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. With
four exceptions, (Panama, Cuba, Costa Rica and Yugoslavia), no sovereign
emerging markets borrower has defaulted on an external bond issue since World
War II.
Income from securities held by an Underlying Fund could be reduced by a
withholding tax at the source or other taxes imposed by the emerging market
countries in which the Underlying Fund makes its investments. An Underlying
Fund's net asset value may also be affected by changes in the rates or methods
of taxation applicable to the Underlying Fund or to entities in which the
Underlying Fund has invested. The Adviser will consider the cost of any taxes in
determining whether to acquire any particular investments, but can provide no
assurance that the taxes will not be subject to change.
Many emerging markets have experienced substantial, and in some periods
extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price controls have been
imposed in certain countries. Of these countries, some, in recent years, have
begun to control inflation through prudent economic policies.
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Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial organizations and
other financial institutions. Certain emerging market governmental issuers have
not been able to make payments of interest on or principal of debt obligations
as those payments have come due. Obligations arising from past restructuring
agreements may affect the economic performance and political and social
stability of those issuers.
Governments of many emerging market countries have exercised and
continue to exercise substantial influence over many aspects of the private
sector through the ownership or control of many companies, including some of the
largest in any given country. As a result, governmental 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 an
Underlying Fund'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 an Underlying Fund'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 their exports in
currencies other than dollars or non-emerging market currencies, their abilities
to make debt payments denominated in dollars or non-emerging market currencies
could be affected.
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.
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.
Investing in Latin America. The Adviser believes that investment opportunities
may result from recent trends in Latin America encouraging greater market
orientation and less governmental intervention in economic affairs. Investors,
however, should be aware that the Latin American economies have experienced
considerable difficulties in the past decade. Although there have been
significant improvements in recent years, the Latin American economies continue
to experience challenging problems, including high inflation rates and high
interest rates relative to the U.S. The emergence of the Latin American
economies and securities markets will require continued economic and fiscal
discipline which has been lacking at times in the past, as well as stable
political and social conditions. Recovery may also be influenced by
international economic conditions, particularly those in the U.S., and by world
prices for oil and other commodities. There is no assurance that recent economic
initiatives will be successful.
Certain risks associated with international investments and investing
in smaller, developing capital markets are heightened for investments in Latin
American countries. For example, some of the currencies of Latin American
countries have experienced steady devaluations relative to the U.S. dollar, and
major adjustments have been made in certain of these currencies periodically. In
addition, although there is a trend toward less government involvement in
commerce, governments of many Latin American countries have exercised and
continue to exercise substantial influence over many aspects of the private
sector. In certain cases, the government still owns or controls many companies,
including some of the largest in the country. Accordingly, governmental actions
in the future could have a significant effect on economic conditions in Latin
American countries, which could affect private sector companies and an
Underlying Fund, as well as the value of securities in an Underlying Fund's
portfolio.
Certain Latin American countries are among the largest debtors to
commercial banks and foreign governments. Some of these countries have in the
past defaulted on their sovereign debt. Holders of sovereign debt (including an
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Underlying Fund) 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.
The portion of an Underlying Fund's assets invested directly in Chile
may be less than the portions invested in other countries in Latin America
because, at present, capital invested in Chile normally cannot be repatriated
for as long as five years.
The securities markets of Latin American countries are substantially
smaller, less developed, less liquid and more volatile than the major securities
markets in the U.S. Disclosure and regulatory standards are in many respects
less stringent than U.S. standards. Furthermore, there is a lower level of
monitoring and regulation of the markets and the activities of investors in such
markets.
The limited size of many Latin American securities markets and limited
trading volume in the securities of Latin American issuers compared to volume of
trading in the securities of U.S. issuers could cause prices to be erratic for
reasons apart from factors that affect the soundness and competitiveness of the
securities issuers. For example, limited market size may cause prices to be
unduly influenced by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on in-depth fundamental analysis,
may decrease the value and liquidity of portfolio securities.
An Underlying Fund may invest a portion of its assets in securities
denominated in currencies of Latin American countries. Accordingly, changes in
the value of these currencies against the U.S. dollar may result in
corresponding changes in the U.S. dollar value of the Underlying Fund's assets
denominated in those currencies.
Some Latin American countries also may have managed currencies, which
are not free floating against the U.S. dollar. In addition, there is risk that
certain Latin American countries may restrict the free conversion of their
currencies into other currencies. Further, certain Latin American currencies may
not be internationally traded. Certain of these currencies have experienced a
steep devaluation relative to the U.S. dollar. Any devaluations in the
currencies in which the Underlying Fund's portfolio securities are denominated
may have a detrimental impact on the Underlying Fund's net asset value.
The economies of individual Latin American countries may differ
favorably or unfavorably from the U.S. economy in such respects as the rate of
growth of gross domestic product, the rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. Certain Latin
American countries have experienced high levels of inflation which can have a
debilitating effect on an economy, although some have begun to control inflation
in recent years through prudent economic policies. Furthermore, certain Latin
American countries may impose withholding taxes on dividends payable to the
Underlying Fund at a higher rate than those imposed by other foreign countries.
This may reduce the Underlying Fund's investment income available for
distribution to shareholders.
Latin America is a region rich in natural resources such as oil,
copper, tin, silver, iron ore, forestry, fishing, livestock and agriculture. The
region has a large population (roughly 300 million) representing a large
domestic market. Economic growth was strong in the 1960's and 1970's, but slowed
dramatically (and in some instances was negative) in the 1980's as a result of
poor economic policies, higher international interest rates, and the denial of
access to new foreign capital. Although a number of Latin American countries are
currently experiencing lower rates of inflation and higher rates of real growth
in Gross Domestic Product than they have in the past, other Latin American
countries continue to experience significant problems, including high inflation
rates and high interest rates. Capital flight has proven a persistent problem
and external debt has been forcibly restructured. Political turmoil, high
inflation, capital repatriation restrictions, and nationalization have further
exacerbated conditions.
Governments of many Latin American countries have exercised and
continue to exercise substantial influence over many aspects of the private
sector through the ownership or control of many companies, including some of the
largest in those countries. As a result, government actions in the future could
have a significant effect on economic conditions which may adversely affect
prices of certain portfolio securities. Expropriation, confiscatory taxation,
nationalization, political, economic or social instability or other similar
developments, such as military coups, have occurred in the past and could also
adversely affect an Underlying Fund's investments in this region.
Changes in political leadership, the implementation of market oriented
economic policies, such as privatization, trade reform and fiscal and monetary
reform are among the recent steps taken to renew economic growth. External debt
is being restructured and flight capital (domestic capital that has left home
country) has begun to return. Inflation control
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efforts have also been implemented. Free Trade Zones are being discussed in
various areas around the region, the most notable being a free zone among
Mexico, the U.S. and Canada and another zone among four countries in the
southernmost point of Latin America. Currencies are typically weak, but most are
now relatively free floating, and it is not unusual for the currencies to
undergo wide fluctuations in value over short periods of time due to changes in
the market.
Special Considerations Affecting the Pacific Basin. Certain Underlying Funds are
susceptible to political and economic factors affecting issuers in Pacific Basin
countries. Many of the countries of the Pacific Basin are developing both
economically and politically. Pacific Basin countries may have relatively
unstable governments, economies based on only a few commodities or industries,
and securities markets trading infrequently or in low volumes. Some Pacific
Basin countries restrict the extent to which foreigners may invest in their
securities markets. Securities of issuers located in some Pacific Basin
countries tend to have volatile prices and may offer significant potential for
loss as well as gain. Further, certain companies in the Pacific Basin may not
have firmly established product markets, may lack depth of management, or may be
more vulnerable to political or economic developments such as nationalization of
their own industries.
Economies of individual Pacific Basin countries in which certain
Underlying Funds may invest, may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency, interest rate levels, and
balance of payments position. Of particular importance, most of the economies in
this region of the world are heavily dependent upon exports, particularly to
developed countries, and, accordingly, have been and may continue to be
adversely affected by trade barriers, managed adjustments in relative currency
values, and other protectionist measures imposed or negotiated by the U.S. and
other countries with which they trade. These economies also have been and may
continue to be negatively impacted by economic conditions in the U.S. and other
trading partners, which can lower the demand for goods produced in the Pacific
Basin.
With respect to the Peoples Republic of China and other markets in
which an Underlying Fund 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 Underlying Fund's investment in
that country.
Trading volume on Pacific Basin stock exchanges outside of Japan,
although increasing, is substantially less than in the U.S. stock market.
Further, securities of some Pacific Basin companies are less liquid and more
volatile than securities of comparable U.S. companies. Fixed commissions on
Pacific Basin stock exchanges are generally higher than negotiated commissions
on U.S. exchanges, although an Underlying Fund endeavors to achieve the most
favorable net results on its portfolio transactions and may be able to purchase
securities in which the Underlying Fund may invest on other stock exchanges
where commissions are negotiable.
Foreign companies, including Pacific Basin companies, are not generally
subject to uniform accounting, auditing and financial reporting standards,
practices and disclosure requirements comparable to those applicable to U.S.
companies. Consequently, there may be less publicly available information about
such companies than about U.S. companies. Moreover, there is generally less
governmental supervision and regulation of Pacific Basin stock exchanges,
brokers, and listed companies than in the U.S.
Investing in Africa. Many of the African countries in which certain Underlying
Funds may invest 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.
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.
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.
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On the other end of the economic spectrum are countries, such as
Burkina, 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.
Eastern Europe. Certain Underlying Funds may invest up to 5% of their 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 Underlying Fund'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 Underlying Fund could lose a substantial portion of any
investments it has made in the affected countries. Further, no accounting
standards exist in East European countries. Finally, even though certain East
European currencies may be convertible into U.S. dollars, the conversion rates
may be artificial to the actual market values and may be adverse to the
Underlying Fund's shareholders.
Investing in Europe. An Underlying Fund's performance may be susceptible to
political, social and economic factors affecting issuers in European countries.
Such factors may include, but are not limited to: growth of GDP or GNP, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position, as well as interest and monetary exchange rates among
European countries.
Eastern European countries and certain Southern European countries are
considered to be emerging markets. Securities traded in certain emerging
European markets may be subject to additional risks due to political and
economic reforms including efforts to decentralize the economic decision-making
process and move toward a market-oriented economy. Additionally, the
inexperience of financial intermediaries, lack of modern technology and the
possibility of permanent or temporary termination of trading of securities may
affect an Underlying Fund's performance. To the extent that an Underlying Fund
purchases equity securities of smaller companies, such securities may experience
greater volatility and have limited liquidity.
Former communist regimes of a number of Eastern European countries had
expropriated a large amount of property, the claims on which have not been
entirely settled. There can be no assurance that an Underlying Fund's
investments in Eastern Europe would not also be expropriated, nationalized or
otherwise confiscated. Finally, any change in the leadership or policies of
Eastern European 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 opportunity.
