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Kemper Variable Series
222 South Riverside Plaza
Chicago, Illinois 60606
(800) 778-1482
Kemper Variable Series offers a choice of 26 investment portfolios to investors
applying for certain variable life insurance and variable annuity contracts
offered by participating insurance companies.
Prospectus
May 1, 2000
<TABLE>
<S> <C>
Kemper Aggressive Growth Portfolio Kemper Small Cap Growth Portfolio
Kemper Blue Chip Portfolio Kemper Small Cap Value Portfolio
Kemper Contrarian Value Portfolio Kemper Strategic Income Portfolio
(formerly Kemper Global Income Portfolio)
Kemper Global Blue Chip Portfolio
Kemper Technology Growth Portfolio
Kemper Government Securities Portfolio
Kemper Total Return Portfolio
Kemper Growth Portfolio
Kemper Value+Growth Portfolio
Kemper High Yield Portfolio
KVS Dreman Financial Services Portfolio
Kemper Horizon 5 Portfolio
KVS Dreman High Return Equity Portfolio
Kemper Horizon 10+ Portfolio
KVS Focused Large Cap Growth Portfolio
Kemper Horizon 20+ Portfolio
KVS Growth And Income Portfolio
Kemper International Portfolio
KVS Growth Opportunities Portfolio
Kemper Investment Grade Bond Portfolio
KVS Index 500 Portfolio
Kemper Money Market Portfolio
Kemper New Europe Portfolio
(formerly Kemper International Growth and Income Portfolio)
</TABLE>
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 (SEC) does not approve or disapprove
these shares or determine whether the information in this prospectus is truthful
or complete. It is a criminal offense for anyone to inform you otherwise.
<PAGE>
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Table Of Contents
<TABLE>
<CAPTION>
About The Portfolios About Your Investment
<S> <C> <C>
3 Kemper Aggressive Growth 44 Kemper Small Cap Growth 77 Investment Advisor
Portfolio Portfolio
84 Share Price
5 Kemper Blue Chip Portfolio 47 Kemper Small Cap Value
Portfolio 84 Purchase And Redemption
8 Kemper Contrarian Value
Portfolio 50 Kemper Strategic Income 85 Distributions And Taxes
Portfolio
11 Kemper Global Blue Chip
Portfolio 53 Kemper Technology Growth
Portfolio
14 Kemper Government
Securities Portfolio 55 Kemper Total Return Portfolio
17 Kemper Growth Portfolio 58 Kemper Value+Growth
Portfolio
20 Kemper High Yield Portfolio
61 KVS Dreman Financial
23 Kemper Horizon 5 Portfolio Services Portfolio
26 Kemper Horizon 10+ Portfolio 64 KVS Dreman High Return
Equity Portfolio
29 Kemper Horizon 20+ Portfolio
67 KVS Focused Large Cap
32 Kemper International Growth Portfolio
Portfolio
69 KVS Growth And Income
35 Kemper Investment Grade Portfolio
Bond Portfolio
72 KVS Growth Opportunities
38 Kemper Money Market Portfolio
Portfolio
74 KVS Index 500 Portfolio
41 Kemper New Europe Portfolio
76 Other Policies And Risks
</TABLE>
About The Portfolios
Kemper Variable Series is an open-end, registered management investment company,
currently comprising 26 portfolios. Additional portfolios may be created from
time to time. The portfolios are intended to be a funding vehicle for variable
life insurance contracts and variable annuity contracts offered by the separate
accounts of certain life insurance companies. Kemper Variable Series currently
does not foresee any disadvantages to the holders of these contracts arising
from the fact that the interests of the various contract holders may differ.
Nevertheless, Kemper Variable Series' 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 contracts are
described in the separate prospectuses issued by the participating insurance
companies. Kemper Variable Series assumes no responsibility for such
prospectuses.
Individual contract holders are not the "shareholders" of Kemper Variable
Series. Rather, the participating insurance companies and their separate
accounts are the shareholders or investors, although such companies may pass
through voting rights to their contract holders.
2 | About the Portfolios
<PAGE>
Kemper Aggressive Growth Portfolio
Portfolio Goal
The portfolio seeks capital appreciation through the use of aggressive
investment techniques.
The Portfolio's Main Strategy
The portfolio normally invests at least 65% of total assets in equities --
mainly common stocks -- of U.S. companies. Although the portfolio can invest in
stocks of any size and market sector, it may invest in initial public offerings
(IPOs) and in growth-oriented market sectors, such as the technology sector. In
fact, the portfolio's stock selection methods may at times cause it to invest
more than 25% of total assets in a single sector. A sector is made up of
numerous industries.
In choosing stocks, the portfolio managers look for individual companies in
growing industries that have innovative products and services, competitive
positions, repeat customers, effective management, control over costs and prices
and strong balance sheets and earnings growth.
To a limited extent, the managers may seek to take advantage of short-term
trading opportunities that result from market volatility. For example, the
managers may increase positions in favored companies when prices decline and may
sell fully valued companies when prices rise.
The portfolio normally will sell a stock when the managers believe its price is
unlikely to go much higher, its fundamental qualities have deteriorated, other
investments offer better opportunities or to adjust its emphasis in a given
industry.
Other investments
While the portfolio invests mainly in U.S. common stocks, it could invest up to
25% of total assets in foreign securities.
The Main Risks Of Investing In The Portfolio
There are several risk factors that could hurt portfolio performance, cause you
to lose money or make the portfolio perform less well than other investments.
As with most stock funds, the most important factor with this portfolio is how
stock markets perform. When growth stock prices decline, you should expect the
value of your investment to decline as well. The fact that the portfolio may
focus on one or more sectors increases this risk, because factors affecting
those sectors could affect portfolio performance.
Similarly, because the portfolio isn't diversified and can invest a larger
percentage of assets in a given stock than a diversified portfolio, factors
affecting that stock could affect portfolio performance. Because a stock
represents ownership in its issuer, stock prices can be hurt by poor management,
shrinking product demand and other business risks. These may affect single
companies as well as groups of companies. Stocks of small companies (including
most that issue IPOs) can be highly volatile because their prices often depend
on future expectations.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of companies, sectors,
economic trends, the relative attractiveness of different sizes of stocks
or other matters
o growth stocks may be out of favor for certain periods
o foreign securities may be more volatile than their U.S. counterparts, for
reasons such as currency fluctuations and political and economic
uncertainty
o derivatives could produce disproportionate losses
o at times, it might be hard to value some investments or to get an
attractive price for them
This portfolio may be appropriate for long-term investors who can accept an
above-average level of risk to their investment in exchange for potentially
higher performance.
Kemper Aggressive Growth Portfolio | 3
<PAGE>
Performance
No performance information is provided because the portfolio has not yet been in
operation for a full calendar year.
The Portfolio Managers
The following people handle the portfolio's day-to-day management:
Sewall F. Hodges Jesus A. Cabrera
Lead Portfolio Manager o Began investment career in 1984
o Began investment career in 1978 o Joined the advisor in 1999
o Joined the advisor in 1995 o Joined the portfolio team in 1999
o Joined the portfolio team in 1999
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance for the period reflected below. The figures in the first part of the
table are for a single share. The total return figures show what a shareholder
in the portfolio would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by Ernst &
Young LLP whose report, along with the portfolio's financial statements, is
included in the portfolio's annual report, which is available upon request by
calling Scudder Kemper Investments at 1-800-778-1482.
Kemper Aggressive Growth Portfolio
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Period Ended December 31, 1999(b)
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Net asset value, beginning of period $1.000
---------
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Income from investment operations:
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Net investment income (loss) (a) .006
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Net realized and unrealized gain (loss) on
investment transactions .393
---------
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Total from investment operations .399
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Net asset value, end of period $1.399
---------
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Total return (%) 39.89**
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Ratios to Average Net Assets and Supplemental Data
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Net assets, end of period ($ thousands) 11,670
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Ratio of expenses before expense reductions (%) 2.66*
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Ratio of expenses after expense reductions (%) .50*
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Ratio of net investment income (loss) (%) .80*
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Portfolio turnover rate (%) 90*
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(a) Based on monthly average shares outstanding during the period.
(b) For the period from May 1, 1999 (commencement of operations) to December
31, 1999.
* Annualized
** Not annualized
4 | Kemper Aggressive Growth Portfolio
<PAGE>
Kemper Blue Chip Portfolio
Portfolio Goal
The portfolio seeks growth of capital and of income.
The Portfolio's Main Strategy
The portfolio normally invests at least 65% of total assets in common stocks of
large U.S. companies (those with market values of $1 billion or more). As of
December 31, 1999, companies in which the portfolio invests had a median market
capitalization of approximately $32 billion.
In choosing stocks, the portfolio managers look for attractive "blue chip"
companies: large, well-known established companies with sound financial strength
whose stock price is attractive relative to potential growth. The managers look
for factors that could signal future growth, such as new management, products or
business strategies.
The managers may favor securities from different industries and companies at
different times while still maintaining variety in terms of the industries and
companies represented.
The portfolio normally will sell a stock when the managers believe its price is
unlikely to go much higher, its fundamental qualities have deteriorated or other
investments offer better opportunities.
Other investments
While the portfolio invests mainly in U.S. common stocks, it could invest up to
25% of total assets in foreign securities.
The Main Risks Of Investing In The Portfolio
There are several risk factors that could hurt portfolio performance, cause you
to lose money or make the portfolio perform less well than other investments.
As with most stock funds, the most important factor with this portfolio is how
stock markets perform -- in this case, the large growth company portion of the
U.S. stock market. When prices of these stocks decline, you should expect the
value of your investment to decline as well. Large company stocks at times may
not perform as well as stocks of small or mid-size companies. Because a stock
represents ownership in its issuer, stock prices can be hurt by poor management,
shrinking product demand and other business risks. These may affect single
companies as well as groups of companies.
To the extent that the portfolio focuses on a given industry, any factors
affecting that industry could affect portfolio securities. For example, a rise
in unemployment could hurt consumer goods makers, or the emergence of new
technologies could hurt computer software or hardware companies.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of companies, industries,
economic trends or other matters
o growth stocks may be out of favor for certain periods o o foreign
securities may be more volatile than their U.S. counterparts, for reasons
such as currency fluctuations and political and economic uncertainty
o derivatives could produce disproportionate losses
o at times, it might be hard to value some investments or to get an
attractive price for them
Investors with long-term goals who want a core stock investment may be
interested in this portfolio.
