Kemper Variable Series
222 South Riverside Plaza, Chicago, Illinois 60606 (800) 778-1482
Kemper Variable Series offers a choice of 26 investment portfolios (each a
"Portfolio"), to investors applying for certain variable life insurance and
variable annuity contracts offered by Participating Insurance Companies.
PROSPECTUS
<TABLE>
<CAPTION>
May 1, 1999 As Revised October 29, 1999
- ---------------------------------------
<S> <C>
Kemper Money Market Portfolio Kemper Small Cap Growth Portfolio
Kemper Government Securities Portfolio Kemper Technology Growth Portfolio
Kemper Investment Grade Bond Portfolio Kemper Value+Growth Portfolio
Kemper High Yield Portfolio Kemper Contrarian Value Portfolio
Kemper Total Return Portfolio Kemper-Dreman High Return Equity Portfolio
Kemper Blue Chip Portfolio Kemper Small Cap Value Portfolio
Kemper Growth Portfolio Kemper-Dreman Financial Services Portfolio
Kemper Aggressive Growth Portfolio Kemper Global Income Portfolio
Kemper Horizon 20+ Portfolio Kemper Global Blue Chip Portfolio
Kemper Horizon 10+ Portfolio Kemper International Growth and Income Portfolio
Kemper Horizon 5 Portfolio Kemper International Portfolio
</TABLE>
September 1, 1999 As Revised October 29, 1999
- ---------------------------------------------
Kemper Index 500 Portfolio
October 29, 1999
- ----------------
KVS Focused Large Cap Growth Portfolio
KVS Growth And Income Portfolio
KVS Growth Opportunities Portfolio
Shares of the Portfolios are available exclusively as pooled funding vehicles
for variable life insurance and variable annuity contracts of Participating
Insurance Companies.
This prospectus should be read in conjunction with the variable life insurance
or variable annuity contract prospectus.
Shares of the Portfolios are not FDIC-insured, have no bank guarantees and 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
FUND INVESTMENT CONCEPT....................................................3
ABOUT THE PORTFOLIOS.......................................................4
Kemper Money Market Portfolio...........................................4
Kemper Government Securities Portfolio..................................7
Kemper Investment Grade Bond Portfolio.................................11
Kemper High Yield Portfolio............................................15
Kemper Total Return Portfolio..........................................19
Kemper Blue Chip Portfolio.............................................24
Kemper Growth Portfolio................................................29
Kemper Aggressive Growth Portfolio.....................................33
Kemper Horizon 20+ Portfolio...........................................37
Kemper Horizon 10+ Portfolio...........................................43
Kemper Horizon 5 Portfolio.............................................48
Kemper Small Cap Growth Portfolio......................................54
Kemper Technology Growth Portfolio.....................................59
Kemper Value+Growth Portfolio..........................................63
Kemper Contrarian Value Portfolio......................................67
Kemper-Dreman High Return Equity Portfolio.............................71
KVS Focused Large Cap Growth Portfolio.................................75
KVS Growth And Income Portfolio........................................78
KVS Growth Opportunities Portfolio.....................................81
Kemper Index 500 Portfolio.............................................84
Kemper Small Cap Value Portfolio.......................................87
Kemper-Dreman Financial Services Portfolio.............................91
Kemper Global Income Portfolio.........................................95
Kemper Global Blue Chip Portfolio......................................99
Kemper International Growth And Income Portfolio......................102
Kemper International Portfolio........................................105
ABOUT YOUR INVESTMENT....................................................109
Investment Manager....................................................109
Share Price...........................................................126
Purchase And Redemption...............................................127
Distributions And Taxes...............................................128
Financial Highlights..................................................129
2
<PAGE>
FUND INVESTMENT CONCEPT
Kemper Variable Series (the "Fund") is an open-end, registered management
investment company, currently comprising 26 portfolios. Additional portfolios
may be created from time to time. The Fund is intended to be a funding vehicle
for variable life insurance contracts ("VLI contracts") and variable annuity
contracts ("VA contracts") offered by the separate accounts of certain life
insurance companies ("Participating Insurance Companies"). The Fund currently
does not foresee any disadvantages to the holders of VLI contracts and VA
contracts arising from the fact that the interests of the holders of such
contracts may differ. Nevertheless, the Fund's Board of Trustees intends to
monitor events in order to identify any material irreconcilable conflicts that
may arise and to determine what action, if any, should be taken. The VLI
contracts and the VA contracts are described in the separate prospectuses issued
by the Participating Insurance Companies. The Fund assumes no responsibility for
such prospectuses.
Individual VLI contract holders and VA contract holders are not the
"shareholders" of the Fund. Rather, the Participating Insurance Companies and
their separate accounts are the shareholders or investors, although such
companies may pass through voting rights to their VLI and VA contract holders.
Shares of the Portfolios are not FDIC-insured, have no bank guarantees and may
lose value.
3
<PAGE>
ABOUT THE PORTFOLIOS
KEMPER MONEY MARKET PORTFOLIO
Investment objective
The Portfolio seeks maximum current income to the extent consistent with
stability of principal. The Portfolio seeks to maintain a net asset value of
$1.00 per share. Unless otherwise indicated, the Portfolio's investment
objective and policies may be changed without a vote of shareholders.
Main investment strategies
The Portfolio pursues its objective by investing principally in high-quality
short-term debt securities issued by:
o U.S. corporations and financial institutions; and
o the U.S. Government and its agencies.
The Portfolio will normally invest at least 25% of its net assets in instruments
issued by domestic or foreign banks.
The Portfolio generally invests only in securities with credit ratings in the
two highest categories as determined by one or more nationally recognized rating
organizations. The Portfolio may also invest in unrated securities that the
investment manager believes to be of comparable quality. The Portfolio maintains
an average dollar-weighted maturity of 90 days or less.
In selecting securities for the Portfolio, the investment manager actively
manages the portfolio with respect to the short-term interest rate outlook and
by selecting securities for superior price or income performance. In addition,
the Portfolio limits its investments to securities that meet the quality and
diversification requirements of Rule 2a-7 under the Investment Company Act of
1940.
Of course, there can be no guarantee that by following these strategies, the
Portfolio will achieve its objective.
Other investments
To a more limited extent, the Portfolio may, but is not required to, invest in
the following:
The Portfolio may invest in instruments bearing rates of interest that are
adjusted periodically or which "float" continuously according to formulae
intended to minimize fluctuations in values of the instruments (variable rate
securities). Consistent
4
<PAGE>
with federal law, the Portfolio may consider certain of such instruments as
having maturities earlier than the maturity date on the face of the instrument.
The Portfolio may utilize other investments and investment techniques that may
impact Portfolio performance.
Risk management strategies
The Portfolio manages credit risk by investing only in high quality securities
that the investment manager believes pose minimal credit risks. The Portfolio
manages interest rate risk by limiting the maturity of each of its portfolio
holdings and by limiting the weighted average maturity of the Portfolio as a
whole. The Portfolio also diversifies its holdings across many industry sectors
and issuers.
Main risks
As with most money market funds, the major factor affecting this Portfolio's
performance is short-term interest rates. If short-term interest rates fall, the
Portfolio's yield is also likely to fall.
This Portfolio may have lower returns than other fixed income funds that invest
in longer-term or lower-quality securities. It is also possible that securities
held by the Portfolio could be downgraded in credit rating or go into default.
To the extent that the Portfolio is invested in foreign securities such as
Eurodollar certificates, it may be subject to some foreign investment risk.
Eurodollar certificates of deposit may not be subject to the same regulatory
requirements as certificates issued by U.S. banks and associated income may be
subject to the imposition of foreign taxes.
Because the Portfolio normally invests at least 25% of its net assets in
instruments issued by domestic or foreign banks, the Portfolio may be more
adversely affected by changes in market or economic conditions and other
circumstances affecting the banking industry than it would be if the Portfolio's
assets were not so concentrated.
Your investment in the Portfolio is not insured or guaranteed by the FDIC or any
other government agency. Although the Portfolio seeks to maintain the value of
your investment at a $1.00 share price, it is possible that you could lose money
by investing in the Portfolio.
The investment manager's skill in choosing appropriate investments for the
Portfolio will determine in large part the Portfolio's ability to achieve its
investment objective.
5
<PAGE>
Past performance
The chart and table below provide some indication of the risks of investing in
the Portfolio by illustrating how the Portfolio has performed from year to year.
The information does not reflect charges and fees associated with a separate
account that invests in the Portfolio or any insurance contract for which the
Portfolio is an investment option. These charges and fees will reduce returns.
Of course, past performance is not necessarily an indication of future
performance.
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
9.11 8.08 5.90 3.43 2.85 3.95 5.66 5.02 5.25 5.14
`89 `90 `91 `92 `93 `94 `95 `96 `97 `98
Year
For the periods included in the bar chart, the Portfolio's highest return for a
calendar quarter was 2.34% (the second quarter of 1989), and the Portfolio's
lowest return for a calendar quarter was 0.68% (the second quarter of 1993).
Average Annual Total Returns
For periods ended
December 31, 1998 Kemper Money Market Portfolio
- ----------------- -----------------------------
One Year 5.14%
Five Years 5.01%
Ten Years 5.43%
7 Day Annualized Yield
On December 31, 1998, the Portfolio's 7-day annualized yield was 4.58%.
6
<PAGE>
KEMPER GOVERNMENT SECURITIES PORTFOLIO
Investment objective
Kemper Government Securities Portfolio seeks high current return consistent with
preservation of capital. Unless otherwise indicated, the Portfolio's investment
objective and policies may be changed without a vote of shareholders.
Main investment strategies
The Portfolio pursues its objective by investing at least 65% of its total
assets in U.S. Government securities and repurchase agreements of U.S.
Government securities. U.S. Government-related debt instruments in which the
Portfolio may invest include:
o direct obligations of the U.S. Treasury; and
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 (such as GNMA Certificates) and others are
backed only by the rights of the issuer to borrow from the U.S. Government (such
as Federal National Mortgage Association Bonds). GNMA, also known as Ginnie Mae,
stands for the Government National Mortgage Association. GNMA Certificates
represent a partial ownership interest in a pool of mortgage loans, for which
GNMA guarantees timely payment of principal and interest. With respect to
securities supported only by the credit of the issuing agency or by an
additional line of credit with the U.S. Treasury, there is no guarantee that the
U.S. Government will provide support to such agencies and such securities may
involve the risk of loss of principal and interest. U.S. Government securities
of the type in which the Portfolio may invest have historically involved little
risk of loss of principal if held to maturity.
The Portfolio may, but is not required to, also invest up to 35% of its total
assets in other types of fixed-income securities, including: corporate debt
securities with investment-grade credit ratings, commercial paper rated within
the two highest grades, certificates of deposit (including term deposits) or
bankers' acceptances issued by domestic banks (including their foreign branches)
and Canadian chartered banks with assets in excess of $1 billion, and repurchase
agreements with respect to any of these instruments. The Portfolio may, but is
not required to, invest up to 10% of its assets in fixed-income securities not
subject to these limitations, including securities that are rated below
investment-grade and non-rated securities.
7
<PAGE>
Of course, there can be no guarantee that by following these strategies, the
Portfolio will achieve its objective.
Other investments
To a more limited extent, the Portfolio may, but is not required to, invest in
the following:
The Portfolio may invest in collateralized obligations that, consistent with the
limitations reflected above, may be privately issued or may be issued or
guaranteed by U.S. Government agencies or instrumentalities. The Portfolio may
also invest in U.S. dollar-denominated foreign securities.
The Portfolio may utilize other investments and investment techniques that may
impact Portfolio performance including, but not limited to, options, futures and
other derivatives (financial instruments that derive their value from other
securities or commodities, or that are based on indices).
Risk management strategies
The Portfolio generally manages its exposure to interest rate risk by adjusting
its duration.
The Portfolio also may, but is not required to, use certain derivatives in an
attempt to manage risk. The use of derivatives could magnify losses.
For temporary defensive purposes, the Portfolio may invest up to 100% of its
assets in short-term high-quality debt securities, cash and cash equivalents. In
such a case, the Portfolio would not be pursuing, and may not achieve, its
investment objective.
Main risks
There are market and investment risks with any security and the value of an
investment in the Portfolio will fluctuate over time and it is possible to lose
money invested in the Portfolio.
The Portfolio's principal risks are associated with investing in fixed-income
and mortgage-backed securities: interest rate movements, maturity, principal
prepayment, and the investment manager's skill in managing the Portfolio.
Because the Portfolio invests in fixed-income securities, the most significant
risk is that interest rates will rise, and the price of bonds held by the
Portfolio will fall in proportion to their duration. Generally, longer-term
securities are more susceptible to changes in value as a result of interest-rate
changes than are shorter-term securities.
8
<PAGE>
The potential for appreciation of mortgage-backed securities, in which the
Portfolio primarily invests, in the event of a decline in interest rates may be
limited or negated by increased principal prepayments in respect to certain
mortgage-backed securities, such as GNMA Certificates. Prepayment of high
interest mortgage-backed securities during times of declining interest rates
will tend to lower the Portfolio's return and may even result in losses to the
Portfolio if some securities were acquired at a premium.
Moreover, during periods of rising interest rates, prepayments of
mortgage-backed securities may decline, resulting in the extension of the
Portfolio's average maturity. As a result, the Portfolio may experience greater
volatility during periods of rising interest rates than under normal market
conditions.
With respect to U.S. Government securities supported only by the credit of the
issuing agency or by an additional line of credit with the U.S. Treasury, there
is no guarantee that the U.S. Government will provide support to such agencies
and such securities may involve risk of loss of principal and interest.
The Portfolio expects to trade securities actively. This strategy could increase
transaction costs and reduce performance.
The investment manager's skill in choosing appropriate investments for the
Portfolio will determine in large part the Portfolio's ability to achieve its
investment objective.
Past performance
The chart and table below provide some indication of the risks of investing in
the Portfolio by illustrating how the Portfolio has performed from year to year,
and comparing this information to a broad measure of market performance. The
information does not reflect charges and fees associated with a separate account
that invests in the Portfolio or any insurance contract for which the Portfolio
is an investment option. These charges and fees will reduce returns. Of course,
past performance is not necessarily an indication of future performance.
9
<PAGE>
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
13.14 9.81 15.22 5.92 6.48 -2.74 18.98 2.56 8.96 7.03
`89 `90 `91 `92 `93 `94 `95 `96 `97 `98
Year
For the period included in the bar chart, the Portfolio's highest return for a
calendar quarter was 7.66% (the second quarter of 1989), and the Portfolio's
lowest return for a calendar quarter was -2.43% (the first quarter of 1994).
Average Annual Total Returns
For periods ended Kemper Government Salomon Brothers
December 31, 1998 Securities Portfolio 30 year GNMA Index^+
----------------- -------------------- -------------------
One Year 7.03% 6.85%
Five Years 6.72% 7.34%
Ten Years 8.37% 9.29%
- -----------
^+ The Salomon Brothers 30-Year GNMA Index is unmanaged, is on a total return
basis with all dividends reinvested and is comprised of GNMA 30-year pass
throughs of single family and graduated payment mortgages. In order for a
GNMA coupon to be included in the Index, it must have at least $200 million
of outstanding coupon product. Index returns assume reinvestment of
dividends and, unlike Portfolio returns, do not reflect any fees or
expenses.
10
<PAGE>
KEMPER INVESTMENT GRADE BOND PORTFOLIO
Investment objective
Kemper Investment Grade Bond Portfolio seeks high current income. Unless
otherwise indicated, the Portfolio's investment objective and policies may be
changed without a vote of shareholders.
Main investment strategies
The Portfolio invests primarily in a diversified portfolio of fixed-income
securities of any maturity with credit ratings of investment-grade, as
determined by one or more nationally recognized statistical rating
organizations. Under normal market conditions, at least 65% of the Portfolio's
assets will be invested in the following types of instruments: investment-grade
corporate debt securities, U.S. Government securities, high-quality commercial
paper, obligations of the Canadian government or its instrumentalities (payable
in U.S. dollars), bank certificates of deposit of domestic or Canadian chartered
banks with deposits in excess of $1 billion and cash and cash equivalents.
The Portfolio may also invest in fixed-income securities with credit ratings
that are below investment-grade and in unrated securities. These high yield/
high risk, low quality bonds and unrated securities may represent up to 35% of
the Portfolio's assets.
In seeking to achieve its investment objective, the Portfolio will invest in
fixed-income securities based on the investment manager's analysis without
relying on any published ratings. The Portfolio will invest in a particular
fixed-income security if in the investment manager's view, the increased yield
offered, regardless of published ratings, is sufficient to compensate for a
reasonable element of assumed risk. Since investments will be based upon the
investment manager's analysis rather than upon published ratings, achievement of
the Portfolio's goals may depend more upon the abilities of the investment
manager than would otherwise be the case.
The Portfolio also may, but is not required to, invest up to 25% of its total
assets in foreign securities.
Of course, there can be no guarantee that by following these strategies, the
Portfolio will achieve its objective.
11
<PAGE>
Other investments
To a more limited extent, the Portfolio may, but is not required to, invest up
to 10% of its assets in preferred stock.
The Portfolio may utilize other investments and investment techniques that may
impact Portfolio performance including, but not limited to, options, futures and
other derivatives (financial instruments that derive their value from other
securities or commodities, or that are based on indices).
Risk management strategies
The Portfolio manages its exposure to interest rate risk by managing duration.
The Portfolio also diversifies its investments across sectors and issuers.
The Portfolio may, but is not required to, use certain derivatives in an attempt
to manage risk. The use of derivatives could magnify losses.
For temporary defensive purposes, the Portfolio may invest up to 100% of its
assets in short-term high-quality debt securities, cash and cash equivalents. In
such a case, the Portfolio would not be pursuing, and may not achieve, its
objective.
Main risks
There are market and investment risks with any security and the value of an
investment in the Portfolio will fluctuate over time and it is possible to lose
money invested in the Portfolio.
The Portfolio's principal risks are associated with investing in fixed-income
securities: credit quality, interest rate movements, maturity, principal
prepayment, and the investment manager's skill in managing the Portfolio.
Because the Portfolio invests in fixed-income securities, a significant risk is
that interest rates will rise, and the price of bonds held by the Portfolio will
fall in proportion to their duration. Generally, longer-term securities are more
susceptible to changes in value as a result of interest-rate changes than are
shorter-term securities.
The issuer of a bond that the Portfolio holds 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.
Fixed-income securities are also subject to prepayment risk. Prepayment risk is
commonly associated with pooled debt securities, such as mortgage-backed
securities and asset-backed securities, but may affect other debt securities as
well. When the underlying debt obligations are prepaid ahead of schedule, the
return on the security will be lower than expected. Prepayment rates usually
increase when interest rates are falling.
12
<PAGE>
High yield/ high risk fixed income securities (often referred to as "junk
bonds"), in which the Portfolio may invest, are more likely to be affected by
negative developments related to their issuer or industry, and entail relatively
greater risk of loss of income and principal than investments in higher rated
securities. Market prices of high yield securities may fluctuate more than
market prices of higher rated securities.
To the extent that the Portfolio invests in foreign securities, foreign
investments, particularly investments in emerging markets, carry added risks due
to the possibility of inadequate or inaccurate financial information about
companies, potential political disturbances and fluctuations in currency
exchange rates. Foreign securities are often thinly traded and could be harder
to sell at a fair price generally, or in specific market situations.
The investment manager's skill in choosing appropriate investments for the
Portfolio will determine in large part the Portfolio's ability to achieve its
investment objective.
Past performance
The chart and table below provide some indication of the risks of investing in
the Portfolio by illustrating how the Portfolio has performed from year to year,
and comparing this information to a broad measure of market performance. The
information does not reflect charges and fees associated with a separate account
that invests in the Portfolio or any insurance contract for which the Portfolio
is an investment option. These charges and fees will reduce returns. Of course,
past performance is not necessarily an indication of future performance.
13
<PAGE>
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
9.03 7.93
`89 `90 `91 `92 `93 `94 `95 `96 `97 `98
Year
For the period included in the bar chart, the Portfolio's highest return for a
calendar quarter was 3.82% (the third quarter of 1998), and the Portfolio's
lowest return for a calendar quarter was -0.25% (the first quarter of 1997).
Average Annual Total Returns
Kemper
For periods ended Investment Grade Lehman Brothers Government/
December 31, 1998 Bond Portfolio Corporate Bond Index^+
----------------- -------------- ---------------------
One Year 7.93% 9.47%
Since Inception (5/1/96) 7.70% 9.53%
- -----------
^+ The Lehman Brothers Government/Corporate Bond Index is an unmanaged index
comprised of intermediate and long-term government and investment-grade
corporate debt securities. Index returns assume reinvestment of dividends
and, unlike Portfolio returns, do not reflect any fees or expenses.
14
<PAGE>
KEMPER HIGH YIELD PORTFOLIO
Investment objective
Kemper High Yield Portfolio seeks to provide a high level of current income.
Unless otherwise indicated, the Portfolio's investment objective and policies
may be changed without a vote of shareholders.
Main investment strategies
The Portfolio pursues its objective by investing primarily in lower rated, or,
if unrated of comparable quality, high yield/ high risk fixed-income securities.
The fixed-income securities in which the Portfolio invests include corporate
debt securities, U.S. and Canadian Government securities, obligations of U.S.
and Canadian banking institutions, convertible securities, assignments or
participations in loans, preferred stock, and cash and cash equivalents,
including repurchase agreements. In seeking to achieve its investment objective,
the Portfolio will invest in fixed-income securities based on the investment
manager's analysis without relying on any published ratings. The Portfolio will
invest in a particular fixed-income security if in the investment manager's
view, the increased yield offered, regardless of published ratings, is
sufficient to compensate for a reasonable element of assumed risk. Since
investments will be based upon the investment manager's analysis rather than
upon published ratings, achievement of the Portfolio's goals may depend more
upon the abilities of the investment manager than would otherwise be the case.
The average maturity and mix of investments in the Portfolio will vary as the
investment manager seeks to provide a high level of income considering the
available alternatives in the market. The investment manager will adjust the
investments of the Portfolio as it deems advisable in view of prevailing or
anticipated market conditions. Accordingly, the investment manager may purchase
or sell certain Portfolio securities in anticipation of a rise or a decline in
interest rates or anticipated or actual changes in credit quality or other
market events.
The characteristics of the securities held by the Portfolio, such as the
maturity and the type of issuer, will affect yields and yield differentials,
which vary over time.
The Portfolio may, but is not required to, invest up to 25% of its total assets
in foreign securities.
Of course, there can be no guarantee that by following these strategies, the
Portfolio will achieve its objective.
15
<PAGE>
Other investments
To a more limited extent, the Portfolio may, but is not required to, utilize
other investments and investment techniques that may impact Portfolio
performance including, but not limited to, options, futures and other
derivatives (financial instruments that derive their value from other securities
or commodities, or that are based on indices).
Risk management strategies
The Portfolio seeks to achieve the highest yields possible while reducing
relative risk through (a) broad diversification, (b) credit analysis by the
investment manager of the issuers in which the Portfolio invests, (c) purchase
of high yield/ high risk securities at discounts from par or stated value when
practicable and (d) monitoring and seeking to anticipate changes and trends in
the economy and financial markets that might affect the prices of Portfolio
securities. The investment manager's judgment as to the "reasonableness" of the
risk involved in any particular investment will be a function of its experience
in managing fixed-income investments and its evaluation of general economic and
financial conditions, a specific issuer's business and management, cash flow,
earnings coverage of interest and dividends, ability to operate under adverse
economic conditions, fair market value of assets, and of such other
considerations as the investment manager may deem appropriate. The investment
manager, while seeking maximum current yield, will monitor current corporate
developments with respect to Portfolio securities and potential investments and
to broad trends in the economy. In some circumstances, defensive strategies may
be implemented to preserve or enhance capital even at the sacrifice of current
yield.
The Portfolio also may, but is not required to, use certain derivatives in an
attempt to manage risk. The use of derivatives could magnify losses.
For temporary defensive purposes, the Portfolio may invest up to 100% of its
assets in short-term high-quality debt securities, cash and cash equivalents. In
such a case, the Portfolio would not be pursuing, and may not achieve, its
objective.
Main risks
There are market and investment risks with any security and the value of an
investment in the Portfolio will fluctuate over time and it is possible to lose
money invested in the Portfolio.
The Portfolio's principal risks are associated with investing in fixed-income
securities: credit quality, interest rate movements, maturity, principal
prepayment, and the investment manager's skill in managing the Portfolio.
High yield/ high risk fixed income securities (often referred to as "junk
bonds"), in which the Portfolio primarily invests, are more likely to be
affected by negative
16
<PAGE>
developments related to their issuer or industry, and entail relatively greater
risk of loss of income and principal than investments in higher rated
securities. Market prices of high yield securities may fluctuate more than
market prices of higher rated securities.
Because the Portfolio invests in fixed-income securities, another significant
risk is that interest rates will rise, and the price of bonds held by the
Portfolio will fall in proportion to their duration. Generally, longer-term
securities are more susceptible to changes in value as a result of interest-rate
changes than are shorter-term securities.
The issuer of a bond that the Portfolio holds may default with respect to
payment of principal and interest. The lower a bond is rated, the more it is
considered to be a speculative or risky investment.
Fixed-income securities are also subject to prepayment risk. Prepayment risk is
commonly associated with pooled debt securities, such as mortgage-backed
securities and asset-backed securities, but may affect other debt securities as
well. When the underlying debt obligations are prepaid ahead of schedule, the
return on the security will be lower than expected. Prepayment rates usually
increase when interest rates are falling.
To the extent that the Portfolio invests in foreign securities, foreign
investments, particularly investments in emerging markets, carry added risks due
to the possibility of inadequate or inaccurate financial information about
companies, potential political disturbances and fluctuations in currency
exchange rates. Foreign securities are often thinly traded and could be harder
to sell at a fair price generally, or in specific market situations.
The Portfolio expects to trade securities actively. This strategy could increase
transaction costs and reduce performance.
The investment manager's skill in choosing appropriate investments for the
Portfolio will determine in large part the Portfolio's ability to achieve its
investment objective.
Past performance
The chart and table below provide some indication of the risks of investing in
the Portfolio by illustrating how the Portfolio has performed from year to year,
and comparing this information to a broad measure of market performance. The
information does not reflect charges and fees associated with a separate account
that invests in the Portfolio or any insurance contract for which the Portfolio
is an investment option. These charges and fees will reduce returns. Of course,
past performance is not necessarily an indication of future performance.
17
<PAGE>
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
-1.24 -15.45 51.82 17.75 19.99 -2.24 17.40 14.06 11.61 1.45
`89 `90 `91 `92 `93 `94 `95 `96 `97 `98
Year
For the period included in the bar chart, the Portfolio's highest return for a
calendar quarter was 26.70% (the first quarter of 1991), and the Portfolio's
lowest return for a calendar quarter was -12.82% (the third quarter of 1990).
Average Annual Total Returns
For periods ended Kemper High Salomon Brothers Long-Term
December 31, 1998 Yield Portfolio High Yield Bond Index^+
----------------- --------------- ----------------------
One Year 1.45% 9.24%
Five Years 8.19% 11.54%
Ten Years 10.26% 12.33%
- -----------
^+ The Salomon Brothers Long-Term High Yield Bond Index is on a total return
basis and is comprised of high yield bonds with a par value of $50 million
or higher and a remaining maturity of ten years or longer rated BB+ or
lower by Standard & Poor's Corporation or Ba1 or lower by Moody's Investors
Service, Inc. This index is unmanaged. Index returns assume reinvestment of
dividends and, unlike Portfolio returns, do not reflect any fees or
expenses.
18
<PAGE>
KEMPER TOTAL RETURN PORTFOLIO
Investment objective
Kemper Total Return Portfolio seeks high total return, a combination of income
and capital appreciation. Unless otherwise indicated, the Portfolio's investment
objective and policies may be changed without a vote of shareholders.
Main investment strategies
The Portfolio pursues its objective by investing in a combination of domestic
and foreign equity and fixed-income securities. The percentage of assets
invested in specific categories of fixed-income and equity securities will vary
from time to time depending upon the judgment of the investment manager as to
general market and economic conditions, trends in yields and interest rates and
changes in fiscal or monetary policies.
Equity securities in which the Portfolio normally invests include common stocks
and securities convertible into common stocks.
In selecting the Portfolio's equity securities, the investment manager
emphasizes growth stocks. In selecting growth stocks, the investment manager
emphasizes stock selection and fundamental research in seeking to enhance
long-term performance potential. The investment manager considers a number of
quantitative and qualitative factors in considering whether to invest in a
growth stock including high return on equity and earnings growth rate, low level
of debt, strong balance sheet, good management and industry leadership.
The investment manager also considers other factors such as:
o patterns of increasing growth in sales and earnings;
o the development of new or improved products or services;
o favorable outlooks for growth in the industry;
o the probability of increased operating efficiencies;
o emphasis on research and development;
o cyclical conditions; or
o other signs that a company is expected to show greater than average capital
appreciation and earnings growth.
19
<PAGE>
Fixed-income investments in which the Portfolio may invest may be of any rating,
and may include lower-rated high yield/ high risk securities and those which are
unrated. Currently, the Portfolio anticipates that its fixed-income investments
will be primarily in investment-grade securities, with not more than 35% of its
total assets in high yield/ high risk fixed-income securities.
The fixed-income securities in which the Portfolio invests include bonds, money
market instruments (including repurchase agreements) and other debt securities
(such as U.S. and foreign government securities and investment-grade and high
yield/ high risk corporate obligations) and preferred stocks, some of which may
have a call on common stocks through attached warrants or a conversion
privilege.
In seeking to achieve its investment objective, the Portfolio will invest in
fixed-income securities based on the investment manager's analysis without
relying on any published ratings. The Portfolio will invest in a particular
fixed-income security if in the investment manager's view, the increased yield
offered, regardless of published ratings, is sufficient to compensate for a
reasonable element of assumed risk. Since investments will be based upon the
investment manager's analysis rather than upon published ratings, achievement of
the Portfolio's goals may depend more upon the abilities of the investment
manager than would otherwise be the case.
The Portfolio may, but is not required to, invest up to 25% of its total assets
in foreign securities.
Of course, there can be no guarantee that by following these strategies, the
Portfolio will achieve its objective.
Other investments
To a more limited extent, the Portfolio may, but is not required to, utilize
other investments and investment techniques that may impact Portfolio
performance including, but not limited to, options, futures and other
derivatives (financial instruments that derive their value from other securities
or commodities, or that are based on indices).
Risk management strategies
The Portfolio manages risk by diversifying widely among market sectors and
companies and through the use of fundamental research.
The Portfolio also may, but is not required to, use certain derivatives in an
attempt to manage risk. The use of derivatives could magnify losses.
For temporary defensive purposes, the Portfolio may invest up to 100% of its
assets in short-term high-quality debt securities, cash and cash equivalents. In
such a case, the Portfolio would not be pursuing, and may not achieve, its
objective.
20
<PAGE>
Main risks
There are market and investment risks with any security and the value of an
investment in the Portfolio will fluctuate over time and it is possible to lose
money invested in the Portfolio.
The Portfolio's principal risks are associated with investing in the stock
market, such as equity and growth investing, and also the risks associated with
investing in fixed-income securities, such as credit quality, interest rate
movements, maturity, and principal prepayment, and the investment manager's
skill in managing the Portfolio.
The Portfolio's returns and net asset value will go up and down. Stock market
movements will affect the Portfolio's share price on a daily basis. Declines in
value are possible in both the overall stock market and in the types of
securities held by the Portfolio.
An investment in the common stock of a company represents a proportionate
ownership interest in that company. Therefore, the Portfolio participates in the
success or failure of any company in which it holds stock. Compared to other
classes of financial assets, such as bonds or cash equivalents, common stocks
have historically offered a greater potential for gain on investment. However,
the market value of common stocks can fluctuate significantly, reflecting such
things as the business performance of the issuing company, investors'
perceptions of the company or the overall stock market and general economic or
financial market movements. Smaller companies are especially sensitive to these
factors and may even become valueless.
Because of their perceived return potential, growth stocks are typically in
demand and tend to carry relatively high prices. Growth stocks generally
experience greater share price fluctuations as the market reacts to changing
perceptions of the underlying companies' growth potential and broader economic
activity. If the growth stocks the Portfolio invests in do not produce the
expected earnings growth, their share price may drop and the Portfolio's net
asset value would decline.
Because the Portfolio invests in fixed-income securities, another significant
risk is that interest rates will rise, and the price of bonds held by the
Portfolio will fall in proportion to their duration. Generally, longer-term
securities are more susceptible to changes in value as a result of interest-rate
changes than are shorter-term securities.
The issuer of a bond that the Portfolio holds may default with respect to
payment of principal and interest. The lower a bond is rated, the more it is
considered to be a speculative or risky investment.
21
<PAGE>
Fixed-income securities are also subject to prepayment risk. Prepayment risk is
commonly associated with pooled debt securities, such as mortgage-backed
securities and asset-backed securities, but may affect other debt securities as
well. When the underlying debt obligations are prepaid ahead of schedule, the
return on the security will be lower than expected. Prepayment rates usually
increase when interest rates are falling.
High yield/ high risk fixed income securities (often referred to as "junk
bonds"), in which the Portfolio may invest, are more likely to be affected by
negative developments related to their issuer or industry, and entail relatively
greater risk of loss of income and principal than investments in higher rated
securities. Market prices of high yield/ high risk securities may fluctuate more
than market prices of higher rated securities.
To the extent that the Portfolio invests in both stocks and bonds to seek to
moderate share price volatility compared with other growth stock portfolios, the
Portfolio may underperform in markets that favor more aggressive growth stock
funds.
In addition, the Portfolio's asset allocation could prove to be less appropriate
than other balanced mutual funds.
To the extent that the Portfolio invests in foreign securities, foreign
investments, particularly investments in emerging markets, carry added risks due
to the possibility of inadequate or inaccurate financial information about
companies, potential political disturbances and fluctuations in currency
exchange rates. Foreign securities are often thinly traded and could be harder
to sell at a fair price generally, or in specific market situations.
The investment manager's skill in choosing appropriate investments for the
Portfolio will determine in large part the Portfolio's ability to achieve its
investment objective.
Past performance
The chart and table below provide some indication of the risks of investing in
the Portfolio by illustrating how the Portfolio has performed from year to year,
and comparing this information to two different measures of market performance.
The information does not reflect charges and fees associated with a separate
account that invests in the Portfolio or any insurance contract for which the
Portfolio is an investment option. These charges and fees will reduce returns.
Of course, past performance is not necessarily an indication of future
performance.
22
<PAGE>
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
24.16 5.05 37.88 1.69 12.11 -9.49 25.97 16.76 19.96 15.14
`89 `90 `91 `92 `93 `94 `95 `96 `97 `98
Year
For the periods included in the bar chart, the Portfolio's highest return for a
calendar quarter was 14.87% (the first quarter of 1991), and the Portfolio's
lowest return for a calendar quarter was -6.91% (the third quarter of 1998).
Average Annual Total Returns
Lehman Brothers
For periods ended Kemper Total Russell 1000 Government/Corporate
December 31, 1998 Return Portfolio Growth Index^+ Bond Index^++
- ----------------- ---------------- ------------- ------------
One Year 15.14% 38.71% 9.47%
Five Years 12.96% 25.70% 7.30%
Ten Years 14.20% 20.57% 9.33%
-----------
^+ The Russell 1000 Growth Index is an unmanaged index comprised of common
stocks of larger U.S. companies with greater than average growth
orientation and represents the universe of stocks from which
"earnings/growth" money managers typically select.
^++ The Lehman Brothers Government/Corporate Bond Index is an unmanaged index
comprised of intermediate and long-term government and investment-grade
corporate debt securities.
Index returns assume reinvestment of dividends and, unlike the Portfolio's
returns, do not reflect any fees or expenses.
23
<PAGE>
KEMPER BLUE CHIP PORTFOLIO
Investment objective
Kemper Blue Chip Portfolio seeks growth of capital and of income. Unless
otherwise indicated, the Portfolio's investment objective and policies may be
changed without a vote of shareholders.
Main investment strategies
The Portfolio pursues its objective by investing in a diversified portfolio,
emphasizing investments primarily in the common stocks of large, well-known,
high quality U.S. companies. Companies of this general type are often referred
to as "Blue Chip" companies and are similar in size to those included in the
Russell 1000 Index, a widely used benchmark of large stock performance.
Blue chip companies are generally identified by:
o substantial capitalization;
o established history of earnings and dividends;
o easy access to credit;
o good industry position; and
o superior management structure.
Under normal market conditions, the Portfolio will invest at least 65%, and may
invest up to 100%, of its total assets in the common stocks of companies with a
market capitalization (total market value of outstanding shares) of at least $1
billion at the time of investment.
Blue chip companies are believed to generally exhibit less investment risk and
less price volatility than companies lacking these high quality characteristics,
such as smaller, less seasoned companies. In addition, the large market of
publicly held shares for such companies and the generally high trading volume in
those shares results in a relatively high degree of liquidity for such
investments. The characteristics of high quality and high liquidity of blue chip
investments should make the market for such stocks attractive to investors both
within and outside the United States. The Portfolio will generally attempt to
avoid speculative securities or those with significant speculative
characteristics.
In general, the Portfolio will seek to invest in those established, high quality
companies whose industries are experiencing favorable long-term or cyclical
change. Thus, in seeking its objective the Portfolio will endeavor to select its
investments from high quality companies operating in the more attractive
industries.
24
<PAGE>
In selecting the Portfolio's equity securities, the investment manager
emphasizes growth stocks. In selecting growth stocks, the investment manager
emphasizes stock selection and fundamental research in seeking to enhance
long-term performance potential. The investment manager considers a number of
quantitative and qualitative factors in considering whether to invest in a
growth stock including high return on equity and earnings growth rate, low level
of debt, strong balance sheet, good management and industry leadership.
The investment manager also considers other factors such as:
o patterns of increasing growth in sales and earnings;
o the development of new or improved products or services;
o favorable outlooks for growth in the industry;
o the probability of increased operating efficiencies;
o emphasis on research and development;
o cyclical conditions; or
o other signs that a company is expected to show greater than average capital
appreciation and earnings growth.
A stock is typically sold when, in the opinion of the investment manager, (i)
the stock has reached its fair market value and its appreciation potential is
limited, (ii) a company's fundamentals have deteriorated or (iii) the
Portfolio's holdings are too heavily weighted in a particular stock or industry
sector.
Of course, there can be no guarantee that by following these strategies, the
Portfolio will achieve its objective.
Other investments
To a more limited extent, the Portfolio may, but is not required to, invest in
the following:
The Portfolio may invest in preferred stocks, debt securities and convertible
securities, including warrants and rights, when the investment manager believes
that they offer opportunities for growth of capital and of income.
The Portfolio may, but is not required to, invest up to 25% of its total assets
in foreign securities.
The Portfolio may utilize other investments and investment techniques that may
impact Portfolio performance including, but not limited to, options, futures and
other derivatives (financial instruments that derive their value from other
securities or commodities, or that are based on indices).
25
<PAGE>
Risk management strategies
The Portfolio manages risk by diversifying widely among market sectors and
companies and through the use of fundamental research. The Portfolio also may,
but is not required to, use certain derivatives in an attempt to manage risk.
The use of derivatives could magnify losses.
For temporary defensive purposes, the Portfolio may invest up to 100% of its
assets in high-quality debt securities, cash and cash equivalents. In such a
case, the Portfolio would not be pursuing, and may not achieve, its objective.
Main risks
There are market and investment risks with any security and the value of an
investment in the Portfolio will fluctuate over time and it is possible to lose
money invested in the Portfolio.
The Portfolio's principal risks are associated with investing in the stock
market, equity and growth investing, and the investment manager's skill in
managing the Portfolio.
The Portfolio's returns and net asset value will go up and down. Stock market
movements will affect the Portfolio's share price on a daily basis. Declines in
value are possible in both the overall stock market and in the types of
securities held by the Portfolio.
An investment in the common stock of a company represents a proportionate
ownership interest in that company. Therefore, the Portfolio participates in the
success or failure of any company in which it holds stock. Compared to other
classes of financial assets, such as bonds or cash equivalents, common stocks
have historically offered a greater potential for gain on investment. However,
the market value of common stocks can fluctuate significantly, reflecting such
things as the business performance of the issuing company, investors'
perceptions of the company or the overall stock market and general economic or
financial market movements. Smaller companies are especially sensitive to these
factors and may even become valueless.
Because of their perceived return potential, growth stocks are typically in
demand and tend to carry relatively high prices. Growth stocks generally
experience greater share price fluctuations as the market reacts to changing
perceptions of the underlying companies' growth potential and broader economic
activity. If the growth stocks the Portfolio invests in do not produce the
expected earnings growth, their share price may drop and the Portfolio's net
asset value would decline.
To the extent that the Portfolio invests in larger, more established companies,
the Portfolio may underperform in markets that do not favor growth stock funds.
26
<PAGE>
To the extent that the Portfolio invests in foreign securities, foreign
investments, particularly investments in emerging markets, carry added risks due
to the possibility of inadequate or inaccurate financial information about
companies, potential political disturbances and fluctuations in currency
exchange rates. Foreign securities are often thinly traded and could be harder
to sell at a fair price generally, or in specific market situations.
The Portfolio expects to trade securities actively. This strategy could increase
transaction costs and reduce performance.
The investment manager's skill in choosing appropriate investments for the
Portfolio will determine in large part the Portfolio's ability to achieve its
investment objective.
Past performance
The chart and table below provide some indication of the risks of investing in
the Portfolio by illustrating how the Portfolio has performed from year to year,
and comparing this information to a broad measure of market performance. The
information does not reflect charges and fees associated with a separate account
that invests in the Portfolio or any insurance contract for which the Portfolio
is an investment option. These charges and fees will reduce returns.
Of course, past performance is not necessarily an indication of future
performance.
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
13.84
`89 `90 `91 `92 `93 `94 `95 `96 `97 `98
Year
For the period included in the bar chart, the Portfolio's highest return for a
calendar quarter was 18.26% (the fourth quarter of 1998), and the Portfolio's
lowest return for a calendar quarter was -12.38% (the third quarter of 1998).
27
<PAGE>
Average Annual Total Returns
For periods ended
December 31, 1998 Kemper Blue Chip Portfolio Russell 1000 Index^+
- ----------------- -------------------------- -------------------
One Year 13.84% 27.02%
Since Inception (5/1/97) 15.38% 31.41%
- -----------
^+ The Russell 1000 Index is an unmanaged capitalization weighted price only
index comprised of the largest capitalized U.S. companies whose common
stocks are traded in the United States. Index returns assume reinvestment
of dividends and, unlike the Portfolio's returns, do not reflect any fees
or expenses.
28
<PAGE>
KEMPER GROWTH PORTFOLIO
Investment objective
Kemper Growth Portfolio seeks maximum appreciation of capital. Unless otherwise
indicated, the Portfolio's investment objective and policies may be changed
without a vote of shareholders.
Main investment strategies
The Portfolio pursues its objective by investing at least 65% of its total
assets in equity securities under normal circumstances. 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, options
and rights exercisable for equity securities. The common stocks or other
securities that the investment manager selects will be those which, in the
investment manager's judgment, have significant appreciation possibilities.
Investment opportunities will often be sought among securities of small, less
well-known companies; but securities of large, well-known companies will also be
purchased, particularly when the investment manager considers such securities to
be priced favorably in comparison with securities of smaller companies.
Companies in which the Portfolio invests generally have market capitalizations
(total market value of outstanding shares) in excess of $1 billion.
In selecting the Portfolio's equity securities, the investment manager
emphasizes growth stocks. In selecting growth stocks, the investment manager
emphasizes stock selection and fundamental research in seeking to enhance
long-term performance potential. The investment manager considers a number of
quantitative and qualitative factors in considering whether to invest in a
growth stock including high return on equity and earnings growth rate, low level
of debt, strong balance sheet, good management and industry leadership.
The investment manager also considers other factors such as:
o patterns of increasing growth in sales and earnings;
o the development of new or improved products or services;
o favorable outlooks for growth in the industry;
o the probability of increased operating efficiencies;
o emphasis on research and development;
29
<PAGE>
o cyclical conditions; or
o other signs that a company is expected to show greater than average capital
appreciation and earnings growth.
In seeking to obtain capital appreciation, the investment manager seeks
reasonably priced securities that it believes have the potential to appreciate
at an above-average rate, relative to the stock market as a whole. The
investment manager anticipates making purchases and sales on the basis of
valuations and fundamentals. The Portfolio attempts to identify undervalued
securities that it anticipates will appreciate over a longer time period.
However, because the valuations of growth-style securities may change more
rapidly than the valuations of other types of investments, the investment
manager expects to hold certain securities for a shorter period of time (that
is, under a year). The Portfolio will emphasize fundamental research to select
securities.
A stock is typically sold when, in the opinion of the investment manager, (i)
the stock has reached its fair market value, or (ii) the company's fundamentals
have deteriorated.
The Portfolio may, but is not required to, invest up to 25% of its total assets
in foreign securities.
Of course, there can be no guarantee that by following these strategies, the
Portfolio will achieve its objective.
Other investments
To a more limited extent, the Portfolio may, but is not required to, utilize
other investments and investment techniques that may impact Portfolio
performance including, but not limited to, options, futures and other
derivatives (financial instruments that derive their value from other securities
or commodities, or that are based on indices).
Risk management strategies
The Portfolio manages risk by diversifying widely among market sectors and
companies. The Portfolio also may, but is not required to, use certain
derivatives in an attempt to manage risk. The use of derivatives could magnify
losses.
For temporary defensive purposes, the Portfolio may invest up to 100% of its
assets in high-quality debt securities, cash and cash equivalents. In such a
case, the Portfolio would not be pursuing, and may not achieve, its objective.
Main risks
There are market and investment risks with any security and the value of an
investment in the Portfolio will fluctuate over time and it is possible to lose
money invested in the Portfolio.
30
<PAGE>
The Portfolio's principal risks are associated with investing in the stock
market, equity and growth investing, sector investing, and the investment
manager's skill in managing the Portfolio.
The Portfolio's returns and net asset value will go up and down. Stock market
movements will affect the Portfolio's share price on a daily basis. Declines in
value are possible in both the overall stock market and in the types of
securities held by the Portfolio.
An investment in the common stock of a company represents a proportionate
ownership interest in that company. Therefore, the Portfolio participates in the
success or failure of any company in which it holds stock. Compared to other
classes of financial assets, such as bonds or cash equivalents, common stocks
have historically offered a greater potential for gain on investment. However,
the market value of common stocks can fluctuate significantly, reflecting such
things as the business performance of the issuing company, investors'
perceptions of the company or the overall stock market and general economic or
financial market movements. Smaller companies are especially sensitive to these
factors and may even become valueless.
Because of their perceived return potential, growth stocks are typically in
demand and tend to carry relatively high prices. Growth stocks generally
experience greater share price fluctuations as the market reacts to changing
perceptions of the underlying companies' growth potential and broader economic
activity. If the growth stocks the Portfolio invests in do not produce the
expected earnings growth, their share price may drop and the Portfolio's net
asset value would decline.
To the extent that the Portfolio invests in foreign securities, foreign
investments, particularly investments in emerging markets, carry added risks due
to the possibility of inadequate or inaccurate financial information about
companies, potential political disturbances and fluctuations in currency
exchange rates. Foreign securities are often thinly traded and could be harder
to sell at a fair price generally, or in specific market situations.
The Portfolio expects to trade securities actively. This strategy could increase
transaction costs and reduce performance.
The investment manager's skill in choosing appropriate investments for the
Portfolio will determine in large part the Portfolio's ability to achieve its
investment objective.
Past performance
The chart and table below provide some indication of the risks of investing in
the Portfolio by illustrating how the Portfolio has performed from year to year,
and comparing this information to a broad measure of market performance. The
information does not reflect charges and fees associated with a separate account
that
31
<PAGE>
invests in the Portfolio or any insurance contract for which the Portfolio is an
investment option. These charges and fees will reduce returns. Of course, past
performance is not necessarily an indication of future performance.
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
27.92 0.60 59.46 3.58 14.62 -4.01 32.97 21.63 21.34 15.10
`89 `90 `91 `92 `93 `94 `95 `96 `97 `98
Year
For the periods included in the bar chart, the Portfolio's highest return for a
calendar quarter was 27.76% (the fourth quarter of 1998), and the Portfolio's
lowest return for a calendar quarter was -21.97% (the third quarter of 1998).
Average Annual Total Returns
For periods ended Kemper Growth Russell 1000
December 31, 1998 Portfolio Growth Index^+ S&P 500 Index^++
----------------- --------- -------------- ----------------
One Year 15.10% 38.71% 28.58%
Five Years 16.74% 25.70% 24.06%
Ten Years 18.11% 20.57% 19.21%
- -----------
^+ The Russell 1000 Growth Index is an unmanaged index comprised of common
stocks of larger U.S. companies with greater than average growth
orientation and represents the universe of stocks from which
"earnings/growth" money managers typically select.
^++ The Standard and Poor's 500 Composite Stock Price Index (S&P 500) is an
unmanaged capitalization-weighted measure of 500 widely held common stocks
listed on the New York Stock Exchange and the American Stock Exchange, and
traded on the Nasdaq Stock Market, Inc.
Index returns assume reinvestment of dividends and, unlike Portfolio
returns, do not reflect any fees or expenses.
32
<PAGE>
KEMPER AGGRESSIVE GROWTH PORTFOLIO
Investment objective
Kemper Aggressive Growth Portfolio seeks capital appreciation. Unless otherwise
indicated, the Portfolio's investment objective and policies may be changed
without a vote of shareholders.