Although the governments of certain Eastern European countries
currently are implementing or considering reforms directed at political and
economic liberalization, there can be no assurance that these reforms will
continue or achieve their goals.
Most Eastern European nations in which certain Underlying Funds may
invest, 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 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 (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 Underlying Fund'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.
Depositary Receipts. Certain Underlying Funds may invest indirectly in
securities of emerging market country issuers through sponsored or unsponsored
American Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs"),
International Depositary Receipts ("IDRs") and other types of Depositary
Receipts (which, together with ADRs, GDRs and IDRs are hereinafter referred to
as "Depositary Receipts"). Depositary Receipts may not necessarily be
denominated in the same currency as the underlying securities into which they
may be converted. In addition, the issuers of the stock of unsponsored
Depositary Receipts are not obligated to disclose material information in the
United States and, therefore, there may not be a correlation between such
information and the market value of the Depositary Receipts. ADRs are Depositary
Receipts typically issued by a U.S. bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. GDRs, 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 an Underlying Fund's
investment policies, the Underlying Fund's investments in ADRs, GDRs and other
types of Depositary Receipts will be deemed to be investments in the underlying
securities. Depositary Receipts other than those denominated in U.S. dollars
will be subject to foreign currency exchange rate risk. Certain Depositary
Receipts may not be listed on an exchange and therefore may be illiquid
securities subject to an Underlying Fund's restrictions on investment in
illiquid securities. For depositary receipts, consider adding disclosure
relating to risk that prices may be more volatile than if they were sponsored by
the issuers of the underlying securities.
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Loan Participations and Assignments. Certain Underlying Funds may invest in
fixed and floating rate loans ("Loans") arranged through private negotiations
between an issuer of emerging market debt instruments and one or more financial
institutions ("Lenders"). An Underlying Fund's investments in Loans in Latin
America are expected in most instances to be in the form of participations in
Loans ("Participations") and assignments of portions of Loans ("Assignments")
from third parties. Participations typically will result in the Underlying Fund
having a contractual relationship only with the Lender and not with the
borrower. The Underlying Fund will have the right to receive payments of
principal, interest and any fees to which it is entitled only from the Lender
selling the Participation and only upon receipt by the Lender of the payments
from the borrower. In connection with purchasing Participations, the Underlying
Fund generally will have no right to enforce compliance by the borrower with the
terms of the loan agreement relating to the Loan, nor any rights of set-off
against the borrower, and the Underlying Fund may not directly benefit from any
collateral supporting the Loan in which it has purchased the Participation. As a
result, the Underlying Fund will assume the credit risk of both the borrower and
the Lender that is selling the Participation. In the event of the insolvency of
the Lender selling a Participation, the Underlying Fund may be treated as a
general creditor of the Lender and may not benefit from any set-off between the
Lender and the borrower. The Underlying Fund will acquire Participations only if
the Lender interpositioned between the Underlying Fund and the borrower is
determined by the Adviser to be creditworthy.
When an Underlying Fund purchases Assignments from Lenders, the
Underlying Fund will acquire direct rights against the borrower on the Loan.
Because Assignments are arranged through private negotiations between potential
assignees and potential assignors, however, the rights and obligations acquired
by the Underlying Fund as the purchaser of an Assignment may differ from, and
may be more limited than, those held by the assigning Lender.
An Underlying Fund may have difficulty disposing of Assignments and
Participations. Because no liquid market for these obligations typically exists,
the Underlying Fund anticipates that these obligations could be sold only to a
limited number of institutional investors. The lack of a liquid secondary market
will have an adverse effect on the Underlying Fund's ability to dispose of
particular Assignments or Participations when necessary to meet the Underlying
Fund's liquidity needs or in response to a specific economic event, such as a
deterioration in the creditworthiness of the borrower. The lack of a liquid
secondary market for Assignments and Participations may also make it more
difficult for the Underlying Fund to assign a value to those securities for
purposes of valuing the Underlying Fund's portfolio and calculating its net
asset value.
Real Estate Investment Trusts. Certain Underlying Funds invest in REITs. REITs
are sometimes informally characterized as equity REITs, mortgage REITs and
hybrid REITs. REITs, which invest the majority of their assets directly in real
property and derive their income primarily from rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs, which invest the majority of their assets in real estate
mortgages, derive their income primarily from interest payments on real estate
mortgages in which they are invested. Hybrid REITs combine the characteristics
of both equity REITs and mortgage REITs. Investment in REITs may subject an
Underlying Fund to risks associated with the direct ownership of real estate,
such as decreases in real estate values, overbuilding, increased competition and
other risks related to local or general economic conditions, increases in
operating costs and property taxes, changes in zoning laws, casualty or
condemnation losses, possible environmental liabilities, regulatory limitations
on rent and fluctuations in rental income. Equity REITs generally experience
these risks directly through fee or leasehold interests, whereas mortgage REITs
generally experience these risks indirectly through mortgage interests, unless
the mortgage REIT forecloses on the underlying real estate. Changes in interest
rates may also affect the value of an Underlying Fund'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 skill and have
limited diversification and are, therefore, subject to risks inherent in
operating and financing a limited number of projects. REITs are also subject to
heavy cash flow dependency, defaults by borrowers and the possibility of failing
to qualify for tax-free pass-through of income under the Internal Revenue Code
of 1986, as amended, and to maintain exemption from the registration
requirements of the 1940 Act. By investing in REITs indirectly through an
Underlying Fund, a shareholder will bear not only his or her proportionate share
of the expenses of an Underlying Fund, 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.
Trust Preferred Securities. Certain Underlying Funds 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 Underlying Funds of Trust Preferred
Securities are typically used to
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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
Underlying Funds, 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 an Underlying Fund 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 Underlying Funds,
to sell their holdings.
Investment company securities. Securities of other investment companies may be
acquired by certain Underlying Funds to the extent permitted under the 1940 Act.
Investment companies incur certain expenses such as management, custodian, and
transfer agency fees, and, therefore, any investment by an Underlying Fund in
shares of other investment companies may be subject to such duplicate expenses.
Non-diversified investment company. Certain Underlying Funds are classified as
non-diversified investment companies under the 1940 Act, which means that an
Underlying Fund is not limited by the 1940 Act in the proportion of its assets
that it may invest in the obligations of a single issuer. The investment of a
large percentage of an Underlying Fund's assets in the securities of a small
number of issuers may cause an Underlying Fund's share price to fluctuate more
than that of a diversified investment company.
Precious metals. Investments in precious metals and in precious metals-related
securities and companies involve a relatively high degree of risk. Prices of
gold and other precious metals can be influenced by a variety of global
economic, financial and political factors and may fluctuate markedly over short
periods of time. Among other things, precious metals values can be affected by
changes in inflation, investment speculation, metal sales by governments or
central banks, changes in industrial and commercial demand, and any governmental
restrictions on private ownership of gold or other precious metals.
Correlation of gold and gold securities. The Adviser believes that the value of
the securities of firms that deal in gold will correspond generally, over time,
with the prices of the underlying metal. At any given time, however, changes in
the price of gold may not strongly correlate with changes in the value of
securities related to gold, which are expected to constitute part of certain
Underlying Funds' assets. In fact, there may be periods in which the price of
gold stocks and gold will move in different directions. The reason for this
potential disparity is that political and economic factors, including behavior
of the stock market, may have differing impacts on gold versus gold stocks.
Mining and exploration risks. The business of gold mining by its nature involves
significant risks and hazards, including environmental hazards, industrial
accidents, labor disputes, discharge of toxic chemicals, fire, drought, flooding
and natural acts. The occurrence of any of these hazards can delay production,
increase production costs and result in liability to the operator of the mines.
A mining operation may become subject to liability for pollution or other
hazards against which it has not insured or cannot insure, including those in
respect of past mining activities for which it was not responsible.
Exploration for gold and other precious metals is speculative in
nature, involves many risks and frequently is unsuccessful. There can be no
assurance that any mineralisation discovered will result in an increase in the
proven and probable reserves of a mining operation. If reserves are developed,
it can take a number of years from the initial phases of drilling and
identification of mineralisation until production is possible, during which time
the economic feasibility of production may change. Substantial expenditures are
required to establish ore reserves properties and to construct mining and
processing facilities. As a result of these uncertainties, no assurance can be
given that the exploration programs undertaken by a particular mining operation
will actually result in any new commercial mining.
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Asset-Indexed Securities. Certain Underlying Funds 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. An Underlying Fund 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 Underlying Fund will purchase
asset-indexed securities to the extent permitted by law.
Special situation securities. From time to time, an Underlying Fund may invest
in equity or debt securities issued by companies that are determined by the
Adviser to possess "special situation" characteristics. In general, a special
situation company is a company whose securities are expected to increase in
value solely by reason of a development particularly or uniquely applicable to
the company. Developments that may create special situations include, among
others, a liquidation, reorganization, recapitalization or merger, material
litigation, technological breakthrough and new management or management
policies. The principal risk with investments in special situation companies is
that the anticipated development thought to create the special situation may not
occur and the investments therefore may not appreciate in value or may decline
in value.
Borrowing. As a matter of fundamental policy, the Portfolios will not borrow
money, except as permitted under the 1940 Act, as amended, and as interpreted or
modified by regulatory authority having jurisdiction, from time to time. While
the Trustees do not currently intend for an Underlying Fund 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 the Portfolios will involve special risk
considerations. Although the principal of a Portfolio's borrowing will be fixed,
a Portfolio's assets may change in value during the time that a borrowing is
outstanding, thus increasing exposure to capital risk.
Certain Underlying Funds are authorized to borrow money for purposes of
liquidity and to provide for redemptions and distributions. An Underlying Fund
will borrow only when the Adviser believes that borrowing will benefit the
Underlying Fund after taking into account considerations such as the costs of
the borrowing. No Underlying Fund expects to borrow for investment purposes, to
increase return or leverage the portfolio. Borrowing by Underlying Funds will
involve special risk considerations. Although the principal of an Underlying
Fund's borrowings will be fixed, the Underlying Fund's assets may change in
value during the time a borrowing is outstanding, thus increasing exposure to
capital risk.
Lending of Portfolio Securities. Certain Underlying Funds may seek to increase
their income by lending portfolio securities. Such loans may be made to
registered broker/dealers, and are required to be secured continuously by
collateral in cash or liquid asset maintained on a current basis at an amount at
least equal to the market value and accrued interest of the securities loaned.
An Underlying Fund has the right to call a loan and obtain the securities loaned
on no more than five days' notice. During the existence of a loan, the
Underlying Fund continues to receive the equivalent of any distributions paid by
the issuer on the securities loaned and also receives compensation based on
investment of the collateral. As with other extensions of credit there are risks
of delay in recovery or even loss of rights in the collateral should the
borrower of the securities fail financially. However, the loans may be made only
to firms deemed by the Adviser to be of good standing and will not be made
unless, in the judgment of the Adviser, the consideration to be earned from such
loans would justify the risk.