Kemper Blue Chip Portfolio | 5
<PAGE>
Performance
The bar chart shows how the total returns for the portfolio have varied from
year to year, which may give some idea of risk. The chart doesn't reflect sales
loads and fees associated with a separate account that invests in the portfolio
or any insurance contract for which the portfolio is an investment option; if it
did, returns would be lower. The table shows how the portfolio's returns over
different periods average out.
For context, the table has two broad-based market indices (which, unlike the
portfolio, have no fees or expenses). All figures on this page assume
reinvestment of dividends and distributions. As always, past performance is no
guarantee of future results.
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
1998 13.84
1999 25.24
Best Quarter: 18.26%, Q4 1998 Worst Quarter: -12.38%, Q3 1998
Year-to-date Total Return as of 3/31/2000: 1.91%
Average Annual Total Returns as of 12/31/1999
1 Year Since 5/1/97
Life of Portfolio
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Portfolio 25.24% 18.98%
Index 1 21.04 27.40
Index 2 20.91 27.37
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Index 1: Standard and Poor's 500 Composite Stock Price Index (S&P 500), an
unmanaged capitalization-weighted index that includes 500 large-cap U.S. stocks.
Index 2: Russell 1000 Index, an unmanaged capitalization-weighted price-only
index that includes the 1000 largest capitalized U.S. companies whose common
stocks are traded in the United States.
The Portfolio Managers
The following people handle the portfolio's day-to-day management:
Tracy McCormick Gary A. Langbaum
Lead Portfolio Manager o Began investment career in 1970
o Began investment career in 1980 o Joined the advisor in 1988
o Joined the advisor in 1994 o Joined the portfolio team in 1998
o Joined the portfolio team in 1997
6 | Kemper Blue Chip Portfolio
<PAGE>
Kemper Blue Chip Portfolio
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance for the period reflected below. The figures in the first part of the
table are for a single share. The total return figures show what a shareholder
in the portfolio would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by Ernst &
Young LLP whose report, along with the portfolio's financial statements, is
included in the portfolio's annual report, which is available upon request by
calling Scudder Kemper Investments at 1-800-778-1482.
Kemper Blue Chip Portfolio
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Periods Ended December 31, 1999 1998 1997(b)
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Net asset value, beginning of period $1.260 1.115 1.000
---------------------------
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Income from investment operations:
- --------------------------------------------------------------------------------
Net investment income (loss) .009(a) .010 .017
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Net realized and unrealized gain (loss) on
investments transactions .308 .145 .098
---------------------------
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Total from investment operations .317 .155 .115
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Less distributions from:
- --------------------------------------------------------------------------------
Net investment income (.008) (.010) --
---------------------------
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Total distributions (.008) (.010) --
- --------------------------------------------------------------------------------
Net asset value, end of period $1.569 1.260 1.115
---------------------------
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Total return (%) 25.24 13.84 11.54**
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Ratios to Average Net Assets and Supplemental Data
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Net assets, end of period ($ thousands) 185,416 78,314 5,023
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Ratio of expenses before expense reductions (%) .71 .76 .95*
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Ratio of expenses after expense reductions (%) .70 .76 .95*
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Ratio of net investment income (loss) (%) .67 1.1 8 2.07*
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Portfolio turnover rate (%) 64 102 78*
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(a) Based on monthly average shares outstanding during the period.
(b) For the period May 1, 1997 (commencement of operations) to December 31,
1997.
* Annualized
** Not annualized
Kemper Blue Chip Portfolio | 7
<PAGE>
Kemper Contrarian Value Portfolio
Portfolio Goal
The portfolio seeks to achieve a high rate of total return.
The Portfolio's Main Strategy
The portfolio normally invests at least 65% of total assets in common stocks and
other equity securities of large U.S. companies (those with a market value of $1
billion or more) that the portfolio managers believe are undervalued. Although
the portfolio can invest in stocks of any economic sector, at times it may
emphasize the financial services sector or other sectors (in fact, it may invest
more than 25% of total assets in a single sector). As of December 31, 1999, the
companies in which the portfolio invests had a median market capitalization of
approximately $14 billion.
The portfolio managers begin by screening for stocks whose price-to-earnings
ratios are below the average for the S&P 500 Index. The managers then compare a
company's stock price to its book value, cash flow and yield, and analyze
individual companies to identify those that are financially sound and appear to
have strong potential for long-term growth.
The managers assemble the portfolio from among the most attractive stocks,
drawing on analysis of economic outlooks for various sectors and industries. The
managers may favor securities from different sectors and industries at different
times while still maintaining variety in terms of the sectors and industries
represented.
The portfolio normally will sell a stock when it reaches a target price, its
fundamental factors have changed or it has performed below the managers'
expectations.
Other investments
The portfolio may also invest up to 20% of assets in U.S. dollar-denominated
American Depositary Receipts.
The Main Risks Of Investing In The Portfolio
There are several factors that could hurt portfolio performance, cause you to
lose money or make the portfolio perform less well than other investments.
As with most stock funds, the most important factor with this portfolio is how
stock markets perform -- in this case, the large company portion of the U.S.
stock market. When large company stock prices decline, you should expect the
value of your investment to decline as well. Large company stocks at times may
not perform as well as stocks of smaller or middle-size companies. Because a
stock represents ownership in its issuer, stock prices can be hurt by poor
management, shrinking product demand and other business risks. These may affect
single companies as well as groups of companies.
To the extent that the portfolio concentrates in one or more sectors, any
factors affecting those sectors could affect portfolio performance. For example,
financial services companies could be hurt by such factors as changing
government regulations, increasing competition and interest rate movements.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of companies, industries,
economic trends or other matters
o value stocks may be out of favor for certain periods
o derivatives could produce disproportionate losses
o at times, it could be hard to value some investments or to get an
attractive price for them
Investors seeking to diversify a growth-oriented portfolio or add a core holding
to a value-oriented portfolio may want to consider this portfolio.
8 | Kemper Contrarian Value Portfolio
<PAGE>
Performance
The bar chart shows how the total returns for the portfolio have varied from
year to year, which may give some idea of risk. The chart doesn't reflect sales
loads and fees associated with a separate account that invests in the portfolio
or any insurance contract for which the portfolio is an investment option; if it
did, returns would be lower. The table shows how the portfolio's returns over
different periods average out.
For context, the table has a broad-based market index (which, unlike the
portfolio, has no fees or expenses). All figures on this page assume
reinvestment of dividends and distributions. As always, past performance is no
guarantee of future results.
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
1997 30.38
1998 19.26
1999 -10.21
Best Quarter: 15.52%, Q4 1998 Worst Quarter: -13.74%, Q3 1999
Year-to-date Total Return as of 3/31/2000: -4.92%
Average Annual Total Returns as of 12/31/1999
Since 5/1/96
1 Year Life of Portfolio
- ----------------------------------------------------------------------
Portfolio -10.21% 14.41%
Index 21.04 26.78
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Index: Standard & Poor's 500 Composite Stock Price Index (S&P 500), an unmanaged
capitalization-weighted index that includes 500 large-cap U.S. stocks.
The Portfolio Managers
The following people handle the portfolio's day-to-day management:
Thomas F. Sassi Frederick L. Gaskin
Lead Portfolio Manager o Began investment career in 1986
o Began investment career in 1971 o Joined the advisor in 1996
o Joined the advisor in 1996 o Joined the portfolio team in 1997
o Joined the portfolio team in 1997
Kemper Contrarian Value Portfolio | 9
<PAGE>
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance for the period reflected below. The figures in the first part of the
table are for a single share. The total return figures show what a shareholder
in the portfolio would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by Ernst &
Young LLP whose report, along with the portfolio's financial statements, is
included in the portfolio's annual report, which is available upon request by
calling Scudder Kemper Investments at 1-800-778-1482.
<TABLE>
<CAPTION>
Kemper Contrarian Value Portfolio
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Periods Ended December 31, 1999 1998 1997 1996(b)
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<S> <C> <C> <C> <C>
Net asset value, beginning of period $1.757 1.518 1.174 1.000
------------------------------------
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Income from investment operations:
- -------------------------------------------------------------------------------------------------
Net investment income (loss) .037(a) .026 .031 .015
- -------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments transactions (.194) .263 .323 .159
------------------------------------
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Total from investment operations (.157) .289 .354 .174
- -------------------------------------------------------------------------------------------------
Less distributions from:
- -------------------------------------------------------------------------------------------------
From net investment income (.030) (.010) (.010) --
- -------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (.100) (.040) -- --
------------------------------------
- -------------------------------------------------------------------------------------------------
Total distributions (.130) (.050) (.010) --
- -------------------------------------------------------------------------------------------------
Net asset value, end of period $1.470 1.757 1.518 1.174
------------------------------------
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Total return (%) (10.21) 19.26 30.38 17.36**
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Ratios to Average Net Assets and Supplemental Data
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Net assets, end of period ($ thousands) 237,415 263,775 162,380 21,305
- -------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) .81 .78 .80 .92*
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Ratio of expenses after expense reductions (%) .80 .78 .80 .90*
- -------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 2.14 2.02 2.38 2.42*
- -------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 88 57 46 57*
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</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the period of May 1, 1996 (commencement of operations) to December 31,
1996.
* Annualized
** Not annualized
10 | Kemper Contrarian Value Portfolio
<PAGE>
Kemper Global Blue Chip Portfolio
Portfolio Goal
The portfolio seeks long-term capital growth.
The Portfolio's Main Strategy
The portfolio normally invests at least 65% of total assets in common stocks and
other equities of "blue chip" companies throughout the world. These are large,
well known companies that typically have an established earnings and dividends
history, easy access to credit, solid positions in their industries and strong
management. Although the portfolio may invest in any country, it primarily
focuses on countries with developed economies (including the U.S.).
In choosing stocks, the portfolio managers look for those blue-chip companies
that appear likely to benefit from global economic trends or have promising new
technologies or products.
