Filed electronically with the Securities and Exchange Commission
on August 31, 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. 27
---- / X /
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
Amendment No. 28
---- / 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
--------------
Phillip 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 September 1, 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
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[LOGO] KEMPER FUNDS
Kemper Variable Series
PROSPECTUS September 1, 1999
KEMPER VARIABLE SERIES
222 South Riverside Plaza, Chicago, Illinois 60606
Kemper Variable Series offers a choice of 23 investment portfolios (each a
"Portfolio"), one of which is offered herein, to investors applying for certain
variable life insurance and variable annuity contracts offered by Participating
Insurance Companies.
The Portfolio offered herein is the Kemper Index 500 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.
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Contents
2 About The Fund
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2 Fund Investment Concept
3 Kemper Index 500 Portfolio
4 About Your Investment
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4 Investment Manager
6 Share Price
6 Purchase and Redemption
7 Distributions and Taxes
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ABOUT THE FUND
FUND INVESTMENT CONCEPT
Kemper Variable Series (the "Fund") is an open-end, registered management
investment company, currently comprising 23 portfolios, one of which is 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.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc., and have been licensed
for use by Scudder Kemper Investments, Inc. The Kemper Index 500 Portfolio is
not sponsored, endorsed, sold or promoted by Standard & Poor's, and Standard &
Poor's makes no representation regarding the advisability of investing in the
fund. Additional information may be found in the fund's Statement of Additional
Information.
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KEMPER INDEX 500 PORTFOLIO
Investment objective
The Portfolio seeks to match, as closely as possible, before expenses, the
performance of the Standard & Poor's 500 Composite Stock Price Index (the "S&P
500 Index"), which emphasizes stocks of large U.S. companies.
Unless otherwise indicated, the Portfolio's investment objective and policies
may be changed without a vote of shareholders.
Main investment strategies
The Portfolio seeks to replicate, before expenses, the risk and return
characteristics of the S&P 500 Index. The Portfolio will invest primarily in
common stocks of companies that comprise the S&P 500 Index, in approximately the
same weightings as the S&P 500 Index. The Portfolio may also use stock index
futures and options. To attempt to match the risk and return characteristics of
the S&P 500 Index as closely as possible, the Portfolio invests in a
statistically selected sample of the securities found in the S&P 500 Index,
using a process known as "optimization." The Portfolio normally does not hold
every one of the 500 stocks in the S&P 500 Index. First, the Portfolio buys the
stocks that make up the larger portions of the S&P 500 Index's value in roughly
the same proportion as the S&P 500 Index. Second, smaller stocks in the S&P 500
Index are analyzed and selected. In selecting smaller stocks, the investment
manager tries to match the industry and risk characteristics of all of the
smaller companies in the S&P 500 Index without buying all of those stocks.
Optimization attempts to maximize the Portfolio's liquidity and returns while
minimizing its costs. It also allows the investment manager to select stocks for
the Portfolio in an attempt to ensure that industry weightings, market
capitalization and fundamental characteristics (price-to-book ratios,
price-to-earnings ratios, debt-to-asset ratios and dividend yields) closely
match those of the securities in the S&P 500 Index. Over the long term, the
investment manager seeks a correlation between the performance of the Portfolio,
before expenses, and the S&P 500 Index, of 98% or better. A figure of 100% would
indicate perfect correlation.
The Portfolio will invest at least 80% of its assets in stocks of companies
included in the S&P 500 Index. The Portfolio's securities are weighted to
attempt to make the Portfolio's total investment characteristics similar to
those of the S&P 500 Index as a whole. The investment manager may exclude or
remove any S&P 500 Index stock from the Portfolio if the investment manager
believes that the stock is illiquid or believes the merit of the investment has
been impaired by financial conditions or other extraordinary events.
The Portfolio may hold up to 20% of its assets in short-term debt securities,
money market instruments and stock index futures and options. The Portfolio
intends to buy futures in anticipation of buying stocks.
Of course, there can be no guarantee that by following these strategies, the
Portfolio will achieve its objective.
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Main risks
There are market and investment risks with any security. The value of an
investment in the Portfolio will fluctuate over time and it is possible to lose
money invested in the Portfolio.
The Portfolio's principal risks are associated with investing in the stock
market and the investment manager's skill in managing the assets of the
Portfolio.
The Portfolio's returns and net asset value will go up and down. Stock market
movements will affect the Portfolio's share price on a daily basis. Declines in
value are possible in both the overall stock market and in the types of
securities held by the Portfolio. Moreover, the returns on the stock of large
U.S. companies, such as those that comprise the S&P 500 Index, could trail the
returns of the stock of medium or small companies.
An investment in the common stock of a company represents a proportionate
ownership interest in that company. Therefore, the Portfolio participates in the
success or failure of any company in which it holds stock. Compared to other
classes of financial assets, such as bonds or cash equivalents, common stocks
have historically offered a greater potential for gain on investment. However,
the market value of common stocks can fluctuate significantly, reflecting such
things as the business performance of the issuing company, investors'
perceptions of the company or the overall stock market and general economic or
financial market movements. Smaller companies are especially sensitive to these
factors and may even become valueless.
The Portfolio may not be able to mirror the S&P 500 Index closely enough to
track its performance for a number of reasons, including the Portfolio's cost to
buy and sell securities, the flow of money into and out of the Portfolio, and
the underperformance of stocks selected by the investment manager.
If the investment manager incorrectly judges factors in selecting options and
futures strategies, or if the price changes in the Portfolio's futures and
options positions are not well correlated with those of its other investments,
the Portfolio may not achieve its investment objective. The Portfolio could also
be exposed to risk if it could not close out its futures and options positions
because of an illiquid secondary market.
The investment manager's skill in choosing appropriate investments for the
Portfolio will determine in large part the Portfolio's ability to achieve its
investment objective.
Past performance
Because the Portfolio commenced operations on September 1, 1999, no past
performance information is available.
ABOUT YOUR INVESTMENT
INVESTMENT MANAGER
The 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
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Board. 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 $280 billion
in assets globally for mutual fund investors, retirement and pension plans,
institutional and corporate clients, and private family and individual accounts.
The Portfolio pays 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-$200 million 0.45%
$200 million-$750 million 0.42%
$750 million-$2 billion 0.40%
$2 billion-$5 billion 0.38%
Over $5 billion 0.35%
Subadviser
Bankers Trust Company, the Portfolio's subadviser, is a New York banking
corporation with its principal offices located at 130 Liberty Street, New York,
New York. It is a wholly owned subsidiary of Bankers Trust Corporation. On June
4, 1999, Bankers Trust Corporation merged with and into a subsidiary of Deutsche
Bank AG. Deutsche Bank AG is a major global banking institution that is engaged
in a wide range of financial services, including investment management, mutual
funds, retail and commercial banking, investment banking and insurance. Bankers
Trust Company will handle day-to-day investment and trading functions for the
Portfolio under the guidance of the portfolio manager. The subadviser has
managed stock index investments since 1977.
A fee is paid to the subadviser by Scudder Kemper Investments, Inc. and
calculated monthly as a percentage of the Portfolio's average daily net assets.
The rate decreases with successive increases in net assets. The minimum annual
fee is set at $100,000, however, the minimum fee does not apply during the
Portfolio's first year of operations. For its services as subadviser, Bankers
Trust Company will receive a subadvisory fee based on the average daily net
assets of the Portfolio, payable monthly, at 1/12 of the annual rates shown
below:
Average Daily Net Assets of the Portfolio Annual Subadviser Fee Rate
- ----------------------------------------- --------------------------
$0-$200 million 0.08%
On the next $550 million 0.05%
On the balance over $750 million 0.025%
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Portfolio management
The following investment professional is associated with the Portfolio as
indicated:
Joined the Portfolio as a
Name & Title Portfolio Manager Background
- --------------------------------------------------------------------------------
Kathleen A. Condon 1999 Joined Bankers Trust Company
Manager in 1970 as an equity analyst.
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Year 2000 readiness
Like all mutual funds, the Portfolio could be affected by the inability of some
computer systems to recognize the year 2000. The investment manager has a year
2000 readiness program designed to address this problem, and is also researching
the readiness of suppliers and business partners as well as issuers of
securities the Portfolio owns. Still, there is some risk that the year 2000
problem could materially affect the Portfolio's operations (such as its ability
to calculate net asset value and process purchases and redemptions), its
investments, or securities markets in general.
SHARE PRICE
Scudder Fund Accounting Corporation determines the net asset value per share of
the Portfolio 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 Portfolio's
assets, but when reliable market quotations are unavailable, the Portfolio may
use procedures established by the Fund's Board of Trustees.
The net asset value per share is the value of one share, and is determined by
dividing the value of the Portfolio's total assets, less liabilities, by the
number of shares outstanding.
PURCHASE AND REDEMPTION
The separate accounts of the Participating Insurance Companies place orders to
purchase and redeem shares of the 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 the
Portfolio are each 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
the Portfolio. During the period of such suspension, shareholders of the
Portfolio are normally permitted to continue to purchase additional shares and
to have dividends reinvested.
Shareholders are not charged a fee when they purchase or redeem Portfolio
shares.
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DISTRIBUTIONS AND TAXES
Dividends and capital gains distributions
The Fund normally declares and distributes dividends of net investment income
annually for the Portfolio. The Portfolio distributes any net realized
short-term and long-term capital gains at least annually.
Taxes
The 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.
The Portfolio is not sponsored, endorsed, sold or promoted by Standard & Poor's
("S&P"). S&P makes no representation or warranty, express or implied, to the
owners of the Portfolio or any member of the public regarding the advisability
of investing in securities generally or in the Portfolio particularly or the
ability of the S&P 500 Index to track general stock market performance. S&P's
only relationship to the Portfolio is the licensing of certain trademarks and
trade names of S&P and of the S&P 500 Index, which is determined, composed and
calculated without regard to the Portfolio. S&P does not guarantee the accuracy
and/or completeness of the S&P 500 Index or any data included therein.
S&P makes no warranty, express or implied, as to the results to be obtained by
the Portfolio, to owners of the Portfolio, or to any other person or entity from
the use of the S&P 500 Index or any data included therein.
S&P makes no express or implied warranties, and expressly disclaims all such
warranties of merchantability or fitness for a particular purpose or use with
respect to the S&P 500 Index or any data included therein.
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Additional information about the Portfolio may be found in the Portfolio's
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 Portfolio's 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:
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By Phone Call Kemper at: 1-800-778-1482
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By Mail Kemper Distributors, Inc.
222 South Riverside Plaza
Chicago, IL 60606-5808
or
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
(a duplication fee is charged)
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In Person Public Reference Room
Securities and Exchange Commission
Washington, D.C.
(Call 1-800-SEC-0330 for more information).
- --------------------------------------------------------------------------------
By Internet http://www.sec.gov
http://www.kemper.com
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The Statement of Additional Information dated September 1, 1999 is incorporated
by reference into this prospectus (is legally a part of this prospectus).
Investment Company Act file number:
Kemper Variable Series 811-5002
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1999
As Revised September 1, 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
May 1, 1999, and the prospectus of Kemper Index 500 Portfolio dated September 1,
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 23 investment portfolios (each a
"Portfolio") to investors applying for certain variable life insurance and
variable annuity contracts offered by Participating Insurance Companies.
The 23 portfolios are:
<TABLE>
<S> <C>
Kemper Money Market Portfolio "Money Market Portfolio"
Kemper Government Securities Portfolio "Government Securities Portfolio"
Kemper Investment Grade Bond Portfolio "Investment Grade Bond Portfolio"
Kemper High Yield Portfolio "High Yield Portfolio"
Kemper Total Return Portfolio "Total Return Portfolio"
Kemper Blue Chip Portfolio "Blue Chip Portfolio"
Kemper Index 500 Portfolio "Index 500 Portfolio"
Kemper Growth Portfolio "Growth Portfolio"
Kemper Aggressive Growth Portfolio "Aggressive Growth Portfolio"
Kemper Horizon 20+ Portfolio \
Kemper Horizon 10+ Portfolio Collectively, the "Horizon Portfolios"
Kemper Horizon 5 Portfolio /
Kemper Small Cap Growth Portfolio "Small Cap Growth Portfolio"
Kemper Technology Growth Portfolio "Technology Portfolio"
Kemper Value+Growth Portfolio "Value+Growth Portfolio"
Kemper Contrarian Value Portfolio "Contrarian Portfolio"
Kemper-Dreman High Return Equity Portfolio "High Return Equity Portfolio"
Kemper Small Cap Value Portfolio "Small Cap Value Portfolio"
Kemper-Dreman Financial Services Portfolio "Financial Services Portfolio"
Kemper Global Income Portfolio "Global Income Portfolio"
Kemper Global Blue Chip Portfolio "Global Blue Chip Portfolio"
Kemper International Growth and Income Portfolio "International Growth and Income Portfolio"
Kemper International Portfolio "International Portfolio"
</TABLE>
<PAGE>
TABLE OF CONTENTS
Page
INVESTMENT RESTRICTIONS.........................................3
INVESTMENT POLICIES AND TECHNIQUES..............................8
PORTFOLIO TRANSACTIONS.........................................27
INVESTMENT MANAGER AND DISTRIBUTOR.............................31
PURCHASE AND REDEMPTION OF SHARES..............................37
OFFICERS AND TRUSTEES..........................................38
NET ASSET VALUE................................................41
DIVIDENDS AND TAXES............................................42
SHAREHOLDER RIGHTS.............................................43
APPENDIX -- RATINGS OF INVESTMENTS
The financial statements appearing in the Fund's Annual Report for the fiscal
year ended December 31, 1998 are incorporated herein by reference. The Annual
Report accompanies this document.
ANN-13 9/99 printed on recycled paper
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INVESTMENT RESTRICTIONS
The Fund has adopted for each Portfolio certain fundamental investment
restrictions which cannot be changed for a Portfolio without approval by a
"majority" of the outstanding voting shares of that Portfolio. As defined in the
Investment Company Act of 1940, as amended (the "1940 Act"), this means the
lesser of the vote of (a) 67% of the shares of a Portfolio present at a meeting
where more than 50% of the outstanding shares are present in person or by proxy
or (b) more than 50% of the outstanding shares of a Portfolio.
Each Portfolio except the Aggressive Growth Portfolio and the Global Income
Portfolio is classified as a diversified open-end management investment company.
The Aggressive Growth and Global Income Portfolios are non-diversified open-end
investment management companies.
Each Portfolio may not, as a fundamental policy:
(1) borrow money, except as permitted under the 1940 Act, and as
interpreted or modified by regulatory authority having jurisdiction,
from time to time;
(2) issue senior securities, except as permitted under the 1940 Act, and as
interpreted or modified by regulatory authority having jurisdiction,
from time to time;
(3) For all Portfolios except Kemper Money Market Portfolio: concentrate
its investments in a particular industry, as that term is used in the
1940 Act, and as interpreted or modified by regulatory authority having
jurisdiction, from time to time;
For Kemper Money Market Portfolio: concentrate its investments in a
particular industry, as that term is used in the 1940 Act, and as
interpreted or modified by regulatory authority having jurisdiction,
from time to time, except that the Portfolio intends to invest more
than 25% of its net assets in instruments issued by banks.
(4) engage in the business of underwriting securities issued by others,
except to the extent that the Fund may be deemed to be an underwriter
in connection with the disposition of portfolio securities;
(5) purchase or sell real estate, which term does not include securities of
companies which deal in real estate or mortgages or investments secured
by real estate or interests therein, except that the Fund reserves
freedom of action to hold and to sell real estate acquired as a result
of the Fund's ownership of securities;
(6) purchase physical commodities or contracts relating to physical
commodities; or
(7) make loans except as permitted under the 1940 Act, and as interpreted
or modified by regulatory authority having jurisdiction, from time to
time.
With regard to Restriction (3) above, for purposes of determining the percentage
of Money Market Portfolio's assets invested in securities of issuers having
their principal business activities in a particular industry, asset backed
securities will be classified separately, based on the nature of the underlying
assets. Currently, the following categories are used: captive auto, diversified,
retail and consumer loans, captive equipment and business, business trade
receivables, nuclear fuel and capital and mortgage lending.
If a percentage restriction is adhered to at the time of the investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Fund has
also adopted the following non-fundamental policies, which may be changed or
eliminated for each Portfolio by the Fund's Board of Trustees without a vote of
the shareholders:
Each of Kemper Money Market Portfolio, Kemper Total Return Portfolio, Kemper
High Yield Portfolio, Kemper Growth Portfolio and Kemper Government Securities
Portfolio may not, as a non-fundamental policy:
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(1) For all Portfolios except Kemper High Yield Portfolio, purchase
securities of any issuer (other than obligations of, or guaranteed by,
the United States Government or its agencies or instrumentalities) if,
as a result, more than 5% of the Portfolio's total assets would be
invested in securities of that issuer.
(2) For Kemper High Yield Portfolio only, With respect to 75% of the Fund's
total assets, purchase the securities of any issuer (other than
securities issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities) if, as a result, (a) more than 5% of the
Portfolio's total assets would be invested in the securities of that
issuer, or (b) the Portfolio would hold more than 10% of the
outstanding voting securities of that issuer;
(3) Except for Kemper High Yield Portfolio, purchase more than 10% of any
class of securities of any issuer. All debt securities and all
preferred stocks are each considered as one class;
(4) For Kemper Money Market Portfolio only, enter into repurchase
agreements if, as a result thereof, more than 10% of the Portfolio's
total assets valued at the time of the transaction would be subject to
repurchase agreements maturing in more than seven (7) days;
(5) Make short sales of securities or purchase any securities on margin
except to obtain such short-term credits as may be necessary for the
clearance of transactions; however, Kemper Total Return Portfolio,
Kemper High Yield Portfolio, Kemper Growth Portfolio and Kemper
Government Securities Portfolio may make margin deposits in connection
with financial futures and options transactions;
(6) For Kemper Money Market Portfolio only, invest more than 5% of the
Portfolio's total assets in securities restricted as to disposition
under the Federal securities laws;
(7) Purchase securities of other investment companies, except as permitted
under the 1940 Act. including in connection with a merger,
consolidation, reorganization or acquisition of assets;
(8) For Kemper Money Market Portfolio only, write, purchase or sell puts,
calls or combinations thereof;
(9) For Kemper Total Return Portfolio, Kemper High Yield Portfolio and
Kemper Growth Portfolio only, engage in put or call option
transactions; except that the Fund may write (sell) put or call options
on up to 25% of its net assets and may purchase put and call options if
no more than 5% of its net assets would be invested in premiums on put
and call options, combinations thereof or similar options; and it may
buy and sell options on financial futures contracts.
(10) For all Portfolios except for Kemper Money Market Portfolio, invest
more than 15% of its net assets in illiquid securities.
(11) For Kemper Money Market Portfolio only, invest more than 10% of its net
assets in illiquid securities.
(12) Invest for the purpose of exercising control or management of another
issuer.
Kemper International Portfolio may not, as a non-fundamental policy:
(1) Purchase securities of any issuer (other than obligations of, or
guaranteed by, the United States or any foreign government or their
agencies or instrumentalities) if, as a result, more than 5% of the
Portfolio's total assets would be invested in securities of that
issuer. With respect to 75% of its assets, the Portfolio will limit its
investments in the securities of any one foreign government issuer to
5% of the Portfolio's total assets;
(2) Purchase more than 10% of any class of securities of any issuer except
securities issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities. All debt securities and preferred stocks
are considered as one class;
(3) Pledge the Portfolio's securities or receivables or transfer or assign
or otherwise encumber them in an amount exceeding the amount of a
borrowing secured thereby;
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(4) Make short sales of securities, or purchase any securities on margin
except to obtain such short-term credits as may be necessary for the
clearance of transactions; however, the Portfolio may make margin
deposits in connection with financial futures and options transactions;
(5) Write or sell put or call options, combinations thereof or similar
options on more than 25% of the Portfolio's net assets; nor may it
purchase put or call options if more than 5% of the Portfolio's net
assets would be invested in premiums on put and call options,
combinations thereof or similar options; however, the Portfolio may buy
or sell options on financial futures contracts;
(6) Purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization, or by
purchase in the open market of securities of closed-end investment
companies where no underwriter or dealer's commission or profit, other
than customary broker's commission, is involved and only if immediately
thereafter not more than (i) 3% of the total outstanding voting stock
of such company is owned by the Portfolio, (ii) 5% of the Portfolio's
total assets would be invested in any one such company, and (iii) 10%
of the Portfolio's total assets would be invested in such securities.
(7) Invest more than 15% of its net assets in illiquid securities.
(8) Invest for the purpose of exercising control or management of another
issuer.
Each of Kemper Small Cap Growth Portfolio, Kemper Investment Grade Bond
Portfolio, Kemper Contrarian Value Portfolio, Kemper Small Cap Value Portfolio,
Kemper Value+Growth Portfolio, Kemper Horizon 10+ Portfolio, Kemper Horizon 20+
Portfolio and Kemper Horizon 5 Portfolio may not, as a non-fundamental policy:
(1) Purchase securities of any issuer (other than obligations of, or
guaranteed by, the United States Government, its agencies or
instrumentalities) if, as a result, more than 5% of the Portfolio's
total assets would be invested in securities of that issuer; except
that, for Kemper Contrarian Value Portfolio and Kemper Small Cap Value
Portfolio, up to 25% of each Portfolio's total assets may be invested
without regard to these limitations;
(2) Purchase more than 10% of the outstanding voting securities of any
issuer;
(3) Make short sales of securities, or purchase any securities on margin
except to obtain such short-term credits as may be necessary for the
clearance of transactions; however, the Portfolio may make margin
deposits in connection with financial futures and options transactions;
(4) For Kemper Small Cap Growth Portfolio, Kemper Investment Grade Bond
Portfolio and Kemper Horizon 10+ Portfolio, Kemper Horizon 20+
Portfolio and Kemper Horizon 5 Portfolio only, write (sell) put or call
options, combinations thereof or similar options on more than 25% of
the Portfolio's net assets; nor may the Portfolio purchase put or call
options if more than 5% of the Portfolio's net assets would be invested
in premiums on put and call options, combinations thereof or similar
options; however, the Portfolio may buy or sell options on financial
futures contracts.
(5) Invest for the purpose of exercising control or management of another
issuer.
(6) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets,
or for the Contrarian, Small Cap Value and Horizon Portfolios, by
purchase in the open market of securities of closed-end investment
companies where no underwriter or dealer's commission or profit, other
than customary broker's commission, is involved and only if immediately
thereafter not more than (i) 3% of the total outstanding voting stock
of such company is owned by it, (ii) 5% of its total assets would be
invested in any one such company, and (iii) 10% of total assets would
be invested in such securities.
(7) Invest more than 15% of its net assets in illiquid securities.
(8) For the Value+Growth Portfolio only, write (sell) put or call options,
combinations thereof or similar options; nor may it purchase put or
call options if more than 5% of the Portfolio's net assets would be
invested in premiums on put and call options, combinations thereof or
similar options; however, the Portfolio may buy or sell options on
financial futures contracts.
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(9) For the Contrarian and Small Cap Value Portfolios only, write (sell)
put or call options, combinations thereof or similar options except
that the Portfolio may write covered call options on up to 100% of the
Portfolio's net assets and may write secured put options on up to 50%
of the Portfolio's net assets; nor may the Portfolio purchase put or
call options; however, the Portfolio may buy or sell options on
financial futures contracts.