Corporate and Municipal Bond Ratings. The following is a description of the
ratings given by S&P and Moody's to corporate and municipal bonds. Should the
rating of a portfolio security held by an Underlying Fund be downgraded, the
Adviser will determine whether it is in the best interest of the Underlying Fund
to retain or dispose of such security.
S&P. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong. Debt rated AA has a very
strong capacity to pay interest and repay principal and differs from the highest
rated issues only in small degree. 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 debt in
higher rated categories. Debt rated BBB is regarded as having 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.
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Debt rated BB, B, CCC, CC and C is regarded as having predominantly
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
are outweighed by large uncertainties or major exposures to adverse conditions.
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. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating. 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.
Debt rated CCC has a currently identifiable 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. The rating CC typically is applied to debt subordinated
to senior debt that is assigned an actual or implied CCC rating. The rating C
typically is 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. The rating C1 is reserved for income bonds on which no interest
is being paid. 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 had not expired, unless S&P 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.
Moody's. Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." 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. 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 fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks appear
somewhat larger than in Aaa securities. 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.
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. 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 safeguarded during other good and bad times over
the future. Uncertainty of position characterizes bonds in this class. Bonds
which are rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
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. Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings. Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
28
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits
<TABLE>
<CAPTION>
<S> <C> <C>
(a) (1) Declaration of Trust dated October 26, 1998.
(Incorporated by reference to the Registration
Statement.)
(2) Establishment and Designation of Series of Shares of
Beneficial Interest.
(Incorporated by reference to Pre-Effective Amendment
No. 2 to the Registration Statement.)
(3) Establishment and Designation of Classes of Shares of
Beneficial Interest.
(Incorporated by reference to Pre-Effective Amendment
No. 2 to the Registration Statement.)
(b) By-Laws dated October 26, 1998.
(Incorporated by reference to the Registration
Statement.)
(c) Inapplicable.
(d) (1) Investment Management Agreement between the
Registrant, on behalf of Income Portfolio, and Scudder
Kemper Investments, Inc. dated February 16, 1999.
(Incorporated by reference to Post-Effective Amendment
No. 1 to the Registration Statement.)
(2) Investment Management Agreement between the
Registrant, on behalf of Income with Growth Portfolio,
and Scudder Kemper Investments, Inc. dated February
16, 1999.
(Incorporated by reference to Post-Effective Amendment
No. 1 to the Registration Statement.)
(3) Investment Management Agreement between the
Registrant, on behalf of Balanced Portfolio, and
Scudder Kemper Investments, Inc. dated February 16,
1999.
(Incorporated by reference to Post-Effective Amendment
No. 1 to the Registration Statement.)
(4) Investment Management Agreement between the
Registrant, on behalf of Growth with Income Portfolio,
and Scudder Kemper Investments, Inc. dated February
16, 1999.
(Incorporated by reference to Post-Effective Amendment
No. 1 to the Registration Statement.)
(5) Investment Management Agreement between the
Registrant, on behalf of Growth Portfolio, and Scudder
Kemper Investments, Inc. dated February 16, 1999.
(Incorporated by reference to Post-Effective Amendment
No. 1 to the Registration Statement.)
<PAGE>
(e) (1) Underwriting and Distribution Services Agreement
between the Registrant and Kemper Distributors, Inc.
dated February 16, 1999.
(Incorporated by reference to Pre-Effective Amendment
No. 2 to the Registration Statement.)
(f) Inapplicable.
(g) Custodian Contract between the Registrant and State
Street Bank and Trust Company dated February 17, 1999
is filed herein.
(1) Fee schedule for Exhibit (g) is filed herein.
(h) (1) Agency Agreement between the Registrant and Kemper
Service Company dated February 16, 1999.
(Incorporated by reference to Pre-Effective Amendment
No. 2 to the Registration Statement.)
(2) Fund Accounting Services Agreement between Registrant,
on behalf of Income Portfolio, and Scudder Fund
Accounting Corporation dated February 16, 1999.
(Incorporated by reference to Post-Effective Amendment
No. 1 to the Registration Statement.)
(3) Fund Accounting Services Agreement between Registrant,
on behalf of Income with Growth Portfolio, and Scudder
Fund Accounting Corporation dated February 16, 1999.
(Incorporated by reference to Post-Effective Amendment
No. 1 to the Registration Statement.)
(4) Fund Accounting Services Agreement between Registrant,
on behalf of Balanced Portfolio, and Scudder Fund
Accounting Corporation dated February 16, 1999.
(Incorporated by reference to Post-Effective Amendment
No. 1 to the Registration Statement.)
(5) Fund Accounting Services Agreement between Registrant,
on behalf of Growth with Income Portfolio, and Scudder
Fund Accounting Corporation dated February 16, 1999.
(Incorporated by reference to Post-Effective Amendment
No. 1 to the Registration Statement.)
(6) Fund Accounting Services Agreement between Registrant,
on behalf of Growth Portfolio, and Scudder Fund
Accounting Corporation dated February 16, 1999.
(Incorporated by reference to Post-Effective Amendment
No. 1 to the Registration Statement.)
(i) Opinion and Consent of Counsel as to legality of
shares being registered is filed herein.
2
<PAGE>
(j) Consent of Independent Accountants is filed herein.
(k) Inapplicable
(l) Inapplicable
(m) (1) Class A Shareholder Services and Distribution Plan.
(Incorporated by reference to Pre-Effective Amendment
No. 2 to the Registration Statement.)
(2) Class B Shareholder Services and Distribution Plan.
(Incorporated by reference to Pre-Effective Amendment
No. 2 to the Registration Statement.)
(3) Multi-Distribution System Plan.
(Incorporated by reference to Pre-Effective Amendment
No. 2 to the Registration Statement.)
(n) Inapplicable
(o) Inapplicable
</TABLE>
3
<PAGE>
Item 24. Persons Controlled by or under Common Control with Registrant.
- -------- --------------------------------------------------------------
All of the outstanding shares of the Registrant, representing
all of the interests in the [Farmers Funds], on the date
Registrant's Registration Statement becomes effective will be
owned by Kemper Distributors, Inc. ("The Distributor").
Item 25. Indemnification
- -------- ---------------
A policy of insurance covering Scudder Kemper Investments,
Inc., its subsidiaries including Kemper Distributors, Inc.,
and all of the registered investment companies advised by
Scudder Kemper Investments, Inc. insures the Registrant's
trustees and officers and others against liability arising by
reason of an alleged breach of duty caused by any negligent
act, error or accidental omission in the scope of their
duties.
Article IV, Sections 4.1 - 4.3 of the 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 Trust Property or
the acts, obligations or affairs of the Trust. No Trustee,
officer, employee or agent of the Trust shall be subject to
any personal liability whatsoever to any Person, other than to
the Trust or its Shareholders, in connection with Trust
Property or the affairs of the Trust, save only that arising
from bad faith, willful misfeasance, gross negligence or
reckless disregard of his duties with respect to such Person;
and all such Persons shall look solely to the Trust Property
for satisfaction of claims of any nature arising in connection
with the affairs of the Trust. If any Shareholder, Trustee,
officer, employee, or agent, as such, of the Trust, is made a
party to any suit or proceeding to enforce any such liability
of the Trust, he shall not, on account thereof, be held to any
personal liability. The Trust shall indemnify and hold each
Shareholder harmless from and against all claims and
liabilities, to which such Shareholder may become subject by
reason of his being or having been a Shareholder, and shall
reimburse such Shareholder for all legal and other expenses
reasonably incurred by him in connection with any such claim
or liability. The indemnification and reimbursement required
by the preceding sentence shall be made only out of the assets
of the one or more Series of which the Shareholder who is
entitled to indemnification or reimbursement was a Shareholder
at the time the act or event occurred which gave rise to the
claim against or liability of said Shareholder. The rights
accruing to a Shareholder under this Section 4.1 shall not
impair any other right to which such Shareholder may be
lawfully entitled, nor shall anything herein contained
restrict the right of the Trust to indemnify or reimburse a
Shareholder in any appropriate situation even though not
specifically provided herein.
Section 4.2. Non-Liability of Trustees, Etc. No Trustee,
officer, employee or agent of the Trust shall be liable to the
Trust, its Shareholders, or to any Shareholder, Trustee,
officer, employee, or agent thereof for any action or failure
to act (including without limitation the failure to compel in
any way any former or acting Trustee to redress any breach of
trust) except for his own bad faith, willful misfeasance,
gross negligence or reckless disregard of the duties involved
in the conduct of his office.
Section 4.3. Mandatory Indemnification. (a) Subject to the
exceptions and limitations contained in paragraph (b) below:
(i) every person who is, or has been, a Trustee or
officer of the Trust shall be indemnified by the Trust to the
fullest extent permitted by law against all liability and
against all expenses reasonably incurred or paid by him in
connection with any claim, action, suit or proceeding in which
he becomes involved as a party or otherwise by virtue of his
being or having been a Trustee or officer and against amounts
paid or incurred by him in the settlement thereof;
4
<PAGE>
(ii) the words "claim," "action," "suit," or
"proceeding" shall apply to all claims, actions, suits or
proceedings (civil, criminal, administrative or other,
including appeals), actual or threatened; and the words
"liability" and "expenses" shall include, without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement,
fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a
Trustee or officer:
(i) against any liability to the Trust, a Series
thereof, or the Shareholders by reason of a final adjudication
by a court or other body before which a proceeding was brought
that he engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of his office;
(ii) with respect to any matter as to which he shall
have been finally adjudicated not to have acted in good faith
in the reasonable belief that his action was in the best
interest of the Trust;
(iii) in the event of a settlement or other disposition
not involving a final adjudication as provided in paragraph
(b)(i) or (b)(ii) resulting in a payment by a Trustee or
officer, unless there has been a determination that such
Trustee or officer did not engage in willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office:
(A) by the court or other body approving the
settlement or other disposition; or
(B) based upon a review of readily available facts
(as opposed to a full trial-type inquiry) by (x) vote
of a majority of the Disinterested Trustees acting on
the matter (provided that a majority of the
Disinterested Trustees then in office act on the
matter) or (y) written opinion of independent legal
counsel.
(c) The rights of indemnification herein provided may
be insured against by policies maintained by the Trust, shall
be severable, shall not affect any other rights to which any
Trustee or officer may now or hereafter be entitled, shall
continue as to a person who has ceased to be such Trustee or
officer and shall insure to the benefit of the heirs,
executors, administrators and assigns of such a person.
Nothing contained herein shall affect any rights to
indemnification to which personnel of the Trust other than
Trustees and officers may be entitled by contract or otherwise
under law.