The managers may favor securities from different countries and industries at
different times, while still maintaining variety in terms of the countries and
industries represented.
The portfolio normally will sell a stock when the managers believe it has
reached its fair value, when its fundamental factors have changed or when
adjusting its exposure to a given country or industry.
Other investments
While most of the portfolio's equities are common stocks, some may be other
types of equities, such as convertible stocks or preferred stocks. While the
fund invests mainly in developed countries, it may invest up to 15% of total
assets in emerging market debt or equity securities of emerging markets (of
which, 5% of net assets may be junk bonds, i.e., grade BB and below), including
closed-end investment companies that invest primarily in emerging market debt
securities.
The Main Risks Of Investing In The Portfolio
There are several factors that could hurt portfolio performance, cause you to
lose money or make the portfolio perform less well than other investments.
The most important factor with this portfolio is how U.S. and foreign stock
markets perform -- something that depends on a large number of factors,
including economic, political and demographic trends. When U.S. and foreign
stock prices fall, especially prices of large company stocks, you should expect
the value of your investment to fall as well.
Foreign stocks tend to be more volatile than their U.S. counterparts, for
reasons ranging from political and economic uncertainties to a higher risk that
essential information may be incomplete or wrong. Large company stocks at times
may not perform as well as stocks of smaller or mid-size companies. Because a
stock represents ownership in its issuer, stock prices can be hurt by poor
management, shrinking product demand and other business risks. These may affect
single companies as well as groups of companies. In addition, changing currency
rates could add to the portfolio's investment losses or reduce its investment
gains.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
countries, industries, companies or other matters
o derivatives could produce disproportionate losses
o at times, it could be hard to value some investments or to get an
attractive price for them
If you are interested in large-cap stocks and want to look beyond U.S. markets,
this portfolio could be appropriate for you.
Kemper Global Blue Chip Portfolio | 11
<PAGE>
Performance
The bar chart shows the total return for the portfolio for its first calendar
year of operations, which may give some idea of risk. The chart doesn't reflect
sales loads and fees associated with a separate account that invests in the
portfolio or any insurance contract for which the portfolio is an investment
option; if it did, returns would be lower. The table shows how the portfolio's
returns over different periods average out.
For context, the table has a broad-based market index (which, unlike the
portfolio, has no fees or expenses). All figures on this page assume
reinvestment of dividends and distributions. As always, past performance is no
guarantee of future results.
Annual Total Returns (%) as of 12/31
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
1999 26.70
Best Quarter: 18.36%, Q4 1999 Worst Quarter: -2.24%, Q3 1999
Year-to-date Total Return as of 3/31/2000: 0.72%
Average Annual Total Returns as of 12/31/1999
Since 5/5/98
1 Year Life of Portfolio
- --------------------------------------------------------------------------------
Portfolio 26.70% 13.86%
Index 21.04 19.85%*
- --------------------------------------------------------------------------------
Index: Standard & Poor's 500 Composite Stock Price Index (S&P 500), an unmanaged
capitalization-weighted index that includes 500 large-cap U.S. stocks.
* Since 4/30/98.
The Portfolio Managers
The following people handle the portfolio's day-to-day management:
Diego Espinosa William E. Holzer
Lead Portfolio Manager o Began investment career in 1970
o Began investment career in 1991 o Joined the advisor in 1980
o Joined the advisor in 1996 o Joined the portfolio team in 1998
o Joined the portfolio team in 1998
Nicholas Bratt
o Began investment career in 1974
o Joined the advisor in 1976
o Joined the portfolio team in 1998
12 | Kemper Global Blue Chip Portfolio
<PAGE>
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance for the period reflected below. The figures in the first part of the
table are for a single share. The total return figures show what a shareholder
in the portfolio would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by Ernst &
Young LLP whose report, along with the portfolio's financial statements, is
included in the portfolio's annual report, which is available upon request by
calling Scudder Kemper Investments at 1-800-778-1482.
Kemper Global Blue Chip Portfolio
- -------------------------------------------------------------------------------
Periods Ended December 31, 1999 1998(b)
- --------------------------------------------------------------------------------
Net asset value, beginning of period $ .979 1.000
--------------------
- --------------------------------------------------------------------------------
Income from investment operations:
- --------------------------------------------------------------------------------
Net investment income (loss) .004(a) .003
- --------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investment transactions .257 (.024)
-------------------
- --------------------------------------------------------------------------------
Total from investment operations .261 (.021)
- --------------------------------------------------------------------------------
Less distributions from:
- --------------------------------------------------------------------------------
Net investment income (.003) --
- --------------------------------------------------------------------------------
Total distributions (.003) --
- --------------------------------------------------------------------------------
Net asset value, end of period $1.237 .979
-------------------
- --------------------------------------------------------------------------------
Total return (%) 26.70 (2.10)**
- --------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- --------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 17,409 3,584
- --------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 3.47 12.32*
- --------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.56 1.56*
- --------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) .39 .91*
- --------------------------------------------------------------------------------
Portfolio turnover rate (%) 65 67*
- --------------------------------------------------------------------------------
(a) Based on monthly average shares outstanding during the period.
(b) For the period from May 5, 1998 (commencement of operations) to December
31, 1998.
* Annualized
** Not annualized
Kemper Global Blue Chip Portfolio | 13
<PAGE>
Kemper Government Securities Portfolio
Portfolio Goal
The portfolio seeks high current income consistent with preservation of capital.
The Portfolio's Main Strategy
The portfolio normally invests at least 65% of total assets in U.S. Government
securities and repurchase agreements of U.S. Government securities. U.S.
Government-related debt instruments in which the portfolio may invest include:
o direct obligations of the U.S. Treasury
o securities issued or guaranteed by U.S. Government agencies or
Government sponsored entities
In deciding which types of securities to buy and sell, the portfolio managers
first consider the relative attractiveness of U.S. Treasury obligations compared
to other U.S. government and agency securities and determine allocations for
each. Their decisions are generally based on a number of factors, including
interest rate outlooks and changes in supply and demand within the bond market.
In choosing individual bonds, the managers review each bond's fundamentals,
compare the yields of shorter maturity bonds to those of longer maturity bonds
and use technical analysis to project prepayment rates and other factors that
could affect a bond's attractiveness.
The managers may adjust the duration (a measure of sensitivity to interest rate
movements) of the portfolio, depending on their outlook for interest rates.
Credit quality policies
This portfolio normally invests all of its assets in securities issued by the
U.S. government, its agencies or instrumentalities. These securities are
generally considered to be among the very highest quality securities.
The Main Risks Of Investing In The Portfolio
There are several factors that could reduce the yield you get from the
portfolio, cause you to lose money or make the portfolio perform less well than
other investments.
As with most bond funds, one of the most important factors is market interest
rates. A rise in interest rates generally means a fall in bond prices -- and, in
turn, a fall in the value of your investment. An increase in the portfolio's
duration could make the portfolio more sensitive to this risk.
Some securities issued by U.S. government agencies or instrumentalities are
supported only by the credit of that agency or instrumentality, while other
securities are backed by the U.S. Treasury. The guarantee of the U.S. government
doesn't protect the portfolio against market-driven declines in the prices or
yields of these securities, nor does it apply to shares of the portfolio itself.
Mortgage-backed securities carry additional risks and may be more volatile than
many other types of debt securities. Any unexpected behavior in interest rates
could hurt the performance of these securities. For example, a large fall in
interest rates could cause these securities to be paid off earlier than
expected, forcing the portfolio to reinvest the money at a lower rate. In
addition, if interest rates rise or stay high, these securities could be paid
off later than expected, forcing the portfolio to endure low yields. The result
for the portfolio could be an increase in the volatility of its share price and
yield.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends, issuers
or other matters
o at times, it could be hard to value some investments or to get an
attractive price for them
This portfolio may appeal to investors who want a portfolio that searches for
attractive yields generated by U.S. government securities.
14 | Kemper Government Securities Portfolio
<PAGE>
Performance
The bar chart shows how the total returns for the portfolio have varied from
year to year, which may give some idea of risk. The chart doesn't reflect sales
loads and fees associated with a separate account that invests in the portfolio
or any insurance contract for which the portfolio is an investment option; if it
did, returns would be lower. The table shows how the portfolio's returns over
different periods average out.
For context, the table has a broad-based market index (which, unlike the
portfolio, has no fees or expenses). All figures on this page assume
reinvestment of dividends and distributions. As always, past performance is no
guarantee of future results.
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
1990 9.81
1991 15.22
1992 5.92
1993 6.48
1994 -2.74
1995 18.98
1996 2.56
1997 8.96
1998 7.03
1999 0.68
Best Quarter: 6.22%, Q4 1990 Worst Quarter: -2.71%, Q1 1992
Year-to-date Total Return as of 3/31/2000: 2.04%
Average Annual Total Returns as of 12/31/1999
Since 9/3/87
1 Year 5 Years 10 Years Life of Portfolio
- -------------------------------------------------------------------------------
Portfolio 0.68% 7.46% 7.12% 7.24%
Index 1.99 8.04 7.93 N/A*
- -------------------------------------------------------------------------------
Index: Salomon Brothers 30-Year GNMA Index, an unmanaged index that measures the
total return of GNMA 30-year pass-throughs of single family and graduated
payment mortgages.
* The index was not in existence on the portfolio's inception date.
The Portfolio Managers
The following people handle the portfolio's day-to-day management:
Richard L. Vandenberg John E. Dugenske
Lead Portfolio Manager o Began investment career in 1990
o Began investment career in 1973 o Joined the advisor in 1998
o Joined the advisor in 1996 o Joined the portfolio team in 1998
o Joined the portfolio team in 1996
Scott E. Dolan
o Began investment career in 1989
o Joined the advisor in 1989
o Joined the portfolio team in 1998
Kemper Government Securities Portfolio | 15
<PAGE>
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance for the period reflected below. The figures in the first part of the
table are for a single share. The total return figures show what a shareholder
in the portfolio would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by Ernst &
Young LLP whose report, along with the portfolio's financial statements, is
included in the portfolio's annual report, which is available upon request by
calling Scudder Kemper Investments at 1-800-778-1482.