Main investment strategies
The Portfolio pursues its objective through the use of aggressive investing
techniques by investing primarily in equity securities of U.S. companies that
the investment manager believes offer the best opportunities for capital
appreciation at any given time. Under normal conditions, the Portfolio will
invest at least 65%, and may invest up to 100%, of its total assets in equity
securities. The investment manager pursues a flexible investment strategy in the
selection of securities, not limited to any particular investment sector,
industry or company size. The investment manager may, depending upon market
circumstances, emphasize the securities of small, medium or large-sized
companies from time to time. The Portfolio may invest a significant portion of
its assets in initial public offerings ("IPOs"), which are typically securities
of small, unseasoned issuers.
The Portfolio may invest 25% or more of its total assets in one or more market
sectors, such as the technology sector.
The investment manager considers a variety of factors in selecting stocks,
including sustainable, above-average earnings growth relative to the overall
stock market, historic earnings, earnings estimates and company fundamentals.
The investment manager uses a disciplined approach to stock selection and
fundamental research to help it identify quality growth companies whose stocks
are selling at reasonable prices. The investment manager relies heavily upon the
fundamental analysis and research of its large research staff, and will
generally seek to invest in growth companies whose value may not be fully
recognized by the market at large.
33
<PAGE>
Such companies may be:
o expected to achieve accelerating earnings growth, perhaps due to strong
demand for their products or services;
o undervalued, based upon price/earnings ratios, price/book value ratios and
other measures;
o undergoing financial restructuring;
o involved in takeover or arbitrage situations;
o expected to benefit from evolving market cycles or changing economic
conditions; or
o representing special situations, such as changes in management or favorable
regulatory developments.
Because of the flexible nature of the Portfolio's investment policies, the
Portfolio may have a higher portfolio turnover than a typical equity mutual
fund. To some extent, the Portfolio may trade in securities for the short term.
In addition, the investment manager may use market volatility in an attempt to
capitalize on apparently unwarranted price fluctuations, both to purchase or
increase undervalued positions and to sell or reduce overvalued holdings. For
example, during market declines, the Portfolio may add to positions in favored
securities, while becoming more aggressive as it gradually reduces the number of
companies represented in its portfolio. Conversely, in rising markets, the
Portfolio may reduce or eliminate fully valued positions, while becoming more
conservative as it gradually increases the number of companies in its portfolio.
The Portfolio may, but is not required to, invest up to 25% of its total assets
in foreign securities.
Of course, there can be no guarantee that by following these strategies, the
Portfolio will achieve its objective.
Other investments
To a more limited extent, the Portfolio may, but is not required to, utilize
other investments and investment techniques that may impact Portfolio
performance including, but not limited to, options, futures and other
derivatives (financial instruments that derive their value from other securities
or commodities, or that are based on indices).
34
<PAGE>
Risk management strategies
The Portfolio may, but is not required to, use certain derivatives in an attempt
to manage risk. The use of derivatives could magnify losses.
For temporary defensive purposes, the Portfolio may invest up to 100% of its
assets in high-quality debt securities, cash and cash equivalents. In such a
case, the Portfolio would not be pursuing, and may not achieve, its objective.
Main risks
There are market and investment risks with any security and the value of an
investment in the Portfolio will fluctuate over time and it is possible to lose
money invested in the Portfolio.
The Portfolio's principal risks are associated with investing in the stock
market, equity and growth investing, sector investing, non-diversified
investing, and the investment manager's skill in managing the Portfolio.
The Portfolio's returns and net asset value will go up and down. Stock market
movements will affect the Portfolio's share price on a daily basis. Declines in
value are possible in both the overall stock market and in the types of
securities held by the Portfolio.
An investment in the common stock of a company represents a proportionate
ownership interest in that company. Therefore, the Portfolio participates in the
success or failure of any company in which it holds stock. Compared to other
classes of financial assets, such as bonds or cash equivalents, common stocks
have historically offered a greater potential for gain on investment. However,
the market value of common stocks can fluctuate significantly, reflecting such
things as the business performance of the issuing company, investors'
perceptions of the company or the overall stock market and general economic or
financial market movements. Smaller companies are especially sensitive to these
factors and may even become valueless.
Because of their perceived return potential, growth stocks are typically in
demand and tend to carry relatively high prices. Growth stocks generally
experience greater share price fluctuations as the market reacts to changing
perceptions of the underlying companies' growth potential and broader economic
activity. If the growth stocks the Portfolio invests in do not produce the
expected earnings growth, their share price may drop and the Portfolio's net
asset value would decline.
To the extent that the Portfolio focuses its investments in a market sector,
financial, economic, business and other developments affecting issuers in that
sector may have a greater effect on the Portfolio than if it had not focused its
assets in that sector.
35
<PAGE>
Because the Portfolio is "non-diversified," the Portfolio may invest a
relatively high percentage of its assets in a limited number of issuers.
Accordingly, the Portfolio's investment returns are more likely to be impacted
by changes in the market value and returns of any one portfolio holding.
To the extent that the Portfolio invests in foreign securities, foreign
investments, particularly investments in emerging markets, carry added risks due
to the possibility of inadequate or inaccurate financial information about
companies, potential political disturbances and fluctuations in currency
exchange rates. Foreign securities are often thinly traded and could be harder
to sell at a fair price generally, or in specific market situations.
The Portfolio expects to trade securities actively. This strategy could increase
transaction costs and reduce performance.
The investment manager's skill in choosing appropriate investments for the
Portfolio will determine in large part the Portfolio's ability to achieve its
investment objective.
Past performance
Because the Portfolio commenced operations on May 1, 1999, no past performance
information is available.
36
<PAGE>
KEMPER HORIZON 20+ PORTFOLIO
Investment objectives
The Horizon 20+ Portfolio, designed for investors with approximately a 20+ year
investment horizon, seeks growth of capital, with income as a secondary
objective. Unless otherwise indicated, the Portfolio's investment objectives and
policies may be changed without a vote of shareholders.
Main investment strategies
The Portfolio pursues its objectives by maintaining, under normal conditions, an
asset allocation of approximately 80% equity securities and 20% fixed-income
securities. Although the Portfolio expects to closely approximate its target
asset allocation over the long-term, the investment manager may adjust this mix
based on cash flow, market conditions, anticipated returns and risk.
The Portfolio's equity securities consist primarily of common stocks of U.S. and
foreign companies. The Portfolio invests primarily in stocks of large
established companies (those with market capitalization in excess of $5
billion), but may also include stocks of smaller companies. The U.S. equity
portion of the portfolio is divided into two parts consisting of growth stocks
and value stocks. The neutral allocation between growth and value stocks would
be 50%/50%. Although allocations in favor of growth or value normally would not
be expected to exceed 60%, it may be up to 75% at any given time. Allocation
decisions are normally based upon long-term considerations and changes would
normally be expected to be gradual. There is no assurance that the allocation
process will improve performance results.
In selecting both growth and value stocks, the investment manager emphasizes
stock selection and quantitative research in seeking to enhance long-term
performance potential. The investment manager seeks stocks it believes are
undervalued in the marketplace in relation to current and estimated future
earnings and dividends. Some of the factors the Portfolio's management team will
consider in making its investments are:
o strong earnings growth rate and positive changes in earnings trend;
o strong balance sheet;
o attractive market, balance sheet and income statement-based valuations; and
o robust short- and long-term momentum.
Under normal conditions, the mix between U.S. equity securities and
international equity securities is expected to be 70% U.S. and 30% foreign. The
Portfolio's
37
<PAGE>
international equity allocation may range from 20% to 40%, although the
investment manager may reduce the international portion to zero if, in the
judgment of the investment manager, foreign securities appear unattractive based
on political and economic conditions.
The fixed-income portion of the portfolio may be invested in a broad variety of
U.S. dollar-denominated fixed-income securities, including U.S. Government and
agency obligations, corporate fixed-income securities and cash and cash
equivalents. These fixed-income securities generally have credit ratings of
investment-grade at the time of purchase, as determined by one or more
nationally recognized statistical rating organizations, or if unrated, are
considered of comparable quality by the investment manager. Under normal
conditions, the Portfolio expects to maintain a high average dollar-weighted
credit quality, i.e. within the top two rating categories of a nationally
recognized statistical rating organization (or of comparable quality as
determined by the investment manager), although the Portfolio may invest up to
10% of its assets in lower rated high yield/ high risk fixed-income securities
or, if unrated, of comparable quality.
Of course, there can be no guarantee that by following these strategies, the
Portfolio will achieve its objectives.
Other investments
To a more limited extent, the Portfolio may, but is not required to, invest in
the following:
The Portfolio may invest in preferred stocks, convertible securities, equity
investments in partnerships, joint ventures and other noncorporate investments
and warrants and rights. The Portfolio may also lend its securities.
The Portfolio may utilize other investments and investment techniques that may
impact Portfolio performance including, but not limited to, options, futures and
other derivatives (financial instruments that derive their value from other
securities or commodities, or that are based on indices).
Risk management strategies
Through professional management and diversification, the Portfolio seeks to
control risk for its time horizon. The Portfolio's asset allocation between
domestic and foreign equity investments is intended to reduce risk, while also
increasing potential return, as compared to investing in U.S. stocks or
international stocks alone. In addition, the Portfolio's allocation between
growth and value stocks seeks to reduce the risk over a whole market cycle of
holding growth or value stocks alone.
The Portfolio attempts to limit the exposure of the fixed-income portion of the
portfolio to interest rate risk (i.e. the risk that the value of the
fixed-income securities
38
<PAGE>
may rise or fall as interest rates change) by maintaining a relatively short
duration. Under normal conditions, the target duration of the Portfolio is
approximately 2.5 years, although it may range from 1.5 to 3.5 years depending
on market conditions.
The Portfolio attempts to limit the exposure of the fixed-income portion of the
portfolio to credit risk (i.e. the risk that the issuer of a fixed-income
security may not make required interest and principal payments in a timely
manner or may even default) by imposing limits on the quality of specific
securities in its portfolio and by maintaining a relatively high average
weighted credit quality.
The Portfolio also may, but is not required to, use certain derivatives in an
attempt to manage risk. The use of derivatives could magnify losses.
For temporary defensive purposes, the Portfolio may invest up to 100% of its
assets in high-quality debt securities, cash and cash equivalents. In such a
case, the Portfolio would not be pursuing, and may not achieve, its objective.
Main risks
There are market and investment risks with any security and the value of an
investment in the Portfolio will fluctuate over time and it is possible to lose
money invested in the Portfolio.
The Portfolio's principal risks are associated with investing in the stock
market, investing in the bond market, and the investment manager's skill in
managing the Portfolio.
The Portfolio's returns and net asset value will go up and down. Stock market
movements will affect the Portfolio's share prices on a daily basis. Declines in
value are possible both in the overall stock market or in the types of
securities held by the Portfolio.
An investment in the common stock of a company represents a proportionate
ownership interest in that company. Therefore, the Portfolio participates in the
success or failure of any company in which it holds stock. Compared to other
classes of financial assets, such as bonds or cash equivalents, common stocks
have historically offered a greater potential for gain on investment. However,
the market value of common stocks can fluctuate significantly, reflecting such
things as the business performance of the issuing company, investors'
perceptions of the company or the overall stock market and general economic or
financial market movements. Smaller companies are especially sensitive to these
factors and may even become valueless.
Because of their perceived return potential, growth stocks are typically in
demand and tend to carry relatively high prices. Growth stocks generally
experience greater share price fluctuations as the market reacts to changing
perceptions of the underlying
39
<PAGE>
companies' growth potential and broader economic activity. If the growth stocks
the Portfolio invests in do not produce the expected earnings growth, their
share price may drop and the Portfolio's net asset value would decline.
The determination that a stock is undervalued is subjective; the market may not
agree, and the stock's price may not rise to what the investment manager
believes is its full value. It may even decrease in value. However, an
investment in undervalued stocks may pose less downside risk than in other
stocks since value stocks are in theory already underpriced.
Because the Portfolio invests in fixed-income securities, a significant risk is
that interest rates will rise, and the price of bonds held by the Portfolio will
fall in proportion to their duration. It is also possible that bonds in the
Portfolio could be downgraded in credit rating or go into default.
Duration, a measurement based on the estimated pay-back period or duration of a
bond (or portfolio of bonds), is the most widely used gauge of sensitivity to
interest rate change. Like maturity, duration is expressed in years. The longer
a Portfolio's duration, the more sharply its share price is likely to rise or
fall when interest rates change.
High yield/ high risk fixed income securities (often referred to as "junk
bonds"), in which the Portfolio may invest, are more likely to be affected by
negative developments related to their issuer or industry, and entail relatively
greater risk of loss of income and principal than investments in higher rated
securities. Market prices of high yield/ high risk securities may fluctuate more
than market prices of higher rated securities.
The Portfolio's asset allocation could prove to be less appropriate to market
conditions than other equity and fixed-income mutual funds.
To the extent the Portfolio invests in foreign securities, foreign investments,
particularly those in emerging markets, carry added risks due to the possibility
of inadequate or inaccurate financial information about companies, potential
political disturbances and fluctuations in currency exchange rates. Foreign
securities are often thinly traded and could be harder to sell at a fair price
generally, or in specific market situations.
The Portfolio may trade securities actively. This strategy could increase
transaction costs and reduce performance.
The investment manager's skill in choosing appropriate investments for the
Portfolio will determine in large part the Portfolio's ability to achieve its
investment objective.
40
<PAGE>
Past performance
The chart and table below provide some indication of the risks of investing in
the Portfolio by illustrating how the Portfolio has performed from year to year,
and comparing this information to two broad measures of market performance. The
information does not reflect charges and fees associated with a separate account
that invests in the Portfolio or any insurance contract for which the Portfolio
is an investment option. These charges and fees will reduce returns. Of course,
past performance is not necessarily an indication of future performance.
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
20.47 13.01
`89 `90 `91 `92 `93 `94 `95 `96 `97 `98
Year
For the periods included in the bar chart, the Portfolio's highest return for a
calendar quarter was 13.86% (the fourth quarter of 1998), and the Portfolio's
lowest return for a calendar quarter was -11.44% (the third quarter of 1998).
Average Annual Total Returns
Lehman Brothers
Government/
For periods ended Kemper Horizon Corporate
December 31, 1998 20+ Portfolio S&P 500 Index^+ Bond Index^++
----------------- ------------- --------------- -------------
One Year 13.01% 28.58% 9.47%
Since Inception (5/1/96) 18.44% 29.00% 9.53%
- ------------
^+ The Standard and Poor's 500 Composite Stock Price Index (S&P 500) is an
unmanaged capitalization-weighted measure of 500 widely held common stocks
listed on the New York Stock Exchange and the American Stock Exchange, and
traded on the Nasdaq Stock Market, Inc.
41
<PAGE>
^++ The Lehman Brothers Government/Corporate Bond Index is an unmanaged index
comprised of intermediate and long-term government and investment-grade
corporate debt securities.
Index returns assume reinvestment of dividends and, unlike Portfolio
returns, do not reflect any fees or expenses.
42
<PAGE>
KEMPER HORIZON 10+ PORTFOLIO
Investment objective
The Horizon 10+ Portfolio, designed for investors with approximately a 10+ year
investment horizon, seeks a balance between growth of capital and income,
consistent with moderate risk. Unless otherwise indicated, the Portfolio's
investment objective and policies may be changed without a vote of shareholders.
Main investment strategies
The Portfolio pursues its objective by maintaining, under normal conditions, an
asset allocation of approximately 60% equity securities and 40% fixed-income
securities. Although the Portfolio expects to closely approximate its target
asset allocation over the long-term, the investment manager may adjust this mix
based on cash flow, market conditions, anticipated returns and risk.
The Portfolio's equity securities consist primarily of common stocks of U.S. and
foreign companies. The Portfolio invests primarily in stocks of large,
established companies (those with market capitalization in excess of $5
billion), but may also include stocks of smaller companies. The U.S. equity
portion of the portfolio is divided into two parts consisting of growth stocks
and value stocks. The neutral allocation between growth and value stocks would
be 50%/50%. Although allocations in favor of growth or value normally would not
be expected to exceed 60%, it may be up to 75% at any given time. Allocation
decisions are normally based upon long-term considerations and changes would
normally be expected to be gradual. There is no assurance that the allocation
process will improve performance results.
In selecting both growth and value stocks, the investment manager emphasizes
stock selection and quantitative research in seeking to enhance long-term
performance potential. The investment manager seeks stocks it believes are
undervalued in the marketplace in relation to current and estimated future
earnings and dividends. Some of the factors the Portfolio's management team will
consider in making its investments are:
o strong earnings growth rate and positive changes in earnings trend;
o strong balance sheet;
o attractive market, balance sheet and income statement-based valuations; and
o robust short- and long-term momentum.
Under normal conditions, the target mix between U.S. equity securities and
international equity securities is expected to be 70% U.S. and 30% foreign. The
43
<PAGE>
Portfolio's international equity allocation may range from 20% to 40%, although
the investment manager may reduce the international portion to zero if, in the
judgment of the investment manager, foreign securities appear unattractive based
on political and economic conditions.
The fixed-income portion of the portfolio may be invested in a broad variety of
U.S. dollar-denominated fixed-income securities, including U.S. Government and
agency obligations, corporate fixed-income securities and cash and cash
equivalents. These fixed-income securities generally have credit ratings of
investment-grade at the time of purchase, as determined by one or more
nationally recognized statistical rating organizations, or if unrated, are
considered of comparable quality by the investment manager. Under normal
conditions, the Portfolio expects to maintain a high average dollar-weighted
credit quality, i.e. within the top two rating categories of a nationally
recognized statistical rating organization (or of comparable quality as
determined by the investment manager), although the Portfolio may invest up to
10% of its assets in lower rated high yield/ high risk fixed-income securities
or, if unrated, of comparable quality.
Of course, there can be no guarantee that by following these strategies, the
Portfolio will achieve its objective.
Other investments
To a more limited extent, the Portfolio may, but is not required to, invest in
the following:
The Portfolio may invest in preferred stocks, convertible securities, equity
investments in partnerships, joint ventures and other noncorporate investments
and warrants and rights. The Portfolio may also lend its securities.
The Portfolio may utilize other investments and investment techniques that may
impact Portfolio performance including, but not limited to, options, futures and
other derivatives (financial instruments that derive their value from other
securities or commodities, or that are based on indices).
Risk management strategies
Through professional management and diversification, the Portfolio seeks to
control risk for its time horizon. The Portfolio's asset allocation between
domestic and foreign equity investments is intended to reduce risk, while also
increasing potential return, as compared to investing in U.S. stocks or
international stocks alone. In addition, the Portfolio's allocation between
growth and value stocks seeks to reduce the risk over a whole market cycle of
holding growth or value stocks alone.
The Portfolio attempts to limit the exposure of the fixed-income portion of the
portfolio to interest rate risk (i.e. the risk that the value of the
fixed-income securities
44
<PAGE>
may rise or fall as interest rates change) by maintaining a relatively short
duration. Under normal conditions, the target duration of the Portfolio is
approximately 2.5 years, although it may range from 1.5 to 3.5 years depending
on market conditions.
The Portfolio attempts to limit the exposure of the fixed-income portion of the
portfolio to credit risk (i.e. the risk that the issuer of a fixed-income
security may not make required interest and principal payments in a timely
manner or may even default) by imposing limits on the quality of specific
securities in its portfolio and by maintaining a relatively high average
weighted credit quality.
The Portfolio also may, but is not required to, use certain derivatives in an
attempt to manage risk. The use of derivatives could magnify losses.
For temporary defensive purposes, the Portfolio may invest up to 100% of its
assets in short-term high-quality debt securities, cash and cash equivalents. In
such a case, the Portfolio would not be pursuing, and may not achieve, its
objective.
Main risks
There are market and investment risks with any security and the value of an
investment in the Portfolio will fluctuate over time and it is possible to lose
money invested in the Portfolio.
The Portfolio's principal risks are associated with investing in the stock
market, investing in the bond market, and the investment manager's skill in
managing the Portfolio.
The Portfolio's returns and net asset value will go up and down. Stock market
movements will affect the Portfolio's share prices on a daily basis. Declines in
value are possible both in the overall stock market or in the types of
securities held by the Portfolio.
An investment in the common stock of a company represents a proportionate
ownership interest in that company. Therefore, the Portfolio participates in the
success or failure of any company in which it holds stock. Compared to other
classes of financial assets, such as bonds or cash equivalents, common stocks
have historically offered a greater potential for gain on investment. However,
the market value of common stocks can fluctuate significantly, reflecting such
things as the business performance of the issuing company, investors'
perceptions of the company or the overall stock market and general economic or
financial market movements. Smaller companies are especially sensitive to these
factors and may even become valueless.
Because of their perceived return potential, growth stocks are typically in
demand and tend to carry relatively high prices. Growth stocks generally
experience greater share price fluctuations as the market reacts to changing
perceptions of the underlying
45
<PAGE>
companies' growth potential and broader economic activity. If the growth stocks
the Portfolio invests in do not produce the expected earnings growth, their
share price may drop and the Portfolio's net asset value would decline.
The determination that a stock is undervalued is subjective; the market may not
agree, and the stock's price may not rise to what the investment manager
believes is its full value. It may even decrease in value. However, an
investment in undervalued stocks may pose less downside risk than in other
stocks since value stocks are in theory already underpriced.
Because the Portfolio invests in fixed-income securities, a significant risk is
that interest rates will rise, and the price of bonds held by the Portfolio will
fall in proportion to their duration. It is also possible that bonds in the
portfolio could be downgraded in credit rating or go into default.
Duration, a measurement based on the estimated pay-back period or duration of a
bond (or portfolio of bonds), is the most widely used gauge of sensitivity to
interest rate change. Like maturity, duration is expressed in years. The longer
a Portfolio's duration, the more sharply its share price is likely to rise or
fall when interest rates change.
High yield/ high risk fixed income securities (often referred to as "junk
bonds"), in which the Portfolio may invest, are more likely to be affected by
negative developments related to their issuer or industry, and entail relatively
greater risk of loss of income and principal than investments in higher rated
securities. Market prices of high yield/ high risk securities may fluctuate more
than market prices of higher rated securities.
The Portfolio's asset allocation could prove to be less appropriate to market
conditions than other equity and fixed-income mutual funds.
To the extent the Portfolio invests in foreign securities, foreign investments,
particularly investments in emerging markets, carry added risks due to the
possibility of inadequate or inaccurate financial information about companies,
potential political disturbances and fluctuations in currency exchange rates.
Foreign securities are often thinly traded and could be harder to sell at a fair
price generally, or in specific market situations.
The Portfolio may trade securities actively. This strategy could increase
transaction costs and reduce performance.
The investment manager's skill in choosing appropriate investments for the
Portfolio will determine in large part the Portfolio's ability to achieve its
investment objective.
46
<PAGE>
Past performance
The chart and table below provide some indication of the risks of investing in
the Portfolio by illustrating how the Portfolio has performed from year to year,
and comparing this information to two broad measures of market performance. The
information does not reflect charges and fees associated with a separate account
that invests in the Portfolio or any insurance contract for which the Portfolio
is an investment option. These charges and fees will reduce returns. Of course,
past performance is not necessarily an indication of future performance.
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
16.77 11.30
`89 `90 `91 `92 `93 `94 `95 `96 `97 `98
Year
For the period included in the bar chart, the Portfolio's highest return for a
calendar quarter was 10.74% (the fourth quarter of 1998), and the Portfolio's
lowest return for a calendar quarter was -7.77% (the third quarter of 1998).
Average Annual Total Returns
Lehman Brothers
Government/
For periods ended Kemper Horizon Corporate
December 31, 1998 10+ Portfolio S&P 500 Index^+ Bond Index^++
----------------- ------------- -------------- ------------
One Year 11.30% 28.58% 9.47%
Since Inception (5/1/96) 14.87% 29.00% 9.53%
- ----------
^+ The Standard and Poor's 500 Composite Stock Price Index (S&P 500) is an
unmanaged capitalization-weighted measure of 500 widely held common stocks
listed on the New York Stock Exchange and the American Stock Exchange, and
traded on the Nasdaq Stock Market, Inc.
^++ The Lehman Brothers Government/Corporate Bond Index is an unmanaged index
comprised of intermediate and long-term government and investment-grade
corporate debt securities.
Index returns assume reinvestment of dividends and, unlike Portfolio
returns, do not reflect any fees or expenses.
47
<PAGE>
KEMPER HORIZON 5 PORTFOLIO
Investment objectives
The Horizon 5 Portfolio, designed for investors with approximately a 5-year
investment horizon, seeks income consistent with preservation of capital, with
growth of capital as a secondary objective. Unless otherwise indicated, the
Portfolio's investment objectives and policies may be changed without a vote of
shareholders.
Main investment strategies
The Portfolio pursues its objectives by maintaining, under normal conditions, an
asset allocation of approximately 40% equity securities and 60% fixed-income
securities. Although the Portfolio expects to closely approximate its target
asset allocation over the long-term, the investment manager may adjust this mix
based on cash flow, market conditions, anticipated returns and risk.
While the Portfolio's equity securities consist primarily of common stocks of
U.S. and foreign companies. The Portfolio invests primarily in stocks of large,
established companies (those with market capitalization in excess of $5
billion), but may also include stocks of smaller companies. The U.S. equity
portion of the portfolio is divided into two parts consisting of growth stocks
and value stocks. The neutral allocation between growth and value stocks would
be 50%/50%. Although allocations in favor of growth or value normally would not
be expected to exceed 60%, it may be up to 75% at any given time. Allocation
decisions are normally based upon long-term considerations and changes would
normally be expected to be gradual. There is no assurance that the allocation
process will improve performance results.
In selecting both growth and value stocks, the investment manager emphasizes
stock selection and quantitative research in seeking to enhance long-term
performance potential. The investment manager seeks stocks it believes are
undervalued in the marketplace in relation to current and estimated future
earnings and dividends. Some of the factors the Portfolio's management team will
consider in making its investments are:
o strong earnings growth rate and positive changes in earnings trend;
o strong balance sheet;
o attractive market, balance sheet and income statement-based valuations; and
o robust short- and long-term momentum.
Under normal conditions, the mix between U.S. equity securities and
international equity securities is expected to be 70% U.S. and 30% foreign. The
Portfolio's international equity allocation may range from 20% to 40%, although
the investment
48
<PAGE>
manager may reduce the international portion to zero if, in the judgment of the
investment manager, foreign securities appear unattractive based on political
and economic conditions.
The fixed-income portion of the portfolio may be invested in a broad variety of
U.S. dollar-denominated fixed-income securities, including U.S. Government and
agency obligations, corporate fixed-income securities and cash and cash
equivalents. These fixed-income securities generally have credit ratings of
investment-grade at the time of purchase, as determined by one or more
nationally recognized statistical rating organizations, or if unrated, are
considered of comparable quality by the investment manager. Under normal
conditions, the Portfolio expects to maintain a high average dollar-weighted
credit quality, i.e. within the top two rating categories of a nationally
recognized statistical rating organization (or of comparable quality as
determined by the investment manager), although the Portfolio may invest up to
10% of its assets in lower rated high yield/ high risk fixed-income securities
or, if unrated, of comparable quality.
Of course, there can be no guarantee that by following these strategies, the
Portfolio will achieve its objective.
Other investments
To a more limited extent, the Portfolio may, but is not required to, invest in
the following:
The Portfolio may invest in preferred stocks, convertible securities, equity
investments in partnerships, joint ventures and other noncorporate investments
and warrants and rights. The Portfolio may also lend its securities.
The Portfolio may utilize other investments and investment techniques that may
impact Portfolio performance including, but not limited to, options, futures and
other derivatives (financial instruments that derive their value from other
securities or commodities, or that are based on indices).
Risk management strategies
Through professional management and diversification, the Portfolio seeks to
control risk for its time horizon. The Portfolio's asset allocation between
domestic and foreign equity investments is intended to reduce risk, while also
increasing potential return, as compared to investing in U.S. stocks or
international stocks alone. In addition, the Portfolio's allocation between
growth and value stocks seeks to reduce the risk over a whole market cycle of
holding growth or value stocks alone.
The Portfolio attempts to limit the exposure of the fixed-income portion of the
Portfolio to interest rate risk (i.e. the risk that the value of the
fixed-income securities
49
<PAGE>
may rise or fall as interest rates change) by maintaining a relatively short
duration. Under normal conditions, the target duration of the Portfolio is
approximately 2.5 years, although it may range from 1.5 to 3.5 years depending
on market conditions.
The Portfolio attempts to limit the exposure of the fixed-income portion of the
portfolio to credit risk (i.e. the risk that the issuer of a fixed-income
security may not make required interest and principal payments in a timely
manner or may even default) by imposing limits on the quality of specific
securities in its portfolio and by maintaining a relatively high average
weighted credit quality.
The Portfolio also may, but is not required to, use certain derivatives in an
attempt to manage risk. The use of derivatives could magnify losses.
For temporary defensive purposes, the Portfolio may invest up to 100% of its
assets in short-term high-quality debt securities, cash and cash equivalents. In
such a case, the Portfolio would not be pursuing, and may not achieve, its
objective.
Main risks
There are market and investment risks with any security and the value of an
investment in the Portfolio will fluctuate over time and it is possible to lose
money invested in the Portfolio.
The Portfolio's principal risks are associated with investing in the stock
market, investing in the bond market, and the investment manager's skill in
managing the Portfolio.
The Portfolio's returns and net asset value will go up and down. Stock market
movements will affect the Portfolio's share prices on a daily basis. Declines in
value are possible both in the overall stock market or in the types of
securities held by the Portfolio.
An investment in the common stock of a company represents a proportionate
ownership interest in that company. Therefore, the Portfolio participates in the
success or failure of any company in which it holds stock. Compared to other
classes of financial assets, such as bonds or cash equivalents, common stocks
have historically offered a greater potential for gain on investment. However,
the market value of common stocks can fluctuate significantly, reflecting such
things as the business performance of the issuing company, investors'
perceptions of the company or the overall stock market and general economic or
financial market movements. Smaller companies are especially sensitive to these
factors and may even become valueless.
Because of their perceived return potential, growth stocks are typically in
demand and tend to carry relatively high prices. Growth stocks generally
experience greater share price fluctuations as the market reacts to changing
perceptions of the underlying companies' growth potential and broader economic
activity. If the growth stocks the
50
<PAGE>
Portfolio invests in do not produce the expected earnings growth, their share
price may drop and the Portfolio's net asset value would decline.
The determination that a stock is undervalued is subjective; the market may not
agree, and the stock's price may not rise to what the investment manager
believes is its full value. It may even decrease in value. However, an
investment in undervalued stocks may pose less downside risk than in other
stocks since value stocks are in theory already underpriced.
Because the Portfolio invests in fixed-income securities, a significant risk is
that interest rates will rise, and the price of bonds held by the Portfolio will
fall in proportion to their duration. It is also possible that bonds in the
portfolio could be downgraded in credit rating or go into default.
Duration, a measurement based on the estimated pay-back period or duration of a
bond (or portfolio of bonds), is the most widely used gauge of sensitivity to
interest rate change. Like maturity, duration is expressed in years. The longer
a Portfolio's duration, the more sharply its share price is likely to rise or
fall when interest rates change.
High yield/ high risk fixed income securities (often referred to as "junk
bonds"), in which the Portfolio may invest, are more likely to be affected by
negative developments related to their issuer or industry, and entail relatively
greater risk of loss of income and principal than investments in higher rated
securities. Market prices of high yield/ high risk securities may fluctuate more
than market prices of higher rated securities.
The Portfolio's asset allocation could prove to be less appropriate to market
conditions than other equity and fixed-income mutual funds.
To the extent the Portfolio invests in foreign securities, foreign investments,
particularly investments in emerging markets, carry added risks due to the
possibility of inadequate or inaccurate financial information about companies,
potential political disturbances and fluctuations in currency exchange rates.
Foreign securities are often thinly traded and could be harder to sell at a fair
price generally, or in specific market situations.
The Portfolio may trade securities actively. This strategy could increase
transaction costs and reduce performance.
The investment manager's skill in choosing appropriate investments for the
Portfolio will determine in large part the Portfolio's ability to achieve its
investment objective.
51
<PAGE>
Past performance
The chart and table below provide some indication of the risks of investing in
the Portfolio by illustrating how the Portfolio has performed from year to year,
and comparing this information to two broad measures of market performance. The
information does not reflect charges and fees associated with a separate account
that invests in the Portfolio or any insurance contract for which the Portfolio
is an investment option. These charges and fees will reduce returns. Of course,
past performance is not necessarily an indication of future performance.
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
12.70 10.00
`89 `90 `91 `92 `93 `94 `95 `96 `97 `98
Year
For the period included in the bar chart, the Portfolio's highest return for a
calendar quarter was 7.73% (the fourth quarter of 1998), and the Portfolio's
lowest return for a calendar quarter was -4.22% (the third quarter of 1998).
Average Annual Total Returns
Lehman Brothers
Kemper Government/
For periods ended Horizon 5 Corporate
December 31, 1998 Portfolio S&P 500 Index^+ Bond Index^++
----------------- --------- -------------- ------------
One Year 10.00% 28.58% 9.47%
Since Inception (5/1/96) 12.07% 29.00% 9.53%
- -----------
^+ The Standard and Poor's 500 Composite Stock Price Index (S&P 500) is an
unmanaged capitalization-weighted measure of 500 widely held common stocks
listed on the New York Stock Exchange and the American Stock Exchange, and
traded on the Nasdaq Stock Market, Inc.
52
<PAGE>
++ The Lehman Brothers Government/Corporate Bond Index is an unmanaged index
comprised of intermediate and long-term government and investment-grade
corporate debt securities.
Index returns assume reinvestment of dividends and, unlike Portfolio
returns, do not reflect any fees or expenses.
53
<PAGE>
KEMPER SMALL CAP GROWTH PORTFOLIO
Investment objective
Kemper Small Cap Growth Portfolio seeks maximum appreciation of investors'
capital. Unless otherwise indicated, the Portfolio's investment objective and
policies may be changed without a vote of shareholders.
Main investment strategies
The Portfolio pursues its objective by investing at least 65% of its total
assets in small capitalization stocks similar in size to those companies
comprising the Russell 2000 Index. Many of these companies would be in the early
stages of their life cycle. Equity securities in which the Portfolio invests
consists primarily of common stocks, but may include convertible securities,
including warrants and rights.
To select securities, the investment manager evaluates a variety of factors,
including historic earnings growth, projected earnings growth, return on equity,
debt to capital ratios, and company fundamentals. The investment manager seeks
attractive areas for investment opportunity arising from such factors as
technological advances, new marketing methods, and changes in the economy and
population.
Currently, the investment manager believes that investment opportunities may be
found among the following types of companies:
o companies engaged in high growth fields such as electronics, medical
technology, computer software and specialty retailing;
o companies having a significantly improved earnings outlook as the result of
a changed economic environment, acquisitions, mergers, new management,
changed corporate strategy or product innovation;
o companies supplying new or rapidly growing services to consumers and
businesses in such fields as automation, data processing, communications,
marketing and finance; and
o companies with innovative concepts or ideas.
In selecting the Portfolio's equity securities, the investment manager
emphasizes growth stocks. In selecting growth stocks, the investment manager
emphasizes stock selection and fundamental research in seeking to enhance
long-term performance potential. The investment manager considers a number of
quantitative and qualitative factors in considering whether to invest in a
growth stock including high return on equity and earnings growth rate, low level
of debt, strong balance sheet, good management and industry leadership.
54
<PAGE>
The investment manager also considers other factors such as:
o patterns of increasing growth in sales and earnings;
o the development of new or improved products or services;
o favorable outlooks for growth in the industry;
o the probability of increased operating efficiencies;
o emphasis on research and development;
o cyclical conditions; or
o other signs that a company is expected to show greater than average capital
appreciation and earnings growth.
In the selection of investments, long-term capital appreciation will take
precedence over short-range market fluctuations. The Portfolio does not intend
to engage actively in trading for short-term profits, although it may
occasionally make investments for short-term capital appreciation when the
investment manager believes it is desirable and consistent with sound investment
procedure.
A stock is typically sold when, in the opinion of the Portfolio management team,
(i) the stock has reached its fair market value and its appreciation potential
is limited, or (ii) a company's fundamentals have deteriorated.
The Portfolio may, but is not required to, invest up to 25% of its total assets
in foreign securities.
Of course, there can be no guarantee that by following these strategies, the
Portfolio will achieve its objective.
Other investments
To a more limited extent, the Portfolio may, but is not required to, invest in
the following:
The Portfolio may invest in other types of securities, including preferred
stocks and debt securities when the investment manager believes they offer
opportunities for capital growth.
The Portfolio may utilize other investments and investment techniques that may
impact Portfolio performance including, but not limited to, options, futures and
other derivatives (financial instruments that derive their value from other
securities or commodities, or that are based on indices).
55
<PAGE>
Risk management strategies
The Portfolio manages risk by diversifying widely among market sectors and
companies.
The Portfolio also may, but is not required to, use certain derivatives in an
attempt to manage risk. The use of derivatives could magnify losses.
For temporary defensive purposes, the Portfolio may invest up to 100% of its
assets in high-quality debt securities, cash and cash equivalents. In such a
case, the Portfolio would not be pursuing, and may not achieve, its objective.
Main risks
There are market and investment risks with any security and the value of an
investment in the Portfolio will fluctuate over time and it is possible to lose
money invested in the Portfolio.
The Portfolio's principal risks are associated with investing in the stock
market, equity and growth investing, small stock investing, and the investment
manager's skill in managing the Portfolio.
The Portfolio's returns and net asset value will go up and down. Stock market
movements will affect the Portfolio's share price on a daily basis. Declines in
value are possible in both the overall stock market and in the types of
securities held by the Portfolio.
An investment in the common stock of a company represents a proportionate
ownership interest in that company. Therefore, the Portfolio participates in the
success or failure of any company in which it holds stock. Compared to other
classes of financial assets, such as bonds or cash equivalents, common stocks
have historically offered a greater potential for gain on investment. However,
the market value of common stocks can fluctuate significantly, reflecting such
things as the business performance of the issuing company, investors'
perceptions of the company or the overall stock market and general economic or
financial market movements. Smaller companies are especially sensitive to these
factors and may even become valueless.
Because of their perceived return potential, growth stocks are typically in
demand and tend to carry relatively high prices. Growth stocks generally
experience greater share price fluctuations as the market reacts to changing
perceptions of the underlying companies' growth potential and broader economic
activity. If the growth stocks the Portfolio invests in do not produce the
expected earnings growth, their share price may drop and the Portfolio's net
asset value would decline.
Small companies in which the Portfolio primarily invests have historically been
subject to greater investment risk. The risks generally associated with small
56
<PAGE>
companies include more limited product lines, markets and financial resources,
lack of management depth or experience, dependency on key personnel, and
vulnerability to adverse market and economic conditions. Accordingly, the prices
of small company stocks tend to be more volatile than prices of large company
stocks. Further, the prices of small company stocks are often adversely affected
by limited trading volumes and the lack of publicly available information.
Also, because small companies normally have fewer shares outstanding and these
shares generally trade less frequently than large companies, it may be more
difficult for the Portfolio to buy and sell significant amounts of small company
shares without having an unfavorable impact on the shares' stock market price.
To the extent that the Portfolio invests in foreign securities, foreign
investments, particularly investments in emerging markets, carry added risks due
to the possibility of inadequate or inaccurate financial information about
companies, potential political disturbances and fluctuations in currency
exchange rates. Foreign securities are often thinly traded and could be harder
to sell at a fair price generally, or in specific market situations.
Since many of the securities held by the Portfolio may be considered speculative
in nature by traditional investment standards, substantially greater than
average market volatility and investment risk may be involved.
The Portfolio expects to trade securities actively. This strategy could increase
transaction costs and reduce performance.
The investment manager's skill in choosing appropriate investments for the
Portfolio will determine in large part the Portfolio's ability to achieve its
investment objective.
Past performance
The chart and table below provide some indication of the risks of investing in
the Portfolio by illustrating how the Portfolio has performed from year to year,
and comparing this information to a broad measure of market performance. The
information does not reflect charges and fees associated with a separate account
that invests in the Portfolio or any insurance contract for which the Portfolio
is an investment option. These charges and fees will reduce returns. Of course,
past performance is not necessarily an indication of future performance.
57
<PAGE>
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
30.07 28.04 34.20 18.37
`89 `90 `91 `92 `93 `94 `95 `96 `97 `98
Year
For the period included in the bar chart, the Portfolio's highest return for a
calendar quarter was 25.56% (the fourth quarter of 1998), and the Portfolio's
lowest return for a calendar quarter was -16.72% (the third quarter of 1998).
Average Annual Total Returns
For periods ended Kemper Small Cap
December 31, 1998 Growth Portfolio Russell 2000 Index^+
----------------- ---------------- --------------------
One Year 18.37% -2.55%
Since Inception (5/2/94) 24.20% 13.28%*
- -----------
^+ The Russell 2000 Index is an unmanaged capitalization-weighted measure of
approximately 2000 small U.S. stocks. Index returns assume reinvestment of
dividends and, unlike the Portfolio's returns, do not reflect any fees or
expenses.
* Since 4/30/94.
58
<PAGE>
KEMPER TECHNOLOGY GROWTH PORTFOLIO
Investment objective
Kemper Technology Growth Portfolio seeks growth of capital. Unless otherwise
indicated, the Portfolio's investment objective and policies may be changed
without a vote of shareholders.
Main investment strategies
The Portfolio pursues its objective by investing primarily in domestic common
stocks of companies in the technology sector which the investment manager
expects to benefit from technological advances and improvements, with an
emphasis on the securities of companies that the investment manager believes
have potential for long-term capital growth. The investment manager considers a
variety of factors in selecting securities, including historic earnings growth,
earnings growth estimates, stock price, balance sheets, and company
fundamentals.
The Portfolio invests principally in the common stock of companies in the
technology sector. Technology companies include those whose processes, products
or services, in the judgment of the investment manager, are or may be expected
to significantly benefit from scientific developments and the application of
technical advances in industry, manufacturing and commerce. This investment
policy permits the investment manager to seek stocks having superior growth
potential in virtually any industry in which they may be found. Examples of the
types of industries the Portfolio may invest in are:
o aerospace;
o electronics;
o genetic engineering;
o geology;
o information sciences (including computers and computer software);
o medicine (including pharmacology, biotechnology and biophysics); and
o oceanography.
A stock is typically sold when, in the opinion of the investment manager, (i)
the stock has reached its fair market value and its appreciation potential is
limited, or (ii) a company's fundamentals have deteriorated.
Of course, there can be no guarantee that by following these strategies, the
Portfolio will achieve its objective.
59
<PAGE>
Other Investments
To a more limited extent, the Portfolio may, but is not required to, invest in
the following:
The Portfolio may invest up to 25% of its total assets in foreign securities.
The Portfolio may utilize other investments and investment techniques that may
impact Portfolio performance including, but not limited to, options, futures and
other derivatives (financial instruments that derive their value from other
securities or commodities, or that are based on indices).
Risk management strategies
The Portfolio may, but is not required to, use certain derivatives in an attempt
to manage risk. The use of derivatives could magnify losses.
For temporary defensive purposes, the Portfolio may invest up to 100% of its
assets in high-quality debt securities, cash and cash equivalents. In such a
case, the Portfolio would not be pursuing, and may not achieve, its objective.
Main risks
There are market and investment risks with any security and the value of an
investment in the Portfolio will fluctuate over time and it is possible to lose
money invested in the Portfolio.
The Portfolio's principal risks are associated with investing in the stock
market, equity and growth investing, sector investing, small company investing,
and the investment manager's skill in managing the Portfolio.
The Portfolio's returns and net asset value will go up and down. Stock market
movements will affect the Portfolio's share price on a daily basis. Declines in
value are possible in both the overall stock market and in the types of
securities held by the Portfolio.
An investment in the common stock of a company represents a proportionate
ownership interest in that company. Therefore, the Portfolio participates in the
success or failure of any company in which it holds stock. Compared to other
classes of financial assets, such as bonds or cash equivalents, common stocks
have historically offered a greater potential for gain on investment. However,
the market value of common stocks can fluctuate significantly, reflecting such
things as the business performance of the issuing company, investors'
perceptions of the company or the overall stock market and general economic or
financial market movements. Smaller companies are especially sensitive to these
factors and may even become valueless.
Because of their perceived return potential, growth stocks are typically in
demand and tend to carry relatively high prices. Growth stocks generally
experience greater share
60
<PAGE>
price fluctuations as the market reacts to changing perceptions of the
underlying companies' growth potential and broader economic activity. If the
growth stocks the Portfolio invests in do not produce the expected earnings
growth, their share price may drop and the Portfolio's net asset value would
decline.
Because the Portfolio focuses its investments in the technology market sector,
financial, economic, business and other developments affecting issuers in that
sector may have a greater effect on the Portfolio than if it had not focused its
assets in that sector. Therefore, an investment in the Portfolio involves
significantly greater risk and greater volatility than an equity Portfolio that
is invested in issuers in various industry sectors.
If certain sectors or securities don't perform as its Portfolio management team
expects, the Portfolio could substantially underperform other technology-focused
mutual funds or lose money.
Small companies in which the Portfolio may invest have historically been subject
to greater investment risk. The risks generally associated with small companies
include more limited product lines, markets and financial resources, lack of
management depth or experience, dependency on key personnel, and vulnerability
to adverse market and economic conditions. Accordingly, the prices of small
company stocks tend to be more volatile than prices of large company stocks.
Further, the prices of small company stocks are often adversely affected by
limited trading volumes and the lack of publicly available information.
Also, because small companies normally have fewer shares outstanding and these
shares generally trade less frequently than large companies, it may be more
difficult for the Portfolio to buy and sell significant amounts of small company
shares without having an unfavorable impact on the shares' stock market price.
To the extent that the Portfolio invests in foreign securities, foreign
investments, particularly investments in emerging markets, carry added risks due
to the possibility of inadequate or inaccurate financial information about
companies, potential political disturbances and fluctuations in currency
exchange rates. Foreign securities are often thinly traded and could be harder
to sell at a fair price generally, or in specific market situations.
The Portfolio expects to trade securities actively. This strategy could increase
transaction costs and reduce performance.
The investment manager's skill in choosing appropriate investments for the
Portfolio will determine in large part the Portfolio's ability to achieve its
investment objective.
61
<PAGE>
Past performance
Because the Portfolio commenced operations on May 1, 1999, no past performance
information is available.
62
<PAGE>
KEMPER VALUE+GROWTH PORTFOLIO
Investment objectives
Kemper Value+Growth Portfolio seeks growth of capital. A secondary objective of
the Portfolio is the reduction of risk over a full market cycle compared to a
portfolio of only growth stocks or only value stocks. Unless otherwise
indicated, the Portfolio's investment objectives and policies may be changed
without a vote of shareholders.
Main investment strategies
The Portfolio pursues its objectives by investing primarily in a diversified
portfolio of U.S. common stocks. The investment manager combines value and
growth stocks using sophisticated quantitative modeling. Companies in which the
Portfolio invests generally will have a market capitalization (total market
value of outstanding shares) in excess of $1 billion.
Growth stocks are stocks of companies whose earnings per share the investment
manager expects will grow faster than the market average. Growth stocks tend to
trade at higher price-to-earnings (P/E) ratios than the general market, but the
investment manager believes that the potential of such stocks for above average
earnings more than justifies their price.
Value stocks are considered "bargain stocks" because they are perceived as
undervalued, i.e., attractively priced in relation to their earnings potential
(low P/E ratios). Value stocks typically have low P/E ratios and dividend yields
higher than the average of the companies represented in the Standard & Poor's
500 Stock Index.
Historically, the performance of growth and value stocks has tended to be
counter-cyclical, that is, when one was in favor, the other was out of favor
relative to the equity market in general. Based on long-term considerations, the
investment manager will use proprietary quantitative modeling techniques to
determine the allocation between growth and value stocks held by the Portfolio.
The neutral allocation between growth and value stocks would be 50%/50%. The
allocation to growth or value may be up to 75% at any time. The investment
manager expects that changes in the allocation would be gradual and there is no
assurance that the allocation process will improve investment results.
To select individual securities, the investment manager uses additional
quantitative models. Growth stocks and value stocks are evaluated according to
style-specific models. By using multiple models, the investment manager seeks to
create a portfolio where value and growth stocks are clearly delineated.
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<PAGE>
In managing the growth portion of the portfolio, the investment manager's
proprietary quantitative models evaluate a variety of momentum factors. These
include historical earnings growth, changes in earnings, growth trends,
long-term momentum and earnings revisions.
In managing the value portion of the portfolio, the investment manager's
proprietary quantitative models evaluate a variety of valuation factors. These
include price-to-earnings ratios, price-to-book ratios, projected dividend
growth rates, earnings estimates and projected growth rates, return on equity
and other balance sheet data.
Of course, there can be no guarantee that by following these strategies, the
Portfolio will achieve its objectives.
Other investments
To a more limited extent, the Portfolio may, but is not required to, invest in
the following:
The Portfolio may purchase convertible securities, such as bonds and preferred
stocks (including warrants and rights).
The Portfolio may also invest up to 25% of its total assets in foreign
securities.
The Portfolio may utilize other investments and investment techniques that may
impact Portfolio performance including, but not limited to, options, futures and
other derivatives (financial instruments that derive their value from other
securities or commodities, or that are based on indices).