(d) Expenses of preparation and presentation of a
defense to any claim, action, suit or proceeding of the
character described in paragraph (a) of this Section 4.3 may
be advanced by the Trust prior to final disposition thereof
upon receipt of an undertaking by or on behalf of the
recipient to repay such amount if it is ultimately determined
that he is not entitled to indemnification under this Section
4.3, provided that either:
(i) such undertaking is secured by a surety bond or
some other appropriate security provided by the recipient, or
the Trust shall be insured against losses arising out of any
such advances; or
(ii) a majority of the Disinterested Trustees acting on
the matter (provided that a majority of the Disinterested
Trustees act on the matter) or an independent legal counsel in
a written opinion shall determine, based upon a review of
readily available facts (as opposed to a full trial-type
inquiry), that there is reason to believe that the recipient
ultimately will be found entitled to indemnification.
As used in this Section 4.3, a "Disinterested Trustee"
is one who is not (i) an "Interested Person" of the Trust
(including anyone who has been exempted from being an
"Interested Person" by any rule, regulation or order of the
Commission), or (ii) involved in the claim, action, suit or
proceeding.
5
<PAGE>
Item 26. Business or Other Connections of Investment Adviser
- -------- ---------------------------------------------------
Scudder Kemper Investments, Inc. has stockholders and
employees who are denominated officers but do not as such have
corporation-wide responsibilities. Such persons are not
considered officers for the purpose of this Item 26.
<TABLE>
<CAPTION>
Business and Other Connections of Board
Name of Directors of Registrant's Adviser
---- ------------------------------------
<S> <C>
Stephen R. Beckwith Treasurer and Chief Financial Officer, Scudder Kemper Investments, Inc.**
Vice President and Treasurer, Scudder Fund Accounting Corporation*
Director, Scudder Stevens & Clark Corporation**
Director and Chairman, Scudder Defined Contribution Services, Inc.**
Director and President, Scudder Capital Asset Corporation**
Director and President, Scudder Capital Stock Corporation**
Director and President, Scudder Capital Planning Corporation**
Director and President, SS&C Investment Corporation**
Director and President, SIS Investment Corporation**
Director and President, SRV Investment Corporation**
Lynn S. Birdsong Director and Vice President, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark (Luxembourg) S.A.#
Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
Director, ZKI Holding Corporation xx
Rolf Huppi Director, Chairman of the Board, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
Director, Chairman of the Board, Zurich Holding Company of America o
Director, ZKI Holding Corporation xx
Kathryn L. Quirk Chief Legal Officer, Chief Compliance Officer and Secretary, Scudder Kemper
Investments, Inc.**
Director, Senior Vice President & Assistant Clerk, Scudder Investor Services, Inc.*
Director, Vice President & Secretary, Scudder Fund Accounting Corporation*
Director, Vice President & Secretary, Scudder Realty Holdings Corporation*
Director & Assistant Clerk, Scudder Service Corporation*
Director, SFA, Inc.*
Vice President, Director & Assistant Secretary, Scudder Precious Metals, Inc.***
Director, Scudder, Stevens & Clark Japan, Inc.***
Director, Vice President and Secretary, Scudder, Stevens & Clark of Canada, Ltd.***
Director, Vice President and Secretary, Scudder Canada Investor Services Limited***
Director, Vice President and Secretary, Scudder Realty Advisers, Inc. x
Director and Secretary, Scudder, Stevens & Clark Corporation**
Director and Secretary, Scudder, Stevens & Clark Overseas Corporation oo
Director and Secretary, SFA, Inc.*
Director, Vice President and Secretary, Scudder Defined Contribution Services, Inc.**
Director, Vice President and Secretary, Scudder Capital Asset Corporation**
Director, Vice President and Secretary, Scudder Capital Stock Corporation**
Director, Vice President and Secretary, Scudder Capital Planning Corporation**
Director, Vice President and Secretary, SS&C Investment Corporation**
Director, Vice President and Secretary, SIS Investment Corporation**
Director, Vice President and Secretary, SRV Investment Corporation**
6
<PAGE>
Director, Vice President and Secretary, Scudder Brokerage Services, Inc.*
Director, Korea Bond Fund Management Co., Ltd.+
Cornelia M. Small Director and Vice President, Scudder Kemper Investments, Inc.**
Edmond D. Villani Director, President and Chief Executive Officer, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc.###
President and Director, Scudder, Stevens & Clark Overseas Corporation oo
President and Director, Scudder, Stevens & Clark Corporation**
Director, Scudder Realty Advisors, Inc.x
Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy of
Luxembourg
</TABLE>
* Two International Place, Boston, MA
x 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C.
Luxembourg B 34.564
*** Toronto, Ontario, Canada
xxx Grand Cayman, Cayman Islands, British West Indies
oo 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
xx 222 S. Riverside, Chicago, IL
o Zurich Towers, 1400 American Ln., Schaumburg, IL
+ P.O. Box 309, Upland House, S. Church St., Grand Cayman,
British West Indies
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
Item 27. Principal Underwriters.
- -------- -----------------------
(a)
Kemper Distributors, Inc. acts as principal underwriter of the
Registrant's shares and also acts as principal underwriter for other
funds managed by Scudder Kemper Investments, Inc.
(b)
Information on the officers and directors of Kemper Distributors,
Inc., principal underwriter for the Registrant is set forth below. The
principal business address is 222 South Riverside Plaza, Chicago,
Illinois 60606.
<TABLE>
(1) (2) (3)
Position and Offices with Positions and
Name Kemper Distributors, Inc. Offices with Registrant
---- ------------------------- -----------------------
<S> <C> <C>
James L. Greenawalt President None
Thomas W. Littauer Director, Chief Executive Officer None
Kathryn L. Quirk Director, Secretary, Chief Legal Chairperson of the Board
Officer & Vice President and Trustee
James J. McGovern Chief Financial Officer & Chief None
Compliance Officer
7
<PAGE>
Position and Offices with Positions and
Name Kemper Distributors, Inc. Offices with Registrant
---- ------------------------- -----------------------
Linda J. Wondrack Vice President & Chief Compliance None
Officer
Paula Gaccione Vice President None
Michael E. Harrington Vice President None
Robert A. Rudell Vice President None
William M. Thomas Vice President None
Elizabeth C. Werth Vice President None
Todd N. Gierke Assistant Treasurer None
Phillip J. Collora Assistant Secretary None
Paul J. Elmlinger Assistant Secretary None
Diane E. Ratekin Assistant Secretary None
Daniel Pierce Director, Chairman None
Mark S. Casady Director, Vice Chairman None
Stephen R. Beckwith Director None
</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 Scudder Kemper
Investments, Inc., Two International Place, Boston, MA
02110-4103. Records relating to the duties of the
Registrant's custodian are maintained by State Street Bank &
Trust Company, 225 Franklin Street, Boston, Massachusetts
02110. Records relating to the duties of the Registrant's
transfer agent are maintained by Kemper Service Company, 811
Main Street, Kansas City, Missouri 64105. Records relating to
the duties of the Registrant's pricing agent are maintained
by Scudder Fund Accounting Corporation, Two International
Place, Boston, Massachusetts 02110-4103. Records relating to
the duties of the Registrant's underwriter are maintained by
Kemper Distributors, Inc., 811 Main Street, Kansas City,
Missouri 64105.
Item 29. Management Services.
- -------- --------------------
Inapplicable.
Item 30. Undertakings
- -------- ------------
Inapplicable.
8
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this amendment to its Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Boston and the
Commonwealth of Massachusetts, on the 20th day of August, 1999.
FARMERS INVESTMENT TRUST
By: /s/John Millette
--------------------------------
John Millette, Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/Paul Secord
- --------------------------------------
Paul Secord* President (Principal Executive Officer) August 20, 1999
/s/Dr. Rosita P. Chang
- --------------------------------------
Dr. Rosita P. Chang* Trustee August 20, 1999
/s/Edgar R. Fiedler*
- --------------------------------------
Edgar R. Fiedler* Trustee August 20, 1999
/s/Dr. J. D. Hammond*
- --------------------------------------
Dr. J. D. Hammond* Trustee August 20, 1999
/s/Richard M. Hunt*
- --------------------------------------
Richard M. Hunt* Trustee August 20, 1999
/s/John R. Hebble
- --------------------------------------
John R. Hebble Treasurer (Principal Financial Officer) August 20, 1999
/s/Kathryn L.Quirk
- --------------------------------------
Kathryn L. Quirk* Chairperson of the Board and Trustee August 20, 1999
</TABLE>
<PAGE>
*By: /s/Caroline Pearson
--------------------------------------
Caroline Pearson**
** Attorney-in-fact pursuant to the powers of attorney
contained in the signature pages of Pre-Effective
Amendment No. 2 to the Registration Statement filed
February 12, 1999.
2
<PAGE>
File No. 811-09085
File No. 333-66385
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 2
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 4
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
FARMERS INVESTMENT TRUST
<PAGE>
FARMERS INVESTMENT TRUST
EXHIBIT INDEX
Exhibit (g)
Exhibit (g)(1)
Exhibit (i)
Exhibit (j)
2
Exhibit (g)
CUSTODIAN CONTRACT
Between
FARMERS INVESTMENT TRUST
and
STATE STREET BANK AND TRUST COMPANY
Series/Trust
21B
<PAGE>
TABLE OF CONTENTS
Page
----
1. Employment of Custodian and Property to be Held By
It.................................................................1
2. Duties of the Custodian with Respect to Property
of the Fund Held by the Custodian..................................2
2.1 Holding Securities........................................2
2.2 Delivery of Securities....................................2
2.3 Registration of Securities................................4
2.4 Bank Accounts.............................................5
2.5 Availability of Federal Funds.............................5
2.6 Collection of Income......................................5
2.7 Payment of Fund Monies....................................5
2.8 Liability for Payment in Advance of Receipt of
Securities Purchased......................................7
2.9 Appointment of Agents.....................................7
2.10 Deposit of Fund Assets in Securities System...............7
2.10A Deposit of Fund Assets with Kemper Service Corporation....8
2.11 Fund Assets Held in the Custodian's Direct
Paper System..............................................9
2.12 Segregated Account.......................................10
2.13 Ownership Certificates for Tax Purposes..................11
2.14 Proxies..................................................11
2.15 Communications Relating to Portfolio
Securities...............................................11
3. Payments for Repurchases or Redemptions and Sales
of Shares of the Fund.............................................11
4. Proper Instructions...............................................12
5. Actions Permitted Without Express Authority.......................12
6. Evidence of Authority.............................................13
7. Duties of Custodian With Respect to the Books of Account
and Calculation of Net Asset Value and Net Income.................13
8. Records...........................................................13
<PAGE>
9. Opinion of Fund's Independent Accountants.........................14
10. Reports to Fund by Independent Public Accountants ................14
11. Compensation of Custodian.........................................14
12. Responsibility of Custodian.......................................14
13. Effective Period, Termination and Amendment.......................15
14. Successor Custodian...............................................16
15. Interpretive and Additional Provisions............................16
16. Additional Funds..................................................17
17. Massachusetts Law to Apply........................................17
18. Prior Contracts...................................................17
19. Shareholder Communications Election...............................17
20. Limitation of Liability ..........................................18
<PAGE>
CUSTODIAN CONTRACT
------------------
This Contract between Farmers Investment Trust, a business trust
organized and existing under the laws of The Commonwealth of Massachusetts,
having its principal place of business at 222 Riverside Plaza, Chicago, Illinois
60606-5808 hereinafter called the "Fund", and State Street Bank and Trust
Company, a Massachusetts trust company, having its principal place of business
at 225 Franklin Street, Boston, Massachusetts, 02110, hereinafter called the
"Custodian",
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in separate series,
with each such series representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Fund intends to initially offer shares in five series,
Income Portfolio, Income with Growth Portfolio, Balanced Portfolio, Growth with
Income Portfolio and Growth Portfolio (such series together with all other
series subsequently established by the Fund and made subject to this Contract in
accordance with paragraph 16, being herein referred to as the "Portfolio(s)");
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
-----------------------------------------------------
The Fund hereby employs the Custodian as the custodian of the assets of
the Portfolios of the Fund pursuant to the provisions of the Declaration of
Trust. The Fund on behalf of the Portfolio(s) agrees to deliver to the Custodian
all securities and cash of the Portfolios, and all payments of income, payments
of principal or capital distributions received by it with respect to all
securities owned by the Portfolio(s) from time to time, and the cash
consideration received by it for such new or treasury shares of beneficial
interest of the Fund representing interests in the Portfolios, ("Shares") as may
be issued or sold from time to time. The Custodian shall not be responsible for
any property of a Portfolio held or received by the Portfolio and not delivered
to the Custodian. With respect to uncertificated shares of the Scudder group of
mutual funds as defined in Rule 11a-3 of the Investment Company Act of 1940, as
amended, (the "Scudder Mutual Funds") the holding of confirmation statements
that identify the shares as being recorded in the Custodian's name on behalf of
the Portfolios will be deemed custody for purposes hereof.
