Filed electronically with the Securities and Exchange
Commission on June 17, 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. 25 / X /
--
And/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
Amendment No. 26 / X /
Kemper Variable Series
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(Exact Name of Registrant as Specified in Charter)
222 South Riverside Plaza, Chicago, Illinois 60606
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (312) 537-7000
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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)
/ / On ______________ pursuant to paragraph (b)
/ / On ______________ pursuant to paragraph (a) (1)
/ X / On September 1, 1999 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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Kemper Variable Series
Prospectus September 1, 1999
Kemper Variable Series
222 South Riverside Plaza, Chicago, Illinois 60606
1-800-778-1482
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
FUND INVESTMENT CONCEPT
KEMPER INDEX 500 PORTFOLIO
ABOUT YOUR INVESTMENT
Investment manager
Share price
Purchase and redemption
Distribution and Taxes
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FUND INVESTMENT CONCEPT
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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.
Shares of the Portfolios are not FDIC-insured, have no bank guarantees and may
lose value.
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KEMPER INDEX 500 PORTFOLIO
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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 compose the S&P 500, in approximately the same
weightings as the S&P 500. 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 know 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 Index's value in roughly the same proportion as the
Index. Second, smaller stocks in the Index are analyzed and selected. In
selecting smaller stocks, the ivestment 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. This approach attempts to maximize the
Portfolio's liquidity and returns while minimizing its costs. This process
selects stocks for the Portfolio so that industry weightings, market
capitalization and fundamental characteristics (price-to-book ratios,
price-to-earning 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, except Bankers Trust Corporation. 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 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.
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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.
The Portfolio is not sponsored, endorsed, sold or promoted by S&P
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 with changes in
the U.S. stock market. The U.S. stock market tends to be cyclical, with periods
when stock prices generally rise and with periods when stock prices generally
decline. Stock prices could decline generally or underperform other investments.
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.
The Portfolio may not be able to mirror the S&P 500 Index closely enough to
track its performance for a number of reason, including he Portfolio's cost to
buy an sell securities, the flow of money into an out of the portfolio, and the
underperformance of stock 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 position are not well correlated with those of its other investments,
the Portfolio would not be pursuing, and may not achieve, its investment
objective. The Portfolio could also be exposed to risk if it could not close out
its futures and options position 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.
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ABOUT YOUR INVESTMENT
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Past performance
Because the Portfolio commenced operations on September 1, 1999, no past
performance information is available.
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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 Board. Scudder Kemper Investments, Inc. manages the Portfolio's
investments. Professional management can be an important advantage for investors
who do not have the time or expertise to invest directly in individual
securities. Scudder Kemper Investments, Inc. is one of the largest and most
experienced investment management organizations worldwide, managing more than
$281 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 monthly investment management fee.
(Fee schedule to be inserted here)
Bankers Trust Company, the Portfolio's subadviser, is a New York banking
corporation with its principal offices located at 130 Liberty Avenue, New York,
NY. It is a wholly owned subsidiary of Bankers Trust Corporation, and is one of
the nation's leading managers of index funds. Bankers Trust Company will handle
day-to-day investment and trading functions for the Portfolio under the guidance
of the portfolio managers. The subadviser has managed stock index investments
since 1977. A fee is paid to the subadviser by Scudder Kemper Investments, Inc.
and calculated quarterly as a percentage of the Portfolio's total assets. The
rate decreases with successive increases in total assets. The minimum annual fee
is set at $___________, however, the minimum fee does not apply during the first
year of operations.
(Fee schedule to be inserted here)
Portfolio management
The following investment professionals are associated with the Portfolio as
indicated:
Name & Title Joined the Background
Portfolio as a
Portfolio Manager
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To be completed
Year 2000 Readiness
Like other mutual funds and financial and business organizations worldwide, the
Portfolio could be adversely affected if computer systems on which the Portfolio
relies, which primarily include those used by the investment manager, its
affiliates or other service providers, are unable to correctly process
date-related information on and after January 1, 2000. This risk is commonly
called the Year 2000 Issue. Failure to successfully address the Year 2000 Issue
could result in interruptions to and other material adverse effects on the
Portfolio's business and operations, such as problems with calculating net asset
value and difficulties in implementing the Portfolio's purchase and redemption
procedures. The investment manager has commenced a review of the Year 2000 Issue
as it may affect the Portfolio and is taking steps it believes are reasonably
designed to address the Year 2000 Issue, although there can be no assurances
that these steps will be sufficient. In addition, there can be no assurances
that the Year 2000 Issue will not have an adverse effect on the issuers whose
securities are held by the Portfolio or on global markets or economies
generally.
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SHARE PRICE
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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 of the Portfolio is the value of one share and is
determined by dividing the value of the Portfolio's net assets by the number of
shares of the Portfolio outstanding.
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PURCHASE AND REDEMPTION
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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
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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
Life 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.
No fee is charged the shareholders when they purchase or redeem Portfolio
shares.
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DISTRIBUTIONS AND TAXES
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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.
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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.
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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: In Person:
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Call Kemper at: Public Reference Room
Securities and Exchange Commission,
1-800-778-1482 Washington, D.C.
(Call 1-800-SEC-0330 for more
information).
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By Mail: By Internet:
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Kemper Distributors, Inc. http://www.sec.gov
222 South Riverside Plaza http://www.kemper.com
Chicago, IL 60606-5808
Or
Public Reference Section, Securities
and Exchange Commission, Washington,
D.C. 20549-6009
(a duplication fee is charged)
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The Statement of Additional Information is incorporated by reference into this
prospectus (is legally a part of this prospectus).
Investment Company Act file numbers:
Kemper Variable Series 811-5002.
Printed with SOYINK Printed on recycled paper
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Goal: Core Strategy: The Investment Adviser invests in a statistically selected
sample of the securities found in the S&P 500 Index.
STRATEGY
PRINCIPAL INVESTMENTS
INVESTMENT PROCESS
INFORMATION REGARDING THE INDEX
The Portfolio is not sponsored, endorsed, sold or promoted by 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&P500 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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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. 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 "International Growth and Income
Portfolio Portfolio"
Kemper International Portfolio "International Portfolio"
</TABLE>
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TABLE OF CONTENTS
Page
INVESTMENT RESTRICTIONS..................................................3
INVESTMENT POLICIES AND TECHNIQUES.......................................8
PORTFOLIO TRANSACTIONS..................................................26
INVESTMENT MANAGER AND DISTRIBUTOR......................................29
PURCHASE AND REDEMPTION OF SHARES.......................................34
OFFICERS AND TRUSTEES...................................................34
NET ASSET VALUE.........................................................37
DIVIDENDS AND TAXES.....................................................38
SHAREHOLDER RIGHTS......................................................39
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.