Kemper Blue Chip Portfolio may not, as a non-fundamental policy:
(1) Purchase securities of any issuer (other than obligations of, or
guaranteed by, the U.S. Government, its agencies or instrumentalities)
if, as a result, more than 5% of the total value of the Portfolio's
assets would be invested in securities of that issuer;
(2) Purchase more than 10% of any class of voting securities of any issuer;
(3) Pledge, hypothecate, mortgage or otherwise encumber more than 15% of
its total assets and then only to secure permitted borrowings. (The
collateral arrangements with respect to options, financial futures and
delayed delivery transactions and any margin payments in connection
therewith are not deemed to be pledges or other encumbrances.);
(4) Purchase securities on margin, except to obtain such short-term credits
as may be necessary for the clearance of transactions; however, the
Portfolio may make margin deposits in connection with options and
financial futures transactions;
(5) Make short sales of securities or maintain a short position for the
account of the Portfolio unless at all times when a short position is
open it owns an equal amount of such securities or owns securities
which, without payment of any further consideration, are convertible
into or exchangeable for securities of the same issue as, and equal in
amount to, the securities sold short and unless not more than 10% of
the Portfolio's total assets is held as collateral for such sales at
any one time;
(6) Write (sell) put or call options, combinations thereof or similar
options; nor may it purchase put or call options if more than 5% of the
Portfolio's net assets would be invested in premiums on put and call
options, combinations thereof or similar options; however, the
Portfolio may buy or sell options on financial futures contracts;
(7) Invest in real estate limited partnerships.
(8) Invest for the purpose of exercising control or management of another
issuer.
(9) Invest more than 15% of its net assets in illiquid securities.
Kemper Global Income Portfolio may not, as a non-fundamental policy:
(1) Purchase securities of any issuer (other than obligations of, or
guaranteed by, the U.S. Government, its agencies or instrumentalities)
if, as a result, more than 5% of the total value of the Portfolio's
assets would be invested in securities of that issuer except that, with
respect to 50% of the Portfolio's total assets, the Portfolio may
invest up to 25% of its total assets in securities of any one issuer;
(2) Purchase more than 10% of any class of voting securities of any issuer;
(3) Pledge, hypothecate, mortgage or otherwise encumber more than 15% of
its total assets and then only to secure permitted borrowings. (The
collateral arrangements with respect to options, financial futures and
delayed delivery transactions and any margin payments in connection
therewith are not deemed to be pledges or other encumbrances.);
(4) Purchase securities on margin, except to obtain such short-term credits
as may be necessary for the clearance of transactions; however, the
Fund may make margin deposits in connection with options and financial
futures transactions;
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(5) Make short sales of securities or other assets or maintain a short
position for the account of the Fund unless at all times when a short
position is open it owns an equal amount of such securities or other
assets or owns securities which, without payment of any further
consideration, are convertible into or exchangeable for securities or
other assets of the same issue as, and equal in amount to, the
securities or other assets sold short and unless not more than 10% of
the Fund's total assets is held as collateral for such sales at any one
time;
(6) Write or sell put or call options, combinations thereof or similar
options on more than 25% of the Fund's net assets; nor may the Fund
purchase put or call options if more than 5% of the Fund's net assets
would be invested in premiums on put and call options, combinations
thereof or similar options; however, the Fund may buy or sell options
on financial futures contracts;
(7) Invest in real estate limited partnerships.
(8) Invest for the purpose of exercising control or management of another
issuer.
(9) Invest more than 15% of its net assets in illiquid securities.
Kemper-Dreman High Return Equity Portfolio may not, as a non-fundamental policy:
(1) Purchase securities of any one issuer other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities
(collectively "U.S. Government Securities") if immediately thereafter
more than 5% of its total assets would be invested in the securities of
any one issuer, or purchase more than 10% of an issuer's outstanding
securities, except that up to 25% of the Fund's total assets may be
invested without regard to these limitations;
(2) Mortgage, pledge or hypothecate any assets except in connection with a
borrowing in amounts not in excess of the lesser of the amount borrowed
or 10% or the value of its total assets at the time of such borrowing;
(3) Purchase securities on margin or make short sales of securities,
provided that the Fund may enter into futures contracts and related
options and make initial and variation margin deposits in connection
therewith;
(4) Invest in oil, gas or mineral exploration or development programs,
except that the Fund may, to the extent appropriate to its investment
objective, purchase publicly traded securities of companies engaging in
whole or in part in such activities;
(5) Invest in mortgage loans, except that the Fund may, to the extent
appropriate to its investment objective, purchase publicly traded
securities of companies engaging in whole or in part in such
activities.
(6) Invest for the purpose of exercising control over management of any
company.
(7) Invest more than 10% of the value of its net assets in illiquid
securities, including restricted securities and repurchase agreements
with remaining maturities in excess of seven days, and other securities
for which market quotations are not readily available.
(8) Invest its assets in securities of any investment company, except by
open market purchases, including an ordinary broker's commission, or in
connection with a merger, acquisition of assets, consolidation or
reorganization, and any investments in the securities of other
investment companies will be in compliance with the 1940 Act.
Kemper-Dreman Financial Services Portfolio may not, as a non-fundamental policy:
(1) Invest for the purpose of exercising control over management of any
company;
(2) Invest its assets in securities of any investment company, except by
open market purchases, including an ordinary broker's commission, or in
connection with a merger, acquisition of assets, consolidation or
reorganization, and any investments in the securities of other
investment companies will be in compliance with the 1940 Act.
(3) Invest more than 15% of the value of its net assets in illiquid
securities.
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The following non-fundamental restrictions apply to the Index 500 , Aggressive
Growth, Technology, Global Blue Chip and International Growth and Income
Portfolios. Each Portfolio may not, as a non-fundamental policy:
(1) Borrow money in an amount greater than 5% of its total assets, except
(i) for temporary or emergency purposes and (ii) by engaging in reverse
repurchase agreements, dollar rolls, or other investments or
transactions described in the Portfolio's registration statement which
may be deemed to be borrowings;
(2) Enter into either of reverse repurchase agreements or dollar rolls in
an amount greater than 5% of its total assets;
(3) Purchase securities on margin or make short sales, except (a) short
sales against the box, (b) in connection with arbitrage transactions,
(c) for margin deposits in connection with futures contracts, options
or other permitted investments, (d) that transactions in futures
contracts and options shall not be deemed to constitute selling
securities short, and (e) that the Portfolio may obtain such short-term
credits as may be necessary for the clearance of securities
transactions;
(4) Purchase options, unless the aggregate premiums paid on all such
options held by the Portfolio at any time do not exceed 20% of its
total assets; or sell put options, if as a result, the aggregate value
of the obligations underlying such put options would exceed 50% of its
total assets;
(5) Enter into futures contracts or purchase options thereon unless
immediately after the purchase, the value of the aggregate initial
margin with respect to such futures contracts entered into on behalf of
the Portfolio and the premiums paid for such options on futures
contracts does not exceed 5% of the fair market value of the
Portfolio's total assets; provided that in the case of an option that
is in-the-money at the time of purchase, the in-the-money amount may be
excluded in computing the 5% limit;
(6) Purchase warrants if as a result, such securities, taken at the lower
of cost or market value, would represent more than 5% of the value of
the Portfolio's total assets (for this purchase, warrants acquired in
units or attached to securities will be deemed to have no value);
(7) For Global Blue Chip Portfolio only, lend portfolio securities in an
amount greater than 5% of its total assets; and
(8) For International Growth and Income Portfolio only, lend portfolio
securities in an amount greater than 33 1/3% of its total assets.
Except as specifically noted, if a percentage restriction is adhered to at the
time of investment, a later increase or decrease in percentage beyond the
specified limit resulting from a change in values or net assets will not be
considered a violation.
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.
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Each Portfolio except the Money Market Portfolio may engage in futures, options,
and other derivatives transactions in accordance with its respective investment
objectives and policies. Each such Portfolio intends to engage in such
transactions if it appears to the investment manager to be advantageous to do
so, in order to pursue its objective, to hedge (i.e., protect) against the
effects of fluctuating interest rates and to stabilize the value of its assets
and not for speculation. The use of futures and options, and possible benefits
and attendant risks, are discussed below along with information concerning
certain other investment policies and techniques.
Derivatives. In addition to options, financial futures and foreign currency
transactions, consistent with its objective, each Portfolio may invest in a
broad array of financial instruments and securities in which the value of the
instrument or security is "derived" from the performance of an underlying asset
or a "benchmark" such as a security index, an interest rate or a currency
("derivatives"). Derivatives are most often used to manage investment risk, to
increase or decrease exposure to an asset class or benchmark (as a hedge or to
enhance return), or to create an investment position indirectly (often because
it is more efficient or less costly than direct investment). There is no
guarantee that these results can be achieved through the use of derivatives. The
types of derivatives used by each Portfolio and the techniques employed by the
investment manager may change over time as new derivatives and strategies are
developed or regulatory changes occur.
Options on Securities. Each Portfolio except the Money Market Portfolio may deal
in options on securities, which options may be listed for trading on a national
securities exchange or traded over-the-counter, except that the Contrarian,
Small Cap Value and High Return Equity Portfolios do not engage in
over-the-counter options transactions. The ability to engage in options
transactions enables a Portfolio to pursue its investment objective and also to
hedge against currency and market risks but is not intended for speculation. In
connection with their foreign securities investments, the Total Return,
Aggressive Growth, Technology, High Yield, Growth, International, Small Cap
Growth, Investment Grade Bond, Horizon, Global Income, Financial Services,
Global Blue Chip, and International Growth and Income Portfolios may also
purchase and sell, and the Value+Growth and Blue Chip Portfolios may purchase,
foreign currency options.
The Government Securities Portfolio individually may write (sell) covered call
options on up to 100% of net assets, may write (sell) secured put options on up
to 50% of net assets and may purchase put and call options provided that no more
than 5% of net assets may be invested in premiums on such options. The Total
Return, High Yield, Growth, International, Small Cap Growth, Investment Grade
Bond, Horizon and Global Income Portfolios may write (sell) covered call and
secured put options on up to 25% of net assets and may purchase put and call
options provided that no more than 5% of its net assets may be invested in
premiums on such options. The Value+Growth and Blue Chip Portfolios may purchase
put and call options provided that no more than 5% of its net assets may be
invested in premiums on such options.
The Contrarian, Small Cap Value, High Return Equity, Technology, Financial
Services, Global Blue Chip, and International Growth and Income Portfolios are
authorized to sell covered call options on all of the stocks they hold. No put
option will be sold for those Portfolios, however, if as a result, a Portfolio
would be obligated to purchase securities whose total value exceeds 50% of its
net assets (total assets for the Global Blue Chip, and International Growth and
Income Portfolios). The Global Blue Chip, International Growth and Income and
Index 500 Portfolios may each purchase put and call options provided that the
aggregate premiums paid on all such options held by the Portfolio at any time do
not exceed 20% of its total assets. The Financial Services Portfolio may
purchase put and call options without limit for hedging purposes, provided that
no more than 5% of its net assets may be committed for non-hedging purposes.
Each Portfolio, except the Money Market, Value+Growth and Blue Chip Portfolios
may write (sell) covered call options so long as they own securities or other
assets that are acceptable for escrow purposes. Also, such Portfolios may write
(sell) secured put options, which means that so long as the Portfolio is
obligated as a writer of a put option, it will invest an amount not less than
the exercise price of the put option in money market instruments.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security or other asset at the exercise price
during the option period. A put option gives the purchaser the right to sell,
and the writer the obligation to buy, the underlying security or other asset at
the exercise price during the option period. The writer of a covered call owns
securities or other assets that are acceptable for escrow and the writer of a
secured put invests an amount not less than the exercise price in eligible
securities or other assets to the extent that it is obligated as a writer. If a
call written by a Portfolio is exercised, the Portfolio foregoes any possible
profit from an increase in the market price
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<PAGE>
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 except the Money Market, Contrarian,
Small Cap Value and High Return Equity Portfolios may deal in over-the-counter
traded options ("OTC options"). OTC options differ from exchange traded options
in several respects. They are transacted directly with dealers and not with a
clearing corporation, and there is a risk of nonperformance by the dealer as a
result of the insolvency of such dealer or otherwise, in which event a Portfolio
may experience material losses. However, in writing options the premium is paid
in advance by the dealer. OTC options are available for a greater variety of
securities, and a wider range of expiration dates and exercise prices, than are
exchange traded options. Since there is no exchange, pricing is normally done by
reference to information from market makers, which information is carefully
monitored by the investment manager and verified in appropriate cases.
A writer or purchaser of a put or call option can terminate it voluntarily only
by entering into a closing transaction. In the case of OTC options, there can be
no assurance that a continuous liquid secondary market will exist for any
particular option at any specific time. Consequently, a Portfolio may be able to
realize the value of an OTC option it has
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purchased only by exercising it or entering into a closing sale with the dealer
that issued it. Similarly, when a Portfolio writes an OTC option, it generally
can close out that option prior to its expiration only by entering into a
closing purchase transaction with the dealer to which the Portfolio originally
wrote it. If a covered call option writer cannot effect a closing transaction,
it cannot sell the underlying security until the option expires or the option is
exercised. Therefore, a covered call option writer may not be able to sell an
underlying security even though it might otherwise be advantageous to do so.
Likewise, a secured put writer may be unable to sell the securities pledged to
secure the put for other investment purposes while it is obligated as a put
writer. Similarly, a purchaser of such put or call options might also find it
difficult to terminate its position on a timely basis in the absence of a
secondary market.
The Fund understands the position of the staff of the Securities and Exchange
Commission ("SEC") to be that purchased OTC options and the assets used as
"cover" for written OTC options are illiquid securities. Procedures are in place
for each Portfolio for engaging in OTC options for the purpose of reducing any
potential adverse effect of such transactions upon the liquidity of such
Portfolios. A brief description of such procedures is set forth below.
Each Portfolio other than the Money Market, Contrarian, Small Cap Value, High
Return Equity, Financial Services, Global Blue Chip, International Growth and
Income and Index 500 Portfolios:
A Portfolio will only engage in OTC options transactions with dealers that have
been specifically approved by the Fund's investment manager pursuant to
procedures adopted by the Board of Trustees of the Fund. The Fund's investment
manager believes that the approved dealers should be able to enter into closing
transactions if necessary and, therefore, present minimal credit risks to a
Portfolio. The investment manager will monitor the creditworthiness of the
approved dealers on an on-going basis. A Portfolio currently will not engage in
OTC options transactions if the amount invested by the Portfolio in OTC options,
plus a "liquidity charge" related to OTC options written by the Portfolio, plus
the amount invested by the Portfolio in illiquid securities, would exceed 15% of
the Portfolio's net assets. The "liquidity charge" referred to above is computed
as described below.
The Fund anticipates entering into agreements with dealers to which a Portfolio
sells OTC options. Under these agreements a Portfolio would have the absolute
right to repurchase the OTC options from the dealer at any time at a price no
greater than a price established under the agreements (the "Repurchase Price").
The "liquidity charge" referred to above for a specific OTC option transaction
will be the Repurchase Price related to the OTC option less the intrinsic value
of the OTC option. The intrinsic value of an OTC call option for such purposes
will be the amount by which the current market value of the underlying security
exceeds the exercise price. In the case of an OTC put option, intrinsic value
will be the amount by which the exercise price exceeds the current market value
of the underlying security. If there is no such agreement requiring a dealer to
allow the Portfolio to repurchase a specific OTC option written by the
Portfolio, the "liquidity charge" will be the current market value of the assets
serving as "cover" for such OTC option.
Aggressive Growth, Technology, Financial Services, Global Blue Chip,
International Growth and Income and Index 500 Portfolios:
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
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A-1 from Standard & Poor's Ratings Services ("S&P") or P-1 from Moody's
Investors Service ("Moody's") or an equivalent rating from any nationally
recognized statistical rating organization ("NRSRO").
Options on Securities Indices. A Portfolio, as part of its option transactions,
also may use index options. Through the writing or purchase of index options a
Portfolio can achieve many of the same objectives as through the use of options
on individual securities. Options on securities indices are similar to options
on a security except that, rather than the right to take or make delivery of a
security at a specified price, an option on a securities index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the securities index upon which the option is based is greater
than, in the case of a call, or less than, in the case of a put, the exercise
price of the option.
Price movements in securities which a Portfolio owns or intends to purchase
probably will not correlate perfectly with movements in the level of an index
and, therefore, a Portfolio bears the risk of a loss on an index option which is
not completely offset by movements in the price of such securities. Because
index options are settled in cash, a call writer cannot determine the amount of
its settlement obligations in advance and, unlike call writing on specific
securities, cannot provide in advance for, or cover, its potential settlement
obligations by acquiring and holding the underlying securities.
The Portfolios, as part of their options transactions, may also use options on
securities indices in an attempt to hedge against market conditions affecting
the value of securities that the Portfolio owns or intends to purchase, and not
for speculation. Through the writing or purchase of index options, a Portfolio
can achieve many of the same objectives as through the use of options on
individual securities. Options on securities indices are similar to options on a
security except that, rather than the right to take or make delivery of a
security at a specified price, an option on a securities index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the securities index upon which the option is based is greater
than, in the case of a call, or less than, in the case of a put, the exercise
price of the option. This amount of cash is equal to such difference between the
closing price of the index and the exercise price of the option. The writer of
the option is obligated, in return for the premium received, to make delivery of
this amount. Unlike security options, all settlements are in cash and gain or
loss depends on price movements in the market generally (or in a particular
industry or segment of the market) rather than price movements in individual
securities. Price movements in securities that the Portfolio owns or intends to
purchase probably will not correlate perfectly with movements in the level of an
index since the prices of such securities may be affected by somewhat different
factors and, therefore, a Portfolio bears the risk that a loss on an index
option would not be completely offset by movements in the price of such
securities.
When a Portfolio writes an option on a securities index, it will be required to
deposit with its custodian and mark-to-market eligible securities to the extent
required by applicable regulation. In addition, where the Portfolio writes a
call option on a securities index at a time when the contract value exceeds the
exercise price, the Portfolio will segregate and mark-to-market, until the
option expires or is closed out, cash or cash equivalents equal in value to such
excess.
A Portfolio may also purchase and sell options on other appropriate indices, as
available, such as foreign currency indices. Options on futures contracts and
index options involve risks similar to those risks relating to transactions in
financial futures contracts described below. Also, an option purchased by a
Portfolio may expire worthless, in which case the Portfolio would lose the
premium paid therefor.
Financial Futures Contracts and Options on Financial Futures Contracts. Each
Portfolio except the Money Market Portfolio may engage in financial futures
transactions. Financial futures contracts are commodity contracts that obligate
the long or short holder to take or make delivery of a specified quantity of a
financial instrument, such as a security, or the cash value of a securities
index during a specified future period at a specified price. A Portfolio will
"cover" futures contracts sold by the Portfolio and maintain in a segregated
account certain liquid assets in connection with futures contracts purchased by
the Portfolio as described under "Investment Policies and Techniques" in the
Statement of Additional Information. In connection with their foreign securities
investments, the Total Return, High Yield, Growth, International, Small Cap
Growth, Investment Grade Bond, Value+Growth, Horizon, Blue Chip, Aggressive
Growth, Technology, Global Income, High Return Equity, Financial Services,
Global Blue Chip, and International Growth and Income Portfolios may also engage
in foreign currency financial futures transactions. The Total Return, High
Yield, Growth, International, Small Cap Growth, Investment Grade Bond,
Value+Growth, Horizon, Blue Chip and Global Income Portfolios will not enter
into any futures contracts or options on futures contracts if the aggregate of
the contract value of the outstanding futures contracts of the Portfolio and
futures contracts subject to outstanding options written by
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the Portfolio would exceed 50% of the total assets of the Portfolio. The
Financial Services, Global Blue Chip, International Growth and Income,
Aggressive Growth, Technology and Index 500 Portfolios each will not enter into
a futures contract or related option (except for closing transactions) if
immediately thereafter, the sum of the amount of its initial margin and premiums
on open future contracts and options thereon would exceed 5% of the Portfolio's
total assets (taken at current value); however, in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation.
The Portfolios may engage in financial futures transactions and may use index
options as an attempt to hedge against currency and market risks. For example,
when the near-term market view is bearish but the portfolio composition is
judged satisfactory for the longer term, exposure to temporary declines in the
market may be reduced by entering into futures contracts to sell securities or
the cash value of an index. Conversely, where the near-term view is bullish, but
a Portfolio is believed to be well positioned for the longer term with a high
cash position, the Portfolio can hedge against market increases by entering into
futures contracts to buy securities or the cash value of an index. In either
case, the use of futures contracts would tend to reduce portfolio turnover and
facilitate a Portfolio's pursuit of its investment objective. Also, if a
Portfolio owned long-term bonds and interest rates were expected to rise, it
could sell financial futures contracts. If interest rates did increase, the
value of the bonds in the Portfolio would decline, but this decline would be
offset in whole or in part by an increase in the value of the Portfolio's
futures contracts. If, on the other hand, long-term interest rates were expected
to decline, the Portfolio could hold short-term debt securities and benefit from
the income earned by holding such securities, while at the same time the
Portfolio could purchase futures contracts on long-term bonds or the cash value
of a securities index. Thus, the Portfolio could take advantage of the
anticipated rise in the value of long-term bonds without actually buying them.
The futures contracts and short-term debt securities could then be liquidated
and the cash proceeds used to buy long-term bonds.
Futures contracts entail risks. If the investment manager's judgment about the
general direction of interest rates, markets or exchange rates is wrong, the
overall performance may be poorer than if no such contracts had been entered
into. There may be an imperfect correlation between movements in prices of
futures contracts and portfolio assets being hedged. In addition, the market
prices of futures contracts may be affected by certain factors. If participants
in the futures market elect to close out their contracts through offsetting
transactions rather than meet margin requirements, distortions in the normal
relationship between the assets and futures market could result. Price
distortions also could result if investors in futures contracts decide to make
or take delivery of underlying securities or other assets rather than engage in
closing transactions because of the resultant reduction in the liquidity of the
futures market. In addition, because, from the point of view of speculators,
margin requirements in the futures market are less onerous than margin
requirements in the cash market, increased participation by speculators in the
futures market could cause temporary price distortions. Due to the possibility
of price distortions in the futures market and because of the imperfect
correlation between movements in the prices of securities or other assets and
movements in the prices of futures contracts, a correct forecast of market
trends by the investment manager still may not result in a successful hedging
transaction. A Portfolio could also experience losses if it could not close out
its futures position because of an illiquid secondary market. If any 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
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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
segregated accounts or will provide cover with respect to written options on
financial futures contracts in a manner similar to that described under "Options
on Securities." Options on futures contracts involve risks similar to those
risks relating to transactions in financial futures contracts described above.
Also, an option purchased by a Portfolio may expire worthless, in which case the
Portfolio would lose the premium paid therefor.
Delayed Delivery Transactions. The Total Return, High Yield, Growth, Government
Securities, Investment Grade Bond, Horizon, Global Income, Financial Services,
Global Blue Chip, Aggressive Growth, Technology , International Growth and
Income and Index 500 Portfolios may purchase or sell portfolio securities on a
when-issued or delayed delivery basis. When-issued or delayed delivery
transactions arise when securities are purchased by the Portfolio with payment
and delivery to take place in the future in order to secure what is considered
to be an advantageous price and yield to the Portfolio at the time of entering
into the transaction. When the Portfolio enters into a delayed delivery
transaction, it becomes obligated to purchase securities and it has all of the
rights and risks attendant to ownership of a security, although delivery and
payment occur at a later date. The value of fixed-income securities to be
delivered in the future will fluctuate as interest rates vary. At the time a
Portfolio makes the commitment to purchase a security on a when-issued or
delayed delivery basis, it will record the transaction and reflect the liability
for the purchase and the value of the security in determining its net asset
value. Likewise, at the time a Portfolio makes the commitment to sell a security
on a delayed delivery basis, it will record the transaction and include the
proceeds to be received in determining
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its net asset value; accordingly, any fluctuations in the value of the security
sold pursuant to a delayed delivery commitment are ignored in calculating net
asset value so long as the commitment remains in effect. The Portfolio generally
has the ability to close out a purchase obligation on or before the settlement
date, rather than take delivery of the security.