Upon receipt of "Proper Instructions" (within the meaning of Article
4), the Custodian shall on behalf of the applicable Portfolio(s) from time to
time employ one or more sub-custodians, but only in accordance with an
applicable vote by the Board of Trustees of the Fund on behalf of the applicable
Portfolio(s), and provided that the Custodian shall have no more or less
responsibility or liability to the Fund on account of any actions or omissions
of any sub-custodian so employed than any such sub-custodian has to the
Custodian.
<PAGE>
2. Duties of the Custodian with Respect to Property of the Fund Held By
--------------------------------------------------------------------
the Custodian
-------------
2.1 Holding Securities. The Custodian shall hold and physically segregate
for the account of each Portfolio all non-cash property, including all
securities owned by such Portfolio, other than (a) securities which are
maintained pursuant to Section 2.10 in a clearing agency which acts as
a securities depository or in a book-entry system authorized by the
U.S. Department of the Treasury, collectively referred to herein as
"Securities System"; (b) commercial paper of an issuer for which State
Street Bank and Trust Company acts as issuing and paying agent ("Direct
Paper") which is deposited and/or maintained in the Direct Paper System
of the Custodian pursuant to Section 2.11; and (c) uncertificated
shares of the Scudder family of mutual funds owned by the Fund which
are maintained pursuant to Section 2.10A in an account with Kemper
Service Corporation ("KSC") as transfer agent for the Scudder funds.
2.2 Delivery of Securities. The Custodian shall release and deliver
securities owned by a Portfolio held by the Custodian, in a Securities
System account of the Custodian, in the Custodian's Direct Paper book
entry system account ("Direct Paper System Account") or in an account
at KSC only upon receipt of Proper Instructions from the Fund on behalf
of the applicable Portfolio, which may be continuing instructions when
deemed appropriate by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Portfolio
and receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the
Portfolio;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other
similar offers for securities of the Portfolio;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the
name of the Portfolio or into the name of any nominee or
nominees of the Custodian or into the name or nominee name of
any agent appointed pursuant to Section 2.9 or into the name
or nominee name of any sub-custodian appointed pursuant to
Article 1; or for exchange for a different number of bonds,
certificates or other evidence representing the same
2
<PAGE>
aggregate face amount or number of units; provided that, in
any such case, the new securities are to be delivered to the
Custodian;
7) Upon the sale of such securities for the account of the
Portfolio, to the broker or its clearing agent, against a
receipt, for examination in accordance with "street delivery"
custom; provided that in any such case, the Custodian shall
have no responsibility or liability for any loss arising from
the delivery of such securities prior to receiving payment for
such securities except as may arise from the Custodian's own
negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and cash,
if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that,
in any such case, the new securities and cash, if any, are to
be delivered to the Custodian;
10) For delivery in connection with any loans of securities made
by the Portfolio, but only against receipt of adequate
collateral as agreed upon from time to time by the Custodian
and the Fund on behalf of the Portfolio, which may be in the
form of cash or obligations issued by the United States
government, its agencies or instrumentalities, except that in
connection with any loans for which collateral is to be
credited to the Custodian's account in the book-entry system
authorized by the U.S. Department of the Treasury, the
Custodian will not be held liable or responsible for the
delivery of securities owned by the Portfolio prior to the
receipt of such collateral;
11) For delivery as security in connection with any borrowings by
the Fund on behalf of the Portfolio requiring a pledge of
assets by the Fund on behalf of the Portfolio, but only
against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Fund on behalf of the Portfolio, the
Custodian and a broker-dealer registered under the Securities
Exchange Act of 1934 (the "Exchange Act") and a member of The
National Association of Securities Dealers, Inc. ("NASD"),
relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities
exchange, or of any similar organization or organizations,
regarding escrow or other arrangements in connection with
transactions by the Portfolio of the Fund;
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<PAGE>
13) For delivery in accordance with the provisions of any
agreement among the Fund on behalf of the Portfolio, the
Custodian, and a Futures Commission Merchant registered under
the Commodity Exchange Act, relating to compliance with the
rules of the Commodity Futures Trading Commission and/or any
Contract Market, or any similar organization or organizations,
regarding account deposits in connection with transactions by
the Portfolio of the Fund;
14) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the Fund, for delivery to such Transfer
Agent or to the holders of shares in connection with
distributions in kind, as may be described from time to time
in the currently effective prospectus and statement of
additional information of the Fund, related to the Portfolio
("Prospectus"), in satisfaction of requests by holders of
Shares for repurchase or redemption; and
15) For any other proper corporate purpose, but only upon receipt
of, in addition to Proper Instructions from the Fund on behalf
of the applicable Portfolio, a certified copy of a resolution
of the Board of Trustees or of the Executive Committee signed
by an officer of the Fund and certified by the Secretary or an
Assistant Secretary, specifying the securities of the
Portfolio to be delivered, setting forth the purpose for which
such delivery is to be made, declaring such purpose to be a
proper corporate purpose, and naming the person or persons to
whom delivery of such securities shall be made.
16) In the case of a sale processed through KSC for shares of the
Scudder Mutual Funds ("Scudder Fund Shares"), in accordance
with Section 2.10A hereof;
2.3 Registration of Securities. Securities held by the Custodian (other
than bearer securities) shall be registered in the name of the
Portfolio or in the name of any nominee of the Fund on behalf of the
Portfolio or of any nominee of the Custodian which nominee shall be
assigned exclusively to the Portfolio, unless the Fund has authorized
in writing the appointment of a nominee to be used in common with other
registered investment companies having the same investment adviser as
the Portfolio, or in the name or nominee name of any agent appointed
pursuant to Section 2.9 or in the name or nominee name of any
sub-custodian appointed pursuant to Article 1. All securities accepted
by the Custodian on behalf of the Portfolio under the terms of this
Contract shall be in "street name" or other good delivery form. If,
however, the Fund directs the Custodian to maintain securities in
"street name", the Custodian shall utilize its best efforts only to
timely collect income due the Fund on such securities and to notify the
Fund on a best efforts basis only of relevant corporate actions
including, without limitation, pendency of calls, maturities, tender or
exchange offers.
