Filed electronically with the Securities and Exchange Commission on
October 29, 1999
File No. 33-11802
File No. 811-5002
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /___/
Pre-Effective Amendment No. /___/
Post-Effective Amendment No. 29 /_X_/
and/or --
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /___/
Amendment No. 30 /_X_/
--
Kemper Variable Series
----------------------
(Exact Name of Registrant as Specified in Charter)
222 South Riverside Plaza, Chicago, Illinois 60606
--------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (312) 537-7000
--------------
Philip J. Collora, Vice President
Secretary
KEMPER VARIABLE SERIES
222 South Riverside Plaza
Chicago, Illinois 60606
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
/___/ Immediately upon filing pursuant to paragraph (b)
/___/ 60 days after filing pursuant to paragraph (a) (1)
/___/ 75 days after filing pursuant to paragraph (a) (2)
/_X_/ On October 29, 1999 pursuant to paragraph (b)
/___/ On _______________ pursuant to paragraph (a) (1)
/___/ On _______________ pursuant to paragraph (a) (2) of Rule 485
/___/ On _______________ pursuant to paragraph (a) (3) of Rule 485
If Appropriate, check the following box:
/___/ This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
<PAGE>
Kemper Variable Series
PROSPECTUS October 29, 1999
KEMPER VARIABLE SERIES
222 South Riverside Plaza, Chicago, Illinois 60606 (800) 778-1482
Kemper Variable Series offers a choice of 26 investment portfolios, three of
which are offered herein (each a "Portfolio"), to investors applying for certain
variable life insurance and variable annuity contracts offered by Participating
Insurance Companies.
The three offered Portfolios are:
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
KVS FOCUSED LARGE CAP GROWTH PORTFOLIO.........................................4
Investment objective...........................................................4
Main investment strategies.....................................................4
Other investments..............................................................5
Risk management strategies.....................................................5
Main risks.....................................................................5
KVS GROWTH AND INCOME PORTFOLIO................................................7
Investment objective...........................................................7
Main investment strategies.....................................................7
Other investments..............................................................8
Risk management strategies.....................................................8
Main risks.....................................................................8
KVS GROWTH OPPORTUNITIES PORTFOLIO............................................10
Investment objective..........................................................10
Main investment strategies....................................................10
Other investments.............................................................11
Risk management strategies....................................................11
Main risks....................................................................11
ABOUT YOUR INVESTMENT.........................................................13
INVESTMENT MANAGER............................................................13
PURCHASE AND REDEMPTION.......................................................20
DISTRIBUTIONS AND TAXES.......................................................21
2
<PAGE>
FUND INVESTMENT CONCEPT
Kemper Variable Series (the "Fund") is an open-end, registered management
investment company, currently comprising 26 portfolios, three of which are
offered herein. 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
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.
4
<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 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
5
<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.
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.
6
<PAGE>
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.
7
<PAGE>
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.
An investment in the common stock of a company represents a proportionate
ownership interest in that company. Therefore, the Portfolio participates in the
success
8
<PAGE>
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.
9
<PAGE>
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.
10
<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).
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.
11
<PAGE>
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.
12
<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.
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%
13
<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
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. The composite data presented below has been audited by
an internationally recognized accounting firm. 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. 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.
14
<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:
'89 33.82
'90 -9.32
'91 37.44
'92 9.22
'93 17.1
'94 -1.74
'95 27.26
'96 23.57
'97 37.53
'98 37.11
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%.
15
<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
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%
16
<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
- ---------------------------------------------------------------------------------------
KVS Focused Large Cap Growth Portfolio
- --------------------------------------------------------------------------------------
<S> <C> <C>
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.
- --------------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------------
</TABLE>
17
<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.
18
<PAGE>
SHARE PRICE
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.
19
<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.
No fee is charged the shareholders when they purchase or redeem Portfolio
shares.
20
<PAGE>
DISTRIBUTIONS AND TAXES
Dividends and capital gains distributions
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.
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.
21
<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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
By Phone: In Person:
- --------------------------------------------------------------------------------------
<S> <C>
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)
- --------------------------------------------------------------------------------------
</TABLE>
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.
22
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
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, three of
which are offered herein (each a "Portfolio"), to investors applying for certain
variable life insurance and variable annuity contracts offered by Participating
Insurance Companies.
The three offered portfolios are:
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"
<PAGE>
TABLE OF CONTENTS
Page
INVESTMENT RESTRICTIONS.......................................................3
INVESTMENT POLICIES AND TECHNIQUES............................................4
PORTFOLIO TRANSACTIONS.......................................................19
INVESTMENT MANAGER AND DISTRIBUTOR...........................................21
PURCHASE AND REDEMPTION OF SHARES............................................24
OFFICERS AND TRUSTEES........................................................24
NET ASSET VALUE..............................................................27
DIVIDENDS AND TAXES..........................................................28
SHAREHOLDER RIGHTS...........................................................28
APPENDIX -- RATINGS OF INVESTMENTS
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 is classified as a diversified open-end management investment
company.
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) concentrate its investments in a particular industry, as that term is
used in the 1940 Act, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
(4) 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.
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 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;
3
<PAGE>
(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; and
(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).
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.
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 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 may deal in options on securities, which
options may be listed for trading on a national securities exchange or traded
over-the-counter. 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 Portfolios may also purchase and sell
foreign currency options.
The 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.
Each Portfolio may write (sell) covered call options so long as they own
securities or other assets that are acceptable for escrow purposes. Also, the
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.
4
<PAGE>
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
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 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.
5
<PAGE>
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.
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
6
<PAGE>
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.