To the extent the Portfolio engages in when-issued or delayed delivery
transactions, it will do so for the purpose of acquiring portfolio securities
consistent with the Portfolio's investment objective and policies. The Portfolio
will only make commitments to purchase securities on a when-issued or delayed
delivery basis with the intention of actually acquiring the securities, but the
Portfolio reserves the right to sell these securities before the settlement date
if deemed advisable. In some instances, the third-party seller of when-issued or
delayed delivery securities may determine prior to the settlement date that it
will be unable to meet its existing transaction commitments without borrowing
securities. If advantageous from a yield perspective, a Portfolio may, in that
event, agree to resell its purchase commitment to the third-party seller at the
current market price on the date of sale and concurrently enter into another
purchase commitment for such securities at a later date. As an inducement for a
Portfolio to "roll over" its purchase commitment, the Portfolio may receive a
negotiated fee.
Regulatory Restrictions. To the extent required to comply with applicable
regulation, when purchasing a futures contract, writing a put option or entering
into a delayed delivery purchase or a forward currency exchange purchase, a
Portfolio will maintain eligible securities in a segregated account. A Portfolio
will use cover in connection with selling a futures contract.
A Portfolio will not engage in transactions in financial futures contracts or
options thereon for speculation, but only to attempt to hedge against changes in
interest rates or market conditions affecting the value of securities which the
Portfolio holds or intends to purchase.
Foreign Currency Transactions. The Total Return, High Yield, Growth, Small Cap
Growth, Investment Grade Bond, Value+Growth, Horizon, Blue Chip, Aggressive
Growth, Technology, High Return Equity and Financial Services Portfolios may
invest a limited portion of their assets, and the International, Global Income,
Global Blue Chip, and International Growth and Income Portfolios may invest
without limit, in securities denominated in foreign currencies. These Portfolios
may engage in foreign currency transactions in connection with their investments
in foreign securities but will not speculate in foreign currency exchange.
The value of the foreign securities investments of a Portfolio measured in U.S.
Dollars (including ADRs) may be affected favorably or unfavorably by changes in
foreign currency exchange rates and exchange control regulations, and the
Portfolio may incur costs in connection with conversions between various
currencies. A Portfolio will conduct its foreign currency exchange transactions
either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign
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 a foreign currency, it may want to establish the U.S. Dollar cost
or proceeds, as the case may be. By entering into a forward contract in U.S.
Dollars for the purchase or sale of the amount of foreign currency involved in
an underlying security transaction, the Portfolio is able to protect itself
against a possible loss between trade and settlement date resulting from an
adverse change in the relationship between the U.S. Dollar and such foreign
currency. However, this tends to limit potential gains that might result from a
positive change in such currency relationships. A Portfolio may also hedge its
foreign currency exchange rate risk by engaging in currency financial futures
and options transactions.
When the investment manager believes that the currency of a particular foreign
country may suffer a substantial decline against the U.S. Dollar, it may enter
into a forward contract to sell an amount of foreign currency approximating the
value of some or all of the Portfolio's securities denominated in such foreign
currency. In this situation the International, Global Income, Financial
Services, Technology, Global Blue Chip, and International Growth and Income
Portfolios may, instead, enter into a forward contract to sell a different
foreign currency for a fixed U.S. Dollar amount when the investment manager
believes that the U.S. Dollar value of the currency to be sold pursuant to the
forward contract will
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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 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, Global Blue Chip, and International Growth
and Income Portfolios intend to commit to such forward contracts. A Portfolio
generally does not enter into a forward contract with a term longer than one
year.
Foreign Currency Options. The Total Return, High Yield, Growth, International,
Small Cap Growth, Investment Grade Bond, Value+Growth, Horizon, Blue Chip,
Aggressive Growth, Technology, High Return Equity, Global Income, Financial
Services, Global Blue Chip, and International Growth and Income Portfolios may
engage in foreign currency options transactions. A foreign currency option
provides the option buyer with the right to buy or sell a stated amount of
foreign currency at the exercise price at a specified date or during the option
period. A call option gives its owner the right, but not the obligation, to buy
the currency, while a put option gives its owner the right, but not the
obligation, to sell the currency. The option seller (writer) is obligated to
fulfill the terms of the option sold if it is exercised. However, either seller
or buyer may close its position during the option period in the secondary market
for such options any time prior to expiration.
A call rises in value if the underlying currency appreciates. Conversely, a put
rises in value if the underlying currency depreciates. While purchasing a
foreign currency option can protect the Portfolio against an adverse movement in
the value of a foreign currency, it does not limit the gain which might result
from a favorable movement in the value of such currency. For example, if a
Portfolio were holding securities denominated in an appreciating foreign
currency and had purchased a foreign currency put to hedge against a decline in
the value of the currency, it would not have to exercise its put. Similarly, if
the Portfolio had entered into a contract to purchase a security denominated in
a foreign currency and had purchased a foreign currency call to hedge against a
rise in value of the currency but instead the currency had depreciated in value
between the date of purchase and the settlement date, the Portfolio would not
have to exercise its call but could acquire in the spot market the amount of
foreign currency needed for settlement.
Foreign Currency Futures Transactions. As part of their financial futures
transactions (see "Financial Futures Contracts" and "Options on Financial
Futures Contracts" above), the Total Return, High Yield, Growth, International,
Small Cap Growth, Investment Grade Bond, Value+Growth, Horizon, Blue Chip,
Aggressive Growth, Technology, High Return Equity, Global Income, Financial
Services, Global Blue Chip, and International Growth and Income Portfolios may
use foreign currency futures contracts and options on such futures contracts.
Through the purchase or sale of such contracts, a Portfolio may be able to
achieve many of the same objectives as through forward foreign currency exchange
contracts more effectively and possibly at a lower cost.
Unlike forward foreign currency exchange contracts, foreign currency futures
contracts and options on foreign currency futures contracts are standardized as
to amount and delivery period and are traded on boards of trade and commodities
exchanges. It is anticipated that such contracts may provide greater liquidity
and lower cost than forward foreign currency exchange contracts.
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Forward Foreign Currency Exchange Contracts. The Total Return, High Yield,
Growth, International, Small Cap Growth, Investment Grade Bond, Value+Growth,
Horizon, Blue Chip, Aggressive Growth, Technology, High Return Equity, Global
Income, Financial Services, Global Blue Chip, International Growth and Income
Portfolios may engage in forward foreign currency transactions. A forward
foreign currency exchange contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days
("term") from the date of the contract agreed upon by the parties, at a price
set at the time of the contract. These contracts are traded directly between
currency traders (usually large commercial banks) and their customers. The
investment manager believes that it is important to have the flexibility to
enter into such forward contracts when it determines that to do so is in the
best interest of a Portfolio. A Portfolio will not speculate in foreign currency
exchange.
If a Portfolio retains the portfolio security and engages in an offsetting
transaction with respect to a forward contract, the Portfolio will incur a gain
or a loss (as described below) to the extent that there has been movement in
forward contract prices. If a Portfolio engages in an offsetting transaction, it
may subsequently enter into a new forward contract to sell the foreign currency.
Should forward prices decline during the period between a Portfolio's entering
into a forward contract for the sale of foreign currency and the date when it
enters into an offsetting contract for the purchase of the foreign currency, the
Portfolio would realize a gain to the extent the price of the currency it has
agreed to sell exceeds the price of the currency it has agreed to purchase.
Should forward prices increase, the Portfolio would suffer a loss to the extent
the price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell. Although such contracts tend to minimize the
risk of loss due to a decline in the value of the hedged currency, they also
tend to limit any potential gain that might result should the value of such
currency increase. A Portfolio may have to convert its holdings of foreign
currencies into U.S. Dollars from time to time in order to meet such needs as
Portfolio expenses and redemption requests. Although foreign exchange dealers do
not charge a fee for conversion, they do realize a profit based on the
difference (the "spread") between the prices at which they are buying and
selling various currencies.
The returns available from foreign currency denominated debt instruments can be
adversely affected by changes in exchange rates. The investment manager believes
that the use of foreign currency hedging techniques, including "cross-hedges"
for the International, Global Income, Financial Services, Global Blue Chip, and
International Growth and Income Portfolios, can help protect against declines in
the U.S. Dollar value of income available for distribution to shareholders, and
against declines in the net asset value of a Portfolio's shares resulting from
adverse changes in currency exchange rates. For example, the return available
from securities denominated in a particular foreign currency would diminish if
the value of the U.S. Dollar increased against that currency. Such a decline
could be partially or completely offset by the increased value of a cross-hedge
involving a forward foreign currency exchange contract to sell a different
foreign currency, if that contract were available on terms more advantageous to
the Portfolio than a contract to sell the currency in which the position being
hedged is denominated. The investment manager believes that cross-hedges can
therefore provide significant protection of net asset value in the event of a
general rise in the U.S. Dollar against foreign currencies. However, a
cross-hedge cannot provide assured protection against exchange rate risks and,
if the investment manager misjudges future exchange rate relationships, the
Portfolio could be in a less advantageous position than if such a hedge had not
been established.
A Portfolio will not enter into forward contracts or maintain a net exposure in
such contracts when the Portfolio would be obligated to deliver an amount of
foreign currency in excess of the value of the Portfolio's securities or other
assets (a) denominated in 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, except that
there is no limit as to the percentage of assets that the
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Global Income, Financial Services, Global Blue Chip, and International Growth
and Income Portfolios intend to commit to such forward 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 securities, an
investor has the option to select from a pool of underlying collateral the
portion of the cash flows that most closely corresponds to the investor's
forecast of interest rate movements. These instruments tend to be highly
sensitive to prepayment rates on the underlying collateral and thus place a
premium on accurate prepayment projections by the investor.
A Portfolio, other than the Money Market Portfolio, may invest in collateralized
obligations whose yield floats inversely against a specified index rate. These
"inverse floaters" are more volatile than conventional fixed or floating rate
collateralized obligations and the yield thereon, as well as the value thereof,
will fluctuate in inverse proportion to changes in the index upon which rate
adjustments are based. As a result, the yield on an inverse floater will
generally increase when market yields (as reflected by the index) decrease and
decrease when market yields increase. The extent of the volatility of inverse
floaters depends on the extent of anticipated changes in market rates of
interest. Generally, inverse floaters provide for interest rate adjustments
based upon a multiple of the specified interest index, which further increases
their volatility. The degree of additional volatility will be directly
proportional to the size of the multiple used in determining interest rate
adjustments.
A Portfolio will currently invest in only those collateralized obligations that
are fully collateralized and that meet the quality standards otherwise
applicable to the Portfolio's investments. Fully collateralized means that the
collateral will generate cash flows sufficient to meet obligations to holders of
the collateralized obligations under even the most conservative prepayment and
interest rate projections. Thus, the collateralized obligations are structured
to anticipate a worst case prepayment condition and to minimize the reinvestment
rate risk for cash flows between coupon dates for the collateralized
obligations. A worst case prepayment condition generally assumes immediate
prepayment of all securities purchased at a premium and zero prepayment of all
securities purchased at a discount. Reinvestment rate risk may be minimized by
assuming very conservative reinvestment rates and by other means such as by
maintaining the flexibility to increase principal distributions in a low
interest rate environment. The effective credit quality of the collateralized
obligations in such instances is the credit quality of the issuer of the
collateral. The requirements as to collateralization are determined by the
issuer or sponsor of the collateralized obligation in order to satisfy rating
agencies, if rated. None of the Portfolios currently intends to invest more than
5% of its total assets in collateralized obligations that are collateralized by
a pool of credit card or automobile receivables or other types of assets rather
than a pool of mortgages, mortgage-backed securities or U.S. Government
securities. Currently, none of the Portfolios intends to invest more than 5% of
its net assets in inverse floaters as described in the prospectus (see
"Investment Techniques -- Collateralized Obligations"). The Money Market
Portfolio does not invest in inverse floaters.
Payments of principal and interest on the underlying collateral securities are
not passed through directly to the holders of the collateralized obligations as
such. Collateralized obligations, depending on their structure and the rate of
prepayments, can be volatile. Some collateralized obligations may not be as
liquid as other securities.
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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, 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 5% of its net assets in zero coupon U.S. Government securities
during the current year.
SPECIAL RISK FACTORS. There are risks inherent in investing in any security,
including shares of each Portfolio. The investment manager attempts to reduce
risk through fundamental research and, for certain Portfolios, the use of a
sub-adviser; however, there is no guarantee that such efforts will be successful
and each Portfolio's returns and net asset value will fluctuate over time. There
are special risks associated with each Portfolio's investments that are
discussed below.
Special Risk Factors -- Foreign Securities. The Total Return, High Yield,
Growth, Small Cap Growth, Investment Grade Bond, Value+Growth, Blue Chip,
Aggressive Growth, Technology and Financial Services Portfolios invest primarily
in securities that are publicly traded in the United States; but, they have
discretion to invest a portion of their assets in foreign securities that are
traded principally in securities markets outside the United States. As a
non-fundamental policy, these Portfolios (other than the Financial Services
Portfolio) currently limit investment in foreign securities not publicly traded
in the United States to 25% of their total assets. The Horizon Portfolios will
invest in foreign securities at a target level normally ranging from 20% to 40%
of the allocation of each Portfolio to equity securities. These Portfolios may
also invest without limit in U.S. Dollar denominated American Depository
Receipts ("ADRs") which are bought and sold in the United States and are not
subject to the preceding limitation. The Financial Services Portfolio may invest
up to 30% of its total assets in foreign securities, including ADRs. The Value
and Small Cap Value Portfolios may invest up to 20% of their assets in
securities of foreign companies in the form of ADRs. High Return Equity may
invest up to 20% of its assets in securities of foreign companies through the
acquisition of ADRs as well as through the purchase of securities of foreign
companies that are publicly traded in the United States and foreign countries.
Foreign securities in which a Portfolio may invest include any type of security
consistent with that Portfolio's investment objective and policies. In
connection with their foreign securities investments, such Portfolios may, to a
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limited extent, engage in foreign currency exchange transactions and purchase
and sell foreign currency options and foreign currency futures contracts as a
hedge and not for speculation. The International, Global Income, Global Blue
Chip, and International Growth and Income Portfolios may invest without limit in
foreign securities and may engage in foreign currency exchange transactions and
may purchase and sell foreign currency options and foreign currency futures
contracts. See "Investment Techniques -- Options and Financial Futures
Transactions -- Foreign Currency Transactions." The Money Market Portfolio and
Government Securities Portfolio, each within its quality standards, may also
invest in securities of foreign issuers. However, such investments will be in
U.S. Dollar denominated instruments.
Foreign securities involve currency risks. The U.S. Dollar value of a foreign
security tends to decrease when the value of the U.S. Dollar rises against the
foreign currency in which the security is denominated and tends to increase when
the value of the U.S. Dollar falls against such currency. Fluctuations in
exchange rates may also affect the earning power and asset value of the foreign
entity issuing the security. Dividend and interest payments may be repatriated
based on the exchange rate at the time of disbursement or payment, and
restrictions on capital flows may be imposed. Losses and other expenses may be
incurred in converting between various currencies in connection with purchases
and sales of foreign securities.
Foreign securities may be subject to foreign government taxes that reduce their
attractiveness. Other risks of investing in such securities include political or
economic instability in the country involved, the difficulty of predicting
international trade patterns and the possibility of imposition of exchange
controls. The prices of such securities may be more volatile than those of
domestic securities and the markets for such securities may be less liquid. In
addition, there may be less publicly available information about foreign issuers
than about domestic issuers. Many foreign issuers are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic issuers. There is generally less regulation of stock
exchanges, brokers, banks, and listed companies abroad than in the United
States. With respect to certain foreign countries, there is a possibility of
expropriation or diplomatic developments which could affect investment in these
countries.
Emerging Markets. While a Portfolio's investments in foreign securities will
principally be in developed countries, a Portfolio (except for the International
Growth and Income Portfolio, which does not invest in emerging markets) may make
investments in developing or "emerging" countries, which involve exposure to
economic structures that are generally less diverse and mature than in the
United States, and to political systems that may be less stable. A developing or
emerging market country can be considered to be a country that is in the initial
stages of its industrialization cycle. Currently, emerging markets generally
include every country in the world other than the United States, Canada, Japan,
Australia, New Zealand, Hong Kong, Singapore and most Western European
countries. Currently, investing in many emerging markets may not be desirable or
feasible because of the lack of adequate custody arrangements for a Portfolio's
assets, overly burdensome repatriation and similar restrictions, the lack of
organized and liquid securities markets, unacceptable political risks or other
reasons. As opportunities to invest in securities in emerging markets develop, a
Portfolio may expand and further broaden the group of emerging markets in which
it invests. In the past, markets of developing or emerging market countries have
been more volatile than the markets of developed countries; however, such
markets often have provided higher rates of return to investors. The investment
manager believes that these characteristics can be expected to continue in the
future.
Many of the risks described above relating to foreign securities generally will
be greater for emerging markets than for developed countries. For instance,
economies in individual developing markets may differ favorably or unfavorably
from the U.S. economy in such respects as growth of domestic product, rates of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency and balance of payments positions. Many emerging markets have
experienced substantial rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on the economies and securities markets of certain developing markets.
Economies in emerging markets generally are dependent heavily upon international
trade and, accordingly, have been and may continue to be affected adversely by
trade barriers, exchange controls, managed adjustments in relative currency
values and other protectionist measures imposed or negotiated by the countries
with which they trade. These economies also have been and may continue to be
affected adversely by economic conditions in the countries with which they
trade.
Also, the securities markets of developing countries are substantially smaller,
less developed, less liquid and more volatile than the securities markets of the
United States and other more developed countries. Disclosure, regulatory and
accounting standards in many respects are less stringent than in the United
States and other developed markets. There
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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.
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
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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 companies, although they also may be issued by United
States banks or trust companies, and evidence ownership of underlying securities
issued by either a foreign or a United States corporation. Generally, Depositary
Receipts in registered form are designed for use in the United States securities
markets and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States. Depositary Receipts may be subject
to foreign currency exchange rate risk. Certain Depositary Receipts may not be
listed on an exchange and therefore may be illiquid securities.
The Growth, Total Return, Blue Chip, High Return Equity, Financial Services,
Aggressive Growth, Technology Growth and Index 500 Portfolios may also invest in
Standard & Poor's Depositary Receipts ("SPDRs"). SPDRs typically trade like a
share of common stock, and provide investment results that generally correspond
to the price and yield
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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").
When-Issued Securities. The Index 500 Portfolio may, from time to time, purchase
securities on a "when-issued" or "forward delivery" basis for payment and
delivery at a later date. The price of such securities, which may be expressed
in yield terms, is fixed at the time the commitment to purchase is made, but
delivery and payment for the when-issued or forward delivery securities takes
place at a later date. During the period between purchase and settlement, no
payment is made by the Portfolio to the issuer and no interest accrues to the
Portfolio. To the extent that assets of the Portfolio are held in cash pending
the settlement of a purchase of securities, the Portfolio would earn no income;
however, it is the Portfolio's intention to be fully invested to the extent
practicable and subject to the policies stated above. While when-issued or
forward delivery securities may be sold prior to the settlement date, the
Portfolio intends to purchase such securities with the purpose of actually
acquiring them unless a sale appears desirable for investment reasons. At the
time the Portfolio makes the commitment to purchase a security on a when-issued
or forward delivery basis, it will record the transaction and reflect the value
of the security in determining its net asset value. At the time of settlement,
the market value of the when-issued or forward delivery securities may be more
or less than the purchase price. The Portfolio does
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not believe that its net asset value or income will be adversely affected by its
purchase of securities on a when-issued or forward delivery basis.
Warrants. Certain Portfolios may invest in warrants up to a certain percentage
of the value of its respective net assets. The holder of a warrant has the
right, until the warrant expires, to purchase a given number of shares of a
particular issuer at a specified price. Such investments can provide a greater
potential for profit or loss than an equivalent investment in the underlying
security. Prices of warrants do not necessarily move, however, in tandem with
the prices of the underlying securities and are, therefore, considered
speculative investments. Warrants pay no dividends and confer no rights other
than a purchase option. Thus, if a warrant held by a Fund were not exercised by
the date of its expiration, the Fund would lose the entire purchase price of the
warrant.
Non-Diversified Portfolios. The Global Income Portfolio operates as a
"non-diversified" portfolio so that it will be able to invest more than 5% of
its assets in the obligations of an issuer, subject to the diversification
requirements of Subchapter M of the Internal Revenue Code applicable to the
Portfolio. This allows the Portfolio, as to 50% of its assets, to invest more
than 5% of its assets, but not more than 25%, in the securities of an individual
foreign government or corporate issuer. Currently, the Global Income Portfolio
does not intend to invest more than 5% of its assets in any individual corporate
issuer. Since the Portfolio may invest a relatively high percentage of its
assets in the obligations of a limited number of issuers, the Portfolio may be
more susceptible to any single economic, political or regulatory occurrence than
a diversified portfolio. The Aggressive Growth Portfolio also operates as a
"non-diversified" portfolio. As a non-diversified Portfolio, the Aggressive
Growth Fund may invest a greater proportion of its assets in the obligations of
a small number of issuers, and may be subject to greater risk and substantial
losses as a result of changes in the financial condition or the market's
assessment of the issuers. While not limited by the 1940 Act as to the
proportion of its assets that it may invest in obligations of a single issuer,
the Aggressive Growth Fund will comply with the diversification requirements
imposed by the Internal Revenue Code for qualification as a regulated investment
company. Accordingly, the Aggressive Growth Fund will not, as a non-fundamental
policy: (i) purchase more than 10% of any class of voting securities of any
issuer; (ii) with respect to 50% of its total assets, purchase securities of any
issuer (other than U.S. Government Securities) if, as a result, more than 5% of
the total value of the Portfolio's assets would be invested in securities of
that issuer; and (iii) invest more than 25% of its total assets in a single
issuer (other than U.S. Government Securities). The Aggressive Growth Fund does
not currently expect that it would invest more than 10% of its total assets in a
single issuer (other than U.S. Government Securities).
Special Risk Factors -- Small Cap Securities. The Small Cap Growth and Small Cap
Value Portfolios intend to invest a substantial portion of their assets in small
capitalization stocks similar in size to those comprising the Russell 2000.
Investments in securities of companies with small market capitalizations are
generally considered to offer greater opportunity for appreciation and to
involve greater risks of depreciation than securities of companies with larger
market capitalizations. Smaller companies often have limited product lines,
markets or financial resources, and they may be dependent upon one or a few key
people for management. Since the securities of such companies are not as broadly
traded as those of companies with larger market capitalizations, these
securities are often subject to wider and more abrupt fluctuations in market
price.
Among the reasons for the greater price volatility of these securities are the
less certain growth prospects of smaller firms, a lower degree of liquidity in
the markets for such stocks compared to larger capitalization stocks or the
market averages in general, and the greater sensitivity of small companies to
changing economic conditions. In addition to exhibiting greater volatility,
small company stocks may, to a degree, fluctuate independently of larger company
stocks. Small company stocks may decline in price as large company stock prices
rise, or rise in price as large company stock prices decline. Investors should
therefore expect that the value of the shares of the Small Cap Growth and Small
Cap Value Portfolios may be more volatile than the shares of a portfolio that
invests in larger capitalization stocks.