Risk management strategies
The Portfolio manages risk by diversifying widely among market sectors and
companies and by allocating its holdings between growth and value stocks. The
Portfolio also may, but is not required to, use certain derivatives in an
attempt to manage risk. The use of derivatives could magnify losses.
For temporary defensive purposes, the Portfolio may invest up to 100% of its
assets in high-quality debt securities, cash and cash equivalents. In such a
case, the Portfolio would not be pursuing, and may not achieve, its objective.
Main risks
There are market and investment risks with any security and the value of an
investment in the Portfolio will fluctuate over time and it is possible to lose
money invested in the Portfolio.
The Portfolio's principal risks are associated with investing in the stock
market, equity, growth and value investing, and the investment manager's skill
in managing the Portfolio.
64
<PAGE>
The Portfolio's returns and net asset value will go up and down. Stock market
movements will affect the Portfolio's share price on a daily basis. Declines in
value are possible in both the overall stock market and in the types of
securities held by the Portfolio.
An investment in the common stock of a company represents a proportionate
ownership interest in that company. Therefore, the Portfolio participates in the
success or failure of any company in which it holds stock. Compared to other
classes of financial assets, such as bonds or cash equivalents, common stocks
have historically offered a greater potential for gain on investment. However,
the market value of common stocks can fluctuate significantly, reflecting such
things as the business performance of the issuing company, investors'
perceptions of the company or the overall stock market and general economic or
financial market movements. Smaller companies are especially sensitive to these
factors and may even become valueless.
Because of their perceived return potential, growth stocks are typically in
demand and tend to carry relatively high prices. Growth stocks generally
experience greater share price fluctuations as the market reacts to changing
perceptions of the underlying companies' growth potential and broader economic
activity. If the growth stocks the Portfolio invests in do not produce the
expected earnings growth, their share price may drop and the Portfolio's net
asset value would decline.
The determination that a stock is undervalued is subjective; the market may not
agree, and the stock's price may not rise to what the investment manager
believes is its full value. It may even decrease in value. However, because of
the Portfolio's focus on undervalued stocks, the Portfolio's downside risk may
be less than with other stocks since value stocks are in theory already
underpriced.
To the extent that the Portfolio seeks to moderate share price volatility by
investing in both value and growth stocks, the Portfolio may underperform in
markets that strongly favor pure growth or value portfolios.
To the extent that the Portfolio invests in foreign securities, foreign
investments, particularly investments in emerging markets, carry added risks due
to the possibility of inadequate or inaccurate financial information about
companies, potential political disturbances and fluctuations in currency
exchange rates. Foreign securities are often thinly traded and could be harder
to sell at a fair price generally, or in specific market situations.
The Portfolio expects to trade securities actively. This strategy could increase
transaction costs and reduce performance.
The investment manager's skill in choosing appropriate investments for the
Portfolio will determine in large part the Portfolio's ability to achieve its
investment objective.
65
<PAGE>
Past performance
The chart and table below provide some indication of the risks of investing in
the Portfolio by illustrating how the Portfolio has performed from year to year,
and comparing this information to a broad measure of market performance. The
information does not reflect charges and fees associated with a separate account
that invests in the Portfolio or any insurance contract for which the Portfolio
is an investment option. These charges and fees will reduce returns. Of course,
past performance is not necessarily an indication of future performance.
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
25.47 20.17
`89 `90 `91 `92 `93 `94 `95 `96 `97 `98
Year
For the period included in the bar chart, the Portfolio's highest return for a
calendar quarter was 23.51% (the fourth quarter of 1998), and the Portfolio's
lowest return for a calendar quarter was -14.36% (the third quarter of 1998).
Average Annual Total Returns
For periods ended Kemper Value+Growth
December 31, 1998 Portfolio Russell 1000 Index^+
----------------- --------- --------------------
One Year 20.17% 27.02%
Since Inception (5/1/96) 22.74% 27.94%
- -----------
^+ The Russell 1000 Index is an unmanaged capitalization-weighted price only
index comprised of the largest capitalized U.S. companies whose common
stocks are traded in the United States. Index returns assume reinvestment
of dividends and, unlike the Portfolio's returns, do not reflect any fees
or expenses.
66
<PAGE>
KEMPER CONTRARIAN VALUE PORTFOLIO
Investment objective
Kemper Contrarian Value Portfolio seeks to achieve a high rate of total return.
Unless otherwise indicated, the Portfolio's investment objective and policies
may be changed without a vote of shareholders.
Main investment strategies
The Portfolio pursues its objective by investing principally in a diversified
portfolio of common stocks of large U.S. companies that the investment manager
believes to be undervalued. Securities may be undervalued as a result of
overreaction by investors to unfavorable news about a company, industry or the
stock markets in general or as a result of a market decline, poor economic
conditions or actual or anticipated unfavorable developments affecting the
company. Such companies in which the Portfolio invests generally have a minimum
market capitalization (total market value of outstanding shares) of $1 billion.
The investment manager looks for investments with the following attributes:
o a record of earnings and dividends;
o low price-to-earnings ratios;
o low price-to-book ratios;
o low price-to-cash flow ratios;
o dividend yields above the market average;
o sound finances; and
o perceived intrinsic value.
The Portfolio 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 investment manager applies a disciplined investment approach for selecting
holdings for the Portfolio. The first stage of the process seeks investments
with low price-to-earnings ratios in relationship to the market as measured by
the Standard & Poor's 500 Composite Stock Price Index (S&P 500). After the
investment manager screens for low price-to-earnings ratios, it analyzes and
compares other value measurements against the market. These include
price-to-book value, price-to-cash flow and dividend yield.
67
<PAGE>
The Portfolio's investment approach emphasizes companies that possess strong
financial positions and that the investment manager believes have strong
potential for long-term growth.
The investment manager analyzes earnings and dividend growth of companies and
seeks those investments that have had 5- and 10-year track records of
consistent, above-market earnings and dividend growth.
After the Portfolio stock universe is refined, the investment manager applies
fundamental analysis. Earnings and cash flow analysis as well as a company's
conventional dividend payout ratio are important to this process. The investment
manager follows all stocks in the portfolio on an intensive ongoing basis. The
manager also monitors a universe of 100 to 125 potentially promising candidates
for future investment.
The investment manager sells stocks or determines a strategy for selling stocks
as their price-to-earnings ratios rise above that of the market. The manager may
choose to sell a stock if the company's long-term fundamentals change
unexpectedly for the worse. A stock will also be sold if the company performs
below the investment manager's expectations for three to four years.
Of course, there can be no guarantee that by following these strategies, the
Portfolio will achieve its objective.
Other investments
To a more limited extent, the Portfolio may, but is not required to, invest in
the following:
While most of the Portfolio's investments will be in dividend-paying common
stocks, the Portfolio may also acquire stocks that do not pay dividends in
anticipation of market appreciation, future dividends, or both. The Portfolio
may write options on such stocks when the investment manager believes that it
would be advantageous.
The Portfolio may also invest in preferred stocks, convertible securities and
warrants. In addition, the Portfolio may invest up to 20% of its assets in U.S.
dollar-denominated American Depository Receipts.
The Portfolio may utilize other investments and investment techniques that may
impact Portfolio performance including, but not limited to, options, futures and
other derivatives (financial instruments that derive their value from other
securities or commodities, or that are based on indices).
Risk management strategies
The Portfolio may, but is not required to, use certain derivatives in an attempt
to manage risk. The use of derivatives could magnify losses.
68
<PAGE>
For temporary defensive purposes, the Portfolio may invest up to 100% of its
assets in high-quality debt securities, cash and cash equivalents. In such
cases, the Portfolio would not be pursuing, and may not achieve, its objective.
Main risks
There are market and investment risks with any security and the value of an
investment in the Portfolio will fluctuate over time and it is possible to lose
money invested in the Portfolio.
The Portfolio's principal risks are associated with investing in the stock
market, equity and value investing, sector investing, and the investment
manager's skill in managing the Portfolio.
The Portfolio's returns and net asset value will go up and down. Stock market
movements will affect the Portfolio's share prices on a daily basis. Declines in
value are possible both in the overall stock market or in the types of
securities held by the Portfolio.
An investment in the common stock of a company represents a proportionate
ownership interest in that company. Therefore, the Portfolio participates in the
success or failure of any company in which it holds stock. Compared to other
classes of financial assets, such as bonds or cash equivalents, common stocks
have historically offered a greater potential for gain on investment. However,
the market value of common stocks can fluctuate significantly, reflecting such
things as the business performance of the issuing company, investors'
perceptions of the company or the overall stock market and general economic or
financial market movements. Smaller companies are especially sensitive to these
factors and may even become valueless.
The determination that a stock is undervalued is subjective; the market may not
agree, and the stock's price may not rise to what the investment manager
believes is its full value. It may even decrease in value. However, because of
the Portfolio's focus on undervalued stocks, the Portfolio's downside risk may
be less than with other stocks since value stocks are in theory already
underpriced.
To the extent that the Portfolio focuses its investments in a market sector,
financial, economic, business and other developments affecting issuers in that
sector may have a greater effect on the Portfolio than if it had not focused its
assets in that sector.
The investment manager's skill in choosing appropriate investments for the
Portfolio will determine in large part the Portfolio's ability to achieve its
investment objective.
69
<PAGE>
Past performance
The chart and table below provide some indication of the risks of investing in
the Portfolio by illustrating how the Portfolio has performed from year to year,
and comparing this information to a broad measure of market performance. The
information does not reflect charges and fees associated with a separate account
that invests in the Portfolio or any insurance contract for which the Portfolio
is an investment option. These charges and fees will reduce returns. Of course,
past performance is not necessarily an indication of future performance.
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
30.38 19.26
`89 `90 `91 `92 `93 `94 `95 `96 `97 `98
Year
For the periods included in the bar chart, the Portfolio's highest return for a
calendar quarter was 15.52% (the fourth quarter of 1998), and the Portfolio's
lowest return for a calendar quarter was -7.07% (the third quarter of 1998).
Average Annual Total Returns
For periods ended Kemper Contrarian
December 31, 1998 Value Portfolio S&P 500 Index^+
----------------- --------------- ---------------
One Year 19.26% 28.58%
Since Inception (5/1/96) 25.28% 29.00%
- -----------
^+ The Standard and Poor's 500 Composite Stock Price Index (S&P 500) is an
unmanaged capitalization-weighted measure of 500 widely held common stocks
listed on the New York Stock Exchange and the American Stock Exchange, and
traded on the Nasdaq Stock Market, Inc. Index returns assume reinvestment
of dividends and, unlike Portfolio returns, do not reflect any fees or
expenses.
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KEMPER-DREMAN HIGH RETURN EQUITY PORTFOLIO
Investment objective
Kemper-Dreman High Return Equity Portfolio seeks to achieve a high rate of total
return. Unless otherwise indicated, the Portfolio's investment objective and
policies may be changed without a vote of shareholders.
Main investment strategies
The Portfolio pursues its objective by investing principally in a diversified
portfolio of the stocks of large U.S. companies that the investment manager
believes are undervalued. Securities may be undervalued as a result of
overreaction by investors to unfavorable news about a company, industry or the
stock markets in general or as a result of a market decline, poor economic
conditions or actual or anticipated unfavorable developments affecting the
company.
The investment manager looks for investments with the following attributes:
o a record of earnings;
o low price-to-earnings ratios;
o low price-to-book ratios;
o low price-to-cash flow ratios;
o dividend yields above the market average;
o sound finances; and
o perceived intrinsic value through in-depth security analysis.
Under normal market conditions, the Portfolio invests at least 65% of its total
assets in equity securities. These include common stock, preferred stock,
convertible securities, equity investments in partnerships, joint ventures and
other forms of non-corporate investments and warrants and rights exercisable for
equity securities and equity equivalents.
The Portfolio 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 investment manager applies a disciplined investment approach for selecting
holdings for the Portfolio. The first stage of the process seeks investments
with low price-to-earnings ratios in relationship to the market as measured by
the Standard & Poor's 500 Composite Stock Price Index (S&P 500). After the
investment manager screens for low price-to-earnings ratios, it analyzes and
compares other value
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measurements against the market. These include price-to-book value,
price-to-cash flow and dividend yield.
The Portfolio's investment approach emphasizes companies that possess strong
financial positions and that the investment manager believes have strong
potential for long-term growth.
The investment manager analyzes earnings and dividend growth of companies and
seeks those investments that have had track records of consistent, above-market
earnings, cash flow and dividend growth.
The Portfolio may invest up to 20% of its total assets in foreign securities in
the form of U.S. dollar-denominated American Depository Receipts and in the
securities of foreign companies that are traded principally in securities
markets outside the United States.
The investment manager sells stocks or determines a strategy for selling stocks
as their price-to-earnings ratios rise above that of the market. The manager may
choose to sell a stock if the company's long-term fundamentals change
unexpectedly for the worse. A stock may also be sold if the company performs
below the investment manager's expectations for three to five years.
Of course, there can be no guarantee that by following these strategies, the
Portfolio will achieve its objective.
Other investments
To a more limited extent, the Portfolio may, but is not required to, invest in
the following:
While most of the Portfolio's investments will be in dividend-paying common
stocks, the Portfolio may also acquire stocks that do not pay dividends in
anticipation of market appreciation, future dividends, or both. The Portfolio
may write options on such stocks when the investment manager believes that it
would be advantageous.
The Portfolio may utilize other investments and investment techniques that may
impact Portfolio performance including, but not limited to, options, futures and
other derivatives (financial instruments that derive their value from other
securities or commodities, or that are based on indices).
Risk management strategies
The Portfolio may, but is not required to, use certain derivatives in an attempt
to manage risk. The use of derivatives could magnify losses.
For temporary defensive purposes, the Portfolio may invest up to 100% of its
assets in high-quality debt securities, cash and cash equivalents. In such a
case, the Portfolio would not be pursuing, and may not achieve, its objective.
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Main risks
There are market and investment risks with any security and the value of an
investment in the Portfolio will fluctuate over time and it is possible to lose
money invested in the Portfolio.
The Portfolio's principal risks are associated with investing in the stock
market, equity and value investing, sector investing, and the investment
manager's skill in managing the Portfolio.
The Portfolio's returns and net asset value will go up and down. Stock market
movements will affect the Portfolio's share prices on a daily basis. Declines in
value are possible both in the overall stock market or in the types of
securities held by the Portfolio.
An investment in the common stock of a company represents a proportionate
ownership interest in that company. Therefore, the Portfolio participates in the
success or failure of any company in which it holds stock. Compared to other
classes of financial assets, such as bonds or cash equivalents, common stocks
have historically offered a greater potential for gain on investment. However,
the market value of common stocks can fluctuate significantly, reflecting such
things as the business performance of the issuing company, investors'
perceptions of the company or the overall stock market and general economic or
financial market movements. Smaller companies are especially sensitive to these
factors and may even become valueless.
The determination that a stock is undervalued is subjective; the market may not
agree, and the stock's price may not rise to what the investment manager
believes is its full value. It may even decrease in value. However, because of
the Portfolio's focus on undervalued stocks, the Portfolio's downside risk may
be less than with other stocks since value stocks are in theory already
underpriced.
Because the Portfolio is "non-diversified," the Portfolio may invest a
relatively high percentage of its assets in a limited number of issuers.
Accordingly, the Portfolio's investment returns are more likely to be impacted
by changes in the market value and returns of any one portfolio holding.
To the extent that the Portfolio focuses its investments in a market sector,
financial, economic, business and other developments affecting issuers in that
sector may have a greater effect on the Portfolio than if it had not focused its
assets in that sector.
To the extent that the Portfolio invests in foreign securities, foreign
investments carry added risks due to the possibility of inadequate or inaccurate
financial information about companies, potential political disturbances and
fluctuations in currency exchange rates. Foreign securities are often thinly
traded and could be harder to sell at a fair price generally, or in specific
market situations.
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The investment manager's skill in choosing appropriate investments for the
Portfolio will determine in large part the Portfolio's ability to achieve its
investment objective.
Past performance
Because the Portfolio commenced operations less than one year ago, no past
performance information is available.
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KVS FOCUSED LARGE CAP GROWTH PORTFOLIO
Investment objective
The Portfolio seeks growth through long-term capital appreciation. Unless
otherwise indicated, the Portfolio's investment objective and policies may be
changed without a vote of shareholders.
Main investment strategies
The Portfolio seeks to achieve its objective by investing in common stocks that
have sufficient growth potential to offer above average long-term capital
appreciation.
The Portfolio invests at least 65% of its total assets in the equity securities
of seasoned, financially strong U.S. growth companies (typically those with a
market value of $10 billion or more). Growth stocks are stocks of companies with
above-average earnings growth potential. The Portfolio uses a "bottom-up" method
of analysis based on fundamental research to determine which common stocks to
purchase. The Portfolio focuses on companies that the portfolio manager
considers likely to have long-term returns greater than the average for
companies included in the Standard & Poor's 500 Composite Stock Price Index (the
"S&P 500 Index"). The Portfolio seeks companies which have at the time of
purchase one or more of the following characteristics:
o earnings-per-share or revenue growth greater than the average of the S&P
500 Index;
o a dominant company in its industry with a sustainable competitive
advantage; or
o an exceptional management team with a clearly articulated vision of their
company's future.
If the stock price appreciates to a level that the portfolio manager believes is
not sustainable, the Portfolio generally will sell the stock to realize the
existing profits and avoid a potential price correction.
Of course, there can be no guarantee that by following these strategies, the
Portfolio will achieve its objective.
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Other investments
To a more limited extent, the Portfolio may, but is not required to, utilize
other investments and investment techniques that may impact Portfolio
performance including, but not limited to, options, futures and other
derivatives (financial instruments that derive their value from other securities
or commodities, or that are based on indices).
Risk management strategies
The Portfolio manages risk by diversifying widely among market sectors and
companies. The Portfolio also may, but is not required to, use certain
derivatives in an attempt to manage risk. The use of derivatives could magnify
losses.
For temporary defensive purposes, the Portfolio may invest up to 100% of its
assets in high-quality debt securities, cash and cash equivalents. In such a
case, the Portfolio would not be pursuing, and may not achieve, its objective.
Main risks
There are market and investment risks with any security. The value of an
investment in the Portfolio will fluctuate over time and it is possible to lose
money invested in the Portfolio.
The Portfolio's principal risks are associated with investing in the stock
market, equity and growth investing, and the investment manager's skill in
managing the Portfolio.
The Portfolio's returns and net asset value will go up and down. Stock market
movements will affect the Portfolio's share price on a daily basis. Declines in
value are possible in both the overall stock market and in the types of
securities held by the Portfolio.
An investment in the common stock of a company represents a proportionate
ownership interest in that company. Therefore, the Portfolio participates in the
success or failure of any company in which it holds stock. Compared to other
classes of financial assets, such as bonds or cash equivalents, common stocks
have historically offered a greater potential for gain on investment. However,
the market value of common stocks can fluctuate significantly, reflecting such
things as the business performance of the issuing company, investors'
perceptions of the company or the overall stock market and general economic or
financial market movements.
Because of their perceived return potential, growth stocks are typically in
demand and tend to carry relatively high prices. Growth stocks generally
experience greater share price fluctuations as the market reacts to changing
perceptions of the underlying companies' growth potential and broader economic
activity. If the growth stocks the
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Portfolio invests in do not produce the expected earnings growth, their share
price may drop and the Portfolio's net asset value would decline.
To the extent that the Portfolio invests in foreign securities, particularly
investments in emerging markets, there are added risks due to the possibility of
inadequate or inaccurate financial information about companies, potential
political disturbances and fluctuations in currency exchange rates. Foreign
securities are often thinly traded and could be harder to sell at a fair price
generally, or in specific market situations.
The Portfolio expects to trade securities actively. This strategy could increase
transaction costs, result in taxable capital gains and reduce performance.
The investment manager's skill in choosing appropriate investments for the
Portfolio will determine in large part the Portfolio's ability to achieve its
investment objective.
Past performance
Because the Portfolio commenced operations less than one year ago, no past
performance information is available.
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KVS GROWTH AND INCOME PORTFOLIO
Investment objective
The Portfolio seeks long-term capital growth and current income. Unless
otherwise indicated, the Portfolio's investment objective and policies may be
changed without a vote of shareholders.
Main investment strategies
The Portfolio's manager applies a "bottom-up" approach in choosing investments.
In other words, it looks mostly for equity and income-producing securities that
meet its investment criteria one at a time. If the Portfolio is unable to find
such investments, much of the Portfolio's assets may be in cash or similar
investments.
The Portfolio normally emphasizes investments in common stocks. It normally will
invest up to 75% of its total assets in equity securities selected primarily for
their growth potential and at least 25% of its total assets in securities the
portfolio manager believes have income potential.
The Portfolio may invest substantially all of its assets in common stocks if the
portfolio manager believes that common stocks have the potential to appreciate
in value. The portfolio manager generally seeks to identify common stocks of
companies with earnings growth potential that may not be recognized by the
market at large. The portfolio manager makes this assessment by looking at
companies one at a time, regardless of size, country of organization, place of
principal business activity, or other similar selection criteria.
The Portfolio may invest without limit in foreign securities either indirectly
(e.g., depositary receipts) or directly in foreign markets. The portfolio
manager seeks companies that meet his selection criteria, regardless of where a
company is located. Foreign securities are generally selected on a
stock-by-stock basis without regard to any defined allocation among countries or
geographic regions. However, certain factors such as expected levels of
inflation, government policies influencing business conditions, currency
exchange rates, and prospects for economic growth among countries or geographic
regions may warrant greater consideration in selecting foreign securities. There
are no limitations on the countries in which the Portfolio may invest.
The Portfolio shifts assets between the growth and income components of its
holdings based on the portfolio manager's analysis of relevant market, financial
and economic conditions. If the portfolio manager believes that growth
securities may provide better returns than the yields then available or expected
on income-producing securities, the Portfolio will place a greater emphasis on
the growth component of its holdings.
The growth component of the Portfolio is expected to consist primarily of common
stocks, but may also include warrants, preferred stocks or convertible
securities selected primarily for their growth potential.
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The income component of the Portfolio will consist of securities that the
portfolio manager believes have income potential. Such securities may include
equity securities, convertible securities and all types of debt securities.
Equity securities may be included in the income component of the Portfolio if
they currently pay dividends or if the portfolio manager believes they have the
potential for either increasing their dividends or commencing dividends, if none
are currently paid.
Of course, there can be no guarantee that by following these strategies, the
Portfolio will achieve its objective.
Other investments
To a more limited extent, the Portfolio may, but is not required to, utilize
other investments and investment techniques that may impact Portfolio
performance including, but not limited to, options, futures and other
derivatives (financial instruments that derive their value from other securities
or commodities, or that are based on indices).
In addition, the Portfolio may invest in debt securities, indexed/structured
securities, high-yield/high-risk bonds (less than 35% of the Portfolio's total
assets) and securities purchased on a when-issued, delayed delivery or forward
commitment basis.
Risk management strategies
The Portfolio manages risk by diversifying widely among market sectors and
companies. The Portfolio also may, but is not required to, use certain
derivatives in an attempt to manage risk. The use of derivatives could magnify
losses.
For temporary defensive purposes, the Portfolio may invest up to 100% of its
assets in high-quality debt securities, cash and cash equivalents. In such a
case, the Portfolio would not be pursuing, and may not achieve, its objective.
Main risks
There are market and investment risks with any security. The value of an
investment in the Portfolio will fluctuate over time and it is possible to lose
money invested in the Portfolio.
The Portfolio's principal risks are associated with investing in the stock
market, equity and growth investing, and the investment manager's skill in
managing the Portfolio.
The Portfolio's returns and net asset value will go up and down. Stock market
movements will affect the Portfolio's share price on a daily basis. Declines in
value are possible in both the overall stock market and in the types of
securities held by the Portfolio.
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An investment in the common stock of a company represents a proportionate
ownership interest in that company. Therefore, the Portfolio participates in the
success or failure of any company in which it holds stock. Compared to other
classes of financial assets, such as bonds or cash equivalents, common stocks
have historically offered a greater potential for gain on investment. However,
the market value of common stocks can fluctuate significantly, reflecting such
things as the business performance of the issuing company, investors'
perceptions of the company or the overall stock market and general economic or
financial market movements. Smaller companies are especially sensitive to these
factors and may even become valueless.
Because of their perceived return potential, growth stocks are typically in
demand and tend to carry relatively high prices. Growth stocks generally
experience greater share price fluctuations as the market reacts to changing
perceptions of the underlying companies' growth potential and broader economic
activity. If the growth stocks the Portfolio invests in do not produce the
expected earnings growth, their share price may drop and the Portfolio's net
asset value would decline.
To the extent that the Portfolio invests in foreign securities, particularly
investments in emerging markets, there are added risks due to the possibility of
inadequate or inaccurate financial information about companies, potential
political disturbances and fluctuations in currency exchange rates. Foreign
securities are often thinly traded and could be harder to sell at a fair price
generally, or in specific market situations.
The Portfolio expects to trade securities actively. This strategy could increase
transaction costs, result in taxable capital gains and reduce performance.
The investment manager's skill in choosing appropriate investments for the
Portfolio will determine in large part the Portfolio's ability to achieve its
investment objective.
Past performance
Because the Portfolio commenced operations less than one year ago, no past
performance is available.
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KVS GROWTH OPPORTUNITIES PORTFOLIO
Investment objective
The Portfolio seeks long-term growth of capital in a manner consistent with the
preservation of capital. Unless otherwise indicated, the Portfolio's investment
objective and policies may be changed without a vote of shareholders.
Main investment strategies
The Portfolio's manager applies a "bottom-up" approach in choosing investments.
In other words, it looks for companies with earnings growth potential one at a
time. If the Portfolio is unable to find investments with earnings growth
potential, a significant portion of the Portfolio's assets may be in cash or
similar investments.
The Portfolio invests primarily in common stocks selected for their growth
potential. Although the Portfolio can invest in companies of any size, it
generally invests in larger, more established companies.
The Portfolio may invest substantially all of its assets in common stocks if the
portfolio manager believes that common stocks will appreciate in value. The
portfolio manager generally seeks to identify individual companies with earnings
growth potential that may not be recognized by the market at large. The
portfolio manager makes this assessment by looking at companies one at a time,
regardless of size, country of organization, place of principal business
activity, or other similar selection criteria. Realization of income is not a
significant consideration when choosing investments for the Portfolio. Income
realized on the Portfolio's investments will be incidental to the Portfolio's
objective.
The Portfolio may invest without limit in foreign securities either indirectly
(e.g., depositary receipts) or directly in foreign markets. The portfolio
manager seeks companies that meet his selection criteria, regardless of where a
company is located. Foreign securities are generally selected on a
stock-by-stock basis without regard to any defined allocation among countries or
geographic regions. However, certain factors such as expected levels of
inflation, government policies influencing business conditions, currency
exchange rates, and prospects for economic growth among countries, regions or
geographic area may warrant greater consideration in selecting foreign
securities. There are no limitations on the countries in which the Portfolio may
invest.
Of course, there can be no guarantee that by following these strategies, the
Portfolio will achieve its objective.
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Other investments
To a more limited extent, the Portfolio may, but is not required to, utilize
other investments and investment techniques that may impact Portfolio
performance including, but not limited to, options, futures and other
derivatives (financial instruments that derive their value from other securities
or commodities, or that are based on indices).
In addition, the Portfolio may invest in debt securities, indexed/structured
securities, high-yield/high-risk bonds (less than 35% of the Portfolio's total
assets) and securities purchased on a when-issued, delayed delivery or forward
commitment basis.
Risk management strategies
The Portfolio manages risk by diversifying widely among market sectors and
companies. The Portfolio also may, but is not required to, use certain
derivatives in an attempt to manage risk. The use of derivatives could magnify
losses.
For temporary defensive purposes, the Portfolio may invest up to 100% of its
assets in high-quality debt securities, cash and cash equivalents. In such a
case, the Portfolio would not be pursuing, and may not achieve, its objective.
Main risks
There are market and investment risks with any security. The value of an
investment in the Portfolio will fluctuate over time and it is possible to lose
money invested in the Portfolio.
The Portfolio's principal risks are associated with investing in the stock
market, equity and growth investing, and the investment manager's skill in
managing the Portfolio.
The Portfolio's returns and net asset value will go up and down. Stock market
movements will affect the Portfolio's share price on a daily basis. Declines in
value are possible in both the overall stock market and in the types of
securities held by the Portfolio.
An investment in the common stock of a company represents a proportionate
ownership interest in that company. Therefore, the Portfolio participates in the
success or failure of any company in which it holds stock. Compared to other
classes of financial assets, such as bonds or cash equivalents, common stocks
have historically offered a greater potential for gain on investment. However,
the market value of common stocks can fluctuate significantly, reflecting such
things as the business performance of the issuing company, investors'
perceptions of the company or the overall stock market and general economic or
financial market movements. Smaller companies are especially sensitive to these
factors and may even become valueless.
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Because of their perceived return potential, growth stocks are typically in
demand and tend to carry relatively high prices. Growth stocks generally
experience greater share price fluctuations as the market reacts to changing
perceptions of the underlying companies' growth potential and broader economic
activity. If the growth stocks the Portfolio invests in do not produce the
expected earnings growth, their share price may drop and the Portfolio's net
asset value would decline.
To the extent that the Portfolio invests in foreign securities, particularly
investments in emerging markets, there are added risks due to the possibility of
inadequate or inaccurate financial information about companies, potential
political disturbances and fluctuations in currency exchange rates. Foreign
securities are often thinly traded and could be harder to sell at a fair price
generally, or in specific market situations.
The Portfolio expects to trade securities actively. This strategy could increase
transaction costs, result in taxable capital gains and reduce performance.
The investment manager's skill in choosing appropriate investments for the
Portfolio will determine in large part the Portfolio's ability to achieve its
investment objective.
Past performance
Because the Portfolio commenced operations less than one year ago, no past
performance information is available.
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KEMPER INDEX 500 PORTFOLIO
Investment objective
The Portfolio seeks to match, as closely as possible, before expenses, the
performance of the Standard & Poor's 500 Composite Stock Price Index (the "S&P
500 Index"), which emphasizes stocks of large U.S. companies.
Unless otherwise indicated, the Portfolio's investment objective and policies
may be changed without a vote of shareholders.
Main investment strategies
The Portfolio seeks to replicate, before expenses, the risk and return
characteristics of the S&P 500 Index. The Portfolio will invest primarily in
common stocks of companies that comprise the S&P 500 Index, in approximately the
same weightings as the S&P 500 Index. The Portfolio also may use stock index
futures and options. The Portfolio pursues its objective by investing in a
statistically selected sample of the securities found in the S&P 500 Index,
using a process known as "optimization." This means that the Portfolio normally
does not hold every one of the 500 stocks in the S&P 500 Index. It buys the
stocks that make up the larger portions of the S&P 500 Index's value in roughly
the same proportion as the S&P 500 Index and then analyzes smaller stocks. In
selecting smaller stocks, the investment manager tries to match the industry and
risk characteristics of all of the smaller companies in the S&P 500 Index
without buying all of those stocks. Optimization attempts to maximize the
Portfolio's liquidity and returns while minimizing its costs. It also allows the
investment manager to select stocks for the Portfolio in an attempt to ensure
that industry weightings, market capitalization and fundamental characteristics
(price-to-book ratios, price-to-earnings ratios, debt-to-asset ratios and
dividend yields) closely match those of the securities in the S&P 500 Index.
Over the long term, the investment manager seeks a correlation between the
performance of the Portfolio, before expenses, and the S&P 500 Index, of 98% or
better. A figure of 100% would indicate perfect correlation.
The Portfolio normally will invest at least 80% of its assets in stocks of
companies included in the S&P 500 Index. The Portfolio's securities are weighted
to attempt to make the Portfolio's total investment characteristics similar to
those of the S&P 500 Index as a whole. The investment manager may exclude or
remove any S&P 500 Index stock from the Portfolio if the investment manager
believes that the stock is illiquid or believes the merit of the investment has
been impaired by financial conditions or other extraordinary events.
The Portfolio may hold up to 20% of its assets in short-term debt securities,
money market instruments and stock index futures and options. The Portfolio
intends to buy futures in anticipation of buying stocks.
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Of course, there can be no guarantee that by following these strategies, the
Portfolio will achieve its objective.
Main risks
There are market and investment risks with any security. The value of an
investment in the Portfolio will fluctuate over time and it is possible to lose
money invested in the Portfolio.
The Portfolio's principal risks are associated with investing in the stock
market and the investment manager's skill in managing the assets of the
Portfolio.
The Portfolio's returns and net asset value will go up and down. Stock market
movements will affect the Portfolio's share price on a daily basis. Declines in
value are possible in both the overall stock market and in the types of
securities held by the Portfolio. Moreover, the returns on the stock of large
U.S. companies, such as those that comprise the S&P 500 Index, could trail the
returns of the stock of medium or small companies.
An investment in the common stock of a company represents a proportionate
ownership interest in that company. Therefore, the Portfolio participates in the
success or failure of any company in which it holds stock. Compared to other
classes of financial assets, such as bonds or cash equivalents, common stocks
have historically offered a greater potential for gain on investment. However,
the market value of common stocks can fluctuate significantly, reflecting such
things as the business performance of the issuing company, investors'
perceptions of the company or the overall stock market and general economic or
financial market movements. Smaller companies are especially sensitive to these
factors and may even become valueless.
The Portfolio may not be able to mirror the S&P 500 Index closely enough to
track its performance for a number of reasons, including the Portfolio's cost to
buy and sell securities, the flow of money into and out of the Portfolio, and
the underperformance of stocks selected by the investment manager.
If the investment manager incorrectly judges factors in selecting options and
futures strategies, or if the price changes in the Portfolio's futures and
options positions are not well correlated with those of its other investments,
the Portfolio may not achieve its investment objective. The Portfolio could also
be exposed to risk if it could not close out its futures and options positions
because of an illiquid secondary market.
The investment manager's skill in choosing appropriate investments for the
Portfolio will determine in large part the Portfolio's ability to achieve its
investment objective.
The Portfolio is not sponsored, endorsed, sold or promoted by Standard & Poor's
("S&P"). S&P makes no representation or warranty, express or implied, to the
owners
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of the Portfolio or any member of the public regarding the advisability
of investing in securities generally or in the Portfolio particularly or the
ability of the S&P 500 Index to track general stock market performance. S&P's
only relationship to the Portfolio is the licensing of certain trademarks and
trade names of S&P and of the S&P 500 Index, which is determined, composed and
calculated without regard to the Portfolio. S&P does not guarantee the accuracy
and/or completeness of the S&P 500 Index or any data included therein.
S&P makes no warranty, express or implied, as to the results to be obtained by
the Portfolio, to owners of the Portfolio, or to any other person or entity from
the use of the S&P 500 Index or any data included therein.
S&P makes no express or implied warranties, and expressly disclaims all such
warranties of merchantability or fitness for a particular purpose or use with
respect to the S&P 500 Index or any data included therein.
Past performance
Because this is a new Portfolio, it did not have a full calendar year of
performance to report as of the date of this prospectus.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc., and have been licensed
for use by Scudder Kemper Investments, Inc. The Kemper Index 500 Portfolio is
not sponsored, endorsed, sold or promoted by Standard & Poor's, and Standard &
Poor's makes no representation regarding the advisability of investing in the
fund. Additional information may be found in the Fund's Statement of Additional
Information.
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KEMPER SMALL CAP VALUE PORTFOLIO
Investment objective
Kemper Small Cap Value Portfolio seeks long-term capital appreciation. Unless
otherwise indicated, the Portfolio's investment objective and policies may be
changed without a vote of shareholders.
Main investment strategies
The Portfolio seeks long-term capital appreciation through a diversified
portfolio of small company stocks that the investment manager believes are
undervalued. Securities may be undervalued as a result of overreaction by
investors to unfavorable news about a company, industry or the stock markets in
general or as a result of a market decline, poor economic conditions, or actual
or anticipated unfavorable developments affecting the company.
The investment manager follows a relative value investment strategy, seeking
undervalued small capitalization stocks from each major sector of the small
capitalization market as part of a well diversified, risk-managed portfolio. In
a relative value investment strategy, stocks are selected based on whether they
are undervalued relative to other stocks in the same sector. The relative value
strategy allows the Portfolio to invest in all sectors, including technology,
healthcare and other areas of the market that typically are underweighted in an
absolute value portfolio.
Under normal market conditions, the Portfolio invests at least 65% of its total
assets in equity securities of companies that are similar in size to those
comprising the Russell 2000 Index. Typically, most companies selected for
inclusion in the Portfolio have market capitalizations ranging from
approximately $100 million to $1.25 billion. The Portfolio sells securities of
companies that have grown in market capitalization above the maximum of the
Russell 2000 Index, as necessary to keep the Portfolio focused on smaller
companies.
The investment manager employs quantitative techniques in evaluating potential
investments and the impact each would have on the Portfolio's holdings. The
evaluation starts systematically by analyzing a large number of small company
stocks to uncover those with attractive valuations. Typically, the stocks
selected are:
o undervalued in the market based on measures such as earnings, sales, cash
flow and book value;
o experiencing favorable trends in sales, earnings, growth and prices; and
o considered to have acceptable financial risk and earnings predictability.
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This systematic screening process is intended to enable the investment manager
to quickly respond to changes in the marketplace and reassess relative
valuations for the Portfolio's holdings in order to make buy and sell decisions.
Of course, there can be no guarantee that by following these strategies, the
Portfolio will achieve its objective.
Other investments
To a more limited extent, the Portfolio may, but is not required to, invest in
the following:
In addition to its investments in common stocks, the Portfolio may also invest
in preferred stocks, convertible securities and warrants. The Portfolio may also
invest up to 20% of its assets in securities of companies in the form of U.S.
dollar-denominated American Depository Receipts.
The Portfolio may utilize other investments and investment techniques that may
impact Portfolio performance including, but not limited to, options, futures and
other derivatives (financial instruments that derive their value from other
securities or commodities, or that are based on indices).
Risk management strategies
The Portfolio may, but is not required to, use certain derivatives in an attempt
to manage risk. The use of derivatives could magnify losses.
For temporary defensive purposes, the Portfolio may invest up to 100% of its
assets in high-quality debt securities, cash and cash equivalents. In such a
case, the Portfolio would not be pursuing, and may not achieve, its objective.
Main risks
There are market and investment risks with any security and the value of an
investment in the Portfolio will fluctuate over time and it is possible to lose
money invested in the Portfolio.
The Portfolio's principal risks are associated with investing in the stock
market, equity and value investing, small stock investing, sector investing, and
the investment manager's skill in managing the Portfolio.
The Portfolio's returns and net asset value will go up and down. Stock market
movements will affect the Portfolio's share prices on a daily basis. Declines in
value are possible both in the overall stock market or in the types of
securities held by the Portfolio.
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<PAGE>
An investment in the common stock of a company represents a proportionate
ownership interest in that company. Therefore, the Portfolio participates in the
success or failure of any company in which it holds stock. Compared to other
classes of financial assets, such as bonds or cash equivalents, common stocks
have historically offered a greater potential for gain on investment. However,
the market value of common stocks can fluctuate significantly, reflecting such
things as the business performance of the issuing company, investors'
perceptions of the company or the overall stock market and general economic or
financial market movements. Smaller companies are especially sensitive to these
factors and may even become valueless.
The determination that a stock is undervalued is subjective; the market may not
agree, and the stock's price may not rise to what the investment manager
believes is its full value. It may even decrease in value. However, because of
the Portfolio's focus on undervalued stocks, the Portfolio's downside risk may
be less than with other stocks since value stocks are in theory already
underpriced.
Small companies in which the Portfolio primarily invests have historically been
subject to greater investment risk. The risks generally associated with small
companies include more limited product lines, markets and financial resources,
lack of management depth or experience, dependency on key personnel, and
vulnerability to adverse market and economic conditions. Accordingly, the prices
of small company stocks tend to be more volatile than prices of large company
stocks. Further, the prices of small company stocks are often adversely affected
by limited trading volumes and the lack of publicly available information.
Also, because small companies normally have fewer shares outstanding and these
shares generally trade less frequently than large companies, it may be more
difficult for the Portfolio to buy and sell significant amounts of small company
shares without having an unfavorable impact on the shares' stock market price.
To the extent that the Portfolio focuses its investments in a market sector,
financial, economic, business and other developments affecting issuers in that
sector may have a greater effect on the Portfolio than if it had not focused its
assets in that sector.
The investment manager's skill in choosing appropriate investments for the
Portfolio will determine in large part the Portfolio's ability to achieve its
investment objective.
Past performance
The chart and table below provide some indication of the risks of investing in
the Portfolio by illustrating how the Portfolio has performed from year to year,
and comparing this information to a broad measure of market performance. The
information does not reflect charges and fees associated with a separate account
that invests in the Portfolio or any insurance contract for which the Portfolio
is an
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<PAGE>
investment option. These charges and fees will reduce returns. Of course, past
performance is not necessarily an indication of future performance.
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
21.74 -11.25
`89 `90 `91 `92 `93 `94 `95 `96 `97 `98
Year
For the period included in the bar chart, the Portfolio's highest return for a
calendar quarter was 16.50% (the second quarter of 1997), and the Portfolio's
lowest return for a calendar quarter was -22.47% (the third quarter of 1998).
Average Annual Total Returns
For periods ended Kemper Small Cap
December 31, 1998 Value Portfolio Russell 2000 Index^+
----------------- --------------- --------------------
One Year -11.25% -2.55%
Since Inception (5/1/96) 3.65% 8.88%
- -----------
+ The Russell 2000 Index is a capitalization-weighted price only index that is
comprised of 2000 of the smallest stocks (on the basis of capitalization) in the
Russell 3000 Index. Index returns assume reinvestment of dividends and, unlike
Portfolio returns, do not reflect any fees or expenses.
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KEMPER-DREMAN FINANCIAL SERVICES PORTFOLIO
Investment objective
Kemper-Dreman Financial Services Portfolio seeks long-term capital appreciation.
Unless otherwise indicated, the Portfolio's investment objective and policies
may be changed without a vote of shareholders.
Main investment strategies
The Portfolio pursues its objective by investing at least 65% of its assets in
U.S. common stocks and other equity securities of companies in the financial
services sector believed by the Portfolio's investment manager to be
undervalued. A company will be considered to be within the financial services
industry if at least 50% of its assets, revenues or net income are related to or
derived from the financial services industry.
The investment manager looks for investments with the following attributes:
o low price-to-earnings ratios;
o low price-to-book ratios;
o low price-to-cash flow ratios;
o dividend yields above the market average;
o sound finances; and
o perceived intrinsic value.
The Portfolio concentrates its investments in securities of financial services
companies, including: commercial banks; insurance companies; thrifts; consumer
finance companies; commercial finance companies; leasing companies; securities
brokerage firms; asset management firms; and government-sponsored financial
enterprises.
The Portfolio invests principally in a portfolio of U.S. common stocks and other
equity securities of companies in the financial services sector believed by the
investment manager to be undervalued. Securities may be undervalued as a result
of overreaction by investors to unfavorable news about a company, the financial
services industry or the stock markets in general or as a result of a market
decline, poor economic conditions, or actual or anticipated unfavorable
developments affecting the company.
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<PAGE>
The investment manager applies a disciplined investment approach for selecting
holdings for the Portfolio. The first stage of the process seeks investments
with low price-to-earnings ratios in relationship to the market as measured by
the Standard & Poor's 500 Composite Stock Price Index (S&P 500). After the
investment manager screens for low price-to-earnings ratios, it analyzes and
compares other value measurements against the market. These include
price-to-book value, price-to-cash flow and dividend yield.
The Portfolio's investment approach emphasizes companies that possess strong
financial positions and that the investment manager believes have strong
potential for long-term growth.
The investment manager analyzes earnings and dividend growth of companies and
seeks those investments that have had track records of consistent, above-market
earnings, cash flow and dividend growth. The Portfolio's style is to own what
the investment manager believes are strong companies, not to speculate on weak
stocks.
After the Portfolio stock universe is refined, the investment manager applies
fundamental analysis. Earnings and cash flow analysis as well as a company's
conventional dividend payout ratio are important to this process. The investment
manager follows all stocks in the portfolio on an intensive ongoing basis. The
manager also monitors a universe of potentially promising candidates for future
investment.
The investment manager sells stocks or determines a strategy for selling stocks
as their price-to-earnings ratios rise above that of the market. The manager may
choose to sell a stock if the company's long-term fundamentals change
unexpectedly for the worse. A stock may also be sold if the company performs
below the investment manager's expectations for three to five years.
The Portfolio may, but is not required to, invest up to 35% of its assets in
corporate debt securities, including up to 5% of its assets in below
investment-grade high yield/ high risk securities (junk bonds).
In addition, the Portfolio may, but is not required to, invest up to 30% of its
total assets in foreign securities and U.S.-Dollar-denominated American
Depository Receipts.
Of course, there can be no guarantee that by following these strategies, the
Portfolio will achieve its objective.
Other investments
To a more limited extent, the Portfolio may, but is not required to, utilize
other investments and investment techniques that may impact Portfolio
performance including, but not limited to, options, futures and other
derivatives (financial
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<PAGE>
instruments that derive their value from other securities or commodities, or
that are based on indices).
Risk management strategies
The Portfolio may, but is not required to, use certain derivatives in an attempt
to manage risk. The use of derivatives could magnify losses.
For temporary defensive purposes, the Portfolio may invest up to 100% of its
assets in high-quality debt securities, cash and cash equivalents. In such a
case, the Portfolio would not be pursuing, and may not achieve, its objective.
Main risks
There are market and investment risks with any security and the value of an
investment in the Portfolio will fluctuate over time and it is possible to lose
money invested in the Portfolio.
The Portfolio's principal risks are associated with investing in the stock
market, equity and value investing, sector investing, non-diversified investing
and the investment manager's skill in managing the Portfolio.
The Portfolio's returns and net asset value will go up and down. Stock market
movements will affect the Portfolio's share prices on a daily basis. Declines in
value are possible both in the overall stock market or in the types of
securities held by the Portfolio.
An investment in the common stock of a company represents a proportionate
ownership interest in that company. Therefore, the Portfolio participates in the
success or failure of any company in which it holds stock. Compared to other
classes of financial assets, such as bonds or cash equivalents, common stocks
have historically offered a greater potential for gain on investment. However,
the market value of common stocks can fluctuate significantly, reflecting such
things as the business performance of the issuing company, investors'
perceptions of the company or the overall stock market and general economic or
financial market movements. Smaller companies are especially sensitive to these
factors and may even become valueless.
The determination that a stock is undervalued is subjective; the market may not
agree, and the stock's price may not rise to what the investment manager
believes is its full value. It may even decrease in value. However, because of
the Portfolio's focus on undervalued stocks, the Portfolio's downside risk may
be less than with other stocks since value stocks are in theory already
underpriced.
Because the Portfolio concentrates its investments in the financial services
sector, financial, economic, business and other developments affecting issuers
in that sector may have a greater effect on the Portfolio than if it had not
concentrated its assets in
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<PAGE>
that sector. Therefore, an investment in the Portfolio involves significantly
greater risk and greater volatility than a diversified equity portfolio that is
invested in issuers in various sectors or industries. The Portfolio is subject
to the risk that a particular group of related stocks will decline in price due
to sector-specific developments.
To the extent that the Portfolio invests in foreign securities, foreign
investments, particularly investments in emerging markets, carry added risks due
to the possibility of inadequate or inaccurate financial information about
companies, potential political disturbances and fluctuations in currency
exchange rates. Foreign securities are often thinly traded and could be harder
to sell at a fair price generally, or in specific market situations.
The investment manager's skill in choosing appropriate investments for the
Portfolio will determine in large part the Portfolio's ability to achieve its
investment objective.
Past performance
Because the Portfolio commenced operations less than one year ago, no past
performance information is available.
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<PAGE>
KEMPER GLOBAL INCOME PORTFOLIO
Investment objective
Kemper Global Income Portfolio seeks to provide high current income consistent
with prudent total return asset management. Unless otherwise indicated, the
Portfolio's investment objective and policies may be changed without a vote of
shareholders.
Main investment strategies
The Portfolio seeks to achieve its investment objective by investing primarily
in investment-grade (rated or unrated) foreign and domestic fixed-income
securities. In managing the Portfolio to provide a high level of current income,
the investment manager also seeks to protect net asset value and to provide
investors with a total return, which is measured by changes in net asset value
as well as income earned. The Portfolio's weighted average maturity may vary
from period to period.
The Portfolio may invest in securities issued by any issuer and in any currency
and may hold foreign currency. Under normal market conditions, the Portfolio
invests at least 65% of its assets in the securities of issuers located in at
least three countries, one of which may be the United States. It is currently
anticipated that the Portfolio will invest principally within Australia, Canada,
Japan, New Zealand, the United States, and Western Europe, and in securities
denominated in the currencies of these countries or denominated in multinational
currency units, such as the Euro.
In managing the Portfolio in an effort to reduce volatility and increase
returns, the Portfolio may allocate its assets among securities of various
issuers, geographic regions, and currency denominations in a manner that is
consistent with its investment objective based upon the following:
o relative interest rates among currencies;
o the outlook for changes in these interest rates; and
o anticipated changes in worldwide exchange rates.
In considering these factors, a country's economic and political state,
including such factors as inflation rate, growth prospects, global trade
patterns and government policies will be evaluated.
The Portfolio will buy and sell its investments on the basis of, among other
things, various economic fundamentals, including inflation rates, interest rates
and exchange rates.