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 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 Portfolios may also engage in foreign currency
financial futures transactions. The 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
7
<PAGE>
if it could not close out its futures position because of an illiquid secondary
market. If any 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 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
8
<PAGE>
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 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 Portfolios may invest a limited portion of
their assets 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
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
9
<PAGE>
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 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 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.
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 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
10
<PAGE>
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 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.
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 investment manager will normally seek to select currencies
for sale under a forward contract for a "cross-hedge" that would reflect a price
movement correlation of .8 or higher with respect to the currency being hedged
(1 reflects a perfect correlation, 0 reflects a random relationship and -1
reflects a diametrically opposite correlation). There is, of course, no
assurance that any specific correlation can be maintained for any specific
transaction. See "Foreign Currency Transactions" under "Investment Techniques"
in the prospectus. 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. A
Portfolio generally will not enter into a forward contract with a term longer
than one year.
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.
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
11
<PAGE>
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 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.
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,
12
<PAGE>
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 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 currently limit investment in foreign
securities not publicly traded in the United States to 25% of their total
assets. 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 Growth And Income Portfolio and the Growth
Opportunities Portfolio may each 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."
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 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 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.
13
<PAGE>
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 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.
14
<PAGE>
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.
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
15
<PAGE>
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 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 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
16
<PAGE>
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.
Additional Investment Information. 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. 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.
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% of the Portfolio's net assets, valued at the time
of the transactions, would be invested in such securities.
Short Sales Against-the-Box. The Growth And Income and Growth Opportunities
Portfolios may each 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.
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.
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 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.
17
<PAGE>
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
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, the 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.
18
<PAGE>
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 managed by Scudder Kemper. In
effecting transactions in over-the-counter securities, orders are placed with
the
19
<PAGE>
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 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
20
<PAGE>
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.
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 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.
21
<PAGE>
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 Portfolios became effective on the date of the commencement
of operations, October 29, 1999.
The Portfolios each pay the investment manager a graduated investment management
fee based on the average daily net assets of the Portfolio, payable monthly, at
1/12 of 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%
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.
22
<PAGE>
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 1/12 of 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 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 1/12 of the annual rates shown below:
Average Daily Net Assets of a Portfolio 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; however, subject to Board approval, at
some time in the future, SFAC may seek payment for its services to the
Portfolios under its agreement with such Portfolios.
23
<PAGE>
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. The 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 agent and dividend-paying agent for each 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. Dechert Price & Rhoads, Ten Post Office Square South, Boston,
Massachusetts, serves as legal counsel to the 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.
24
<PAGE>
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 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.
25
<PAGE>
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.
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
26
<PAGE>
** 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.
Scudder Kemper will be the sole shareholder of the 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.
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.
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.
27
<PAGE>
DIVIDENDS AND TAXES
Dividends. 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.
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
28
<PAGE>
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
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.
29
<PAGE>
30
<PAGE>
ADDITIONAL INFORMATION
Other Information
The CUSIP number of each Portfolio is as follows:
KVS Focused Large Cap Growth Portfolio 488439 72 0
KVS Growth And Income Portfolio 488439 69 6
KVS Growth Opportunities Portfolio 488439 71 2
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 constru
ed 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 sha res 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 availa ble for inspection by t he public at
the SEC in Washington, D.C.
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.
31
<PAGE>
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.
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
32
<PAGE>
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.
33
<PAGE>
KEMPER VARIABLE SERIES
PART C. OTHER INFORMATION
<TABLE>
<CAPTION>
Item 23. Exhibits.
-------- ---------
<S> <C> <C>
(a)(1) Amended and Restated Agreement and Declaration of Trust, dated April 24,
1998.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement)
(a)(2)
Amendment to the Declaration of Trust, dated March 31, 1999.
(Incorporated by reference to Post-Effective Amendment No. 24 to the
Registration Statement, filed on April 29, 1999)
(b) By-laws.
(Incorporated by reference to Post-Effective Amendment No. 14 to the
Registration Statement, filed on April 27, 1995)
(c) Text of Share Certificate.