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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 (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 diversified open-end management investment companies.
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 Investment Company Act of
1940, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
(2) issue senior securities, except as permitted under the Investment
Company Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
(3) For all Portfolios except Kemper Money Market Portfolio: concentrate
its investments in a particular industry, as that term is used in the
Investment Company Act of 1940, as amended, 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 Investment Company Act
of 1940, as amended, 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 Investment Company Act of
1940, as amended, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time.
If a percentage restriction is adhered to at the time of the investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Fund has
also adopted the following non-fundamental policies, which may be changed or
eliminated for each Portfolio by the Fund's Board of Trustees without a vote of
the shareholders:
Each 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:
(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;
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(3) Except for Kemper High Yield Portfolio, purchase more than 10% of any
class of securities of any issuer. All debt securities and all
preferred stocks are each considered as one class;
(4) For Kemper Money Market Portfolio only, enter into repurchase
agreements if, as a result thereof, more than 10% of the Portfolio's
total assets valued at the time of the transaction would be subject to
repurchase agreements maturing in more than seven (7) days;
(5) Make short sales of securities or purchase any securities on margin
except to obtain such short-term credits as may be necessary for the
clearance of transactions; however, Kemper Total Return Portfolio,
Kemper High Yield Portfolio, Kemper Growth Portfolio and Kemper
Government Securities Portfolio may make margin deposits in connection
with financial futures and options transactions;
(6) For Kemper Money Market Portfolio only, invest more than 5% of the
Portfolio's total assets in securities restricted as to disposition
under the Federal securities laws;
(7) Purchase securities of other investment companies, except as permitted
under the 1940 Act including in connection with a merger,
consolidation, reorganization or acquisition of assets;
(8) For Kemper Money Market Portfolio only, write, purchase or sell puts,
calls or combinations thereof;
(9) For Kemper Total Return Portfolio, Kemper High Yield Portfolio and
Kemper Growth Portfolio only, engage in put or call option
transactions; except that the Fund may write (sell) put or call options
on up to 25% of its net assets and may purchase put and call options if
no more than 5% of its net assets would be invested in premiums on put
and call options, combinations thereof or similar options; and it may
buy and sell options on financial futures contracts.
(10) For all Portfolios except for Kemper Money Market Portfolio, invest
more than 15% of its net assets in illiquid securities.
(11) For Kemper Money Market Portfolio only, invest more than 10% of its net
assets in illiquid securities.
(12) Invest for the purpose of exercising control or management of another
issuer.
Kemper International Portfolio may not, as a non-fundamental policy:
(1) Purchase securities of any issuer (other than obligations of, or
guaranteed by, the United States or any foreign government or their
agencies or instrumentalities) if, as a result, more than 5% of the
Portfolio's total assets would be invested in securities of that
issuer. With respect to 75% of its assets, the Portfolio will limit its
investments in the securities of any one foreign government issuer to
5% of the Portfolio's total assets;
(2) Purchase more than 10% of any class of securities of any issuer except
securities issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities. All debt securities and preferred stocks
are considered as one class;
(3) Pledge the Portfolio's securities or receivables or transfer or assign
or otherwise encumber them in an amount exceeding the amount of a
borrowing secured thereby;
(4) 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
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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.
(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
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delivery transactions and any margin payments in connection therewith
are not deemed to be pledges or other encumbrances.);
(4) Purchase securities on margin, except to obtain such short-term credits
as may be necessary for the clearance of transactions; however, the
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;
(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:
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(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.
The following non-fundamental restrictions apply to the Index 500 Portfolio,
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;
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(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.
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
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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 and International Growth and Income
Portfolios may each purchase put and call options provided that the aggregate
premiums paid on all such options held by the Portfolio at any time do not
exceed 20% of its total assets. The Financial Services Portfolio may purchase
put and call options without limit for hedging purposes, provided that no more
than 5% of its net assets may be committed for non-hedging purposes.
Each Portfolio, except the Money Market, Value+Growth and Blue Chip Portfolios
may write (sell) covered call options so long as they own securities or other
assets that are acceptable for escrow purposes. Also, such Portfolios may write
(sell) secured put options, which means that so long as the Portfolio is
obligated as a writer of a put option, it will invest an amount not less than
the exercise price of the put option in money market instruments.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security or other asset at the exercise price
during the option period. A put option gives the purchaser the right to sell,
and the writer the obligation to buy, the underlying security or other asset at
the exercise price during the option period. The writer of a covered call owns
securities or other assets that are acceptable for escrow and the writer of a
secured put invests an amount not less than the exercise price in eligible
securities or other assets to the extent that it is obligated as a writer. If a
call written by a Portfolio is exercised, the Portfolio foregoes any possible
profit from an increase in the market price of the underlying security or other
asset over the exercise price plus the premium received. In writing puts, there
is a risk that a Portfolio may be required to take delivery of the underlying
security or other asset at a disadvantageous price.
A Portfolio may write (sell) "covered" call options on securities as long as it
owns the underlying securities subject to the option or an option to purchase
the same underlying securities, having an exercise price equal to or less than
the exercise price of the "covered" option, or will establish and maintain with
the Portfolio's custodian for the term of the option a segregated account
consisting of cash or other liquid securities ("eligible securities") to the
extent required by applicable regulation in connection with the optioned
securities. A Portfolio may write "covered" put options provided that, so long
as the Portfolio is obligated as a writer of a put option, the Portfolio will
own an option to sell the underlying securities subject to the option, having an
exercise price equal to or greater than the exercise price of the "covered"
option, or it will deposit and maintain with the custodian in a segregated
account eligible securities having a value equal to or greater than the exercise
price of the option. A call option gives the purchaser the right to buy, and the
writer the obligation to sell, the underlying security at the exercise price
during the option period. A put option gives the purchaser the right to sell,
and the writer has the obligation to buy, the underlying security at the
exercise price during the option period. The premium received for writing an
option will reflect, among other things, the current market price of the
underlying security, the relationship of the exercise price to such market
price, the price volatility of the underlying security, the option period,
supply and demand and interest rates. A Portfolio may write or purchase spread
options, which are options for which the exercise price may be a fixed dollar
spread or yield spread between the security underlying the option and another
security that is used as a bench mark. The exercise price of an option may be
below, equal to or above the current market value of the underlying security at
the time the option is written. The buyer of a put who also owns the related
security is protected by ownership of a put option against any decline in that
security's price below the exercise price less the amount paid for the option.