<TABLE>
<CAPTION>
Kemper Government Securities Portfolio
- ----------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $1.208 1.207 1.207 1.269 1.142
---------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Income from investment operations:
- ----------------------------------------------------------------------------------------------------------
Net investment income (loss) .072(a) .062 .084 .085 .084
- ----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investment transactions (.064) .019 .016 (.057) .123
---------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Total from investment operations .008 .081 .100 .028 .207
- ----------------------------------------------------------------------------------------------------------
Less distributions from
- ----------------------------------------------------------------------------------------------------------
Net investment income (.060) (.080) (.100) (.090) (.080)
---------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Total distributions (.060) (.080) (.100) (.090) (.080)
- ----------------------------------------------------------------------------------------------------------
Net asset value, end of period $1.156 1.208 1.207 1.207 1.269
---------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Total return (%) .68 7.03 8.96 2.56 18.98
- ----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ----------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 146,389 123,211 86,682 84,314 95,185
- ----------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) .63 .65 .64 .66 .65
- ----------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) .63 .65 .64 .66 .65
- ----------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 6.13 6.27 7.12 7.09 7.08
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 150 142 179 325 275
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
16 | Kemper Government Securities Portfolio
<PAGE>
Kemper Growth Portfolio
Portfolio Goal
The portfolio seeks maximum appreciation of capital.
The Portfolio's Main Strategy
The portfolio normally invests at least 65% of total assets in common stocks of
U.S. companies. The portfolio typically invests in stocks of small, less
well-known companies; but securities of large, well-known companies,
particularly when the portfolio manager considers them to be attractively priced
favorably compared with stocks of smaller companies. Companies in which the
portfolio invests generally have market capitalizations in excess of $1 billion.
In choosing stocks, the portfolio manager looks for individual companies that
have strong product lines, effective management and leadership positions within
core markets. The manager also analyzes each company's, valuation, stock price
movements and other factors.
Based on the above analysis, the manager classifies stocks as follows:
Stable Growth (typically at least 70% of portfolio): companies with strong
business lines and potentially sustainable earnings growth at a rapid rate
Accelerating Growth (typically up to 25% of portfolio): companies with a history
of strong earnings growth and the potential for continued growth
Special Situations (typically up to 15% of portfolio): companies that appear
likely to become Stable Growth or Accelerating Growth companies through a new
product launch, restructuring, change in management or other catalyst.
The manager intends to keep the portfolio's holdings diversified across
industries and companies, and generally keep its sector weightings similar to
those of the Russell 1000 Growth Index.
The portfolio normally will sell a stock when the manager believes its earnings
potential or its fundamental qualities have deteriorated or when other
investments offer better opportunities.
Other investments
The portfolio could invest up to 25% of total assets in foreign securities.
The Main Risks Of Investing In The Portfolio
There are several risk factors that could hurt portfolio performance, cause you
to lose money or make the portfolio perform less well than other investments.
As with most stock funds, the most important factor with this portfolio is how
stock markets perform -- in this case, the large company portion of the U.S.
stock market. When prices of these stocks decline, you should expect the value
of your investment to decline as well. Large company stocks may at times not
perform as well as stocks of small or mid-size companies. Because a stock
represents ownership in its issuer, stock prices can be hurt by poor management,
shrinking product demand and other business risks. These may affect single
companies as well as groups of companies.
To the extent that the portfolio focuses on a given industry, any factors
affecting that industry could affect portfolio securities. For example, a rise
in unemployment could hurt consumer goods makers, or the emergence of new
technologies could hurt computer software or hardware companies.
Kemper Growth Portfolio | 17
<PAGE>
Other factors that could affect performance include:
o the manager could be wrong in the analysis of companies, industries,
economic trends or other matters
o growth stocks may be out of favor for certain periods
o foreign securities may be more volatile than their U.S. counterparts, for
reasons such as currency fluctuations and political and economic
uncertainty
o derivatives could produce disproportionate losses
o at times, it might be hard to value some investments or to get an
attractive price for them
This portfolio may be suitable for investors who want a moderate to aggressive
long-term growth portfolio with a large-cap emphasis.
Performance
The bar chart shows how the total returns for the portfolio have varied from
year to year, which may give some idea of risk. The chart doesn't reflect sales
loads and fees associated with a separate account that invests in the portfolio
or any insurance contract for which the portfolio is an investment option; if it
did, returns would be lower. The table shows how the portfolio's returns over
different periods average out.
For context, the table has two broad-based market indices (which, unlike the
portfolio, have no fees or expenses). All figures on this page assume
reinvestment of dividends and distributions. As always, past performance is no
guarantee of future results.
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
1990 0.60
1991 59.46
1992 3.58
1993 14.62
1994 -4.62
1995 32.97
1996 21.63
1997 21.34
1998 15.10
1999 37.12
Best Quarter: 28.94%, Q4 1999 Worst Quarter: -21.97%, Q3 1998
Year-to-date Total Return as of 3/31/2000: 8.06%
Average Annual Total Returns as of 12/31/1999
Since 12/31/89
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Portfolio 37.12% 25.38% 18.94%
Index 1 21.04 28.56 18.21
Index 2 33.16 32.41 20.32
- --------------------------------------------------------------------------------
Index 1: Standard and Poor's 500 Composite Stock Price Index (S&P 500), an
unmanaged capitalization-weighted index that includes 500 large-cap U.S. stocks.
Index 2: Russell 1000 Growth Index, an unmanaged capitalization-weighted index
containing the growth stocks in the Russell 1000 Index.
18 | Kemper Growth Portfolio
<PAGE>
The Portfolio Manager
The following person handles the portfolio's day-to-day management:
Valerie F. Malter
Lead Portfolio Manager
o Began investment career in 1985
o Joined the advisor in 1995
o Joined the portfolio team in 1999
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance for the period reflected below. The figures in the first part of the
table are for a single share. The total return figures show what a shareholder
in the portfolio would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by Ernst &
Young LLP whose report, along with the portfolio's financial statements, is
included in the portfolio's annual report, which is available upon request by
calling Scudder Kemper Investments at 1-800-778-1482.
<TABLE>
<CAPTION>
Kemper Growth Portfolio
- -----------------------------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Net asset value, beginning of period $2.957 3.001 3.371 3.262 2.665
---------------------------------------------
- -----------------------------------------------------------------------------------------------------
Income from investment operations:
- -----------------------------------------------------------------------------------------------------
Net investment income (loss) (.001)(a) .007 .012 .030 .034
- -----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments transactions 1.098 .459 .448 .589 .793
---------------------------------------------
- -----------------------------------------------------------------------------------------------------
Total from investment operations 1.097 .466 .460 .619 .827
- -----------------------------------------------------------------------------------------------------
Less distributions from:
- -----------------------------------------------------------------------------------------------------
Net investment income -- (.010) (.020) (.040) (.010)
- -----------------------------------------------------------------------------------------------------
Net realized gains on investment transactions -- (.500) (.810) (.470) (.220)
---------------------------------------------
- -----------------------------------------------------------------------------------------------------
Total distributions -- (.510) (.830) (.510) (.230)
- -----------------------------------------------------------------------------------------------------
Net asset value, end of period $4.054 2.957 3.001 3.371 3.262
---------------------------------------------
- -----------------------------------------------------------------------------------------------------
Total return (%) 37.12 15.10 21.34 21.63 32.97
- -----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- -----------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 737,691 628,551 563,016 487,483 414,533
- -----------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) .66 .66 .65 .64 .64
- -----------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) .66 .66 .65 .64 .64
- -----------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) (.04) .28 .42 94 1.15
- -----------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 87 109 170 175 88
- -----------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
Kemper Growth Portfolio | 19
<PAGE>
Kemper High Yield Portfolio
Portfolio Goal
The portfolio seeks to provide a high level of current income.
The Portfolio's Main Strategy
The portfolio normally invests at least 65% of total assets in lower rated, high
yield/high risk fixed-income securities, often called junk bonds. Generally, the
portfolio invests in bonds from U.S. issuers, but up to 25% of total assets
could be in bonds from foreign issuers.
In deciding which securities to buy and sell to achieve income and capital
appreciation, the portfolio managers analyze securities to determine which
appear to offer reasonable risk compared to their potential return. To do this,
they rely on extensive independent analysis, favoring the bonds of companies
whose credit is gaining strength or who they believe are unlikely to default.
Based on their analysis of economic and market trends, the managers may favor
bonds from different segments of the economy at different times, while still
maintaining variety in terms of the types of bonds, companies and industries
represented. For example, the managers typically favor subordinated debt (which
has higher risks and may pay higher returns), but may emphasize senior debt if
they expect an economic slowdown.
The managers may adjust the duration (a measure of sensitivity to interest rate
movements) of the portfolio, depending on their outlook for interest rates.
Credit quality policies
This portfolio normally invests at least 65% of total assets in junk bonds,
which are those below the fourth credit grade (i.e., grade BB/Ba and below).
Compared to investment grade bonds, junk bonds may pay higher yields and have
higher volatility and risk of default.
The Main Risks Of Investing In The Portfolio
There are several risk factors that could reduce the yield you get from the
portfolio, cause you to lose money or make the portfolio perform less well than
other investments.
For this portfolio, one of the main factors is the economy. Because the
companies that issue high yield bonds may be in uncertain financial health, the
prices of their bonds can be more vulnerable to bad economic news or even the
expectation of bad news, than investment-grade bonds. This may affect a company,
an industry or the high yield market as a whole. In some cases, bonds may
decline in credit quality or go into default. This risk is higher with foreign
bonds.
Another factor is market interest rates. A rise in interest rates generally
means a fall in bond prices -- and, in turn, a fall in the value of your
investment. An increase in the portfolio's duration could make the portfolio
more sensitive to this risk.
Because the economy has a strong impact on corporate bond performance, the
portfolio will tend to perform less well than other types of bond funds when the
economy is weak. To the extent that the portfolio emphasizes bonds from any
given industry, it could be hurt if that industry does not do well.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends, issuers,
industries or other matters
o some bonds could be paid off earlier than expected, which could hurt the
portfolio's performance
o currency fluctuations could cause foreign investments to lose value
o at times, it could be hard to value some investments or to get an
attractive price for them
Investors who seek high current income and can accept risk of loss of principal
may be interested in this portfolio.