(Incorporated by reference to Post-Effective Amendment No. 14 to the
Registration Statement, filed on April 27, 1995)
(d)(1) Investment Management Agreement (IMA) between the Registrant, on behalf of
Kemper Money Market Portfolio, and Scudder Kemper Investments, Inc., dated
September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
(d)(2) Investment Management Agreement (IMA) between the Registrant, on behalf of
Kemper High Yield Portfolio, and Scudder Kemper Investments, Inc., dated
September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
(d)(3) Investment Management Agreement (IMA) between the Registrant, on behalf of
Kemper Growth Portfolio, and Scudder Kemper Investments, Inc., dated
September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
(d)(4) Investment Management Agreement (IMA) between the Registrant, on behalf of
Kemper Government Securities Portfolio, and Scudder Kemper Investments,
Inc., dated September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
(d)(5) Investment Management Agreement (IMA) between the Registrant, on behalf of
Kemper International Portfolio, and Scudder Kemper Investments, Inc., dated
September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
2
<PAGE>
Registration Statement, filed on February 12, 1999)
(d)(6) Investment Management Agreement (IMA) between the Registrant, on behalf of
Kemper Small Cap Growth Portfolio, and Scudder Kemper Investments, Inc.,
dated September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
(d)(7) Investment Management Agreement (IMA) between the Registrant, on behalf of
Kemper Investment Grade Bond Portfolio, and Scudder Kemper Investments,
Inc., dated September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
(d)(8) Investment Management Agreement (IMA) between the Registrant, on behalf of
Kemper Value+Growth Portfolio, and Scudder Kemper Investments, Inc., dated
September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
(d)(9) Investment Management Agreement (IMA) between the Registrant, on behalf of
Kemper Horizon 20+ Portfolio, and Scudder Kemper Investments, Inc., dated
September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
(d)(10) Investment Management Agreement (IMA) between the Registrant, on behalf of
Kemper Horizon 10+ Portfolio, and Scudder Kemper Investments, Inc., dated
September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
(d)(11) Investment Management Agreement (IMA) between the Registrant, on behalf of
Kemper Horizon 5 Portfolio, and Scudder Kemper Investments, Inc., dated
September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
(d)(12) Investment Management Agreement (IMA) between the Registrant, on behalf of
Kemper Contrarian Value Portfolio, and Scudder Kemper Investments, Inc.,
dated September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
3
<PAGE>
(d)(13) Investment Management Agreement (IMA) between the Registrant, on behalf of
Kemper Small Cap Value Portfolio, and Scudder Kemper Investments, Inc.,
dated September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
(d)(14) Investment Management Agreement (IMA) between the Registrant, on behalf of
Kemper Blue Chip Portfolio, and Scudder Kemper Investments, Inc., dated
September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
(d)(15) Investment Management Agreement (IMA) between the Registrant, on behalf of
Kemper Global Income Portfolio, and Scudder Kemper Investments, Inc., dated
September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
(d)(16) Investment Management Agreement (IMA) between the Registrant, on behalf of
Kemper-Dreman High Return Equity Portfolio, and Scudder Kemper Investments,
Inc., dated September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
(d)(17) Investment Management Agreement (IMA) between the Registrant, on behalf of
Kemper-Dreman Financial Services Portfolio, and Scudder Kemper Investments,
Inc., dated September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
(d)(18) Investment Management Agreement (IMA) between the Registrant, on behalf of
Kemper Global Blue Chip Portfolio, and Scudder Kemper Investments, Inc.,
dated September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
(d)(19) Investment Management Agreement (IMA) between the Registrant, on behalf of
Kemper International Growth and Income Portfolio, and Scudder Kemper
Investments, Inc., dated September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
(d)(20) Investment Management Agreement (IMA) between the Registrant, on behalf of
Kemper Total Return Portfolio, and Scudder Kemper Investments, Inc., dated
September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
4
<PAGE>
(d)(21) Investment Management Agreement (IMA) between the Registrant, on behalf of
Kemper Aggressive Growth Portfolio, and Scudder Kemper Investments, Inc.,
dated May 1, 1999.
(Incorporated by reference to Post-Effective Amendment No. 24 to the
Registration Statement, filed on April 29, 1999)
(d)(22) Investment Management Agreement (IMA) between the Registrant, on behalf of
Kemper Technology Portfolio, and Scudder Kemper Investments, Inc., dated May
1, 1999.
(Incorporated by reference to Post-Effective Amendment No. 24 to the
Registration Statement, filed on April 29, 1999)
(d)(23) Investment Management Agreement (IMA) between the Registrant, on behalf of
Kemper Index 500 Portfolio, and Scudder Kemper Investments, Inc., dated
September 1, 1999.
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
(e)(1) Underwriting Agreement between Investors Fund Series and Kemper
Distributors, Inc., dated August 1, 1998.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
(e)(2) Underwriting Agreement between Investors Fund Series and Kemper
Distributors, Inc., dated September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
(f) Inapplicable.
(g)(1) Custody Agreement between the Registrant, on behalf of Kemper Money Market
Portfolio, Kemper Total Return Portfolio, Kemper High Yield Portfolio,
Kemper Growth Portfolio, Kemper Government Securities Portfolio, Kemper
International Portfolio, Kemper Small Cap Growth Portfolio, Kemper
Investment Grade Bond Portfolio, Kemper Value+Growth Portfolio, Kemper
Horizon 20+ Portfolio, Kemper Horizon 10+ Portfolio, Kemper Horizon 5
Portfolio, Kemper Contrarian Portfolio, Kemper Small Cap Value Portfolio,
Kemper Blue Chip Portfolio and Kemper Global Income Portfolio, and Investors
Fiduciary Trust Company, dated March 1, 1995.
(Incorporated herein by reference to Post-Effective Amendment No. 14 to the
Registration Statement, filed on April 27, 1995.)
(g)(2) Foreign Custodian Agreement between Chase Manhattan Bank and Kemper
Investors Fund, dated January 2, 1990.
(Incorporated herein by reference to Post-Effective Amendment No. 14 to the
Registration Statement, filed on April 27, 1995.)
(g)(3) Custody Agreement between the Registrant, on behalf of Kemper-Dreman High
Return Equity Portfolio and Kemper-Dreman Financial Services Portfolio, and
State Street Bank and Trust Company, dated April 24, 1998.
5
<PAGE>
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
(g)(4) Custody Agreement between the Registrant, on behalf of Kemper International
Growth and Income Portfolio and Kemper Global Blue Chip Portfolio, and Brown
Brothers Harriman & Co., dated May 1, 1998.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
(g)(5) Addendum to the Custody Agreement between the Registrant, on behalf of
Kemper Aggressive Growth Portfolio and Kemper Technology Growth Portfolio,
and State Street Bank and Trust Company, dated May 1, 1999.
(Incorporated herein by reference to Post-Effective Amendment No. 24 to the
Registration Statement, filed on April 29, 1999.)
(h)(1) Agency Agreement between Kemper Investors Fund and Investors Fiduciary Trust
Company, dated March 24, 1987.
(Incorporated herein by reference to Post-Effective Amendment No. 14 to the
Registration Statement, filed on April 27, 1995.)
(h)(2) Supplement to Agency Agreement.