The ability to purchase put options allows the Portfolio to protect capital
gains in an appreciated security it owns, without being required to actually
sell that security. At times a Portfolio would like to establish a position in
securities upon which call options are available. By purchasing a call option,
the Portfolio is able
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<PAGE>
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 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 the 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, and International Growth
and Income 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
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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, and
International Growth and Income 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 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
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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 the Portfolio would
exceed 50% of the total assets of the Portfolio. The Financial Services, Global
Blue Chip, and International Growth and Income 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
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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
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
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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 Growth, and International Growth
and Income Portfolios may purchase or sell portfolio securities on a when-issued
or delayed delivery basis. When-issued or delayed delivery transactions arise
when securities are purchased by the Portfolio with payment and delivery to take
place in the future in order to secure what is considered to be an advantageous
price and yield to the Portfolio at the time of entering into the transaction.
When the Portfolio enters into a delayed delivery transaction, it becomes
obligated to purchase securities and it has all of the rights and risks
attendant to ownership of a security, although delivery and payment occur at a
later date. The value of fixed-income securities to be delivered in the future
will fluctuate as interest rates vary. At the time a Portfolio makes the
commitment to purchase a security on a when-issued or delayed delivery basis, it
will record the transaction and reflect the liability for the purchase and the
value of the security in determining its net asset value. Likewise, at the time
a Portfolio makes the commitment to sell a security on a delayed delivery basis,
it will record the transaction and include the proceeds to be received in
determining its net asset value; accordingly, any fluctuations in the value of
the security sold pursuant to a delayed delivery commitment are ignored in
calculating net asset value so long as the commitment remains in effect. The
Portfolio generally has the ability to close out a purchase obligation on or
before the settlement date, rather than take delivery of the security.
To the extent the Portfolio engages in when-issued or delayed delivery
transactions, it will do so for the purpose of acquiring portfolio securities
consistent with the Portfolio's investment objective and policies. The Portfolio
will only make commitments to purchase securities on a when-issued or delayed
delivery basis with the intention of actually acquiring the securities, but the
Portfolio reserves the right to sell these securities before the settlement date
if deemed advisable. In some instances, the third-party seller of when-issued or
delayed delivery securities may determine prior to the settlement date that it
will be unable to meet its existing transaction commitments without borrowing
securities. If advantageous from a yield perspective, a Portfolio may, in that
event, agree to resell its purchase commitment to the third-party seller at the
current market price on the date of sale and concurrently enter into another
purchase commitment for such securities at a later date. As an inducement for a
Portfolio to "roll over" its purchase commitment, the Portfolio may receive a
negotiated fee.
Regulatory Restrictions. To the extent required to comply with applicable
regulation, when purchasing a futures contract, writing a put option or entering
into a delayed delivery purchase or a forward currency exchange purchase, a
Portfolio will maintain eligible securities in a segregated account. A Portfolio
will use cover in connection with selling a futures contract.
A Portfolio will not engage in transactions in financial futures contracts or
options thereon for speculation, but only to attempt to hedge against changes in
interest rates or market conditions affecting the value of securities which the
Portfolio holds or intends to purchase.
Foreign Currency Transactions. The Total Return, High Yield, Growth, Small Cap
Growth, Investment Grade Bond, Value+Growth, Horizon, Blue Chip, Aggressive
Growth, Technology, High Return Equity 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
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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 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
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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.
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
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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 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,
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mortgage-backed securities or U.S. Government securities. Currently, none of the
Portfolios intends to invest more than 5% of its net assets in inverse floaters
as described in the prospectus (see "Investment Techniques -- Collateralized
Obligations"). The Money Market Portfolio does not invest in inverse floaters.
Payments of principal and interest on the underlying collateral securities are
not passed through directly to the holders of the collateralized obligations as
such. Collateralized obligations, depending on their structure and the rate of
prepayments, can be volatile. Some collateralized obligations may not be as
liquid as other securities.
Collateralized obligations often are issued in two or more classes with varying
maturities and stated rates of interest. Because interest and principal payments
on the underlying securities are not passed through directly to holders of
collateralized obligations, such obligations of varying maturities may be
secured by a single portfolio or pool of securities, the payments on which are
used to pay interest on each class and to retire successive maturities in
sequence. These relationships may in effect "strip" the interest payments from
principal payments of the underlying securities and allow for the separate
purchase of either the interest or the principal payments. Collateralized
obligations are designed to be retired as the underlying securities are repaid.
In the event of prepayment on or call of such securities, the class of
collateralized obligation first to mature generally will be paid down first.
Therefore, although in most cases the issuer of collateralized obligations will
not supply additional collateral in the event of such prepayment, there will be
sufficient collateral to secure collateralized obligations that remain
outstanding. It is anticipated that no more than 5% of a Portfolio's net assets
will be invested in IO and PO securities. Governmentally-issued and
privately-issued IO's and PO's will be considered illiquid for purposes of a
Portfolio's limitation on illiquid securities, however, the Board of Trustees
may adopt guidelines under which governmentally-issued IO's and PO's may be
determined to be liquid.
In reliance on an interpretation by the SEC, a Portfolio's investments in
certain qualifying collateralized obligations are not subject to the limitations
in the 1940 Act regarding investments by a registered investment company, such
as a Portfolio, in another investment company.
Zero Coupon Government Securities. Subject to its investment objective and
policies, a Portfolio may invest in zero coupon U.S. Government securities. Zero
coupon bonds are purchased at a discount from the face amount. The buyer
receives only the right to receive a fixed payment on a certain date in the
future and does not receive any periodic interest payments. These securities may
include those created directly by the U.S. Treasury and those created as
collateralized obligations through various proprietary custodial, trust or other
relationships. The effect of owning instruments which do not make current
interest payments is that a fixed yield is earned not only on the original
investment but also, in effect, 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
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Return Equity may invest up to 20% of its assets in securities of foreign
companies through the acquisition of ADRs as well as through the purchase of
securities of foreign companies that are publicly traded in the United States
and foreign countries. Foreign securities in which a Portfolio may invest
include any type of security consistent with that Portfolio's investment
objective and policies. In connection with their foreign securities investments,
such Portfolios may, to a limited extent, engage in foreign currency exchange
transactions and purchase and sell foreign currency options and foreign currency
futures contracts as a hedge and not for speculation. The International, Global
Income, Global Blue Chip, 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
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
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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 Index 500 Portfolio may also invest in Standard & Poor's Depositary Receipts
("SPDRs"). SPDRs typically trade like a share of common stock, and provide
investment results that generally correspond to the price and yield performance
of the component common stocks of the S&P 500 Index. There can be no assurance
that this can be accomplished, as it may not be possible for the trust to
replicate and maintain exactly the composition and relative weightings of the
component securities of the S&P 500 Index. SPDRs are subject to the risks of an
investment in a broadly based portfolio of common stocks, including the risk
that the general level of stock prices may decline, thereby adversely affecting
the value of such investment. SPDRs are also subject to risks other than those
associated with an investment in a broadly based portfolio of common stocks, in
that the selection of the stocks included in the trust may affect trading in
SPDRs, as compared with trading in a broadly based portfolio of common stocks.