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<PAGE>
Under normal market conditions, the Portfolio invests at least 65% of its total
assets in fixed-income securities. These include U.S. and foreign government
obligations, obligations of supranational entities, debt obligations of foreign
and domestic corporations, banks, and other business organizations, foreign and
domestic debt securities such as convertible securities and preferred stocks,
cash and cash equivalents.
Of course, there can be no guarantee that by following these strategies, the
Portfolio will achieve its objective.
Other investments
To a more limited extent, the Portfolio may, but is not required to, utilize
other investments and investment techniques that may impact Portfolio
performance including, but not limited to, options, futures and other
derivatives (financial instruments that derive their value from other securities
or commodities, or that are based on indices).
Risk management strategies
The Portfolio may, but is not required to, use certain derivatives in an attempt
to manage risk. The use of derivatives could magnify losses.
For temporary defensive purposes, the Portfolio may invest up to 100% of its
assets in high-quality debt securities, cash and cash equivalents. In such a
case, the Portfolio would not be pursuing, and may not achieve, its investment
objective.
Main risks
There are market and investment risks with any security and the value of an
investment in the Portfolio will fluctuate over time and it is possible to lose
money invested in the Portfolio.
The Portfolio's principal risks are associated with investing in the bond
market, investing in foreign securities, non-diversified investing, and the
investment manager's skill in managing the Portfolio.
Because the Portfolio invests in fixed-income securities, a significant risk is
that interest rates will rise, and the price of bonds held by the Portfolio will
fall in proportion to their duration. It is also possible that bonds in the
portfolio could be downgraded in credit rating or go into default.
Duration, a measurement based on the estimated pay-back period or duration of a
bond (or portfolio of bonds), is the most widely used gauge of sensitivity to
interest rate change. Like maturity, duration is expressed in years. The longer
a Portfolio's duration, the more sharply its share price is likely to rise or
fall when interest rates change.
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<PAGE>
The investment manager's choice of countries, market sectors or specific
investments may not perform as well as expected, and the Portfolio could
underperform its peers or lose money.
Foreign investments, particularly investments in emerging markets, carry added
risks due to inadequate or inaccurate financial information about companies,
potential political disturbances and fluctuations in currency exchange rates.
Foreign securities are often thinly traded and could be harder to value or sell
at a fair price generally, or in specific market situations.
Because the Portfolio is "non-diversified", the Portfolio may invest a
relatively high percentage of its assets in a limited number of issuers.
Accordingly, the Portfolio's investment returns are more likely to be impacted
by changes in the market value and returns of any one portfolio holding.
The Portfolio expects to trade securities actively. This strategy could increase
transaction costs and reduce performance.
The investment manager's skill in choosing appropriate investments for the
Portfolio will determine in large part the Portfolio's ability to achieve its
investment objective.
Past performance
The chart and table below provide some indication of the risks of investing in
the Portfolio by illustrating how the Portfolio has performed and comparing this
information to a broad measure of market performance. The information does not
reflect charges and fees associated with a separate account that invests in the
Portfolio or any insurance contract for which the Portfolio is an investment
option. These charges and fees will reduce returns. Of course, past performance
is not necessarily an indication of future performance.
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<PAGE>
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
10.98
`89 `90 `91 `92 `93 `94 `95 `96 `97 `98
Year
For the period included in the bar chart, the Portfolio's highest return for a
calendar quarter was 6.35% (the third quarter of 1998), and the Portfolio's
lowest return for a calendar quarter was 1.17% (the first quarter of 1998).
Average Annual Total Returns
Salomon Brothers
For periods ended Kemper Global World Government
December 31, 1998 Income Portfolio Bond Index+
----------------- ---------------- -----------
One Year 10.98% 15.31%
Since Inception (5/1/97) 8.26% 12.47%
- -------------
^+ The Salomon Brothers World Government Bond Index is an unmanaged index
comprised of government bonds from eighteen countries (United States,
Japan, United Kingdom, Germany, France, Canada, the Netherlands, Australia,
Switzerland, Denmark, Austria, Belgium, Finland, Ireland, Italy, Portugal,
Spain and Sweden) with maturities greater than one year. Index returns
assume reinvestment of dividends and, unlike Portfolio returns, do not
reflect any fees or expenses.
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<PAGE>
KEMPER GLOBAL BLUE CHIP PORTFOLIO
Investment objective
Kemper Global Blue Chip Portfolio seeks long-term growth of capital. Unless
otherwise indicated, the Portfolio's investment objective and policies may be
changed without a vote of shareholders.
Main investment strategies
The Portfolio pursues its investment objective through a diversified worldwide
portfolio of marketable securities, primarily equity securities, including
common stocks, preferred stocks and debt securities convertible into common
stocks.
The Portfolio will emphasize investments in common stocks of large, well-known
companies. Companies of this general type are often referred to as "Blue Chip"
companies. Blue chip companies are generally identified by:
o substantial capitalization;
o established history of earnings and dividends;
o easy access to credit;
o good industry position; and
o superior management structure.
Under normal market conditions, the Portfolio invests at least 65% of its assets
in global blue chip companies. The Portfolio will also invest at least 65% of
its assets in the securities of issuers located in at least three countries, one
of which may be the United States.
Global blue chip companies are believed to generally exhibit less investment
risk and less price volatility, on average, than companies lacking these
characteristics, such as smaller, less seasoned companies. In addition, the
large market of publicly held shares for such companies and the generally high
trading volume in those shares usually results in a relatively high degree of
liquidity for such investments.
In general, the Portfolio will seek to invest in companies that appear likely to
benefit from global economic trends, promising technologies or products and
specific country opportunities resulting from changing geopolitical, currency or
economic relationships. The Portfolio will also seek to invest in companies
which possess attractive valuations.
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<PAGE>
The Portfolio will typically sell a stock when, in the opinion of the investment
manager, (i) it no longer has favorable fundamentals or valuations and (ii) it
is not expected to benefit from long-term changes in the global economy.
The Portfolio will invest primarily in developed markets. The Portfolio may
invest up to 100% of its assets in non-U.S. issues, although under normal
circumstances, it is expected that both foreign and U.S. investments will be
represented in the Portfolio.
Of course, there can be no guarantee that by following these strategies, the
Portfolio will achieve its objective.
Other investments
To a more limited extent, the Portfolio may, but is not required to, invest in
the following:
The Portfolio may invest up to 15% of its total assets in debt or equity
securities of developing or emerging markets. The Portfolio may invest in
closed-end investment companies that invest primarily in emerging market debt
securities.
The Portfolio may invest in securities traded over-the-counter and may invest in
debt securities when the investment manager believes the potential for
appreciation will equal or exceed that available from equity securities.
The Portfolio may invest in investment-grade debt securities with credit ratings
of Aaa/AAA through Baa/BBB (and their unrated equivalents) of U.S. and foreign
issuers. The Portfolio may also invest up to 5% of its total assets in debt
securities rated Baa/BBB or below (and their unrated equivalents) of U.S. and
foreign issuers. Debt securities rated below Baa/BBB are often referred to as
"junk" bonds.
The Portfolio may utilize other investments and investment techniques that may
impact Portfolio performance including, but not limited to, options, futures and
other derivatives (financial instruments that derive their value from other
securities or commodities, or that are based on indices).
Risk management strategies
The Portfolio may, but is not required to, use certain derivatives in an attempt
to manage risk. The use of derivatives could magnify losses.
For temporary defensive purposes, the Portfolio may invest up to 100% of its
assets in U.S. issues, high-quality debt securities, cash and cash equivalents.
In such a case, the Portfolio would not be pursuing, and may not achieve, its
investment objective.
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<PAGE>
Main risks
There are market and investment risks with any security and the value of an
investment in the Portfolio will fluctuate over time and it is possible to lose
money invested in the Portfolio.
The Portfolio's principal risks are associated with investing in the stock
market, investing in foreign securities, and the investment manager's skill in
managing the Portfolio.
The Portfolio's returns and net asset value will go up and down. Stock market
movements will affect the Portfolio's share prices on a daily basis. Declines in
value are possible both in the overall stock market or in the types of
securities held by the Portfolio.
An investment in the common stock of a company represents a proportionate
ownership interest in that company. Therefore, the Portfolio participates in the
success or failure of any company in which it holds stock. Compared to other
classes of financial assets, such as bonds or cash equivalents, common stocks
have historically offered a greater potential for gain on investment. However,
the market value of common stocks can fluctuate significantly, reflecting such
things as the business performance of the issuing company, investors'
perceptions of the company or the overall stock market and general economic or
financial market movements. Smaller companies are especially sensitive to these
factors and may even become valueless.
Foreign investments, particularly investments in emerging markets, carry added
risks due to inadequate or inaccurate financial information about companies,
potential political disturbances and fluctuations in currency exchange rates.
Foreign securities are often thinly traded and could be harder to value or sell
at a fair price generally, or in specific market situations.
Convertible debt securities in which the Portfolio may invest are subject to
some of the same interest rate risk as bonds; that is, their prices tend to drop
when interest rates rise.
In addition, the investment manager's choice of countries, market sectors or
specific investments may not perform as well as expected, and the Portfolio
could underperform its peers or lose money.
The investment manager's skill in choosing appropriate investments for the
Portfolio will determine in large part the Portfolio's ability to achieve its
investment objective.
Past performance
Because the Portfolio commenced operations less than one year ago, no past
performance information is available.
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KEMPER INTERNATIONAL GROWTH
AND INCOME PORTFOLIO
Investment objective
Kemper International Growth and Income Portfolio seeks long-term growth of
capital and current income. Unless otherwise indicated, the Portfolio's
investment objective and policies may be changed without a vote of shareholders.
Main investment strategies
The Portfolio pursues its investment objective by investing primarily in foreign
equity securities. The Portfolio invests generally in common stocks of
established companies listed on foreign exchanges, which the investment manager
believes offer prospects for growth of earnings while paying relatively high
current dividends.
At least 80% of the Portfolio's net assets will normally be invested in the
equity securities of established non-U.S. companies. The Portfolio normally
invests in securities of issuers located in at least three different countries.
The Portfolio focuses its investments in the developed foreign countries
included in the Morgan Stanley Capital International World ex-US Index.
Stocks are selected for the Portfolio using a disciplined, multi-part investment
approach with four stages as follows:
o Stage 1: The investment manager analyzes the pool of dividend-paying
foreign securities, primarily from the world's more mature markets,
targeting stocks that have high relative yields compared to the average for
their markets.
o Stage 2: The investment manager identifies what it believes are the most
promising stocks for the portfolio.
o Stage 3: The investment manager diversifies the portfolio across different
industry sectors.
o Stage 4: The investment manager diversifies the portfolio among different
countries.
A stock is typically sold when a company's dividend yield reaches a
predetermined level versus the market yield. A stock is also sold when, in the
opinion of the investment managers, a company's financial situation begins to
deteriorate, especially through the assumption of large amounts of debt.
Of course, there can be no guarantee that by following these investment
strategies, the Portfolio will achieve its objective.
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<PAGE>
Other investments
To a more limited extent, the Portfolio may, but is not required to, invest in
the following:
Under normal conditions, the Portfolio may also invest up to 20% of its net
assets in debt securities convertible into common stock and fixed-income
securities of governments, governmental agencies, supranational agencies and
private issuers when the investment manager believes the potential for
appreciation and income will equal or exceed that available from investments in
equity securities. These securities will predominantly be "investment-grade"
securities which are those rated Aaa/AAA through Baa/BBB (and their unrated
equivalents).
The Portfolio may also invest up to 5% of its total assets in debt securities
rated below Baa/BBB (and their unrated equivalents), often referred to as "junk"
bonds.
The Portfolio may utilize other investments and investment techniques that may
impact Portfolio performance including, but not limited to, options, futures and
other derivatives (financial instruments that derive their value from other
securities or commodities, or that are based on indices).
Risk management strategies
The Portfolio manages risk by diversifying the portfolio's holdings across
different countries and different industry sectors.
The Portfolio also may, but is not required to, use certain derivatives in an
attempt to manage risk. The use of derivatives could magnify losses.
For temporary defensive purposes, the Portfolio may invest without limit in cash
and cash equivalents which may include domestic and foreign money market
instruments, short-term government and corporate obligations and repurchase
agreements. The Portfolio may also hold up to 20% of its net assets in the U.S.
and foreign fixed-income securities for temporary defensive purposes. In such
cases, the Portfolio would not be pursuing, and may not achieve, its investment
objective.
Main risks
There are market and investment risks with any security and the value of an
investment in the Portfolio will fluctuate over time and it is possible to lose
money invested in the Portfolio.
The Portfolio's principal risks are associated with investing in the stock
market, investing in foreign securities, and the investment manager's skill in
managing the Portfolio.
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<PAGE>
The Portfolio's returns and net asset value will go up and down. Stock market
movements will affect the Portfolio's share prices on a daily basis. Declines in
value are possible both in the overall stock market or in the types of
securities held by the Portfolio.
An investment in the common stock of a company represents a proportionate
ownership interest in that company. Therefore, the Portfolio participates in the
success or failure of any company in which it holds stock. Compared to other
classes of financial assets, such as bonds or cash equivalents, common stocks
have historically offered a greater potential for gain on investment. However,
the market value of common stocks can fluctuate significantly, reflecting such
things as the business performance of the issuing company, investors'
perceptions of the company or the overall stock market and general economic or
financial market movements. Smaller companies are especially sensitive to these
factors and may even become valueless.
Foreign investments, carry added risks due to inadequate or inaccurate financial
information about companies, potential political disturbances and fluctuations
in currency exchange rates. Foreign securities are often thinly traded and could
be harder to value or sell at a fair price generally, or in specific market
situations.
In addition, the investment manager's choice of countries, market sectors or
specific investments may not perform as well as expected, and the Portfolio
could underperform its peers or lose money.
The Portfolio expects to trade securities actively. This strategy could increase
transaction costs and reduce performance.
The investment manager's skill in choosing appropriate investments for the
Portfolio will determine in large part the Portfolio's ability to achieve its
investment objective.
Past performance
Because the Portfolio commenced operations less than one year ago, no past
performance information is available.
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KEMPER INTERNATIONAL PORTFOLIO
Investment objective
Kemper International Portfolio seeks total return, a combination of capital
growth and income. Unless otherwise indicated, the Portfolio's investment
objective and policies may be changed without a vote of shareholders.
Main investment strategies
The Portfolio pursues its objective by investing primarily in common stocks of
established non-U.S. companies that the investment manager believes have
potential for capital growth, income or both.
There is no limitation on the percentage or amount of the Portfolio's assets
that may be invested in growth or income, and therefore at any particular time
the investment emphasis may be placed solely or primarily on growth of capital
or on income. In determining whether the Portfolio will be invested for capital
growth or income, the investment manager analyzes the international equity and
fixed-income markets and seeks to assess the degree of risk and level of return
that can be expected from each market.
The Portfolio invests primarily in non-U.S. issuers, and under normal
circumstances more than 80% of the Portfolio's total assets will be invested in
non-U.S. issuers. From time to time, the Portfolio may have more than 25% of its
assets invested in any major industrial or developed country that in the view of
the investment manager poses no unique investment risk.
In determining the appropriate distribution of investments among various
countries and geographic regions, the investment manager ordinarily considers
the following factors:
o prospects for relative economic growth among foreign countries;
o expected levels of inflation;
o relative price levels of the various capital markets;
o government policies influencing business conditions;
o the outlook for currency relationships; and
o the range of individual investment opportunities available to the
international investor.
In selecting its investments, the investment manager will look for companies
with (i) strong earnings growth, (ii) clean balance sheets, (iii) strong
management and (iv)
105
<PAGE>
increasing revenue. The investment manager will also look for previously
unmanaged companies, which are undergoing a turnaround as a result of new
management, product focus or balance sheet restructuring.
A stock is typically sold when (i) the stock has reached a predetermined value,
(ii) the company's fundamentals have deteriorated, and (iii) the company
deviates from a previously demonstrated business plan.
Of course, there can be no guarantee that by following these strategies, the
Portfolio will achieve its objective.
Other investments
To a more limited extent, the Portfolio may, but is not required to, invest in
the following:
The Portfolio may invest in convertible securities.
The Portfolio may also invest in debt securities, preferred stocks, bonds, notes
and other debt securities of companies and futures contracts.
The Portfolio may utilize other investments and investment techniques that may
impact Portfolio performance including, but not limited to, options, futures and
other derivatives (financial instruments that derive their value from other
securities or commodities, or that are based on indices).
Risk management strategies
The Portfolio may, but is not required to, use certain derivatives in an attempt
to manage risk. The use of derivatives could magnify losses.
The Portfolio may also establish and maintain reserves for defensive purposes
and to enable the Portfolio to take advantage of buying opportunities. The
Portfolio's reserves may be invested in domestic as well as foreign short-term
money market instruments.
For temporary defensive purposes, the Portfolio may invest up to 100% of its
assets in U.S. Government obligations or securities of companies incorporated in
and having their principal activities in the United States. In such cases, the
Portfolio would not be pursuing, and may not achieve, its investment objective.
Main risks
There are market and investment risks with any security and the value of an
investment in the Portfolio will fluctuate over time and it is possible to lose
money invested in the Portfolio.
106
<PAGE>
The Portfolio's principal risks are associated with investing in the stock
market, investing in foreign securities, and the investment manager's skill in
managing the Portfolio.
The Portfolio's returns and net asset value will go up and down. Stock market
movements will affect the Portfolio's share prices on a daily basis. Declines in
value are possible both in the overall stock market or in the types of
securities held by the Portfolio.
An investment in the common stock of a company represents a proportionate
ownership interest in that company. Therefore, the Portfolio participates in the
success or failure of any company in which it holds stock. Compared to other
classes of financial assets, such as bonds or cash equivalents, common stocks
have historically offered a greater potential for gain on investment. However,
the market value of common stocks can fluctuate significantly, reflecting such
things as the business performance of the issuing company, investors'
perceptions of the company or the overall stock market and general economic or
financial market movements. Smaller companies are especially sensitive to these
factors and may even become valueless.
Foreign investments, particularly investments in emerging markets, carry added
risks due to inadequate or inaccurate financial information about companies,
potential political disturbances and fluctuations in currency exchange rates.
Foreign securities are often thinly traded and could be harder to value or sell
at a fair price generally, or in specific market situations.
In addition, the investment manager's choice of countries, market sectors or
specific investments may not perform as well as expected, and the Portfolio
could underperform its peers or lose money.
The Portfolio expects to trade securities actively. This strategy could increase
transaction costs and reduce performance.
The investment manager's skill in choosing appropriate investments for the
Portfolio will determine in large part the Portfolio's ability to achieve its
investment objective.
Past performance
The chart and table below provide some indication of the risks of investing in
the Portfolio by illustrating how the Portfolio has performed from year to year
and comparing this information to a broad measure of market performance. The
information does not reflect charges and fees associated with a separate account
that invests in the Portfolio or any insurance contract for which the Portfolio
is an investment option. These charges and fees will reduce returns. Of course,
past performance is not necessarily an indication of future performance.
107
<PAGE>
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
32.79 -3.59 12.83 16.49 9.46 10.02
`89 `90 `91 `92 `93 `94 `95 `96 `97 `98
Year
For the periods included in the bar chart, the Portfolio's highest return for a
calendar quarter was 15.43% (fourth quarter of 1998), and the Portfolio's lowest
return for a calendar quarter was -17.32% (third quarter of 1998).
Average Annual Total Returns
For periods ended Kemper
December 31, 1998 International Portfolio MSCI EAFE Index+
----------------- ----------------------- ----------------
One Year 10.02% 20.33%
Five Years 8.82% 9.50%
Since Inception (1/6/92) 10.53% 9.15%*
- -------------
^+ The EAFE Index (Morgan Stanley Capital International Europe, Austral-Asia,
Far East Index) is a generally accepted benchmark for performance of major
overseas markets. Index returns assume reinvestment of dividends and,
unlike Portfolio returns, do not reflect any fees or expenses.
* Since 12/31/91.
108
<PAGE>
ABOUT YOUR INVESTMENT
INVESTMENT MANAGER
Each Portfolio retains the investment management firm of Scudder Kemper
Investments, Inc., 345 Park Avenue, New York, New York, to manage its daily
investment and business affairs subject to the policies established by the
Fund's Board. Scudder Kemper Investments, Inc. actively manages the Portfolios'
investments. Professional management can be an important advantage for investors
who do not have the time or expertise to invest directly in individual
securities. Scudder Kemper Investments, Inc. is one of the largest and most
experienced investment management organizations worldwide, managing more than
$290 billion in assets globally for mutual fund investors, retirement and
pension plans, institutional and corporate clients, and private family and
individual accounts.
Each Portfolio pays the investment manager a monthly investment management fee.
Fees paid for the most recently completed fiscal year for the Portfolios
operating at least one year are shown below:
% of Average Net Assets
Portfolio Name on an Annual Basis
- -------------- ------------------
Kemper Money Market Portfolio 0.50%
Kemper Government Securities Portfolio 0.55%
Kemper Investment Grade Bond Portfolio 0.60%
Kemper High Yield Portfolio 0.60%
Kemper Total Return Portfolio 0.55%
Kemper Blue Chip Portfolio 0.65%
Kemper Growth Portfolio 0.60%
Kemper Horizon 20+ Portfolio 0.60%
Kemper Horizon 10+ Portfolio 0.60%
Kemper Horizon 5 Portfolio 0.60%
Kemper Small Cap Growth 0.65%
Kemper Value+Growth Portfolio 0.75%
Kemper Contrarian Value Portfolio 0.75%
Kemper Small Cap Value Portfolio 0.75%
Kemper Global Income Portfolio 0.75%
Kemper International Portfolio 0.75%
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<PAGE>
The Kemper-Dreman High Return Equity Portfolio, Kemper-Dreman Financial Services
Portfolio, Kemper Aggressive Growth Portfolio and Kemper Technology Growth
Portfolio each pays the investment manager a graduated investment management
fee, based on the average daily net assets of the Portfolio, payable monthly, at
the annual rates shown below:
Average Daily Net Assets of the Portfolio Annual Management Fee Rate
- ----------------------------------------- --------------------------
$0-$250 million 0.75%
$250 million-$1 billion 0.72%
$1 billion-$2.5 billion 0.70%
$2.5 billion-$5 billion 0.68%
$5 billion-$7.5 billion 0.65%
$7.5 billion-$10 billion 0.64%
$10 billion-$12.5 billion 0.63%
Over $12.5 billion 0.62%
KVS Focused Large Cap Growth Portfolio, KVS Growth And Income Portfolio and KVS
Growth Opportunities Portfolio each pays the investment manager a graduated
investment management fee based on the average daily net assets of the
Portfolio, payable monthly, at the annual rates shown below:
Average Daily Net Assets of the Portfolio Annual Management Fee Rate
- ----------------------------------------- --------------------------
$0-$250 million 0.950%
$250 million-$500 million 0.925%
$500 million-$1 billion 0.900%
$1 billion-$2.5 billion 0.875%
Over $2.5 billion 0.850%
Kemper Index 500 Portfolio pays the investment manager a graduated investment
management fee based on the average daily net assets of the Portfolio, payable
monthly, at the annual rates shown below:
Average Daily Net Assets of the Portfolio Annual Management Fee Rate
- ----------------------------------------- --------------------------
$0-$200 million 0.45%
$200 million-$750 million 0.42%
$750 million-$2 billion 0.40%
$2 billion-$5 billion 0.38%
Over $5 billion 0.35%
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<PAGE>
The Kemper Global Blue Chip Portfolio pays the investment manager a graduated
investment management fee, based on the average daily net assets of the
Portfolio, payable monthly, at the annual rates shown below:
Average Daily Net Assets of the Portfolio Annual Management Fee Rate
- ----------------------------------------- --------------------------
$0-$250 million 1.00%
$250 million-$1 billion 0.95%
Over $1 billion 0.90%
The Kemper International Growth and Income Portfolio pays the investment manager
an investment management fee, payable monthly, based on an annual rate of 1% of
the average daily net assets of the Portfolio.
Subadviser for Kemper Index 500 Portfolio
Bankers Trust Company, the Portfolio's subadviser, is a New York banking
corporation with its principal offices located at 130 Liberty Street, New York,
New York. It is a wholly owned subsidiary of Bankers Trust Corporation. On June
4, 1999, Bankers Trust Corporation merged with and into a subsidiary of Deutsche
Bank AG. Deutsche Bank AG is a major global banking institution that is engaged
in a wide range of financial services, including investment management, mutual
funds, retail and commercial banking, investment banking and insurance. Bankers
Trust Company will handle day-to-day investment and trading functions for the
Portfolio under the guidance of the portfolio manager. The subadviser has
managed stock index investments since 1977.
A fee is paid to the subadviser by Scudder Kemper Investments, Inc. and
calculated monthly as a percentage of the Portfolio's average daily net assets.
The rate decreases with successive increases in net assets. The minimum annual
fee is set at $100,000, however, the minimum fee does not apply during the
Portfolio's first year of operations. For its services as subadviser, Bankers
Trust Company will receive a subadvisory fee based on the average daily net
assets of the Portfolio, payable monthly, at the annual rates shown below:
Average Daily Net Assets of the Portfolio Annual Subadviser Fee Rate
----------------------------------------- --------------------------
$0-$200 million 0.08%
On the next $550 million 0.05%
On the balance over $750 million 0.025%
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<PAGE>
Subadviser for KVS Focused Large Cap Growth Portfolio
Pursuant to a subadvisory agreement with Scudder Kemper Investments, Inc., Eagle
Asset Management, Inc., 880 Carillon Parkway, St. Petersburg, Florida, is the
subadviser for the KVS Focused Large Cap Growth Portfolio and receives a fee for
its services from Scudder Kemper Investments, Inc. Eagle Asset Management, Inc.
manages more than $5.5 billion in assets for institutional, high net worth
individuals and subadvisory clients. Eagle Asset Management, Inc. will handle
day-to-day investment and trading functions for the KVS Focused Large Cap Growth
Portfolio under the guidance of the portfolio manager.
A fee is paid to the subadviser by Scudder Kemper Investments, Inc. and is
calculated monthly as a percentage of the Portfolio's average daily net assets.
The rate decreases with successive increases in net assets. For its services as
subadviser, Eagle Asset Management, Inc. will receive a subadvisory fee based on
the average daily net assets of the Portfolio, payable monthly, at the annual
rates shown below:
Average Daily Net Assets of the Portfolio Annual Subadviser Fee Rate
----------------------------------------- --------------------------
$0-$50 million 0.45%
$50 million-$300 million 0.40%
On the balance over $300 million 0.30%
Prior Performance of the Subadviser
Provided below are historical performance figures representing the total returns
for the subadviser's Growth Equity institutional composite. This composite is
comprised of institutional large cap growth accounts of $2 million or more with
respect to which the subadviser has trading discretion. One of the accounts is a
registered investment company. The accounts that comprise the composite have
investment objectives, policies and strategies that are substantially similar to
those of the Portfolio. This information is provided merely to illustrate the
past performance of a composite group of similar accounts, as measured against a
specified market index, and does not represent the performance of the Portfolio,
which does not yet have a performance record of its own. The information does
not reflect charges and fees associated with a separate account that invests in
the Portfolio or any insurance contract for which the Portfolio is an investment
option. These charges and fees will reduce returns. If the Portfolio's fees and
expenses had been used in calculating the composite's performance, the
performance of the composite would have been lower. Investors should not
consider this performance data as an indication of future performance of the
Portfolio, the investment manager or the subadviser to the Portfolio.
112
<PAGE>
The performance information below is for the subadviser's Growth Equity
institutional composite and is presented net of fees and expenses. Certain of
the accounts that comprise the composite are private accounts, which are not
subject to frequent inflows and outflows of assets as are most mutual funds,
including the Portfolio. Such inflows and outflows of assets make it more
difficult to manage the Portfolio and thus may adversely affect its performance
relative to these private accounts. In addition, the private accounts are not
subject to the diversification requirements, specific tax restrictions and
investment limitations imposed on the Portfolio by the 1940 Act and Subchapter M
of the Internal Revenue Code. Consequently, the performance results for the
composite could have been lower than what is shown had these private accounts
been regulated as registered investment companies under the federal securities
laws.
Total returns for years ended December 31
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
33.82 -9.32 37.44 9.22 17.1 -1.74 27.26 23.57 37.53 37.11
`89 `90 `91 `92 `93 `94 `95 `96 `97 `98
For the periods included in the bar chart, the highest return for a calendar
quarter was 20.89% (the second quarter of 1997), and the lowest return for a
calendar quarter was -15.58% (the third quarter of 1990).
The year-to-date total return as of June 30, 1999 was 14.40%.
113
<PAGE>
Average Annual Total Returns
For periods ended Growth Equity
December 31, 1998 Institutional Composite S&P 500 Index*
----------------- ----------------------- --------------
One Year 37.11% 28.58%
Five Years 23.85% 24.06%
Ten Years 20.05% 19.21%
- -------------
* The Standard & Poor's 500 Composite Stock Price Index (S&P 500) is an
unmanaged capitalization-weighted measure of 500 widely held common stocks
listed on the New York Stock Exchange and the American Stock Exchange, and
traded on the Nasdaq Stock Market, Inc. Index returns assume reinvestment
of dividends and, unlike the composite's returns, do not reflect any fees
or expenses.
Subadviser for KVS Growth And Income Portfolio and KVS Growth Opportunities
Portfolio
Pursuant to a subadvisory agreement with Scudder Kemper Investments, Inc., Janus
Capital Corporation, 100 Fillmore Street, Denver, Colorado, is the subadviser
for the KVS Growth And Income Portfolio and the KVS Growth Opportunities
Portfolio and receives a fee for its services from Scudder Kemper Investments,
Inc. Janus Capital Corporation manages more than $155 billion in assets for
variable annuities, mutual funds and separately managed institutional accounts.
They began serving as investment adviser to Janus Fund in 1970 and currently
serve as investment adviser to all of the Janus Funds, acts as subadviser for a
number of private-label mutual funds and provides separate account advisory
services for institutional accounts. Janus Capital Corporation will handle
day-to-day investment and trading functions for the KVS Growth And Income
Portfolio and the KVS Growth Opportunities Portfolio under the guidance of the
portfolio managers.
A fee is paid to the subadviser by Scudder Kemper Investments, Inc. and is
calculated monthly as a percentage of the combined average daily net assets of
the KVS Growth And Income Portfolio and the KVS Growth Opportunities Portfolio.
The rate decreases with successive increases in net assets. For its services as
subadviser, Janus Capital Corporation will receive subadvisory fees based on the
combined average daily net assets of the Portfolios, payable monthly, at the
annual rates shown below:
Average Daily Net Assets of the Portfolios Annual Subadviser Fee Rate
------------------------------------------ --------------------------
$0-$100 million 0.55%
$100 million-$500 million 0.50%
On the balance over $500 million 0.45%
114
<PAGE>
Subadviser for Kemper Global Income Portfolio and Kemper International Portfolio
Scudder Investments (U.K.) Limited, 1 South Place, London, U.K., an affiliate of
Scudder Kemper Investments, Inc., is the subadviser for Kemper Global Income
Portfolio and Kemper International Portfolio. Scudder Investments (U.K.) Limited
has served as subadviser for mutual funds since December 1996, and investment
adviser for certain institutional accounts since August 1998.
For its services as subadviser, Scudder Investments (U.K.) received an annual
fee from Scudder Kemper Investments of 0.30% and 0.35% for each of the Kemper
Global Income Portfolio and Kemper International Portfolio, respectively, for
the fiscal year ended December 31, 1998.
Subadviser for Kemper-Dreman High Return Equity Portfolio and
Kemper-Dreman Financial Services Portfolio
Pursuant to a subadvisory agreement with Scudder Kemper Investments, Inc.,
Dreman Value Management L.L.C., 10 Exchange Place, Jersey City, New Jersey, is
the subadviser for the Kemper-Dreman High Return Equity Portfolio and
Kemper-Dreman Financial Services Portfolio and receives a fee for its services
from Scudder Kemper Investments, Inc. Founded in 1977, Dreman Value Management,
L.L.C. manages over $7 billion in assets.
Scudder Kemper Investments, Inc. pays Dreman Value Management, L.L.C. a
sub-advisory fee for each of Kemper-Dreman High Return Equity Portfolio and
Kemper-Dreman Financial Services Portfolio. For its services as subadviser,
Dreman Value Management, L.L.C. receives an annual fee based on the average
daily net assets of each of the Kemper-Dreman High Return Equity Portfolio and
Kemper-Dreman Financial Services Portfolio, payable monthly, at the annual rates
shown below:
Average Daily Net Assets of the Portfolio Annual Subadviser Fee Rate
- ----------------------------------------- --------------------------
$0-$250 million 0.240%
$250 million-$1 billion 0.230%
$1 billion-$2.5 billion 0.224%
$2.5 billion-$5 billion 0.218%
$5 billion-$7.5 billion 0.208%
$7.5 billion-$10 billion 0.205%
$10 billion-$12.5 billion 0.202%
Over $12.5 billion 0.198%
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<PAGE>
Portfolio management
The following investment professionals are associated with the Portfolios as
indicated:
<TABLE>
<CAPTION>
Joined the
Portfolio as
Name & Title Portfolio Manager Background
- ---------------------------------------------------------------------------------------
Kemper Money Market Portfolio
- --------------------------------------------------------------------------------------
<S> <C> <C>
Frank J. Rachwalski, 1982 Joined Scudder Kemper in 1973. Since
Jr., Lead Manager joining Scudder Kemper, he has served as
portfolio manager for other
affiliated mutual funds, and has over
20 years of experience in short-term
fixed income investing and research.
- --------------------------------------------------------------------------------------
Jerri I. Cohen, 1999 Joined Scudder Kemper in 1981. She has
Manager over five years of experience in
tax-exempt money market fund investing.
- --------------------------------------------------------------------------------------
Kemper Government Securities Portfolio
- --------------------------------------------------------------------------------------
Richard L. 1996 Joined Scudder Kemper in 1996. He began
Vandenberg, his investment career in 1973. Prior to
Lead Manager joining Scudder Kemper he was a portfolio
manager for an unaffiliated investment
management firm.
- --------------------------------------------------------------------------------------
Scott E. Dolan, 1998 Joined Scudder Kemper in 1989. He has
Manager four years of experience in compliance
analysis and account administration
and has been a portfolio manager for
certain affiliated mutual funds since
1993.
- --------------------------------------------------------------------------------------
John E. Dugenske, 1998 Joined Scudder Kemper in 1998. He began
Manager his investment career in 1990. Prior to
joining Scudder Kemper he was a portfolio
manager for an unaffiliated investment
management firm.
- --------------------------------------------------------------------------------------
Kemper Investment Grade Bond Portfolio
- --------------------------------------------------------------------------------------
Robert S. Cessine, 1996 Joined Scudder Kemper in 1993. He is
Lead Manager director of investment-grade corporate
and sovereign bond research. Prior to
joining Scudder Kemper he was a senior
corporate bond analyst and chairman of
the bond selection committee of an
unaffiliated investment management
company.
- --------------------------------------------------------------------------------------
116
<PAGE>
Joined the
Portfolio as
Name & Title Portfolio Manager Background
- ---------------------------------------------------------------------------------------
Kemper High Yield Portfolio
- --------------------------------------------------------------------------------------
Harry E. Resis, Jr., 1993 Joined Scudder Kemper in 1988. Since
Lead Manager then, he has served as portfolio manager
on various affiliated mutual funds. He
began his investment career in 1967.
- --------------------------------------------------------------------------------------
Michael A. McNamara, 1990 Joined Scudder Kemper in 1972. Since
Manager then, he has served as portfolio manager
on various affiliated funds. He began his
investment career in 1972.
- --------------------------------------------------------------------------------------
Daniel J. Doyle, 1999 Joined Scudder Kemper in 1986. He was
responsible analyzing and researching
Manager high yield bonds for high yield
portfolios. He is a Chartered
Financial Analyst and a member of the
Investment Analyst Society of
Chicago.
- --------------------------------------------------------------------------------------
Kemper Total Return Portfolio
- --------------------------------------------------------------------------------------
Gary A. Langbaum, 1995 Joined Scudder Kemper in 1988. He has
Lead Manager previously served as the director of
equity research. He began his investment
career in 1970.
- --------------------------------------------------------------------------------------
Tracy McCormick, 1998 Joined Scudder Kemper in 1994. She began
Manager her investment career in 1980. Prior to
joining Scudder Kemper she was Senior
Vice President and a portfolio manager at
an unaffiliated investment management
company.
- --------------------------------------------------------------------------------------
Robert S. Cessine, 1999 Joined Scudder Kemper in 1993. He is
Manager director of investment-grade corporate
and sovereign bond research. Prior to
joining Scudder Kemper he was a senior
corporate bond analyst and chairman of
the bond selection committee of an
unaffiliated investment management
company.
- --------------------------------------------------------------------------------------
117
<PAGE>
Joined the
Portfolio as
Name & Title Portfolio Manager Background
- ---------------------------------------------------------------------------------------
Kemper Blue Chip Portfolio
- --------------------------------------------------------------------------------------
Tracy McCormick, 1994 Joined Scudder Kemper in 1994. She began
Lead Manager her investment career in 1980. Prior to
joining Scudder Kemper she was Senior
Vice President and a portfolio manager at
an unaffiliated investment management
company.
- --------------------------------------------------------------------------------------
Gary A. Langbaum, 1998 Joined Scudder Kemper in 1988. He has
Manager previously served as the director of
equity research. He began his investment
career in 1970.
- --------------------------------------------------------------------------------------
Kemper Growth Portfolio
- --------------------------------------------------------------------------------------
Valerie F. Malter, 1999 Joined Scudder Kemper in 1995. She began
Co-Lead Manager her investment career in 1984. Prior to
joining Scudder Kemper she spent ten
years as an analyst and portfolio manager
at an unaffiliated investment advisory
firm.
- --------------------------------------------------------------------------------------
George P. Fraise, 1999 Joined Scudder Kemper in 1997. He began
Co-Lead Manager his investment career in 1986. Prior to
joining Scudder Kemper he was a
senior equity analyst at several
unaffiliated investment advisory
firms.
- --------------------------------------------------------------------------------------
Kemper Aggressive Growth Portfolio
- --------------------------------------------------------------------------------------
Sewall F. Hodges, 1999 Joined Scudder Kemper in 1995. He is a
Lead Manager member of the firm's Global Equity Group.
He began his investment career in
1978. Prior to joining Scudder Kemper
he was a global equity portfolio
manager and research analyst at an
unaffiliated investment management.
- --------------------------------------------------------------------------------------
Jesus A. Cabrera, 1999 Joined Scudder Kemper in 1999. He began
Manager his investment career in 1989. Prior to
joining Scudder Kemper he was Head of
Small Cap Growth Group at an
unaffiliated investment management
company.
- --------------------------------------------------------------------------------------
118
<PAGE>
Joined the
Portfolio as
Name & Title Portfolio Manager Background
- ---------------------------------------------------------------------------------------
Kemper Horizon 20+, 10+ and 5 Portfolios
- --------------------------------------------------------------------------------------
Robert D. Tymoczko, 1999 Joined Scudder Kemper in 1997. He began
Lead Manager his investment career in 1996. Prior to
joining Scudder Kemper he worked as an
economic consultant specializing in
quantitative research and econometric
consulting.
- --------------------------------------------------------------------------------------
Shahram Tajbakhsh, 1999 Joined Scudder Kemper in 1996. He began
Manager his investment career in 1984. Prior to
joining Scudder Kemper he was Lead
Project Manager at an international
financial news provider.
- --------------------------------------------------------------------------------------
Almond G. Goduti, 1999 Joined Scudder Kemper in 1996. He began
Manager his investment career in 1984. Prior to
joining Scudder Kemper he was a
research and investment analyst
dealing with mortgage and asset
backed securities at an unaffiliated
asset management company.
- --------------------------------------------------------------------------------------
Josephine Chu, 1999 Joined Scudder Kemper in 1997. She began
Manager her investment career in 1997. Prior to
joining Scudder Kemper she attended
the Chinese University of Hong Kong
and obtained an MBA with honors with
a concentration in analytic finance
from the University of Chicago.
- --------------------------------------------------------------------------------------
Kemper Value+Growth Portfolio
- --------------------------------------------------------------------------------------
Donald E. Hall, 1999 Joined Scudder Kemper in 1982. He began
Lead Manager his investment career in 1982. Prior to
joining Scudder Kemper he received an
MBA from Harvard Business School
after working as a sales engineer for
an international aluminum products
manufacturer.
- --------------------------------------------------------------------------------------
William J. Wallace, 1999 Joined Scudder Kemper in 1987 as a
Manager manager of institutional equity accounts.
He began his investment career in
1981. Prior to joining Scudder Kemper
he performed product management and
client relations for a variety of
trustee banks.
- --------------------------------------------------------------------------------------
119
<PAGE>
Joined the
Portfolio as
Name & Title Portfolio Manager Background
- ---------------------------------------------------------------------------------------
Kemper Small Cap Growth Portfolio
- --------------------------------------------------------------------------------------
Jesus A. Cabrera, 1999 Joined Scudder Kemper in 1999. He began
Lead Manager his investment career in 1989. Prior to
joining Scudder Kemper he was Head of
the Small Cap Growth Group at an
unaffiliated investment management
company.
- --------------------------------------------------------------------------------------
Kemper Technology Growth Portfolio
- --------------------------------------------------------------------------------------
James B. Burkart, 1999 Joined Scudder Kemper in 1998. He began
Lead Manager his investment career in 1970. Prior to
joining Scudder Kemper he was an analyst
and portfolio manager for a trust company.
- --------------------------------------------------------------------------------------
Tracy McCormick, 1999 Joined Scudder Kemper in 1994. She began
Manager her investment career in 1980. Prior to
joining Scudder Kemper she was a Senior
Vice President and portfolio manager at
an unaffiliated investment management
company.
- --------------------------------------------------------------------------------------
J. Brooks Dougherty, 1999 Joined Scudder Kemper in 1993. He began
Manager his investment career in 1984.
- --------------------------------------------------------------------------------------
Robert Horton, 1999 Joined Scudder Kemper in 1996. He began
Manager his investment career in 1983.
- --------------------------------------------------------------------------------------
Deborah Koch, 1999 Joined Scudder Kemper in 1992. He began
Manager his investment career in 1985.
- --------------------------------------------------------------------------------------
Virginea Stuart, 1999 Joined Scudder Kemper in 1996. He began
Manager his investment career in 1995.
- --------------------------------------------------------------------------------------
Kemper Contrarian Value Portfolio
- --------------------------------------------------------------------------------------
Thomas F. Sassi, 1996 Joined Scudder Kemper in 1996. He began
Lead Manager his investment career in 1971. Prior to
joining Scudder Kemper he was a Vice
President and portfolio manager for
an unaffiliated life insurance and
investment management company.
- --------------------------------------------------------------------------------------
Frederick L. Gaskin, 1997 Joined Scudder Kemper in 1996. He began
Manager his investment career in 1986. Prior to
joining Scudder Kemper he was a Vice
President and portfolio manager for a
bank.
- --------------------------------------------------------------------------------------
120
<PAGE>
Joined the
Portfolio as
Name & Title Portfolio Manager Background
- ---------------------------------------------------------------------------------------
Kemper-Dreman High Return Equity Portfolio
- --------------------------------------------------------------------------------------
David N. Dreman, 1998 Chairman of Dreman Value Management,
Lead Manager L.L.C. since 1977. He is a pioneer of the
philosophy of contrarian investing
(buying what is out of favor) and a
leading proponent of the low P/E
investment style. He is a columnist
for Forbes and the author of several
books on the value style of
investing. He began his investment
career in 1957.
- --------------------------------------------------------------------------------------
KVS Focused Large Cap Growth Portfolio
- --------------------------------------------------------------------------------------
Ashi Parikh, 1999 Serves as Managing Director and portfolio
Manager manager at Eagle Asset Management, Inc.
since April 1999. Mr. Parikh joined Eagle
from Bank One Investment Advisors, Inc.
where he was Managing Director of their
Growth Equity Team and the lead manager
of the One Group Large Company Growth
Fund and One Group Growth Opportunities
Fund. He joined Bank One Investment
Advisors in 1994.
- --------------------------------------------------------------------------------------
KVS Growth And Income Portfolio
- --------------------------------------------------------------------------------------
David J. Corkins, 1999 Serves as portfolio manager of Janus
Manager Growth and Income Fund and Janus Aspen
Growth and Income Portfolio, which he
has managed since its inception. He
joined Janus in 1995 as a research
analyst specializing in domestic
financial services companies and a
variety of foreign industries. Prior
to joining Janus, he was the Chief
Financial Officer of Chase U.S.
Consumer Services, Inc., a Chase
Manhattan mortgage business.
- --------------------------------------------------------------------------------------
121
<PAGE>
Joined the
Portfolio as
Name & Title Portfolio Manager Background
- ---------------------------------------------------------------------------------------
KVS Growth Opportunities Portfolio
- --------------------------------------------------------------------------------------
E. Marc Pinto, 1999 Joined Janus in 1994 and serves as
Manager Portfolio Manager of separate accounts in
the Large Cap Growth discipline. He also
has served as an assistant portfolio
manager of Janus Twenty Fund and
Janus Growth and Income Fund. He has
14 years of investment industry
experience.
- --------------------------------------------------------------------------------------
Kemper Index 500 Portfolio
- --------------------------------------------------------------------------------------
James A. Creighton, 1999 Managing Director and Head of Global
Manager Index Management for Deutsche Asset
Management. Prior to joining Deutsche
Asset Management, he was Managing
Director and Chief Investment Officer
of Global Index Investments at
Barclays Global Investors, where he
led the global index and investment
process, including portfolio
management, trading and fund
accounting.
- --------------------------------------------------------------------------------------
Kemper Small Cap Value Portfolio
- --------------------------------------------------------------------------------------
James M. Eysenbach, 1999 Joined Scudder Kemper in 1991, serving as
Lead Manager portfolio manager on various affiliated
mutual funds. He began his investment
career in 1988.
- --------------------------------------------------------------------------------------
Calvin S. Young, 1999 Joined Scudder Kemper in 1990, serving as
Manager portfolio manager on various affiliated
mutual funds. He began his investment
career in 1988.
- --------------------------------------------------------------------------------------
Kemper-Dreman Financial Services Portfolio
- --------------------------------------------------------------------------------------
David N. Dreman, 1998 Chairman of Dreman Value Management,
Lead Manager L.L.C. since 1977. He is a pioneer of the
philosophy of contrarian investing
(buying what is out of favor) and a
leading proponent of the low P/E
investment style. He is a columnist
for Forbes and the author of several
books on the value style of
investing. He began his investment
career in 1957.
- --------------------------------------------------------------------------------------
122
<PAGE>
Joined the
Portfolio as
Name & Title Portfolio Manager Background
- ---------------------------------------------------------------------------------------
Kemper Global Income Portfolio
- --------------------------------------------------------------------------------------
Robert Stirling, 1999 Joined Scudder Kemper in 1990. He is an
Co-Lead Manager international portfolio manager at
Scudder Investments (U.K.) Limited and
Threadneedle Asset Management, both of
which are affiliated investment
management companies. Prior to joining
these companies, he was a partner of an
unaffiliated investment management
company managing fixed income assets and
assisting in the management of currency
risk.
- --------------------------------------------------------------------------------------
Jan Faller, 1999 Joined Scudder Kemper in 1999. He began
Co-Lead Manager his investment career in 1988. Prior to
joining Scudder Kemper he was part of
a global fixed-income portfolio
management team at an unaffiliated
investment management company.
- --------------------------------------------------------------------------------------
Jeremy Ragus, 1999 Joined Scudder Kemper in 1990. Prior to
Manager joining Scudder Kemper, he was a vice
president of a municipal bond department
for an unaffiliated investment management
company.
- --------------------------------------------------------------------------------------
Kemper International Growth and Income Portfolio
- --------------------------------------------------------------------------------------
Sheridan P. Reilly, 1998 Joined Scudder Kemper in 1995. He began
Lead Manager his investment career in 1987. Prior to
joining Scudder Kemper he focused on
strategies for global bond
portfolios, currency hedging, and
foreign equity markets at an
unaffiliated investment management
company.
- --------------------------------------------------------------------------------------
Irene T. Cheng, 1998 Joined Scudder Kemper in 1993. She began
Manager her investment career in 1985. She is a
member of the firm's Global Equity
Group and has over six years
experience as a portfolio manager.
- --------------------------------------------------------------------------------------
Lauren C. Lambert, 1999 Joined Scudder Kemper in 1994. She began
Manager her investment career in 1987. Prior to
joining Scudder Kemper she was an equity
analyst at an unaffiliated investment
management company.
- --------------------------------------------------------------------------------------
123
<PAGE>
Joined the
Portfolio as
Name & Title Portfolio Manager Background
- ---------------------------------------------------------------------------------------
Kemper Global Blue Chip Portfolio
- --------------------------------------------------------------------------------------
Diego Espinosa, Lead 1998 Joined Scudder Kemper in 1996. He began
Manager his investment career in 1991. Prior to
joining Scudder Kemper he was a Latin
American securities analyst for an
unaffiliated investment management
company.
- --------------------------------------------------------------------------------------
William E. Holzer, 1998 Joined Scudder Kemper in 1980. He began
Manager his investment career in 1970. He is
Product Leader of the firm's global
equity investment product and is on
the portfolio management teams for
other affiliated international mutual
funds.
- --------------------------------------------------------------------------------------
Nicholas Bratt, 1998 Joined Scudder Kemper in 1976. He has
Manager over 20 years of international investment
experience. He is head of the firm's
Global Equity Group, responsible for
the strategic direction of the firm's
equity management business.