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<PAGE>
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the name of each Portfolio of the Fund, subject
only to draft or order by the Custodian acting pursuant to the terms of
this Contract, and shall hold in such account or accounts, subject to
the provisions hereof, all cash received by it from or for the account
of the Portfolio, other than cash maintained by the Portfolio in a bank
account established and used in accordance with Rule 17f-3 under the
Investment Company Act of 1940. Funds held by the Custodian for a
Portfolio may be deposited by it to its credit as Custodian in the
Banking Department of the Custodian or in such other banks or trust
companies as it may in its discretion deem necessary or desirable;
provided, however, that every such bank or trust company shall be
qualified to act as a custodian under the Investment Company Act of
1940 and that each such bank or trust company and the funds to be
deposited with each such bank or trust company shall on behalf of each
applicable Portfolio be approved by vote of a majority of the Board of
Trustees of the Fund. Such funds shall be deposited by the Custodian in
its capacity as Custodian and shall be withdrawable by the Custodian
only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund
on behalf of each applicable Portfolio and the Custodian, the Custodian
shall, upon the receipt of Proper Instructions from the Fund on behalf
of a Portfolio, make federal funds available to such Portfolio as of
specified times agreed upon from time to time by the Fund and the
Custodian in the amount of checks received in payment for Shares of
such Portfolio which are deposited into the Portfolio's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments
with respect to registered securities held hereunder to which each
Portfolio shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all income and
other payments with respect to bearer securities if, on the date of
payment by the issuer, such securities are held by the Custodian or its
agent thereof and shall credit such income, as collected, to such
Portfolio's custodian account. Without limiting the generality of the
foregoing, the Custodian shall detach and present for payment all
coupons and other income items requiring presentation as and when they
become due and shall collect interest when due on securities held
hereunder. Income due each Portfolio on securities loaned pursuant to
the provisions of Section 2.2 (10) shall be the responsibility of the
Fund. The Custodian will have no duty or responsibility in connection
therewith, other than to provide the Fund with such information or data
as may be necessary to assist the Fund in arranging for the timely
delivery to the Custodian of the income to which the Portfolio is
properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions from the
Fund on behalf of the applicable Portfolio, which may be continuing
instructions when deemed appropriate by the parties, the Custodian
shall pay out monies of a Portfolio in the following cases only:
5
<PAGE>
1) Upon the purchase of domestic securities, options, futures
contracts or options on futures contracts for the account of
the Portfolio but only (a) against the delivery of such
securities or evidence of title to such options, futures
contracts or options on futures contracts to the Custodian (or
any bank, banking firm or trust company doing business in the
United States or abroad which is qualified under the
Investment Company Act of 1940, as amended, to act as a
custodian and has been designated by the Custodian as its
agent for this purpose) registered in the name of the
Portfolio or in the name of a nominee of the Custodian
referred to in Section 2.3 hereof or in proper form for
transfer; (b) in the case of a purchase effected through a
Securities System, in accordance with the conditions set forth
in Section 2.10 hereof; (c) in the case of a purchase of
Scudder Fund Shares, in accordance with the conditions set
forth in Section 2.10A hereof; (d) in the case of a purchase
involving the Direct Paper System, in accordance with the
conditions set forth in Section 2.11; (e) in the case of
repurchase agreements entered into between the Fund on behalf
of the Portfolio and the Custodian, or another bank, or a
broker-dealer which is a member of NASD, (i) against delivery
of the securities either in certificate form or through an
entry crediting the Custodian's account at the Federal Reserve
Bank with such securities or (ii) against delivery of the
receipt evidencing purchase by the Portfolio of securities
owned by the Custodian along with written evidence of the
agreement by the Custodian to repurchase such securities from
the Portfolio or (f) for transfer to a time deposit account of
the Fund in any bank, whether domestic or foreign; such
transfer may be effected prior to receipt of a confirmation
from a broker and/or the applicable bank pursuant to Proper
Instructions from the Fund as defined in Article 5;
2) In connection with conversion, exchange or surrender of
securities owned by the Portfolio as set forth in Section 2.2
hereof;
3) For the redemption or repurchase of Shares issued by the
Portfolio as set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the
Portfolio, including but not limited to the following payments
for the account of the Portfolio: interest, taxes, management,
accounting, transfer agent and legal fees, and operating
expenses of the Fund whether or not such expenses are to be in
whole or part capitalized or treated as deferred expenses;
5) For the payment of any dividends on Shares of the Portfolio
declared pursuant to the governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
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<PAGE>
7) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions from the Fund on behalf of the
Portfolio, a certified copy of a resolution of the Board of
Trustees or of the Executive Committee of the Fund signed by
an officer of the Fund and certified by its Secretary or an
Assistant Secretary, specifying the amount of such payment,
setting forth the purpose for which such payment is to be
made, declaring such purpose to be a proper purpose, and
naming the person or persons to whom such payment is to be
made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and
every case where payment for purchase of securities for the account of
a Portfolio is made by the Custodian in advance of receipt of the
securities purchased in the absence of specific written instructions
from the Fund on behalf of such Portfolio to so pay in advance, the
Custodian shall be absolutely liable to the Fund for such securities to
the same extent as if the securities had been received by the
Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of
1940, as amended, to act as a custodian, as its agent to carry out such
of the provisions of this Article 2 as the Custodian may from time to
time direct; provided, however, that the appointment of any agent shall
not relieve the Custodian of its responsibilities or liabilities
hereunder. SSC shall not be deemed an agent or subcustodian of the
Custodian for purposes of this Section 2.9 or any other provision of
this Agreement.
2.10 Deposit of Fund Assets in Securities Systems. The Custodian may deposit
and/or maintain securities owned by a Portfolio in a clearing agency
registered with the Securities and Exchange Commission under Section
17A of the Securities Exchange Act of 1934, which acts as a securities
depository, or in the book-entry system authorized by the U.S.
Department of the Treasury and certain federal agencies, collectively
referred to herein as "Securities System" in accordance with applicable
Federal Reserve Board and Securities and Exchange Commission rules and
regulations, if any, and subject to the following provisions:
1) The Custodian may keep securities of the Portfolio in a
Securities System provided that such securities are
represented in an account ("Account") of the Custodian in the
Securities System which shall not include any assets of the
Custodian other than assets held as a fiduciary, custodian or
otherwise for customers;
2) The records of the Custodian with respect to securities of the
Portfolio which are maintained in a Securities System shall
identify by book-entry those securities belonging to the
Portfolio;
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<PAGE>
3) The Custodian shall pay for securities purchased for the
account of the Portfolio upon (i) receipt of advice from the
Securities System that such securities have been transferred
to the Account, and (ii) the making of an entry on the records
of the Custodian to reflect such payment and transfer for the
account of the Portfolio. The Custodian shall transfer
securities sold for the account of the Portfolio upon (i)
receipt of advice from the Securities System that payment for
such securities has been transferred to the Account, and (ii)
the making of an entry on the records of the Custodian to
reflect such transfer and payment for the account of the
Portfolio. Copies of all advices from the Securities System of
transfers of securities for the account of the Portfolio shall
identify the Portfolio, be maintained for the Portfolio by the
Custodian and be provided to the Fund at its request. Upon
request, the Custodian shall furnish the Fund on behalf of the
Portfolio confirmation of each transfer to or from the account
of the Portfolio in the form of a written advice or notice and
shall furnish to the Fund on behalf of the Portfolio copies of
daily transaction sheets reflecting each day's transactions in
the Securities System for the account of the Portfolio;
4) The Custodian shall provide the Fund for the Portfolio with
any report obtained by the Custodian on the Securities
System's accounting system, internal accounting control and
procedures for safeguarding securities deposited in the
Securities System;
5) The Custodian shall have received from the Fund on behalf of
the Portfolio the initial or annual certificate, as the case
may be, required by Article 14 hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for the benefit of the
Portfolio for any loss or damage to the Portfolio resulting
from use of the Securities System by reason of any negligence,
misfeasance or misconduct of the Custodian or any of its
agents or of any of its or their employees or from failure of
the Custodian or any such agent to enforce effectively such
rights as it may have against the Securities System; at the
election of the Fund, it shall be entitled to be subrogated to
the rights of the Custodian with respect to any claim against
the Securities System or any other person which the Custodian
may have as a consequence of any such loss or damage if and to
the extent that the Portfolio has not been made whole for any
such loss or damage.
2.10A Deposit of Fund Assets with Kemper Service Corporation. Scudder Fund
Shares shall be deposited and/or maintained in an account maintained
with KSC as transfer agent for the funds. KSC shall be deemed to be
acting as if it is a "depositary" for purposes of Rule 17f-4 of the
Investment Company Act of 1940. The Fund hereby directs the Custodian
to deposit and/or maintain such securities with KSC, subject to the
following provisions:
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<PAGE>
1) The Custodian shall keep Scudder Fund Shares owned by a
Portfolio with KSC provided that such securities are
maintained in an account in the books and records of KSC in
the name of the Custodian as custodian for the Portfolio.
2) The records of the Custodian with respect to Scudder Fund
Shares which are maintained with KSC shall identify by
book-entry those Scudder Fund Shares belonging to the
Portfolio;
3) The Custodian shall pay for Scudder Fund Shares purchased for
the account of the Portfolio upon (i) receipt of advice from
the Portfolio's investment adviser that such securities have
been purchased and will be transferred to the account of the
Custodian, on behalf of the Portfolio, on the books and
records of KSC, and (ii) the making of an entry on the records
of the Custodian to reflect such payment and transfer for the
account of the Portfolio. The Custodian shall receive
confirmation from KSC of the purchase of such securities and
the transfer of such securities to the Custodian's account
with KSC only after such payment is made. The Custodian shall
transfer Scudder Fund Shares redeemed for the account of a
Portfolio (i) upon receipt of an advice from the Portfolio's
investment adviser that such securities have been redeemed and
that payment for such securities will be transferred to the
Custodian and (ii) the making of an entry on the records of
the Custodian to reflect such transfer and payment for the
account of the Portfolio. The Custodian will receive
confirmation from KSC of the redemption of such securities and
payment therefor only after such securities are redeemed.
Copies of all advices from the Portfolio's investment adviser
of purchases and sales of Scudder Fund Shares for the account
of the Portfolio shall identify the Portfolio, be maintained
for the Portfolio by the Custodian, and be provided to the
investment adviser at its request;
4) The Custodian shall be not be liable to the Fund or any
Portfolio for any loss or damage to the Fund or any Portfolio
resulting from maintenance of Scudder Fund Shares with KSC
except for losses resulting directly from the negligence,
misfeasance or misconduct of the Custodian or any of its
agents or of any of its or their employees.
2.11 Fund Assets Held in the Custodian's Direct Paper System. The Custodian
may deposit and/or maintain securities owned by a Portfolio in the
Direct Paper System of the Custodian subject to the following
provisions:
1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper Instructions
from the Fund on behalf of the Portfolio;
2) The Custodian may keep securities of the Portfolio in the
Direct Paper System only if such securities are represented in
an account ("Account") of the Custodian in the
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Direct Paper System which shall not include any assets of the
Custodian other than assets held as a fiduciary, custodian or
otherwise for customers;
3) The records of the Custodian with respect to securities of the
Portfolio which are maintained in the Direct Paper System
shall identify by book-entry those securities belonging to the
Portfolio;
4) The Custodian shall pay for securities purchased for the
account of the Portfolio upon the making of an entry on the
records of the Custodian to reflect such payment and transfer
of securities to the account of the Portfolio. The Custodian
shall transfer securities sold for the account of the
Portfolio upon the making of an entry on the records of the
Custodian to reflect such transfer and receipt of payment for
the account of the Portfolio;
5) The Custodian shall furnish the Fund on behalf of the
Portfolio confirmation of each transfer to or from the account
of the Portfolio, in the form of a written advice or notice,
of Direct Paper on the next business day following such
transfer and shall furnish to the Fund on behalf of the
Portfolio copies of daily transaction sheets reflecting each
day's transaction in the Securities System for the account of
the Portfolio;
6) The Custodian shall provide the Fund on behalf of the
Portfolio with any report on its system of internal accounting
control as the Fund may reasonably request from time to time.
2.12 Segregated Account. The Custodian shall upon receipt of Proper
Instructions from the Fund on behalf of each applicable Portfolio
establish and maintain a segregated account or accounts for and on
behalf of each such Portfolio, into which account or accounts may be
transferred cash and/or securities, including securities maintained in
an account by the Custodian pursuant to Section 2.10 hereof, (i) in
accordance with the provisions of any agreement among the Fund on
behalf of the Portfolio, the Custodian and a broker-dealer registered
under the Exchange Act and a member of the NASD (or any futures
commission merchant registered under the Commodity Exchange Act),
relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange (or the
Commodity Futures Trading Commission or any registered contract
market), or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the
Portfolio, (ii) for purposes of segregating cash or government
securities in connection with options purchased, sold or written by the
Portfolio or commodity futures contracts or options thereon purchased
or sold by the Portfolio, (iii) for the purposes of compliance by the
Portfolio with the procedures required by Investment Company Act
Release No. 10666, or any subsequent release or releases of the
Securities and Exchange Commission relating to the maintenance of
segregated accounts by registered investment companies and (iv) for
other proper
10
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corporate purposes, but only, in the case of clause (iv), upon receipt
of, in addition to Proper Instructions from the Fund on behalf of the
applicable Portfolio, a certified copy of a resolution of the Board of
Trustees or of the Executive Committee signed by an officer of the Fund
and certified by the Secretary or an Assistant Secretary, setting forth
the purpose or purposes of such segregated account and declaring such
purposes to be proper corporate purposes.