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High yield, high risk securities. Below investment grade securities, commonly
referred to as "junk bonds," (rated below Baa by Moody's and below BBB by S&P)
or unrated securities of equivalent quality in the Adviser's judgment, carry a
high degree of risk (including the possibility of default or bankruptcy of the
issuers of such securities), generally involve greater volatility of price and
risk of principal and income, and may be less liquid, than securities in the
higher rating categories and are considered speculative. The lower the ratings
of such debt securities, the greater their risks render them like equity
securities. See the Appendix to this Statement of Additional Information for a
more complete description of the ratings assigned by ratings organizations and
their respective characteristics.
An economic downturn could disrupt the high-yield market and impair the ability
of issuers to repay principal and interest. Also, an increase in interest rates
would likely have a greater adverse impact on the value of such obligations than
on higher quality debt securities. During an economic downturn or period of
rising interest rates, highly leveraged issues may experience financial stress
which could adversely affect their ability to service their principal and
interest payment obligations. Prices and yields of high-yield securities will
fluctuate over time and, during periods of economic uncertainty, volatility of
high-yield securities may adversely affect a Fund's net asset value. In
addition, investments in high-yield zero coupon or pay-in-kind bonds, rather
than income-bearing high-yield securities, may be more speculative and may be
subject to greater fluctuations in value due to changes in interest rates.
The trading market for high-yield securities may be thin to the extent that
there is no established retail secondary market. A thin trading market may limit
the ability of a Fund to accurately value high-yield securities in its portfolio
and to dispose of those securities. Adverse publicity and investor perceptions
may decrease the values and liquidity of high-yield securities. These securities
may also involve special registration responsibilities, liabilities and costs,
and liquidity and valuation difficulties.
Credit quality in the high-yield securities market can change suddenly and
unexpectedly, and even recently issued credit ratings may not fully reflect the
actual risks posed by a particular high-yield security. For these reasons, it is
the policy of the Adviser not to rely exclusively on ratings issued by
established credit rating agencies, but to supplement such ratings with its own
independent and on-going review of credit quality. The achievement of a Fund's
investment objective by investment in such securities may be more dependent on
the Adviser's credit analysis than is the case for higher quality bonds. Should
the rating of a portfolio security be downgraded, the Adviser will determine
whether it is in the best interest of a Fund to retain or dispose of such
security.
Prices for below investment-grade securities may be affected by legislative and
regulatory developments. For example, new federal rules require savings and loan
institutions to gradually reduce their holdings of this type of security. Also,
recent legislation restricts the issuer's tax deduction for interest payments on
these securities. Such legislation may significantly depress the prices of
outstanding securities of this type. For more information regarding tax issues
related to high-yield securities (see "TAXES").
Warrants. Certain Portfolios may invest in warrants up to a certain percentage
of the value of its respective net assets. The holder of a warrant has the
right, until the warrant expires, to purchase a given number of shares of a
particular issuer at a specified price. Such investments can provide a greater
potential for profit or loss than an equivalent investment in the underlying
security. Prices of warrants do not necessarily move, however, in tandem with
the prices of the underlying securities and are, therefore, considered
speculative investments. Warrants pay no dividends and confer 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
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(other than U.S. Government Securities) if, as a result, more than 5% of the
total value of the Portfolio's assets would be invested in securities of that
issuer; and (iii) invest more than 25% of its total assets in a single issuer
(other than U.S. Government Securities). The Aggressive Growth Fund does not
currently expect that it would invest more than 10% of its total assets in a
single issuer (other than U.S. Government Securities).
Special Risk Factors -- Small Cap Securities. The Small Cap Growth and Small Cap
Value Portfolios intend to invest a substantial portion of their assets in small
capitalization stocks similar in size to those comprising the Russell 2000.
Investments in securities of companies with small market capitalizations are
generally considered to offer greater opportunity for appreciation and to
involve greater risks of depreciation than securities of companies with larger
market capitalizations. Smaller companies often have limited product lines,
markets or financial resources, and they may be dependent upon one or a few key
people for management. Since the securities of such companies are not as broadly
traded as those of companies with larger market capitalizations, these
securities are often subject to wider and more abrupt fluctuations in market
price.
Among the reasons for the greater price volatility of these securities are the
less certain growth prospects of smaller firms, a lower degree of liquidity in
the markets for such stocks compared to larger capitalization stocks or the
market averages in general, and the greater sensitivity of small companies to
changing economic conditions. In addition to exhibiting greater volatility,
small company stocks may, to a degree, fluctuate independently of larger company
stocks. Small company stocks may decline in price as large company stock prices
rise, or rise in price as large company stock prices decline. Investors should
therefore expect that the value of the shares of the Small Cap Growth and Small
Cap Value Portfolios may be more volatile than the shares of a portfolio that
invests in larger capitalization stocks.
Additional Investment Information. The portfolio turnover rates for each
Portfolio other than the Money Market are listed under "Financial Highlights" in
the prospectus. Each Portfolio's average portfolio turnover rate is the ratio of
the lesser of sales or purchases to the monthly average value of the portfolio
securities owned during the year, excluding all securities with maturities or
expiration dates at the time of acquisition of one year or less. Since
securities with maturities of less than one year are excluded from portfolio
turnover rate calculations, the portfolio turnover rate for the Money Market
Portfolio is zero. Frequency of portfolio turnover will not be a limiting factor
should a Portfolio's investment manager deem it desirable to purchase or sell
securities. Purchases and sales are made for a Portfolio whenever necessary, in
management's opinion, to meet a Portfolio's objective. Higher portfolio turnover
(over 100%) involves correspondingly greater brokerage commissions or other
transaction costs. Higher portfolio turnover may result in the realization of
greater net short-term capital gains. See "Dividends and Taxes" herein.