(Incorporated by reference to Post-Effective Amendment No. 24 to the
Registration Statement, filed on April 29, 1999)
(h)(3) Fund Accounting Services Agreements between the Registrant, on behalf of
Kemper Money Market Portfolio, Kemper Total Return Portfolio, Kemper High
Yield Portfolio, Kemper Growth Portfolio, Kemper Government Securities
Portfolio, Kemper International Portfolio, Kemper Small Cap Growth
Portfolio, Kemper Investment Grade Bond Portfolio, Kemper Value+Growth
Portfolio, Kemper Horizon 20+ Portfolio, Kemper Horizon 10+ Portfolio,
Kemper Horizon 5 Portfolio, Kemper Value Portfolio, Kemper Small Cap Value
Portfolio, Kemper Blue Chip Portfolio and Kemper Global Income Portfolio,
and Scudder Fund Accounting Corporation, dated December 31, 1997.
(Incorporated herein by reference to Post-Effective Amendment No. 21 to the
Registration Statement, filed on March 26, 1998.)
(h)(4) Fund Accounting Services Agreements between the Registrant, on behalf of
Kemper-Dreman High Return Equity Portfolio, Kemper-Dreman Financial Services
Portfolio, Kemper Global Blue Chip Portfolio and Kemper International Growth
and Income Portfolio, and Scudder Fund Accounting Corporation, dated May 1,
1998.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
(h)(5) Fund Accounting Services Agreement between the Registrant, on behalf of
Kemper Aggressive Growth Portfolio, and Scudder Fund Accounting Corporation,
dated May 1, 1999.
(Incorporated by reference to Post-Effective Amendment No. 24 to the
Registration Statement, filed on April 29, 1999)
(h)(6) Fund Accounting Services Agreement between the Registrant, on behalf of
Kemper Technology Growth Portfolio, and Scudder Fund Accounting
6
<PAGE>
Corporation, dated May 1, 1999.
(Incorporated by reference to Post-Effective Amendment No. 24 to the
Registration Statement, filed on April 29, 1999)
(h)(7) Subadvisory Agreement between Scudder Kemper Investments, Inc. and Dreman
Value Management, L.L.C., dated September 7, 1998, for Kemper-Dreman High
Return Equity Portfolio.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
(h)(8) Subadvisory Agreement between Scudder Kemper Investments, Inc., on behalf of
Investors Fund Series, and Dreman Value Management, L.L.C., dated September
7, 1998, for Kemper-Dreman Financial Services Portfolio.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
(h)(9) Subadvisory Agreement between Scudder Kemper Investments, Inc. and Scudder
Investments (U.K.) Limited, dated September 7, 1998, for Kemper Global
Income Portfolio.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
(h)(10) Subadvisory Agreement between Scudder Kemper Investments, Inc. and Scudder
Investments (U.K.) Limited, dated September 7, 1998, for Kemper
International Portfolio.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
(h)(11) Subadvisory Agreement between Scudder Kemper Investments, Inc. and Banker
Trust Company, dated September 1, 1999, for Kemper Index 500 Portfolio.
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
(h)(12) Fund Accounting Services Agreement between the Registrant, on behalf of
Kemper Index 500 Portfolio, and Scudder Fund Accounting Corporation, dated
September 1, 1999.
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
(h)(13) Amended and Restated Establishment and Designation of Series, on behalf of
Kemper Aggressive Growth Portfolio and Kemper Technology Growth Portfolio,
dated March 31, 1999.
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
(h)(14) Amended and Restated Establishment and Designation of Series, on behalf of
Kemper Index 500 Portfolio, dated July 14, 1999.
(Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement.)
(h)(15) Amended and Restated Establishment and Designation of Series, on behalf of
KVS Growth Opportunities Portfolio, KVS Growth And Income Portfolio
7
<PAGE>
and KVS Focused Large Cap Growth Portfolio dated September 29, 1999 is
filed herein.
(i) (1) Opinion of Counsel from Vedder, Price, Kaufman & Kammholz is filed herein.
(2) Opinion of Counsel from Dechert Price & Rhoads is filed herein.
(j) Inapplicable.
(k) Inapplicable.
(l) Inapplicable.
(m) Inapplicable.
(n) Inapplicable.
(o) Inapplicable.
</TABLE>
Item 24. Persons Controlled by or under Common Control with Fund.
- -------- --------------------------------------------------------
None
Item 25. Indemnification.
- -------- ----------------
Article VIII of the Registrant's Agreement and Declaration of Trust
(Exhibit 23(a) hereto, which is incorporated herein by reference) provides in
effect that the Registrant will indemnify its officers and trustees under
certain circumstances. However, in accordance with Section 17(h) and 17(i) of
the Investment Company Act of 1940 and its own terms, said Article of the
Agreement and Declaration of Trust does not protect any person against any
liability to the Registrant or its shareholders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers, and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer, or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such trustee, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question as to whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
On June 26, 1997, Zurich Insurance Company ("Zurich"), ZKI Holding
Corp. ("ZKIH"), Zurich Kemper Investments, Inc. ("ZKI"), Scudder, Stevens &
Clark, Inc. ("Scudder") and the representatives of the beneficial owners of the
capital stock of Scudder ("Scudder Representatives") entered into a transaction
agreement ("Transaction Agreement") pursuant to which Zurich became the majority
stockholder in Scudder with an approximately 70% interest, and ZKI was combined
with Scudder ("Transaction"). In connection with the trustees' evaluation of the
Transaction, Zurich agreed to indemnify the Registrant and the trustees who were
not interested persons of ZKI or Scudder (the "Independent Trustees") for and
against any liability and expenses based upon any action or omission by the
Independent Trustees in connection with their consideration of and action with
respect to the Transaction. In addition, Scudder has agreed to indemnify the
Registrant and the Independent Trustees for and against any liability and
expenses
8
<PAGE>
based upon any misstatements or omissions
by Scudder to the Independent Trustees in connection with their consideration of
the Transaction.