Additional Investment Information. The portfolio turnover rates for each
Portfolio other than the Money Market and Index 500 Portfolios are listed under
"Financial Highlights" in the prospectus. Each Portfolio's average portfolio
turnover rate is the ratio of the lesser of sales or purchases to the monthly
average value of the portfolio securities owned during the year, excluding all
securities with maturities or expiration dates at the time of acquisition of one
year or less. Since securities with maturities of less than one year are
excluded from portfolio turnover rate calculations, the portfolio turnover rate
for the Money Market Portfolio is zero. Frequency of portfolio turnover will not
be a limiting factor should a Portfolio's investment manager deem it desirable
to purchase or sell securities. Purchases and sales are made for a Portfolio
whenever necessary, in management's opinion, to meet a Portfolio's objective.
Higher portfolio turnover (over
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100%) involves correspondingly greater brokerage commissions or other
transaction costs. Higher portfolio turnover may result in the realization of
greater net short-term capital gains. See "Dividends and Taxes" herein.
The Global Income Portfolio may take full advantage of the entire range of
maturities of fixed-income securities, including zero-coupon securities, and may
adjust the average maturity of its portfolio from time to time, depending upon
its assessment of relative yields on securities of different maturities and its
expectations of future changes in interest rates. Thus, the average maturity of
the Portfolio's securities may be relatively short (under five years, for
example) at some times and relatively long (over 10 years, for example) at other
times. Generally, since shorter term debt securities tend to be more stable than
longer term debt securities, the Portfolio's average maturity will be shorter
when interest rates are expected to rise and longer when interest rates are
expected to fall. Since in most foreign markets debt securities generally are
issued with maturities of ten years or less, it is currently anticipated that
the average maturity of the Portfolio's securities will normally be in the
intermediate range (three to ten years).
Each Horizon Portfolio attempts to limit its exposure to interest rate risk by
maintaining a relatively short duration. Interest rate risk is the risk that the
value of the fixed income securities may rise or fall as interest rates change.
Under normal conditions, the target duration of the fixed-income portion of each
Horizon Portfolio is approximately 2.5 years, although it may range from 1.5 to
3.5 years depending upon market conditions. "Duration," and the more traditional
"average dollar-weighted maturity," are measures of how a fixed income portfolio
tends to react to interest rate changes. Each fixed income security held by a
Horizon Portfolio has a stated maturity. The stated maturity is the date when
the issuer must repay the entire principal amount to an investor. A security's
term to maturity is the time remaining to maturity. A security will be treated
as having a maturity earlier than its stated maturity date if the security has
technical features (such as puts or demand features) or a variable rate of
interest that, in the judgment of the investment manager, will result in the
security being valued in the market as though it has the earlier maturity.
Average dollar-weighted maturity is calculated by averaging the terms to
maturity of each fixed income security held by each Horizon Portfolio with each
maturity "weighted" according to the percentage of assets that it represents.
Unlike average dollar-weighted maturity, duration reflects both principal and
interest payments and is designed to measure more accurately a portfolio's
sensitivity to incremental changes in interest rates than does average weighted
maturity. By way of example, if the duration of a Horizon Portfolio's fixed
income securities were two years, and interest rates decreased by 100 basis
points (a basis point is one-hundredth of one percent), the market price of that
portfolio of fixed income securities would be expected to increase by
approximately 2%.
The Blue Chip Portfolio and High Yield Portfolio each does not generally make
investments for short-term profits, but it is not restricted in policy with
regard to portfolio turnover and will make changes in its investment portfolio
from time to time as business and economic conditions and market prices may
dictate and as its investment policy may require.
A Portfolio will not, as a non-fundamental policy, purchase illiquid securities
including repurchase agreements maturing in more than seven days, if, as a
result thereof, more than 15% (10% for the Money Market and High Return Equity
Portfolios) of the Portfolio's net assets, valued at the time of the
transactions, would be invested in such securities.
Lending of Portfolio Securities. Consistent with applicable regulatory
requirements, each Portfolio may lend securities (principally to broker-dealers)
without limit where such loans are callable at any time and are continuously
secured by segregated collateral (cash or other liquid securities) equal to no
less than the market value, determined daily, of the securities loaned. The
Portfolio will receive amounts equal to dividends or interest on the securities
loaned. It will also earn income for having made the loan. Any cash collateral
pursuant to these loans will be invested in short-term money market instruments.
As with other extensions of credit, there are risks of delay in recovery or even
loss of rights in the collateral should the borrower of the securities fail
financially. However, the loans would be made only to firms deemed by the
Portfolio's investment manager to be of good standing, and when the Portfolio's
investment manager believes the potential earnings to justify the attendant
risk. For each Portfolio except the Global Blue Chip Portfolio, the investment
manager will limit such lending to not more than one-third of the value of a
Portfolio's total assets. For the Global Blue Chip Portfolio, the investment
manager will, as a non-fundamental policy, limit securities lending to not more
than 5% of the value of the Portfolio's total assets.
25
<PAGE>
Short Sales Against-the-Box. The Aggressive Growth and Blue Chip Portfolios may
make short sales against-the-box for the purpose of, but not limited to,
deferring realization of loss when deemed advantageous for federal income tax
purposes. A short sale "against-the-box" is a short sale in which a Portfolio
owns at least an equal amount of the securities sold short or securities
convertible into or exchangeable for, without payment of any further
consideration, securities of the same issue as, and at least equal in amount to,
the securities sold short. As a non-fundamental policy, a Portfolio may engage
in such short sales only to the extent that not more than 10% of the Portfolio's
total assets (determined at the time of the short sale) is held as collateral
for such sales. Each Portfolio does not currently intend, however, to engage in
such short sales to the extent that more than 5% of its net assets will be held
as collateral therefor during the current year.
Repurchase Agreements. Each Portfolio may invest in repurchase agreements, which
are instruments under which it acquires ownership of a security from a
broker-dealer or bank that agrees to repurchase the security at a mutually
agreed upon time and price (which is higher than the purchase price), thereby
determining the yield during the Portfolio's holding period. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Portfolio
might have expenses in enforcing its rights, and could experience losses,
including a decline in the value of the underlying securities and loss of
income. The securities underlying a repurchase agreement will be
marked-to-market every business day so that the value of such securities is at
least equal to the investment value of the repurchase agreement, including any
accrued interest thereon. Each Portfolio currently does not intend to invest
more than 5% of its net assets in repurchase agreements during the current year.
Reverse Repurchase Agreements. The Global Blue Chip, International Growth and
Income and Index 500 Portfolios may each enter into "reverse repurchase
agreements," which are repurchase agreements in which a Portfolio, as the seller
of the securities, agrees to repurchase them at an agreed time and price. Each
Portfolio maintains a segregated account in connection with outstanding reverse
repurchase agreements. A Portfolio will enter into reverse repurchase agreements
only when the investment manager believes that the interest income to be earned
from the investment of the proceeds of the transaction will be greater than the
interest expense of the transaction.
Borrowing. Each Portfolio is authorized to borrow money for purposes of
liquidity and to provide for redemptions and distributions. Each Portfolio will
borrow only when the investment manager believes that borrowing will benefit the
Portfolio after taking into account considerations such as the costs of the
borrowing. Borrowing by each Portfolio will involve special risk considerations.
Although the principal of each Portfolio's borrowings will be fixed, a
Portfolio's assets may change in value during the time a borrowing is
outstanding, thus increasing exposure to capital risk.
Section 4(2) Paper. Subject to its investment objectives and policies, a
Portfolio may invest in commercial paper issued by major corporations under the
Securities Act of 1933 in reliance on the exemption from registration afforded
by Section 3(a)(3) thereof. Such commercial paper may be issued only to finance
current transactions and must mature in nine months or less. Trading of such
commercial paper is conducted primarily by institutional investors through
investment dealers, and individual investor participation in the commercial
paper market is very limited. A Portfolio also may invest in commercial paper
issued in reliance on the so-called "private placement" exemption from
registration afforded by Section 4(2) of the Securities Act of 1933 ("Section
4(2) paper"). Section 4(2) paper is restricted as to disposition under the
federal securities laws, and generally is sold to institutional investors such
as a Portfolio who agree that they are purchasing the paper for investment and
not with a view to public distribution. Any resale by the purchaser must be in
an exempt transaction. Section 4(2) paper normally is resold to other
institutional investors like the Portfolio through or with the assistance of the
issuer or investment dealers who make a market in the Section 4(2) paper, thus
providing liquidity. The investment manager considers the legally restricted but
readily saleable Section 4(2) paper to be liquid; however, pursuant to
procedures approved by the Board of Trustees of the Fund, if a particular
investment in Section 4(2) paper is not determined to be liquid, that investment
will be included within the limitation of the particular Portfolio on illiquid
securities. The investment manager monitors the liquidity of each Portfolio's
investments in Section 4(2) paper on a continuing basis.
Common Stocks. Subject to its investment objectives and policies, certain
Portfolios may invest in common stocks. Common stock is issued by companies to
raise cash for business purposes and represents a proportionate interest in the
issuing companies. Therefore, a Portfolio participates in the success or failure
of any company in which it holds stock. The market values of common stock can
fluctuate significantly, reflecting the business performance of the issuing
company, investor perception and general economic or financial market movements.
Smaller companies are especially sensitive to these factors. An investment in
common stock entails greater risk of becoming valueless than does an
26
<PAGE>
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.
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.
27
<PAGE>
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 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
28
<PAGE>
effort since the information must still be analyzed, weighed and reviewed by the
investment manager's staff. Such information may be useful to the investment
manager in providing services to clients other than the Portfolios, and not all
such information is used by the investment manager in connection with the
Portfolios. Conversely, such information provided to the investment manager by
broker/dealers through whom other clients of the investment manager effect
securities transactions may be useful to the investment manager in providing
services to a Portfolio.
The Trustees for the Fund review, from time to time, whether the recapture for
the benefit of a Portfolio of some portion of the brokerage commissions or
similar fees paid by a Portfolio on portfolio transactions is legally
permissible and advisable.
Brokerage -- Dreman Value Management, L.L.C.
Under the sub-advisory agreement between Scudder Kemper and Dreman Value
Management, L.L.C. ("DVM"), DVM places all orders for purchases and sales of the
High Return Equity and Financial Services Portfolios' securities. At times
investment decisions may be made to purchase or sell the same investment
securities of a Portfolio and for one or more of the other clients managed by
DVM. When two or more of such clients are simultaneously engaged in the purchase
or sale of the same security through the same trading facility, the transactions
are allocated as to amount and price in a manner considered equitable to each.
Position limits imposed by national securities exchanges may restrict the number
of options the Portfolio will be able to write on a particular security.
The above mentioned factors may have a detrimental effect on the quantities or
prices of securities, options or future contracts available to the Portfolio. On
the other hand, the ability of the Portfolio to participate in volume
transactions may produce better executions for the Portfolio in some cases. The
Board of Trustees believes that the benefits of DVM's organization outweigh any
limitations that may arise from simultaneous transactions or position
limitations.
DVM, in effecting purchases and sales of portfolio securities for the account of
the Portfolio, will implement the Portfolio's policy of seeking best execution
of orders. DVM may be permitted to pay higher brokerage commissions for research
services as described below. Consistent with this policy, orders for portfolio
transactions are placed with broker-dealer firms giving consideration to the
quality, quantity and nature of each firm's professional services, which include
execution, financial responsibility, responsiveness, clearance procedures, wire
service quotations and statistical and other research information provided to
the Portfolio and DVM. Subject to seeking best execution of an order, brokerage
is allocated on the basis of all services provided. Any research benefits
derived are available for all clients of DVM. In selecting among firms believed
to meet the criteria for handling a particular transaction, DVM may give
consideration to those firms that have sold or are selling shares of the
Portfolio and of other funds managed by Scudder Kemper and its affiliates, as
well as to those firms that provide market, statistical and other research
information to the Portfolio and DVM, although DVM is not authorized to pay
higher commissions to firms that provide such services, except as described
below.
DVM may in certain instances be permitted to pay higher brokerage commissions
for receipt of market, statistical and other research services as defined in
Section 28(e) of the Securities Exchange Act of 1934 and interpretations
thereunder. Such services may include among other things: economic, industry or
company research reports or investment recommendations; computerized databases;
quotation and execution equipment and software; and research or analytical
computer software and services. Where products or services have a "mixed use," a
good faith effort is made to make a reasonable allocation of the cost of
products or services in accordance with the anticipated research and
non-research uses and the cost attributable to non-research use is paid by DVM
in cash. Subject to Section 28(e) and procedures adopted by the Board of
Trustees, the Portfolio could pay a firm that provides research services
commissions for effecting a securities transaction for the Portfolio in excess
of the amount other firms would have charged for the transaction if DVM
determines in good faith that the greater commission is reasonable in relation
to the value of the brokerage and research services provided by the executing
firm viewed in terms either of a particular transaction or DVM's overall
responsibilities to the Portfolio and other clients. Not all of such research
services may be useful or of value in advising the Portfolio. Research benefits
will be available for all clients of DVM. The sub-advisory fee paid by Scudder
Kemper to DVM is not reduced because these research services are received.
Brokerage Commissions - Bankers Trust Company
29
<PAGE>
Under the sub-advisory agreement between Scudder Kemper and Bankers Trust
Company ("Bankers Trust"), Bankers Trust will place orders for the purchase and
sale of the Index 500 Portfolio's securities.
The primary objective of Bankers Trust in placing orders for the purchase and
sale of securities for the Portfolio is to obtain the most favorable net
results, taking into account such factors as price, commission, where
applicable, size of order, difficulty of execution and skill required of the
executing broker/dealer. Bankers Trust routinely reviews commission rates,
execution and settlement services performed and makes internal and external
comparisons.
When it can be done consistently with the policy of obtaining the most favorable
net results, it is Bankers Trust's practice to place orders with broker/dealers
who supply brokerage and research services to Bankers Trust or the Portfolio.
The term "research services" includes advice as to the value of securities; the
advisability of investing in, purchasing or selling securities; the availability
of securities or purchasers or sellers of securities; and analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts. Bankers Trust is authorized
when placing portfolio transactions, as applicable, for the Portfolio to pay a
brokerage commission in excess of that which another broker might charge for
executing the same transaction on account of execution services and the receipt
of research services. Bankers Trust has negotiated arrangements, which are not
applicable to most fixed-income transactions, with certain broker/dealers
pursuant to which a broker/dealer will provide research services to Bankers
Trust or the Portfolio in exchange for the direction by Bankers Trust of
brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity transactions. Bankers
Trust will not place orders with broker/dealers on the basis that the
broker/dealer has or has not sold variable life insurance policies and variable
annuity contracts for which the Portfolio is an investment option. In effecting
transactions in over-the-counter securities, orders are placed with the
principal market makers for the security being traded unless, after exercising
care, it appears that more favorable results are available elsewhere.
Although certain research services from broker/dealers may be useful to the
Portfolio and to Bankers Trust, it is the opinion of Bankers Trust that such
information only supplements Bankers Trust's own research effort since the
information must still be analyzed, weighed, and reviewed by Bankers Trust's
staff. Such information may be useful to Bankers Trust in providing services to
clients other than the Portfolio, and not all such information is used by
Bankers Trust in connection with the Portfolio. Conversely, such information
provided to Bankers Trust by broker/dealers through whom other clients of
Bankers Trust effect securities transactions may be useful to Bankers Trust in
providing services to the Portfolio.
The Trustees review, from time to time, whether the recapture for the benefit of
the Portfolio of some portion of the brokerage commissions or similar fees paid
by the Portfolio on portfolio transactions is legally permissible and advisable.
Brokerage Commissions
The table below shows total brokerage commissions paid by each Portfolio (other
than the Aggressive Growth and Technology Portfolios, which commenced operations
on May 1, 1999, and the Index 500 Portfolio, which commenced operations on
September 1, 1999) then existing for the last three fiscal years and, for the
most recent fiscal year, the percentage thereof that was allocated to firms
based upon research information provided.
<TABLE>
<CAPTION>
Allocated to
Firms Based on
Research in
Portfolio Fiscal 1998 Fiscal 1998+ Fiscal 1997 Fiscal 1996
- --------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Money Market $0 0% $ 0 $ 0
Total Return $2,772,000 42% $ 1,512,000 $ 1,562,000
High Yield $4,933,000 0% $ 3,627,000 $ 2,567,000
Growth $1,325,000 94% $ 1,936,000 $ 1,782,000
Government Securities $14,000 0% $ 16,000 $ 20,000
International $928,000 97% $ 747,000 $ 936,000
Small Cap Growth $1,115,000 90% $ 2,658,000 $ 787,000
Investment Grade Bond $37,000 0% $ 31,000 $ 6,000**
30
<PAGE>
Contrarian Value $292,000 97% $ 92,000 $ 26,000**
High Return Equity* $38,000 4% N/A N/A
Financial Services* $8,000 1% N/A N/A
Small Cap Value $190,000 75% $ 31,000 $ 50,000**
Value+Growth $275,000 89% $ 97,000 $ 15,000**
Horizon 20+ $79,000 39% $ 35,000 $ 5,000**
Horizon 10+ $82,000 35% $ 37,000 $ 6,000**
Horizon 5 $37,000 32% $ 17,000 $ 2,000**
Blue Chip $134,000 99% $ 31,000*** --
Global Income $0 0% $ 0*** --
International Growth and Income* $10,000 96% N/A N/A
Global Blue Chip* $6,000 97% N/A N/A
</TABLE>
* Commencement of Operations on (May 4, 1998 for High Return Equity and
Financial Services, May 5, 1998 for International Growth and Income and
Global Blue Chip) through December 31, 1998.
** Commencement of Operations on May 1, 1996 through December 31, 1996.
*** Commencement of Operations on May 1, 1997 through December 31, 1997.
+ Estimated for the Growth, International, Horizon, Blue Chip, and Global
Income Portfolios.
INVESTMENT MANAGER AND DISTRIBUTOR
Investment Manager. Scudder Kemper Investments, Inc., 345 Park Avenue, New York,
New York is investment manager for each Portfolio. Scudder Kemper is
approximately 70% owned by Zurich Insurance Company, a leading internationally
recognized provider of insurance and financial services in property/casualty and
life insurance, reinsurance and structured financial solutions as well as asset
management. The balance of Scudder Kemper is owned by its officers and
employees. Pursuant to investment management agreements, Scudder Kemper acts as
investment manager to each Portfolio, manages its investments, administers its
business affairs, furnishes office facilities and equipment, provides clerical
and administrative services, and permits any of its officers or employees to
serve without compensation as trustees or officers of the Fund if elected to
such positions. The investment management agreements provide that each Portfolio
shall pay the charges and expenses of its operations, including the fees and
expenses of the trustees (except those who are affiliates of Scudder Kemper),
independent auditors, counsel, custodian and transfer agent and the cost of
share certificates, reports and notices to shareholders, brokerage commissions
or transaction costs, costs of calculating net asset value and maintaining all
accounting records related thereto, taxes and membership dues. The Fund bears
the expenses of registration of its shares with the SEC, while Kemper
Distributors, Inc., ("KDI") as principal underwriter, pays 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
31
<PAGE>
different amounts and at different times for more than one but less than all
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling the security. In addition, purchases
or sales of the same security may be made for two or more clients on the same
day. In such event, such transactions will be allocated among the clients in a
manner believed by the investment manager to be equitable to each. In some
cases, this procedure could have an adverse effect on the price or amount of the
securities purchased or sold by a Portfolio. Purchase and sale orders for a
Portfolio may be combined with those of other clients of the investment manager
in the interest of the most favorable net results to a Portfolio.
In certain cases, the investments for the Portfolios are managed by the same
individuals who manager one or more other mutual funds advised by Scudder Kemper
that have similar names, objectives and investment styles as a Portfolio. You
should be aware that the Portfolios are likely to differ from these other mutual
funds in size, cash flow pattern and tax matters. Accordingly, the holdings and
performance of the Portfolios can be expected to vary from those of the other
mutual funds.
The investment manager maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The investment manager receives
published reports and statistical compilations from issuers and other sources,
as well as analyses from brokers and dealers who may execute portfolio
transactions for the investment manager's clients. However, the investment
manager regards this information and material as an adjunct to its own research
activities. The investment manager's international investment management team
travels the world, researching hundreds of companies. In selecting the
securities in which each Portfolio may invest, the conclusions and investment
decisions of the investment manager with respect to the Fund are based primarily
on the analyses of its own research department.
Responsibility for overall management of each Portfolio rests with the Fund's
Board of Trustees and officers. Professional investment supervision is provided
by Scudder Kemper. The investment management agreements provide that Scudder
Kemper shall act as each Portfolio's investment adviser, manage its investments
and provide it with various services and facilities.
On December 31, 1997, pursuant to the terms of an agreement, Scudder, Stevens &
Clark, Inc. ("Scudder"), and Zurich Insurance Company ("Zurich"), formed a new
global investment organization by combining Scudder with Zurich Kemper
Investments, Inc. ("ZKI") and Zurich Kemper Value Advisors, Inc. ("ZKVA"),
former subsidiaries of Zurich. ZKI, the former investment manager for each
Portfolio. Upon completion of the transaction, Scudder changed its name to
Scudder Kemper Investments, Inc. As a result of the transaction, Zurich owns
approximately 70% of Scudder Kemper, with the balance owned by Scudder Kemper's
officers and employees.
On September 7, 1998, the businesses of Zurich (including Zurich's 70% interest
in Scudder Kemper) and the financial services businesses of B.A.T Industries
p.l.c. ("B.A.T") were combined to form a new global insurance and financial
services company known as Zurich Financial Services Group. By way of a dual
holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services, Inc., with the balance initially
owned by former B.A.T shareholders.
Upon consummation of this transaction, each Portfolio's existing investment
management agreement with Scudder Kemper was deemed to have been assigned and,
therefore, terminated. The Board approved new investment management agreements
with Scudder Kemper, which are substantially identical to the current investment
management agreements, except for the date of execution (now September 7, 1998)
and termination. These agreements became effective upon the termination of the
then current investment management agreements and were approved by shareholders
at a special meeting which concluded in December 1998. The investment management
agreements for the Aggressive Growth Portfolio and the Technology Growth
Portfolio are effective as of their inception, May 1, 1999, and, for the Index
500 Portfolio, September 1, 1999.
Each Portfolio pays Scudder Kemper an investment management fee, based on the
average daily net assets of the Portfolio, payable monthly, at 1/12 of the
annual rates shown below:
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<PAGE>
Portfolio Annual Management Fee Rate
- --------- --------------------------
Money Market 0.50%
Total Return 0.55%
High Yield 0.60%
Growth 0.60%
Government Securities 0.55%
International 0.75%
Small Cap Growth 0.65%
Investment Grade Bond 0.60%
Contrarian Value 0.75%
Small Cap Value 0.75%
Value+ Growth 0.75%
Horizon 20+ 0.60%
Horizon 10+ 0.60%
Horizon 5 0.60%
Blue Chip 0.65%
Global Income 0.75%
International Growth and Income 1.00%*
Index 500 Portfolio 1.00%
*By contract, fees are capped at 0.70% through 4/30/00.
The High Return Equity, Financial Services, Aggressive Growth, and Technology
Portfolios each pays Scudder Kemper a graduated investment management fee, based
on the average daily net assets of the Portfolio, payable monthly, at 1/12 of
the annual rates shown below:
Average Daily Net Assets of the Portfolio Annual Management Fee Rate
- ----------------------------------------- --------------------------
$0-$250 million 0.75%
$250 million-$1 billion 0.72%
$1 billion-$2.5 billion 0.70%
$2.5 billion-$5 billion 0.68%
$5 billion-$7.5 billion 0.65%
$7.5 billion-$10 billion 0.64%
$10 billion-$12.5 billion 0.63%
Over $12.5 billion 0.62%
The Kemper Global Blue Chip Portfolio pays Scudder Kemper a graduated investment
management fee, based on the average daily net assets of the Portfolio, payable
monthly, at 1/12 of the annual rates shown below:
Average Daily Net Assets of the Portfolio Annual Management Fee Rate*
- ----------------------------------------- ---------------------------
$0-$250 million 1.00%
$250 million-$1 billion 0.95%
Over $1 billion 0.90%
*By contract, fees are capped at 0.85% through 4/30/00.