20 | Kemper High Yield Portfolio
<PAGE>
Performance
The bar chart shows how the total returns for the portfolio have varied from
year to year, which may give some idea of risk. The chart doesn't reflect sales
loads and fees associated with a separate account that invests in the portfolio
or any insurance contract for which the portfolio is an investment option; if it
did, returns would be lower. The table shows how the portfolio's returns over
different periods average out. For context, the table has a broad-based market
index (which, unlike the portfolio, has no fees or expenses). All figures on
this page assume reinvestment of dividends and distributions. As always, past
performance is no guarantee of future results.
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
1990 -15.45
1991 51.82
1992 17.75
1993 19.99
1994 -2.24
1995 17.40
1996 14.06
1997 11.61
1998 1.45
1999 2.15
Best Quarter: 26.74%, Q1 1991 Worst Quarter: -12.83%, Q3 1990
Year-to-date Total Return as of 3/31/2000: -1.99%
Average Annual Total Returns as of 12/31/1999
Since 4/6/82
1 Year 5 Years 10 Years Life of Portfolio
- --------------------------------------------------------------------------------
Portfolio 2.15% 9.15% 10.63% 12.11%
Index 0.27 12.47 12.48 N/A*
- --------------------------------------------------------------------------------
Index: Salomon Brothers Long-Term High Yield Bond Index, a measure of the total
return of high yield bond issues with a par value of at least $50 million and a
remaining maturity of at least ten years.
* The index was not in existence on the portfolio's inception date.
The Portfolio Managers
The following people handle the portfolio's day-to-day management:
Harry E. Resis, Jr. Daniel J. Doyle
Lead Portfolio Manager o Began investment career in 1984
o Began investment career in 1968 o Joined the advisor in 1986
o Joined the advisor in 1988 o Joined the portfolio team in 1999
o Joined the portfolio team in 1992
Kemper High Yield Portfolio | 21
<PAGE>
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance for the period reflected below. The figures in the first part of the
table are for a single share. The total return figures show what a shareholder
in the portfolio would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by Ernst &
Young LLP whose report, along with the portfolio's financial statements, is
included in the portfolio's annual report, which is available upon request by
calling Scudder Kemper Investments at 1-800-778-1482.
<TABLE>
<CAPTION>
Kemper High Yield Portfolio
- ------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $1.227 1.296 1.281 1.259 1.185
---------------------------------------------
- ------------------------------------------------------------------------------------------------------
Income from investment operations:
- ------------------------------------------------------------------------------------------------------
Net investment income (loss) .122(a) .106 .116 .120 .125
- ------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investment transactions (.093) (.085) .019 .042 .069
---------------------------------------------
- ------------------------------------------------------------------------------------------------------
Total from investment operations .029 .021 .135 .162 .194
- ------------------------------------------------------------------------------------------------------
Less distributions from:
- ------------------------------------------------------------------------------------------------------
Net investment income (.110) (.090) (.120) (.140) (.120)
---------------------------------------------
- ------------------------------------------------------------------------------------------------------
Total distributions (.110) (.090) (.120) (.140) (.120)
- ------------------------------------------------------------------------------------------------------
Net asset value, end of period $1.146 1.227 1.296 1.281 1.259
---------------------------------------------
- ------------------------------------------------------------------------------------------------------
Total return (%) 2.15 1.45 11.61 14.06 17.40
- ------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 396,203 442,125 391,664 289,315 257,377
- ------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) .67 .65 .65 .65 .65
- ------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) .67 .65 .65 .65 .65
- ------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 10.40 9.36 9.20 9.70 10.27
- ------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 42 74 90 98 90
- ------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
22 | Kemper High Yield Portfolio
<PAGE>
Kemper Horizon 5 Portfolio
Portfolio Goal
To seek income consistent with capital preservation; growth of capital is a
secondary goal.
The Portfolio's Main Strategy
Under normal conditions, the portfolio maintains an asset allocation of
approximately 40% equity securities and 60% fixed-income securities.
Fixed-income portion. This portion is divided among government and agency
securities, corporate securities, bank obligations and cash equivalents. All of
the portfolio's fixed-income securities must be denominated in U.S. dollars, and
90% of the fixed-income portion must be in the top four credit grades, with an
average credit quality within the top two credit grades.
Although the managers may adjust the duration (a measure of sensitivity to
interest rates) of the portfolio's fixed-income portion, they generally intend
to keep it between 1.5 and 3.5 years, with an average of approximately 2.5
years.
Equity portion. Most of this portion is normally invested in common stocks.
The equity portion is normally allocated approximately 70% U.S. equities and 30%
foreign equities. In choosing U.S. stocks, the managers use proprietary models
to rank stocks according to book value, earnings per share, expected earnings
growth and other factors. The model uses the same criteria for all stocks, but
ranks growth stocks and value stocks separately. Based on market, economic and
other factors, the managers determine their desired mix of growth and value
stocks (between 40% and 60% of each) and choose stocks from among the top-ranked
in each category.
In choosing foreign stocks, the managers generally focus on established
companies in countries with developed economies, although the portfolio can
invest in stocks of any size and from any country.
Allocation adjustments
While the managers expect that, over time, the portfolio's actual allocations
will average out to be similar to its target allocations, the actual allocations
may be different from the target allocations at any given time. This is because
the managers may adjust the portfolio's actual allocations in seeking to take
advantage of current or expected market conditions, or to manage risk.
The Main Risks Of Investing In The Portfolio
There are several factors that could hurt portfolio performance, cause you to
lose money or make the portfolio perform less well than other investments.
The portfolio is affected by how bond markets perform. Bonds could be hurt by
rises in market interest rates. (As a general rule, a 1% rise in interest rates
means a 1% fall in value for every year of duration.) Some bonds could be paid
off earlier than expected if interest rates fall. With mortgage- or asset-backed
securities, any unexpected behavior in interest rates could increase the
volatility of the portfolio's share price and yield. Corporate bonds could
perform less well than other types of bonds in a weak economy.
The portfolio is also affected by how stock markets perform -- something that
depends on many influences, including economic, political and demographic
trends. When stock prices fall, the value of your investment is likely to fall
as well. Stock prices can be hurt by poor management, shrinking product demand
and other business risks. Stock risks tend to be greater with smaller companies.
Foreign stocks tend to be more volatile than their American. counterparts. There
is also the risk with foreign investments that changing currency rates could add
to market losses or reduce market gains. These risks tend to be greater in
emerging markets.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
countries, industries, companies, the attractiveness of asset classes or
other matters
Kemper Horizon 5 Portfolio | 23
<PAGE>
o a bond could fall in credit quality or go into default
o at times, it could be hard to value some investments or to get an
attractive price for them
Investors who are about five years away from their financial goals, or who want
a portfolio that takes a more conservative asset allocation, may want to
consider this portfolio.
Performance
The bar chart shows how the total returns for the portfolio have varied from
year to year, which may give some idea of risk. The chart doesn't reflect sales
loads and fees associated with a separate account that invests in the portfolio
or any insurance contract for which the portfolio is an investment option; if it
did, returns would be lower. The table shows how the portfolio's returns over
different periods average out.
For context, the table has two broad-based market indices (which, unlike the
portfolio, have no fees or expenses). All figures on this page assume
reinvestment of dividends and distributions. As always, past performance is no
guarantee of future results.
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
1997 12.70
1998 10.00
1999 4.86
Best Quarter: 7.73%, Q4 1998 Worst Quarter: -4.22%, Q3 1998
Year-to-date Total Return as of 3/31/2000: -0.16%
Average Annual Total Returns as of 12/31/1999
Since 5/1/96
1 Year Life of Portfolio
- ----------------------------------------------------------------
Portfolio 4.86% 10.06%
Index 1 21.04 26.78
Index 2 -2.15 6.21
- ----------------------------------------------------------------
Index 1: Standard and Poor's 500 Composite Stock Price Index (S&P 500), an
unmanaged capitalization-weighted index that includes 500 large-cap U.S. stocks.
Index 2: Lehman Brothers Government/Corporate Bond Index, an unmanaged index
that includes intermediate and long-term government and investment-grade
corporate debt securities.
24 | Kemper Horizon 5 Portfolio
<PAGE>
The Portfolio Managers
The following people handle the portfolio's day-to-day management:
Robert D. Tymoczko Josephine Chu
Lead Portfolio Manager o Began investment career in 1996
o Began investment career in 1996 o Joined the advisor in 1997
o Joined the advisor in 1997 o Joined the portfolio team in 1999
o Joined the portfolio team in 1999 Mark Berroth
o Began investment career in 1993
Shahram Tajbakhsh o Joined the advisor in 1993
o Began investment career in 1991 o Joined the portfolio team in 2000
o Joined the advisor in 1996
o Joined the portfolio team in 1999
Almond G. Goduti
o Began investment career in 1985
o Joined the advisor in 1996
o Joined the portfolio team in 1999
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance for the period reflected below. The figures in the first part of the
table are for a single share. The total return figures show what a shareholder
in the portfolio would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by Ernst &
Young LLP whose report, along with the portfolio's financial statements, is
included in the portfolio's annual report, which is available upon request by
calling Scudder Kemper Investments at 1-800-778-1482.
<TABLE>
<CAPTION>
Kemper Horizon 5 Portfolio
- -----------------------------------------------------------------------------------------------
Periods Ended December 31, 1999 1998 1997 1996(b)
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
Net asset value, beginning of period $1.305 1.224 1.096 1.000
------------------------------------
- -----------------------------------------------------------------------------------------------
Income from investment operations:
- -----------------------------------------------------------------------------------------------
Net investment income (loss) .050(a) .028 .043 .023
- -----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments transactions .009 .093 .095 .073
------------------------------------
- -----------------------------------------------------------------------------------------------
Total from investment operations .059 .121 .138 .096
- -----------------------------------------------------------------------------------------------
Less distributions from:
- -----------------------------------------------------------------------------------------------
Net investment income (.030) (.010) (.010) --
- -----------------------------------------------------------------------------------------------
Net realized gains (loss) on investment transactions -- (.030) -- --
------------------------------------
- -----------------------------------------------------------------------------------------------
Total distributions (.030) (.040) (.010) --
- -----------------------------------------------------------------------------------------------
Net asset value, end of period $1.334 1.305 1.224 1.096
------------------------------------
- -----------------------------------------------------------------------------------------------
Total return (%) 4.86 10.00 12.70 9.59**
- -----------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- -----------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 42,630 32,741 14,258 2,534
- -----------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) .76 .66 .97 1.01*
- -----------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) .76 .66 .97 .83*
- -----------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 3.81 3.85 3.63 3.60*
- -----------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 33 42 89 13*
- -----------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the period from May 1, 1996 (commencement of operations) to December
31, 1996.