- --------------------------------------------------------------------------------------
Kemper International Portfolio
- --------------------------------------------------------------------------------------
Irene T. Cheng, Lead 1999 Joined Scudder Kemper in 1993. She began
Manager her investment career in 1985. She is a
member of the firm's Global Equity
Group and has over six years
experience as a portfolio manager.
- --------------------------------------------------------------------------------------
Marc J. Slendebroek, 1998 Joined Scudder Kemper in 1994. He is an
Manager international portfolio manager at
Scudder Investments, (U.K.) Ltd., an
affiliated investment management
company. He began investment career
in 1990. Prior to joining Scudder
Kemper he worked for an unaffiliated
investment management company
responsible for the Dutch equity
research product.
- --------------------------------------------------------------------------------------
</TABLE>
124
<PAGE>
Year 2000 Readiness
Like other mutual funds and financial and business organizations worldwide, the
Portfolios could be adversely affected if computer systems on which a Portfolio
relies, which primarily include those used by the investment manager, its
affiliates or other service providers, are unable to correctly process
date-related information on and after January 1, 2000. This risk is commonly
called the Year 2000 Issue. Failure to successfully address the Year 2000 Issue
could result in interruptions to and other material adverse effects on the
Portfolios' business and operations, such as problems with calculating net asset
value and difficulties in implementing a Portfolio's purchase and redemption
procedures. The investment manager has commenced a review of the Year 2000 Issue
as it may affect the Portfolios and is taking steps it believes are reasonably
designed to address the Year 2000 Issue, although there can be no assurances
that these steps will be sufficient. In addition, there can be no assurances
that the Year 2000 Issue will not have an adverse effect on the issuers whose
securities are held by a Portfolio or on global markets or economies generally.
Euro Conversion
The introduction of a new European currency, the Euro, may result in
uncertainties for European securities and the operation of each Portfolio. The
Euro was introduced on January 1, 1999, by eleven European countries that are
members of the European Economic and Monetary Union (EMU). The introduction of
the Euro will require the redenomination of European debt and equity securities
over a period of time, which may result in various accounting differences and/or
tax treatments. Additional questions are raised by the fact that certain other
European community members, including the United Kingdom, did not officially
implement the Euro on January 1, 1999.
The investment manager is actively working to address Euro-related issues and
understands that other key service providers are taking similar steps. At this
time, however, no one knows precisely what the degree of impact will be. To the
extent that the market impact or effect on a Portfolio's holdings is negative,
it could hurt the Portfolio's performance.
125
<PAGE>
SHARE PRICE
All Portfolios (other than the Money Market Portfolio). Scudder Fund Accounting
Corporation determines the net asset value per share as of the close of regular
trading on the New York Stock Exchange, normally 4:00 p.m. eastern time, on each
day the New York Stock Exchange is open for trading. Market prices are used to
determine the value of the Portfolios' assets, but when reliable market
quotations are unavailable, a Portfolio may use procedures established by the
Fund's Board of Trustees.
The net asset value per share of each Portfolio is the value of one share and is
determined by dividing the value of the Portfolio's net assets by the number of
shares of that Portfolio outstanding.
To the extent that the Portfolios 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 per share of the Portfolios
may change at a time when shareholders are not able to purchase or redeem their
shares.
Money Market Portfolio. Scudder Fund Accounting Corporation determines the net
asset value per share of the Money Market Portfolio at 12:00 p.m. (noon) Eastern
time and the close of regular trading on the New York Stock Exchange, normally
4:00 p.m., Eastern time, on each day the New York Stock Exchange is open for
trading. The net asset value per share of the Money Market Portfolio is normally
$1.00 calculated at amortized cost in accordance with a rule of the Securities
and Exchange Commission (Rule 2a-7).
The net asset value per share of the Money Market Portfolio is the value of one
share and is determined by dividing the value of the Portfolio's net assets,
less all liabilities, by the number of shares of the Portfolio outstanding.
The Money Market Portfolio purchases only securities with a maturity of one year
or less and maintains a dollar-weighted average portfolio maturity of 90 days or
less. In addition, the Money Market Portfolio limits its portfolio investments
to securities that meet the quality and diversification requirements of Rule
2a-7.
126
<PAGE>
PURCHASE AND REDEMPTION
The separate accounts of the Participating Insurance Companies place orders to
purchase and redeem shares of each Portfolio based on, among other things, the
amount of premium payments to be invested and surrender and transfer requests to
be effected on that day pursuant to VLI and VA contracts. The shares of each
Portfolio are purchased and redeemed at the net asset value of the Portfolio's
shares determined that same day or, in the case of an order not resulting
automatically from VLI and VA contract transactions, next determined after an
order in proper form is received. An order is considered to be in proper form if
it is communicated by telephone or wire by an authorized employee of the
Participating Insurance Company.
From time to time, the Fund may temporarily suspend the offering of shares of
one or more of its Portfolios. During the period of such suspension,
shareholders of such Portfolio are normally permitted to continue to purchase
additional shares and to have dividends reinvested.
The Fund seeks to have its Money Market Portfolio as fully invested as possible
at all times in order to achieve maximum income. Since the Money Market
Portfolio will be investing in instruments that normally require immediate
payment in Federal funds (monies credited to a bank's account with its regional
Federal Reserve Bank), the Fund has adopted certain procedures for the
convenience of its shareholders and to ensure that the Money Market Portfolio
receives investable funds.
No fee is charged the shareholders when they purchase or redeem Portfolio
shares.
127
<PAGE>
DISTRIBUTIONS AND TAXES
Dividends and capital gains distributions
Dividends for All Portfolios Except Money Market Portfolio. The Fund normally
declares and distributes dividends of net investment income annually for these
Portfolios. Each Portfolio distributes any net realized short-term and long-term
capital gains at least annually.
Dividends for Money Market Portfolio. The Money Market Portfolio's net
investment income is declared as a dividend daily. Shareholders will receive
dividends monthly in additional shares. If a shareholder withdraws its entire
account, all dividends accrued to the time of withdrawal will be paid at that
time.
Taxes
Each Portfolio intends to comply with the diversification requirements of
Internal Revenue code section 817(h). By meeting this and other requirements,
the participating insurance companies, rather than the holders of variable
annuity contracts and variable life insurance policies, should be subject to tax
on distributions received with respect to Portfolio shares. For further
information concerning federal income tax consequences for the holders of
variable annuity contracts and variable life insurance policies, such holders
should consult the prospectus used in connection with the issuance of their
particular contracts or policies.
Distributions of net investment income are treated by shareholders as ordinary
income. Long-term capital gains distributions are treated by shareholders as
long-term capital gains, regardless of how long they have owned their shares.
Short-term capital gains and any other taxable income distributions are treated
by shareholders as ordinary income. Participating insurance companies should
consult their own tax advisers as to whether such distributions are subject to
federal income tax if they are retained as part of policy reserves.
The preceding is a brief summary of certain of the relevant tax considerations.
The Statement of Additional Information includes a more detailed discussion.
This discussion is not intended, even as supplemented by the Statement of
Additional Information, as a complete explanation or a substitute for careful
tax planning and consultation with individual tax advisers.
128
<PAGE>
FINANCIAL HIGHLIGHTS
The tables below are intended to help you understand the Portfolios' financial
performance for the period reflected below. Certain information reflects the
financial results for a single Portfolio share. The total return figures show
what a shareholder in a Portfolio would have earned (or lost) assuming
reinvestment of all distributions. This information has been audited by Ernst &
Young LLP whose report, along with the Portfolios' financial statements, are
included in the Portfolios' annual reports, which are available upon request by
calling Scudder Kemper Investments at 1-800-621-1048.
Kemper Money Market Portfolio
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of year $1.00 1.00 1.00 1.00 1.00
- --------------------------------------------------------------------------------------
Net investment income .05 .05 .05 .06 .04
- --------------------------------------------------------------------------------------
Less dividends declared .05 .05 .05 .06 .04
- --------------------------------------------------------------------------------------
Net asset value, end of year $1.00 1.00 1.00 1.00 1.00
- --------------------------------------------------------------------------------------
Total return 5.15% 5.25 5.03 5.66 3.96
- --------------------------------------------------------------------------------------
Ratios to average net assets
Expenses .54% .55 .60 .55 .53
- --------------------------------------------------------------------------------------
Net investment income 5.02% 5.14 4.90 5.52 3.95
- --------------------------------------------------------------------------------------
Supplemental data
Net assets at end of year (in
thousands) $151,930 100,143 70,601 61,078 83,821
- --------------------------------------------------------------------------------------
</TABLE>
Note to Kemper Money Market Portfolio: The total returns for 1995 and 1994
include the effect of a capital contribution from the investment manager.
Without the capital contribution, the total returns would have been 5.11% and
3.47%, respectively.
129
<PAGE>
Kemper Government Securities Portfolio
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of year $1.207 1.207 1.269 1.142 1.267
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .062 .084 .085 .084 .067
- --------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) .019 .016 (.057) .123 (.102)
- --------------------------------------------------------------------------------------
Total from investment operations .081 .100 .028 .207 (.035)
- --------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment
income .080 .100 .090 .080 .060
- --------------------------------------------------------------------------------------
Distribution from net realized
gain -- -- -- -- .030
- --------------------------------------------------------------------------------------
Total dividends .080 .100 .090 .080 .090
- --------------------------------------------------------------------------------------
Net asset value, end of year $1.208 1.207 1.207 1.269 1.142
- --------------------------------------------------------------------------------------
Total return 7.03% 8.96 2.56 18.98 (2.74)
- --------------------------------------------------------------------------------------
Ratios to average net assets
Expenses .65% .64 .66 .65 .63
- --------------------------------------------------------------------------------------
Net investment income 6.27% 7.12 7.09 7.08 5.69
- --------------------------------------------------------------------------------------
Supplemental data
Net assets at end of year (in
thousands) $123,211 86,682 84,314 95,185 95,782
- --------------------------------------------------------------------------------------
Portfolio turnover rate 142% 179 325 275 606
- --------------------------------------------------------------------------------------
</TABLE>
130
<PAGE>
Kemper Investment Grade Bond Portfolio
<TABLE>
<CAPTION>
Year ended May 1 to
December 31, December 31,
1998 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $1.118 1.036 1.000
- ---------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .032 .066 .031
- ---------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .055 .026 .005
- ---------------------------------------------------------------------------------------
Total from investment operations .087 .092 .036
- ---------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .030 .010 --
- ---------------------------------------------------------------------------------------
Distribution from net realized gain .010 -- --
- ---------------------------------------------------------------------------------------
Total dividends .040 .010 --
- ---------------------------------------------------------------------------------------
Net asset value, end of period $1.165 1.118 1.036
- ---------------------------------------------------------------------------------------
Total return (not annualized) 7.93% 9.04 3.57
- ---------------------------------------------------------------------------------------
Ratios to average net assets after expense
absorption (annualized)
Expenses .67% .80 .87
- ---------------------------------------------------------------------------------------
Net investment income 5.50% 6.23 4.93
- ---------------------------------------------------------------------------------------
Ratios to average net assets before expense
absorption (annualized)
Expenses .67% .80 .87
- ---------------------------------------------------------------------------------------
Net investment income 5.50% 6.23 4.93
- ---------------------------------------------------------------------------------------
Supplemental data
Net assets at end of period (in thousands) $52,155 15,504 1,998
- ---------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 130% 311 75
- ---------------------------------------------------------------------------------------
</TABLE>
131
<PAGE>
Kemper High Yield Portfolio
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of year $1.296 1.281 1.259 1.185 1.338
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .106 .116 .120 .125 .116
- --------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) (.085) .019 .042 .069 (.149)
- --------------------------------------------------------------------------------------
Total from investment operations .021 .135 .162 .194 (.033)
- --------------------------------------------------------------------------------------
Less distribution from net
investment income .090 .120 .140 .120 .120
- --------------------------------------------------------------------------------------
Net asset value, end of year $1.227 1.296 1.281 1.259 1.185
- --------------------------------------------------------------------------------------
Total return 1.45% 11.61 14.06 17.40 (2.25)
- --------------------------------------------------------------------------------------
Ratios to average net assets
Expenses .65% .65 .65 .65 .65
- --------------------------------------------------------------------------------------
Net investment income 9.36% 9.20 9.70 10.27 9.49
- --------------------------------------------------------------------------------------
Supplemental data
Net assets at end of year (in
thousands) $442,125 391,664 289,315 257,377 219,415
- --------------------------------------------------------------------------------------
Portfolio turnover rate 74% 90 98 90 98
- --------------------------------------------------------------------------------------
</TABLE>
132
<PAGE>
Kemper Total Return Portfolio
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of year $2.822 2.815 2.579 2.112 2.586
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .086 .090 .084 .084 .069
- --------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) .317 .377 .322 .453 (.313)
- --------------------------------------------------------------------------------------
Total from investment operations .403 .467 .406 .537 (.244)
- --------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment
income .090 .090 .090 .070 .060
- --------------------------------------------------------------------------------------
Distribution from net realized
gain .400 .370 .080 -- .170
- --------------------------------------------------------------------------------------
Total dividends .490 .460 .170 .070 .230
- --------------------------------------------------------------------------------------
Net asset value, end of year $2.735 2.822 2.815 2.579 2.112
- --------------------------------------------------------------------------------------
Total return 15.14% 19.96 16.76 25.97 (9.50)
- --------------------------------------------------------------------------------------
Ratios to average net assets
Expenses .60% .60 .59 .60 .61
- --------------------------------------------------------------------------------------
Net investment income 3.33% 3.32 3.21 3.52 3.13
- --------------------------------------------------------------------------------------
Supplemental data
Net assets at end of year (in
thousands) $865,423 786,996 697,102 659,894 586,594
- --------------------------------------------------------------------------------------
Portfolio turnover rate 81% 122 90 118 128
- --------------------------------------------------------------------------------------
</TABLE>
133
<PAGE>
Kemper Blue Chip Portfolio
<TABLE>
<CAPTION>
Year ended May 1 to
December 31, December 31,
1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
Net asset value, beginning of period $1.115 1.000
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .010 .017
- --------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .145 .098
- --------------------------------------------------------------------------------------
Total from investment operations .155 .115
- --------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .010 --
- --------------------------------------------------------------------------------------
Distribution from net realized gain -- --
- --------------------------------------------------------------------------------------
Total dividends .010 --
- --------------------------------------------------------------------------------------
Net asset value, end of period $1.260 1.115
- --------------------------------------------------------------------------------------
Total return (not annualized) 13.84% 11.54
- --------------------------------------------------------------------------------------
Ratios to average net assets after expense
absorption (annualized)
Expenses .76% .95
- --------------------------------------------------------------------------------------
Net investment income 1.18% 2.07
- --------------------------------------------------------------------------------------
Ratios to average net assets before expense
absorption (annualized)
Expenses .76% .95
- --------------------------------------------------------------------------------------
Net investment income (loss) 1.18% 2.07
- --------------------------------------------------------------------------------------
Supplemental data
Net assets at end of period (in thousands) $78,314 5,023
- --------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 102% 78
- --------------------------------------------------------------------------------------
</TABLE>
134
<PAGE>
Kemper Growth Portfolio
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of year $3.001 3.371 3.262 2.665 2.935
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .007 .012 .030 .034 .018
- --------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) .459 .448 .589 .793 (.138)
- --------------------------------------------------------------------------------------
Total from investment operations .466 .460 .619 .827 (.120)
- --------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment
income .010 .020 .040 .010 --
- --------------------------------------------------------------------------------------
Distribution from net realized
gain .500 .810 .470 .220 .150
- --------------------------------------------------------------------------------------
Total dividends .510 .830 .510 .230 .150
- --------------------------------------------------------------------------------------
Net asset value, end of year $2.957 3.001 3.371 3.262 2.665
- --------------------------------------------------------------------------------------
Total return 15.10% 21.34 21.63 32.97 (4.02)
- --------------------------------------------------------------------------------------
Ratios to average net assets
Expenses .66% .65 .64 .64 .66
- --------------------------------------------------------------------------------------
Net investment income .28% .42 .94 1.15 .69
- --------------------------------------------------------------------------------------
Supplemental data
Net assets at end of year (in $628,551 563,016 487,483 414,533 321,708
thousands)
- --------------------------------------------------------------------------------------
Portfolio turnover rate 109% 170 175 88 106
- --------------------------------------------------------------------------------------
</TABLE>
135
<PAGE>
Kemper Horizon 20+ Portfolio
<TABLE>
<CAPTION>
May 1 to
Year ended December
December 31, 31,
1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $1.378 1.154 1.000
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .019 .020 .012
- --------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .160 .214 .142
- --------------------------------------------------------------------------------------
Total from investment operations .179 .234 .154
- --------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .010 .010 --
- --------------------------------------------------------------------------------------
Distribution from net realized gain .040 -- --
- --------------------------------------------------------------------------------------
Total dividends .050 .010 --
- --------------------------------------------------------------------------------------
Net asset value, end of period $1.507 1.378 1.154
- --------------------------------------------------------------------------------------
Total return (not annualized) 13.01% 20.48 15.37
- --------------------------------------------------------------------------------------
Ratios to average net assets after expense
absorption (annualized)
Expenses .67% .93 .81
- --------------------------------------------------------------------------------------
Net investment income 1.84% 1.58 1.71
- --------------------------------------------------------------------------------------
Ratios to average net assets before expense
absorption (annualized)
Expenses .67% .93 1.13
- --------------------------------------------------------------------------------------
Net investment income 1.84% 1.58 1.39
- --------------------------------------------------------------------------------------
Supplemental data
Net assets at end of period (in thousands) $38,265 16,659 3,759
- --------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 55% 75 60
- --------------------------------------------------------------------------------------
</TABLE>
136
<PAGE>
Kemper Horizon 10+ Portfolio
<TABLE>
<CAPTION>
May 1 to
Year ended December
December 31, 31,
1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $1.289 1.114 1.000
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .020 .034 .018
- --------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .125 .151 .096
- --------------------------------------------------------------------------------------
Total from investment operations .145 .185 .114
- --------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .010 .010 --
- --------------------------------------------------------------------------------------
Distribution from net realized gain .030 -- --
- --------------------------------------------------------------------------------------
Total dividends .040 .010 --
- --------------------------------------------------------------------------------------
Net asset value, end of period $1.394 1.289 1.114
- --------------------------------------------------------------------------------------
Total return (not annualized) 11.30% 16.77 11.37
- --------------------------------------------------------------------------------------
Ratios to average net assets after expense
absorption (annualized)
Expenses .64% .83 .78
- --------------------------------------------------------------------------------------
Net investment income 2.84% 2.77 2.69
- --------------------------------------------------------------------------------------
Ratios to average net assets before expense
absorption (annualized)
Expenses .64% .83 1.01
- --------------------------------------------------------------------------------------
Net investment income (loss) 2.84% 2.77 2.46
- --------------------------------------------------------------------------------------
Supplemental data
Net assets at end of period (in thousands) $57,411 22,553 5,727
- --------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 35% 67 76
- --------------------------------------------------------------------------------------
</TABLE>
137
<PAGE>
Kemper Horizon 5 Portfolio
<TABLE>
<CAPTION>
May 1 to
Year ended December
December 31, 31,
1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $1.224 1.096 1.000
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .028 .043 .023
- --------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .093 .095 .073
- --------------------------------------------------------------------------------------
Total from investment operations .121 .138 .096
- --------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .010 .010 --
- --------------------------------------------------------------------------------------
Distribution from net realized gain .030 -- --
- --------------------------------------------------------------------------------------
Total dividends .040 .010 --
- --------------------------------------------------------------------------------------
Net asset value, end of period $1.305 1.224 1.096
- --------------------------------------------------------------------------------------
Total return (not annualized) 10.00% 12.70 9.59
- --------------------------------------------------------------------------------------
Ratios to average net assets after expense
absorption (annualized)
Expenses .66% .97 .83
- --------------------------------------------------------------------------------------
Net investment income 3.85% 3.63 3.60
- --------------------------------------------------------------------------------------
Ratios to average net assets before expense
absorption (annualized)
Expenses .66% .97 1.01
- --------------------------------------------------------------------------------------
Net investment income (loss) 3.85% 3.63 3.42
- --------------------------------------------------------------------------------------
Supplemental data
Net assets at end of period (in thousands) $32,741 14,258 2,534
- --------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 42% 89 13
- --------------------------------------------------------------------------------------
</TABLE>
138
<PAGE>
Kemper Small Cap Growth Portfolio
<TABLE>
<CAPTION>
May 2 to
December
Year ended December 31, 31,
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of $1.969 1.677 1.346 1.039 1.000
period
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income -- .004 .002 .005 .008
- --------------------------------------------------------------------------------------
Net realized and unrealized gain .342 .488 .369 .307 .031
- --------------------------------------------------------------------------------------
Total from investment operations .342 .492 .371 .312 .039
- --------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment
income -- .010 -- .005 --
- --------------------------------------------------------------------------------------
Distribution from net realized
gain .340 .190 .040 -- --
- --------------------------------------------------------------------------------------
Total dividends .340 .200 .040 .005 --
- --------------------------------------------------------------------------------------
Net asset value, end of period $1.971 1.969 1.677 1.346 1.039
- --------------------------------------------------------------------------------------
Total return (not annualized) 18.37% 34.20 28.04 30.07 3.95
- --------------------------------------------------------------------------------------
Ratios to average net assets (annualized)
Expenses .70% .71 .75 .87 1.25
- --------------------------------------------------------------------------------------
Net investment income (loss) (.01)% .20 .15 .42 .91
- --------------------------------------------------------------------------------------
Supplemental data
Net assets at end of period
(in thousands) $208,335 137,415 69,137 35,373 12,909
- --------------------------------------------------------------------------------------
Portfolio turnover rate
(annualized) 276% 330 156 81 58
- --------------------------------------------------------------------------------------
</TABLE>
139
<PAGE>
Kemper Value+Growth Portfolio
<TABLE>
<CAPTION>
May 1 to
Year ended December
December 31, 31,
1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $1.425 1.146 1.000
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .008 .012 .008
- --------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .278 .277 .138
- --------------------------------------------------------------------------------------
Total from investment operations .286 .289 .146
- --------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income -- .010 --
- --------------------------------------------------------------------------------------
Distribution from net realized gain .040 -- --
- --------------------------------------------------------------------------------------
Total dividends .040 .010 --
- --------------------------------------------------------------------------------------
Net asset value, end of period $1.671 1.425 1.146
- --------------------------------------------------------------------------------------
Total return (not annualized) 20.17% 25.47 14.60
- --------------------------------------------------------------------------------------
Ratios to average net assets after expense
absorption (annualized)
Expenses .78% .84 .90
- --------------------------------------------------------------------------------------
Net investment income .80% .95 .97
- --------------------------------------------------------------------------------------
Ratios to average net assets before expense
absorption (annualized)
Expenses .78% .84 1.01
- --------------------------------------------------------------------------------------
Net investment income .80% .95 .86
- --------------------------------------------------------------------------------------
Supplemental data
Net assets at end of period (in thousands) $152,321 69,094 10,196
- --------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 102% 50 25
- --------------------------------------------------------------------------------------
</TABLE>
140
<PAGE>
Kemper Contrarian Value Portfolio
<TABLE>
<CAPTION>
May 1 to
Year ended December
December 31, 31,
1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $1.518 1.174 1.000
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .026 .031 .015
- --------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .263 .323 .159
- --------------------------------------------------------------------------------------
Total from investment operations .289 .354 .174
- --------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .010 .010 --
- --------------------------------------------------------------------------------------
Distribution from net realized gain .040 -- --
- --------------------------------------------------------------------------------------
Total dividends .050 .010 --
- --------------------------------------------------------------------------------------
Net asset value, end of period $1.757 1.518 1.174
- --------------------------------------------------------------------------------------
Total return (not annualized) 19.26% 30.38 17.36
- --------------------------------------------------------------------------------------
Ratios to average net assets after expense
absorption (annualized)
Expenses .78% .80 .90
- --------------------------------------------------------------------------------------
Net investment income 2.02% 2.38 2.42
- --------------------------------------------------------------------------------------
Ratios to average net assets before expense
absorption (annualized)
Expenses .78% .80 .92
- --------------------------------------------------------------------------------------
Net investment income 2.02% 2.38 2.40
- --------------------------------------------------------------------------------------
Supplemental data
Net assets at end of period (in thousands) $263,775 162,380 21,305
- --------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 57% 46 57
- --------------------------------------------------------------------------------------
</TABLE>
141
<PAGE>
Kemper-Dreman High Return Equity Portfolio
<TABLE>
<CAPTION>
May 4 to
December 31,
1998 (a)
- --------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period $1.000
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .008
- --------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .020
- --------------------------------------------------------------------------------------
Total from investment operations .028
- --------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income --
- --------------------------------------------------------------------------------------
Distribution from net realized gain --
- --------------------------------------------------------------------------------------
Total dividends --
- --------------------------------------------------------------------------------------
Net asset value, end of period $1.028
- --------------------------------------------------------------------------------------
Total return (not annualized) 2.80%
- --------------------------------------------------------------------------------------
Ratios to average net assets after expense absorption (annualized)
Expenses .87%
- --------------------------------------------------------------------------------------
Net investment income 2.77%
- --------------------------------------------------------------------------------------
Ratios to average net assets before expense absorption (annualized)
Expenses 1.20%
- --------------------------------------------------------------------------------------
Net investment income (loss) 2.44%
- --------------------------------------------------------------------------------------
Supplemental data
Net assets at end of period (in thousands) $59,294
- --------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 5%
- --------------------------------------------------------------------------------------
</TABLE>
(a) Commencement of operations
142
<PAGE>
Kemper Small Cap Value Portfolio
<TABLE>
<CAPTION>
May 1 to
Year ended December
December 31, 31,
1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share operating performance
Net asset value, beginning of period $1.227 1.019 1.000
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .009 .012 .013
- --------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.141) .206 .006
- --------------------------------------------------------------------------------------
Total from investment operations (.132) .218 .019
- --------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income -- .010 --
- --------------------------------------------------------------------------------------
Distribution from net realized gain .030 -- --
- --------------------------------------------------------------------------------------
Total dividends .030 .010 --
- --------------------------------------------------------------------------------------
Net asset value, end of period $1.065 1.227 1.019
- --------------------------------------------------------------------------------------
Total return (not annualized) (11.25)% 21.73 1.86
- --------------------------------------------------------------------------------------
Ratios to average net assets after expense
absorption (annualized)
Expenses .80% .84 .90
- --------------------------------------------------------------------------------------
Net investment income 1.15% 1.18 2.25
- --------------------------------------------------------------------------------------
Ratios to average net assets before expense
absorption (annualized)
Expenses .80% .84 .92
- --------------------------------------------------------------------------------------
Net investment income 1.15% 1.18 2.23
- --------------------------------------------------------------------------------------
Supplemental data
Net assets at end of period (in thousands) $102,009 76,108 13,307
- --------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 43% 22 61
- --------------------------------------------------------------------------------------
</TABLE>
143
<PAGE>
Kemper-Dreman Financial Services Portfolio
<TABLE>
<CAPTION>
May 4 to
December 31,
1998 (a)
- --------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period $1.000
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .004
- --------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.026)
- --------------------------------------------------------------------------------------
Total from investment operations (.022)
- --------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income --
- --------------------------------------------------------------------------------------
Distribution from net realized gain --
- --------------------------------------------------------------------------------------
Total dividends --
- --------------------------------------------------------------------------------------
Net asset value, end of period $.978
- --------------------------------------------------------------------------------------
Total return (not annualized) (2.20)%
- --------------------------------------------------------------------------------------
Ratios to average net assets after expense absorption (annualized)
Expenses .99%
- --------------------------------------------------------------------------------------
Net investment income 1.29%
- --------------------------------------------------------------------------------------
Ratios to average net assets before expense absorption (annualized)
Expenses 1.73%
- --------------------------------------------------------------------------------------
Net investment income (loss) .55%
- --------------------------------------------------------------------------------------
Supplemental data
Net assets at end of period (in thousands) $15,516
- --------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 6%
- --------------------------------------------------------------------------------------
</TABLE>
(a) Commencement of operations
144
<PAGE>
Kemper Global Income Portfolio
<TABLE>
<CAPTION>
Year ended May 1 to
December 31, December 31,
1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
Per share operating performance
Net asset value, beginning of period $1.029 1.000
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .024 .036
- --------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .086 (.007)
- --------------------------------------------------------------------------------------
Total from investment operations .110 .029
- --------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income .020 --
- --------------------------------------------------------------------------------------
Distribution from net realized gain .010 --
- --------------------------------------------------------------------------------------
Total dividends .030 --
- --------------------------------------------------------------------------------------
Net asset value, end of period $1.109 1.029
- --------------------------------------------------------------------------------------
Total return (not annualized) 10.98% 2.87
- --------------------------------------------------------------------------------------
Ratios to average net assets after expense
absorption (annualized)
Expenses 1.08% 1.10
- --------------------------------------------------------------------------------------
Net investment income 4.32% 5.36
- --------------------------------------------------------------------------------------
Ratios to average net assets before expense
absorption (annualized)
Expenses 1.08% 1.10
- --------------------------------------------------------------------------------------
Net investment income (loss) 4.32% 5.36
- --------------------------------------------------------------------------------------
Supplemental data
Net assets at end of period (in thousands) $5,023 2,145
- --------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 330% 290
- --------------------------------------------------------------------------------------
</TABLE>
145
<PAGE>
Kemper Global Blue Chip Portfolio
<TABLE>
<CAPTION>
May 5 to
December 31,
1998 (a)
- --------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period $1.000
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .003
- --------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.024)
- --------------------------------------------------------------------------------------
Total from investment operations (.021)
- --------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income --
- --------------------------------------------------------------------------------------
Distribution from net realized gain --
- --------------------------------------------------------------------------------------
Total dividends --
- --------------------------------------------------------------------------------------
Net asset value, end of period $.979
- --------------------------------------------------------------------------------------
Total return (not annualized) (2.10)%
- --------------------------------------------------------------------------------------
Ratios to average net assets after expense absorption (annualized)
Expenses 1.56%
- --------------------------------------------------------------------------------------
Net investment income .91%
- --------------------------------------------------------------------------------------
Ratios to average net assets before expense absorption (annualized)
Expenses 12.32%
- --------------------------------------------------------------------------------------
Net investment income (loss) (9.85)%
- --------------------------------------------------------------------------------------
Supplemental data
Net assets at end of period (in thousands) $3,584
- --------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 67%
- --------------------------------------------------------------------------------------
</TABLE>
(a) Commencement of operations
146
<PAGE>
Kemper International Growth and Income Portfolio
<TABLE>
<CAPTION>
May 5 to
December 31,
1998 (a)
- --------------------------------------------------------------------------------------
<S> <C>
Per share operating performance
Net asset value, beginning of period $1.000
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .003
- --------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (.091)
- --------------------------------------------------------------------------------------
Total from investment operations (.088)
- --------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment income --
- --------------------------------------------------------------------------------------
Distribution from net realized gain --
- --------------------------------------------------------------------------------------
Total dividends --
- --------------------------------------------------------------------------------------
Net asset value, end of period $.912
- --------------------------------------------------------------------------------------
Total return (not annualized) (8.80)%
- --------------------------------------------------------------------------------------
Ratios to average net assets after expense absorption (annualized)
Expenses 1.13%
- --------------------------------------------------------------------------------------
Net investment income 1.13%
- --------------------------------------------------------------------------------------
Ratios to average net assets before expense absorption (annualized)
Expenses 19.55%
- --------------------------------------------------------------------------------------
Net investment income (loss) (17.29)%
- --------------------------------------------------------------------------------------
Supplemental data
Net assets at end of period (in thousands) $3,003
- --------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 100%
- --------------------------------------------------------------------------------------
</TABLE>
(a) Commencement of operations
147
<PAGE>
Kemper International Portfolio
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
Net asset value, beginning of year $1.615 1.564 1.371 1.244 1.306
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income .017 .011 .011 .018 .009
- --------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) .148 .130 .212 .139 (.056)
- --------------------------------------------------------------------------------------
Total from investment operations .165 .141 .223 .157 (.047)
- --------------------------------------------------------------------------------------
Less dividends:
Distribution from net investment
income .020 .020 .020 .010 --
- --------------------------------------------------------------------------------------
Distribution from net realized
gain .060 .070 .010 .020 .015
- --------------------------------------------------------------------------------------
Total dividends .080 .090 .030 .030 .015
- --------------------------------------------------------------------------------------
Net asset value, end of year $1.700 1.615 1.564 1.371 1.244
- --------------------------------------------------------------------------------------
Total return 10.02% 9.46 16.49 12.83 (3.59)
- --------------------------------------------------------------------------------------
Ratios to average net assets
Expenses .93% .91 .96 .92 .93
- --------------------------------------------------------------------------------------
Net investment income .96% .71 .89 1.39 .74
- --------------------------------------------------------------------------------------
Supplemental data
Net assets at end of year (in
thousands) $213,199 200,046 163,475 134,481 122,710
- --------------------------------------------------------------------------------------
Portfolio turnover rate 90% 79 87 126 107
- --------------------------------------------------------------------------------------
</TABLE>
148
<PAGE>
Additional information about the Portfolios may be found in the Portfolios'
Statement of Additional Information and in shareholder reports. Shareholder
inquiries may be made by calling the toll-free telephone number listed below.
The Statement of Additional Information contains information on Portfolio
investments and operations. The semiannual and annual shareholder reports
contain a discussion of the market conditions and the investment strategies that
significantly affected 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 Phone: In Person:
- --------------------------------------------------------------------------------
Call Kemper at: Public Reference Room
Securities and Exchange Commission,
1-800-778-1482 Washington, D.C.
(Call 1-800-SEC-0330
for more information.)
- --------------------------------------------------------------------------------
By Mail: By Internet:
- --------------------------------------------------------------------------------
Kemper Distributors, Inc. http://www.sec.gov
222 South Riverside Plaza http://www.kemper.com
Chicago, IL 60606-5808
or
Public Reference Section, Securities
and Exchange Commission, Washington,
D.C. 20549-6009
(a duplication fee is charged)
- --------------------------------------------------------------------------------
The Statement of Additional Information is incorporated by reference into this
prospectus (is legally a part of this prospectus).
Investment Company Act file number:
Kemper Variable Series 811-5002.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1999
As Revised October 29, 1999
---------------------------
KEMPER VARIABLE SERIES
222 South Riverside Plaza, Chicago, Illinois 60606
1-800-778-1482
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the prospectus of Kemper Variable Series (the "Fund") dated
October 29, 1999. The prospectus may be obtained without charge from the Fund by
calling the toll-free number listed above, and is also available along with
other related materials on the SEC's Internet web site (http://www.sec.gov).
Kemper Variable Series offers a choice of 26 investment portfolios (each a
"Portfolio") to investors applying for certain variable life insurance and
variable annuity contracts offered by Participating Insurance Companies.
The 26 portfolios are:
<TABLE>
<S> <C>
Kemper Money Market Portfolio "Money Market Portfolio"
Kemper Government Securities Portfolio "Government Securities Portfolio"
Kemper Investment Grade Bond Portfolio "Investment Grade Bond Portfolio"
Kemper High Yield Portfolio "High Yield Portfolio"
Kemper Total Return Portfolio "Total Return Portfolio"
Kemper Blue Chip Portfolio "Blue Chip Portfolio"
Kemper Index 500 Portfolio "Index 500 Portfolio"
Kemper Growth Portfolio "Growth Portfolio"
Kemper Aggressive Growth Portfolio "Aggressive Growth Portfolio"
Kemper Horizon 20+ Portfolio \
Kemper Horizon 10+ Portfolio Collectively, the "Horizon Portfolios"
Kemper Horizon 5 Portfolio /
Kemper Small Cap Growth Portfolio "Small Cap Growth Portfolio"
Kemper Technology Growth Portfolio "Technology Portfolio"
Kemper Value+Growth Portfolio "Value+Growth Portfolio"
Kemper Contrarian Value Portfolio "Contrarian Portfolio"
Kemper-Dreman High Return Equity Portfolio "High Return Equity Portfolio"
KVS Focused Large Cap Growth Portfolio "Large Cap Growth Portfolio"
KVS Growth And Income Portfolio "Growth And Income Portfolio"
KVS Growth Opportunities Portfolio "Growth Opportunities Portfolio"
Kemper Small Cap Value Portfolio "Small Cap Value Portfolio"
Kemper-Dreman Financial Services Portfolio "Financial Services Portfolio"
Kemper Global Income Portfolio "Global Income Portfolio"
Kemper Global Blue Chip Portfolio "Global Blue Chip Portfolio"
Kemper International Growth and Income
Portfolio "International Growth and Income Portfolio"
Kemper International Portfolio "International Portfolio"
</TABLE>
<PAGE>
TABLE OF CONTENTS
Page
INVESTMENT RESTRICTIONS...................................3
INVESTMENT POLICIES AND TECHNIQUES........................9
PORTFOLIO TRANSACTIONS...................................28
INVESTMENT MANAGER AND DISTRIBUTOR.......................32
PURCHASE AND REDEMPTION OF SHARES........................40
OFFICERS AND TRUSTEES....................................40
NET ASSET VALUE..........................................43
DIVIDENDS AND TAXES......................................44
SHAREHOLDER RIGHTS.......................................45
APPENDIX -- RATINGS OF INVESTMENTS
The financial statements appearing in the Fund's Annual Report for the fiscal
year ended December 31, 1998 are incorporated herein by reference. The Annual
Report accompanies this document.
2
<PAGE>
INVESTMENT RESTRICTIONS
The Fund has adopted for each Portfolio certain fundamental investment
restrictions which cannot be changed for a Portfolio without approval by a
"majority" of the outstanding voting shares of that Portfolio. As defined in the
Investment Company Act of 1940, as amended (the "1940 Act"), this means the
lesser of the vote of (a) 67% of the shares of a Portfolio present at a meeting
where more than 50% of the outstanding shares are present in person or by proxy
or (b) more than 50% of the outstanding shares of a Portfolio.
Each Portfolio except the Financial Services, Aggressive Growth and Global
Income Portfolios is classified as a diversified open-end management investment
company. The Financial Services, Aggressive Growth and Global Income Portfolios
are non-diversified open-end investment management companies.
Each Portfolio may not, as a fundamental policy:
(1) borrow money, except as permitted under the 1940 Act, and as
interpreted or modified by regulatory authority having jurisdiction,
from time to time;
(2) issue senior securities, except as permitted under the 1940 Act, and as
interpreted or modified by regulatory authority having jurisdiction,
from time to time;
(3) For all Portfolios except Kemper Money Market Portfolio: concentrate
its investments in a particular industry, as that term is used in the
1940 Act, and as interpreted or modified by regulatory authority having
jurisdiction, from time to time;
For Kemper Money Market Portfolio: concentrate its investments in a
particular industry, as that term is used in the 1940 Act, and as
interpreted or modified by regulatory authority having jurisdiction,
from time to time, except that the Portfolio intends to invest more
than 25% of its net assets in instruments issued by banks.
(4) engage in the business of underwriting securities issued by others,
except to the extent that the Fund may be deemed to be an underwriter
in connection with the disposition of portfolio securities;
(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 Fund reserves
freedom of action to hold and to sell real estate acquired as a result
of the Fund's ownership of securities;
(6) purchase physical commodities or contracts relating to physical
commodities; or
(7) make loans except as permitted under the 1940 Act, and as interpreted
or modified by regulatory authority having jurisdiction, from time to
time.
With regard to Restriction (3) above, for purposes of determining the percentage
of Money Market Portfolio's assets invested in securities of issuers having
their principal business activities in a particular industry, asset backed
securities will be classified separately, based on the nature of the underlying
assets. Currently, the following categories are used: captive auto, diversified,
retail and consumer loans, captive equipment and business, business trade
receivables, nuclear fuel and capital and mortgage lending.
If a percentage restriction is adhered to at the time of the investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Fund has
also adopted the following non-fundamental policies, which may be changed or
eliminated for each Portfolio by the Fund's Board of Trustees without a vote of
the shareholders:
Each of Kemper Money Market Portfolio, Kemper Total Return Portfolio, Kemper
High Yield Portfolio, Kemper Growth Portfolio and Kemper Government Securities
Portfolio may not, as a non-fundamental policy:
3
<PAGE>
(1) For all Portfolios except Kemper High Yield Portfolio, purchase
securities of any issuer (other than obligations of, or guaranteed by,
the United States Government or its agencies or instrumentalities) if,
as a result, more than 5% of the Portfolio's total assets would be
invested in securities of that issuer.
(2) For Kemper High Yield Portfolio only, With respect to 75% of the Fund's
total assets, purchase the securities of any issuer (other than
securities issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities) if, as a result, (a) more than 5% of the
Portfolio's total assets would be invested in the securities of that
issuer, or (b) the Portfolio would hold more than 10% of the
outstanding voting securities of that issuer;
(3) Except for Kemper High Yield Portfolio, purchase more than 10% of any
class of securities of any issuer. All debt securities and all
preferred stocks are each considered as one class;
(4) For Kemper Money Market Portfolio only, enter into repurchase
agreements if, as a result thereof, more than 10% of the Portfolio's
total assets valued at the time of the transaction would be subject to
repurchase agreements maturing in more than seven (7) days;
(5) Make short sales of securities or purchase any securities on margin
except to obtain such short-term credits as may be necessary for the
clearance of transactions; however, Kemper Total Return Portfolio,
Kemper High Yield Portfolio, Kemper Growth Portfolio and Kemper
Government Securities Portfolio may make margin deposits in connection
with financial futures and options transactions;
(6) For Kemper Money Market Portfolio only, invest more than 5% of the
Portfolio's total assets in securities restricted as to disposition
under the Federal securities laws;
(7) Purchase securities of other investment companies, except as permitted
under the 1940 Act including in connection with a merger,
consolidation, reorganization or acquisition of assets;
(8) For Kemper Money Market Portfolio only, write, purchase or sell puts,
calls or combinations thereof;
(9) For Kemper Total Return Portfolio, Kemper High Yield Portfolio and
Kemper Growth Portfolio only, engage in put or call option
transactions; except that the Fund may write (sell) put or call options
on up to 25% of its net assets and may purchase put and call options if
no more than 5% of its net assets would be invested in premiums on put
and call options, combinations thereof or similar options; and it may
buy and sell options on financial futures contracts.
(10) For all Portfolios except for Kemper Money Market Portfolio, invest
more than 15% of its net assets in illiquid securities.
(11) For Kemper Money Market Portfolio only, invest more than 10% of its net
assets in illiquid securities.
(12) Invest for the purpose of exercising control or management of another
issuer.
Kemper International Portfolio may not, as a non-fundamental policy:
(1) Purchase securities of any issuer (other than obligations of, or
guaranteed by, the United States or any foreign government or their
agencies or instrumentalities) if, as a result, more than 5% of the
Portfolio's total assets would be invested in securities of that
issuer. With respect to 75% of its assets, the Portfolio will limit its
investments in the securities of any one foreign government issuer to
5% of the Portfolio's total assets;
(2) Purchase more than 10% of any class of securities of any issuer except
securities issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities. All debt securities and preferred stocks
are considered as one class;
(3) Pledge the Portfolio's securities or receivables or transfer or assign
or otherwise encumber them in an amount exceeding the amount of a
borrowing secured thereby;
4
<PAGE>
(4) Make short sales of securities, or purchase any securities on margin
except to obtain such short-term credits as may be necessary for the
clearance of transactions; however, the Portfolio may make margin
deposits in connection with financial futures and options transactions;
(5) Write or sell put or call options, combinations thereof or similar
options on more than 25% of the Portfolio's net assets; nor may it
purchase put or call options if more than 5% of the Portfolio's net
assets would be invested in premiums on put and call options,
combinations thereof or similar options; however, the Portfolio may buy
or sell options on financial futures contracts;
(6) Purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization, or by
purchase in the open market of securities of closed-end investment
companies where no underwriter or dealer's commission or profit, other
than customary broker's commission, is involved and only if immediately
thereafter not more than (i) 3% of the total outstanding voting stock
of such company is owned by the Portfolio, (ii) 5% of the Portfolio's
total assets would be invested in any one such company, and (iii) 10%
of the Portfolio's total assets would be invested in such securities.
(7) Invest more than 15% of its net assets in illiquid securities.
(8) Invest for the purpose of exercising control or management of another
issuer.
Each of Kemper Small Cap Growth Portfolio, Kemper Investment Grade Bond
Portfolio, Kemper Contrarian Value Portfolio, Kemper Small Cap Value Portfolio,
Kemper Value+Growth Portfolio, Kemper Horizon 10+ Portfolio, Kemper Horizon 20+
Portfolio and Kemper Horizon 5 Portfolio may not, as a non-fundamental policy:
(1) Purchase securities of any issuer (other than obligations of, or
guaranteed by, the United States Government, its agencies or
instrumentalities) if, as a result, more than 5% of the Portfolio's
total assets would be invested in securities of that issuer; except
that, for Kemper Contrarian Value Portfolio and Kemper Small Cap Value
Portfolio, up to 25% of each Portfolio's total assets may be invested
without regard to these limitations;
(2) Purchase more than 10% of the outstanding voting securities of any
issuer;
(3) Make short sales of securities, or purchase any securities on margin
except to obtain such short-term credits as may be necessary for the
clearance of transactions; however, the Portfolio may make margin
deposits in connection with financial futures and options transactions;
(4) For Kemper Small Cap Growth Portfolio, Kemper Investment Grade Bond
Portfolio and Kemper Horizon 10+ Portfolio, Kemper Horizon 20+
Portfolio and Kemper Horizon 5 Portfolio only, write (sell) put or call
options, combinations thereof or similar options on more than 25% of
the Portfolio's net assets; nor may the Portfolio purchase put or call
options if more than 5% of the Portfolio's net assets would be invested
in premiums on put and call options, combinations thereof or similar
options; however, the Portfolio may buy or sell options on financial
futures contracts.
(5) Invest for the purpose of exercising control or management of another
issuer.
(6) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets,
or for the Contrarian, Small Cap Value and Horizon Portfolios, by
purchase in the open market of securities of closed-end investment
companies where no underwriter or dealer's commission or profit, other
than customary broker's commission, is involved and only if immediately
thereafter not more than (i) 3% of the total outstanding voting stock
of such company is owned by it, (ii) 5% of its total assets would be
invested in any one such company, and (iii) 10% of total assets would
be invested in such securities.
(7) Invest more than 15% of its net assets in illiquid securities.
5
<PAGE>
(8) For the Value+Growth Portfolio only, write (sell) put or call options,
combinations thereof or similar options; nor may it purchase put or
call options if more than 5% of the Portfolio's net assets would be
invested in premiums on put and call options, combinations thereof or
similar options; however, the Portfolio may buy or sell options on
financial futures contracts.
(9) For the Contrarian and Small Cap Value Portfolios only, write (sell)
put or call options, combinations thereof or similar options except
that the Portfolio may write covered call options on up to 100% of the
Portfolio's net assets and may write secured put options on up to 50%
of the Portfolio's net assets; nor may the Portfolio purchase put or
call options; however, the Portfolio may buy or sell options on
financial futures contracts.
Kemper Blue Chip Portfolio may not, as a non-fundamental policy:
(1) Purchase securities of any issuer (other than obligations of, or
guaranteed by, the U.S. Government, its agencies or instrumentalities)
if, as a result, more than 5% of the total value of the Portfolio's
assets would be invested in securities of that issuer;
(2) Purchase more than 10% of any class of voting securities of any issuer;
(3) Pledge, hypothecate, mortgage or otherwise encumber more than 15% of
its total assets and then only to secure permitted borrowings. (The
collateral arrangements with respect to options, financial futures and
delayed delivery transactions and any margin payments in connection
therewith are not deemed to be pledges or other encumbrances.);
(4) Purchase securities on margin, except to obtain such short-term credits
as may be necessary for the clearance of transactions; however, the
Portfolio may make margin deposits in connection with options and
financial futures transactions;
(5) Make short sales of securities or maintain a short position for the
account of the Portfolio unless at all times when a short position is
open it owns an equal amount of such securities or owns securities
which, without payment of any further consideration, are convertible
into or exchangeable for securities of the same issue as, and equal in
amount to, the securities sold short and unless not more than 10% of
the Portfolio's total assets is held as collateral for such sales at
any one time;
(6) Write (sell) put or call options, combinations thereof or similar
options; nor may it purchase put or call options if more than 5% of the
Portfolio's net assets would be invested in premiums on put and call
options, combinations thereof or similar options; however, the
Portfolio may buy or sell options on financial futures contracts;
(7) Invest in real estate limited partnerships.
(8) Invest for the purpose of exercising control or management of another
issuer.
(9) Invest more than 15% of its net assets in illiquid securities.