33
<PAGE>
The Kemper Index 500 Portfolio pays Scudder Kemper a graduated investment
management fee, based on 1% of the average daily net assets of the Portfolio,
payable monthly, at 1/12 of the annual rates shown below:
Average Daily Net Assets of the Portfolio Annual Management Fee Rate
- ----------------------------------------- --------------------------
$0-$200 million 0.45%
$200 million-$750 million 0.42%
$750 million-$2.0 billion 0.40%
$2.0 billion-$5.0 billion 0.38%
Over $5.0 billion 0.35%
The investment management fees paid by each Portfolio (other than the Aggressive
Growth and Technology Portfolios, which commenced operations on May 1, 1999, and
the Index 500 Portfolio, which commenced operations on September 1, 1999) for
its last three fiscal years are shown in the table below.
<TABLE>
<CAPTION>
Portfolio Fiscal 1998 Fiscal 1997 Fiscal 1996
- --------- ----------- ----------- -----------
<S> <C> <C> <C>
Money Market $ 600,000 $ 497,000 $ 376,000
Total Return $ 4,521,000 $ 4,072,000 $ 3,691,000
High Yield $ 2,606,000 $ 1,991,000 $ 1,565,000
Growth $ 3,600,000 $ 3,142,000 $ 2,658,000
Government Securities $ 564,000 $ 460,000 $ 485,000
International $ 1,613,000 $ 1,419,000 $ 1,174,000
Small Cap Growth $ 1,060,000 $ 633,000 $ 340,000
Investment Grade Bond $ 184,000 $ 46,000 $ 4,000*
Contrarian Value $ 1,641,000 $ 604,000 $ 44,000*
Small Cap Value $ 702,000 $ 307,000 $ 33,000*
Value+Growth $ 825,000 $ 257,000 $ 22,000*
Horizon 20+ $ 164,000 $ 56,000 $ 6,000*
Horizon 10+ $ 223,000 $ 77,000 $ 11,000*
Horizon 5 $ 137,000 $ 44,000 $ 5,000*
Blue Chip $ 306,000 $ 27,000** --
Global Income $ 31,000 $9,000** --
High Return Equity $ 100,000***+ N/A N/A
Financial Services $ 26,000***+ N/A N/A
International Growth and Income $ 6,000***# N/A N/A
Global Blue Chip $ 9,000***# N/A N/A
</TABLE>
* Commencement of Operations on May 1, 1996 through December 31, 1996.
** Commencement of Operations on May 1, 1997 through December 31, 1997.
*** Commencement of Operations on (May 4, 1998 for High Return Equity and
Financial Services, May 5, 1998 for International Growth and Income and
Global Blue Chip) through December 31, 1998.
+ Amount shown after voluntary fee waiver by the investment manager of
$25,000 and $15,000 for the High Return Equity and Financial Services
Portfolios, respectively. The actual level of this voluntary waiver
shall be in the investment manager's discretion and, upon notice to the
Portfolio, the investment manager may at any time terminate this
waiver.
# Amount shown after contractual fee waiver by the investment manager of
$2,000 and $3,000 for the International Growth and Income, and Global
Blue Chip Portfolios, respectively. This fee waiver is in effect
through April 30, 2000.
Fund Sub-Adviser for the International and Global Income Portfolios. Scudder
Investments (U.K.) Ltd. ("Scudder UK"), 1 South Place, London, U.K. EC2M 2ZS, an
affiliate of Scudder Kemper, is the sub-adviser for the International and Global
Income Portfolios. Scudder UK acts as sub-adviser pursuant to the terms of a
sub-advisory agreement between it and Scudder Kemper for the Portfolios. Scudder
UK is subject to regulation by the Investment Management Regulatory Organization
in England as well as the SEC.
34
<PAGE>
Under the terms of the sub-advisory agreement for the International and Global
Income Portfolios, Scudder UK renders investment advisory and management
services with regard to that portion of a Portfolio's assets as may be allocated
to Scudder UK by the investment manager from time to time for management,
including services related to foreign securities, foreign currency transactions
and related investments. Scudder UK may, under the terms of the sub-advisory
agreement, render similar services to others including other investment
companies. For its services, Scudder UK will receive from Scudder Kemper a
monthly fee at 1/12 of the following annual rates applied to the portion of the
average daily net assets of each Portfolio allocated by Scudder Kemper to
Scudder UK for management: 0.35% for the International Portfolio and 0.30% for
the Global Income Portfolio. Scudder UK permits any of its officers or employees
to serve without compensation as trustees or officers of the Fund if elected to
such positions.
Each sub-advisory agreement provides that Scudder UK will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with matters to which the sub-advisory agreement relates, except a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of Scudder UK in the performance of its duties or from reckless disregard
by Scudder UK of its obligations and duties under the sub-advisory agreement.
Each sub-advisory agreement continues in effect from year to year so long as its
continuation is approved at least annually by a majority of the trustees who are
not parties to such agreement or interested persons of any such party except in
their capacity as trustees of the Fund and by the shareholders of the Portfolio
subject thereto or the Board of Trustees. Each sub-advisory agreement may be
terminated at any time for a Portfolio upon 60 days' notice by Scudder Kemper,
Scudder UK or the Board of Trustees, or by a majority vote of the outstanding
shares of the Portfolio, and will terminate automatically upon assignment or
upon the termination of the Fund's investment management agreement. If
additional Portfolios become subject to the sub-advisory agreement, the
provisions concerning continuation, amendment and termination shall be on a
Portfolio-by-Portfolio basis. Additional Portfolios may be subject to a
different agreement.
The sub-adviser fees paid by Scudder Kemper to Scudder UK for the International
and Global Income Portfolios for the period from May 1, 1997 (inception) through
December 31, 1997 were $657,013 and $3,176, and for fiscal year 1998 were
(estimated) $753,000 and $12,000, respectively.
Fund Sub-Adviser for the High Return Equity and Financial Services Portfolios
Dreman Value Management, L.L.C. ("DVM"), Ten Exchange Place, Jersey City, New
Jersey 07302, is the sub-adviser for the High Return Equity Portfolio and the
Financial Services Portfolio. DVM is controlled by David N. Dreman. DVM serves
as sub-adviser pursuant to the terms of a sub-advisory agreement between it and
the Adviser for each Portfolio. DVM was formed in April 1997 and has served as
sub-adviser for these Portfolios since their inception.
Under the terms of each sub-advisory agreement, DVM manages the investment and
reinvestment of each Portfolio's assets and will provide such investment advice,
research and assistance as the investment manager may, from time to time,
reasonably request.
Each sub-advisory agreement provides that DVM will not be liable for any error
of judgment or mistake of law or for any loss suffered by the Portfolio in
connection with matters to which the sub-advisory agreement relates, except a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of DVM in the performance of its duties or from reckless disregard by DVM
of its obligations and duties under the sub-advisory agreement.
Each sub-advisory agreement with DVM remains in effect until May 1, 2003 unless
sooner terminated or not annually approved as described below. Notwithstanding
the foregoing, the sub-advisory agreement shall continue in effect through May
1, 2003 and year to year thereafter, but only as long as such continuance is
specifically approved at least annually (a) by a majority of the trustees who
are not parties to such agreement or interested persons of any such party except
in their capacity as trustees of the Fund, and (b) by the shareholders or the
Board of Trustees of the Fund. The sub-advisory agreement may be terminated at
any time upon 60 days' notice by Scudder Kemper or by the Board of Trustees of
the Fund or by majority vote of the outstanding shares of the Portfolio, and
will terminate automatically upon assignment or upon termination of the
Portfolio's investment management agreement. DVM may not terminate each
sub-advisory agreement prior to May 1, 2001. Thereafter, DVM may terminate the
sub-advisory agreement upon 90 days' notice to the investment manager.
35
<PAGE>
The investment manager pays DVM for its services a sub-advisory fee, payable
monthly, at 1/12 of the annual rates shown below:
Average Daily Net Assets of the Portfolio Annual Sub-Adviser Fee Rate
- ----------------------------------------- ---------------------------
$0-$250 million 0.240%
$250 million-$1 billion 0.230%
$1 billion-$2.5 billion 0.224%
$2.5 billion-$5 billion 0.218%
$5 billion-$7.5 billion 0.208%
$7.5 billion-$10 billion 0.205%
$10 billion-$12.5 billion 0.202%
Over $12.5 billion 0.198%
The sub-adviser fees paid by Scudder Kemper Investments, Inc. to DVM for the
Kemper Dreman High Return Equity and Kemper Dreman Financial Services Portfolios
for the period from May 4, 1998 (inception) through December 31, 1998 were
$13,268 and $40,717, respectively.
Fund Sub-Adviser for the Index 500 Portfolio. Pursuant to a sub-advisory
agreement entered into between the Adviser and Bankers Trust Company ("Bankers
Trust") on September 1, 1999, Bankers Trust provides sub-advisory services
relating to the management of the Index 500 Portfolio. Bankers Trust, a New York
banking corporation with principal offices at 130 Liberty Street, New York, New
York, 10006, is a wholly owned subsidiary of Deutsche Bank AG, and one of the
nation's leading managers of index funds.
Under the terms of the sub-advisory agreement, Bankers Trust manages the
investment and reinvestment of the Portfolio's assets and will provide such
investment advice, research and assistance as the Adviser may, from time to
time, reasonably request.
The sub-advisory agreement provides that Bankers Trust will not be liable for
any error of judgment or mistake of law or for any loss suffered by the
Portfolio in connection with matters to which the sub-advisory agreement
relates, except a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of Bankers Trust in the performance of its duties or from
reckless disregard by Bankers Trust of its obligations and duties under the
sub-advisory agreement.
The sub-advisory agreement shall remain in full force and effect through
September 30, 2000, and is renewable annually thereafter by specific approval of
the Board of Trustees of the Fund or by the affirmative vote of a majority of
the outstanding voting securities of the Portfolio. Any such renewal shall be
approved by the vote of a majority of the Trustees of the Fund who are not
interested persons under the 1940 Act, cast in person at a meeting called for
the purpose of voting on such renewal. The sub-advisory agreement may be
terminated without penalty at any time by the Trustees, by vote of a majority of
the outstanding voting securities of the Portfolio, or by the Adviser or Bankers
Trust upon 60 days' written notice, and will automatically terminate in the
event of its assignment by either party to the agreement, as defined in the 1940
Act, or upon termination of the Investment Management Agreement between the
Adviser and the Fund. In addition, the Adviser or the Fund may terminate the
sub-advisory agreement upon immediate notice if Bankers Trust becomes
statutorily disqualified from performing its duties under this agreement or
otherwise is legally prohibited from operating as an investment adviser.
The fee paid to Bankers Trust is calculated on a monthly basis and is based upon
the average daily net assets in the Portfolio. The annual fee rate decreases as
the level of the Portfolio's net assets increases. The annual fee rate for each
level of assets is: 0.08% on the first $200 million of average daily net assets,
0.05% on the next $550 million, and 0.025% on the balance over $750 million,
with a minimum annual fee of $100,000. The minimum annual fee is not applicable
for the first year of the sub-advisory agreement.
36
<PAGE>
Fund Accounting Agent. Scudder Fund Accounting Corp. ("SFAC"), Two International
Place, Boston, Massachusetts, 02210-4103, a subsidiary of Scudder Kemper, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records of each Portfolio. SFAC receives no
fee for its services to each Portfolio, other than the High Return Equity,
Financial Services, Global Blue Chip, International Growth and Income,
Aggressive Growth, and Technology Portfolios; however, subject to Board
approval, at some time in the future, SFAC may seek payment for its services to
those Portfolios under its agreement with such Portfolios. Each agreement states
that the Aggressive Growth, Technology, High Return Equity and Financial
Services Portfolios shall each pay SFAC an annual fee equal to 0.025% of the
first $150 million of average daily net assets of the Portfolio, 0.0075% of the
next $850 million of such assets and 0.0045% of such assets in excess of $1
billion, plus holding and transaction charges for this service. Each agreement
states that the Global Blue Chip and International Growth and Income Portfolios
shall each pay SFAC an annual fee equal to 0.065% of the first $150 million of
average daily net assets of the Portfolio, 0.04% of the next $850 million of
such assets and 0.02% of such assets in excess of $1 billion, plus holding and
transaction charges for this service. However, the Portfolios incurred no
accounting fees for the period ended December 31, 1998, after a fee reduction by
SFAC.
Principal Underwriter. Kemper Distributors, Inc. ("KDI"), 222 South Riverside
Plaza, Chicago, Illinois 60606, a wholly owned subsidiary of Scudder Kemper, is
the distributor and principal underwriter for shares of each Portfolio in the
continuous offering of its shares. The Fund pays the cost for the prospectus and
shareholder reports to be set in type and printed for existing shareholders, and
KDI pays for the printing and distribution of copies thereof used in connection
with the offering of shares to prospective shareholders. KDI also pays for
supplementary sales literature and advertising costs. Terms of continuation,
termination and assignment under the underwriting agreement are identical to
those described above with regard to the investment management agreements,
except that termination other than upon assignment requires sixty days' notice.
Custodian and Transfer Agent. State Street Bank and Trust Company ("State
Street"), 225 Franklin Street, Boston, Massachusetts 02110, as custodian, has
custody of all securities and cash of each Portfolio (other than the Global
Income, International, Global Blue Chip, and International Growth and Income
Portfolios). The Chase Manhattan Bank, Chase MetroTech Center, Brooklyn, New
York 11245, as custodian, has custody of all securities and cash of the Global
Income and International Portfolios. Brown Brothers Harriman & Co., as
custodian, has custody of all securities and cash of the Global Blue Chip and
International Growth and Income Portfolios. Each custodian attends to the
collection of principal and income, and payment for and collection of proceeds
of securities bought and sold by those Portfolios. Investors Fiduciary Trust
Company ("IFTC"), 801 Pennsylvania Avenue, Kansas City, Missouri 64105 is the
transfer agent and dividend-paying agent for each Portfolio. For the fiscal year
ended December 31, 1998, no fees were paid to IFTC by any Portfolio.
Pursuant to a services agreement with IFTC, Kemper Service Company ("KSvC"), an
affiliate of Scudder Kemper, serves as "Shareholder Service Agent" of each Fund
and, as such, performs all of IFTC's duties as transfer agent and dividend
paying agent. IFTC receives as transfer agent, and pays to KSvC as follows:
prior to January 1, 1999, annual account fees at a maximum rate of $6 per
account plus account set up, transaction, maintenance charges and out-of-pocket
expense reimbursement and effective January 1, 1999, for the equity Portfolios
annual account fees of $10.00 ($18.00 for retirement accounts) plus set up
charges, an asset-based fee of 0.08% and out-of-pocket reimbursement, and for
the fixed-income Portfolios annual account fees of $14.00 ($23.00 for retirement
accounts) plus set up charges, an asset-based fee of 0.05% and out-of-pocket
reimbursement.
Independent Auditors And Reports To Shareholders. The Fund's independent
auditors, Ernst & Young LLP, 233 South Wacker Drive, Chicago, Illinois 60606,
audit and report on the Portfolios' annual financial statements, review certain
regulatory reports and the Portfolios' federal income tax returns, and perform
other professional accounting, auditing, tax and advisory services when engaged
to do so by the Fund. Shareholders will receive annual audited financial
statements and semi-annual unaudited financial statements.
Legal Counsel. Vedder, Price, Kaufman & Kammholz, 222 N. LaSalle St., Chicago,
Illinois, serves as legal counsel to each Portfolio other than the Financial
Services, Global Blue Chip, International Growth and Income and Index 500
Portfolios. Dechert Price & Rhoads, Ten Post Office Square South, Boston,
Massachusetts, serves as legal counsel to the Financial Services, Index 500,
Global Blue Chip, and International Growth and Income Portfolios.
37
<PAGE>
PURCHASE AND REDEMPTION OF SHARES
Fund shares are sold at their net asset value next determined after an order and
payment are received as described below. (See "Net Asset Value").
Upon receipt by a Portfolio's Transfer Agent of a request for redemption, shares
will be redeemed by the Fund, on behalf of a particular Portfolio, at the
applicable net asset value as described below.
The Fund, on behalf of a particular Portfolio, may suspend the right of
redemption or delay payment more than seven days (a) during any period when the
New York Stock Exchange ("Exchange") is closed, other than customary weekend and
holiday closings or during any period in which trading on the Exchange is
restricted, (b) during any period when an emergency exists as a result of which
(i) disposal of a Portfolio's investments is not reasonably practicable, or (ii)
it is not reasonably practicable for the Portfolio to determine the value of its
net assets, or (c) for such other periods as the Securities and Exchange
Commission may by order permit for the protection of the Fund's shareholders.
OFFICERS AND TRUSTEES
The Fund's activities are supervised by the Fund's Board of Trustees. The
officers and trustees of the Fund, their principal occupations, employment
history for the past five years, and their affiliations, if any, with Scudder
Kemper or Scudder UK, the investment manager or sub-adviser for the Fund and
KDI, the Fund's principal underwriter or their affiliates, are listed below. All
persons named as trustees also serve in similar capacities for other funds
advised by Scudder Kemper.
JAMES E. AKINS (10/15/26), Trustee, 2904 Garfield Terrace, N.W., Washington,
D.C.; Consultant on International, Political and Economic Affairs; formerly a
career United States Foreign Service Officer, Energy Adviser for the White House
and United States Ambassador to Saudi Arabia, 1973-76.
JAMES R. EDGAR (07/22/46), Trustee, 1927 County Road, 150E, Seymour, Illinois;
Distinguished Fellow, Institute of Government and Public Affairs, University of
Illinois; Director, Kemper Insurance Companies; formerly, Governor of the State
of Illinois , 1991-1999.
ARTHUR R. GOTTSCHALK (02/13/25), Trustee, 10642 Brookridge Drive, Frankfort,
Illinois; Retired; formerly, President, Illinois Manufacturers Association;
Trustee, Illinois Masonic Medical Center; formerly, Illinois State Senator;
formerly, Vice President, The Reuben H. Donnelley Corp.; formerly, attorney.
FREDERICK T. KELSEY (04/25/27), Trustee, 4010 Arbor Lane, Unit 102, Northfield,
Illinois; Retired; formerly, consultant to Goldman, Sachs & Co.; formerly,
President, Treasurer and Trustee of Institutional Liquid Assets and its
affiliated mutual funds; Trustee of the Northern Institutional Funds; formerly,
Trustee of the Pilot Fund.
THOMAS W. LITTAUER* (4/26/55), 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.
38
<PAGE>
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.
DAVID H. BURSHTAN* (10/24/61), Vice President, 222 South Riverside Plaza,
Chicago, Illinois; Senior Vice President, Scudder Kemper; formerly, employed as
a senior international securities analyst from 1993 to 1995.
ROBERT S. CESSINE* (01/05/50), Vice President, 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Scudder Kemper; formerly, Vice President,
Wellington Management Company.
TRACY McCORMICK* (9/27/54), Vice President, 222 South Riverside Plaza, Chicago,
Illinois; Managing Director, Scudder Kemper; formerly, senior vice president and
portfolio manager for an investment management company from August 1992 to
September 1995.
PHILIP J. COLLORA* (11/15/45), Vice President and Secretary, 222 South Riverside
Plaza, Chicago, Illinois; Attorney, Senior Vice President, Scudder Kemper.
PHILIP S. FORTUNA* (11/30/57), Vice President, 101 California Street, Suite
4100, San Francisco, California; Managing Director, Scudder Kemper.
ANN M. McCREARY* (11/6/56), Vice President, 345 Park Avenue, New York, New York;
Managing Director, Scudder Kemper.
MICHAEL A. McNAMARA* (12/28/44), Vice President, 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Scudder Kemper.
ROBERT C. PECK, JR.* (10/1/46), Vice President, 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Scudder Kemper; formerly, Executive Vice
President and Chief Investment Officer with an unaffiliated investment
management firm from 1988 to 1997.
KATHRYN L. QUIRK* (12/3/52), Vice President, 345 Park Avenue, New York, New
York; Managing Director, Scudder Kemper.
FRANK J. RACHWALSKI, JR.* (03/26/45), Vice President, 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Scudder Kemper.
HARRY E. RESIS, JR.* (11/24/45), Vice President, 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Scudder Kemper.
THOMAS F. SASSI* (11/7/42), Vice President, 345 Park Avenue, New York, New York;
Managing Director, Scudder Kemper; formerly, consultant with an unaffiliated
investment consulting firm and an officer of an unaffiliated investment banking
firm from 1993 to 1996.
RICHARD L. VANDENBERG* (11/16/49), Vice President, 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Scudder Kemper; formerly, senior vice
president and portfolio manager with an unaffiliated investment management firm.
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).
39
<PAGE>
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 Investment Company Act
of 1940.
The trustees and officers who are "interested persons," as designated above,
receive no compensation from the Fund. The table below shows amounts paid or
accrued to those trustees who are not designated "interested persons," during
the 1998 calendar year.
<TABLE>
<CAPTION>
Aggregate Total Compensation From Fund and
Name of Trustee Compensation From Fund Fund Complex Paid to Trustees***
- --------------- ---------------------- --------------------------------
<S> <C> <C>
James E. Akins $45,800 $140,800
James R. Edgar* $ 0 $ 0
Arthur R. Gottschalk** $47,800 $146,300
Frederick T. Kelsey $45,800 $141,300
Fred B. Renwick $45,800 $141,300
John G. Weithers $47,800 $146,300
John B. Tingleff**** $47,800 $146,300
</TABLE>
* James R. Edgar became a trustee on May 27, 1999
** Includes deferred fees and interest thereon pursuant to deferred
compensation agreements with the Fund. Deferred amounts accrue interest
monthly at a rate equal to the yield of Zurich Money Funds -- Zurich
Money Market Fund. Total deferred fees and interest accrued for the
latest and prior fiscal years for this Fund are $151,300 for Mr.
Gottschalk.
*** Includes compensation for service on the Boards of 15 funds managed by
Scudder Kemper and its affiliates with 53 fund portfolios during
calendar year 1998. Each trustee currently serves as a board member of
15 funds managed by Scudder Kemper and its affiliates with 55 fund
portfolios.
**** Deceased.
As of August 1, 1999, the trustees and officers as a group owned beneficially
less than 1% of the outstanding shares of each Portfolio of the Fund.
As of August 1, 1999, all the shares of the Money Market, Total Return, High
Yield, Growth, Government Securities, International, Small Cap Growth,
Investment Grade Bond, Contrarian, Small Cap Value, Value+Growth, Horizon, Blue
Chip, Global Blue Chip, International Growth and Income, Kemper-Dreman Financial
Services, Kemper-Dreman High Return Equity, Global Income, Aggressive Growth,
and Technology Growth Portfolios were held of record by
40
<PAGE>
KILICO Variable Annuity Separate Account ("KVASA"), KILICO Variable Separate
Account ("KVSA"), KILICO Variable Separate Account 2 ("KVSA2"), Separate Account
KGC ("KGC"), Separate Account KG ("KG"), Prudential Variable Contract Account
GI-2 ("PVCA"), Cova Variable Annuity Account One ("Cova One"), Cova Variable
Annuity Account Five ("Cova Five") and Lincoln Life Variable Annuity Account N
("LLVAA") on behalf of the owners of variable life insurance contracts and
variable annuity contracts. At all meetings of shareholders of these Portfolios,
Kemper Investors Life Insurance Company ("KILICO") will vote the shares held of
record by KVASA, KVSA KVSA and KVSA2, Allmerica Financial Life Insurance and
Annuity Company ("Allmerica") will vote the shares held of record by KGC and KG,
Prudential Insurance Company of America ("Prudential") will vote the shares held
of record by PVCA, Cova Financial Services Life Insurance Company and Cova
Financial Life Insurance Company (collectively, "Cova") will vote the shares
held of record by Cova One and Cova Five, and Lincoln National Life Insurance
Company ("Lincoln") will vote the shares held of record by LLVAA only in
accordance with the instructions received from the variable life and variable
annuity contract owners on behalf of whom the shares are held. All shares for
which no instructions are received will be voted in the same proportion as the
shares for which instructions are received. Accordingly, KILICO disclaims
beneficial ownership of the shares of these portfolios held of record by KVASA,
KVSA, and KVSA2, and Allmerica disclaims beneficial ownership of the shares of
these portfolios held of record by KGC and KG, and Prudential disclaims
beneficial ownership of the shares of these portfolios held of record by PVCA,
and Cova disclaims beneficial ownership of the shares of these portfolios held
of record by Cova One and Cova Five and Lincoln disclaims beneficial ownership
of the shares of these portfolios held of record by LLVAA.