2.13 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other
payments with respect to securities of each Portfolio held by it and in
connection with transfers of securities.
2.14 Proxies. The Custodian shall, with respect to the securities held
hereunder, cause to be promptly executed by the registered holder of
such securities, if the securities are registered otherwise than in the
name of the Portfolio or a nominee of the Portfolio, all proxies,
without indication of the manner in which such proxies are to be voted,
and shall promptly deliver to the Portfolio such proxies, all proxy
soliciting materials and all notices relating to such securities.
2.15 Communications Relating to Portfolio Securities. Subject to the
provisions of Section 2.3, the Custodian shall transmit promptly to the
Fund for each Portfolio all written information (including, without
limitation, pendency of calls and maturities of securities and
expirations of rights in connection therewith and notices of exercise
of call and put options written by the Fund on behalf of the Portfolio
and the maturity of futures contracts purchased or sold by the
Portfolio) received by the Custodian from issuers of the securities
being held for the Portfolio. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Portfolio all
written information received by the Custodian from issuers of the
securities whose tender or exchange is sought and from the party (or
his agents) making the tender or exchange offer. If the Portfolio
desires to take action with respect to any tender offer, exchange offer
or any other similar transaction, the Portfolio shall notify the
Custodian at least three business days prior to the date on which the
Custodian is to take such action.
3. Payments for Repurchases or Redemptions and Sales of Shares of the Fund
-----------------------------------------------------------------------
From such funds as may be available for the purpose but subject to the
limitations of the Declaration of Trust and any applicable votes of the Board of
Trustees of the Fund pursuant thereto, the Custodian shall, upon receipt of
instructions from the Transfer Agent, make funds available for payment to
holders of Shares who have delivered to the Transfer Agent a request for
redemption or repurchase of their Shares. In connection with the redemption or
repurchase of Shares of a Portfolio, the Custodian is authorized upon receipt of
instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with the redemption
or repurchase of Shares of the Fund, the Custodian shall honor checks drawn
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on the Custodian by a holder of Shares, which checks have been furnished by the
Fund to the holder of Shares, when presented to the Custodian in accordance with
such procedures and controls as are mutually agreed upon from time to time
between the Fund and the Custodian.
The Custodian shall receive from the distributor for the Shares or from
the Transfer Agent of the Fund and deposit into the account of the appropriate
Portfolio such payments as are received for Shares of that Portfolio issued or
sold from time to time by the Fund. The Custodian will provide timely
notification to the Fund on behalf of each such Portfolio and the Transfer Agent
of any receipt by it of payments for Shares of such Portfolio.
4. Proper Instructions
-------------------
Proper Instructions as used herein means a writing signed or initialed
by one or more person or persons as the Board of Trustees shall have from time
to time authorized. Each such writing shall set forth the specific transaction
or type of transaction involved, including a specific statement of the purpose
for which such action is requested. Oral instructions will be considered Proper
Instructions if the Custodian reasonably believes them to have been given by a
person authorized to give such instructions with respect to the transaction
involved. The Fund shall cause all oral instructions to be confirmed in writing.
Upon receipt of a certificate of the Secretary or an Assistant Secretary as to
the authorization by the Board of Trustees of the Fund accompanied by a detailed
description of procedures approved by the Board of Trustees, Proper Instructions
may include communications effected directly between electro-mechanical or
electronic devices provided that the Board of Trustees and the Custodian are
satisfied that such procedures afford adequate safeguards for the Portfolios'
assets. For purposes of this Section, Proper Instructions shall include
instructions received by the Custodian pursuant to any three-party agreement
which requires a segregated asset account in accordance with Section 2.12.
5. Actions Permitted without Express Authority
-------------------------------------------
The Custodian may in its discretion, without express authority from the
Fund on behalf of each applicable Portfolio:
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Contract, provided that all such payments
shall be accounted for to the Fund on behalf of the Portfolio;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Portfolio, checks,
drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and
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property of the Portfolio except as otherwise directed by the
Board of Trustees of the Fund.
6. Evidence of Authority
---------------------
The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper believed by
it to be genuine and to have been properly executed by or on behalf of the Fund.
The Custodian may receive and accept a certified copy of a vote of the Board of
Trustees of the Fund as conclusive evidence (a) of the authority of any person
to act in accordance with such vote or (b) of any determination or of any action
by the Board of Trustees pursuant to the Declaration of Trust as described in
such vote, and such vote may be considered as in full force and effect until
receipt by the Custodian of written notice to the contrary.
7. Duties of Custodian with Respect to the Books of Account and
------------------------------------------------------------
Calculation of Net Asset Value and Net Income
---------------------------------------------
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Trustees of the Fund to keep
the books of account of each Portfolio and/or compute the net asset value per
share of the outstanding shares of each Portfolio or, if directed in writing to
do so by the Fund on behalf of the Portfolio, shall itself keep such books of
account and/or compute such net asset value per share. If so directed, the
Custodian shall also calculate daily the net income of the Portfolio as
described in the Fund's currently effective prospectus related to such Portfolio
and shall advise the Fund and the Transfer Agent daily of the total amounts of
such net income and, if instructed in writing by an officer of the Fund to do
so, shall advise the Transfer Agent periodically of the division of such net
income among its various components. The Fund acknowledges and agrees that, with
respect to investments maintained with KSC, KSC is the sole source of
information on the number of shares of a fund held by it on behalf of a
Portfolio and that the Custodian has the right to rely on holdings information
furnished by KSC to the Custodian in performing its duties under this Contract,
including without limitation, the duties set forth in this Section 7 and in
Section 8 hereof; provided, however, that the Custodian shall be obligated to
reconcile information as to purchases and sales of Scudder Fund Shares contained
in trade instructions and confirmations received by the Custodian and to report
promptly any discrepancies to KSC. The calculations of the net asset value per
share and the daily income of each Portfolio shall be made at the time or times
described from time to time in the Fund's currently effective prospectus related
to such Portfolio.
8. Records
-------
The Custodian shall with respect to each Portfolio create and maintain
all records relating to its activities and obligations under this Contract in
such manner as will meet the obligations of the Fund under the Investment
Company Act of 1940, with particular attention to Section 31 thereof and Rules
31a-1 and 31a-2 thereunder. All such records shall be the property of the Fund
and shall at all times during the regular business hours of the Custodian be
open for inspection by duly
13
<PAGE>
authorized officers, employees or agents of the Fund and employees and agents of
the Securities and Exchange Commission. The Custodian shall at the Fund's
request, supply the Fund with a tabulation of securities owned by each Portfolio
and held by the Custodian and shall, when requested to do so by the Fund and for
such compensation as shall be agreed upon between the Fund and the Custodian,
include certificate numbers in such tabulations.
9. Opinion of Fund's Independent Accountant
----------------------------------------
The Custodian shall take all reasonable action, as the Fund on behalf
of each applicable Portfolio may from time to time request, to obtain from year
to year favorable opinions from the Fund's independent accountants with respect
to its activities hereunder in connection with the preparation of the Fund's
Form N-1A, and Form N-SAR or other annual reports to the Securities and Exchange
Commission and with respect to any other requirements of such Commission.
10. Reports to Fund by Independent Public Accountants
-------------------------------------------------
The Custodian shall provide the Fund, on behalf of each of the
Portfolios at such times as the Fund may reasonably require, with reports by
independent public accountants on the accounting system, internal accounting
control and procedures for safeguarding securities, futures contracts and
options on futures contracts, including securities deposited and/or maintained
in a Securities System, relating to the services provided by the Custodian under
this Contract; such reports, shall be of sufficient scope and in sufficient
detail, as may reasonably be required by the Fund to provide reasonable
assurance that any material inadequacies would be disclosed by such examination,
and, if there are no such inadequacies, the reports shall so state.
11. Compensation of Custodian
-------------------------
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Fund on behalf of each applicable Portfolio and the Custodian.
12. Responsibility of Custodian
---------------------------
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Contract, but
shall be kept indemnified by and shall be without liability to the Fund for any
action taken or omitted by it in
14
<PAGE>
good faith without negligence. It shall be entitled to rely on and may act upon
advice of counsel (who may be counsel for the Fund) on all matters, and shall be
without liability for any action reasonably taken or omitted pursuant to such
advice.
If the Fund on behalf of a Portfolio requires the Custodian to take any
action with respect to securities, which action involves the payment of money or
which action may, in the opinion of the Custodian, result in the Custodian or
its nominee assigned to the Fund or the Portfolio being liable for the payment
of money or incurring liability of some other form, the Fund on behalf of the
Portfolio, as a prerequisite to requiring the Custodian to take such action,
shall provide indemnity to the Custodian in an amount and form satisfactory to
it.
If the Fund requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not limited
to securities settlements, foreign exchange contracts and assumed settlement)
for the benefit of a Portfolio or in the event that the Custodian or its nominee
shall incur or be assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this Contract, except such as
may arise from its or its nominee's own negligent action, negligent failure to
act or willful misconduct, any property at any time held for the account of the
applicable Portfolio shall be security therefor and should the Fund fail to
repay the Custodian promptly, the Custodian shall be entitled to utilize
available cash and to dispose of such Portfolio's assets to the extent necessary
to obtain reimbursement.
13. Effective Period, Termination and Amendment
-------------------------------------------
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing; provided,
however that the Custodian shall not with respect to a Portfolio act under
Section 2.10 hereof in the absence of receipt of an initial certificate of the
Secretary or an Assistant Secretary that the Board of Trustees of the Fund has
approved the initial use of a particular Securities System by such Portfolio, as
required by Rule 17f-4 under the Investment Company Act of 1940, as amended and
that the Custodian shall not with respect to a Portfolio act under Section 2.11
hereof in the absence of receipt of an initial certificate of the Secretary or
an Assistant Secretary that the Board of Trustees has approved the initial use
of the Direct Paper System by such Portfolio; provided further, however, that
the Fund shall not amend or terminate this Contract in contravention of any
applicable federal or state regulations, or any provision of the Declaration of
Trust, and further provided, that the Fund on behalf of one or more of the
Portfolios may at any time by action of its Board of Trustees (i) substitute
another bank or trust company for the Custodian by giving notice as described
above to the Custodian, or (ii) immediately terminate this Contract in the event
of the appointment of a conservator or receiver for the Custodian by the
Comptroller of the Currency or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction.
15
<PAGE>
Upon termination of the Contract, the Fund on behalf of each applicable
Portfolio shall pay to the Custodian such compensation as may be due as of the
date of such termination and shall likewise reimburse the Custodian for its
costs, expenses and disbursements.