The Global Income Portfolio may take full advantage of the entire range of
maturities of fixed-income securities, including zero-coupon securities, and may
adjust the average maturity of its portfolio from time to time, depending upon
its assessment of relative yields on securities of different maturities and its
expectations of future changes in interest rates. Thus, the average maturity of
the Portfolio's securities may be relatively short (under five years, for
example) at some times and relatively long (over 10 years, for example) at other
times. Generally, since shorter term debt securities tend to be more stable than
longer term debt securities, the Portfolio's average maturity will be shorter
when interest rates are expected to rise and longer when interest rates are
expected to fall. Since in most foreign markets debt securities generally are
issued with maturities of ten years or less, it is currently anticipated that
the average maturity of the Portfolio's securities will normally be in the
intermediate range (three to ten years).
Each Horizon Portfolio attempts to limit its exposure to interest rate risk by
maintaining a relatively short duration. Interest rate risk is the risk that the
value of the fixed income securities may rise or fall as interest rates change.
Under normal conditions, the target duration of the fixed-income portion of each
Horizon Portfolio is approximately 2.5 years, although it may range from 1.5 to
3.5 years depending upon market conditions. "Duration," and the more traditional
"average dollar-weighted maturity," are measures of how a fixed income portfolio
tend 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
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(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.
The Index 500 Portfolio invests its assets in covered call options in order to
invest uncommitted cash balances, to maintain liquidity, or to minimize trading
costs. The writing of covered call options by the Portfolio is subject to
limitations imposed by certain state securities authorities.
Lending of Portfolio Securities. Consistent with applicable regulatory
requirements, each Portfolio may lend securities (principally to broker-dealers)
without limit where such loans are callable at any time and are continuously
secured by segregated collateral (cash or other liquid securities) equal to no
less than the market value, determined daily, of the securities loaned. The
Portfolio will receive amounts equal to dividends or interest on the securities
loaned. It will also earn income for having made the loan. Any cash collateral
pursuant to these loans will be invested in short-term money market instruments.
As with other extensions of credit, there are risks of delay in recovery or even
loss of rights in the collateral should the borrower of the securities fail
financially. However, the loans would be made only to firms deemed by the
Portfolio's investment manager to be of good standing, and when the Portfolio's
investment manager believes the potential earnings to justify the attendant
risk. For each Portfolio except the Global Blue Chip Portfolio, the investment
manager will limit such lending to not more than one-third of the value of a
Portfolio's total assets. For the Global Blue Chip Portfolio, the investment
manager will, as a non-fundamental policy, limit securities lending to not more
than 5% of the value of the Portfolio's total assets.
Short Sales Against-the-Box. The 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 and International Growth and
Income 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
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<PAGE>
involve special risk considerations. Although the principal of each Portfolio's
borrowings will be fixed, a Portfolio's assets may change in value during the
time a borrowing is outstanding, thus increasing exposure to capital risk.
Section 4(2) Paper. Subject to its investment objectives and policies, a
Portfolio may invest in commercial paper issued by major corporations under the
Securities Act of 1933 in reliance on the exemption from registration afforded
by Section 3(a)(3) thereof. Such commercial paper may be issued only to finance
current transactions and must mature in nine months or less. Trading of such
commercial paper is conducted primarily by institutional investors through
investment dealers, and individual investor participation in the commercial
paper market is very limited. A Portfolio also may invest in commercial paper
issued in reliance on the so-called "private placement" exemption from
registration afforded by Section 4(2) of the Securities Act of 1933 ("Section
4(2) paper"). Section 4(2) paper is restricted as to disposition under the
federal securities laws, and generally is sold to institutional investors such
as a Portfolio who agree that they are purchasing the paper for investment and
not with a view to public distribution. Any resale by the purchaser must be in
an exempt transaction. Section 4(2) paper normally is resold to other
institutional investors like the Portfolio through or with the assistance of the
issuer or investment dealers who make a market in the Section 4(2) paper, thus
providing liquidity. The investment manager considers the legally restricted but
readily saleable Section 4(2) paper to be liquid; however, pursuant to
procedures approved by the Board of Trustees of the Fund, if a particular
investment in Section 4(2) paper is not determined to be liquid, that investment
will be included within the limitation of the particular Portfolio on illiquid
securities. The investment manager monitors the liquidity of each Portfolio's
investments in Section 4(2) paper on a continuing basis.
Common Stocks. Subject to its investment objectives and policies, certain
Portfolios may invest in common stocks. Common stock is issued by companies to
raise cash for business purposes and represents a proportionate interest in the
issuing companies. Therefore, a Portfolio participates in the success or failure
of any company in which it holds stock. The market values of common stock can
fluctuate significantly, reflecting the business performance of the issuing
company, investor perception and general economic or financial market movements.
Smaller companies are especially sensitive to these factors. An investment in
common stock entails greater risk of becoming valueless than does an investment
in fixed-income securities. Despite the risk of price volatility, however,
common stock also offers the greatest potential for long-term gain on
investment, compared to other classes of financial assets such as bonds or cash
equivalents.
Convertible Securities. Subject to its investment objectives and policies,
certain Portfolios may invest in convertible securities, that is, bonds, notes,
debentures, preferred stocks and other securities which are convertible into
common stock. Investments in convertible securities can provide an opportunity
for capital appreciation and/or income through interest and dividend payments by
virtue of their conversion or exchange features.
The convertible securities in which a Portfolio may invest are either
fixed-income or zero coupon debt securities which may be converted or exchanged
at a stated or determinable exchange ratio into underlying shares of common
stock. The exchange ratio for any particular convertible security may be
adjusted from time to time due to stock splits, dividends, spin-offs, other
corporate distributions or scheduled changes in the exchange ratio. Convertible
debt securities and convertible preferred stocks, until converted, have general
characteristics similar to both debt and equity securities. Although to a lesser
extent than with debt securities generally, the market value of convertible
securities tends to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. In addition, because of the conversion or
exchange feature, the market value of convertible securities typically changes
as the market value of the underlying common stocks changes, and, therefore,
also tends to follow movements in the general market for equity securities. A
unique feature of convertible securities is that as the market price of the
underlying common stock declines, convertible securities tend to trade
increasingly on a yield basis, and so may not experience market value declines
to the same extent as the underlying common stock. When the market price of the
underlying common stock increases, the prices of the convertible securities tend
to rise as a reflection of the value of the underlying common stock, although
typically not as much as the underlying common stock. While no securities
investments are without risk, investments in convertible securities generally
entail less risk than investments in common stock of the same issuer.