Kemper Global Income Portfolio may not, as a non-fundamental policy:
(1) Purchase securities of any issuer (other than obligations of, or
guaranteed by, the U.S. Government, its agencies or instrumentalities)
if, as a result, more than 5% of the total value of the Portfolio's
assets would be invested in securities of that issuer except that, with
respect to 50% of the Portfolio's total assets, the Portfolio may
invest up to 25% of its total assets in securities of any one issuer;
(2) Purchase more than 10% of any class of voting securities of any issuer;
(3) Pledge, hypothecate, mortgage or otherwise encumber more than 15% of
its total assets and then only to secure permitted borrowings. (The
collateral arrangements with respect to options, financial futures and
delayed
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delivery transactions and any margin payments in connection therewith
are not deemed to be pledges or other encumbrances.);
(4) Purchase securities on margin, except to obtain such short-term credits
as may be necessary for the clearance of transactions; however, the
Fund may make margin deposits in connection with options and financial
futures transactions;
(5) Make short sales of securities or other assets or maintain a short
position for the account of the Fund unless at all times when a short
position is open it owns an equal amount of such securities or other
assets or owns securities which, without payment of any further
consideration, are convertible into or exchangeable for securities or
other assets of the same issue as, and equal in amount to, the
securities or other assets sold short and unless not more than 10% of
the Fund's total assets is held as collateral for such sales at any one
time;
(6) Write or sell put or call options, combinations thereof or similar
options on more than 25% of the Fund's net assets; nor may the Fund
purchase put or call options if more than 5% of the Fund's net assets
would be invested in premiums on put and call options, combinations
thereof or similar options; however, the Fund may buy or sell options
on financial futures contracts;
(7) Invest in real estate limited partnerships.
(8) Invest for the purpose of exercising control or management of another
issuer.
(9) Invest more than 15% of its net assets in illiquid securities.
Kemper-Dreman High Return Equity Portfolio may not, as a non-fundamental policy:
(1) Purchase securities of any one issuer other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities
(collectively "U.S. Government Securities") if immediately thereafter
more than 5% of its total assets would be invested in the securities of
any one issuer, or purchase more than 10% of an issuer's outstanding
securities, except that up to 25% of the Fund's total assets may be
invested without regard to these limitations;
(2) Mortgage, pledge or hypothecate any assets except in connection with a
borrowing in amounts not in excess of the lesser of the amount borrowed
or 10% or the value of its total assets at the time of such borrowing;
(3) Purchase securities on margin or make short sales of securities,
provided that the Fund may enter into futures contracts and related
options and make initial and variation margin deposits in connection
therewith;
(4) Invest in oil, gas or mineral exploration or development programs,
except that the Fund may, to the extent appropriate to its investment
objective, purchase publicly traded securities of companies engaging in
whole or in part in such activities;
(5) Invest in mortgage loans, except that the Fund may, to the extent
appropriate to its investment objective, purchase publicly traded
securities of companies engaging in whole or in part in such
activities.
(6) Invest for the purpose of exercising control over management of any
company.
(7) Invest more than 10% of the value of its net assets in illiquid
securities, including restricted securities and repurchase agreements
with remaining maturities in excess of seven days, and other securities
for which market quotations are not readily available.
(8) Invest its assets in securities of any investment company, except by
open market purchases, including an ordinary broker's commission, or in
connection with a merger, acquisition of assets, consolidation or
reorganization, and any investments in the securities of other
investment companies will be in compliance with the 1940 Act.
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Kemper-Dreman Financial Services Portfolio may not, as a non-fundamental policy:
(1) Invest for the purpose of exercising control over management of any
company;
(2) Invest its assets in securities of any investment company, except by
open market purchases, including an ordinary broker's commission, or in
connection with a merger, acquisition of assets, consolidation or
reorganization, and any investments in the securities of other
investment companies will be in compliance with the 1940 Act.
(3) Invest more than 15% of the value of its net assets in illiquid
securities.
The following non-fundamental restrictions apply to the Index 500, Aggressive
Growth, Technology, Global Blue Chip, Focused Large Cap Growth, Growth And
Income, Growth Opportunities Portfolio and International Growth and Income
Portfolios. Each Portfolio may not, as a non-fundamental policy:
(1) Borrow money in an amount greater than 5% of its total assets, except
(i) for temporary or emergency purposes and (ii) by engaging in reverse
repurchase agreements, dollar rolls, or other investments or
transactions described in the Portfolio's registration statement which
may be deemed to be borrowings;
(2) Enter into either of reverse repurchase agreements or dollar rolls in
an amount greater than 5% of its total assets;
(3) Purchase securities on margin or make short sales, except (a) short
sales against the box, (b) in connection with arbitrage transactions,
(c) for margin deposits in connection with futures contracts, options
or other permitted investments, (d) that transactions in futures
contracts and options shall not be deemed to constitute selling
securities short, and (e) that the Portfolio may obtain such short-term
credits as may be necessary for the clearance of securities
transactions;
(4) Purchase options, unless the aggregate premiums paid on all such
options held by the Portfolio at any time do not exceed 20% of its
total assets; or sell put options, if as a result, the aggregate value
of the obligations underlying such put options would exceed 50% of its
total assets;
(5) Enter into futures contracts or purchase options thereon unless
immediately after the purchase, the value of the aggregate initial
margin with respect to such futures contracts entered into on behalf of
the Portfolio and the premiums paid for such options on futures
contracts does not exceed 5% of the fair market value of the
Portfolio's total assets; provided that in the case of an option that
is in-the-money at the time of purchase, the in-the-money amount may be
excluded in computing the 5% limit;
(6) Purchase warrants if as a result, such securities, taken at the lower
of cost or market value, would represent more than 5% of the value of
the Portfolio's total assets (for this purchase, warrants acquired in
units or attached to securities will be deemed to have no value);
(7) For Global Blue Chip Portfolio only, lend portfolio securities in an
amount greater than 5% of its total assets; and
(8) For International Growth and Income Portfolio only, lend portfolio
securities in an amount greater than 33 1/3% of its total assets.
Except as specifically noted, if a percentage restriction is adhered to at the
time of investment, a later increase or decrease in percentage beyond the
specified limit resulting from a change in values or net assets will not be
considered a violation.
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INVESTMENT POLICIES AND TECHNIQUES
General Investment Objectives and Policies
Descriptions in this Statement of Additional Information of a
particular investment practice or technique in which a Portfolio may engage
(such as short selling, hedging, etc.) or a financial instrument which a
Portfolio may purchase (such as options, forward foreign currency contracts,
etc.) are meant to describe the spectrum of investments that Scudder Kemper
Investments, Inc. ("Scudder Kemper" or the "investment manager" or the
"Adviser"), in its discretion, might, but is not required to, use in managing
each Portfolio's assets. The investment manager may, in its discretion, at any
time employ such practice, technique or instrument for one or more Portfolios
but not for all investment companies advised by it. Furthermore, it is possible
that certain types of financial instruments or investment techniques described
herein may not be available, permissible, economically feasible or effective for
their intended purposes in all markets. Certain practices, techniques, or
instruments may not be principal activities of a Portfolio but, to the extent
employed, could from time to time have a material impact on the Portfolio's
performance.
Each Portfolio except the Money Market Portfolio may engage in futures, options,
and other derivatives transactions in accordance with its respective investment
objectives and policies. Each such Portfolio intends to engage in such
transactions if it appears to the investment manager to be advantageous to do
so, in order to pursue its objective, to hedge (i.e., protect) against the
effects of fluctuating interest rates and to stabilize the value of its assets
and not for speculation. The use of futures and options, and possible benefits
and attendant risks, are discussed below along with information concerning
certain other investment policies and techniques.
Derivatives. In addition to options, financial futures and foreign currency
transactions, consistent with its objective, each Portfolio may invest in a
broad array of financial instruments and securities in which the value of the
instrument or security is "derived" from the performance of an underlying asset
or a "benchmark" such as a security index, an interest rate or a currency
("derivatives"). Derivatives are most often used to manage investment risk, to
increase or decrease exposure to an asset class or benchmark (as a hedge or to
enhance return), or to create an investment position indirectly (often because
it is more efficient or less costly than direct investment). There is no
guarantee that these results can be achieved through the use of derivatives. The
types of derivatives used by each Portfolio and the techniques employed by the
investment manager may change over time as new derivatives and strategies are
developed or regulatory changes occur.
Options on Securities. Each Portfolio except the Money Market Portfolio may deal
in options on securities, which options may be listed for trading on a national
securities exchange or traded over-the-counter, except that the Contrarian,
Small Cap Value and High Return Equity Portfolios do not engage in
over-the-counter options transactions. The ability to engage in options
transactions enables a Portfolio to pursue its investment objective and also to
hedge against currency and market risks but is not intended for speculation. In
connection with their foreign securities investments, the Total Return,
Aggressive Growth, Technology, High Yield, Growth, International, Small Cap
Growth, Investment Grade Bond, Horizon, Global Income, Financial Services,
Focused Large Cap Growth, Growth And Income, Growth Opportunities, Global Blue
Chip, and International Growth and Income Portfolios may also purchase and sell,
and the Value+Growth and Blue Chip Portfolios may purchase, foreign currency
options.
The Government Securities Portfolio individually may write (sell) covered call
options on up to 100% of net assets, may write (sell) secured put options on up
to 50% of net assets and may purchase put and call options provided that no more
than 5% of net assets may be invested in premiums on such options. The Total
Return, High Yield, Growth, International, Small Cap Growth, Investment Grade
Bond, Horizon and Global Income Portfolios may write (sell) covered call and
secured put options on up to 25% of net assets and may purchase put and call
options provided that no more than 5% of its net assets may be invested in
premiums on such options. The Value+Growth and Blue Chip Portfolios may purchase
put and call options provided that no more than 5% of its net assets may be
invested in premiums on such options.
The Contrarian, Small Cap Value, High Return Equity, Technology, Financial
Services, Global Blue Chip, and International Growth and Income Portfolios are
authorized to sell covered call options on all of the stocks they hold. No put
option will be sold for those Portfolios, however, if as a result, a Portfolio
would be obligated to purchase securities whose total value exceeds 50% of its
net assets (total assets for the Global Blue Chip, and International Growth and
Income Portfolios). The Global Blue Chip, International Growth and Income,
Focused Large Cap Growth, Growth And
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Income, Growth Opportunities and Index 500 Portfolios may each purchase put and
call options provided that the aggregate premiums paid on all such options held
by the Portfolio at any time do not exceed 20% of its total assets. The
Financial Services Portfolio may purchase put and call options without limit for
hedging purposes, provided that no more than 5% of its net assets may be
committed for non-hedging purposes.
Each Portfolio, except the Money Market, Value+Growth and Blue Chip Portfolios
may write (sell) covered call options so long as they own securities or other
assets that are acceptable for escrow purposes. Also, such Portfolios may write
(sell) secured put options, which means that so long as the Portfolio is
obligated as a writer of a put option, it will invest an amount not less than
the exercise price of the put option in money market instruments.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security or other asset at the exercise price
during the option period. A put option gives the purchaser the right to sell,
and the writer the obligation to buy, the underlying security or other asset at
the exercise price during the option period. The writer of a covered call owns
securities or other assets that are acceptable for escrow and the writer of a
secured put invests an amount not less than the exercise price in eligible
securities or other assets to the extent that it is obligated as a writer. If a
call written by a Portfolio is exercised, the Portfolio foregoes any possible
profit from an increase in the market price of the underlying security or other
asset over the exercise price plus the premium received. In writing puts, there
is a risk that a Portfolio may be required to take delivery of the underlying
security or other asset at a disadvantageous price.
A Portfolio may write (sell) "covered" call options on securities as long as it
owns the underlying securities subject to the option or an option to purchase
the same underlying securities, having an exercise price equal to or less than
the exercise price of the "covered" option, or will establish and maintain with
the Portfolio's custodian for the term of the option a segregated account
consisting of cash or other liquid securities ("eligible securities") to the
extent required by applicable regulation in connection with the optioned
securities. A Portfolio may write "covered" put options provided that, so long
as the Portfolio is obligated as a writer of a put option, the Portfolio will
own an option to sell the underlying securities subject to the option, having an
exercise price equal to or greater than the exercise price of the "covered"
option, or it will deposit and maintain with the custodian in a segregated
account eligible securities having a value equal to or greater than the exercise
price of the option. A call option gives the purchaser the right to buy, and the
writer the obligation to sell, the underlying security at the exercise price
during the option period. A put option gives the purchaser the right to sell,
and the writer has the obligation to buy, the underlying security at the
exercise price during the option period. The premium received for writing an
option will reflect, among other things, the current market price of the
underlying security, the relationship of the exercise price to such market
price, the price volatility of the underlying security, the option period,
supply and demand and interest rates. A Portfolio may write or purchase spread
options, which are options for which the exercise price may be a fixed dollar
spread or yield spread between the security underlying the option and another
security that is used as a bench mark. The exercise price of an option may be
below, equal to or above the current market value of the underlying security at
the time the option is written. The buyer of a put who also owns the related
security is protected by ownership of a put option against any decline in that
security's price below the exercise price less the amount paid for the option.
The ability to purchase put options allows the Portfolio to protect capital
gains in an appreciated security it owns, without being required to actually
sell that security. At times a Portfolio would like to establish a position in
securities upon which call options are available. By purchasing a call option,
the Portfolio is able to fix the cost of acquiring the security, this being the
cost of the call plus the exercise price of the option. This procedure also
provides some protection from an unexpected downturn in the market, because the
Portfolio is only at risk for the amount of the premium paid for the call option
which it can, if it chooses, permit to expire.
During the option period the covered call writer gives up the potential for
capital appreciation above the exercise price should the underlying security
rise in value, and the secured put writer retains the risk of loss should the
underlying security decline in value. For the covered call writer, substantial
appreciation in the value of the underlying security would result in the
security being "called away." For the secured put writer, substantial
depreciation in the value of the underlying security would result in the
security being "put to" the writer. If a covered call option expires
unexercised, the writer realizes a gain in the amount of the premium received.
If the covered call option writer has to sell the underlying security because of
the exercise of a call option, it realizes a gain or loss from the sale of the
underlying security, with the proceeds being increased by the amount of the
premium.
If a secured put option expires unexercised, the writer realizes a gain from the
amount of the premium, plus the interest income on the money market investment.
If the secured put writer has to buy the underlying security because of the
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exercise of the put option, the secured put writer incurs an unrealized loss to
the extent that the current market value of the underlying security is less than
the exercise price of the put option. However, this would be offset in whole or
in part by gain from the premium received and any interest income earned on the
money market investment.
Over-the-Counter Options. Each Portfolio except the Money Market, Contrarian,
Small Cap Value and High Return Equity Portfolios may deal in over-the-counter
traded options ("OTC options"). OTC options differ from exchange traded options
in several respects. They are transacted directly with dealers and not with a
clearing corporation, and there is a risk of nonperformance by the dealer as a
result of the insolvency of such dealer or otherwise, in which event a Portfolio
may experience material losses. However, in writing options the premium is paid
in advance by the dealer. OTC options are available for a greater variety of
securities, and a wider range of expiration dates and exercise prices, than are
exchange traded options. Since there is no exchange, pricing is normally done by
reference to information from market makers, which information is carefully
monitored by the investment manager and verified in appropriate cases.
A writer or purchaser of a put or call option can terminate it voluntarily only
by entering into a closing transaction. In the case of OTC options, there can be
no assurance that a continuous liquid secondary market will exist for any
particular option at any specific time. Consequently, a Portfolio may be able to
realize the value of an OTC option it has purchased only by exercising it or
entering into a closing sale with the dealer that issued it. Similarly, when a
Portfolio writes an OTC option, it generally can close out that option prior to
its expiration only by entering into a closing purchase transaction with the
dealer to which the Portfolio originally wrote it. If a covered call option
writer cannot effect a closing transaction, it cannot sell the underlying
security until the option expires or the option is exercised. Therefore, a
covered call option writer may not be able to sell an underlying security even
though it might otherwise be advantageous to do so. Likewise, a secured put
writer may be unable to sell the securities pledged to secure the put for other
investment purposes while it is obligated as a put writer. Similarly, a
purchaser of such put or call options might also find it difficult to terminate
its position on a timely basis in the absence of a secondary market.
The Fund understands the position of the staff of the Securities and Exchange
Commission ("SEC") to be that purchased OTC options and the assets used as
"cover" for written OTC options are illiquid securities. Procedures are in place
for each Portfolio for engaging in OTC options for the purpose of reducing any
potential adverse effect of such transactions upon the liquidity of such
Portfolios. A brief description of such procedures is set forth below.
Each Portfolio other than the Money Market, Contrarian, Small Cap Value, High
Return Equity, Financial Services, Global Blue Chip, International Growth and
Income, Focused Large Cap Growth, Growth And Income, Growth Opportunities and
Index 500 Portfolios:
A Portfolio will only engage in OTC options transactions with dealers that have
been specifically approved by the Fund's investment manager pursuant to
procedures adopted by the Board of Trustees of the Fund. The Fund's investment
manager believes that the approved dealers should be able to enter into closing
transactions if necessary and, therefore, present minimal credit risks to a
Portfolio. The investment manager will monitor the creditworthiness of the
approved dealers on an on-going basis. A Portfolio currently will not engage in
OTC options transactions if the amount invested by the Portfolio in OTC options,
plus a "liquidity charge" related to OTC options written by the Portfolio, plus
the amount invested by the Portfolio in illiquid securities, would exceed 15% of
the Portfolio's net assets. The "liquidity charge" referred to above is computed
as described below.
The Fund anticipates entering into agreements with dealers to which a Portfolio
sells OTC options. Under these agreements a Portfolio would have the absolute
right to repurchase the OTC options from the dealer at any time at a price no
greater than a price established under the agreements (the "Repurchase Price").
The "liquidity charge" referred to above for a specific OTC option transaction
will be the Repurchase Price related to the OTC option less the intrinsic value
of the OTC option. The intrinsic value of an OTC call option for such purposes
will be the amount by which the current market value of the underlying security
exceeds the exercise price. In the case of an OTC put option, intrinsic value
will be the amount by which the exercise price exceeds the current market value
of the underlying security. If there is no such agreement requiring a dealer to
allow the Portfolio to repurchase a specific OTC option written by the
Portfolio, the "liquidity charge" will be the current market value of the assets
serving as "cover" for such OTC option.
Aggressive Growth, Technology, Financial Services, Global Blue Chip,
International Growth and Income, Focused Large Cap Growth, Growth And Income,
Growth Opportunities and Index 500 Portfolios:
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OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. A
Portfolio will only sell OTC options that are subject to a buy-back provision
permitting the Portfolio to require the Counterparty to sell the option back to
the Portfolio at a formula price within seven days. The Portfolio expects
generally to enter into OTC options that have cash settlement provisions,
although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, or other instrument underlying an OTC option it
has entered into with the Portfolio or fails to make a cash settlement payment
due in accordance with the terms of that option, the Portfolio will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the investment manager must assess the
creditworthiness of each such Counterparty or any guarantor or credit
enhancement of the Counterparty's credit to determine the likelihood that the
terms of the OTC option will be satisfied. A Portfolio will engage in OTC option
transactions only with U.S. government securities dealers recognized by the
Federal Reserve Bank of New York as "primary dealers" or broker/dealers,
domestic or foreign banks or other financial institutions which have received
(or the guarantors of the obligation of which have received) a short-term credit
rating of A-1 from Standard & Poor's Ratings Services ("S&P") or P-1 from
Moody's Investors Service ("Moody's") or an equivalent rating from any
nationally recognized statistical rating organization ("NRSRO").
Options on Securities Indices. A Portfolio, as part of its option transactions,
also may use index options. Through the writing or purchase of index options a
Portfolio can achieve many of the same objectives as through the use of options
on individual securities. Options on securities indices are similar to options
on a security except that, rather than the right to take or make delivery of a
security at a specified price, an option on a securities index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the securities index upon which the option is based is greater
than, in the case of a call, or less than, in the case of a put, the exercise
price of the option.
Price movements in securities which a Portfolio owns or intends to purchase
probably will not correlate perfectly with movements in the level of an index
and, therefore, a Portfolio bears the risk of a loss on an index option which is
not completely offset by movements in the price of such securities. Because
index options are settled in cash, a call writer cannot determine the amount of
its settlement obligations in advance and, unlike call writing on specific
securities, cannot provide in advance for, or cover, its potential settlement
obligations by acquiring and holding the underlying securities.
The Portfolios, as part of their options transactions, may also use options on
securities indices in an attempt to hedge against market conditions affecting
the value of securities that the Portfolio owns or intends to purchase, and not
for speculation. Through the writing or purchase of index options, a Portfolio
can achieve many of the same objectives as through the use of options on
individual securities. Options on securities indices are similar to options on a
security except that, rather than the right to take or make delivery of a
security at a specified price, an option on a securities index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the securities index upon which the option is based is greater
than, in the case of a call, or less than, in the case of a put, the exercise
price of the option. This amount of cash is equal to such difference between the
closing price of the index and the exercise price of the option. The writer of
the option is obligated, in return for the premium received, to make delivery of
this amount. Unlike security options, all settlements are in cash and gain or
loss depends on price movements in the market generally (or in a particular
industry or segment of the market) rather than price movements in individual
securities. Price movements in securities that the Portfolio owns or intends to
purchase probably will not correlate perfectly with movements in the level of an
index since the prices of such securities may be affected by somewhat different
factors and, therefore, a Portfolio bears the risk that a loss on an index
option would not be completely offset by movements in the price of such
securities.
When a Portfolio writes an option on a securities index, it will be required to
deposit with its custodian and mark-to-market eligible securities to the extent
required by applicable regulation. In addition, where the Portfolio writes a
call option on a securities index at a time when the contract value exceeds the
exercise price, the Portfolio will segregate and mark-to-market, until the
option expires or is closed out, cash or cash equivalents equal in value to such
excess.
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A Portfolio may also purchase and sell options on other appropriate indices, as
available, such as foreign currency indices. Options on futures contracts and
index options involve risks similar to those risks relating to transactions in
financial futures contracts described below. Also, an option purchased by a
Portfolio may expire worthless, in which case the Portfolio would lose the
premium paid therefor.
Financial Futures Contracts and Options on Financial Futures Contracts. Each
Portfolio except the Money Market Portfolio may engage in financial futures
transactions. Financial futures contracts are commodity contracts that obligate
the long or short holder to take or make delivery of a specified quantity of a
financial instrument, such as a security, or the cash value of a securities
index during a specified future period at a specified price. A Portfolio will
"cover" futures contracts sold by the Portfolio and maintain in a segregated
account certain liquid assets in connection with futures contracts purchased by
the Portfolio as described under "Investment Policies and Techniques." In
connection with their foreign securities investments, the Total Return, High
Yield, Growth, International, Small Cap Growth, Investment Grade Bond,
Value+Growth, Horizon, Blue Chip, Aggressive Growth, Technology, Global Income,
High Return Equity, Financial Services, Focused Large Cap Growth, Growth And
Income, Growth Opportunities, Global Blue Chip, and International Growth and
Income Portfolios may also engage in foreign currency financial futures
transactions. The Total Return, High Yield, Growth, International, Small Cap
Growth, Investment Grade Bond, Value+Growth, Horizon, Blue Chip and Global
Income Portfolios will not enter into any futures contracts or options on
futures contracts if the aggregate of the contract value of the outstanding
futures contracts of the Portfolio and futures contracts subject to outstanding
options written by the Portfolio would exceed 50% of the total assets of the
Portfolio. The Financial Services, Global Blue Chip, International Growth and
Income, Aggressive Growth, Technology, Focused Large Cap Growth, Growth And
Income, Growth Opportunities and Index 500 Portfolios each 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 future contracts and options thereon would exceed 5% of the Portfolio's
total assets (taken at current value); however, in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation.
The Portfolios may engage in financial futures transactions and may use index
options as an attempt to hedge against currency and market risks. For example,
when the near-term market view is bearish but the portfolio composition is
judged satisfactory for the longer term, exposure to temporary declines in the
market may be reduced by entering into futures contracts to sell securities or
the cash value of an index. Conversely, where the near-term view is bullish, but
a Portfolio is believed to be well positioned for the longer term with a high
cash position, the Portfolio can hedge against market increases by entering into
futures contracts to buy securities or the cash value of an index. In either
case, the use of futures contracts would tend to reduce portfolio turnover and
facilitate a Portfolio's pursuit of its investment objective. Also, if a
Portfolio owned long-term bonds and interest rates were expected to rise, it
could sell financial futures contracts. If interest rates did increase, the
value of the bonds in the Portfolio would decline, but this decline would be
offset in whole or in part by an increase in the value of the Portfolio's
futures contracts. If, on the other hand, long-term interest rates were expected
to decline, the Portfolio could hold short-term debt securities and benefit from
the income earned by holding such securities, while at the same time the
Portfolio could purchase futures contracts on long-term bonds or the cash value
of a securities index. Thus, the Portfolio could take advantage of the
anticipated rise in the value of long-term bonds without actually buying them.
The futures contracts and short-term debt securities could then be liquidated
and the cash proceeds used to buy long-term bonds.
Futures contracts entail risks. If the investment manager's judgment about the
general direction of interest rates, markets or exchange rates is wrong, the
overall performance may be poorer than if no such contracts had been entered
into. There may be an imperfect correlation between movements in prices of
futures contracts and portfolio assets being hedged. In addition, the market
prices of futures contracts may be affected by certain factors. If participants
in the futures market elect to close out their contracts through offsetting
transactions rather than meet margin requirements, distortions in the normal
relationship between the assets and futures market could result. Price
distortions also could result if investors in futures contracts decide to make
or take delivery of underlying securities or other assets rather than engage in
closing transactions because of the resultant reduction in the liquidity of the
futures market. In addition, because, from the point of view of speculators,
margin requirements in the futures market are less onerous than margin
requirements in the cash market, increased participation by speculators in the
futures market could cause temporary price distortions. Due to the possibility
of price distortions in the futures market and because of the imperfect
correlation between movements in the prices of securities or other assets and
movements in the prices of futures contracts, a correct forecast of market
trends by the investment manager still may not result in a successful hedging
transaction. A Portfolio could also experience losses if it could not close out
its futures position because of an illiquid secondary market. If any
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of these events should occur, a Portfolio could lose money on the financial
futures contracts and also on the value of its portfolio assets. The costs
incurred in connection with futures transactions could reduce a Portfolio's
return.
Index options involve risks similar to those risks relating to transactions in
financial futures contracts described above. Also, an option purchased by a
Portfolio may expire worthless, in which case a Portfolio would lose the premium
paid therefor.
A Portfolio may engage in futures transactions only on commodities exchanges or
boards of trade. A Portfolio will not engage in transactions in index options,
financial futures contracts or related options for speculation, but only as an
attempt to hedge against changes in interest rates or market conditions
affecting the values of securities which the Portfolio owns or intends to
purchase.
The Portfolios may enter into financial futures contracts for the future
delivery of a financial instrument, such as a security, or an amount of foreign
currency, or the cash value of a securities index. This investment technique is
designed primarily to hedge (i.e. protect) against anticipated future changes in
market conditions or foreign exchange rates which otherwise might affect
adversely the value of securities or other assets which the Portfolio holds or
intends to purchase. A "sale" of a futures contract means the undertaking of a
contractual obligation to deliver the securities or the cash value of an index
or foreign currency called for by the contract at a specified price during a
specified delivery period. A "purchase" of a futures contract means the
undertaking of a contractual obligation to acquire the securities or cash value
of an index or foreign currency at a specified price during a specified delivery
period. At the time of delivery, in the case of fixed-income securities pursuant
to the contract, adjustments are made to recognize differences in value arising
from the delivery of securities with a different interest rate than that
specified in the contract. In some cases, securities called for by a futures
contract may not have been issued at the time the contract was written.
Although some futures contracts by their terms call for the actual delivery or
acquisition of securities or other assets, in most cases a party will close out
the contractual commitment before delivery of the underlying assets by
purchasing (or selling, as the case may be) on a commodities exchange an
identical futures contract calling for delivery in the same month. Such a
transaction, if effected through a member of an exchange, cancels the obligation
to make or take delivery of the underlying securities or other assets. All
transactions in the futures market are made, offset or fulfilled through a
clearing house associated with the exchange on which the contracts are traded. A
Portfolio will incur brokerage fees when it purchases or sells contracts, and
will be required to maintain margin deposits. At the time a Portfolio enters
into a futures contract, it is required to deposit with its custodian, on behalf
of the broker, a specified amount of cash or eligible securities, called
"initial margin." The initial margin required for a futures contract is set by
the exchange on which the contract is traded. Subsequent payments, called
"variation margin," to and from the broker are made on a daily basis as the
market price of the futures contract fluctuates. The costs incurred in
connection with futures transactions could reduce the Portfolio's return.
Futures contracts entail risks. If the investment manager's judgment about the
general direction of markets or exchange rates is wrong, the overall performance
may be poorer than if no contracts had been entered into.
There may be an imperfect correlation between movements in prices of futures
contracts and portfolio assets being hedged. In addition, the market prices of
futures contracts may be affected by certain factors. If participants in the
futures market elect to close out their contracts through offsetting
transactions rather than meet margin requirements, distortions in the normal
relationship between the assets and futures markets could result. Price
distortions could also result if investors in futures contracts decide to make
or take delivery of underlying securities or other assets rather than engage in
closing transactions because of the resultant reduction in the liquidity of the
futures market. In addition, because, from the point of view of speculators, the
margin requirements in the futures markets are less onerous than margin
requirements in the cash market, increased participation by speculators in the
futures market could cause temporary price distortions. Due to the possibility
of price distortions in the futures market and because of the imperfect
correlation between movements in the prices of securities or other assets and
movements in the prices of futures contracts, a correct forecast of market
trends by the investment manager may still not result in a successful hedging
transaction. If any of these events should occur, the Portfolio could lose money
on the financial futures contracts and also on the value of its portfolio
assets.
The Portfolios may purchase and write call and put options on financial futures
contracts. 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 at a
specified exercise price at any time during the period of the option. Upon
exercise, the writer of the option delivers the
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futures contract to the holder at the exercise price. The Portfolio would be
required to deposit with its custodian initial margin and maintenance margin
with respect to call and put options on futures contracts written by it. A
Portfolio will establish segregated accounts or will provide cover with respect
to written options on financial futures contracts in a manner similar to that
described under "Options on Securities." Options on futures contracts involve
risks similar to those risks relating to transactions in financial futures
contracts described above. Also, an option purchased by a Portfolio may expire
worthless, in which case the Portfolio would lose the premium paid therefor.
Delayed Delivery Transactions. The Total Return, High Yield, Growth, Government
Securities, Investment Grade Bond, Horizon, Global Income, Financial Services,
Global Blue Chip, Aggressive Growth, Technology , International Growth and
Income, Focused Large Cap Growth, Growth And Income, Growth Opportunities and
Index 500 Portfolios may purchase or sell portfolio securities on a when-issued
or delayed delivery basis. When-issued or delayed delivery transactions arise
when securities are purchased by the Portfolio with payment and delivery to take
place in the future in order to secure what is considered to be an advantageous
price and yield to the Portfolio at the time of entering into the transaction.
When the Portfolio enters into a delayed delivery transaction, it becomes
obligated to purchase securities and it has all of the rights and risks
attendant to ownership of a security, although delivery and payment occur at a
later date. The value of fixed-income securities to be delivered in the future
will fluctuate as interest rates vary. At the time a Portfolio makes the
commitment to purchase a security on a when-issued or delayed delivery basis, it
will record the transaction and reflect the liability for the purchase and the
value of the security in determining its net asset value. Likewise, at the time
a Portfolio makes the commitment to sell a security on a delayed delivery basis,
it will record the transaction and include the proceeds to be received in
determining its net asset value; accordingly, any fluctuations in the value of
the security sold pursuant to a delayed delivery commitment are ignored in
calculating net asset value so long as the commitment remains in effect. The
Portfolio generally has the ability to close out a purchase obligation on or
before the settlement date, rather than take delivery of the security.
To the extent the Portfolio engages in when-issued or delayed delivery
transactions, it will do so for the purpose of acquiring portfolio securities
consistent with the Portfolio's investment objective and policies. The Portfolio
will only make commitments to purchase securities on a when-issued or delayed
delivery basis with the intention of actually acquiring the securities, but the
Portfolio reserves the right to sell these securities before the settlement date
if deemed advisable. In some instances, the third-party seller of when-issued or
delayed delivery securities may determine prior to the settlement date that it
will be unable to meet its existing transaction commitments without borrowing
securities. If advantageous from a yield perspective, a Portfolio may, in that
event, agree to resell its purchase commitment to the third-party seller at the
current market price on the date of sale and concurrently enter into another
purchase commitment for such securities at a later date. As an inducement for a
Portfolio to "roll over" its purchase commitment, the Portfolio may receive a
negotiated fee.
Regulatory Restrictions. To the extent required to comply with applicable
regulation, when purchasing a futures contract, writing a put option or entering
into a delayed delivery purchase or a forward currency exchange purchase, a
Portfolio will maintain eligible securities in a segregated account. A Portfolio
will use cover in connection with selling a futures contract.
A Portfolio will not engage in transactions in financial futures contracts or
options thereon for speculation, but only to attempt to hedge against changes in
interest rates or market conditions affecting the value of securities which the
Portfolio holds or intends to purchase.
Foreign Currency Transactions. The Total Return, High Yield, Growth, Small Cap
Growth, Investment Grade Bond, Value+Growth, Horizon, Blue Chip, Aggressive
Growth, Technology, High Return Equity, Financial Services, Focused Large Cap
Growth, Growth And Income, and Growth Opportunities Portfolios may invest a
limited portion of their assets, and the International, Global Income, Global
Blue Chip, and International Growth and Income Portfolios may invest without
limit, in securities denominated in foreign currencies. These Portfolios may
engage in foreign currency transactions in connection with their investments in
foreign securities but will not speculate in foreign currency exchange.
The value of the foreign securities investments of a Portfolio measured in U.S.
Dollars (including ADRs) may be affected favorably or unfavorably by changes in
foreign currency exchange rates and exchange control regulations, and the
Portfolio may incur costs in connection with conversions between various
currencies. A Portfolio will conduct its foreign currency exchange transactions
either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign
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currency exchange market, or through forward contracts to purchase or sell
foreign currencies. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are traded
directly between currency traders (usually large commercial banks) and their
customers.
When a Portfolio enters into a contract for the purchase or sale of a security
denominated in or exposed to a foreign currency, it may want to establish the
U.S. Dollar cost or proceeds, as the case may be. By entering into a forward
contract in U.S. Dollars for the purchase or sale of the amount of foreign
currency involved in an underlying security transaction, the Portfolio is able
to protect itself against a possible loss between trade and settlement date
resulting from an adverse change in the relationship between the U.S. Dollar and
such foreign currency. However, this tends to limit potential gains that might
result from a positive change in such currency relationships. A Portfolio may
also hedge its foreign currency exchange rate risk by engaging in currency
financial futures and options transactions.
When the investment manager believes that the currency of a particular foreign
country may suffer a substantial decline against the U.S. Dollar, it may enter
into a forward contract to sell an amount of foreign currency approximating the
value of some or all of the Portfolio's securities denominated in such foreign
currency. In this situation the International, Global Income, Financial
Services, Focused Large Cap Growth, Growth And Income, Growth Opportunities,
Technology, Global Blue Chip, and International Growth and Income Portfolios
may, instead, enter into a forward contract to sell a different foreign currency
for a fixed U.S. Dollar amount when the investment manager believes that the
U.S. Dollar value of the currency to be sold pursuant to the forward contract
will fall whenever there is a decline in the U.S. Dollar value of the currency
in which portfolio securities of the Portfolio are denominated ("cross-hedge").
The forecasting of short-term currency market movement is extremely difficult
and whether such a short-term hedging strategy will be successful is highly
uncertain.
It is impossible to forecast with precision the market value of portfolio
securities at the expiration of a contract. Accordingly, it may be necessary for
a Portfolio to purchase additional currency on the spot market (and bear the
expense of such purchase) if the market value of the security is less than the
amount of foreign currency the Portfolio is obligated to deliver when a decision
is made to sell the security and make delivery of the foreign currency in
settlement of a forward contract. Conversely, it may be necessary to sell on the
spot market some of the foreign currency received upon the sale of the portfolio
security if its market value exceeds the amount of foreign currency the
Portfolio is obligated to deliver.
The Portfolios will not speculate in foreign currency exchange. A Portfolio will
not enter into such forward contracts or maintain a net exposure in such
contracts where the Portfolio would be obligated to deliver an amount of foreign
currency in excess of the value of the Portfolio's securities or other assets
(a) denominated in or exposed to that currency or (b), in the case of a
"cross-hedge", denominated in a currency or currencies that the Fund's
investment manager believes will have price movements that closely correlate
with that currency. The Portfolios' custodian bank segregates cash or liquid
securities to the extent required by applicable regulation in connection with
forward foreign currency exchange contracts entered into for the purchase of a
foreign currency. The Portfolios do not intend to enter into such forward
contracts if they would have more than 15% of the value of their total assets
committed to such contracts, except that there is no limit as to the percentage
of assets that the Global Income, Financial Services, Focused Large Cap Growth,
Growth And Income, Growth Opportunities, Global Blue Chip, and International
Growth and Income Portfolios intend to commit to such forward contracts. A
Portfolio generally does not enter into a forward contract with a term longer
than one year.
Foreign Currency Options. The Total Return, High Yield, Growth, International,
Small Cap Growth, Investment Grade Bond, Value+Growth, Horizon, Blue Chip,
Aggressive Growth, Technology, High Return Equity, Global Income, Financial
Services, Focused Large Cap Growth, Growth And Income, Growth Opportunities,
Global Blue Chip, and International Growth and Income Portfolios may engage in
foreign currency options transactions. A foreign currency option provides the
option buyer with the right to buy or sell a stated amount of foreign currency
at the exercise price at a specified date or during the option period. A call
option gives its owner the right, but not the obligation, to buy the currency,
while a put option gives its owner the right, but not the obligation, to sell
the currency. The option seller (writer) is obligated to fulfill the terms of
the option sold if it is exercised. However, either seller or buyer may close
its position during the option period in the secondary market for such options
any time prior to expiration.
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A call rises in value if the underlying currency appreciates. Conversely, a put
rises in value if the underlying currency depreciates. While purchasing a
foreign currency option can protect the Portfolio against an adverse movement in
the value of a foreign currency, it does not limit the gain which might result
from a favorable movement in the value of such currency. For example, if a
Portfolio were holding securities denominated in an appreciating foreign
currency and had purchased a foreign currency put to hedge against a decline in
the value of the currency, it would not have to exercise its put. Similarly, if
the Portfolio had entered into a contract to purchase a security denominated in
a foreign currency and had purchased a foreign currency call to hedge against a
rise in value of the currency but instead the currency had depreciated in value
between the date of purchase and the settlement date, the Portfolio would not
have to exercise its call but could acquire in the spot market the amount of
foreign currency needed for settlement.
Foreign Currency Futures Transactions. As part of their financial futures
transactions (see "Financial Futures Contracts" and "Options on Financial
Futures Contracts" above), the Total Return, High Yield, Growth, International,
Small Cap Growth, Investment Grade Bond, Value+Growth, Horizon, Blue Chip,
Aggressive Growth, Technology, High Return Equity, Global Income, Financial
Services, Focused Large Cap Growth, Growth And Income, Growth Opportunities,
Global Blue Chip, and International Growth and Income Portfolios may use foreign
currency futures contracts and options on such futures contracts. Through the
purchase or sale of such contracts, a Portfolio may be able to achieve many of
the same objectives as through forward foreign currency exchange contracts more
effectively and possibly at a lower cost.
Unlike forward foreign currency exchange contracts, foreign currency futures
contracts and options on foreign currency futures contracts are standardized as
to amount and delivery period and are traded on boards of trade and commodities
exchanges. It is anticipated that such contracts may provide greater liquidity
and lower cost than forward foreign currency exchange contracts.
Forward Foreign Currency Exchange Contracts. The Total Return, High Yield,
Growth, International, Small Cap Growth, Investment Grade Bond, Value+Growth,
Horizon, Blue Chip, Aggressive Growth, Technology, High Return Equity, Global
Income, Financial Services, Focused Large Cap Growth, Growth And Income, Growth
Opportunities, Global Blue Chip, International Growth and Income Portfolios may
engage in forward foreign currency transactions. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days ("term") from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded directly between currency traders (usually
large commercial banks) and their customers. The investment manager believes
that it is important to have the flexibility to enter into such forward
contracts when it determines that to do so is in the best interest of a
Portfolio. A Portfolio will not speculate in foreign currency exchange.
If a Portfolio retains the portfolio security and engages in an offsetting
transaction with respect to a forward contract, the Portfolio will incur a gain
or a loss (as described below) to the extent that there has been movement in
forward contract prices. If a Portfolio engages in an offsetting transaction, it
may subsequently enter into a new forward contract to sell the foreign currency.
Should forward prices decline during the period between a Portfolio's entering
into a forward contract for the sale of foreign currency and the date when it
enters into an offsetting contract for the purchase of the foreign currency, the
Portfolio would realize a gain to the extent the price of the currency it has
agreed to sell exceeds the price of the currency it has agreed to purchase.
Should forward prices increase, the Portfolio would suffer a loss to the extent
the price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell. Although such contracts tend to minimize the
risk of loss due to a decline in the value of the hedged currency, they also
tend to limit any potential gain that might result should the value of such
currency increase. A Portfolio may have to convert its holdings of foreign
currencies into U.S. Dollars from time to time in order to meet such needs as
Portfolio expenses and redemption requests. Although foreign exchange dealers do
not charge a fee for conversion, they do realize a profit based on the
difference (the "spread") between the prices at which they are buying and
selling various currencies.
The returns available from foreign currency denominated debt instruments can be
adversely affected by changes in exchange rates. The investment manager believes
that the use of foreign currency hedging techniques, including "cross-hedges"
for the International, Global Income, Financial Services, Global Blue Chip, and
International Growth and Income Portfolios, can help protect against declines in
the U.S. Dollar value of income available for distribution to shareholders, and
against declines in the net asset value of a Portfolio's shares resulting from
adverse changes in currency exchange rates. For example, the return available
from securities denominated in a particular foreign currency
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would diminish if the value of the U.S. Dollar increased against that currency.
Such a decline could be partially or completely offset by the increased value of
a cross-hedge involving a forward foreign currency exchange contract to sell a
different foreign currency, if that contract were available on terms more
advantageous to the Portfolio than a contract to sell the currency in which the
position being hedged is denominated. The investment manager believes that
cross-hedges can therefore provide significant protection of net asset value in
the event of a general rise in the U.S. Dollar against foreign currencies.
However, a cross-hedge cannot provide assured protection against exchange rate
risks and, if the investment manager misjudges future exchange rate
relationships, the Portfolio could be in a less advantageous position than if
such a hedge had not been established.
A Portfolio will not enter into forward contracts or maintain a net exposure in
such contracts when the Portfolio would be obligated to deliver an amount of
foreign currency in excess of the value of the Portfolio's securities or other
assets (a) denominated in or exposed to that currency or (b), in the case of a
"cross-hedge" denominated in a currency or currencies that the investment
manager believes will have price movements that tend to correlate closely with
that currency. The Portfolio's custodian bank segregates eligible securities to
the extent required by applicable regulation in connection with forward foreign
currency exchange contracts entered into for the purchase of foreign currency.
If the value of the securities segregated declines, additional cash or
securities are added so that the segregated amount is not less than the amount
of the Portfolio's commitments with respect to such contracts. The Portfolios
currently do not intend to enter into such forward contracts if they would have
more than 15% of the value of their total assets committed to such contracts,
except that there is no limit as to the percentage of assets that the Global
Income, Financial Services, Global Blue Chip, Growth And Income, Growth
Opportunities and International Growth and Income Portfolios intend to commit to
such forward contracts.
Real Estate Investment Trusts (REITs). The Aggressive Growth Portfolio may
invest in REITs. REITs are sometimes informally characterized as equity REITs,
mortgage REITs and hybrid REITs. Investment in REITs may subject the Portfolio
to risks associated with the direct ownership of real estate, such as decreases
in real estate values, overbuilding, increased competition and other risks
related to local or general economic conditions, increases in operating costs
and property taxes, changes in zoning laws, casualty or condemnation losses,
possible environmental liabilities, regulatory limitations on rent and
fluctuations in rental income. Equity REITs generally experience these risks
directly through fee or leasehold interests, whereas mortgage REITs generally
experience these risks indirectly through mortgage interests, unless the
mortgage REIT forecloses on the underlying real estate. Changes in interest
rates may also affect the value of the Portfolio's investment in REITs. For
instance, during periods of declining interest rates, certain mortgage REITs may
hold mortgages that the mortgagors elect to prepay, which prepayment may
diminish the yield on securities issued by those REITs.
Certain REITs have relatively small market capitalization, which may tend to
increase the volatility of the market price of their securities. Furthermore,
REITs are dependent upon specialized management skills, have limited
diversification and are, therefore, subject to risks inherent in operating and
financing a limited number of projects. REITs are also subject to heavy cash
flow dependency, defaults by borrowers and the possibility of failing to qualify
for tax-free pass-through of income under the Code and to maintain exemption
from the registration requirements of the 1940 Act. By investing in REITs
indirectly through the Fund, a shareholder will bear not only his or her
proportionate share of the expenses of the Portfolio, but also, indirectly,
similar expenses of the REITs. In addition, REITs depend generally on their
ability to generate cash flow to make distributions to shareholders.
Collateralized Obligations. Subject to its investment objectives and policies, a
Portfolio may purchase collateralized obligations, including interest only
("IO") and principal only ("PO") securities. A collateralized obligation is a
debt security issued by a corporation, trust or custodian, or by a U.S.
Government agency or instrumentality, that is collateralized by a portfolio or
pool of mortgages, mortgage-backed securities, U.S. Government securities or
other assets. The issuer's obligation to make interest and principal payments is
secured by the underlying pool or portfolio of securities. Collateralized
obligations issued or guaranteed by a U.S. Government agency or instrumentality,
such as the Federal Home Loan Mortgage Corporation, are considered U.S.
Government securities for purposes of this prospectus. Privately-issued
collateralized obligations collateralized by a portfolio of U.S. Government
securities are not direct obligations of the U.S. Government or any of its
agencies or instrumentalities and are not considered U.S. Government securities
for purposes of this prospectus. A variety of types of collateralized
obligations are available currently and others may become available in the
future.
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Collateralized obligations, depending on their structure and the rate of
prepayments, can be volatile. Some collateralized obligations may not be as
liquid as other securities. Since collateralized obligations may be issued in
classes with varying maturities and interest rates, the investor may obtain
greater predictability of maturity than with direct investments in
mortgage-backed securities. Classes with shorter maturities may have lower
volatility and lower yield while those with longer maturities may have higher
volatility and higher yield. This provides the investor with greater control
over the characteristics of the investment in a changing interest rate
environment. With respect to interest only and principal only securities, an
investor has the option to select from a pool of underlying collateral the
portion of the cash flows that most closely corresponds to the investor's
forecast of interest rate movements. These instruments tend to be highly
sensitive to prepayment rates on the underlying collateral and thus place a
premium on accurate prepayment projections by the investor.
A Portfolio, other than the Money Market Portfolio, may invest in collateralized
obligations whose yield floats inversely against a specified index rate. These
"inverse floaters" are more volatile than conventional fixed or floating rate
collateralized obligations and the yield thereon, as well as the value thereof,
will fluctuate in inverse proportion to changes in the index upon which rate
adjustments are based. As a result, the yield on an inverse floater will
generally increase when market yields (as reflected by the index) decrease and
decrease when market yields increase. The extent of the volatility of inverse
floaters depends on the extent of anticipated changes in market rates of
interest. Generally, inverse floaters provide for interest rate adjustments
based upon a multiple of the specified interest index, which further increases
their volatility. The degree of additional volatility will be directly
proportional to the size of the multiple used in determining interest rate
adjustments.
A Portfolio will currently invest in only those collateralized obligations that
are fully collateralized and that meet the quality standards otherwise
applicable to the Portfolio's investments. Fully collateralized means that the
collateral will generate cash flows sufficient to meet obligations to holders of
the collateralized obligations under even the most conservative prepayment and
interest rate projections. Thus, the collateralized obligations are structured
to anticipate a worst case prepayment condition and to minimize the reinvestment
rate risk for cash flows between coupon dates for the collateralized
obligations. A worst case prepayment condition generally assumes immediate
prepayment of all securities purchased at a premium and zero prepayment of all
securities purchased at a discount. Reinvestment rate risk may be minimized by
assuming very conservative reinvestment rates and by other means such as by
maintaining the flexibility to increase principal distributions in a low
interest rate environment. The effective credit quality of the collateralized
obligations in such instances is the credit quality of the issuer of the
collateral. The requirements as to collateralization are determined by the
issuer or sponsor of the collateralized obligation in order to satisfy rating
agencies, if rated. None of the Portfolios currently intends to invest more than
5% of its total assets in collateralized obligations that are collateralized by
a pool of credit card or automobile receivables or other types of assets rather
than a pool of mortgages, mortgage-backed securities or U.S. Government
securities. Currently, none of the Portfolios intends to invest more than 5% of
its net assets in inverse floaters as described in the prospectus (see
"Investment Techniques -- Collateralized Obligations"). The Money Market
Portfolio does not invest in inverse floaters.
Payments of principal and interest on the underlying collateral securities are
not passed through directly to the holders of the collateralized obligations as
such. Collateralized obligations, depending on their structure and the rate of
prepayments, can be volatile. Some collateralized obligations may not be as
liquid as other securities.
Collateralized obligations often are issued in two or more classes with varying
maturities and stated rates of interest. Because interest and principal payments
on the underlying securities are not passed through directly to holders of
collateralized obligations, such obligations of varying maturities may be
secured by a single portfolio or pool of securities, the payments on which are
used to pay interest on each class and to retire successive maturities in
sequence. These relationships may in effect "strip" the interest payments from
principal payments of the underlying securities and allow for the separate
purchase of either the interest or the principal payments. Collateralized
obligations are designed to be retired as the underlying securities are repaid.
In the event of prepayment on or call of such securities, the class of
collateralized obligation first to mature generally will be paid down first.