Item 26. Business and Other Connections of Investment Adviser
- -------- ----------------------------------------------------
Scudder Kemper Investments, Inc. has stockholders and
employees who are denominated officers but do not as such have
corporation-wide responsibilities. Such persons are not
considered officers for the purpose of this Item 26.
<TABLE>
<CAPTION>
Business and Other Connections of Board
Name of Directors of Registrant's Adviser
---- ------------------------------------
<S> <C>
Stephen R. Beckwith Treasurer and Chief Financial Officer, Scudder Kemper Investments, Inc.**
Vice President and Treasurer, Scudder Fund Accounting Corporation*
Director, Scudder Stevens & Clark Corporation**
Director and Chairman, Scudder Defined Contribution Services, Inc.**
Director and President, Scudder Capital Asset Corporation**
Director and President, Scudder Capital Stock Corporation**
Director and President, Scudder Capital Planning Corporation**
Director and President, SS&C Investment Corporation**
Director and President, SIS Investment Corporation**
Director and President, SRV Investment Corporation**
Lynn S. Birdsong Director and Vice President, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark (Luxembourg) S.A.#
William H. Bolinder Director, Scudder Kemper Investments, Inc.**
Member, Group Executive Board, Zurich Financial Services, Inc.##
Chairman, Zurich-American Insurance Company o
Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
Director, ZKI Holding Corporation xx
Gunther Gose Director, Scudder Kemper Investments, Inc.**
CFO and Member, Group Executive Board, Zurich Financial Services, Inc.##
CEO/Branch Offices, Zurich Life Insurance Company##
Rolf Huppi Director, Chairman of the Board, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
Director, Chairman of the Board, Zurich Holding Company of America o
Director, ZKI Holding Corporation xx
Kathryn L. Quirk Chief Legal Officer, Chief Compliance Officer and Secretary, Scudder Kemper
Investments, Inc.**
Director, Senior Vice President & Assistant Clerk, Scudder Investor Services, Inc.*
Director, Vice President & Secretary, Scudder Fund Accounting Corporation*
Director, Vice President & Secretary, Scudder Realty Holdings Corporation*
Director & Assistant Clerk, Scudder Service Corporation*
Director, SFA, Inc.*
Vice President, Director & Assistant Secretary, Scudder Precious Metals, Inc.***
Director, Scudder, Stevens & Clark Japan, Inc.***
Director, Vice President and Secretary, Scudder, Stevens & Clark of Canada, Ltd.***
9
<PAGE>
Director, Vice President and Secretary, Scudder Canada Investor Services Limited***
Director, Vice President and Secretary, Scudder Realty Advisers, Inc. x
Director and Secretary, Scudder, Stevens & Clark Corporation**
Director and Secretary, Scudder, Stevens & Clark Overseas Corporation oo
Director and Secretary, SFA, Inc.*
Director, Vice President and Secretary, Scudder Defined Contribution Services, Inc.**
Director, Vice President and Secretary, Scudder Capital Asset Corporation**
Director, Vice President and Secretary, Scudder Capital Stock Corporation**
Director, Vice President and Secretary, Scudder Capital Planning Corporation**
Director, Vice President and Secretary, SS&C Investment Corporation**
Director, Vice President and Secretary, SIS Investment Corporation**
Director, Vice President and Secretary, SRV Investment Corporation**
Director, Vice President and Secretary, Scudder Brokerage Services, Inc.*
Director, Korea Bond Fund Management Co., Ltd.+
Cornelia M. Small Director and Vice President, Scudder Kemper Investments, Inc.**
Edmond D. Villani Director, President and Chief Executive Officer, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc.###
President and Director, Scudder, Stevens & Clark Overseas Corporation oo
President and Director, Scudder, Stevens & Clark Corporation**
Director, Scudder Realty Advisors, Inc.x
Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy of Luxembourg
</TABLE>
* Two International Place, Boston, MA
x 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C.
Luxembourg B 34.564
*** Toronto, Ontario, Canada
oo 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
xx 222 S. Riverside, Chicago, IL
o Zurich Towers, 1400 American Ln., Schaumburg, IL
+ P.O. Box 309, Upland House, S. Church St., Grand Cayman,
British West Indies
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
Item 27. Principal Underwriters.
- -------- -----------------------
(a)
Kemper Distributors, Inc. acts as principal underwriter of the
Registrant's shares and acts as principal underwriter of the Kemper
Funds.
(b)
Information on the officers and directors of Kemper Distributors, Inc.,
principal underwriter for the Registrant is set forth below. The
principal business address is 222 South Riverside Plaza, Chicago,
Illinois 60606.
<TABLE>
<CAPTION>
(1) (2) (3)