* Annualized
** Not annualized
Kemper Horizon 5 Portfolio | 25
<PAGE>
Kemper Horizon 10+ Portfolio
Portfolio Goal
To seek a balance between growth of capital and income, consistent with moderate
risk.
The Portfolio's Main Strategy
Under normal conditions, the portfolio maintains an asset allocation of
approximately 60% equity securities and 40% fixed-income securities.
Equity portion. Most of this portion is normally invested in common stocks.
The equity portion is normally allocated approximately 70% U.S. equities and 30%
foreign equities. In choosing U.S. stocks, the managers use proprietary models
to rank stocks according to book value, earnings per share, expected earnings
growth and other factors. The model uses the same criteria for all stocks, but
ranks growth stocks and value stocks separately. Based on market, economic and
other factors, the managers determine their desired mix of growth and value
stocks (between 40% and 60% of each) and choose stocks from among the top-ranked
in each category.
In choosing foreign stocks, the managers generally focus on established
companies in countries with developed economies, although the portfolio can
invest in stocks of any size and from any country.
Fixed-income portion. This portion is divided among government and agency
securities (including mortgage- and asset-backed securities), corporate
securities, bank obligations and cash equivalents. All of the portfolio's
fixed-income securities will be denominated in U.S. dollars, and 90% of the
fixed-income portion must be in the top four credit grades, with an average
credit quality within the top two credit grades.
Although the managers may adjust the duration (a measure of sensitivity to
interest rates) of the portfolio's fixed-income portion, they generally intend
to keep it between 1.5 and 3.5 years, with an average of approximately 2.5
years.
Allocation adjustments
While the managers expect that, over time, the portfolio's actual allocations
will average out to be similar to its target allocations, the actual allocations
may be different from the target allocations at any given time. This is because
the managers may adjust the portfolio's actual allocations in seeking to take
advantage of current or expected market conditions, or to manage risk.
The Main Risks Of Investing In The Portfolio
There are several factors that could hurt portfolio performance, cause you to
lose money or make the portfolio perform less well than other investments.
The most important factor is how stock markets perform -- something that depends
on many influences, including economic, political and demographic trends. When
stock prices fall, the value of your investment is likely to fall as well. Stock
prices can be hurt by poor management, shrinking product demand and other
business risks. Stock risks tend to be greater with smaller companies, which
often don't have the broad business lines or financial resources to weather hard
times.
Foreign stocks tend to be more volatile than their American counterparts. There
is also the risk with foreign investments that changing currency rates could add
to market losses or reduce market gains. These risks tend to be greater in
emerging markets.
The portfolio is also affected by how bond markets perform. Bonds could be hurt
by rises in market interest rates. (As a general rule, a 1% rise in interest
rates means a 1% fall in value for every year of duration.) Some bonds could be
paid off earlier than expected if interest rates fall. With mortgage- or
asset-backed securities, any unexpected behavior in interest rates could
increase the volatility of the portfolio's share price and yield. Corporate
bonds could perform less well than other types of bonds in a weak economy.
Other factors that could affect performance include:
26 | Kemper Horizon 10+ Portfolio
<PAGE>
o the managers could be wrong in their analysis of economic trends,
countries, industries, companies, the attractiveness of asset classes or
other matters
o a bond could fall in credit quality or go into default
o at times, it could be hard to value some investments or to get an
attractive price for them
Investors who are looking for a balanced portfolio of stock and bond investments
and whose time horizon is approximately ten or more years may be interested in
this portfolio.
Performance
The bar chart shows how the total returns for the portfolio have varied from
year to year, which may give some idea of risk. The chart doesn't reflect sales
loads and fees associated with a separate account that invests in the portfolio
or any insurance contract for which the portfolio is an investment option; if it
did, returns would be lower. The table shows how the portfolio's returns over
different periods average out.
For context, the table has two broad-based market indices (which, unlike the
portfolio, have no fees or expenses). All figures on this page assume
reinvestment of dividends and distributions. As always, past performance is no
guarantee of future results.
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
1997 16.77
1998 11.30
1999 8.38
Best Quarter: 10.74%, Q4 1998 Worst Quarter: -7.77%, Q3 1998
Year-to-date Total Return as of 3/31/2000: -0.86%
Average Annual Total Returns as of 12/31/1999
Since 5/1/96
1 Year Life of Portfolio
- ----------------------------------------------------------------
Portfolio 8.38% 13.07%
Index 1 21.04 26.78
Index 2 -2.15 6.21
- ----------------------------------------------------------------
Index 1: Standard and Poor's 500 Composite Stock Price Index (S&P 500), an
unmanaged capitalization-weighted index that includes 500 large-cap U.S. stocks.
Index 2: Lehman Brothers Government/Corporate Bond Index, an unmanaged index
that includes intermediate and long-term government and investment-grade
corporate debt securities.
Kemper Horizon 10+ Portfolio | 27
<PAGE>
The Portfolio Managers
The following people handle the portfolio's day-to-day management:
Robert D. Tymoczko Josephine Chu
Lead Portfolio Manager o Began investment career in 1996
o Began investment career in 1996 o Joined the advisor in 1997
o Joined the advisor in 1997 o Joined the portfolio team in 1999
o Joined the portfolio team in 1999 Mark Berroth
o Began investment career in 1993
Shahram Tajbakhsh o Joined the advisor in 1993
o Began investment career in 1991 o Joined the portfolio team in 2000
o Joined the advisor in 1996
o Joined the portfolio team in 1999
Almond G. Goduti
o Began investment career in 1985
o Joined the advisor in 1996
o Joined the portfolio team in 1999
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance for the period reflected below. The figures in the first part of the
table are for a single share. The total return figures show what a shareholder
in the portfolio would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by Ernst &
Young LLP whose report, along with the portfolio's financial statements, is
included in the portfolio's annual report, which is available upon request by
calling Scudder Kemper Investments at 1-800-778-1482.
<TABLE>
<CAPTION>
Kemper Horizon 10+ Portfolio
- -------------------------------------------------------------------------------------------------
Periods Ended December 31, 1999 1998 1997 1996(b)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $1.394 1.289 1.114 1.000
------------------------------------
- -------------------------------------------------------------------------------------------------
Income from investment operations:
- -------------------------------------------------------------------------------------------------
Net investment income (loss) .040(a) .020 .034 .018
- -------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) .075 .125 .151 .096
------------------------------------
- -------------------------------------------------------------------------------------------------
Total from investment operations .115 .145 .185 .114
- -------------------------------------------------------------------------------------------------
Less distributions from
- -------------------------------------------------------------------------------------------------
Net investment income (.030) (.010) (.010) --
- -------------------------------------------------------------------------------------------------
Net realized gains on investment transactions -- (.030) -- --
------------------------------------
- -------------------------------------------------------------------------------------------------
Total distributions (.030) (.040) (.010) --
- -------------------------------------------------------------------------------------------------
Net asset value, end of period $1.479 1.394 1.289 1.114
------------------------------------
- -------------------------------------------------------------------------------------------------
Total return (%) 8.38 11.30 16.77 11.37**
- -------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- -------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 66,963 57,411 22,553 5,727
- -------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) .72 .64 .83 1.01*
- -------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) .72 .64 .83 .78*
- -------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 2.83 2.84 2.77 2.69*
- -------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 50 35 67 76*
- -------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the period from May 1, 1996 (commencement of operations) to December
31, 1996.
* Annualized
** Not annualized
28 | Kemper Horizon 10+ Portfolio
<PAGE>
Kemper Horizon 20+ Portfolio
Portfolio Goal
To seek growth of capital, with income a secondary goal.
The Portfolio's Main Strategy
Under normal circumstances, the portfolio maintains an asset allocation of
approximately 80% equity securities and 20% fixed-income securities.
Equity portion. Most of this portion is normally invested in common stocks.
The equity portion is normally allocated approximately 70% U.S. equities and 30%
foreign equities. In choosing U.S. stocks, the managers use proprietary models
to rank stocks according to book value, earnings per share, expected earnings
growth and other factors. The model uses the same criteria for all stocks, but
ranks growth stocks and value stocks separately. Based on market, economic and
other factors, the managers determine their desired mix of growth and value
stocks (between 40% and 60% of each) and choose stocks from among the top-ranked
in each category.
In choosing foreign stocks, the managers generally focus on established
companies in countries with developed economies, although the portfolio can
invest in stocks of any size and from any country.
Fixed-income portion. This portion is divided among government and agency
securities, corporate securities, bank obligations and cash equivalents. All of
the portfolio's fixed-income securities must be denominated in U.S. dollars, and
90% of the fixed-income portion must be in the top four credit grades, with an
average credit quality within the top two credit grades.
Although the managers may adjust the duration (a measure of sensitivity to
interest rates) of the portfolio's fixed-income portion, they generally intend
to keep it between 1.5 and 3.5 years, with an average of approximately 2.5
years.
Allocation adjustments
While the managers expect that, over time, the portfolio's actual allocations
will average out to be similar to its target allocations, the actual allocations
may be different from the target allocations at any given time. This is because
the managers may adjust the portfolio's actual allocations in seeking to take
advantage of current or expected market conditions, or to manage risk.
The Main Risks Of Investing In The Portfolio
There are several factors that could hurt portfolio performance, cause you to
lose money or make the portfolio perform less well than other investments.
The most important factor is how stock markets perform -- something that depends
on many influences, including economic, political and demographic trends. When
stock prices fall, the value of your investment is likely to fall as well.