Therefore, although in most cases the issuer of collateralized obligations will
not supply additional collateral in the event of such prepayment, there will be
sufficient collateral to secure collateralized obligations that remain
outstanding. It is anticipated that no more than 5% of a Portfolio's net assets
will be invested in IO and PO securities. Governmentally-issued and
privately-issued IO's and PO's will be considered illiquid for purposes of a
Portfolio's limitation on illiquid securities, however, the Board of Trustees
may adopt guidelines under which governmentally-issued IO's and PO's may be
determined to be liquid.
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In reliance on an interpretation by the SEC, a Portfolio's investments in
certain qualifying collateralized obligations are not subject to the limitations
in the 1940 Act regarding investments by a registered investment company, such
as a Portfolio, in another investment company.
Zero Coupon Government Securities. Subject to its investment objective and
policies, a Portfolio may invest in zero coupon U.S. Government Securities. Zero
coupon bonds are purchased at a discount from the face amount. The buyer
receives only the right to receive a fixed payment on a certain date in the
future and does not receive any periodic interest payments. These securities may
include those created directly by the U.S. Treasury and those created as
collateralized obligations through various proprietary custodial, trust or other
relationships. The effect of owning instruments which do not make current
interest payments is that a fixed yield is earned not only on the original
investment but also, in effect, on all discount accretion during the life of the
obligations. This implicit reinvestment of earnings at the same rate eliminates
the risk of being unable to reinvest distributions at a rate as high as the
implicit yield on the zero coupon bond, but at the same time eliminates any
opportunity to reinvest earnings at higher rates. For this reason, zero coupon
bonds are subject to substantially greater price fluctuations during periods of
changing market interest rates than those of comparable securities that pay
interest currently, which fluctuation is greater as the period to maturity is
longer. Zero coupon bonds created as collateralized obligations are similar to
those created through the U.S. Treasury, but the former investments do not
provide absolute certainty of maturity or of cash flows after prior classes of
the collateralized obligations are retired. No Portfolio currently intends to
invest more than 20% of its net assets in zero coupon U.S. Government securities
during the current year.
SPECIAL RISK FACTORS. There are risks inherent in investing in any security,
including shares of each Portfolio. The investment manager attempts to reduce
risk through fundamental research and, for certain Portfolios, the use of a
sub-adviser; however, there is no guarantee that such efforts will be successful
and each Portfolio's returns and net asset value will fluctuate over time. There
are special risks associated with each Portfolio's investments that are
discussed below.
Special Risk Factors -- Foreign Securities. The Total Return, High Yield,
Growth, Small Cap Growth, Investment Grade Bond, Value+Growth, Blue Chip,
Aggressive Growth, Technology, Financial Services, Focused Large Cap Growth,
Growth And Income, and Growth Opportunities Portfolios invest primarily in
securities that are publicly traded in the United States; but, they have
discretion to invest a portion of their assets in foreign securities that are
traded principally in securities markets outside the United States. As a
non-fundamental policy, these Portfolios (other than the Financial Services
Portfolio) currently limit investment in foreign securities not publicly traded
in the United States to 25% of their total assets. The Horizon Portfolios will
invest in foreign securities at a target level normally ranging from 20% to 40%
of the allocation of each Portfolio to equity securities. These Portfolios may
also invest without limit in U.S. Dollar denominated American Depository
Receipts ("ADRs") which are bought and sold in the United States and are not
subject to the preceding limitation. The Financial Services Portfolio may invest
up to 30% of its total assets in foreign securities, including ADRs. The Value
and Small Cap Value Portfolios may invest up to 20% of their assets in
securities of foreign companies in the form of ADRs. High Return Equity may
invest up to 20% of its assets in securities of foreign companies through the
acquisition of ADRs as well as through the purchase of securities of foreign
companies that are publicly traded in the United States and foreign countries.
Foreign securities in which a Portfolio may invest include any type of security
consistent with that Portfolio's investment objective and policies. In
connection with their foreign securities investments, such Portfolios may, to a
limited extent, engage in foreign currency exchange transactions and purchase
and sell foreign currency options and foreign currency futures contracts as a
hedge and not for speculation. The International, Global Income, Global Blue
Chip, Growth And Income, Growth Opportunities and International Growth and
Income Portfolios may invest without limit in foreign securities and may engage
in foreign currency exchange transactions and may purchase and sell foreign
currency options and foreign currency futures contracts. See "Investment
Techniques -- Options and Financial Futures Transactions -- Foreign Currency
Transactions." The Money Market Portfolio and Government Securities Portfolio,
each within its quality standards, may also invest in securities of foreign
issuers. However, such investments will be in U.S. Dollar denominated
instruments.
Foreign securities involve currency risks. The U.S. Dollar value of a foreign
security tends to decrease when the value of the U.S. Dollar rises against the
foreign currency in which the security is denominated and tends to increase when
the value of the U.S. Dollar falls against such currency. Fluctuations in
exchange rates may also affect the earning power and asset value of the foreign
entity issuing the security. Dividend and interest payments may be repatriated
based on the exchange rate at the time of disbursement or payment, and
restrictions on capital flows may be imposed. Losses and
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other expenses may be incurred in converting between various currencies in
connection with purchases and sales of foreign securities.
Foreign securities may be subject to foreign government taxes that reduce their
attractiveness. Other risks of investing in such securities include political or
economic instability in the country involved, the difficulty of predicting
international trade patterns and the possibility of imposition of exchange
controls. The prices of such securities may be more volatile than those of
domestic securities and the markets for such securities may be less liquid. In
addition, there may be less publicly available information about foreign issuers
than about domestic issuers. Many foreign issuers are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic issuers. There is generally less regulation of stock
exchanges, brokers, banks, and listed companies abroad than in the United
States. With respect to certain foreign countries, there is a possibility of
expropriation or diplomatic developments which could affect investment in these
countries.
Emerging Markets. While a Portfolio's investments in foreign securities will
principally be in developed countries, a Portfolio (except for the International
Growth and Income Portfolio, which does not invest in emerging markets) may make
investments in developing or "emerging" countries, which involve exposure to
economic structures that are generally less diverse and mature than in the
United States, and to political systems that may be less stable. A developing or
emerging market country can be considered to be a country that is in the initial
stages of its industrialization cycle. Currently, emerging markets generally
include every country in the world other than the United States, Canada, Japan,
Australia, New Zealand, Hong Kong, Singapore and most Western European
countries. Currently, investing in many emerging markets may not be desirable or
feasible because of the lack of adequate custody arrangements for a Portfolio's
assets, overly burdensome repatriation and similar restrictions, the lack of
organized and liquid securities markets, unacceptable political risks or other
reasons. As opportunities to invest in securities in emerging markets develop, a
Portfolio may expand and further broaden the group of emerging markets in which
it invests. In the past, markets of developing or emerging market countries have
been more volatile than the markets of developed countries; however, such
markets often have provided higher rates of return to investors. The investment
manager believes that these characteristics can be expected to continue in the
future.
Many of the risks described above relating to foreign securities generally will
be greater for emerging markets than for developed countries. For instance,
economies in individual developing markets may differ favorably or unfavorably
from the U.S. economy in such respects as growth of domestic product, rates of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency and balance of payments positions. Many emerging markets have
experienced substantial rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on the economies and securities markets of certain developing markets.
Economies in emerging markets generally are dependent heavily upon international
trade and, accordingly, have been and may continue to be affected adversely by
trade barriers, exchange controls, managed adjustments in relative currency
values and other protectionist measures imposed or negotiated by the countries
with which they trade. These economies also have been and may continue to be
affected adversely by economic conditions in the countries with which they
trade.
Also, the securities markets of developing countries are substantially smaller,
less developed, less liquid and more volatile than the securities markets of the
United States and other more developed countries. Disclosure, regulatory and
accounting standards in many respects are less stringent than in the United
States and other developed markets. There also may be a lower level of
monitoring and regulation of developing markets and the activities of investors
in such markets, and enforcement of existing regulations has been extremely
limited.
In addition, brokerage commissions, custodial services and other needs relating
to investment in foreign markets generally are more expensive than in the United
States; this is particularly true with respect to emerging markets. Such markets
have different settlement and clearance procedures. In certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Such settlement problems may cause emerging market securities to be illiquid.
The inability of a Portfolio to make intended securities purchases because of
settlement problems could cause the Portfolio to miss attractive investment
opportunities. Inability to dispose of a portfolio security because of
settlement problems could result in losses to a Portfolio from subsequent
declines in value of the portfolio security or, if a Portfolio has entered into
a contract to sell the security, it could result in possible liability to the
purchaser. Certain emerging markets may lack clearing facilities equivalent to
those in developed countries. Accordingly, settlements can pose additional risks
in such markets
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and ultimately can expose a Portfolio to the risk of losses resulting from the
Portfolio's inability to recover from a counterparty.
The risk also exists that an emergency situation may arise in one or more
emerging markets as a result of which trading in securities may cease or may be
substantially curtailed and prices for a Portfolio's securities in such markets
may not be readily available. A Portfolio's securities in the affected markets
will be valued at fair value determined in good faith by or under the direction
of the Fund's Board of Trustees.
Investment in certain emerging market securities is restricted or controlled to
varying degrees. These restrictions or controls may at times limit or preclude
foreign investment in certain emerging market securities and increase the costs
and expenses of a Portfolio. 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 country's balance of payments, the market could impose temporary
restrictions on foreign capital remittances.
Fixed-Income. Since most foreign fixed-income securities are not rated, a
Portfolio will invest in foreign fixed-income securities based upon the
investment manager's analysis without relying on published ratings. Since such
investments will be based upon the investment manager's analysis rather than
upon published ratings, achievement of a Portfolio's goals may depend more upon
the abilities of the investment manager than would otherwise be the case.
The value of the foreign fixed-income securities held by a Portfolio, and thus
the net asset value of the Portfolio's shares, generally will fluctuate with (a)
changes in the perceived creditworthiness of the issuers of those securities,
(b) movements in interest rates, and (c) changes in the relative values of the
currencies in which a Portfolio's investments in fixed-income securities are
denominated with respect to the U.S. Dollar. The extent of the fluctuation will
depend on various factors, such as the average maturity of a Portfolio's
investments in foreign fixed-income securities, and the extent to which a
Portfolio hedges its interest rate, credit and currency exchange rate risks.
Many of the foreign fixed-income obligations in which a Portfolio will invest
will have long maturities. A longer average maturity generally is associated
with a higher level of volatility in the market value of such securities in
response to changes in market conditions.
Investments in sovereign debt, including Brady Bonds, involve special risks.
Brady Bonds are debt securities issued under a plan implemented to allow debtor
nations to restructure their outstanding commercial bank indebtedness. Foreign
governmental issuers of debt or the governmental authorities that control the
repayment of the debt may be unable or unwilling to repay principal or pay
interest when due. In the event of default, there may be limited or no legal
recourse in that, generally, remedies for defaults must be pursued in the courts
of the defaulting party. Political conditions, especially a sovereign entity's
willingness to meet the terms of its fixed-income securities, are of
considerable significance. Also, there can be no assurance that the holders of
commercial bank loans to the same sovereign entity may not contest payments to
the holders of sovereign debt in the event of default under commercial bank loan
agreements. In addition, there is no bankruptcy proceeding with respect to
sovereign debt on which a sovereign has defaulted, and a Portfolio may be unable
to collect all or any part of its investment in a particular issue.
Foreign investment in certain sovereign debt is restricted or controlled to
varying degrees, including requiring governmental approval for the repatriation
of income, capital or proceeds of sales by foreign investors. These restrictions
or controls may at times limit or preclude foreign investment in certain
sovereign debt or increase the costs and expenses of a Portfolio. A significant
portion of the sovereign debt in which a Portfolio may invest is issued as part
of debt restructuring and such debt is to be considered speculative. There is a
history of defaults with respect to commercial bank loans by public and private
entities issuing Brady Bonds. All or a portion of the interest payments and/or
principal repayment with respect to Brady Bonds may be uncollateralized.
Privatized Enterprises. Investments in foreign securities may include securities
issued by enterprises that have undergone or are currently undergoing
privatization. The governments of certain foreign countries have, to varying
degrees, embarked on privatization programs contemplating the sale of all or
part of their interests in state enterprises. A Portfolio's investments in the
securities of privatized enterprises include privately negotiated investments in
a government or state-owned or controlled company or enterprise that has not yet
conducted an initial equity offering, investments in the initial offering of
equity securities of a state enterprise or former state enterprise and
investments in the securities of a state enterprise following its initial equity
offering.
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In certain jurisdictions, the ability of a foreign entity, such as a Portfolio
of the Fund, to participate in privatizations may be limited by local law, or
the price or terms on which a Portfolio of the Fund may be able to participate
may be less advantageous than for local investors. Moreover, there can be no
assurance that governments that have embarked on privatization programs will
continue to divest their ownership of state enterprises, that proposed
privatizations will be successful or that governments will not re-nationalize
enterprises that have been privatized.
In the case of the enterprises in which a Portfolio of the Fund may invest,
large blocks of the stock of those enterprises may be held by a small group of
stockholders, even after the initial equity offerings by those enterprises. The
sale of some portion or all of those blocks could have an adverse effect on the
price of the stock of any such enterprise.
Prior to making an initial equity offering, most state enterprises or former
state enterprises go through an internal reorganization or management. Such
reorganizations are made in an attempt to better enable these enterprises to
compete in the private sector. However, certain reorganizations could result in
a management team that does not function as well as the enterprise's prior
management and may have a negative effect on such enterprise. In addition, the
privatization of an enterprise by its government may occur over a number of
years, with the government continuing to hold a controlling position in the
enterprise even after the initial equity offering for the enterprise.
Prior to privatization, most of the state enterprises in which a Portfolio may
invest enjoy the protection of and receive preferential treatment from the
respective sovereigns that own or control them. After making an initial equity
offering these enterprises may no longer have such protection or receive such
preferential treatment and may become subject to market competition from which
they were previously protected. Some of these enterprises may not be able to
effectively operate in a competitive market and may suffer losses or experience
bankruptcy due to such competition.
Depository Receipts. Investments in securities of foreign issuers may be in the
form of 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 Depository 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. Depositary Receipts may be subject
to foreign currency exchange rate risk. Certain Depositary Receipts may not be
listed on an exchange and therefore may be illiquid securities.
The Growth, Total Return, Blue Chip, High Return Equity, Financial Services,
Aggressive Growth, Technology Growth, Focused Large Cap Growth, Growth And
Income, Growth Opportunities and Index 500 Portfolios may also invest in
Standard & Poor's Depositary Receipts ("SPDRs"). SPDRs typically trade like a
share of common stock, and provide investment results that generally correspond
to the price and yield performance of the component common stocks of the S&P 500
Index. There can be no assurance that this can be accomplished, as it may not be
possible for the trust to replicate and maintain exactly the composition and
relative weightings of the component securities of the S&P 500 Index. SPDRs are
subject to the risks of an investment in a broadly based portfolio of common
stocks, including the risk that the general level of stock prices may decline,
thereby adversely affecting the value of such investment. SPDRs are also subject
to risks other than those associated with an investment in a broadly based
portfolio of common stocks, in that the selection of the stocks included in the
trust may affect trading in SPDRs, as compared with trading in a broadly based
portfolio of common stocks.
High Yield, High Risk Securities. Below investment grade securities, commonly
referred to as "junk bonds," (rated below Baa by Moody's and below BBB by S&P)
or unrated securities of equivalent quality in the Adviser's judgment, 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
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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 Statement of Additional Information for a more complete
description of the ratings assigned by ratings organizations and their
respective characteristics.
An economic downturn could disrupt the high-yield market and impair 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 higher quality debt securities. During an economic downturn or period of
rising interest rates, highly leveraged issues may experience financial stress
which could 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 a 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. A thin trading market may limit
the ability of a Fund to accurately value high-yield securities in its 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,
and liquidity and valuation difficulties.
Credit quality in the high-yield securities market can change suddenly and
unexpectedly, and even recently issued credit ratings may not fully reflect the
actual risks posed by a particular high-yield security. For these reasons, it is
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 a 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 interest of a 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,
recent legislation restricts the issuer's tax deduction for interest payments on
these securities. Such legislation may significantly depress the prices of
outstanding securities of this type. For more information regarding tax issues
related to high-yield securities (see "TAXES").
Warrants. Certain Portfolios may invest in warrants up to a certain percentage
of the value of its respective net assets. The holder of a warrant has the
right, until the warrant expires, to purchase a given number of shares of a
particular issuer at a specified price. Such investments can provide a greater
potential for profit or loss than an equivalent investment in the underlying
security. Prices of warrants do not necessarily move, however, in tandem with
the prices of the underlying securities and are, therefore, considered
speculative investments. Warrants pay no dividends and confer no rights other
than a purchase option. Thus, if a warrant held by a Fund were not exercised by
the date of its expiration, the Fund would lose the entire purchase price of the
warrant.
Non-Diversified Portfolios. The Global Income Portfolio operates as a
"non-diversified" portfolio so that it will be able to invest more than 5% of
its assets in the obligations of an issuer, subject to the diversification
requirements of Subchapter M of the Internal Revenue Code applicable to the
Portfolio. This allows the Portfolio, as to 50% of its assets, to invest more
than 5% of its assets, but not more than 25%, in the securities of an individual
foreign government or corporate issuer. Currently, the Global Income Portfolio
does not intend to invest more than 5% of its assets in any individual corporate
issuer. Since the Portfolio may invest a relatively high percentage of its
assets in the obligations of a limited number of issuers, the Portfolio may be
more susceptible to any single economic, political or regulatory occurrence than
a diversified portfolio. The Aggressive Growth Portfolio also operates as a
"non-diversified" portfolio. As a non-diversified Portfolio, the Aggressive
Growth Portfolio may invest a greater proportion of its assets in the
obligations of a small number of issuers, and may be subject to greater risk and
substantial losses as a result of changes in the financial condition or the
market's assessment of the issuers. While not limited by the 1940 Act as to the
proportion of its assets that it may invest in obligations of a single issuer,
the Aggressive Growth Fund will comply with the diversification requirements
imposed by the Internal Revenue Code for qualification as a regulated investment
company. Accordingly, the Aggressive Growth Fund will not, as a non-fundamental
policy: (i) purchase more than 10% of any class of voting securities of any
issuer; (ii) with respect to 50% of its total assets, purchase securities of any
issuer
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(other than U.S. Government Securities) if, as a result, more than 5% of the
total value of the Portfolio's assets would be invested in securities of that
issuer; and (iii) invest more than 25% of its total assets in a single issuer
(other than U.S. Government Securities). The Aggressive Growth Fund does not
currently expect that it would invest more than 10% of its total assets in a
single issuer (other than U.S. Government Securities).
Special Risk Factors -- Small Cap Securities. The Small Cap Growth and Small Cap
Value Portfolios intend to invest a substantial portion of their assets in small
capitalization stocks similar in size to those comprising the Russell 2000.
Investments in securities of companies with small market capitalizations are
generally considered to offer greater opportunity for appreciation and to
involve greater risks of depreciation than securities of companies with larger
market capitalizations. Smaller companies often have limited product lines,
markets or financial resources, and they may be dependent upon one or a few key
people for management. Since the securities of such companies are not as broadly
traded as those of companies with larger market capitalizations, these
securities are often subject to wider and more abrupt fluctuations in market
price.
Among the reasons for the greater price volatility of these securities are the
less certain growth prospects of smaller firms, a lower degree of liquidity in
the markets for such stocks compared to larger capitalization stocks or the
market averages in general, and the greater sensitivity of small companies to
changing economic conditions. In addition to exhibiting greater volatility,
small company stocks may, to a degree, fluctuate independently of larger company
stocks. Small company stocks may decline in price as large company stock prices
rise, or rise in price as large company stock prices decline. Investors should
therefore expect that the value of the shares of the Small Cap Growth and Small
Cap Value Portfolios may be more volatile than the shares of a portfolio that
invests in larger capitalization stocks.
Additional Investment Information. The portfolio turnover rates for each
Portfolio other than the Money Market, Focused Large Cap Growth, Growth And
Income, Growth Opportunities and Index 500 Portfolios are listed under
"Financial Highlights" in the prospectus. Each Portfolio's average 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. Since securities with maturities of less than one year are
excluded from portfolio turnover rate calculations, the portfolio turnover rate
for the Money Market Portfolio is zero. Frequency of portfolio turnover will not
be a limiting factor should a Portfolio's investment manager deem it desirable
to purchase or sell securities. Purchases and sales are made for a Portfolio
whenever necessary, in management's opinion, to meet a Portfolio's objective.
Higher portfolio turnover (over 100%) involves correspondingly greater brokerage
commissions or other transaction costs. Higher portfolio turnover may result in
the realization of greater net short-term capital gains. See "Dividends and
Taxes" herein.
The Global Income Portfolio may take full advantage of the entire range of
maturities of fixed-income securities, including zero-coupon securities, and may
adjust the average maturity of its portfolio from time to time, depending upon
its assessment of relative yields on securities of different maturities and its
expectations of future changes in interest rates. Thus, the average maturity of
the Portfolio's securities may be relatively short (under five years, for
example) at some times and relatively long (over 10 years, for example) at other
times. Generally, since shorter term debt securities tend to be more stable than
longer term debt securities, the Portfolio's average maturity will be shorter
when interest rates are expected to rise and longer when interest rates are
expected to fall. Since in most foreign markets debt securities generally are
issued with maturities of ten years or less, it is currently anticipated that
the average maturity of the Portfolio's securities will normally be in the
intermediate range (three to ten years).
Each Horizon Portfolio attempts to limit its exposure to interest rate risk by
maintaining a relatively short duration. Interest rate risk is the risk that the
value of the fixed income securities may rise or fall as interest rates change.
Under normal conditions, the target duration of the fixed-income portion of each
Horizon Portfolio is approximately 2.5 years, although it may range from 1.5 to
3.5 years depending upon market conditions. "Duration," and the more traditional
"average dollar-weighted maturity," are measures of how a fixed income portfolio
tends to react to interest rate changes. Each fixed income security held by a
Horizon Portfolio has a stated maturity. The stated maturity is the date when
the issuer must repay the entire principal amount to an investor. A security's
term to maturity is the time remaining to maturity. A security will be treated
as having a maturity earlier than its stated maturity date if the security has
technical features (such as puts or demand features) or a variable rate of
interest that, in the judgment of the investment manager, will result in the
security being valued in the market as though it has the earlier maturity.
Average dollar-weighted maturity is calculated by averaging the terms to
maturity of each fixed income security held by each Horizon Portfolio with each
maturity "weighted" according to the percentage of assets that it represents.
Unlike average dollar-weighted
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maturity, duration reflects both principal and interest payments and is designed
to measure more accurately a portfolio's sensitivity to incremental changes in
interest rates than does average weighted maturity. By way of example, if the
duration of a Horizon Portfolio's fixed income securities were two years, and
interest rates decreased by 100 basis points (a basis point is one-hundredth of
one percent), the market price of that portfolio of fixed income securities
would be expected to increase by approximately 2%.
The Blue Chip Portfolio and High Yield Portfolio each does not generally make
investments for short-term profits, but it is not restricted in policy with
regard to portfolio turnover and will make changes in its investment portfolio
from time to time as business and economic conditions and market prices may
dictate and as its investment policy may require.
A Portfolio will not, as a non-fundamental policy, purchase illiquid securities
including repurchase agreements maturing in more than seven days, if, as a
result thereof, more than 15% (10% for the Money Market and High Return Equity
Portfolios) of the Portfolio's net assets, valued at the time of the
transactions, would be invested in such securities.
Lending of Portfolio Securities. Consistent with applicable regulatory
requirements, each Portfolio may lend securities (principally to broker-dealers)
without limit where such loans are callable at any time and are continuously
secured by segregated collateral (cash or other liquid securities) equal to no
less than the market value, determined daily, of the securities loaned. The
Portfolio will receive amounts equal to dividends or interest on the securities
loaned. It will also earn income for having made the loan. Any cash collateral
pursuant to these loans will be invested in short-term money market instruments.
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 would be made only to firms deemed by the
Portfolio's investment manager to be of good standing, and when the Portfolio's
investment manager believes the potential earnings to justify the attendant
risk. For each Portfolio except the Global Blue Chip Portfolio, the investment
manager will limit such lending to not more than one-third of the value of a
Portfolio's total assets. For the Global Blue Chip Portfolio, the investment
manager will, as a non-fundamental policy, limit securities lending to not more
than 5% of the value of the Portfolio's total assets.
Short Sales Against-the-Box. The Growth And Income, Growth Opportunities,
Aggressive Growth and Blue Chip Portfolios may make short sales against-the-box
for the purpose of, but not limited to, deferring realization of loss when
deemed advantageous for federal income tax purposes. A short sale
"against-the-box" is a short sale in which a Portfolio owns at least an equal
amount of the securities sold short or securities convertible into or
exchangeable for, without payment of any further consideration, securities of
the same issue as, and at least equal in amount to, the securities sold short.
As a non-fundamental policy, a Portfolio may engage in such short sales only to
the extent that not more than 10% of the Portfolio's total assets (determined at
the time of the short sale) is held as collateral for such sales. Each Portfolio
does not currently intend, however, to engage in such short sales to the extent
that more than 5% of its net assets will be held as collateral therefor during
the current year.
Repurchase Agreements. Each Portfolio may invest in repurchase agreements, which
are instruments under which it acquires ownership of a security from a
broker-dealer or bank that agrees to repurchase the security at a mutually
agreed upon time and price (which is higher than the purchase price), thereby
determining the yield during the Portfolio's holding period. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Portfolio
might have expenses in enforcing its rights, and could experience losses,
including a decline in the value of the underlying securities and loss of
income. The securities underlying a repurchase agreement will be
marked-to-market every business day so that the value of such securities is at
least equal to the investment value of the repurchase agreement, including any
accrued interest thereon.
Reverse Repurchase Agreements. The Global Blue Chip, International Growth and
Income, Focused Large Cap Growth, Growth And Income, Growth Opportunities and
Index 500 Portfolios may each enter into "reverse repurchase agreements," which
are repurchase agreements in which a Portfolio, as the seller of the securities,
agrees to repurchase them at an agreed time and price. Each Portfolio maintains
a segregated account in connection with outstanding reverse repurchase
agreements. A Portfolio will enter into reverse repurchase agreements only when
the investment manager 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.
Borrowing. Each Portfolio is authorized to borrow money for purposes of
liquidity and to provide for redemptions and distributions. Each Portfolio will
borrow only when the investment manager believes that borrowing will benefit the
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<PAGE>
Portfolio after taking into account considerations such as the costs of the
borrowing. Borrowing by each Portfolio will involve special risk considerations.
Although the principal of each Portfolio's borrowings will be fixed, a
Portfolio's assets may change in value during the time a borrowing is
outstanding, thus increasing exposure to capital risk.
Section 4(2) Paper. Subject to its investment objectives and policies, a
Portfolio may invest in commercial paper issued by major corporations under the
Securities Act of 1933 in reliance on the exemption from registration afforded
by Section 3(a)(3) thereof. Such commercial paper may be issued only to finance
current transactions and must mature in nine months or less. Trading of such
commercial paper is conducted primarily by institutional investors through
investment dealers, and individual investor participation in the commercial
paper market is very limited. A Portfolio also may invest in commercial paper
issued in reliance on the so-called "private placement" exemption from
registration afforded by Section 4(2) of the Securities Act of 1933 ("Section
4(2) paper"). Section 4(2) paper is restricted as to disposition under the
federal securities laws, and generally is sold to institutional investors such
as a Portfolio who agree that they are purchasing the paper for investment and
not with a view to public distribution. Any resale by the purchaser must be in
an exempt transaction. Section 4(2) paper normally is resold to other
institutional investors like the Portfolio through or with the assistance of the
issuer or investment dealers who make a market in the Section 4(2) paper, thus
providing liquidity. The investment manager considers the legally restricted but
readily saleable Section 4(2) paper to be liquid; however, pursuant to
procedures approved by the Board of Trustees of the Fund, if a particular
investment in Section 4(2) paper is not determined to be liquid, that investment
will be included within the limitation of the particular Portfolio on illiquid
securities. The investment manager monitors the liquidity of each Portfolio's
investments in Section 4(2) paper on a continuing basis.
Common Stocks. Subject to its investment objectives and policies, certain
Portfolios may invest in common stocks. Common stock is issued by companies to
raise cash for business purposes and represents a proportionate interest in the
issuing companies. Therefore, a Portfolio participates 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. An investment in
common stock entails greater risk of becoming valueless than does an investment
in fixed-income securities. Despite the risk of price volatility, however,
common stock also offers the greatest potential for long-term gain on
investment, compared to other classes of financial assets such as bonds or cash
equivalents.
Convertible Securities. Subject to its investment objectives and policies,
certain Portfolios 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 a Portfolio 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 tends 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.
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Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar
non-convertible securities.
Convertible securities may be issued as fixed-income obligations that pay
current income or as zero coupon notes and bonds, including Liquid Yield Option
Notes ("LYONs"(TM)). Zero coupon securities pay no cash income and are sold at
substantial discounts from their value at maturity. When held to maturity, their
entire income, which consists of accretion of discount, comes from the
difference between the issue price and their value at maturity. Zero coupon
convertible securities offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follow the
movements in the market value of the underlying common stock. Zero coupon
convertible securities generally are expected to be less volatile than the
underlying common stocks as they usually are issued with shorter maturities (15
years or less) and are issued with options and/or redemption features
exercisable by the holder of the obligation entitling the holder to redeem the
obligation and receive a defined cash payment.
Investment Company Securities. Securities of other investment companies may be
acquired by certain Portfolios, 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 a Portfolio in shares of
other investment companies may be subject to such duplicate expenses.
PORTFOLIO TRANSACTIONS
Brokerage -- Scudder Kemper
Allocation of brokerage is supervised by the investment manager (which also
includes Scudder UK for purposes of the following disclosure).
The primary objective of the investment manager in placing orders for the
purchase and sale of securities for a Portfolio is to obtain the most favorable
net results, taking into account such factors as price, commission where
applicable, size of order, difficulty of execution and skill required of the
executing broker/dealer. The investment manager seeks to evaluate the overall
reasonableness of brokerage commissions paid (to the extent applicable) through
the familiarity of Scudder Investor Services, Inc. ("SIS"), a corporation
registered as a broker-dealer and a subsidiary of Scudder Kemper, with
commissions charged on comparable transactions, as well as by comparing
commissions paid by a Portfolio to reported commissions paid by others. The
investment manager routinely reviews commission rates, execution and settlement
services performed and makes internal and external comparisons.
Each Portfolio's purchases and sales of fixed-income securities are generally
placed by the investment manager with primary market makers for these securities
on a net basis, without any brokerage commission being paid by a Portfolio.
Trading does, however, involve transaction costs. Transactions with dealers
serving as primary market makers reflect the spread between the bid and asked
prices. Purchases of underwritten issues may be made, which will include an
underwriting fee paid to the underwriter.
When it can be done consistently with the policy of obtaining the most favorable
net results, it is the investment manager's practice to place such orders with
broker/dealers who supply brokerage and research services to the investment
manager or a Portfolio. The term "research services" includes advice as to the
value of securities; the advisability of investing in, purchasing or selling
securities; the availability of securities or purchasers or sellers of
securities; and analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts.
The investment manager is authorized when placing portfolio transactions, if
applicable, for a Portfolio to pay a brokerage commission in excess of that
which another broker might charge for executing the same transaction on account
of execution services and the receipt of research services. The investment
manager has negotiated arrangements, which are not applicable to most
fixed-income transactions, with certain broker/dealers pursuant to which a
broker/dealer will provide research services to the investment manager or a
Portfolio in exchange for the direction by the investment manager of brokerage
transactions to the broker/dealer. These arrangements regarding receipt of
research services generally apply to equity security transactions. The
investment manager may place orders with a broker/dealer on the basis that the
broker/dealer has or has not sold shares of a fund
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<PAGE>
managed by Scudder Kemper. In effecting transactions in over-the-counter
securities, orders are placed with the principal market makers for the security
being traded unless, after exercising care, it appears that more favorable
results are available elsewhere.
Subject to the foregoing, the investment manager may consider sales of variable
life insurance policies and variable annuity contracts for which the Fund is an
investment option as a factor in the selection of firms to execute portfolio
transactions.
To the maximum extent feasible, it is expected that the investment managers will
place orders for portfolio transactions through SIS. SIS will place orders on
behalf of the Portfolios with issuers, underwriters or other brokers and
dealers. SIS will not receive any commission, fee or other remuneration from the
Portfolios for this service.
In addition to the discounts or commissions described above, SIS will, from time
to time, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash, to firms that sell shares of the Portfolios. In
some instances, such discounts, commissions or other incentives will be offered
only to certain firms that sell, or are expected to sell during specified time
periods, certain minimum amounts of shares of the Portfolios, or other funds
underwritten by SIS.
Although certain research services from broker/dealers may be useful to a
Portfolio and to the investment manager, it is the opinion of the investment
manager that such information only supplements the investment manager's own
research effort since the information must still be analyzed, weighed and
reviewed by the investment manager's staff. Such information may be useful to
the investment manager in providing services to clients other than the
Portfolios, and not all such information is used by the investment manager in
connection with the Portfolios. Conversely, such information provided to the
investment manager by broker/dealers through whom other clients of the
investment manager effect securities transactions may be useful to the
investment manager in providing services to a Portfolio.
The Trustees for the Fund review, from time to time, whether the recapture for
the benefit of a Portfolio of some portion of the brokerage commissions or
similar fees paid by a Portfolio on portfolio transactions is legally
permissible and advisable.
Brokerage -- Dreman Value Management, L.L.C.
Under the sub-advisory agreement between Scudder Kemper and Dreman Value
Management, L.L.C. ("DVM"), DVM places all orders for purchases and sales of the
High Return Equity and Financial Services Portfolios' securities. At times
investment decisions may be made to purchase or sell the same investment
securities of a Portfolio and for one or more of the other clients managed by
DVM. When two or more of such clients are simultaneously engaged in the purchase
or sale of the same security through the same trading facility, the transactions
are allocated as to amount and price in a manner considered equitable to each.
Position limits imposed by national securities exchanges may restrict the number
of options the Portfolio will be able to write on a particular security.
The above mentioned factors may have a detrimental effect on the quantities or
prices of securities, options or future contracts available to the Portfolio. On
the other hand, the ability of the Portfolio to participate in volume
transactions may produce better executions for the Portfolio in some cases. The
Board of Trustees believes that the benefits of DVM's organization outweigh any
limitations that may arise from simultaneous transactions or position
limitations.
DVM, in effecting purchases and sales of portfolio securities for the account of
the Portfolio, will implement the Portfolio's policy of seeking best execution
of orders. DVM may be permitted to pay higher brokerage commissions for research
services as described below. Consistent with this policy, orders for portfolio
transactions are placed with broker-dealer firms giving consideration to the
quality, quantity and nature of each firm's professional services, which include
execution, financial responsibility, responsiveness, clearance procedures, wire
service quotations and statistical and other research information provided to
the Portfolio and DVM. Subject to seeking best execution of an order, brokerage
is allocated on the basis of all services provided. Any research benefits
derived are available for all clients of DVM. In selecting among firms believed
to meet the criteria for handling a particular transaction, DVM may give
consideration to those firms that have sold or are selling shares of the
Portfolio and of other funds managed by Scudder Kemper and its affiliates, as
well as to those firms that provide market, statistical and other research
information to the
29
<PAGE>
Portfolio and DVM, although DVM is not authorized to pay higher commissions to
firms that provide such services, except as described below.
DVM may in certain instances be permitted to pay higher brokerage commissions
for receipt of market, statistical and other research services as defined in
Section 28(e) of the Securities Exchange Act of 1934 and interpretations
thereunder. Such services may include among other things: economic, industry or
company research reports or investment recommendations; computerized databases;
quotation and execution equipment and software; and research or analytical
computer software and services. Where products or services have a "mixed use," a
good faith effort is made to make a reasonable allocation of the cost of
products or services in accordance with the anticipated research and
non-research uses and the cost attributable to non-research use is paid by DVM
in cash. Subject to Section 28(e) and procedures adopted by the Board of
Trustees, the Portfolio could pay a firm that provides research services
commissions for effecting a securities transaction for the Portfolio in excess
of the amount other firms would have charged for the transaction if DVM
determines in good faith that the greater commission is reasonable in relation
to the value of the brokerage and research services provided by the executing
firm viewed in terms either of a particular transaction or DVM's overall
responsibilities to the Portfolio and other clients. Not all of such research
services may be useful or of value in advising the Portfolio. Research benefits
will be available for all clients of DVM. The sub-advisory fee paid by Scudder
Kemper to DVM is not reduced because these research services are received.
Brokerage Commissions -- Bankers Trust Company
Under the sub-advisory agreement between Scudder Kemper and Bankers Trust
Company ("Bankers Trust"), Bankers Trust will place orders for the purchase and
sale of the Index 500 Portfolio's securities.
The primary objective of Bankers Trust in placing orders for the purchase and
sale of securities for the Portfolio is to obtain the most favorable net
results, taking into account such factors as price, commission, where
applicable, size of order, difficulty of execution and skill required of the
executing broker/dealer. Bankers Trust routinely reviews commission rates,
execution and settlement services performed and makes internal and external
comparisons.
When it can be done consistently with the policy of obtaining the most favorable
net results, it is Bankers Trust's practice to place orders with broker/dealers
who supply brokerage and research services to Bankers Trust or the Portfolio.
The term "research services" includes advice as to the value of securities; the
advisability of investing in, purchasing or selling securities; the availability
of securities or purchasers or sellers of securities; and analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts. Bankers Trust is authorized
when placing portfolio transactions, as applicable, for the Portfolio to pay a
brokerage commission in excess of that which another broker might charge for
executing the same transaction on account of execution services and the receipt
of research services. Bankers Trust has negotiated arrangements, which are not
applicable to most fixed-income transactions, with certain broker/dealers
pursuant to which a broker/dealer will provide research services to Bankers
Trust or the Portfolio in exchange for the direction by Bankers Trust of
brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity transactions. Bankers
Trust will not place orders with broker/dealers on the basis that the
broker/dealer has or has not sold variable life insurance policies and variable
annuity contracts for which the Portfolio is an investment option. In effecting
transactions in over-the-counter securities, orders are placed with the
principal market makers for the security being traded unless, after exercising
care, it appears that more favorable results are available elsewhere.
Although certain research services from broker/dealers may be useful to the
Portfolio and to Bankers Trust, it is the opinion of Bankers Trust that such
information only supplements Bankers Trust's own research effort since the
information must still be analyzed, weighed, and reviewed by Bankers Trust's
staff. Such information may be useful to Bankers Trust in providing services to
clients other than the Portfolio, and not all such information is used by
Bankers Trust in connection with the Portfolio. Conversely, such information
provided to Bankers Trust by broker/dealers through whom other clients of
Bankers Trust effect securities transactions may be useful to Bankers Trust in
providing services to the Portfolio.
The Trustees review, from time to time, whether the recapture for the benefit of
the Portfolio of some portion of the brokerage commissions or similar fees paid
by the Portfolio on portfolio transactions is legally permissible and advisable.
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<PAGE>
Brokerage Commissions -- Eagle Asset Management and Janus Capital Corporation
Under the sub-advisory agreements between Scudder Kemper and Eagle Asset
Management, Inc. ("EAM") and Janus Capital Corporation ("JCC"), EAM and JCC
places all orders for purchases and sales of the Portfolios' securities. At
times investment decisions may be made to purchase or sell the same investment
securities of a Portfolio and for one or more of the other clients managed by
EAM and JCC. When two or more of such clients are simultaneously engaged in the
purchase or sale of the same security through the same trading facility, the
transactions are allocated as to amount and price in a manner considered
equitable to each. Position limits imposed by national securities exchanges may
restrict the number of options a Portfolio will be able to write on a particular
security.
The above mentioned factors may have a detrimental effect on the quantities or
prices of securities, options or future contracts available to a Portfolio. On
the other hand, the ability of a Portfolio to participate in volume transactions
may produce better executions for a Portfolio in some cases. The Board of
Trustees believes that the benefits of EAM and JCC's organizations each outweigh
any limitations that may arise from simultaneous transactions or position
limitations.
EAM and JCC, in effecting purchases and sales of portfolio securities for the
account of the Portfolios, will implement the Portfolios' policy of seeking best
execution of orders. EAM and JCC may each be permitted to pay higher brokerage
commissions for research services as described below. Consistent with this
policy, orders for portfolio transactions are placed with broker-dealer firms
giving consideration to the quality, quantity and nature of each firm's
professional services, which include execution, financial responsibility,
responsiveness, clearance procedures, wire service quotations and statistical
and other research information provided to the Portfolios, EAM and JCC. Subject
to seeking best execution of an order, brokerage is allocated on the basis of
all services provided. Any research benefits derived are available for all
clients of EAM and JCC. In selecting among firms believed to meet the criteria
for handling a particular transaction, EAM and JCC may each give consideration
to those firms that have sold or are selling shares of the Portfolios and of
other funds managed by Scudder Kemper and its affiliates, as well as to those
firms that provide market, statistical and other research information to the
Portfolio, EAM and JCC, although EAM and JCC are not authorized to pay higher
commissions to firms that provide such services, except as described below.
EAM and JCC may in certain instances be permitted to pay higher brokerage
commissions for receipt of market, statistical and other research services as
defined in Section 28(e) of the Securities Exchange Act of 1934 and
interpretations thereunder. Such services may include among other things:
economic, industry or company research reports or investment recommendations;
computerized databases; quotation and execution equipment and software; and
research or analytical computer software and services. Where products or
services have a "mixed use," a good faith effort is made to make a reasonable
allocation of the cost of products or services in accordance with the
anticipated research and non-research uses and the cost attributable to
non-research use is paid by EAM and JCC in cash. Subject to Section 28(e) and
procedures adopted by the Board of Trustees, the Portfolios could pay a firm
that provides research services commissions for effecting a securities
transaction for the Portfolio in excess of the amount other firms would have
charged for the transaction if EAM and JCC determines in good faith that the
greater commission is reasonable in relation to the value of the brokerage and
research services provided by the executing firm viewed in terms either of a
particular transaction or EAM and JCC's overall responsibilities to the
Portfolios and other clients. Not all of such research services may be useful or
of value in advising the Portfolios. Research benefits will be available for all
clients of EAM and JCC. The sub-advisory fees paid by Scudder Kemper to EAM and
JCC are not reduced because these research services are received.
Brokerage Commissions
The table below shows total brokerage commissions paid by each Portfolio (other
than the Aggressive Growth and Technology Portfolios, which commenced operations
on May 1, 1999, the Index 500 Portfolio, which commenced operations on September
1, 1999 and the Focused Large Cap Growth, Growth And Income, and Growth
Opportunities Portfolios, which each commenced operations on October 29, 1999)
then existing for the last three fiscal years and, for the most recent fiscal
year, the percentage thereof that was allocated to firms based upon research
information provided.
<TABLE>
<CAPTION>
Allocated to Firms
Based on
Research in
Portfolio Fiscal 1998 Fiscal 1998+ Fiscal 1997 Fiscal 1996
- --------- ----------- ------------ ----------- -----------
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<S> <C> <C> <C> <C>
Money Market $0 0% $ 0 $ 0
Total Return $2,772,000 42% $ 1,512,000 $ 1,562,000
High Yield $4,933,000 0% $ 3,627,000 $ 2,567,000
Growth $1,325,000 94% $ 1,936,000 $ 1,782,000
Government Securities $14,000 0% $ 16,000 $ 20,000
International $928,000 97% $ 747,000 $ 936,000
Small Cap Growth $1,115,000 90% $ 2,658,000 $ 787,000
Investment Grade Bond $37,000 0% $ 31,000 $ 6,000**
Contrarian Value $292,000 97% $ 92,000 $ 26,000**
High Return Equity* $38,000 4% N/A N/A
Financial Services* $8,000 1% N/A N/A
Small Cap Value $190,000 75% $ 31,000 $ 50,000**
Value+Growth $275,000 89% $ 97,000 $ 15,000**
Horizon 20+ $79,000 39% $ 35,000 $ 5,000**
Horizon 10+ $82,000 35% $ 37,000 $ 6,000**
Horizon 5 $37,000 32% $ 17,000 $ 2,000**
Blue Chip $134,000 99% $ 31,000*** --
Global Income $0 0% $ 0*** --
International Growth and Income* $10,000 96% N/A N/A
Global Blue Chip* $6,000 97% N/A N/A
</TABLE>
* Commencement of Operations on (May 4, 1998 for High Return Equity and
Financial Services, May 5, 1998 for International Growth and Income and
Global Blue Chip) through December 31, 1998.
** Commencement of Operations on May 1, 1996 through December 31, 1996.
*** Commencement of Operations on May 1, 1997 through December 31, 1997.
+ Estimated for the Growth, International, Horizon, Blue Chip, and Global
Income Portfolios.
INVESTMENT MANAGER AND DISTRIBUTOR
Investment Manager. Scudder Kemper Investments, Inc., 345 Park Avenue, New York,
New York is investment manager for each Portfolio. Scudder Kemper is
approximately 70% owned by Zurich Insurance Company, a leading internationally
recognized provider of insurance and financial services in property/casualty and
life insurance, reinsurance and structured financial solutions as well as asset
management. The balance of Scudder Kemper is owned by its officers and
employees. Pursuant to investment management agreements, Scudder Kemper acts as
investment manager to each Portfolio, manages its investments, administers its
business affairs, furnishes office facilities and equipment, provides clerical
and administrative services, and permits any of its officers or employees to
serve without compensation as trustees or officers of the Fund if elected to
such positions. The investment management agreements provide that each Portfolio
shall pay the charges and expenses of its operations, including the fees and
expenses of the trustees (except those who are affiliates of Scudder Kemper),
independent auditors, counsel, custodian and transfer agent and the cost of
share certificates, reports and notices to shareholders, brokerage commissions
or transaction costs, costs of calculating net asset value and maintaining all
accounting records related thereto, taxes and membership dues. The Fund bears
the expenses of registration of its shares with the SEC and the cost of
qualifying and maintaining the qualification of the Fund's shares for sale under
the securities laws of the various states, if any.
The investment management agreements provide that Scudder Kemper shall not be
liable for any error of judgment or of law, or for any loss suffered by the Fund
in connection with the matters to which the agreements relate, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
the Scudder Kemper in the performance of its obligations and duties, or by
reason of its reckless disregard of its obligations and duties under each
agreement.
Each investment management agreement continues in effect from year to year so
long as its continuation is approved at least annually by a majority of the
trustees who are not parties to such agreement or interested persons of any such
party except in their capacity as trustees of the Fund and by the shareholders
of the Portfolio subject thereto or the Board of Trustees. Each Portfolio's
agreement may be terminated at any time upon 60 days' notice by either party, or
by a majority vote of the outstanding shares, and will terminate automatically
upon assignment. If additional Portfolios may
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<PAGE>
become subject to an investment management agreement, the provisions concerning
continuation, amendment and termination and the allocation of the management
fees and the application of the expense limitation shall be on a Portfolio by
Portfolio basis. Additional Portfolios may be subject to different agreements.
Certain investments may be appropriate for the Portfolios and for other clients
advised by the investment manager. Investment decisions for the Portfolios and
other clients are made with a view to achieving their respective investment
objectives and after consideration of such factors as their current holdings,
availability of cash for investment and the size of their investments generally.
Frequently, a particular security may be bought or sold for only one client or
in different amounts and at different times for more than one but less than all
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling the security. In addition, purchases
or sales of the same security may be made for two or more clients on the same
day. In such event, such transactions will be allocated among the clients in a
manner believed by the investment manager to be equitable to each. In some
cases, this procedure could have an adverse effect on the price or amount of the
securities purchased or sold by a Portfolio. Purchase and sale orders for a
Portfolio may be combined with those of other clients of the investment manager
in the interest of the most favorable net results to a Portfolio.
In certain cases, the investments for the Portfolios are managed by the same
individuals who manager one or more other mutual funds advised by Scudder Kemper
that have similar names, objectives and investment styles as a Portfolio. You
should be aware that the Portfolios are likely to differ from these other mutual
funds in size, cash flow pattern and tax matters. Accordingly, the holdings and
performance of the Portfolios can be expected to vary from those of the other
mutual funds.
The investment manager maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The investment manager 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 investment manager's clients. However, the investment
manager regards this information and material as an adjunct to its own research
activities. The investment manager'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 investment manager with respect to the Fund are based primarily
on the analyses of its own research department.
Responsibility for overall management of each Portfolio rests with the Fund's
Board of Trustees and officers. Professional investment supervision is provided
by Scudder Kemper. The investment management agreements provide that Scudder
Kemper shall act as each Portfolio's investment adviser, manage its investments
and provide it with various services and facilities.
On December 31, 1997, pursuant to the terms of an agreement, Scudder, Stevens &
Clark, Inc. ("Scudder"), and Zurich Insurance Company ("Zurich"), formed a new
global investment organization by combining Scudder with Zurich Kemper
Investments, Inc. ("ZKI") and Zurich Kemper Value Advisors, Inc. ("ZKVA"),
former subsidiaries of Zurich. ZKI, the former investment manager for each
Portfolio. Upon completion of the transaction, Scudder changed its name to
Scudder Kemper Investments, Inc. As a result of the transaction, Zurich owns
approximately 70% of Scudder Kemper, with the balance owned by Scudder Kemper's
officers and employees.