Positions and Offices with Positions and
Name Kemper Distributors, Inc. Offices with Registrant
---- ------------------------- -----------------------
10
<PAGE>
Positions and Offices with Positions and
Name Kemper Distributors, Inc. Offices with Registrant
---- ------------------------- -----------------------
<S> <C> <C> <C>
James L. Greenawalt President None
Thomas W. Littauer Director, Chief Executive Officer Trustee and Vice President
Kathryn L. Quirk Director, Secretary, Chief Legal Vice President
Officer and Vice President
James J. McGovern Chief Financial Officer and Vice None
President
Linda J. Wondrack Vice President and Chief Compliance Vice President
Officer
Paula Gaccione Vice President None
Michael E. Harrington Vice President None
Robert A. Rudell Vice President None
William M. Thomas Vice President None
Elizabeth C. Werth Vice President Assistant Secretary
Todd N. Gierke Assistant Treasurer None
Philip J. Collora Assistant Secretary Vice President and Secretary
Paul J. Elmlinger Assistant Secretary None
Diane E. Ratekin Assistant Secretary None
Mark S. Casady Director, Vice Chairman President
Stephen R. Beckwith Director None
</TABLE>
(c) Not applicable
Item 28. Location of Accounts and Records
- -------- --------------------------------
Accounts, books and other documents are maintained at the offices of
the Registrant, the offices of Registrant's investment adviser, Scudder Kemper
Investments, Inc., 222 South Riverside Plaza, Chicago, Illinois 60606, at the
offices of the Registrant's principal underwriter, Kemper Distributors, Inc.,
222 South Riverside Plaza, Chicago, Illinois 60606 or, in the case of records
concerning custodial functions, at the offices of the custodian, Investors
Fiduciary Trust Company ("IFTC"), 801 Pennsylvania Avenue, Kansas City, Missouri
64105 or, in the case of records concerning transfer agency functions, at the
offices of IFTC and of the shareholder service agent, Kemper Service Company,
811 Main Street, Kansas City, Missouri 64105.
Item 29. Management Services.
- -------- --------------------
Inapplicable.
11
<PAGE>
Item 30. Undertakings.
- -------- -------------
Inapplicable.
12
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Chicago and State of Illinois on the 28th day of
October, 1999.
By /s/Mark S. Casady
-------------------------------
Mark S. Casady, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on October 28, 1999 on behalf of
the following persons in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/Mark S. Casady
- ------------------------------------------------------------------------- President
Mark S. Casady
/s/Thomas W. Littauer* Chairman and Trustee
- -------------------------------------------------------------------------
/s/James E. Akins* Trustee
- -------------------------------------------------------------------------
/s/Arthur R. Gottschalk* Trustee
- -------------------------------------------------------------------------
/s/Frederick T. Kelsey* Trustee
- -------------------------------------------------------------------------
/s/Fred B. Renwick* Trustee
- -------------------------------------------------------------------------
/s/James R. Edgar* Trustee
- -------------------------------------------------------------------------
Trustee
- -------------------------------------------------------------------------
/s/John G. Weithers* Trustee
- -------------------------------------------------------------------------
/s/John R. Hebble Treasurer
- -------------------------------------------------------------------------
John R. Hebble
</TABLE>
*Philip J. Collara signs this document pursuant to powers of attorney filed with
Post-Effective Amendment No. 21 to the Registration Statement on Form N-1A filed
March 26, 1998 and Post-Effective Amendment No. 29 to the Registration Statement
on Form N-1A filed herein.
/s/Philip J. Collora
----------------------------------
Philip J. Collora
<PAGE>
LIMITED POWER OF ATTORNEY
-------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Caroline Pearson, Maureen E. Kane, and Philip J. Collora and any of
them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities to sign the Registration Statement of Kemper Variable
Series, a Massachusetts business trust, on Form N-1A under the Securities Act of
1933, as amended, and the Investment Company Act of 1940, as amended, and any or
all amendments thereto, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully as all intents and purposes as he
might or could do in person, hereby ratifying and confirming all said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
DATED: May 27, 1999
-------
/s/James R. Edgar
------------------------------
James R. Edgar
Trustee
<PAGE>
LIMITED POWER OF ATTORNEY
-------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Caroline Pearson, Maureen E. Kane, and Philip J. Collora and any of
them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities to sign the Registration Statement of Kemper Variable
Series, a Massachusetts business trust, on Form N-1A under the Securities Act of
1933, as amended, and the Investment Company Act of 1940, as amended, and any or
all amendments thereto, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully as all intents and purposes as he
might or could do in person, hereby ratifying and confirming all said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
DATED: June 30, 1999
-------------
/s/Thomas W. Littauer
------------------------------
Thomas W. Littauer
Trustee
<PAGE>
File No. 33-11802
File No. 811-5002
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 29
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 30
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
KEMPER VARIABLE SERIES
<PAGE>
KEMPER VARIABLE SERIES
EXHIBIT INDEX
Exhibit (h)(15)
Exhibit (i)(1)
Exhibit (i)(2)
14
Exhibit (h)(15)
KEMPER VARIABLE SERIES
Amended and Restated Establishment and Designation
of Series of Shares of Beneficial Interest
The undersigned, being a majority of the Trustees of Kemper Variable
Series, a Massachusetts business trust (the "Trust"), acting pursuant to Article
III, Section 1 of the Trust's Declaration of Trust dated January 22, 1987, as
amended (the "Declaration of Trust"), having heretofore established and
designated the shares of beneficial interest of the Trust into twenty-three
separate series (each individually a "Portfolio" or collectively the
"Portfolios"), hereby establish and designate three additional Portfolios, to
have the following special and relative rights:
1. The Portfolios heretofore designated are as follows:
Kemper Aggressive Growth Portfolio
Kemper Blue Chip Portfolio
Kemper Contrarian Value Portfolio
Kemper Global Blue Chip Portfolio
Kemper Global Income Portfolio
Kemper Government Securities Portfolio
Kemper Growth Portfolio
Kemper High Yield Portfolio
Kemper Horizon 5 Portfolio
Kemper Horizon 10+ Portfolio
Kemper Horizon 20+ Portfolio
Kemper Index 500 Portfolio
Kemper International Growth and Income Portfolio
Kemper International Portfolio
Kemper Investment Grade Bond Portfolio
Kemper Money Market Portfolio
Kemper Small Cap Growth Portfolio
Kemper Small Cap Value Portfolio
Kemper Technology Growth Portfolio
Kemper Total Return Portfolio
Kemper Value+Growth Portfolio
Kemper-Dreman Financial Services Portfolio
Kemper-Dreman High Return Equity Portfolio
2. The additional Portfolios designated hereby are:
KVS Growth Opportunities Portfolio
KVS Growth And Income Portfolio
KVS Focused Large Cap Growth Portfolio
3. Each Portfolio shall consist of an unlimited number of Shares. Each
Portfolio shall be authorized to hold cash and invest in securities and
instruments and use investment techniques as described in the Trust's
registration statement under the Securities Act of 1933, as
<PAGE>
amended from time to time. Each share of beneficial interest of each Portfolio
("share") shall be redeemable as provided in the Declaration of Trust, shall be
entitled to one vote (or fraction thereof with respect to a fractional share) on
matters on which shares of that Portfolio shall be entitled to vote and shall
represent a pro rata beneficial interest in the assets allocated to that
Portfolio. The proceeds of sales of shares of a Portfolio, together with any
income and gain thereon, less any diminution or expenses thereof, shall
irrevocably belong to that Portfolio, unless otherwise required by law. Each
share of a Portfolio shall be entitled to receive its pro rata share of net
assets of that Portfolio upon liquidation of that Portfolio. Upon redemption of
a shareholder's shares or indemnification for liabilities incurred by reason of
a shareholder's being or having been a shareholder of a Portfolio, or the entry
of a final judgment in favor of a shareholder by reason of being or having been
a shareholder of a Portfolio, such shareholder shall be paid solely out of the
property of that Portfolio.