As debt securities, convertible securities are investments which provide for a
stream of income (or in the case of zero coupon securities, accretion of income)
with generally higher yields than common stocks. Of course, like all debt
securities, there can be no assurance of income or principal payments because
the issuers of the convertible securities may default on their obligations.
Convertible securities generally offer lower yields than non-convertible
securities of similar quality because of their conversion or exchange features.
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
25
<PAGE>
convertible preferred stock is senior to common stock, of the same issuer.
However, because of the subordination feature, convertible bonds and convertible
preferred stock typically have lower ratings than similar non-convertible
securities.
Convertible securities may be issued as fixed-income obligations that pay
current income or as zero coupon notes and bonds, including Liquid Yield Option
Notes ("LYONs"(TM)). Zero coupon securities pay no cash income and are sold at
substantial discounts from their value at maturity. When held to maturity, their
entire income, which consists of accretion of discount, comes from the
difference between the issue price and their value at maturity. Zero coupon
convertible securities offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follow the
movements in the market value of the underlying common stock. Zero coupon
convertible securities generally are expected to be less volatile than the
underlying common stocks as they usually are issued with shorter maturities (15
years or less) and are issued with options and/or redemption features
exercisable by the holder of the obligation entitling the holder to redeem the
obligation and receive a defined cash payment.
Investment Company Securities. Securities of other investment companies may be
acquired by certain Portfolios, to the extent permitted under the 1940 Act.
Investment companies incur certain expenses such as management, custodian, and
transfer agency fees, and, therefore, any investment by a Portfolio in shares of
other investment companies may be subject to such duplicate expenses.
PORTFOLIO TRANSACTIONS
Brokerage -- Scudder Kemper
Allocation of brokerage is supervised by the investment manager (which also
includes Scudder UK for purposes of the following disclosure).
The primary objective of the investment manager in placing orders for the
purchase and sale of securities for a Portfolio is to obtain the most favorable
net results, taking into account such factors as price, commission where
applicable, size of order, difficulty of execution and skill required of the
executing broker/dealer. The investment manager seeks to evaluate the overall
reasonableness of brokerage commissions paid (to the extent applicable) through
the familiarity of the Distributor 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.
26
<PAGE>
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 Scudder Investor Services, Inc.
("SIS"), a corporation registered as a broker-dealer and a subsidiary of Scudder
Kemper; 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.
Although certain research services from broker/dealers may be useful to a
Portfolio and to the investment manager, it is the opinion of the investment
manager that such information only supplements the investment manager's own
research effort since the information must still be analyzed, weighed and
reviewed by the investment manager's staff. Such information may be useful to
the investment manager in providing services to clients other than the
Portfolios, and not all such information is used by the investment manager in
connection with the Portfolios. Conversely, such information provided to the
investment manager by broker/dealers through whom other clients of the
investment manager effect securities transactions may be useful to the
investment manager in providing services to a Portfolio.
The Trustees for the Fund review, from time to time, whether the recapture for
the benefit of a Portfolio of some portion of the brokerage commissions or
similar fees paid by a Portfolio on portfolio transactions is legally
permissible and advisable.
Brokerage -- Dreman Value Management, L.L.C.
Under the sub-advisory agreement between Scudder Kemper and Dreman Value
Management, L.L.C. ("DVM"), DVM places all orders for purchases and sales of the
High Return Equity and Financial Services Portfolios' securities. At times
investment decisions may be made to purchase or sell the same investment
securities of a Portfolio and for one or more of the other clients managed by
DVM. When two or more of such clients are simultaneously engaged in the purchase
or sale of the same security through the same trading facility, the transactions
are allocated as to amount and price in a manner considered equitable to each.
Position limits imposed by national securities exchanges may restrict the number
of options the Portfolio will be able to write on a particular security.
The above mentioned factors may have a detrimental effect on the quantities or
prices of securities, options or future contracts available to the Portfolio. On
the other hand, the ability of the Portfolio to participate in volume
transactions may produce better executions for the Portfolio in some cases. The
Board of Trustees believes that the benefits of DVM's organization outweigh any
limitations that may arise from simultaneous transactions or position
limitations.
DVM, in effecting purchases and sales of portfolio securities for the account of
the Portfolio, will implement the Portfolio's policy of seeking best execution
of orders. DVM may be permitted to pay higher brokerage commissions for research
services as described below. Consistent with this policy, orders for portfolio
transactions are placed with broker-dealer firms giving consideration to the
quality, quantity and nature of each firm's professional services, which include
execution, financial responsibility, responsiveness, clearance procedures, wire
service quotations and statistical and other research information provided to
the Portfolio and DVM. Subject to seeking best execution of an order, brokerage
is allocated on the basis of all services provided. Any research benefits
derived are available for all clients of DVM. In selecting among firms believed
to meet the criteria for handling a particular transaction, DVM may give
consideration to those firms that have sold or are selling shares of the
Portfolio and of other funds managed by Scudder Kemper and its affiliates, as
well as to those firms that provide market, statistical and other research
information to the 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
27
<PAGE>
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
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**
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.
28
<PAGE>
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 Financial Services, a newly formed global
insurance and financial services company. 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 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.
29
<PAGE>
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 and 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, Inc. 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.
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:
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%
The High Return Equity, Financial Services, Aggressive Growth, and Technology
Portfolios each 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:
Average Daily Net Assets of the Fund 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%
30
<PAGE>
$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 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:
Average Daily Net Assets of the Fund Annual Management Fee Rate
- ------------------------------------ --------------------------
$0-$250 million 1.00%
$250 million-$1 billion 0.95%
Over $1 billion 0.90%
The investment management fees paid by each Portfolio (other than the Aggressive
Growth and Technology Portfolios, which commenced operations on May 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, $15,000,
$2,000 and $3,000 for the High Return Equity, Financial Services,
International Growth and Income, and Global Blue Chip 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.
Fund Sub-Adviser for the International and Global Income Portfolios. Scudder
Investments Ltd. (U.K.) Scudder UK ("Scudder UK"), 1 South Place, London, U.K.
EC2M 2ZS, an affiliate of Scudder Kemper, is the sub-adviser for the
International and Global Income Portfolios. Scudder UK acts as sub-adviser
pursuant to the terms of a sub-advisory agreement between it and Scudder Kemper
for the Portfolios. Scudder UK is subject to regulation by the Investment
Management Regulatory Organization in England as well as the SEC.