Because a stock represents ownership in its issuer, stock prices can be hurt by
poor management, shrinking product demand and other business risks. Stock risks
tend to be greater with smaller companies, which often don't have the broad
business lines or financial resources to weather hard times.
Foreign stocks tend to be more volatile than their American counterparts, for
reasons ranging from political and economic uncertainties to a higher risk that
essential information may be incomplete or wrong. In addition, there is the risk
with foreign investments that changing currency rates could add to market losses
or reduce market gains. These risks tend to be greater in emerging markets.
Because the portfolio invests some of its assets in bonds, it may perform less
well in the long run than a portfolio investing entirely in stocks. At the same
time, the portfolio's bond component means that its performance could be hurt
somewhat by poor performance in the bond market or from the particular bonds it
owns.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
countries, industries, companies, the attractiveness of asset classes or
other matters
Kemper Horizon 20+ Portfolio | 29
<PAGE>
o bond prices could be hurt by rising interest rates or declines in credit
quality
o at times, it could be hard to value some investments or to get an
attractive price for them
This portfolio may make sense for investors with a time horizon of 20 years or
longer who want an investment that uses an asset allocation strategy to pursue
growth and manage risk.
Performance
The bar chart shows how the total returns for the portfolio have varied from
year to year, which may give some idea of risk. The chart doesn't reflect sales
loads and fees associated with a separate account that invests in the portfolio
or any insurance contract for which the portfolio is an investment option; if it
did, returns would be lower. The table shows how the portfolio's returns over
different periods average out.
For context, the table has two broad-based market indices (which, unlike the
portfolio, have no fees or expenses). All figures on this page assume
reinvestment of dividends and distributions. As always, past performance is no
guarantee of future results.
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
1997 20.48
1998 13.01
1999 9.26
Best Quarter: 13.86%, Q4 1998 Worst Quarter: -11.44%, Q3 1998
Year-to-date Total Return as of 3/31/2000: -1.86%
Average Annual Total Returns as of 12/31/1999
Since 5/1/96
1 Year Life of Portfolio
- --------------------------------------------------------------------------------
Portfolio 9.26% 15.87%
Index 1 21.04 26.56
Index 2 -2.15 6.21
- --------------------------------------------------------------------------------
Index 1: Standard and Poor's 500 Composite Stock Price Index (S&P 500), an
unmanaged capitalization-weighted index that includes 500 large-cap U.S. stocks.
Index 2: Lehman Brothers Government/Corporate Bond Index, an unmanaged index
that includes intermediate and long-term government and investment-grade
corporate debt securities.
30 | Kemper Horizon 20+ Portfolio
<PAGE>
The Portfolio Managers
The following people handle the portfolio's day-to-day management:
Robert D. Tymoczko Josephine Chu
Lead Portfolio Manager o Began investment career in 1996
o Began investment career in 1996 o Joined the advisor in 1997
o Joined the advisor in 1997 o Joined the portfolio team in 1999
o Joined the portfolio team in 1999 Mark Berroth
o Began investment career in 1993
Shahram Tajbakhsh o Joined the advisor in 1993
o Began investment career in 1991 o Joined the portfolio team in 2000
o Joined the advisor in 1996
o Joined the portfolio team in 1999
Almond G. Goduti
o Began investment career in 1985
o Joined the advisor in 1996
o Joined the portfolio team in 1999
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance for the period reflected below. The figures in the first part of the
table are for a single share. The total return figures show what a shareholder
in the portfolio would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by Ernst &
Young LLP whose report, along with the portfolio's financial statements, is
included in the portfolio's annual report, which is available upon request by
calling Scudder Kemper Investments at 1-800-778-1482.
<TABLE>
<CAPTION>
Kemper Horizon 20+ Portfolio
- --------------------------------------------------------------------------------------------
Periods Ended December 31, 1999 1998 1997 1996(b)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $1.507 1.378 1.154 1.000
------------------------------------
- --------------------------------------------------------------------------------------------
Income from investment operations:
- --------------------------------------------------------------------------------------------
Net investment income (loss) .027(a) .019 .020 .012
- --------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments transactions .110 .160 .214 .142
------------------------------------
- --------------------------------------------------------------------------------------------
Total from investment operations .137 .179 .234 .154
- --------------------------------------------------------------------------------------------
Less distributions from:
- --------------------------------------------------------------------------------------------
Net investment income (.020) (.010) (.010) --
- --------------------------------------------------------------------------------------------
Net realized gains on investment transactions (.010) (.040) -- --
------------------------------------
- --------------------------------------------------------------------------------------------
Total distributions (.030) (.050) (.010) --
- --------------------------------------------------------------------------------------------
Net asset value, end of period $1.614 1.507 1.378 1.154
------------------------------------
- --------------------------------------------------------------------------------------------
Total return (%) 9.26 13.01 20.48 15.37**
- --------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- --------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 37,409 38,265 16,659 3,759
- --------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) .78 .67 .93 1.13*
- --------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) .78 .67 .93 .81*
- --------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 1.78 1.84 1.58 1.71*
- --------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 62 55 75 60*
- --------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the period from May 1, 1996 (commencement of operations) to December
31, 1996.
* Annualized
** Not annualized
Kemper Horizon 20+ Portfolio | 31
<PAGE>
Kemper International Portfolio
Portfolio Goal
The portfolio seeks total return through a combination of capital growth and
income.
The Portfolio's Main Strategy
The portfolio normally invests at least 80% of total assets in securities issued
by foreign-based issuers. The portfolio generally focuses on common stocks of
established companies. The portfolio may invest more than 25% of total assets in
any given developed country that the managers believe poses no unique investment
risk.
In choosing stocks, the portfolio managers use a combination of three analytical
disciplines:
Bottom-up research. The managers look for individual companies that have sound
financial strength, good business prospects and strong competitive positioning
and above-average earnings growth, among other factors.
Top-down analysis. The managers consider the economic outlooks for various
countries and geographical areas, favoring those they believe have sound
economic conditions and open markets.
Analysis of global themes. The managers look for significant changes in the
business environment, with an eye toward identifying industries that may benefit
from these changes.
The managers may favor securities from different countries and industries at
different times, while still maintaining variety in terms of the countries and
industries represented.
The portfolio normally will sell a stock when the managers believe it has
reached its fair value, its underlying investment theme has matured or the
reasons for originally investing no longer apply.
Other investments
The portfolio may also invest in debt securities, convertible securities,
preferred stocks, bonds, notes and other debt securities of companies and
futures contracts.
The Main Risks Of Investing In The Portfolio
There are several factors that could hurt portfolio performance, cause you to
lose money or make the portfolio perform less well than other investments.
The most important factor with this portfolio is how foreign stock markets
perform -- something that depends on a large number of factors, including
economic, political and demographic trends. When foreign stock prices decline,
you should expect the value of your investment to decline as well.
Foreign stocks may at times be more volatile than their U.S. counterparts, for
reasons ranging from political and economic uncertainties to a higher risk that
essential information may be incomplete or wrong. Because a stock represents
ownership in its issuer, stock prices can be hurt by poor management, shrinking
product demand and other business risks. These may affect single companies as
well as groups of companies. In addition, changing currency rates could add to
the portfolio's investment losses or reduce its investment gains.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
countries, industries, companies or other matters
o bond investments could be hurt by rising interest rates or declines in
credit quality
o at times, it could be hard to value some investments or to get an
attractive price for them
Investors who are looking for a broadly diversified international portfolio may
want to consider this portfolio.
32 | Kemper International Portfolio
<PAGE>
Performance
The bar chart shows how the total returns for the portfolio have varied from
year to year, which may give some idea of risk. The chart doesn't reflect sales
loads and fees associated with a separate account that invests in the portfolio
or any insurance contract for which the portfolio is an investment option; if it
did, returns would be lower. The table shows how the portfolio's returns over
different periods average out.
For comparison, the table has a broad-based market index (which, unlike the
portfolio, has no fees or expenses). All figures on this page assume
reinvestment of dividends and distributions. As always, past performance is no
guarantee of future results.
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
1993 32.79
1994 -3.59
1995 12.83
1996 16.49
1997 9.46
1998 10.02
1999 45.71
Best Quarter: 31.03%, Q4 1999 Worst Quarter: -17.32%, Q3 1998
Year-to-date Total Return as of 3/31/2000: -1.16%
Average Annual Total Returns as of 12/31/1999
Since 1/6/92
1 Year 5 Years Life of Portfolio
- --------------------------------------------------------------------------------
Portfolio 45.71% 18.19% 14.42%
Index 26.96 11.22 11.36
- --------------------------------------------------------------------------------
Index: The EAFE Index (Morgan Stanley Capital International Europe,
Austral-Asia, Far East Index) is a generally accepted benchmark for performance
of major overseas markets.
The Portfolio Managers
The following people handle the portfolio's day-to-day management:
Irene Cheng Marc Slendebroek
Lead Portfolio Manager o Began investment career in 1990
o Began investment career in 1985 o Joined the advisor in 1994
o Joined the advisor in 1993 o Joined the portfolio team in 1998
o Joined the portfolio team in 1999
Carol L. Franklin
Nicholas Bratt o Began investment career in 1975
o Began investment career in 1974 o Joined the advisor in 1981
o Joined the advisor in 1976 o Joined the portfolio team in 2000
o Joined the portfolio team in 2000
Kemper International Portfolio | 33
<PAGE>
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance for the period reflected below. The figures in the first part of the
table are for a single share. The total return figures show what a shareholder
in the portfolio would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by Ernst &
Young LLP whose report, along with the portfolio's financial statements, is
included in the portfolio's annual report, which is available upon request by
calling Scudder Kemper Investments at 1-800-778-1482.