On September 7, 1998, the businesses of Zurich (including Zurich's 70% interest
in Scudder Kemper) and the financial services businesses of B.A.T Industries
p.l.c. ("B.A.T") were combined to form a new global insurance and financial
services company known as Zurich Financial Services Group. By way of a dual
holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services, Inc., with the balance initially
owned by former B.A.T shareholders.
Upon consummation of this transaction, each Portfolio's existing investment
management agreement with Scudder Kemper was deemed to have been assigned and,
therefore, terminated. The Board approved new investment management agreements
with Scudder Kemper, which are substantially identical to the current investment
management agreements, except for the date of execution (now September 7, 1998)
and termination. These agreements became effective upon the termination of the
then current investment management agreements and were approved by shareholders
at a special meeting which concluded in December 1998. The investment management
agreements for the Aggressive Growth Portfolio and the Technology Growth
Portfolio are effective as of their inception, May 1, 1999, for
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<PAGE>
the Index 500 Portfolio, September 1, 1999 and for the Focused Large Cap Growth,
Growth And Income and Growth Opportunities Portfolios, October 29, 1999.
Each Portfolio pays Scudder Kemper an investment management fee, based on the
average daily net assets of the Portfolio, payable monthly, at the annual rates
shown below:
Portfolio Annual Management Fee Rate
- --------- --------------------------
Money Market 0.50%
Total Return 0.55%
High Yield 0.60%
Growth 0.60%
Government Securities 0.55%
International 0.75%
Small Cap Growth 0.65%
Investment Grade Bond 0.60%
Contrarian Value 0.75%
Small Cap Value 0.75%
Value+ Growth 0.75%
Horizon 20+ 0.60%
Horizon 10+ 0.60%
Horizon 5 0.60%
Blue Chip 0.65%
Global Income 0.75%
International Growth and Income 1.00%*
Index 500 Portfolio 1.00%
*By contract, fees are capped at 0.70% through 4/30/2000.
The High Return Equity, Financial Services, Aggressive Growth, and Technology
Portfolios each pays Scudder Kemper a graduated investment management fee, based
on the average daily net assets of the Portfolio, payable monthly, at the annual
rates shown below:
Average Daily Net Assets of the Portfolio Annual Management Fee Rate
- ----------------------------------------- --------------------------
$0-$250 million 0.75%
$250 million-$1 billion 0.72%
$1 billion-$2.5 billion 0.70%
$2.5 billion-$5 billion 0.68%
$5 billion-$7.5 billion 0.65%
$7.5 billion-$10 billion 0.64%
$10 billion-$12.5 billion 0.63%
Over $12.5 billion 0.62%
The Kemper Global Blue Chip Portfolio pays Scudder Kemper a graduated investment
management fee, based on the average daily net assets of the Portfolio, payable
monthly, at the annual rates shown below:
Average Daily Net Assets of the Portfolio Annual Management Fee Rate*
- ----------------------------------------- ---------------------------
$0-$250 million 1.00%
$250 million-$1 billion 0.95%
Over $1 billion 0.90%
*By contract, fees are capped at 0.85% through 4/30/00.
34
<PAGE>
The Kemper Index 500 Portfolio pays Scudder Kemper a graduated investment
management fee, based on 1% of the average daily net assets of the Portfolio,
payable monthly, at the annual rates shown below:
Average Daily Net Assets of the Portfolio Annual Management Fee Rate
$0-$200 million 0.45%
$200 million-$750 million 0.42%
$750 million-$2.0 billion 0.40%
$2.0 billion-$5.0 billion 0.38%
Over $5.0 billion 0.35%
KVS Focused Large Cap Growth Portfolio, KVS Growth And Income Portfolio and KVS
Growth Opportunities Portfolio each pay the investment manager a graduated
investment management fee based on the average daily net assets of the
Portfolio, payable monthly, at the annual rates shown below:
Average Daily Net Assets of the Portfolio Annual Management Fee Rate
- ----------------------------------------- --------------------------
$0-$250 million 0.950%
$250 million-$500 million 0.925%
$500 million-$1 billion 0.900%
$1 billion-$2.5 billion 0.875%
Over $2.5 billion 0.850%
The investment management fees paid by each Portfolio (other than the Aggressive
Growth and Technology Portfolios, which commenced operations on May 1, 1999, the
Index 500 Portfolio, which commenced operations on September 1, 1999 and the
Focused Large Cap Growth, Growth And Income and Growth Opportunities Portfolios,
which each commenced operations on October 29, 1999) for its last three fiscal
years are shown in the table below.
<TABLE>
<CAPTION>
Portfolio Fiscal 1998 Fiscal 1997 Fiscal 1996
- --------- ----------- ----------- -----------
<S> <C> <C> <C>
Money Market $ 600,000 $ 497,000 $ 376,000
Total Return $ 4,521,000 $ 4,072,000 $ 3,691,000
High Yield $ 2,606,000 $ 1,991,000 $ 1,565,000
Growth $ 3,600,000 $ 3,142,000 $ 2,658,000
Government Securities $ 564,000 $ 460,000 $ 485,000
International $ 1,613,000 $ 1,419,000 $ 1,174,000
Small Cap Growth $ 1,060,000 $ 633,000 $ 340,000
Investment Grade Bond $ 184,000 $ 46,000 $ 4,000*
Contrarian Value $ 1,641,000 $ 604,000 $ 44,000*
Small Cap Value $ 702,000 $ 307,000 $ 33,000*
Value+Growth $ 825,000 $ 257,000 $ 22,000*
Horizon 20+ $ 164,000 $ 56,000 $ 6,000*
Horizon 10+ $ 223,000 $ 77,000 $ 11,000*
Horizon 5 $ 137,000 $ 44,000 $ 5,000*
Blue Chip $ 306,000 $ 27,000** --
Global Income $ 31,000 $9,000** --
High Return Equity $ 100,000***+ N/A N/A
Financial Services $ 26,000***+ N/A N/A
International Growth and Income $ 6,000***# N/A N/A
Global Blue Chip $ 9,000***# N/A N/A
</TABLE>
* Commencement of Operations on May 1, 1996 through December 31, 1996.
** Commencement of Operations on May 1, 1997 through December 31, 1997.
*** Commencement of Operations on (May 4, 1998 for High Return Equity and
Financial Services, May 5, 1998 for International Growth and Income and
Global Blue Chip) through December 31, 1998.
35
<PAGE>
+ Amount shown after voluntary fee waiver by the investment manager of
$25,000 and $15,000 for the High Return Equity and Financial Services
Portfolios, respectively. The actual level of this voluntary waiver
shall be in the investment manager's discretion and, upon notice to the
Portfolio, the investment manager may at any time terminate this
waiver.
# Amount shown after contractual fee reduction by the investment manager
of $2,000 and $3,000 for the International Growth and Income, and
Global Blue Chip Portfolios, respectively. This fee reduction is in
effect through April 30, 2000.
Fund Sub-Adviser for the International and Global Income Portfolios. Scudder
Investments (U.K.) Ltd. ("Scudder UK"), 1 South Place, London, U.K. EC2M 2ZS, an
affiliate of Scudder Kemper, is the sub-adviser for the International and Global
Income Portfolios. Scudder UK acts as sub-adviser pursuant to the terms of a
sub-advisory agreement between it and Scudder Kemper for the Portfolios. Scudder
UK is subject to regulation by the Investment Management Regulatory Organization
in England as well as the SEC.
Under the terms of the sub-advisory agreement for the International and Global
Income Portfolios, Scudder UK renders investment advisory and management
services with regard to that portion of a Portfolio's assets as may be allocated
to Scudder UK by the investment manager from time to time for management,
including services related to foreign securities, foreign currency transactions
and related investments. Scudder UK may, under the terms of the sub-advisory
agreement, render similar services to others including other investment
companies. For its services, Scudder UK will receive from Scudder Kemper a
monthly fee at 1/12 of the following annual rates applied to the portion of the
average daily net assets of each Portfolio allocated by Scudder Kemper to
Scudder UK for management: 0.35% for the International Portfolio and 0.30% for
the Global Income Portfolio. Scudder UK permits any of its officers or employees
to serve without compensation as trustees or officers of the Fund if elected to
such positions.
Each sub-advisory agreement provides that Scudder UK will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with matters to which the sub-advisory agreement relates, except a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of Scudder UK in the performance of its duties or from reckless disregard
by Scudder UK of its obligations and duties under the sub-advisory agreement.
Each sub-advisory agreement continues in effect from year to year so long as its
continuation is approved at least annually by a majority of the trustees who are
not parties to such agreement or interested persons of any such party except in
their capacity as trustees of the Fund and by the shareholders of the Portfolio
subject thereto or the Board of Trustees. Each sub-advisory agreement may be
terminated at any time for a Portfolio upon 60 days' notice by Scudder Kemper,
Scudder UK or the Board of Trustees, or by a majority vote of the outstanding
shares of the Portfolio, and will terminate automatically upon assignment or
upon the termination of the Fund's investment management agreement. If
additional Portfolios become subject to the sub-advisory agreement, the
provisions concerning continuation, amendment and termination shall be on a
Portfolio-by-Portfolio basis. Additional Portfolios may be subject to a
different agreement.
The sub-adviser fees paid by Scudder Kemper to Scudder UK for the International
and Global Income Portfolios for the period from May 1, 1997 (inception) through
December 31, 1997 were $657,013 and $3,176, and for fiscal year 1998 were
(estimated) $753,000 and $12,000, respectively.
Fund Sub-Adviser for the High Return Equity and Financial Services Portfolios.
Dreman Value Management, L.L.C. ("DVM"), Ten Exchange Place, Jersey City, New
Jersey 07302, is the sub-adviser for the High Return Equity Portfolio and the
Financial Services Portfolio. DVM is controlled by David N. Dreman. DVM serves
as sub-adviser pursuant to the terms of a sub-advisory agreement between it and
the Adviser for each Portfolio. DVM was formed in April 1997 and has served as
sub-adviser for these Portfolios since their inception.
Under the terms of each sub-advisory agreement, DVM manages the investment and
reinvestment of each Portfolio's assets and will provide such investment advice,
research and assistance as the investment manager may, from time to time,
reasonably request.
Each sub-advisory agreement provides that DVM will not be liable for any error
of judgment or mistake of law or for any loss suffered by the Portfolio in
connection with matters to which the sub-advisory agreement relates, except a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of DVM in the performance of its duties or from reckless disregard by DVM
of its obligations and duties under the sub-advisory agreement.
36
<PAGE>
Each sub-advisory agreement with DVM remains in effect until May 1, 2003 unless
sooner terminated or not annually approved as described below. Notwithstanding
the foregoing, the sub-advisory agreement shall continue in effect through May
1, 2003 and year to year thereafter, but only as long as such continuance is
specifically approved at least annually (a) by a majority of the trustees who
are not parties to such agreement or interested persons of any such party except
in their capacity as trustees of the Fund, and (b) by the shareholders or the
Board of Trustees of the Fund. The sub-advisory agreement may be terminated at
any time upon 60 days' notice by Scudder Kemper or by the Board of Trustees of
the Fund or by majority vote of the outstanding shares of the Portfolio, and
will terminate automatically upon assignment or upon termination of the
Portfolio's investment management agreement. DVM may not terminate each
sub-advisory agreement prior to May 1, 2001. Thereafter, DVM may terminate the
sub-advisory agreement upon 90 days' notice to the investment manager.
The investment manager pays DVM for its services a sub-advisory fee, payable
monthly, at 1/12 of the annual rates shown below:
Average Daily Net Assets of the Portfolio Annual Sub-Adviser Fee Rate
- ----------------------------------------- ---------------------------
$0-$250 million 0.240%
$250 million-$1 billion 0.230%
$1 billion-$2.5 billion 0.224%
$2.5 billion-$5 billion 0.218%
$5 billion-$7.5 billion 0.208%
$7.5 billion-$10 billion 0.205%
$10 billion-$12.5 billion 0.202%
Over $12.5 billion 0.198%
The sub-adviser fees paid by Scudder Kemper Investments, Inc. to DVM for the
Kemper Dreman High Return Equity and Kemper Dreman Financial Services Portfolios
for the period from May 4, 1998 (inception) through December 31, 1998 were
$13,268 and $40,717, respectively.
Fund Sub-Adviser for the Index 500 Portfolio. Pursuant to a sub-advisory
agreement entered into between the Adviser and Bankers Trust Company ("Bankers
Trust") on September 1, 1999, Bankers Trust provides sub-advisory services
relating to the management of the Index 500 Portfolio. Bankers Trust, a New York
banking corporation with principal offices at 130 Liberty Street, New York, New
York, 10006, is a wholly owned subsidiary of Deutsche Bank AG, and one of the
nation's leading managers of index funds. Under the terms of the sub-advisory
agreement, Bankers Trust manages the investment and reinvestment of the
Portfolio's assets and will provide such investment advice, research and
assistance as the Adviser may, from time to time, reasonably request.
The sub-advisory agreement provides that Bankers Trust will not be liable for
any error of judgment or mistake of law or for any loss suffered by the
Portfolio in connection with matters to which the sub-advisory agreement
relates, except a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of Bankers Trust in the performance of its duties or from
reckless disregard by Bankers Trust of its obligations and duties under the
sub-advisory agreement.
The sub-advisory agreement shall remain in full force and effect through
September 30, 2000, and is renewable annually thereafter by specific approval of
the Board of Trustees of the Fund or by the affirmative vote of a majority of
the outstanding voting securities of the Portfolio. Any such renewal shall be
approved by the vote of a majority of the Trustees of the Fund who are not
interested persons under the 1940 Act, cast in person at a meeting called for
the purpose of voting on such renewal. The sub-advisory agreement may be
terminated without penalty at any time by the Trustees, by vote of a majority of
the outstanding voting securities of the Portfolio, or by the Adviser or Bankers
Trust upon 60 days' written notice, and will automatically terminate in the
event of its assignment by either party to the agreement, as defined in the 1940
Act, or upon termination of the Investment Management Agreement between the
Adviser and the Fund. In addition, the Adviser or the Fund may terminate the
sub-advisory agreement upon immediate
37
<PAGE>
notice if Bankers Trust becomes statutorily disqualified from performing its
duties under this agreement or otherwise is legally prohibited from operating as
an investment adviser.
The fee paid to Bankers Trust is calculated on a monthly basis and is based upon
the average daily net assets in the Portfolio. The annual fee rate decreases as
the level of the Portfolio's net assets increases. The minimum annual fee is not
applicable for the first year of the sub-advisory agreement. The fee is paid to
Bankers Trust monthly, at the annual rates shown below:
Average Daily Net Assets of the Portfolio Annual Management Fee Rate
- ----------------------------------------- --------------------------
$0-$200 million 0.08%
$200 million-$750 million 0.05%
Over $750 million 0.025%
Fund Sub-Adviser for the Focused Large Cap Growth Portfolio. Eagle Asset
Management, 880 Carillon Parkway, St. Petersburg, Florida, 33716, is the
sub-adviser for the Focused Large Cap Growth Portfolio. EAM manages more than
$5.5 billion in assets for institutional, high net worth individuals and
subadvisory clients.
Under the terms of the sub-advisory agreement, EAM manages the investment and
reinvestment of the Portfolio's assets and will provide such investment advice,
research and assistance as the investment manager may, from time to time,
reasonably request.
Each sub-advisory agreement provides that EAM will not be liable for any error
of judgment or mistake of law or for any loss suffered by the Portfolio in
connection with matters to which the sub-advisory agreement relates, except a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of EAM in the performance of its duties or from reckless disregard by EAM
of its obligations and duties under the sub-advisory agreement.
The sub-advisory Agreement with EAM shall continue in effect through September
30, 2001 and year to year thereafter, but only as long as such continuance is
specifically approved at least annually (a) by a majority of the trustees who
are not parties to such agreement or interested persons of any such party except
in their capacity as trustees of the Fund, and (b) by the shareholders or the
Board of Trustees of the Fund. The sub-advisory agreement may be terminated at
any time upon 60 days' notice by EAM, by Scudder Kemper or by the Board of
Trustees of the Fund or by majority vote of the outstanding shares of the
Portfolio, and will terminate automatically upon assignment or upon termination
of the Portfolio's investment management agreement.
The investment manager pays EAM for its services a sub-advisory fee, payable
monthly, at the annual rates shown below:
Average Daily Net Assets of the Portfolio Annual Subadviser Fee Rate
----------------------------------------- --------------------------
$0-$50 million 0.45%
$50 million-$300 million 0.40%
On the balance over $300 million 0.30%
Fund Sub-Adviser for the Growth Opportunities Portfolio and the Growth And
Income Portfolio. Janus Capital Corporation, 100 Fillmore Street, Denver,
Colorado 80206-4928, is the sub-adviser for the Growth Opportunities Portfolio
and the Growth And Income Portfolio. JCC began serving as investment adviser to
Janus Fund in 1970 and currently serves as investment adviser to all of the
Janus Funds, acts as sub-adviser for a number of private-label mutual funds and
provides separate account advisory services for institutional accounts.
Under the terms of each sub-advisory agreement, JCC manages the investment and
reinvestment of each Portfolio's assets and will provide such investment advice,
research and assistance as the investment manager may, from time to time,
reasonably request.
Each sub-advisory agreement provides that JCC will not be liable for any error
of judgment or mistake of law or for any loss suffered by the Portfolio in
connection with matters to which the sub-advisory agreement relates, except a
loss
38
<PAGE>
resulting from willful misfeasance, bad faith or gross negligence on the part of
JCC in the performance of its duties or from reckless disregard by JCC of its
obligations and duties under the sub-advisory agreement.
Each Sub-Advisory Agreement with JCC shall continue in effect through September
30, 2001 and year to year thereafter, but only as long as such continuance is
specifically approved at least annually (a) by a majority of the trustees who
are not parties to such agreement or interested persons of any such party except
in their capacity as trustees of the Fund, and (b) by the shareholders or the
Board of Trustees of the Fund. The sub-advisory agreement may be terminated at
any time upon 60 days' notice by JCC, by Scudder Kemper or by the Board of
Trustees of the Fund or by majority vote of the outstanding shares of the
Portfolio, and will terminate automatically upon assignment or upon termination
of the Portfolio's investment management agreement.
The investment manager pays JCC for its services a sub-advisory fee, payable
monthly, at the annual rates shown below:
Average Daily Net Assets of the Portfolios Annual Subadviser Fee Rate
------------------------------------------ --------------------------
$0-$100 million 0.55%
$100 million-$500 million 0.50%
On the balance over $500 million 0.45%
Fund Accounting Agent. Scudder Fund Accounting Corp. ("SFAC"), Two International
Place, Boston, Massachusetts, 02210-4103, a subsidiary of Scudder Kemper, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records of each Portfolio. SFAC receives no
fee for its services to each Portfolio, other than the High Return Equity,
Financial Services, Focused Large Cap Growth, Growth And Income, Growth
Opportunities, Global Blue Chip, International Growth and Income, Aggressive
Growth, and Technology Portfolios; however, subject to Board approval, at some
time in the future, SFAC may seek payment for its services to those Portfolios
under its agreement with such Portfolios. Each agreement states that the
Aggressive Growth, Technology, High Return Equity and Financial Services
Portfolios shall each pay SFAC an annual fee equal to 0.025% of the first $150
million of average daily net assets of the Portfolio, 0.0075% of the next $850
million of such assets and 0.0045% of such assets in excess of $1 billion, plus
holding and transaction charges for this service. Each agreement states that the
Global Blue Chip and International Growth and Income Portfolios shall each pay
SFAC an annual fee equal to 0.065% of the first $150 million of average daily
net assets of the Portfolio, 0.04% of the next $850 million of such assets and
0.02% of such assets in excess of $1 billion, plus holding and transaction
charges for this service. However, the Portfolios incurred no accounting fees
for the period ended December 31, 1998, after a fee reduction by SFAC.
Principal Underwriter. Kemper Distributors, Inc. ("KDI"), 222 South Riverside
Plaza, Chicago, Illinois 60606, a wholly owned subsidiary of Scudder Kemper, is
the distributor and principal underwriter for shares of each Portfolio in the
continuous offering of its shares. The Fund pays the cost for the prospectus and
shareholder reports to be set in type and printed for existing shareholders, and
KDI pays for the printing and distribution of copies thereof used in connection
with the offering of shares to prospective shareholders. KDI also pays for
supplementary sales literature and advertising costs. Terms of continuation,
termination and assignment under the underwriting agreement are identical to
those described above with regard to the investment management agreements,
except that termination other than upon assignment requires sixty days' notice.
In addition, KDI may, from time to time, from its own resources pay certain
firms additional amounts for ongoing administrative services and assistance
provided to their customers and clients who are shareholders of the Fund.
Custodian and Transfer Agent. State Street Bank and Trust Company ("State
Street"), 225 Franklin Street, Boston, Massachusetts 02110, as custodian, has
custody of all securities and cash of each Portfolio (other than the Global
Income, International, Global Blue Chip, and International Growth and Income
Portfolios). The Chase Manhattan Bank, Chase MetroTech Center, Brooklyn, New
York 11245, as custodian, has custody of all securities and cash of the Global
Income and International Portfolios. Brown Brothers Harriman & Co., as
custodian, has custody of all securities and cash of the Global Blue Chip and
International Growth and Income Portfolios. Each custodian attends to the
collection of principal and income, and payment for and collection of proceeds
of securities bought and sold by those Portfolios. Investors Fiduciary Trust
Company ("IFTC"), 801 Pennsylvania Avenue, Kansas City, Missouri 64105 is the
transfer
39
<PAGE>
agent and dividend-paying agent for each Portfolio. For the fiscal year ended
December 31, 1998, no fees were paid to IFTC by any Portfolio.
Independent Auditors And Reports To Shareholders. The Fund's independent
auditors, Ernst & Young LLP, 233 South Wacker Drive, Chicago, Illinois 60606,
audit and report on the Portfolios' annual financial statements, review certain
regulatory reports and the Portfolios' federal income tax returns, and perform
other professional accounting, auditing, tax and advisory services when engaged
to do so by the Fund. Shareholders will receive annual audited financial
statements and semi-annual unaudited financial statements.
Legal Counsel. Vedder, Price, Kaufman & Kammholz, 222 N. LaSalle St., Chicago,
Illinois, serves as legal counsel to each Portfolio other than the Financial
Services, Global Blue Chip, International Growth and Income and Index 500
Portfolios. Dechert Price & Rhoads, Ten Post Office Square South, Boston,
Massachusetts, serves as legal counsel to the Financial Services, Index 500,
Focused Large Cap Growth, Growth And Income, Growth Opportunities, Global Blue
Chip, and International Growth and Income Portfolios.
PURCHASE AND REDEMPTION OF SHARES
Fund shares are sold at their net asset value next determined after an order and
payment are received as described below. (See "Net Asset Value").
Upon receipt by a Portfolio's Transfer Agent of a request for redemption, shares
will be redeemed by the Fund, on behalf of a particular Portfolio, at the
applicable net asset value as described below.
The Fund, on behalf of a particular Portfolio, may suspend the right of
redemption or delay payment more than seven days (a) during any period when the
New York Stock Exchange ("Exchange") is closed, other than customary weekend and
holiday closings or during any period in which trading on the Exchange is
restricted, (b) during any period when an emergency exists as a result of which
(i) disposal of a Portfolio's investments is not reasonably practicable, or (ii)
it is not reasonably practicable for the Portfolio to determine the value of its
net assets, or (c) for such other periods as the Securities and Exchange
Commission may by order permit for the protection of the Fund's shareholders.
OFFICERS AND TRUSTEES
The Fund's activities are supervised by the Fund's Board of Trustees. The
officers and trustees of the Fund, their principal occupations, employment
history for the past five years, and their affiliations, if any, with Scudder
Kemper or Scudder UK, the investment manager or sub-adviser for the Fund and
KDI, the Fund's principal underwriter or their affiliates, are listed below. All
persons named as trustees also serve in similar capacities for other funds
advised by Scudder Kemper.
JAMES E. AKINS (10/15/26), Trustee, 2904 Garfield Terrace, N.W., Washington,
D.C.; Consultant on International, Political and Economic Affairs; formerly a
career United States Foreign Service Officer, Energy Adviser for the White House
and United States Ambassador to Saudi Arabia, 1973-76.
JAMES R. EDGAR (07/22/46), Trustee, 1927 County Road, 150E, Seymour, Illinois;
Distinguished Fellow, Institute of Government and Public Affairs, University of
Illinois; Director, Kemper Insurance Companies; formerly, Governor of the State
of Illinois , 1991-1999.
ARTHUR R. GOTTSCHALK (02/13/25), Trustee, 10642 Brookridge Drive, Frankfort,
Illinois; Retired; formerly, President, Illinois Manufacturers Association;
Trustee, Illinois Masonic Medical Center; formerly, Illinois State Senator;
formerly, Vice President, The Reuben H. Donnelley Corp.; formerly, attorney.
FREDERICK T. KELSEY (04/25/27), Trustee, 4010 Arbor Lane, Unit 102, Northfield,
Illinois; Retired; formerly, consultant to Goldman, Sachs & Co.; formerly,
President, Treasurer and Trustee of Institutional Liquid Assets and its
affiliated mutual funds; Trustee of the Northern Institutional Funds; formerly,
Trustee of the Pilot Fund.
THOMAS W. LITTAUER* (4/26/55), Chairman, Trustee and Vice President, Two
International Place, Boston, Massachusetts; Managing Director, Scudder Kemper,
formerly, Head of Broker Dealer Division of an unaffiliated
40
<PAGE>
investment management firm during 1997; prior thereto, President of Client
Management Services of an unaffiliated investment management firm from 1991 to
1996.
FRED B. RENWICK (02/01/30), Trustee, 3 Hanover Square, New York, New York;
Professor of Finance, New York University, Stern School of Business; Director,
TIFF Industrial Program, Inc., Director, the Wartburg Home Foundation; Chairman
Investment Committee of Morehouse College Board of Trustees; Chairman, American
Bible Society Investment Committee; formerly member of the Investment Committee
of Atlanta University Board of Trustees; formerly Director of Board of Pensions
Evangelical Lutheran Church of America.
JOHN G. WEITHERS (08/08/33), Trustee, 311 Spring Lake, Hinsdale, Illinois;
Retired; formerly, Chairman of the Board and Chief Executive Officer, Chicago
Stock Exchange; Director, Federal Life Insurance Company; President of the
Members of the Corporation and Trustee, DePaul University.
MARK S. CASADY* (9/21/60), President, Two International Place, Boston,
Massachusetts; Managing Director, Scudder Kemper; formerly Institutional Sales
Manager of an unaffiliated mutual fund distributor.
ROBERT S. CESSINE* (01/05/50), Vice President, 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Scudder Kemper; formerly, Vice President,
Wellington Management Company.
TRACY McCORMICK* (9/27/54), Vice President, 222 South Riverside Plaza, Chicago,
Illinois; Managing Director, Scudder Kemper; formerly, senior vice president and
portfolio manager for an investment management company from August 1992 to
September 1995.
PHILIP J. COLLORA* (11/15/45), Vice President and Secretary, 222 South Riverside
Plaza, Chicago, Illinois; Attorney, Senior Vice President, Scudder Kemper.
PHILIP S. FORTUNA* (11/30/57), Vice President, 101 California Street, Suite
4100, San Francisco, California; Managing Director, Scudder Kemper.
ANN M. McCREARY* (11/6/56), Vice President, 345 Park Avenue, New York, New York;
Managing Director, Scudder Kemper.
MICHAEL A. McNAMARA* (12/28/44), Vice President, 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Scudder Kemper.
ROBERT C. PECK, JR.* (10/1/46), Vice President, 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Scudder Kemper; formerly, Executive Vice
President and Chief Investment Officer with an unaffiliated investment
management firm from 1988 to 1997.
KATHRYN L. QUIRK* (12/3/52), Vice President, 345 Park Avenue, New York, New
York; Managing Director, Scudder Kemper.
FRANK J. RACHWALSKI, JR.* (03/26/45), Vice President, 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Scudder Kemper.
HARRY E. RESIS, JR.* (11/24/45), Vice President, 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Scudder Kemper.
THOMAS F. SASSI* (11/7/42), Vice President, 345 Park Avenue, New York, New York;
Managing Director, Scudder Kemper; formerly, consultant with an unaffiliated
investment consulting firm and an officer of an unaffiliated investment banking
firm from 1993 to 1996.
RICHARD L. VANDENBERG* (11/16/49), Vice President, 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Scudder Kemper; formerly, senior vice
president and portfolio manager with an unaffiliated investment management firm.
41
<PAGE>
LINDA J. WONDRACK* (9/12/64), Vice President, Two International Place, Boston,
Massachusetts; Senior Vice President, Scudder Kemper.
JOHN R. HEBBLE* (6/27/58), Treasurer, Two International Place, Boston,
Massachusetts; Senior Vice President, Scudder Kemper.
MAUREEN E. KANE* (2/14/62), Assistant Secretary, Two International Place,
Boston, Massachusetts; Vice President, Scudder Kemper; formerly, Assistant Vice
President of an unaffiliated investment management firm; prior there to,
Associate Staff Attorney of an unaffiliated investment management firm;
Associate, Peabody & Arnold (law firm).
CAROLINE PEARSON* (4/1/62), Assistant Secretary, Two International Place,
Boston, Massachusetts; Senior Vice President, Scudder Kemper; formerly,
Associate, Dechert Price & Rhoads (law firm), 1989 to 1997.
BRENDA LYONS* (2/21/63) Assistant Treasurer, Two International Place, Boston,
Massachusetts; Senior Vice President, Scudder Kemper.
CORNELIA M. SMALL* (7/28/44) Vice President, 345 Park Avenue, New York, New
York; Managing Director, Scudder Kemper Investments, Inc.
SHERIDAN P. REILLY* (2/27/52) Vice President, Two International Place, Boston,
Massachusetts; Senior Vice President, Scudder Kemper Investments, Inc.
DIEGO ESPINOSA* (6/30/62) Vice President, Two International Place, Boston,
Massachusetts; Senior Vice President, Scudder Kemper Investments, Inc.
* Interested persons of the Fund as defined in the 1940 Act.
The trustees and officers who are "interested persons," as designated above,
receive no compensation from the Fund. The table below shows amounts paid or
accrued to those trustees who are not designated "interested persons," during
the 1998 calendar year.
<TABLE>
<CAPTION>
Aggregate Total Compensation From Fund and
Name of Trustee Compensation From Fund Fund Complex Paid to Trustees***
- --------------- ---------------------- --------------------------------
<S> <C> <C>
James E. Akins $45,800 $140,800
James R. Edgar* $ 0 $ 0
Arthur R. Gottschalk** $47,800 $146,300
Frederick T. Kelsey $45,800 $141,300
Fred B. Renwick $45,800 $141,300
John G. Weithers $47,800 $146,300
John B. Tingleff**** $47,800 $146,300
</TABLE>
* James R. Edgar became a trustee on May 27, 1999
** Includes deferred fees pursuant to deferred compensation agreements
with the Fund. Deferred amounts accrue interest monthly at a rate equal
to the yield of Zurich Money Funds -- Zurich Money Market Fund. Total
deferred fees and interest accrued for the latest and prior fiscal
years for this Fund are $151,300 for Mr. Gottschalk.
*** Includes compensation for service on the Boards of 15 funds managed by
Scudder Kemper and its affiliates with 53 fund portfolios during
calendar year 1998. Each trustee currently serves as a board member of
15 funds managed by Scudder Kemper and its affiliates with 55 fund
portfolios.
**** Deceased.
As of September 30, 1999, the trustees and officers as a group owned
beneficially less than 1% of the outstanding shares of each Portfolio of the
Fund.
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<PAGE>
As of September 30, 1999, all the shares of the Money Market, Total Return, High
Yield, Growth, Government Securities, International, Small Cap Growth,
Investment Grade Bond, Contrarian, Small Cap Value, Value+Growth, Horizon, Blue
Chip, Global Blue Chip, International Growth and Income, Kemper-Dreman Financial
Services, Kemper-Dreman High Return Equity, Global Income, Aggressive Growth,
and Technology Growth Portfolios were held of record by KILICO Variable Annuity
Separate Account ("KVASA"), KILICO Variable Separate Account ("KVSA"), KILICO
Variable Separate Account 2 ("KVSA2"), Separate Account KGC ("KGC"), Separate
Account KG ("KG"), Prudential Variable Contract Account GI-2 ("PVCA"), Cova
Variable Annuity Account One ("Cova One"), Cova Variable Annuity Account Five
("Cova Five") and Lincoln Life Variable Annuity Account N ("LLVAA") on behalf of
the owners of variable life insurance contracts and variable annuity contracts.
At all meetings of shareholders of these Portfolios, Kemper Investors Life
Insurance Company ("KILICO") will vote the shares held of record by KVASA, KVSA
KVSA and KVSA2, Allmerica Financial Life Insurance and Annuity Company
("Allmerica") will vote the shares held of record by KGC and KG, Prudential
Insurance Company of America ("Prudential") will vote the shares held of record
by PVCA, Cova Financial Services Life Insurance Company and Cova Financial Life
Insurance Company (collectively, "Cova") will vote the shares held of record by
Cova One and Cova Five, and Lincoln National Life Insurance Company ("Lincoln")
will vote the shares held of record by LLVAA only in accordance with the
instructions received from the variable life and variable annuity contract
owners on behalf of whom the shares are held. All shares for which no
instructions are received will be voted in the same proportion as the shares for
which instructions are received. Accordingly, KILICO disclaims beneficial
ownership of the shares of these portfolios held of record by KVASA, KVSA, and
KVSA2, and Allmerica disclaims beneficial ownership of the shares of these
portfolios held of record by KGC and KG, and Prudential disclaims beneficial
ownership of the shares of these portfolios held of record by PVCA, and Cova
disclaims beneficial ownership of the shares of these portfolios held of record
by Cova One and Cova Five and Lincoln disclaims beneficial ownership of the
shares of these portfolios held of record by LLVAA.
Scudder Kemper will be the sole shareholder of the Focused Large Cap Growth,
Growth And Income, Growth Opportunities and Index 500 Portfolios until such time
as the Portfolios have public shareholders, and therefore may be deemed a
controlling person.
NET ASSET VALUE
The net asset value per share of each Portfolio is the value of one share and is
determined by dividing the value of the Portfolio's net assets by the number of
shares outstanding. The net asset value of shares of the Portfolio is computed
as of the close of regular trading on the New York Stock Exchange (the
"Exchange") on each day the Exchange is open for trading. The Exchange is
scheduled to be closed on the following holidays: New Year's Day, Martin Luther
King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving and Christmas. With respect to Portfolios with
securities listed primarily on foreign exchanges, such securities may trade on
days when the Portfolio's net asset value is not computed; and therefore, the
net asset value of a Portfolio may be significantly affected on days when the
investor has no access to the Portfolio.
All Portfolios (other than the Money Market Portfolio):
An exchange-traded equity security is valued at its most recent sale price.
Lacking any sales, the security is valued at the calculated mean between the
most recent bid quotation and the most recent asked quotation (the "Calculated
Mean"). Lacking a Calculated Mean, the security is valued at the most recent bid
quotation. An equity security which is traded on The Nasdaq Stock Market
("Nasdaq") is valued at its most recent sale price. Lacking any sales, the
security is valued at the most recent bid quotation. The value of an equity
security not quoted on Nasdaq, but traded in another over-the-counter market, is
its most recent sale price. Lacking any sales, the security is valued at the
Calculated Mean. Lacking a Calculated Mean, the security is valued at the most
recent bid quotation.
Debt securities are valued at prices supplied by the Portfolio's pricing
agent(s) which reflect broker/dealer supplied valuations and electronic data
processing techniques. Money market instruments purchased with an original
maturity of sixty days or less, maturing at par, are valued at amortized cost,
which the Board believes approximates market value. If it is not possible to
value a particular debt security pursuant to these valuation methods, the value
of such security is the most recent bid quotation supplied by a bona fide
marketmaker. If it is not possible to value a particular debt security pursuant
to the above methods, the investment manager may calculate the price of that
debt security, subject to limitations established by the Board.
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<PAGE>
An exchange-traded options contract on securities, currencies, futures and other
financial instruments is valued at its most recent sale price on such exchange.
Lacking any sales, the options contract is valued at the Calculated Mean.
Lacking any Calculated Mean, the options contract is valued at the most recent
bid quotation in the case of a purchased options contract, or the most recent
asked quotation in the case of a written options contract. An options contract
on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price.
If a security is traded on more than one exchange, or upon one or more exchanges
and in the over-the-counter market, quotations are taken from the market in
which the security is traded most extensively.
If, in the opinion of the Fund's Valuation Committee of the Fund's Board, the
value of a Portfolio asset as determined in accordance with these procedures
does not represent the fair market value of the Portfolio asset, the value of
the Portfolio asset is taken to be an amount which, in the opinion of the
Valuation Committee, represents fair market value on the basis of all available
information. The value of other Portfolio holdings owned by the Portfolio is
determined in a manner which, in the discretion of the Valuation Committee, most
fairly reflects the fair market value of the property on the valuation date.
Money Market Portfolio: The net asset value per share of the Money Market
Portfolio is determined at 11:00 a.m. and as of the earlier of 3:00 p.m. Central
time or the close of the Exchange on each day the Exchange is open for trading,
except that the net asset value will not be computed on a day in which no orders
to purchase shares were received or no shares were tendered for redemption. The
net asset value per share is determined by dividing the total assets of the
Portfolio minus its liabilities by the total number of its shares outstanding.
The net asset value per share of the Money Market Portfolio is ordinarily $1.00
calculated at amortized cost in accordance with Rule 2a-7 under the 1940 Act.
While this rule provides certainty in valuation, it may result in periods during
which value, as determined by amortized cost, is higher or lower than the price
the Portfolio would have received if all its investments were sold. Under the
direction of the Board of Trustees, certain procedures have been adopted to
monitor and stabilize the price per share for the Portfolio. Calculations are
made to compare the value of its investments valued at amortized cost with
market-based values. Market-based values will be obtained by using actual
quotations provided by market makers, estimates of market value, or values
obtained from yield data relating to classes of money market instruments or
government securities published by reputable sources. In the event that a
deviation of 1/2 of 1% or more exists between the Portfolio's $1.00 per share
net asset value, calculated at amortized cost, and the net asset value
calculated by reference to market-based quotations, or if there is any other
deviation that the Board of Trustees believes would result in a material
dilution to shareholders or purchasers, the Board of Trustees will promptly
consider what action, if any, should be initiated. In order to value its
investments at amortized cost, the Money Market Portfolio purchases only
securities with a maturity of one year or less and maintains a dollar-weighted
average portfolio maturity of 90 days or less. In addition, the Money Market
Portfolio limits its portfolio investments to securities that meet the quality
and diversification requirements of Rule 2a-7.
DIVIDENDS AND TAXES
Dividends for Money Market Portfolio. The Money Market Portfolio's net
investment income is declared as a dividend daily. Shareholders will receive
dividends monthly in additional shares. If a shareholder withdraws its entire
account, all dividends accrued to the time of withdrawal will be paid at that
time.
Dividends for All Portfolios Except Money Market Portfolio. The Fund normally
follows the practice of declaring and distributing substantially all the net
investment income and any net short-term and long-term capital gains of these
Portfolios at least annually.
The Fund may at any time vary the dividend practices with respect to a Portfolio
and, therefore, reserves the right from time to time to either distribute or
retain for reinvestment such of its net investment income and its net short-term
and long-term capital gains as the Board of Trustees of the Fund determines
appropriate under the then current circumstances.
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<PAGE>
Taxes. Each Portfolio intends to continue to qualify (or, for the Index 500
Portfolio, intends to qualify) as a regulated investment company under
subchapter M of the Internal Revenue Code ("Code") in order to avoid taxation of
the Fund and its shareholders.
Pursuant to the requirements of Section 817(h) of the Code, with certain limited
exceptions, the only shareholders of the Fund and its Portfolios will be
insurance companies and their separate accounts that fund variable insurance
contracts. The prospectus that describes a particular variable insurance
contract discusses the taxation of separate accounts and the owner of the
particular variable insurance contract.
Each Portfolio intends to comply with the requirements of Section 817(h) and
related regulations. Section 817(h) of the Code and the regulations issued by
the Treasury Department impose certain diversification requirements affecting
the securities in which the Portfolios may invest. These diversification
requirements are in addition to the diversification requirements under
subchapter M and the Investment Company Act of 1940. The consequences of failure
to meet the requirements of Section 817(h) could result in taxation of the
insurance company offering the variable insurance contract and immediate
taxation of the owner of the contract to the extent of appreciation on
investment under the contract.
The preceding is a brief summary of certain of the relevant tax considerations.
The summary is not intended as a complete explanation or a substitute for
careful tax planning and consultation with individual tax advisers.
SHAREHOLDER RIGHTS
The Fund was organized as a business trust under the laws of Massachusetts on
January 22, 1987. On May 1, 1997, the Fund changed its name from "Kemper
Investors Fund" to "Investors Fund Series" and on May 1, 1999 the Fund changed
its name from "Investors Fund Series" to "Kemper Variable Series." The Fund may
issue an unlimited number of shares of beneficial interest all having no par
value. Since the Fund offers multiple Portfolios, it is known as a "series
company." Shares of a Portfolio have equal noncumulative voting rights and equal
rights with respect to dividends, assets and liquidation of such Portfolio.
Shares are fully paid and nonassessable when issued, and have no preemptive or
conversion rights. The Fund is not required to hold annual shareholders'
meetings and does not intend to do so. However, it will hold special meetings as
required or deemed desirable for such purposes as electing trustees, changing
fundamental policies or approving an investment advisory contract. If shares of
more than one Portfolio are outstanding, shareholders will vote by Portfolio and
not in the aggregate except when voting in the aggregate is required under the
1940 Act, such as for the election of trustees. The Board of Trustees may
authorize the issuance of additional Portfolios if deemed desirable, each with
its own investment objective, policies and restrictions. The Board of Trustees
may also authorize the establishment of a multiple class fund structure. This
would permit the Fund to issue classes that would differ as to the allocation of
certain expenses, such as distribution and administrative expenses, permitting,
among other things, different levels of services or methods of distribution
among various classes. Currently, the Fund does not offer a multi-class fund
structure, but it may adopt such a structure at a future date.
On November 3, 1989, KILICO Money Market Separate Account, KILICO Total Return
Separate Account, KILICO Income Separate Account and KILICO Equity Separate
Account (collectively, the Accounts), which were separate accounts organized as
open-end management investment companies, were restructured into one continuing
separate account (KILICO Variable Annuity Separate Account) in unit investment
trust form with subaccounts investing in corresponding Portfolios of the Fund.
An additional subaccount also was created to invest in the Fund's Government
Securities Portfolio. The restructuring and combining of the Accounts is
referred to as the Reorganization. In connection with the Reorganization,
approximately $550,000,000 in assets was added to the Fund (which at that time
consisted of approximately $6,000,000 in assets). Because the assets added to
the Fund as a result of the Reorganization were significantly greater than the
existing assets of the Fund, the per share financial highlights of the Money
Market, Total Return, High Yield and Growth Portfolios reflect the Accounts as
the continuing entities.
Information about the Portfolios' investment performance is contained in the
Fund's 1998 Annual Report to Shareholders, which may be obtained without charge
from the Fund.
Shareholder inquiries should be made by writing the Fund at the address shown on
the front cover .
The Fund is generally not required to hold meetings of its shareholders. Under
the Agreement and Declaration of Trust of the Fund ("Declaration of Trust"),
however, shareholder meetings will be held in connection with the following
45
<PAGE>
matters: (a) the election or removal of trustees if a meeting is called for such
purpose; (b) the adoption of any contract for which approval is required by the
1940 Act; (c) any termination of the 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 Fund or any Portfolio, establishing a
Portfolio, supplying any omission, curing any ambiguity or curing, correcting or
supplementing any defective or inconsistent provision thereof); (e) as to
whether a court action, preceding or claim should or should not be brought or
maintained derivatively or as a class action on behalf of the Fund or the
shareholders, to the same extent as the stockholders of a Massachusetts business
corporation; and (f) such additional matters as may be required by law, the
Declaration of Trust, the By-laws of the Fund, or any registration of the Fund
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.
Under current interpretations of the 1940 Act, the Fund expects that
Participating Insurance Company shareholders will offer VLI and VA contract
holders the opportunity to instruct them as to how Fund shares attributable to
such contracts will be voted with respect to the matters described above. The
separate prospectuses describing the VLI and VA contracts include additional
disclosure of how contract holder voting rights are computed.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for obligations of the
Fund. The Declaration of Trust, however, contains provisions designed to protect
shareholders from liability for acts or obligations of the Fund and requires
that notice of such provisions be given in each agreement, obligation or
instrument entered into or executed by the Fund or the trustees. Moreover, the
Declaration of Trust provides for indemnification out of Fund property for all
losses and expenses of any shareholders held personally liable for the
obligations of the Fund and the Fund 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 Scudder Kemper remote and not material since it is limited to
circumstances in which the provisions limiting liability are inoperative and the
Fund itself is unable to meet its obligations.
The Declaration of Trust further provides that the trustees will not be liable
for errors of judgment or mistakes of fact or law. The Declaration of Trust does
not protect a trustee against any liability to which he or she should otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties of a trustee. The Declaration of Trust permits
the Trust to purchase insurance against certain liabilities on behalf of the
trustees.
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<PAGE>
ADDITIONAL INFORMATION
Other Information
The CUSIP number of each Portfolio is as follows:
Kemper Money Market Portfolio 488439 10 0
Kemper Government Securities Portfolio 488439 30 8
Kemper Investment Grade Bond Portfolio 488439 40 7
Kemper High Yield Portfolio 488439 50 6
Kemper Total Return Portfolio 488439 60 5
Kemper Blue Chip Portfolio 488439 70 4
Kemper Index 500 Portfolio 488439 73 8
Kemper Growth Portfolio 488439 80 3
Kemper Aggressive Growth Portfolio 488439 88 6
Kemper Horizon 20+ Portfolio 488439 87 8
Kemper Horizon 10+ Portfolio 488439 86 0
Kemper Horizon 5 Portfolio 488439 85 2
Kemper Small Cap Growth Portfolio 488439 84 5
Kemper Technology Growth Portfolio 488439 83 7
Kemper Value+Growth Portfolio 488439 82 9
Kemper Contrarian Value Portfolio 488439 74 6
Kemper-Dreman High Return Equity Portfolio 488439 20 9
KVS Focused Large Cap Growth Portfolio 488439 72 0
KVS Growth And Income Portfolio 488439 69 6
KVS Growth Opportunities Portfolio 488439 71 2
Kemper Small Cap Value Portfolio 488439 81 1
Kemper-Dreman Financial Services Portfolio 488439 79 5
Kemper Global Income Portfolio 488439 78 7
Kemper Global Blue Chip Portfolio 488439 76 1
Kemper International Growth and Income Portfolio 488439 77 9
Kemper International Portfolio 488439 75 3
The Fund has a fiscal year ending December 31.
Many of the investment changes in the Fund will be made at prices different from
those prevailing at the time they may be reflected in a regular report to
shareholders of the Fund. These transactions will reflect investment decisions
made by the Adviser in light of the Fund's investment objectives and policies,
its other portfolio holdings and tax considerations, and should not be construed
as recommendations for similar action by other investors.
The Fund, 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 generally
held in an omnibus account.
The Portfolios' prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement and its amendments
which the Fund 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 Fund and the securities offered hereby. The Registration
Statement and its amendments, are available for inspection by the public at the
SEC in Washington, D.C.
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<PAGE>
FINANCIAL STATEMENTS
The financial statements, including the investment portfolios of each Portfolio,
together with the Report of Independent Accountants, Financial Highlights and
notes to financial statements in the Annual Report to the Shareholders of each
Portfolio dated December 31, 1998 are incorporated herein by reference and are
hereby deemed to be a part of this Statement of Additional Information.
Effective May 1, 1999, the Fund's Board of Trustees approved a name change of
the Fund from Investors Fund Series to Kemper Variable Series.
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APPENDIX -- RATINGS OF INVESTMENTS
COMMERCIAL PAPER RATINGS
A-1, A-2 and Prime-1, Prime-2 Commercial Paper Ratings
Commercial paper rated by Standard & Poor's Corporation has the following
characteristics: Liquidity ratios are adequate to meet cash requirements.
Long-term senior debt is rated "A" or better. The issuer has access to at least
two additional channels of borrowing. Basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances. Typically, the
issuer's industry is well established and the issuer has a strong position
within the industry. The reliability and quality of management are unquestioned.
Relative strength or weakness of the above factors determine whether the
issuer's commercial paper is rated A-1 or A-2.
The ratings Prime-1 and Prime-2 are the two highest commercial paper ratings
assigned by Moody's Investors Service, Inc. Among the factors considered by them
in assigning ratings are the following: (1) evaluation of the management of the
issuer; (2) economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain areas; (3)
evaluation of the issuer's products in relation to competition and customer
acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend
of earnings over a period of ten years; (7) financial strength of a parent
company and the relationships which exist with the issuer; and (8) recognition
by the management of obligations which may be present or may arise as a result
of public interest questions and preparations to meet such obligations. Relative
strength or weakness of the above factors determines whether the issuer's
commercial paper is rated Prime-1 or 2.
CORPORATE BONDS
Standard & Poor's Corporation Bond Ratings
AAA. Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. 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.
BB, B, CCC, CC, C. Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI. The rating CI is reserved for income bonds on which no interest is being
paid.
D. Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
Moody's Investors Service, Inc. Bond Ratings
Aaa. 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.
<PAGE>
Aa. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or 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.
A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B. 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.
Caa. Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca. Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C. 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.
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