Under the terms of the sub-advisory agreement for the International and Global
Income Portfolios, Scudder UK renders investment advisory and management
services with regard to that portion of a Portfolio's assets as may be allocated
to Scudder UK by the investment manager from time to time for management,
including services related to foreign securities, foreign currency transactions
and related investments. Scudder UK may, under the terms of the sub-advisory
31
<PAGE>
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.
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.
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%
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<PAGE>
$10 billion-$12.5 billion 0.202%
Over $12.5 billion 0.198%
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. The sub-adviser fees paid by
Scudder Kemper Investments, Inc. to Dreman Value Management, LLC 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 investment manager and Bankers Trust Company
on (date) , Bankers Trust Company (the "Sub-adviser") provides sub-advisory
services relating to the management of the Index 500 Portfolio. The fee paid to
the Sub-adviser is calculated on a quarterly basis and depends on the level of
total assets in the Portfolio. The fee rate decreases as the level of total
assets for the Portfolio increases. The fee rate for each level of assets is:
0.08% of the first $200 million of average daily net assets, 0.05% of such
assets in excess of $550 million, and 0.025% of such assets in excess of $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.
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 services to
each Portfolio other than the High Return Equity, Financial Services, Global
Blue Chip, International Growth and Income, Aggressive Growth, and Technology
Growth 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. The Aggressive Growth, Technology, High Return
Equity and Financial Services Portfolios each pays 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. The
Global Blue Chip and International Growth and Income Portfolios each pays 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 waiver 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.
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
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<PAGE>
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, and International Growth and Income 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.
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, Illinois Governor,
1991-1999.
ARTHUR R. GOTTSCHALK (02/13/25), Trustee, 10642 Brookridge Drive, Frankfort,
Illinois; Retired; formerly, President, Illinois Manufacturers Association;
Trustee, Illinois Masonic Medical Center; formerly, Illinois State Senator;
formerly, Vice President, The Reuben H. Donnelley Corp.; formerly, attorney.
FREDERICK T. KELSEY (04/25/27), Trustee, 4010 Arbor Lane, Unit 102, Northfield,
Illinois; Retired; formerly, consultant to Goldman, Sachs & Co.; formerly,
President, Treasurer and Trustee of Institutional Liquid Assets and its
affiliated mutual funds; Trustee of the Northern Institutional Funds; formerly,
Trustee of the Pilot Fund.
THOMAS W. LITTAUER* (4/26/55), Chairman, Trustee and Vice President, Two
International Place, Boston, Massachusetts; Managing Director, Scudder Kemper,
formerly, Head of Broker Dealer Division of an unaffiliated investment
management firm during 1997; prior thereto, President of Client Management
Services of an unaffiliated investment management firm from 1991 to 1996.
34
<PAGE>
FRED B. RENWICK (02/01/30), Trustee, 3 Hanover Square, New York, New York;
Professor of Finance, New York University, Stern School of Business; Director,
TIFF Industrial Program, Inc., Director, the Wartburg Home Foundation; Chairman
Investment Committee of Morehouse College Board of Trustees; Chairman, American
Bible Society Investment Committee; formerly member of the Investment Committee
of Atlanta University Board of Trustees; formerly Director of Board of Pensions
Evangelical Lutheran Church of America.
JOHN G. WEITHERS (08/08/33), Trustee, 311 Spring Lake, Hinsdale, Illinois;
Retired; formerly, Chairman of the Board and Chief Executive Officer, Chicago
Stock Exchange; Director, Federal Life Insurance Company; President of the
Members of the Corporation and Trustee, DePaul University.
MARK S. CASADY* (9/21/60), President, Two International Place, Boston,
Massachusetts; Managing Director, Scudder Kemper; formerly Institutional Sales
Manager of an unaffiliated mutual fund distributor.
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.
35
<PAGE>
JOHN R. HEBBLE* (6/27/58), Treasurer, Two International Place, Boston,
Massachusetts; Senior Vice President, Scudder Kemper.
MAUREEN E. KANE* (2/14/62), Assistant Secretary, Two International Place,
Boston, Massachusetts; Vice President, Scudder Kemper; formerly, Assistant Vice
President of an unaffiliated investment management firm; prior there to,
Associate Staff Attorney of an unaffiliated investment management firm;
Associate, Peabody & Arnold (law firm).
CAROLINE PEARSON* (4/1/62), Assistant Secretary, Two International Place,
Boston, Massachusetts; Senior Vice President, Scudder Kemper; formerly,
Associate, Dechert Price & Rhoads (law firm), 1989 to 1997.
ELIZABETH C. WERTH* (10/1/47), Assistant Secretary, 222 South Riverside Plaza,
Chicago, Illinois; Vice President, Scudder Kemper; Vice President, KDI.
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.
STEPHEN P. DEXTER* (3/17/58) Vice President, 345 Park Avenue, New York, New
York; Senior Vice President, Scudder Kemper.
* 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
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>
* 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 _____________________, 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 _____________________, 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
36
<PAGE>
Services, Kemper-Dreman High Return Equity, and Global Income Portfolios were
held of record by KILICO Variable Annuity Separate Account ("KVASA"), KILICO
Variable Separate Account ("KVSA"), KILICO Variable Separate Account 2
("KVSA2"), Separate Account KGC ("KGC"), Separate Account KG ("KG"), Prudential
Variable Contract Account GI-2 ("PVCA"), Cova Variable Annuity Account One
("Cova One"), Cova Variable Annuity Account Five ("Cova Five") and Lincoln Life
Variable Annuity Account N ("LLVAA") on behalf of the owners of variable life
insurance contracts and variable annuity contracts. At all meetings of
shareholders of these Portfolios, Kemper Investors Life Insurance Company
("KILICO") will vote the shares held of record by KVASA, KVSA KVSA and KVSA2,
Allmerica Financial Life Insurance and Annuity Company ("Allmerica") will vote
the shares held of record by KGC and KG, Prudential Insurance Company of America
("Prudential") will vote the shares held of record by PVCA, Cova Financial
Services Life Insurance Company and Cova Financial Life Insurance Company
(collectively, "Cova") will vote the shares held of record by Cova One and Cova
Five, and Lincoln National Life Insurance Company ("Lincoln") will vote the
shares held of record by LLVAA only in accordance with the instructions received
from the variable life and variable annuity contract owners on behalf of whom
the shares are held. All shares for which no instructions are received will be
voted in the same proportion as the shares for which instructions are received.