Scudder Kemper will be the sole shareholder of the Index 500 Portfolio until
such time as the Portfolio has public shareholders, and therefore may be deemed
a controlling person.
NET ASSET VALUE
The net asset value per share of each Portfolio is the value of one share and is
determined by dividing the value of the Portfolio's net assets by the number of
shares outstanding. The net asset value of shares of the Portfolio is computed
as of the close of regular trading on the New York Stock Exchange (the
"Exchange") on each day the Exchange is open for trading. The Exchange is
scheduled to be closed on the following holidays: New Year's Day, Martin Luther
King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving and Christmas. With respect to Portfolios with
securities listed primarily on foreign exchanges, such securities may trade on
days when the Portfolio's net asset value is not computed; and therefore, the
net asset value of a Portfolio may be significantly affected on days when the
investor has no access to the Portfolio.
All Portfolios (other than the Money Market Portfolio):
An exchange-traded equity security is valued at its most recent sale price.
Lacking any sales, the security is valued at the calculated mean between the
most recent bid quotation and the most recent asked quotation (the "Calculated
Mean"). Lacking a Calculated Mean, the security is valued at the most recent bid
quotation. An equity security which is traded on The Nasdaq Stock Market
("Nasdaq") is valued at its most recent sale price. Lacking any sales, the
security is valued at the most recent bid quotation. The value of an equity
security not quoted on Nasdaq, but traded in another over-the-counter market, is
its most recent sale price. Lacking any sales, the security is valued at the
Calculated Mean. Lacking a Calculated Mean, the security is valued at the most
recent bid quotation.
Debt securities are valued at prices supplied by the Portfolio's pricing
agent(s) which reflect broker/dealer supplied valuations and electronic data
processing techniques. Money market instruments purchased with an original
maturity of sixty days or less, maturing at par, are valued at amortized cost,
which the Board believes approximates market value. If it is not possible to
value a particular debt security pursuant to these valuation methods, the value
of such security is the most recent bid quotation supplied by a bona fide
marketmaker. If it is not possible to value a particular debt security pursuant
to the above methods, the investment manager may calculate the price of that
debt security, subject to limitations established by the Board.
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
41
<PAGE>
securities, currencies and other financial instruments traded over-the-counter
is valued at the most recent bid quotation in the case of a purchased options
contract and at the most recent asked quotation in the case of a written options
contract. Futures contracts are valued at the most recent settlement price.
If a security is traded on more than one exchange, or upon one or more exchanges
and in the over-the-counter market, quotations are taken from the market in
which the security is traded most extensively.
If, in the opinion of the Fund's Valuation Committee of the Fund's Board, the
value of a Portfolio asset as determined in accordance with these procedures
does not represent the fair market value of the Portfolio asset, the value of
the Portfolio asset is taken to be an amount which, in the opinion of the
Valuation Committee, represents fair market value on the basis of all available
information. The value of other Portfolio holdings owned by the Portfolio is
determined in a manner which, in the discretion of the Valuation Committee, most
fairly reflects the fair market value of the property on the valuation date.
Money Market Portfolio: The net asset value per share of the Money Market
Portfolio is determined at 11:00 a.m. and as of the earlier of 3:00 p.m. Central
time or the close of the Exchange on each day the Exchange is open for trading,
except that the net asset value will not be computed on a day in which no orders
to purchase shares were received or no shares were tendered for redemption. The
net asset value per share is determined by dividing the total assets of the
Portfolio minus its liabilities by the total number of its shares outstanding.
The net asset value per share of the Money Market Portfolio is ordinarily $1.00
calculated at amortized cost in accordance with Rule 2a-7 under the 1940 Act.
While this rule provides certainty in valuation, it may result in periods during
which value, as determined by amortized cost, is higher or lower than the price
the Portfolio would have received if all its investments were sold. Under the
direction of the Board of Trustees, certain procedures have been adopted to
monitor and stabilize the price per share for the Portfolio. Calculations are
made to compare the value of its investments valued at amortized cost with
market-based values. Market-based values will be obtained by using actual
quotations provided by market makers, estimates of market value, or values
obtained from yield data relating to classes of money market instruments or
government securities published by reputable sources. In the event that a
deviation of 1/2 of 1% or more exists between the Portfolio's $1.00 per share
net asset value, calculated at amortized cost, and the net asset value
calculated by reference to market-based quotations, or if there is any other
deviation that the Board of Trustees believes would result in a material
dilution to shareholders or purchasers, the Board of Trustees will promptly
consider what action, if any, should be initiated. In order to value its
investments at amortized cost, the Money Market Portfolio purchases only
securities with a maturity of one year or less and maintains a dollar-weighted
average portfolio maturity of 90 days or less. In addition, the Money Market
Portfolio limits its portfolio investments to securities that meet the quality
and diversification requirements of Rule 2a-7.
DIVIDENDS AND TAXES
Dividends for Money Market Portfolio. The Money Market Portfolio's net
investment income is declared as a dividend daily. Shareholders will receive
dividends monthly in additional shares. If a shareholder withdraws its entire
account, all dividends accrued to the time of withdrawal will be paid at that
time.
Dividends for All Portfolios Except Money Market Portfolio. The Fund normally
follows the practice of declaring and distributing substantially all the net
investment income and any net short-term and long-term capital gains of these
Portfolios at least annually.
The Fund may at any time vary the dividend practices with respect to a Portfolio
and, therefore, reserves the right from time to time to either distribute or
retain for reinvestment such of its net investment income and its net short-term
and long-term capital gains as the Board of Trustees of the Fund determines
appropriate under the then current circumstances.
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.
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<PAGE>
Each Portfolio intends to comply with the requirements of Section 817(h) and
related regulations. Section 817(h) of the Code and the regulations issued by
the Treasury Department impose certain diversification requirements affecting
the securities in which the Portfolios may invest. These diversification
requirements are in addition to the diversification requirements under
subchapter M and the Investment Company Act of 1940. The consequences of failure
to meet the requirements of Section 817(h) could result in taxation of the
insurance company offering the variable insurance contract and immediate
taxation of the owner of the contract to the extent of appreciation on
investment under the contract.
The preceding is a brief summary of certain of the relevant tax considerations.
The summary is not intended as a complete explanation or a substitute for
careful tax planning and consultation with individual tax advisers.
SHAREHOLDER RIGHTS
The Fund was organized as a business trust under the laws of Massachusetts on
January 22, 1987. On May 1, 1997, the Fund changed its name from "Kemper
Investors Fund" to "Investors Fund Series" and on May 1, 1999 the Fund changed
its name from "Investors Fund Series" to "Kemper Variable Series." The Fund may
issue an unlimited number of shares of beneficial interest all having no par
value. Since the Fund offers multiple Portfolios, it is known as a "series
company." Shares of a Portfolio have equal noncumulative voting rights and equal
rights with respect to dividends, assets and liquidation of such Portfolio.
Shares are fully paid and nonassessable when issued, and have no preemptive or
conversion rights. The Fund is not required to hold annual shareholders'
meetings and does not intend to do so. However, it will hold special meetings as
required or deemed desirable for such purposes as electing trustees, changing
fundamental policies or approving an investment advisory contract. If shares of
more than one Portfolio are outstanding, shareholders will vote by Portfolio and
not in the aggregate except when voting in the aggregate is required under the
1940 Act, such as for the election of trustees. The Board of Trustees may
authorize the issuance of additional Portfolios if deemed desirable, each with
its own investment objective, policies and restrictions. The Board of Trustees
may also authorize the establishment of a multiple class fund structure. This
would permit the Fund to issue classes that would differ as to the allocation of
certain expenses, such as distribution and administrative expenses, permitting,
among other things, different levels of services or methods of distribution
among various classes. Currently, the Fund does not offer a multi-class fund
structure, but it may adopt such a structure at a future date.
On November 3, 1989, KILICO Money Market Separate Account, KILICO Total Return
Separate Account, KILICO Income Separate Account and KILICO Equity Separate
Account (collectively, the Accounts), which were separate accounts organized as
open-end management investment companies, were restructured into one continuing
separate account (KILICO Variable Annuity Separate Account) in unit investment
trust form with subaccounts investing in corresponding Portfolios of the Fund.
An additional subaccount also was created to invest in the Fund's Government
43
<PAGE>
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.
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ADDITIONAL INFORMATION
Other Information
The CUSIP number of each Portfolio is as follows:
Kemper Money Market Portfolio 488439 10 0
Kemper Government Securities Portfolio 488439 30 8
Kemper Investment Grade Bond Portfolio 488439 40 7
Kemper High Yield Portfolio 488439 50 6
Kemper Total Return Portfolio 488439 60 5
Kemper Blue Chip Portfolio 488439 70 4
Kemper Index 500 Portfolio 488439 73 8
Kemper Growth Portfolio 488439 80 3
Kemper Aggressive Growth Portfolio 488439 88 6
Kemper Horizon 20+ Portfolio 488439 87 8
Kemper Horizon 10+ Portfolio 488439 86 0
Kemper Horizon 5 Portfolio 488439 85 2
Kemper Small Cap Growth Portfolio 488439 84 5
Kemper Technology Growth Portfolio 488439 83 7
Kemper Value+Growth Portfolio 488439 82 9
Kemper Contrarian Value Portfolio 488439 74 6
Kemper-Dreman High Return Equity Portfolio 488439 20 9
Kemper Small Cap Value Portfolio 488439 81 1
Kemper-Dreman Financial Services Portfolio 488439 79 5
Kemper Global Income Portfolio 488439 78 7
Kemper Global Blue Chip Portfolio 488439 76 1
Kemper International Growth and Income Portfolio 488439 77 9
Kemper International Portfolio 488439 75 3
The Fund has a fiscal year ending December 31.
Many of the investment changes in the Fund will be made at prices different from
those prevailing at the time they may be reflected in a regular report to
shareholders of the Fund. These transactions will reflect investment decisions
made by the Adviser in light of the Fund's investment objectives and policies,
its other portfolio holdings and tax considerations, and should not be construed
as recommendations for similar action by other investors.
The Fund, or the Adviser (including any affiliate of the Adviser), or both, may
pay unaffiliated third parties for providing recordkeeping and other
administrative services with respect to accounts of participants in retirement
plans or other beneficial owners of Fund shares whose interests are generally
held in an omnibus account.
The Portfolios' prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement and its amendments
which the Fund has filed with the SEC under the Securities Act of 1933 and
reference is hereby made to the Registration Statement for further information
with respect to the Fund and the securities offered hereby. The Registration
Statement and its amendments, are available for inspection by the public at the
SEC in Washington, D.C.
45
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FINANCIAL STATEMENTS
The financial statements, including the investment portfolios of each Portfolio,
together with the Report of Independent Accountants, Financial Highlights and
notes to financial statements in the Annual Report to the Shareholders of each
Portfolio dated December 31, 1998 are incorporated herein by reference and are
hereby deemed to be a part of this Statement of Additional Information.
Effective May 1, 1999, the Fund's Board of Trustees approved a name change of
the Fund from Investors Fund Series to Kemper Variable Series.
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APPENDIX -- RATINGS OF INVESTMENTS
COMMERCIAL PAPER RATINGS
A-1, A-2 and Prime-1, Prime-2 Commercial Paper Ratings
Commercial paper rated by Standard & Poor's Corporation has the following
characteristics: Liquidity ratios are adequate to meet cash requirements.
Long-term senior debt is rated "A" or better. The issuer has access to at least
two additional channels of borrowing. Basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances. Typically, the
issuer's industry is well established and the issuer has a strong position
within the industry. The reliability and quality of management are unquestioned.
Relative strength or weakness of the above factors determine whether the
issuer's commercial paper is rated A-1 or A-2.
The ratings Prime-1 and Prime-2 are the two highest commercial paper ratings
assigned by Moody's Investors Service, Inc. Among the factors considered by them
in assigning ratings are the following: (1) evaluation of the management of the
issuer; (2) economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain areas; (3)
evaluation of the issuer's products in relation to competition and customer
acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend
of earnings over a period of ten years; (7) financial strength of a parent
company and the relationships which exist with the issuer; and (8) recognition
by the management of obligations which may be present or may arise as a result
of public interest questions and preparations to meet such obligations. Relative
strength or weakness of the above factors determines whether the issuer's
commercial paper is rated Prime-1 or 2.
CORPORATE BONDS
Standard & Poor's Corporation Bond Ratings
AAA. Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C. Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI. The rating CI is reserved for income bonds on which no interest is being
paid.
D. Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
Moody's Investors Service, Inc. Bond Ratings
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
<PAGE>
Aa. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa. Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca. Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
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KEMPER VARIABLE SERIES
Kemper Index 500 Portfolio
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)
2
<PAGE>
(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
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.
Filed herein.
(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.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
5
<PAGE>
(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 Corporation,
dated May 1, 1999.
(Incorporated by reference to Post-Effective Amendment No. 24 to the
Registration Statement, filed on April 29, 1999)
6
<PAGE>
(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.
Filed herein.
(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.
Filed herein.
(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.
File herein.
(h)(14) Amended and Restated Establishment and Designation of Series, on behalf of
Kemper Index 500 Portfolio, dated July 14, 1999.
File herein.
(i)(1) Opinion of Counsel from Vedder, Price, Kaufman & Kammholz.
Filed herein.
(i)(2) Opinion of Counsel from Dechert Price & Rhoads.
Filed herein.
(j) Inapplicable.
(k) Inapplicable.
(l) Inapplicable.
7
<PAGE>
(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 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*
8
<PAGE>
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.***
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.+
9
<PAGE>
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
---- ------------------------- -----------------------
<S> <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.
10
<PAGE>
Positions and Offices with Positions and
Name Kemper Distributors, Inc. Offices with Registrant
---- ------------------------- -----------------------
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.
Item 30. Undertakings.
- -------- -------------
Inapplicable.
11
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Chicago and State of Illinois, on the 26th day of
August, 1999.
KEMPER VARIABLE SERIES
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 August 26, 1999, on behalf of
the following persons in the capacities indicated.
SIGNATURE TITLE
--------- -----
/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 D. Weithers
-------------------------------------------
John D. Weithers* Trustee
<PAGE>
/s/John R. Hebble
-------------------------------------------
John R. Hebble Treasurer (Principle
Financial and Accounting
Officer)
*By: /s/Philip J. Collora
-------------------------------------
Philip J. Collora
*Philip J. Collora signs this document pursuant to powers of attorney
filed with Post-Effective Amendment No. 21 to the Registrant's
Registration Statement on Form N-1A, filed on March 26, 1998.
2
<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. 27
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 28
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
KEMPER VARIABLE SERIES
12
<PAGE>
KEMPER VARIABLE SERIES
EXHIBIT INDEX
Exhibit 23(d)(23)
Exhibit 23(h)(11)
Exhibit 23(h)(12)
Exhibit 23(h)(13)
Exhibit 23(h)(14)
Exhibit 23(i)(1)
Exhibit 23(i)(2)
Exhibit 23(d)(23)
INVESTMENT MANAGEMENT AGREEMENT
Kemper Variable Series
222 South Riverside Plaza
Chicago, Illinois 60606
September 1, 1999
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
Investment Management Agreement
Kemper Index 500 Portfolio
Ladies and Gentlemen:
KEMPER VARIABLE SERIES (the "Trust") has been established as a Massachusetts
business trust to engage in the business of an investment company. Pursuant to
the Trust's Declaration of Trust, as amended from time-to-time (the
"Declaration"), the Board of Trustees is authorized to issue the Trust's shares
of beneficial interest (the "Shares"), in separate series, or funds. The Board
of Trustees has authorized Kemper Index 500 Portfolio (the "Fund"). Series may
be abolished and dissolved, and additional series established, from time to time
by action of the Trustees.
The Trust, on behalf of the Fund, has selected you to act as the investment
manager of the Fund and to provide certain other services, as more fully set
forth below, and you have indicated that you are willing to act as such
investment manager and to perform such services under the terms and conditions
hereinafter set forth. Accordingly, the Trust on behalf of the Fund agrees with
you as follows:
1. Delivery of Documents. The Trust engages in the business of investing and
reinvesting the assets of the Fund in the manner and in accordance with the
investment objectives, policies and restrictions specified in the currently
effective Prospectus (the "Prospectus") and Statement of Additional Information
(the "SAI") relating to the Fund included in the Trust's Registration Statement
on Form N-1A, as amended from time to time, (the "Registration Statement") filed
by the Trust under the Investment Company Act of 1940, as amended, (the "1940
Act") and the Securities Act of 1933, as amended. Copies of the documents
referred to in the preceding sentence have been furnished to you by the Trust.
The Trust has also furnished you with copies properly certified or authenticated
of each of the following additional documents related to the Trust and the Fund:
(a) The Declaration, as amended to date.
(b) By-Laws of the Trust as in effect on the date hereof (the
"By-Laws").
(c) Resolutions of the Trustees of the Trust and the shareholders
of the Fund selecting you as investment manager and approving
the form of this Agreement.
(d) Establishment and Designation of Series of Shares of
Beneficial Interest relating to the Fund, as applicable.
The Trust will furnish you from time to time with copies, properly certified or
authenticated, of all amendments of or supplements, if any, to the foregoing,
including the Prospectus, the SAI and the Registration Statement.
2. Portfolio Management Services. As manager of the assets of the Fund, you
shall provide continuing investment management of the assets of the Fund in
accordance with the investment objectives, policies and restrictions set forth
in the Prospectus and SAI; the applicable provisions of the 1940 Act and the
Internal Revenue
<PAGE>
Code of 1986, as amended, (the "Code") relating to regulated investment
companies and all rules and regulations thereunder; and all other applicable
federal and state laws and regulations of which you have knowledge; subject
always to policies and instructions adopted by the Trust's Board of Trustees. In
connection therewith, you shall use reasonable efforts to manage the Fund so
that it will qualify as a regulated investment company under Subchapter M of the
Code and regulations issued thereunder. The Fund shall have the benefit of the
investment analysis and research, the review of current economic conditions and
trends and the consideration of long-range investment policy generally available
to your investment advisory clients. In managing the Fund in accordance with the
requirements set forth in this section 2, you shall be entitled to receive and
act upon advice of counsel to the Trust. You shall also make available to the
Trust promptly upon request all of the Fund's investment records and ledgers as
are necessary to assist the Trust in complying with the requirements of the 1940
Act and other applicable laws. To the extent required by law, you shall furnish
to regulatory authorities having the requisite authority any information or
reports in connection with the services provided pursuant to this Agreement
which may be requested in order to ascertain whether the operations of the Trust
are being conducted in a manner consistent with applicable laws and regulations.
You shall determine the securities, instruments, investments, currencies,
repurchase agreements, futures, options and other contracts relating to
investments to be purchased, sold or entered into by the Fund and place orders
with broker-dealers, foreign currency dealers, futures commission merchants or
others pursuant to your determinations and all in accordance with Fund policies
as expressed in the Registration Statement. You shall determine what portion of
the Fund's portfolio shall be invested in securities and other assets and what
portion, if any, should be held uninvested.
You shall furnish to the Trust's Board of Trustees periodic reports on the
investment performance of the Fund and on the performance of your obligations
pursuant to this Agreement, and you shall supply such additional reports and
information as the Trust's officers or Board of Trustees shall reasonably
request.
3. Administrative Services. In addition to the portfolio management services
specified above in section 2, you shall furnish at your expense for the use of
the Fund such office space and facilities in the United States as the Fund may
require for its reasonable needs, and you (or one or more of your affiliates
designated by you) shall render to the Trust administrative services on behalf
of the Fund necessary for operating as an open end investment company and not
provided by persons not parties to this Agreement including, but not limited to,
preparing reports to and meeting materials for the Trust's Board of Trustees and
reports and notices to Fund shareholders; supervising, negotiating contractual
arrangements with, to the extent appropriate, and monitoring the performance of,
accounting agents, custodians, depositories, transfer agents and pricing agents,
accountants, attorneys, printers, underwriters, brokers and dealers, insurers
and other persons in any capacity deemed to be necessary or desirable to Fund
operations; preparing and making filings with the Securities and Exchange
Commission (the "SEC") and other regulatory and self-regulatory organizations,
including, but not limited to, preliminary and definitive proxy materials,
post-effective amendments to the Registration Statement, semi-annual reports on
Form N-SAR and notices pursuant to Rule 24f-2 under the 1940 Act; overseeing the
tabulation of proxies by the Fund's transfer agent; assisting in the preparation
and filing of the Fund's federal, state and local tax returns; preparing and
filing the Fund's federal excise tax return pursuant to Section 4982 of the
Code; providing assistance with investor and public relations matters;
monitoring the valuation of portfolio securities and the calculation of net
asset value; monitoring the registration of Shares of the Fund under applicable
federal and state securities laws; maintaining or causing to be maintained for
the Fund all books, records and reports and any other information required under
the 1940 Act, to the extent that such books, records and reports and other
information are not maintained by the Fund's custodian or other agents of the
Fund; assisting in establishing the accounting policies of the Fund; assisting
in the resolution of accounting issues that may arise with respect to the Fund's
operations and consulting with the Fund's independent accountants, legal counsel
and the Fund's other agents as necessary in connection therewith; establishing
and monitoring the Fund's operating expense budgets; reviewing the Fund's bills;
processing the payment of bills that have been approved by an authorized person;
assisting the Fund in determining the amount of dividends and distributions
available to be paid by the Fund to its shareholders, preparing and arranging
for the printing of dividend notices to shareholders, and providing the transfer
and dividend paying agent, the custodian, and the accounting agent with such
information as is required for such parties to effect the payment of dividends
and distributions; and otherwise assisting the Trust as it may reasonably
request in the conduct of the Fund's
2
<PAGE>
business, subject to the direction and control of the Trust's Board of Trustees.
Nothing in this Agreement shall be deemed to shift to you or to diminish the
obligations of any agent of the Fund or any other person not a party to this
Agreement which is obligated to provide services to the Fund.
4. Allocation of Charges and Expenses. Except as otherwise specifically provided
in this section 4, you shall pay the compensation and expenses of all Trustees,
officers and executive employees of the Trust (including the Fund's share of
payroll taxes) who are affiliated persons of you, and you shall make available,
without expense to the Fund, the services of such of your directors, officers
and employees as may duly be elected officers of the Trust, subject to their
individual consent to serve and to any limitations imposed by law. You shall
provide at your expense the portfolio management services described in section 2
hereof and the administrative services described in section 3 hereof.