4. Shareholders of the Trust shall vote by individual series and not in
the aggregate on any matter submitted to a vote of Shareholders, except to the
extent otherwise required by the Investment Company Act of 1940, as amended (the
"1940 Act"), or when the Trustees have determined that the matter affects only
the interests of one or more series or classes, in which case only the
shareholders of such series or classes shall be entitled to vote thereon. Any
matter shall be deemed to have been effectively acted upon with respect to a
Portfolio if acted upon as provided in Rule 18f-2 under the 1940 Act or any
successor rule and in the Declaration of Trust. The Trustees of the Trust may,
in conjunction with the establishment of any additional series or class of
shares of the Trust, establish or reserve the right to establish conditions
under which the several series or classes shall have separate voting rights or
no voting rights.
5. The shares of beneficial interest of the Portfolios outstanding, and
the assets and liabilities of such Portfolios shown on the books of the Trust as
of the close of business on the date of the filing of this Instrument with the
Secretary of the Commonwealth of Massachusetts shall be unaffected by this
instrument.
6. The assets and liabilities of the Trust existing on the date hereof
shall, except as provided below, shall be allocated to the Portfolios listed in
paragraph 1 and, hereafter, the assets and liabilities of the Trust shall be
allocated among the Portfolios, now or hereafter created, as set forth in
Article III, Section 3 and Article IV, Section 3 of the Declaration of Trust,
except as provided below.
(a) Costs incurred by the Trust in connection with the
organization, registration and public offering of shares
of KVS Growth Opportunities Portfolio, KVS Growth And
Income Portfolio and KVS Focused Large Cap Growth
Portfolio shall be allocated to each such Portfolio unless
assumed by another party or otherwise required by
applicable law or generally accepted accounting
principles.
(b) The liabilities, expenses, costs, charges or reserves of
the Trust which are not readily identifiable as belonging
to any particular Portfolio shall be allocated among the
Portfolios and any Series hereafter established on the
basis of its relative average daily net assets.
2
<PAGE>
(c) The Trustees may from time to time in particular cases
make specific allocations of assets or liabilities to a
Portfolio.
7. The Trustees (including any successor Trustees) shall have the right
at any time and from time to time to reallocate assets and expenses or to change
the designation of a Portfolio (or any class thereof) now or hereafter created,
or to otherwise change the special and relative rights of a Portfolio (or any
class thereof) provided that such change shall not adversely affect the rights
of Shareholders of the Portfolios.
8. Except as otherwise provided in this instrument, the foregoing shall
be effective upon the filing of this instrument with the Secretary of The
Commonwealth of Massachusetts.
/s/James E. Akins
---------------------------------
James E. Akins, Trustee
/s/James R. Edgar
---------------------------------
James R. Edgar, Trustee
/s/Arthur R. Gottschalk
---------------------------------
Arthur R. Gottschalk, Trustee
/s/Frederick T. Kelsey
---------------------------------
Frederick T. Kelsey, Trustee
/s/Thomas W. Littauer
---------------------------------
Thomas W. Littauer, Trustee
/s/Fred B. Renwick
---------------------------------
Fred B. Renwick, Trustee
/s/John G. Weithers
---------------------------------
John G. Weithers, Trustee
Dated: September 29, 1999
3
Exhibit (i)(1)
October 27, 1999
Kemper Variable Series
222 South Riverside Plaza
Chicago, Illinois 60606
Ladies and Gentlemen:
Reference is made to Post-Effective Amendment No. 29 to the
Registration Statement on Form N-1A under the Securities Act of 1933 being filed
by Kemper Variable Series (the "Fund") in connection with the proposed public
offering of units of beneficial interest, no par value ("Shares"), in the Kemper
Money Market Portfolio, Kemper Total Return Portfolio, Kemper High Yield
Portfolio, Kemper Growth Portfolio, Kemper Government Securities Portfolio,
Kemper International Portfolio, 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 20+
Portfolio, Kemper Horizon 10+ Portfolio, Kemper Horizon 5 Portfolio, Kemper Blue
Chip Portfolio, Kemper Global Income Portfolio, Kemper-Dreman High Return Equity
Portfolio, Kemper Aggressive Growth Portfolio, and Kemper Technology Growth
Portfolio (each, a "Portfolio" and collectively, the "Portfolios").