Accordingly, KILICO disclaims beneficial ownership of the shares of these
portfolios held of record by KVASA, KVSA, and KVSA2, and Allmerica disclaims
beneficial ownership of the shares of these portfolios held of record by KGC and
KG, and Prudential disclaims beneficial ownership of the shares of these
portfolios held of record by PVCA, and Cova disclaims beneficial ownership of
the shares of these portfolios held of record by Cova One and Cova Five and
Lincoln disclaims beneficial ownership of the shares of these portfolios held of
record by LLVAA.
Scudder Kemper will be the sole shareholder of the Index 500, Aggressive Growth
and Technology Growth Portfolios until such time as each 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 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.
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<PAGE>
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 Aggressive Growth
and Technology Portfolios, intend 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.
If for any taxable year a Portfolio does not qualify for the special federal
income tax treatment afforded regulated investment companies, all of its taxable
income will be subject to federal income tax at regular corporate rates (without
any deductions for distributions to 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.
38
<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
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 in this Prospectus
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.
39
<PAGE>
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.
40
<PAGE>
ADDITIONAL INFORMATION
Other Information
The CUSIP number of each Portfolio is as follows:
Kemper Money Market Portfolio 488439 10 0
Kemper Government Securities Portfolio 488439 30 8
Kemper Investment Grade Bond Portfolio 488439 40 7
Kemper High Yield Portfolio 488439 50 6
Kemper Total Return Portfolio 488439 60 5
Kemper Blue Chip Portfolio 488439 70 4
Kemper Index 500 Portfolio tba
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.
41
<PAGE>
FINANCIAL STATEMENTS
The financial statements, including the investment portfolios of each Portfolio,
together with the Report of Independent Accountants, Financial Highlights and
notes to financial statements in the Annual Report to the Shareholders of each
Portfolio dated December 31, 1998 are incorporated herein by reference and are
hereby deemed to be a part of this Statement of Additional Information.
Effective May 1, 1999, the Fund's Board of Trustees approved a name change of
the Fund from Investors Fund Series to Kemper Variable Series.
42
<PAGE>
APPENDIX -- RATINGS OF INVESTMENTS
COMMERCIAL PAPER RATINGS
A-1, A-2 and Prime-1, Prime-2 Commercial Paper Ratings
Commercial paper rated by Standard & Poor's Corporation has the following
characteristics: Liquidity ratios are adequate to meet cash requirements.
Long-term senior debt is rated "A" or better. The issuer has access to at least
two additional channels of borrowing. Basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances. Typically, the
issuer's industry is well established and the issuer has a strong position
within the industry. The reliability and quality of management are unquestioned.
Relative strength or weakness of the above factors determine whether the
issuer's commercial paper is rated A-1 or A-2.
The ratings Prime-1 and Prime-2 are the two highest commercial paper ratings
assigned by Moody's Investors Service, Inc. Among the factors considered by them
in assigning ratings are the following: (1) evaluation of the management of the
issuer; (2) economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain areas; (3)
evaluation of the issuer's products in relation to competition and customer
acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend
of earnings over a period of ten years; (7) financial strength of a parent
company and the relationships which exist with the issuer; and (8) recognition
by the management of obligations which may be present or may arise as a result
of public interest questions and preparations to meet such obligations. Relative
strength or weakness of the above factors determines whether the issuer's
commercial paper is rated Prime-1 or 2.
CORPORATE BONDS
Standard & Poor's Corporation Bond Ratings
AAA. Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C. Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI. The rating CI is reserved for income bonds on which
no interest is being paid.
D. Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
Moody's Investors Service, Inc. Bond Ratings
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of
<PAGE>
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa. Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca. Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
44
<PAGE>
KEMPER VARIABLE SERIES
PART C. OTHER INFORMATION
<TABLE>
<CAPTION>
Item 23. Exhibits.
-------- ---------
<S> <C>
(a)(1) Amended and Restated Agreement and Declaration of Trust, dated April 24,
1998.
(Incorporated by reference to Post-Effective Amendment No. 22 to the
Registration Statement)
(a)(2) Amendment to the Declaration of Trust, dated March 31, 1999.
(Incorporated by reference to Post-Effective Amendment No. 24 to the
Registration Statement, filed on April 29, 1999)
(b) By-laws.
(Incorporated by reference to Post-Effective Amendment No. 14 to the
Registration Statement, filed on April 27, 1995)
(c) Text of Share Certificate.
(Incorporated by reference to Post-Effective Amendment No. 14 to the
Registration Statement, filed on April 27, 1995)
(d)(1) Investment Management Agreement (IMA) between the Registrant, on behalf of
Kemper Money Market Portfolio, and Scudder Kemper Investments, Inc., dated
September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
(d)(2) Investment Management Agreement (IMA) between the Registrant, on behalf of
Kemper High Yield Portfolio, and Scudder Kemper Investments, Inc., dated
September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
(d)(3) Investment Management Agreement (IMA) between the Registrant, on behalf of
Kemper Growth Portfolio, and Scudder Kemper Investments, Inc., dated
September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
(d)(4) Investment Management Agreement (IMA) between the Registrant, on behalf of
Kemper Government Securities Portfolio, and Scudder Kemper Investments,
Inc., dated September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
(d)(5) Investment Management Agreement (IMA) between the Registrant, on behalf of
Kemper International Portfolio, and Scudder Kemper Investments, Inc., dated
September 7, 1998.
(Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement, filed on February 12, 1999)
2
<PAGE>
(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)
(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)
3
<PAGE>
(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)
(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)
(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)
4
<PAGE>
(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)
(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)
5
<PAGE>
(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)
(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)
6
<PAGE>
(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)
(i) Opinion of Counsel.
To be filed by amendment.
(j) Consent of Independent Accountants.
To be filed by amendment.
(k) Inapplicable.
(l) Inapplicable.
(m) Inapplicable.
(n) Financial Data Schedule.
To be filed by amendment.
(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,
7
<PAGE>
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*
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
8
<PAGE>
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.+
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
* 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
</TABLE>
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.
9
<PAGE>
(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.
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.
Daniel Pierce Director, Chairman
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
10
<PAGE>
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 16th day of
June, 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 June 16, 1999, on behalf of the
following persons in the capacities indicated.
SIGNATURE TITLE
--------- -----
/s/ Daniel Pierce
-------------------------------------------
Daniel Pierce* Chairman and Trustee
/s/ James E. Akins
-------------------------------------------
James E. Akins* 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 B. Tingleff
-------------------------------------------
John B. Tingleff* 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. 25
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 26
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
KEMPER VARIABLE SERIES
<PAGE>
KEMPER VARIABLE SERIES
EXHIBIT INDEX
13