14. Successor Custodian
-------------------
If a successor custodian for the Fund or one or more of the Portfolios
shall be appointed by the Board of Trustees of the Fund, the Custodian shall,
upon termination, deliver to such successor custodian at the office of the
Custodian, duly endorsed and in the form for transfer, all securities of each
applicable Portfolio then held by it hereunder and shall transfer to an account
of the successor custodian all of the securities of each such Portfolio held in
a Securities System or at KSC.
If no such successor custodian shall be appointed, the Custodian shall,
in like manner, upon receipt of a certified copy of a vote of the Board of
Trustees of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Trustees shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940,
doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian on behalf of each applicable Portfolio and all
instruments held by the Custodian relative thereto and all other property held
by it under this Contract on behalf of each applicable Portfolio and to transfer
to an account of such successor custodian all of the securities of each such
Portfolio held in any Securities System or at KSC. Thereafter, such bank or
trust company shall be the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Trustees to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in Rill force and effect.
15. Interpretive and Additional Provisions
--------------------------------------
In connection with the operation of this Contract, the Custodian and
the Fund on behalf of each of the Portfolios, may from time to time agree on
such provisions interpretive of or in addition to the provisions of this
Contract as may in their joint opinion be consistent with the general tenor of
this Contract. Any such interpretive or additional provisions shall be in a
writing signed by both parties and shall be annexed hereto, provided that no
such interpretive or additional provisions shall contravene any applicable
federal or state regulations or any provision of the Declaration of Trust
16
<PAGE>
of the Fund. No interpretive or additional provisions made as provided in the
preceding sentence shall be deemed to be an amendment of this Contract.
16. Additional Funds
----------------
In the event that the Fund establishes one or more series of Shares in
addition to Income Portfolio, Income with Growth Portfolio, Balanced Portfolio,
Growth with Income Portfolio and Growth Portfolio with respect to which it
desires to have the Custodian render services as custodian under the terms
hereof, it shall so notify the Custodian in writing, and if the Custodian agrees
in writing to provide such services, such series of Shares shall become a
Portfolio hereunder.
17. Massachusetts Law to Apply
--------------------------
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
18. Prior Contracts
---------------
This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Fund on behalf of each of the Portfolios and the
Custodian relating to the custody of the Fund's assets.
19. Shareholder Communications Election
-----------------------------------
Securities and Exchange Commission Rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether it authorizes the
Custodian to provide the Fund's name, address, and share position to requesting
companies whose securities the Fund owns. If the Fund tells the Custodian "no",
the Custodian will not provide this information to requesting companies. If the
Fund tells the Custodian "yes" or does not check either "yes" or "no" below, the
Custodian is required by the rule to treat the Fund as consenting to disclosure
of this information for all securities owned by the Fund or any funds or
accounts established by the Fund. For the Fund's protection, the Rule prohibits
the requesting company from using the Fund's name and address for any purpose
other than corporate communications. Please indicate below whether the Fund
consents or objects by checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's
name, address, and share positions.
17
<PAGE>
NO [ ] The Custodian is not authorized to release the Fund's
name, address, and share positions.
20. Limitation of Liability
-----------------------
The Fund is organized as a Massachusetts business trust, and references
in this Contract to the Fund mean and refer to the Trustees from time to time
serving under its Declaration of Trust on file with the Secretary of State of
the Commonwealth of Massachusetts, as the same may be amended from time to time,
pursuant to which the Fund conducts its business. It is expressly agreed that
the obligations of the Fund hereunder shall not be binding upon any of the
Trustees, shareholders, nominees, officers, agents or employees of the Fund, as
provided in said Declaration of Trust. Moreover, if the Fund has more than one
series or Portfolio, no series or Portfolio of the Fund other than the series or
Portfolio on whose behalf a specified transaction shall have been undertaken
shall be responsible for the obligations of the Fund, and persons engaging in
transactions with the Fund shall look only to the assets of that series or
Portfolio to satisfy those obligations. The execution and delivery of this
Contract has been authorized by the Trustees and signed by an authorized officer
of the Fund, acting as such, and neither such authorization by such Trustees nor
such execution and delivery by such officer shall be deemed to have been made by
any of them but shall bind only the trust property of the Fund as provided in
such Declaration of Trust.
18
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the 17th day of February, 1999.
ATTEST FARMERS INVESTMENT TRUST
/s/ILLEGIBLE By /s/Thomas F. McDonough
- ------------------------ -------------------------
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/Marc L. Parsons By /s/ILLEGIBLE
- ------------------------ -------------------------
Executive Vice President
Exhibit (g)(1)
[logo] State Street
STATE STREET BANK AND TRUST COMPANY
CUSTODIAN FEE SCHEDULE
FARMERS INVESTMENT TRUST
Income Portfolio
Income with Growth Portfolio
Balanced Portfolio
Growth with Income Portfolio
Growth Portfolio
- --------------------------------------------------------------------------------
I. ADMINISTRATION
--------------
Maintain custody of fund assets. Settle portfolio purchases and sales.
Report buy and sell fails. Determine and collect portfolio income. Make
cash disbursements and report cash transactions in local and base
currency. Withhold foreign taxes. File foreign tax reclaims. Monitor
corporate actions. Report portfolio positions.
Annual Charge $3,000 per portfolio for first year
$6,000 per portfolio for subsequent years
II. PORTFOLIO TRADES - FOR EACH LINE ITEM PROCESSED
-----------------------------------------------
State Street Bank Repos $4.00
DTC or Fed Book Entry $12.00
New York Physical Settlements $25.00
PTC Purchase, Sale, Deposit or Withdrawal $16.00
Mutual Fund Purchases and Sales No Charge
III. SPECIAL SERVICES
----------------
Fees for activities of a non-recurring nature such as fund
consolidations or reorganizations, extraordinary security shipments and
the preparation of special reports will be subject to negotiation. Fees
for tax accounting/recordkeeping for options, financial futures, and
other special items will be negotiated separately.
IV. EARNINGS CREDIT
---------------
A balance credit equal to 75% of the 90 day CD rate in effect the last
business day of each month will be applied to the Custodian Demand
Deposit Account balance of each fund, net of check redemption service
overdrafts, on a pro-rated basis against the fund's custodian fee,
excluding out-of-pocket expenses. The balance credit will be cumulative
and carried forward each month. Any excess credit remaining at year-end
(December 31) will not be carried forward.
<PAGE>
V. OUT-OF-POCKET EXPENSES
----------------------
A billing for the recovery of applicable out-of-pocket expenses will be
made as of the end of each month. Out-of-pocket expenses include, but
are not limited to the following:
Telephone
Wire Charges ($5.00 per wire in and $5.25 out)
Postage and Insurance
Courier Service
Duplicating
Legal Fees
Supplies Related to Fund Records
Rush Transfers -- $8.00 each
Transfer Fees
Sub-Custodian Charges
Price Waterhouse Audit Letter
Federal Reserve Fee for Returned Check items over $2,500 -- $4.25 each
GNMA transfer -- $15.00 each
Stamp Duties
Registration Fees
SCUDDER KEMPER INVESTMENTS, INC. STATE STREET BANK & TRUST COMPANY
- -------------------------------------------------------------------------------
By: By:
-------------------------------- -------------------------------
Title: Title:
----------------------------- -------------------------------
Date: Date:
------------------------------ --------------------------------
Exhibit (i)
[DECHERT PRICE & RHOADS LETTERHEAD]
August 30, 1999
Farmers Investment Trust
222 South Riverside Plaza
Chicago, IL 60606
Re: Post-Effective Amendment No. 2 to the Registration Statement
on Form N-1A (SEC File No. 811-09085)
Ladies and Gentlemen:
Farmers Investment Trust (the "Trust") is a trust created under a
written Declaration of Trust dated October 26, 1998. The Declaration of Trust,
as amended from time to time, is referred to as the "Declaration of Trust." The
beneficial interest under the Declaration of Trust is represented by
transferable shares, $.01 par value per share ("Shares"). The Trustees have the
powers set forth in the Declaration of Trust, subject to the terms, provisions
and conditions therein provided.
We are of the opinion that all legal requirements have been complied
with in the creation of the Trust and that said Declaration of Trust is legal
and valid.
Under Article V, Section 5.4 of the Declaration of Trust, the Trustees
are empowered, in their discretion, from time to time, to issue Shares for such
amount and type of consideration, at such time or times and on such terms as the
Trustees may deem best. Under Article V, Section 5.1, it is provided that the
number of Shares authorized to be issued under the Declaration of Trust is
unlimited. Under Article V, Section 5.11, the Trustees may authorize the
division of Shares into two or more series. By written instruments, the Trustees
have from time to time established various series of the Trust. The Shares are
currently divided into five series (the "Funds").
By votes adopted on February 12, 1999, the Trustees of the Trust
authorized the President, any Vice President, the Secretary and the Treasurer,
from time to time, to determine
<PAGE>
Farmers Investment Trust
August 30, 1999
Page 2
the appropriate number of Shares to be registered, to register with the
Securities and Exchange Commission, and to issue and sell to the public, such
Shares.
We understand that you are about to file with the Securities and
Exchange Commission, on Form N-1A, Post Effective Amendment No. 2 to the Trust's
Registration Statement (the "Registration Statement") under the Securities Act
of 1933, as amended (the "Securities Act"), in connection with the continuous
offering of the Shares of the five Funds: Income Portfolio, Income with Growth
Portfolio, Balanced Portfolio, Growth with Income Portfolio and Growth
Portfolio. We understand that our opinion is required to be filed as an exhibit
to the Registration Statement.
We are of the opinion that all necessary Trust action precedent to the
issue of the Shares of the Funds named above has been duly taken, and that all
such Shares may be legally and validly issued for cash, and when sold will be
fully paid and non-assessable by the Trust upon receipt by the Trust or its
agent of consideration for such Shares in accordance with the terms in the
Registration Statement, subject to compliance with the Securities Act, the
Investment Company Act of 1940, as amended, and applicable state laws regulating
the sale of securities.
We consent to your filing this opinion with the Securities and Exchange
Commission as an Exhibit to Post-Effective Amendment No. 2 to the Registration
Statement.
Very truly yours,
/s/ Dechert Price & Rhoads
<PAGE>
Prepared by: Mark K. Loughman
Signed by: Sheldon A. Jones
Exhibit (j)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference into the Prospectus and
Statement of Additional Information constituting the Post-Effective Amendment
No. 2 to the Registration Statement on Form N-1A (the "Registration Statement")
of Farmers Investment Trust comprised of Income Portfolio, Income with Growth
Portfolio, Balanced Portfolio, Growth with Income Portfolio and Growth
Portfolio, of our report dated June 9, 1999, on the financial statements and
financial highlights appearing in the April 30, 1999 Annual Report to the
Shareholders of Farmers Mutual Fund Portfolios, which is also incorporated by
reference into the Registration Statement. We further consent to the references
to our Firm under the heading "Financial Highlights," in the Prospectus and
"Experts" in the Statement of Additional Information.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
August 31, 1999