We have acted as counsel to the Fund, and in such capacity are
familiar with the Fund's organization and have counseled the Fund regarding
various legal matters. We have examined such Fund records and other documents
and certificates as we have considered necessary or appropriate for the purposes
of this opinion. In our examination of such materials, we have assumed the
genuineness of all signatures and the conformity to original documents of all
copies submitted to us.
Based upon the foregoing and assuming that the Fund's Amended and
Restated Agreement and Declaration of Trust dated April 24, 1998, as amended by
the Certificate of Amendment of Declaration of Trust adopted on March 31, 1999
and effective as of May 1, 1999, and the By-Laws of the Fund adopted January 22,
1987, are presently in full force and effect and have not been amended in any
respect except as provided in the above-referenced documents and that the
resolutions adopted by the Board of Trustees of the Fund on January 22, 1987,
July 24, 1991, February 16, 1994, January 17, 1996, March 11, 1997, March 18,
1998, and March 31, 1999 relating to organizational matters, securities matters
and the issuance of shares are presently in full force and effect and have not
been amended in any respect, we advise you and opine that (a) the Fund is a
<PAGE>
VEDDER PRICE
Kemper Variable Series
October 27, 1999
Page 2
validly existing voluntary association with transferrable shares under the laws
of the Commonwealth of Massachusetts and is authorized to issue an unlimited
number of Shares in the Portfolios; and (b) presently and upon such further
issuance of the Shares in accordance with the Fund's Agreement and Declaration
of Trust and the receipt by the Fund of a purchase price not less than the net
asset value per Share and when the pertinent provisions of the Securities Act of
1933 and such "blue-sky" and securities laws as may be applicable have been
complied with, and assuming that the Fund continues to validly exist as provided
in (a) above, the Shares are and will be legally issued and outstanding, fully
paid and nonassessable.
The Fund is an entity of the type commonly known as a "Massachusetts
business trust". Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund or any
Portfolio. However, the Trust Agreement disclaims shareholder liability for acts
and obligations of the fund or of a particular Portfolio and requires that
notice of such disclaimer be given in each note, bond, contract, instrument,
certificate share or undertaking made or issued by the Trustees or officers of
the Fund. The Trust Agreement provides for indemnification out of the property
of a particular Portfolio for all loss and expense of any shareholder of that
Portfolio held personally liable for the obligations of such Portfolio. Thus,
the risk of liability is limited to circumstances in which the relevant
Portfolio would be unable to meet its obligations.
This opinion is solely for the benefit of the Fund, the Fund's Board
of Trustees and the Fund's officers and may not be relied upon by any other
person without our prior written consent. We hereby consent to the use of this
opinion in connection with said Post-Effective Amendment.
Very truly yours,
/s/VEDDER, PRICE, KAUFMAN & KAMMHOLZ
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
DAS/COK
Exhibit (i)(2)
Law Offices of
Dechert Price & Rhoads
Ten Post Office Square South
Boston, MA 02109-4603
TELEPHONE: (617) 728-7100
FAX: (617) 426-6567
October 28, 1999
Kemper Variable Series
222 South Riverside Plaza
Chicago, Illinois 60606
Re: Post-Effective Amendment No. 29 to the Registration Statement on Form
N-1A (SEC File No. 33-11802)
Ladies and Gentlemen:
Kemper Variable Series, formerly Investors Fund Series and Kemper
Investors Fund (the "Trust"), is a trust created under a written Declaration of
Trust dated January 22, 1987. The Declaration of Trust, as amended from time to
time, is referred to as the "Declaration of Trust." The beneficial interest
under the Declaration of Trust is represented by transferable shares without par
value ("Shares"). The Trustees have the powers set forth in the Declaration of
Trust, subject to the terms, provisions and conditions therein provided.
We are of the opinion that all legal requirements have been complied
with in the creation of the Trust and that said Declaration of Trust is legal
and valid.
Under Article III, Section 3 of the Declaration of Trust, the Trustees
may issue Shares on such terms and for such consideration as they may from time
to time authorize. Under Article III, Section 1, it is provided that the number
of Shares authorized under the Declaration of Trust is unlimited. Under Article
III, Section 1, the Shares shall be issued in one or more Series as the Trustees
may authorize from time to time. By written instruments, the Trustees have from
time to time established various series of the Trust. The Shares are currently
divided into twenty-six active series (the "Funds"). By vote adopted on July 14,
1999, the Trustees of the Trust authorized the President, any Vice President,
the Secretary and the Treasurer, from time to time, to cause to be registered
with the Securities and Exchange Commission an indefinite number of Shares of
the Trust and its series and to cause such Shares to be issued and sold to the
public.
We understand that you are about to file with the Securities and
Exchange Commission, on Form N-1A, Post-Effective Amendment No. 29 to the
Trust's Registration Statement (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), in connection with
the continuous offering of the Shares of three Funds: KVS Growth Opportunities
Portfolio, KVS Growth and Income Portfolio and KVS Focused Large Cap Growth
Portfolio. We understand that our opinion is required to be filed as an exhibit
to the Registration Statement.
<PAGE>
We are of the opinion that all necessary Trust action precedent to the
issue of the Shares of the Fund named above has been duly taken, and that all
such Shares may be legally and validly issued for cash, and when sold will be
fully paid and non-assessable by the Trust upon receipt by the Trust or its
agent of consideration for such Shares in accordance with the terms in the
Registration Statement, subject to compliance with the Securities Act, the
Investment Company Act of 1940, as amended, and applicable state laws regulating
the sale of securities.
We consent to your filing this opinion with the Securities and Exchange
Commission as an Exhibit to Post-Effective Amendment No. 29 to the Registration
Statement.
Very truly yours,
/s/ Dechert Price & Rhoads
Dechert Price & Rhoads