You shall not be required to pay any expenses of the Fund other than those
specifically allocated to you in this section 4. In particular, but without
limiting the generality of the foregoing, you shall not be responsible, except
to the extent of the reasonable compensation of such of the Fund's Trustees and
officers as are directors, officers or employees of you whose services may be
involved, for the following expenses of the Fund: organization expenses of the
Fund (including out of-pocket expenses, but not including your overhead or
employee costs); fees payable to you and to any other Fund advisors or
consultants; legal expenses; auditing and accounting expenses; maintenance of
books and records which are required to be maintained by the Fund's custodian or
other agents of the Trust; telephone, telex, facsimile, postage and other
communications expenses; taxes and governmental fees; fees, dues and expenses
incurred by the Fund in connection with membership in investment company trade
organizations; fees and expenses of the Fund's accounting agent for which the
Trust is responsible pursuant to the terms of the Fund Accounting Services
Agreement, custodians, subcustodians, transfer agents, dividend disbursing
agents and registrars; payment for portfolio pricing or valuation services to
pricing agents, accountants, bankers and other specialists, if any; expenses of
preparing share certificates and, except as provided below in this section 4,
other expenses in connection with the issuance, offering, distribution, sale,
redemption or repurchase of securities issued by the Fund; expenses relating to
investor and public relations; expenses and fees of registering or qualifying
Shares of the Fund for sale; interest charges, bond premiums and other insurance
expense; freight, insurance and other charges in connection with the shipment of
the Fund's portfolio securities; the compensation and all expenses (specifically
including travel expenses relating to Trust business) of Trustees, officers and
employees of the Trust who are not affiliated persons of you; brokerage
commissions or other costs of acquiring or disposing of any portfolio securities
of the Fund; expenses of printing and distributing reports, notices and
dividends to shareholders; expenses of printing and mailing Prospectuses and
SAIs of the Fund and supplements thereto; costs of stationery; any litigation
expenses; indemnification of Trustees and officers of the Trust; and costs of
shareholders' and other meetings.
You shall not be required to pay expenses of any activity which is primarily
intended to result in sales of Shares of the Fund if and to the extent that (i)
such expenses are required to be borne by a principal underwriter which acts as
the distributor of the Fund's Shares pursuant to an underwriting agreement which
provides that the underwriter shall assume some or all of such expenses, or (ii)
the Trust on behalf of the Fund shall have adopted a plan in conformity with
Rule 12b-1 under the 1940 Act providing that the Fund (or some other party)
shall assume some or all of such expenses. You shall be required to pay such of
the foregoing sales expenses as are not required to be paid by the principal
underwriter pursuant to the underwriting agreement or are not permitted to be
paid by the Fund (or some other party) pursuant to such a plan.
5. Management Fee. For all services to be rendered, payments to be made and
costs to be assumed by you as provided in sections 2, 3, and 4 hereof, the Trust
on behalf of the Fund shall pay you in United States Dollars on the last day of
each month the unpaid balance of a fee equal to the excess of 1/12 of 0.45 of 1
percent of the average daily net assets as defined below of the Fund for such
month; provided that, for any calendar month during which the average of such
values exceeds $200 million, the fee payable for that month based on the portion
of the average of such values in excess of $200 million up to and including $750
million shall be 1/12 of 0.42 of 1 percent of such portion; provided further
that, for any calendar month during which the average of such values exceeds
$750 million, the fee payable for that month based on the portion of the average
of such values in excess of $750 million up to and including $2.0 billion shall
be 1/12 of 0.40 of 1 percent of such portion; provided that, for any calendar
3
<PAGE>
month during which the average of such values exceeds $2.0 billion, the fee
payable for that month based on the portion of the average of such values in
excess of $2.0 billion up to and including $5.0 billion shall be 1/12 of 0.38 of
1 percent of such portion; provided that, for any calendar month during which
the average of such values exceeds $5.0 billion, the fee payable for that month
based on the portion of the average of such values in excess of $5.0 billion
shall be 1/12 of 0.35 of 1 percent of such portion over the lowest applicable
expense fully described below or over any compensation waived by you from time
to time (as more fully described below). You shall be entitled to receive during
any month such interim payments of your fee hereunder as you shall request,
provided that no such payment shall exceed 75 percent of the amount of your fee
then accrued on the books of the Fund and unpaid.
The "average daily net assets" of the Fund shall mean the average of the values
placed on the Fund's net assets as of 4:00 p.m. (New York time) on each day on
which the net asset value of the Fund is determined consistent with the
provisions of Rule 22c-1 under the 1940 Act or, if the Fund lawfully determines
the value of its net assets as of some other time on each business day, as of
such time. The value of the net assets of the Fund shall always be determined
pursuant to the applicable provisions of the Declaration and the Registration
Statement. If the determination of net asset value does not take place for any
particular day, then for the purposes of this section 5, the value of the net
assets of the Fund as last determined shall be deemed to be the value of its net
assets as of 4:00 p.m. (New York time), or as of such other time as the value of
the net assets of the Fund's portfolio may be lawfully determined on that day.
If the Fund determines the value of the net assets of its portfolio more than
once on any day, then the last such determination thereof on that day shall be
deemed to be the sole determination thereof on that day for the purposes of this
section 5.
You may waive all or a portion of your fees provided for hereunder and such
waiver shall be treated as a reduction in purchase price of your services. You
shall be contractually bound hereunder by the terms of any publicly announced
waiver of your fee, or any limitation of the Fund's expenses, as if such waiver
or limitation were fully set forth herein.
6. Avoidance of Inconsistent Position; Services Not Exclusive. In connection
with purchases or sales of portfolio securities and other investments for the
account of the Fund, neither you nor any of your directors, officers or
employees shall act as a principal or agent or receive any commission. You or
your agent shall arrange for the placing of all orders for the purchase and sale
of portfolio securities and other investments for the Fund's account with
brokers or dealers selected by you in accordance with Fund policies as expressed
in the Registration Statement. If any occasion should arise in which you give
any advice to clients of yours concerning the Shares of the Fund, you shall act
solely as investment counsel for such clients and not in any way on behalf of
the Fund.
Your services to the Fund pursuant to this Agreement are not to be deemed to be
exclusive and it is understood that you may render investment advice, management
and services to others. In acting under this Agreement, you shall be an
independent contractor and not an agent of the Trust. Whenever the Fund and one
or more other accounts or investment companies advised by you have available
funds for investment, investments suitable and appropriate for each shall be
allocated in accordance with procedures believed by you to be equitable to each
entity. Similarly, opportunities to sell securities shall be allocated in a
manner believed by you to be equitable. The Fund recognizes that in some cases
this procedure may adversely affect the size of the position that may be
acquired or disposed of for the Fund.
7. Limitation of Liability of Manager. As an inducement to your undertaking to
render services pursuant to this Agreement, the Trust agrees that you shall not
be liable under this Agreement for any error of judgment or mistake of law or
for any loss suffered by the Fund in connection with the matters to which this
Agreement relates, provided that nothing in this Agreement shall be deemed to
protect or purport to protect you against any liability to the Trust, the Fund
or its shareholders to which you would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of your duties, or
by reason of your reckless disregard of your obligations and duties hereunder.
8. Duration and Termination of This Agreement. This Agreement shall remain in
force until September 30, 2000, and continue in force from year to year
thereafter, but only so long as such continuance is specifically approved at
least annually (a) by the vote of a majority of the Trustees who are not parties
to this Agreement or
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interested persons of any party to this Agreement, cast in person at a meeting
called for the purpose of voting on such approval, and (b) by the Trustees of
the Trust, or by the vote of a majority of the outstanding voting securities of
the Fund. The aforesaid requirement that continuance of this Agreement be
"specifically approved at least annually" shall be construed in a manner
consistent with the 1940 Act and the rules and regulations thereunder and any
applicable SEC exemptive order therefrom.
This Agreement may be terminated with respect to the Fund at any time, without
the payment of any penalty, by the vote of a majority of the outstanding voting
securities of the Fund or by the Trust's Board of Trustees on 60 days' written
notice to you, or by you on 60 days' written notice to the Trust. This Agreement
shall terminate automatically in the event of its assignment.
This Agreement may be terminated with respect to the Fund at any time without
the payment of any penalty by the Board of Trustees or by vote of a majority of
the outstanding voting securities of the Fund in the event that it shall have
been established by a court of competent jurisdiction that you or any of your
officers or directors has taken any action which results in a breach of your
covenants set forth herein.
9. Amendment of this Agreement. No provision of this Agreement may be changed,
waived, discharged or terminated orally, but only by an instrument in writing
signed by the party against whom enforcement of the change, waiver, discharge or
termination is sought, and no amendment of this Agreement shall be effective
until approved in a manner consistent with the 1940 Act and rules and
regulations thereunder and any applicable SEC exemptive order therefrom.
10. Limitation of Liability for Claims. The Declaration, a copy of which,
together with all amendments thereto, is on file in the Office of the Secretary
of the Commonwealth of Massachusetts, provides that the name "Kemper Variable
Series" refers to the Trustees under the Declaration collectively as Trustees
and not as individuals or personally, and that no shareholder of the Fund, or
Trustee, officer, employee or agent of the Trust, shall be subject to claims
against or obligations of the Trust or of the Fund to any extent whatsoever, but
that the Trust estate only shall be liable.
You are hereby expressly put on notice of the limitation of liability as set
forth in the Declaration and you agree that the obligations assumed by the Trust
on behalf of the Fund pursuant to this Agreement shall be limited in all cases
to the Fund and its assets, and you shall not seek satisfaction of any such
obligation from the shareholders or any shareholder of the Fund or any other
series of the Trust, or from any Trustee, officer, employee or agent of the
Trust. You understand that the rights and obligations of each Fund, or series,
under the Declaration are separate and distinct from those of any and all other
series.
11. Miscellaneous. The captions in this Agreement are included for convenience
of reference only and in no way define or limit any of the provisions hereof or
otherwise affect their construction or effect. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
In interpreting the provisions of this Agreement, the definitions contained in
Section 2(a) of the 1940 Act (particularly the definitions of "affiliated
person," "assignment" and "majority of the outstanding voting securities"), as
from time to time amended, shall be applied, subject, however, to such
exemptions as may be granted by the SEC by any rule, regulation or order.
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Massachusetts, provided that nothing herein shall be construed
in a manner inconsistent with the 1940 Act, or in a manner which would cause the
Fund to fail to comply with the requirements of Subchapter M of the Code.
This Agreement shall supersede all prior investment advisory or management
agreements entered into between you and the Trust on behalf of the Fund.
If you are in agreement with the foregoing, please execute the form of
acceptance on the accompanying counterpart
5
<PAGE>
of this letter and return such counterpart to the Trust, whereupon this letter
shall become a binding contract effective as of the date of this Agreement.
Yours very truly,
KEMPER VARIABLE SERIES, on behalf of
Kemper Index 500 Portfolio
By:
----------------------------------------
President
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By:
----------------------------------------
Managing Director
6
Exhibit 23(h)(11)
SUBADVISORY AGREEMENT
AGREEMENT made as of the 1st day of September, 1999, between Scudder
Kemper Investments, Inc., a Delaware corporation (hereinafter called the
"Manager"), and Bankers Trust Company, a New York corporation (hereinafter
called the "Subadviser").
WITNESSETH:
WHEREAS, Kemper Variable Series (the "Trust") is a Massachusetts
business trust organized with one or more series of shares, and is registered as
an investment company under the Investment Company Act of 1940 (the "1940 Act");
and
WHEREAS, the Manager desires to utilize the services of the Subadviser
as investment counsel with respect to certain portfolio assets of the Trust; and
WHEREAS, the Subadviser is willing to perform such services on the
terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual agreements herein
contained, it is agreed as follows:
1. The Subadviser's Services. The Subadviser will serve the Manager as
investment counsel with respect to the investment portfolio of Kemper Index 500
Portfolio (the "Series"), being one of the portfolio series of the Trust, which
is under the management of the Manager pursuant to an Investment Management
Agreement between the Manager and the Trust dated September 1, 1999.
The Subadviser is hereby authorized and directed and hereby agrees,
subject to the stated investment policies and restrictions of the Series as set
forth in the current Prospectus and Statement of Additional Information of the
Trust (including amendments) and in accordance with the Fund's Declaration of
Trust and By-laws, as both may be amended from time to time, governing the
offering of its shares and subject to such resolutions as from time to time may
be adopted by the Fund's Trustees and furnished to the Subadviser, to develop,
recommend and implement such investment program and strategy for the Series as
may from time to time be most appropriate to the achievement of the investment
objectives of the Series as stated in the aforesaid Prospectus, to provide
research and analysis relative to the investment program and investments of the
Series, to determine what securities should be purchased and sold and to monitor
on a continuing basis the performance of the portfolio securities of the Series.
In addition, the Subadviser will place orders for the purchase and sale of
portfolio securities and, subject to the
<PAGE>
provisions of the following paragraph, will take reasonable steps to assure that
portfolio transactions are effected at the best price and execution available.
The Subadviser will advise the Fund's custodian and the Manager on a prompt
basis of each purchase and sale of a portfolio security specifying the name of
the issuer, the description and amount or number of shares of the security
purchased, the market price, commission and gross or net price, trade date,
settlement date and identity of the effecting broker or dealer. From time to
time as the Trustees of the Trust or the Manager may reasonably request, the
Subadviser will furnish to the Manager, Trust's officers and to each of its
Trustees reports on portfolio transactions and reports on assets held in the
Series, all in such detail as the Trust or the Manager may reasonably request.
The Subadviser will also inform the Manager, Trust's officers and Trustees on a
current basis of changes in investment strategy or tactics or any other
developments materially affecting the Series. The Subadviser will make its
officers and employees available to meet with the Manager, Trust's officers and
Trustees at least quarterly on due notice to review the investments and
investment performance of the Series in the light of the Trust's investment
objectives and policies and market conditions.
In using its best efforts to obtain for the Series the most favorable
price and execution available, the Subadviser, bearing in mind the Series' best
interests at all times, shall consider all factors it deems relevant, including,
by way of illustration, price, the size of the transaction, the nature of the
market for the security, the amount of the commission, the timing of the
transaction taking into account market prices and trends, the reputation,
experience and financial stability of the broker or dealer involved and the
quality of service rendered by the broker or dealer in other transactions.
Subject to such policies as the Trustees of the Trust may determine, the
Subadviser shall not be deemed to have acted unlawfully or to have breached any
duty created by this Agreement or otherwise solely by reason of its having
caused the Series to pay an unaffiliated broker or dealer that provides
brokerage and research services to the Subadviser an amount of commission for
effecting a portfolio investment transaction in excess of the amount of
commission another broker or dealer would have charged for effecting that
transaction, if the Subadviser determines in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or the Subadviser's overall responsibilities with respect
to the clients of the Subadviser for whom the Subadviser exercises investment
discretion.
It shall be the duty of the Subadviser to furnish to the Trustees of
the Trust such information as may reasonably be requested in order for such
Trustees to evaluate this Agreement or any proposed amendments thereto for the
purposes of casting a vote pursuant to Section 9 hereof.
In the performance of its duties hereunder, the Subadviser is and shall
be an independent contractor and except as otherwise expressly provided herein
or otherwise authorized in writing, shall have no authority to act for or
represent the Trust, the Series
2
<PAGE>
or the Manager in any way or otherwise be deemed to be an agent of the Trust,
the Series or the Manager.
In furnishing the services under this Agreement, the Subadviser will
comply with the requirements of the 1940 Act applicable to it, and the
regulations promulgated thereunder. The Subadviser will immediately notify the
Manager and the Trust in the event that the Subadviser: (i) becomes subject to a
statutory disqualification that prevents the Subadviser from serving as an
investment adviser pursuant to this Agreement; or (ii) is or expects to become
the subject of an administrative proceeding or enforcement action by the
Securities and Exchange Commission or other regulatory authority. The Subadviser
will immediately forward, upon receipt, to the Manager any correspondence from
the Securities and Exchange Commission or other regulatory authority that
relates to the Series.
2. Delivery of Documents to Subadviser. The Manager will furnish to the
Subadviser copies of each of the following documents:
(a) The Declaration of Trust of the Trust as in effect on the date
hereof;
(b) The By-laws of the Trust in effect on the date hereof;
(c) The resolutions of the Trustees approving the engagement of the
Subadviser as subadviser to the Series and approving the form of this
agreement;
(d) The resolutions of the Trustees selecting the Manager as investment
manager to the Trust and approving the form of the Investment
Management Agreement with the Trust, on behalf of the Series;
(e) The Investment Management Agreement with the Trust, on behalf of
the Series;
(f) The Code of Ethics of the Trust and of the Manager as currently in
effect; and
(g) Current copies of the Series' Prospectus and Statement of
Additional Information.
The Manager will furnish the Subadviser from time to time with copies,
properly certified or otherwise authenticated, of all amendments of or
supplements to the foregoing, if any. Such amendments or supplements as to Items
(a) though (g) above will be provided within 30 days of the time such materials
became available to the Manager and until so provided the Subadviser may
continue to rely on those documents previously provided.
3
<PAGE>
During the term of this Agreement, the Manager also will furnish to the
Subadviser prior to use thereof copies of all Trust documents, proxy statements,
reports to shareholders, sales literature, or other material prepared for
distribution to shareholders of the Series or the public that refer in any way
to the Subadviser, and will not use such material if the Subadviser reasonably
objects in writing within five business days (or such other time period as may
be mutually agreed) after receipt thereof. However, the Manager and the
Subadviser may agree amongst themselves that certain of the above-mentioned
documents do not need to be furnished to the Subadviser prior to the document's
use.
In the event of termination of this Agreement, the Manager will
continue to furnish to the Subadviser copies of any of the above-mentioned
materials that refer in any way to the Subadviser. The Manager shall furnish or
otherwise make available to the Subadviser such other information relating to
the business affairs of the Trust as the Subadviser at any time, or from time to
time, reasonably requests in order to discharge its obligations hereunder.
3. Delivery of Documents to the Manager. The Subadviser has furnished
the Manager with copies of each of the following documents:
(a) The Subadviser's most recent balance sheet;
(b) Separate lists of persons who the Subadviser wishes to have
authorized to give written and/or oral instructions to Custodians and
the fund accounting agent of Trust assets for the Series; and
(c) The Code of Ethics of the Subadviser as currently in effect.
The Subadviser will maintain a written code of ethics complying with
the requirements of Rule 17j-1 under the 1940 Act and will provide Trust with a
copy of the code of ethics, including any amendments thereto, and evidence of
its adoption. Within 45 days of the end of each year while this Agreement is in
effect (or more frequently if required by Rule 17j-1 or as the Trust may
reasonably request), an officer of the Subadviser shall certify to Trust that
the Subadviser has complied with the requirements of Rule 17j-1 during the
previous year and that there has been no violation of its code of ethics or, if
such a violation has occurred, that appropriate action was taken in response to
such violation. Upon the written request of the Trust, the Subadviser shall
permit Trust to examine the reports to be made by the Subadviser under Rule
17j-1(c)(1).
The Subadviser will furnish the Manager from time to time with copies,
properly certified or otherwise authenticated, of all material amendments of or
supplements to the foregoing, if any. Additionally, the Subadviser will provide
to the Manager such other documents relating to its services under this
Agreement as the Manager may reasonably request on a periodic basis. Such
amendments or supplements as to items (a) through (c)
4
<PAGE>
above will be provided within 30 days of the time such materials became
available to the Subadviser.
4. Other Agreements, etc. It is understood that any of the
shareholders, Trustees, officers and employees of the Trust or the Series may be
a shareholder, director, officer or employee of, or be otherwise interested in,
the Subadviser, any interested person of the Subadviser, any organization in
which the Subadviser may have an interest or any organization which may have an
interest in the Subadviser, and that any such interested person or any such
organization may have an interest in the Trust or the Series. It is also
understood that the Subadviser, the Manager and the Trust may have advisory,
management, service or other contracts with other individuals or entities, and
may have other interests and businesses. When a security proposed to be
purchased or sold for the Series is also to be purchased or sold for other
accounts managed by the Subadviser at the same time, the Subadviser shall make
such purchases or sales on a pro-rata, rotating or other equitable basis so as
to avoid any one account's being preferred over any other account.
The Subadviser may give advice and take action with respect to other
funds or clients, or for its own account which may differ from the advice or the
timing or nature of action taken with respect to the Series.
Nothing in this Agreement shall be implied to prevent the (i) Manager
from engaging other subadvisers to provide investment advice and other services
in relation to portfolios of the Trust for which the Subadviser does not provide
such services, or to prevent the Manager from providing such services itself in
relation to such portfolios; or (ii) the Subadviser from providing investment
advice and other services to other funds or clients.
5. Fees, Expenses and Other Charges.
(a) For its services hereunder, the Subadviser shall be paid a
management fee by the Manager according to the fee schedule attached
hereto as Schedule A.
(b) The Subadviser, at its expense, will furnish all necessary
investment facilities, including salaries of personnel required for it
to execute its duties under this Agreement.
6. Confidential Treatment. It is understood that any information or
recommendation supplied by the Subadviser in connection with the performance of
its obligations hereunder is to be regarded as confidential and for use only by
the Manager, the Trust or such persons as the Manager may designate in
connection with the Series. It is also understood that any information supplied
to the Subadviser in connection with the performance of its obligations
hereunder, particularly, but not limited to, any list of securities which, on a
temporary basis, may not be bought or sold for the Series, is to be
5
<PAGE>
regarded as confidential and for use only by the Subadviser in connection with
its obligation to provide investment advice and other services to the Series.
The Subadviser will maintain and enforce adequate security procedures
with respect to all materials, records, documents and data relating to any of
its responsibilities pursuant to this Agreement including all means for the
effecting of securities transactions.
7. Representations and Covenants of the Parties. The Subadviser hereby
acknowledges that it is a "bank" as defined in Section 202(a)(2) of the
Investment Advisers Act of 1940 (the "Adviser's Act") and neither it nor any
"affiliated person" of it, as defined in the 1940 Act, is subject to any
disqualification that would make the Subadviser unable to serve as an investment
adviser to a registered investment company under Section 9 of the 1940 Act. The
Subadviser covenants that it will carry out appropriate compliance procedures
necessary to the operation of the Series as the Subadviser and the Manager may
agree. The Subadviser also covenants that it will manage the Series in
conformity with all applicable rules and regulations of the Securities and
Exchange Commission in all material respects and so that the Trust will qualify
as a regulated investment company under Subchapter M and Section 817 of the
Internal Revenue Code.
8. Reports by the Subadviser and Records of the Series. The Subadviser
shall furnish the Manager monthly, quarterly and annual reports concerning
transactions and performance of the Series, including information required to be
disclosed in the Trust's registration statement, in such form as may be mutually
agreed, to review the Series and discuss the management of it. The Subadviser
shall permit the financial statements, books and records with respect to the
Series to be inspected and audited by the Trust, the Manager or their agents at
all reasonable times during normal business hours. The Subadviser shall
immediately notify and forward to both the Manager and legal counsel for the
Series any legal process served upon it on behalf of the Manager or the Trust.
The Subadviser shall promptly notify the Manager of any changes in any
information concerning the Subadviser of which the Subadviser becomes aware that
would be required to be disclosed in the Trust's registration statement.
In compliance with the requirements of Rule 31a-3 under the 1940 Act,
the Subadviser agrees that all records it maintains for the Trust are the
property of the Trust and further agrees to surrender promptly to the Trust or
the Manager any such records upon the Trust's or the Manager's request. The
Subadviser further agrees to maintain for the Trust the records the Trust is
required to maintain under Rule 31a-1(b) insofar as such records relate to the
investment affairs of the Trust. The Subadviser further agrees to preserve for
the periods prescribed by Rule 31a-2 under the 1940 Act the records it maintains
for the Trust.
9. Continuance and Termination. This Agreement shall remain in full
force and effect through September 30, 2000, and is renewable annually
thereafter by specific approval of the Board of Trustees of the Trust or by the
affirmative vote of a majority of
6
<PAGE>
the outstanding voting securities of the Series. Any such renewal shall be
approved by the vote of a majority of the Trustees of the Trust who are not
interested persons under the 1940 Act, cast in person at a meeting called for
the purpose of voting on such renewal. This Agreement may be terminated without
penalty at any time by the Trustees, by vote of a majority of the outstanding
voting securities of the Series, or by the Manager or by the Subadviser upon 60
days written notice, and will automatically terminate in the event of its
assignment by either party to this Agreement, as defined in the 1940 Act, or
upon termination of the Manager's Investment Management Agreement with the
Trust. In addition, the Manager or the Trust may terminate this Agreement upon
immediate notice if the Subadviser becomes statutorily disqualified from
performing its duties under this Agreement or otherwise is legally prohibited
from operating as an investment adviser.
10. Voting Rights. The Manager shall be responsible for exercising any
voting rights of any securities of the Series.
11. Indemnification. The Subadviser agrees to indemnify and hold
harmless the Manager, any affiliated person within the meaning of Section
2(a)(3) of the 1940 Act ("affiliated person") of the Manager and each person, if
any, who, within the meaning of Section 15 of the Securities Act of 1933 (the
"1933 Act"), controls ("controlling person") the Manager, against any and all
losses, claims damages, liabilities or litigation (including reasonable legal
and other expenses), to which the Manager or such affiliated person or
controlling person may become subject under the 1933 Act, the 1940 Act, the
Advisers Act, under any other statute, at common law or otherwise, arising out
of Subadviser's responsibilities as portfolio manager of the Series (1) to the
extent of and as a result of the willful misconduct, bad faith, or gross
negligence by the Subadviser, any of the Subadviser's employees or
representatives or any affiliate of or any person acting on behalf of the
Subadviser, or (2) as a result of any untrue statement or alleged untrue
statement of a material fact contained in a prospectus or statement of
additional information covering the Series or the Trust or any amendment thereof
or any supplement thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statement
therein not misleading, if such a statement or omission was made in reliance
upon written information furnished by the Subadviser to the Manager, the Trust
or any affiliated person of the Manager or the Trust expressly for use in the
Trust's registration statement, or upon verbal information confirmed by the
Subadviser in writing expressly for use in the Trust's registration statement or
(3) to the extent of, and as a result of, the failure of the Subadviser to
execute, or cause to be executed, portfolio transactions according to the
standards and requirements of the 1940 Act; provided, however, that in no case
is the Subadviser's indemnity in favor of the Manager or any affiliated person
or controlling person of the Manager deemed to protect such person against any
liability to which any such person would otherwise be subject by reason of
willful misconduct, bad faith or gross negligence in the performance of its
duties or by reason of its reckless disregard of its obligations and duties
under this Agreement.
7
<PAGE>
The Manager agrees to indemnify and hold harmless the Subadviser, any
affiliated person within the meaning of Section 2(a)(3) of the 1940 Act
("affiliated person") of the Subadviser and each person, if any, who, within the
meaning of Section 15 of the 1933 Act, controls ("controlling person") the
Subadviser, against any and all losses, claims, damages, liabilities or
litigation (including reasonable legal and other expenses), to which the
Subadviser or such affiliated person or controlling person may become subject
under the 1933 Act, the 1940 Act, the Advisers Act, under any other statute, at
common law or otherwise, arising out of the Manager's responsibilities as
investment manager of the Series (1) to the extent of and as a result of the
willful misconduct, bad faith, or gross negligence by the Manager, any of the
Manager's employees or representatives or any affiliate of or any person acting
on behalf of the Manager, or (2) as a result of any untrue statement or alleged
untrue statement of a material fact contained in a prospectus or statement of
additional information covering the Series or the Trust or any amendment thereof
or any supplement thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statement
therein not misleading, if such a statement or omission was made by the Trust
other than in reliance upon written information furnished by the Subadviser, or
any affiliated person of the Subadviser, expressly for use in the Trust's
registration statement or other than upon verbal information confirmed by the
Subadviser in writing expressly for use in the Trust's registration statement;
provided, however, that in no case is the Manager's indemnity in favor of the
Subadviser or any affiliated person or controlling person of the Subadviser
deemed to protect such person against any liability to which any such person
would otherwise be subject by reason of willful misconduct, bad faith or gross
negligence in the performance of its duties or by reason of its reckless
disregard of its obligations and duties under this Agreement.
12. Certain Definitions. For the purposes of this Agreement, the "vote
of a majority of the outstanding voting securities of the Series" means the
affirmative vote, at a duly called and held meeting of shareholders of the
Series, (a) of the holders of 67% or more of the shares of the Series present
(in person or by proxy) and entitled to vote at such meeting, if the holders of
more than 50% of the outstanding shares of the Series entitled to vote at such
meeting are present in person or by proxy, or (b) of the holders of more than
50% of the outstanding shares of the Series entitled to vote at such meeting,
whichever is less.
For the purposes of this Agreement, the terms "interested person" and
"assignment" shall have their respective meanings defined in the 1940 Act,
subject, however, to such exemptions as may be granted by the Securities and
Exchange Commission under said Act.
For the purposes of this Agreement, the terms "assets", "net assets",
"securities", "portfolio securities" or "investments" of the Series shall mean,
respectively, such assets, net assets, securities, portfolio securities or
investments which are from time to time under the management of the Subadviser
pursuant to this Agreement.
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13. Notices. All notices or other communications required or permitted
to be given hereunder shall be in writing and shall be delivered or sent by
pre-paid first class letter post to the following addresses or to such other
address as the relevant addressee shall hereafter notify for such purpose to the
others by notice in writing and shall be deemed to have been given at the time
of delivery.
If to the Manager: SCUDDER KEMPER INVESTMENTS, INC.
345 Park Avenue
New York, NY 10154
Attention: General Counsel
If to the Trust: KEMPER VARIABLE SERIES
KEMPER INDEX 500 PORTFOLIO
Two International Place
Boston, MA 02110
Attention: Secretary
If to the Subadviser: BANKERS TRUST COMPANY
Global Investment Management
One Bankers Trust Plaza
New York, New York 10006
Attention: Kathleen Condon
14. Instructions. The Subadviser is authorized to honor and act on any
notice, instruction or confirmation given by the Trust or Manager in writing
signed or sent by one of the persons whose names, addresses and specimen
signatures will be provided by the Trust or Manager from time to time.
15. Law. This Agreement is governed by and shall be construed in
accordance with the laws of the State of New York in a manner not in conflict
with the provisions of the 1940 Act, except with respect to Section 16, which
shall be construed in accordance with the laws of the State of Massachusetts.
16. Limitation of Liability of the Trust, Trustees, and Shareholders.
It is understood and expressly stipulated that none of the trustees, officers,
agents, or shareholders of the Trust shall be personally liable hereunder. It is
understood and acknowledged that all persons dealing with the Series must look
solely to the property of such Series for the enforcement of any claims against
such Series as neither the trustees, officers, agents or shareholders assume any
personal liability for obligations entered into on behalf of the Trust or the
Series. No series of the Trust shall be liable for the obligations of any other
series.
17. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and all such
counterparts shall constitute a single instrument.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have each caused this instrument
to be signed in duplicate on its behalf by the officer designated below
thereunto duly authorized.
SCUDDER KEMPER INVESTMENTS,
INC.
Attest: By
--------------------- -------------------------------------
Name: Cornelia M. Small
Title: Managing Director
BANKERS TRUST COMPANY
Attest: By
--------------------- -------------------------------------
Name: Lawrence Lafer
Title: Director
Deutsche Bank Asset Management
10
<PAGE>
Schedule A to the Subadvisory Agreement
for the Kemper Index 500 Portfolio (the "Series")
dated as of September 1, 1999 between Scudder Kemper Investments, Inc.
("Manager") and Bankers Trust Company ("Subadviser")
FEE SCHEDULE
As compensation for its services described herein, Subadviser shall receive from
the Manager a monthly fee based on a percentage of average daily net assets of
the Series calculated according to the following annualized fee schedule:
Series Net Assets Annualized Rate
----------------- ---------------
On the first $200 million 0.08 of 1%
On the next $550 million 0.05 of 1%
On the balance over $750 million 0.025 of 1%
Minimum annual fee: $100,000. The minimum annual fee is not applicable for the
first year of the Subadvisory Agreement.
The "average daily net assets" of the Series shall be calculated at such time or
times as the Trustees of Kemper Variable Series (the "Trust") may determine in
accordance with the provisions of the Investment Company Act of 1940. (All other
terms that were defined in the agreement are defined again in this Schedule).
The value of the net assets of the Series shall always be determined pursuant to
the applicable provisions of the Declaration of Trust and the Registration
Statement of the Trust. If the determination of net asset value does not take
place for any particular day, for the purposes of this Schedule A, the net asset
value shall be deemed to be the net asset value determined as of the close of
business on the last day on which such calculation was made for the purpose of
the foregoing computation. If the Series determines the value of the net assets
of its portfolio more than once on any day, then the last such determination
thereof on that day shall be deemed to be the sole determination thereof on that
day for the purposes of this Schedule A. Fees are charged monthly in arrears
based on one-twelfth of the annual fee rate. Fees will be prorated appropriately
if Subadviser does not perform services pursuant to this Subadvisory Agreement
for a full month.
11
Exhibit 23(h)(12)
FUND ACCOUNTING SERVICES AGREEMENT
THIS AGREEMENT is made on the 1st day of September, 1999 between Kemper Variable
Series (the "Fund"), on behalf of Kemper Index 500 Portfolio (hereinafter called
the "Portfolio"), a registered open-end management investment company with its
principal place of business in 222 South Riverside Plaza, Chicago, Illinois
60606 and Scudder Fund Accounting Corporation, with its principal place of
business in Boston, Massachusetts (hereinafter called "FUND ACCOUNTING").
WHEREAS, the Portfolio has need to determine its net asset value which service
FUND ACCOUNTING is willing and able to provide;
NOW THEREFORE in consideration of the mutual promises herein made, the Fund and
FUND ACCOUNTING agree as follows:
Section 1. Duties of FUND ACCOUNTING - General
FUND ACCOUNTING is authorized to act under the terms of this Agreement
to calculate the net asset value of the Portfolio as provided in the
prospectus of the Portfolio and in connection therewith shall:
a. Maintain and preserve all accounts, books, financial records
and other documents as are required of the Fund under Section
31 of the Investment Company Act of 1940 (the "1940 Act") and
Rules 31a-1, 31a-2 and 31a-3 thereunder, applicable federal
and state laws and any other law or administrative rules or
procedures which may be applicable to the Fund on behalf of
the Portfolio, other than those accounts, books and financial
records required to be maintained by the Fund's investment
adviser, custodian or transfer agent and/or books and records
maintained by all other service providers necessary for the
Fund to conduct its business as a registered open-end
management investment company. All such books and records
shall be the property of the Fund and shall at all times
during regular business hours be open for inspection by, and
shall be surrendered promptly upon request of, duly authorized
officers of the Fund. All such books and records shall at all
times during regular business hours be open for inspection,
upon request of duly authorized officers of the Fund, by
employees or agents of the Fund and employees and agents of
the Securities and Exchange Commission.
b. Record the current day's trading activity and such other
proper bookkeeping entries as are necessary for determining
that day's net asset value and net income.
c. Render statements or copies of records as from time to time
are reasonably requested by the Fund.
d. Facilitate audits of accounts by the Fund's independent public
accountants or by any other auditors employed or engaged by
the Fund or by any regulatory body with jurisdiction over the
Fund.
e. Compute the Portfolio's public offering price and/or its
daily dividend rates and money market yields, if applicable,
in accordance with Section 3 of the Agreement and notify the
Fund and such other persons as the Fund may
<PAGE>
reasonably request of the net asset value per share, the
public offering price and/or its daily dividend rates and
money market yields.
Section 2. Valuation of Securities
Securities shall be valued in accordance with (a) the Fund's
Registration Statement, as amended or supplemented from time to time
(hereinafter referred to as the "Registration Statement"); (b) the
resolutions of the Board of Trustees of the Fund at the time in force
and applicable, as they may from time to time be delivered to FUND
ACCOUNTING, and (c) Proper Instructions from such officers of the Fund
or other persons as are from time to time authorized by the Board of
Trustees of the Fund to give instructions with respect to computation
and determination of the net asset value. FUND ACCOUNTING may use one
or more external pricing services, including broker-dealers, provided
that an appropriate officer of the Fund shall have approved such use in
advance.
Section 3. Computation of Net Asset Value, Public
Offering Price, Daily Dividend Rates and Yields
FUND ACCOUNTING shall compute the Portfolio's net asset value,
including net income, in a manner consistent with the specific
provisions of the Registration Statement. Such computation shall be
made as of the time or times specified in the Registration Statement.
FUND ACCOUNTING shall compute the daily dividend rates and money market
yields, if applicable, in accordance with the methodology set forth in
the Registration Statement.
Section 4. FUND ACCOUNTING's Reliance on Instructions and
Advice
In maintaining the Portfolio's books of account and making the
necessary computations FUND ACCOUNTING shall be entitled to receive,
and may rely upon, information furnished it by means of Proper
Instructions, including but not limited to:
a. The manner and amount of accrual of expenses to be recorded
on the books of the Portfolio;
b. The source of quotations to be used for such securities as may
not be available through FUND ACCOUNTING's normal pricing
services;
c. The value to be assigned to any asset for which no price
quotations are readily available;
2
<PAGE>
d. If applicable, the manner of computation of the public
offering price and such other computations as may be
necessary;
e. Transactions in portfolio securities;
f. Transactions in capital shares.
FUND ACCOUNTING shall be entitled to receive, and shall be entitled to
rely upon, as conclusive proof of any fact or matter required to be
ascertained by it hereunder, a certificate, letter or other instrument
signed by an authorized officer of the Fund or any other person
authorized by the Fund's Board of Trustees.
FUND ACCOUNTING shall be entitled to receive and act upon advice of
Counsel for the Fund at the reasonable expense of the Portfolio and
shall be without liability for any action taken or thing done in good
faith in reliance upon such advice.
FUND ACCOUNTING shall be entitled to receive, and may rely upon,
information received from the Transfer Agent.
Section 5. Proper Instructions
"Proper Instructions" as used herein means any certificate, letter or
other instrument or telephone call reasonably believed by FUND
ACCOUNTING to be genuine and to have been properly made or signed by
any authorized officer of the Fund or person certified to FUND
ACCOUNTING as being authorized by the Board of Trustees. The Fund, on
behalf of the Portfolio, shall cause oral instructions to be confirmed
in writing. Proper Instructions may include communications effected
directly between electro-mechanical or electronic devices as from time
to time agreed to by an authorized officer of the Fund and FUND
ACCOUNTING.
The Fund, on behalf of the Portfolio, agrees to furnish to the
appropriate person(s) within FUND ACCOUNTING a copy of the Registration
Statement as in effect from time to time. FUND ACCOUNTING may
conclusively rely on the Fund's most recently delivered Registration
Statement for all purposes under this Agreement and shall not be liable
to the Portfolio or the Fund in acting in reliance thereon.
Section 6. Standard of Care
FUND ACCOUNTING shall exercise reasonable care and diligence in the
performance of its duties hereunder. The Fund agrees that FUND
ACCOUNTING shall not be liable under this Agreement for any error of
judgment or mistake of law made in good faith and
3
<PAGE>
consistent with the foregoing standard of care, provided that nothing
in this Agreement shall be deemed to protect or purport to protect FUND
ACCOUNTING against any liability to the Fund, the Portfolio or its
shareholders to which FUND ACCOUNTING would otherwise be subject by
reason of willful misfeasance, bad faith or negligence in the
performance of its duties, or by reason of its reckless disregard of
its obligations and duties hereunder.
Section 7. Compensation and FUND ACCOUNTING Expenses
FUND ACCOUNTING shall be paid as compensation for its services pursuant
to this Agreement such compensation as may from time to time be agreed
upon in writing by the two parties. FUND ACCOUNTING shall be entitled,
if agreed to by the Fund on behalf of the Portfolio, to recover its
reasonable telephone, courier or delivery service, and all other
reasonable out-of-pocket, expenses as incurred, including, without
limitation, reasonable attorneys' fees and reasonable fees for pricing
services.
FUND ACCOUNTING shall be contractually bound hereunder by the terms of
any publicly announced fee cap or waiver of its fee or by the terms of
any written document provided to the Board of Trustees of the Fund
announcing a fee cap or waiver of its fee, or any limitation of the
Fund's expenses, as if such fee cap, fee waiver or expense limitation
were fully set forth herein.
Section 8. Amendment and Termination
This Agreement shall continue in full force and effect until terminated
as hereinafter provided, may be amended at any time by mutual agreement
of the parties hereto and may be terminated by an instrument in writing
delivered or mailed to the other party. Such termination shall take
effect not sooner than sixty (60) days after the date of delivery or
mailing of such notice of termination. Any termination date is to be no
earlier than four months from the effective date hereof. Upon
termination, FUND ACCOUNTING will turn over to the Fund or its designee
and cease to retain in FUND ACCOUNTING files, records of the
calculations of net asset value and all other records pertaining to its
services hereunder; provided, however, FUND ACCOUNTING in its
discretion may make and retain copies of any and all such records and
documents which it determines appropriate or for its protection.
Section 9. Services Not Exclusive
4
<PAGE>
FUND ACCOUNTING's services pursuant to this Agreement are not to be
deemed to be exclusive, and it is understood that FUND ACCOUNTING may
perform fund accounting services for others. In acting under this
Agreement, FUND ACCOUNTING shall be an independent contractor and not
an agent of the Fund or the Portfolio.
Section 10. Limitation of Liability for Claims
The Fund's Amended and Restated Declaration of Trust, as amended to
date (the "Declaration"), a copy of which, together with all amendments
thereto, is on file in the Office of the Secretary of State of the
Commonwealth of Massachusetts, provides that the name "Kemper Variable
Series" refers to the Trustees under the Declaration collectively as
trustees and not as individuals or personally, and that no shareholder
of the Fund or the Portfolio, or Trustee, officer, employee or agent of
the Fund shall be subject to claims against or obligations of the Trust
or of the Portfolio to any extent whatsoever, but that the Trust estate
only shall be liable.
FUND ACCOUNTING is expressly put on notice of the limitation of
liability as set forth in the Declaration and FUND ACCOUNTING agrees
that the obligations assumed by the Fund and/or the Portfolio under
this Agreement shall be limited in all cases to the Portfolio and its
assets, and FUND ACCOUNTING shall not seek satisfaction of any such
obligation from the shareholders or any shareholder of the Fund or the
Portfolio or any other series of the Fund, or from any Trustee,
officer, employee or agent of the Fund. FUND ACCOUNTING understands
that the rights and obligations of the Portfolio under the Declaration
are separate and distinct from those of any and all other series of the
Fund.
Section 11. Notices
Any notice shall be sufficiently given when delivered or mailed to the
other party at the address of such party set forth below or to such
other person or at such other address as such party may from time to
time specify in writing to the other party.
If to FUND ACCOUNTING: Scudder Fund Accounting Corporation
Two International Place
Boston, Massachusetts 02110
Attn: Vice President
If to the Fund - Portfolio: Kemper Variable Series
5
<PAGE>
222 South Riverside Plaza
Chicago, Illinois 60606
Attn: President,Secretary
or Treasurer
Section 12. Miscellaneous
This Agreement may not be assigned by FUND ACCOUNTING without the
consent of the Fund as authorized or approved by resolution of its
Board of Trustees.
In connection with the operation of this Agreement, the Fund and FUND
ACCOUNTING may agree from time to time on such provisions interpretive
of or in addition to the provisions of this Agreement as in their joint
opinions may be consistent with this Agreement. Any such interpretive
or additional provisions shall be in writing, signed by both parties
and annexed hereto, but no such provisions shall be deemed to be an
amendment of this Agreement.
This Agreement shall be governed and construed in accordance with the
laws of the Commonwealth of Massachusetts.
This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
This Agreement constitutes the entire agreement between the parties
concerning the subject matter hereof, and supersedes any and all prior
understandings.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their respective officers thereunto duly authorized and its seal to be
hereunder affixed as of the date first written above.
[SEAL] KEMPER VARIABLE SERIES
on behalf of Kemper Index 500 Portfolio
By:
Title:
-----------------------------
6
<PAGE>
[SEAL] SCUDDER FUND ACCOUNTING CORPORATION
By:
Title:
-----------------------------
7
Exhibit 23(h)(13)
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 (formerly Investors Fund 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 separate series (each individually a "Portfolio" or
collectively the "Portfolios"), hereby establish and designate two additional
Portfolios, each Portfolio to have the following special and relative rights:
1. The Portfolios heretofore designated are as follows:
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 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 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 as follows:
Kemper Aggressive Growth Portfolio
Kemper Technology 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 amended from time to
time. Each share of beneficial interest of each Portfolio ("share") shall be
<PAGE>
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 together on any matter, 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 interest of shareholders of one or more Portfolios, in which
case only the shareholders of such Portfolios 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 date hereof shall be unaffected by this instrument.
6. The assets and liabilities of the Trust existing on the date hereof
shall, except as provided below, 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 Kemper Aggressive Growth Portfolio and Kemper
Technology 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.
------------------------------
James E. Akins, Trustee
------------------------------
Arthur R. Gottschalk, Trustee
------------------------------
Frederick T. Kelsey, Trustee
------------------------------
Thomas W. Littauer, Trustee
------------------------------
Daniel Pierce, Trustee
------------------------------
Fred B. Renwick, Trustee
------------------------------
John G. Weithers, Trustee
Dated as of March 31, 1999
3
<PAGE>
Exhibit 23(h)(14)
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 (formerly Investors Fund 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-two separate series (each individually a "Portfolio" or
collectively the "Portfolios"), hereby establish and designate one additional
Portfolio, 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 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 Portfolio designated hereby is Kemper Index 500
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 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
<PAGE>
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 Kemper Index 500 Portfolio shall be allocated to 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.
(c) The Trustees may from time to time in particular cases
make specific allocations of assets or liabilities to a
Portfolio.
2
<PAGE>
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.
-------------------------------
James E. Akins, Trustee
-------------------------------
James R. Edgar, Trustee
-------------------------------
Arthur R. Gottschalk, Trustee
-------------------------------
Frederick T. Kelsey, Trustee
-------------------------------
Thomas W. Littauer, Trustee
-------------------------------
Fred B. Renwick, Trustee
-------------------------------
John G. Weithers, Trustee
3
<PAGE>
Dated: July 14, 1999
4
<PAGE>
August 27, 1999
Kemper Variable Series
222 South Riverside Plaza
Chicago, Illinois 60606
Ladies and Gentlemen:
Reference is made to Post-Effective Amendment No. 27 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-Dreman Financial Services Portfolio, Kemper Global Blue Chip
Portfolio, Kemper International Growth and Income Portfolio, Kemper Aggressive
Growth Portfolio, Kemper Technology Growth Portfolio and Kemper Index 500
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, March 31, 1999 and July 13, 1999 relating to organizational matters,
securities matters and the issuance of shares are presently in full force and
<PAGE>
effect and have not been amended in any respect, we advise you and opine that
(a) the Fund is a 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, 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,
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
DAS/COK
Law Offices of
Dechert Price & Rhoads
Ten Post Office Square South
Boston, MA 02109-4603
TELEPHONE: (617) 728-7100
FAX: (617) 426-6567
August 27, 1999
Kemper Variable Series
222 South Riverside Plaza
Chicago, Illinois 60606
Re: Post-Effective Amendment No. 27 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-three active series (the "Funds").
By vote adopted on May 19, 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. 27 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 one Fund: Kemper Index 500 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. 27 to the
Registration Statement.
Very truly yours,
/s/ Dechert Price & Rhoads