<TABLE>
<CAPTION>
Kemper International Portfolio
- -------------------------------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $1.700 1.615 1.564 1.371 1.244
---------------------------------------------
- -------------------------------------------------------------------------------------------------------
Income from investment operations:
- -------------------------------------------------------------------------------------------------------
Net investment income (loss) .007(a) .017 .011 .011 .018
- -------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investment transactions .673 .148 .130 .212 .139
---------------------------------------------
- -------------------------------------------------------------------------------------------------------
Total from investment operations .680 .165 .141 .223 .157
- -------------------------------------------------------------------------------------------------------
Less distributions from:
- -------------------------------------------------------------------------------------------------------
Net investment income (.020) (.020) (.020) (.020) (.010)
- -------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (.215) (.060) (.070) (.010) (.020)
---------------------------------------------
- -------------------------------------------------------------------------------------------------------
Total distributions (.235) (.080) (.090) (.030) (.030)
- -------------------------------------------------------------------------------------------------------
Net asset value, end of period $2.145 1.700 1.615 1.564 1.371
---------------------------------------------
- -------------------------------------------------------------------------------------------------------
Total return (%) 45.71 10.02 9.46 16.49 12.83
- -------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- -------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 251,631 213,199 200,046 163,475 134,481
- -------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) .94 .93 .91 .96 .92
- -------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) .94 .93 .91 .96 .92
- -------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) .40 .96 .71 .89 1.39
- -------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 136 90 79 87 126
- -------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
34 | Kemper International Portfolio
<PAGE>
Kemper Investment Grade Bond Portfolio
Portfolio Goal
The portfolio seeks high current income.
The Portfolio's Main Strategy
The portfolio pursues its goal by investing primarily in a diversified portfolio
of fixed-income securities.
The portfolio can buy many types of income-producing securities, among them
corporate bonds, U.S. government and agency bonds, high quality commercial
paper, obligations of the Canadian government or its instrumentalities (payable
in U.S. dollars), bank certificates of deposit of domestic or Canadian chartered
banks with deposits in excess of $1 billion and cash and cash equivalents.
Generally, the portfolio invests in U.S. bonds or instruments, but up to 25% of
total assets could be in bonds from foreign issuers.
In deciding which securities to buy and sell, the portfolio manager uses
independent analysis to look for bonds of companies whose fundamental business
prospects and cash flows are expected to improve. The manager also considers
valuation, preferring those bonds that appear attractively priced in comparison
to similar issues.
Based on the analysis of economic and market trends, the manager may favor bonds
from different segments of the economy at different times, while still
maintaining variety in terms of the companies and industries represented.
Credit quality policies
This portfolio normally invests at least 65% of total assets in bonds of the top
four grades of credit quality. The portfolio could invest up to 35% of total
assets in junk bonds (i.e., grade BB/Ba and below). Compared to investment-grade
bonds, junk bonds may pay higher yields and have higher volatility and risk of
default.
The Main Risks Of Investing In The Portfolio
There are several factors that could reduce the yield you get from the
portfolio, cause you to lose money or make the portfolio perform less well than
other investments.
As with most bond funds, the most important factor is market interest rates. A
rise in interest rates generally means a fall in bond prices -- and, in turn, a
fall in the value of your investment. Changes in interest rates will also affect
the portfolio's yield: when rates fall, the portfolio's yield tends to fall as
well.
Because the economy affects corporate bond performance, the portfolio will tend
to perform less well than other types of bond funds when the economy is weak.
Also, to the extent that the portfolio emphasizes bonds from any given industry,
it could be hurt if that industry does not do well.
Other factors that could affect performance include:
o the manager could be wrong in the analysis of economic trends, issuers,
industries or other matters
o a bond could decline in credit quality or go into default; this risk is
greater with lower rated bonds
o some bonds could be paid off earlier than expected, which could hurt the
portfolio's performance
o currency fluctuations could cause foreign investments to lose value
o at times, it could be hard to value some investments or to get an
attractive price for them
This portfolio may appeal to investors who want exposure to the corporate bond
market through a diversified investment portfolio that seeks high current
income.
Kemper Investment Grade Bond Portfolio | 35
<PAGE>
Performance
The bar chart shows how the total returns for the portfolio have varied from
year to year, which may give some idea of risk. The chart doesn't reflect sales
loads and fees associated with a separate account that invests in the portfolio
or any insurance contract for which the portfolio is an investment option; if it
did, returns would be lower. The table shows how the portfolio's returns over
different periods average out.
For context, the table has a broad-based market index (which, unlike the
portfolio, has no fees or expenses). All figures on this page assume
reinvestment of dividends and distributions. As always, past performance is no
guarantee of future results.
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
1997 9.04
1998 7.93
1999 -2.06
Best Quarter: 3.82%, Q3 1998 Worst Quarter: -1.23%, Q2 1999
Year-to-date Total Return as of 3/31/2000: 1.64%
Average Annual Total Returns as of 12/31/1999
Since 5/1/96
1 Year Life of Portfolio
- --------------------------------------------------------------------------------
Portfolio -2.06% 4.95%
Index -2.15 6.21
- --------------------------------------------------------------------------------
Index: Lehman Brothers Government/Corporate Bond Index, an unmanaged index that
includes intermediate- and long-term government and investment-grade corporate
debt securities.
The Portfolio Manager
The following person handles the portfolio's day-to-day management:
Robert S. Cessine
Lead Portfolio Manager
o Began investment career in 1982
o Joined the advisor in 1993
o Joined the portfolio team in 1996
36 | Kemper Investment Grade Bond Portfolio
<PAGE>
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance for the period reflected below. The figures in the first part of the
table are for a single share. The total return figures show what a shareholder
in the portfolio would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by Ernst &
Young LLP whose report, along with the portfolio's financial statements, is
included in the portfolio's annual report, which is available upon request by
calling Scudder Kemper Investments at 1-800-778-1482.
<TABLE>
<CAPTION>
Kemper Investment Grade Bond Portfolio
- ---------------------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997 1996(b)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $1.165 1.118 1.036 1.000
------------------------------------
- ---------------------------------------------------------------------------------------------
Income from investment operations:
- ---------------------------------------------------------------------------------------------
Net investment income (loss) .060(a) .032 .066 .031
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investment transactions (.085) .055 .026 .005
------------------------------------
- ---------------------------------------------------------------------------------------------
Total from investment operations (.025) .087 .092 .036
- ---------------------------------------------------------------------------------------------
Less distributions from:
- ---------------------------------------------------------------------------------------------
Net investment income (.030) (.030) (.010) --
- ---------------------------------------------------------------------------------------------
Net realized gains on investments transactions (.010) (.010) -- --
------------------------------------
- ---------------------------------------------------------------------------------------------
Total distributions (.040) (.040) (.010) --
- ---------------------------------------------------------------------------------------------
Net asset value, end of period $1.100 1.165 1.118 1.036
------------------------------------
- ---------------------------------------------------------------------------------------------
Total return (%) (2.06) 7.93 9.04 3.57**
- ---------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ---------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 70,978 52,155 15,504 1,998
- ---------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) .65 .67 .80 .87*
- ---------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) .65 .67 .80 .87*
- ---------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 5.42 5.50 6.23 4.93*
- ---------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 131 130 311 75*
- ---------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the period from May 1, 1996 (commencement of operations) to December
31, 1996.
* Annualized
** Not annualized
Kemper Investment Grade Bond Portfolio | 37
<PAGE>
Kemper Money Market Portfolio
Portfolio Goal
The portfolio seeks maximum current income to the extent consistent with
stability of principal.
The Portfolio's Main Strategy
The portfolio invests exclusively in high-quality short-term securities, as well
as repurchase agreements.
The portfolio may buy securities from many types of issuers, including the U.S.
government, corporations and municipalities. The portfolio typically invests
more than 25% of net assets in obligations of U.S. banks and domestic branches
of foreign banks. However, everything the portfolio buys must meet the rules for
money market fund investments (see below).
Working in conjunction with credit analysts, the portfolio managers screen
potential securities and develop a list of those that the portfolio may buy. The
managers then decide which securities on this list to buy, looking for
attractive yield and weighing considerations such as credit quality, economic
outlook and possible interest rate movements. The managers may adjust the
portfolio's exposure to interest rate risk, typically seeking to take advantage
of possible rises in interest rates and to preserve yield when interest rates
appear likely to decline.
Money market fund rules
To be called a money market fund, a mutual fund must operate within strict
federal rules. Designed to help maintain a stable share price, these rules limit
money market funds to particular types of securities. Some of these rules:
o individual securities must have remaining maturities of no more than 397
days
o the dollar-weighted average maturity of the portfolio's holdings cannot
exceed 90 days
o all securities must be in the top two credit ratings for short-term
securities and be denominated in U.S. dollars
The Main Risks Of Investing In The Portfolio
Money market portfolios are generally considered to have lower risks than other
types of mutual fund portfolios. Even so, there are several risk factors that
could reduce the yield you get from the portfolio or make it perform less well
than other investments. An investment in the portfolio is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. Although the portfolio seeks to preserve the value of your investment at
$1.00 per share, you could lose money by investing in the portfolio.
As with most money market funds, the most important factor affecting the
portfolio's performance is market interest rates. The portfolio's yield tends to
reflect current interest rates, which means that when these rates decline, the
portfolio's yield generally declines as well.
A second factor is credit quality. If a portfolio security declines in credit
quality or goes into default, it could hurt the portfolio's performance. To the
extent that the portfolio emphasizes sectors of the short-term securities
market, the portfolio increases its exposure to factors affecting these sectors.
For example, banks' repayment abilities could be compromised by broad economic
declines or sharp rises in interest rates. Securities from foreign banks may
have greater credit risk than comparable U.S. securities, for reasons ranging
from political and economic uncertainties to less stringent banking regulations.
38 | Kemper Money Market Portfolio
<PAGE>
Other factors that could affect performance include:
o the managers could be incorrect in their analysis of interest rate trends,
credit quality or other matters
o the counterparty to a repurchase agreement or other transaction could
default on its obligations
o securities that rely on outside guarantors to raise their credit quality
could decline in price or go into default if the financial condition of the
guarantor deteriorates
o over time, inflation may erode the real value of an investment in the
portfolio
This portfolio may be of interest to investors who want a broadly diversified
money market fund.
Performance
The bar chart below shows how the total returns for the portfolio have varied
from year to year, which may give some idea of risk. The chart doesn't include
sales loads and fees associated with a separate account that invests in the
portfolio or any insurance contract for which the portfolio is an investment
option; if it did, returns would be lower. The table shows how the portfolio's
returns over different periods average out. All figures on this page assume
reinvestment of dividends and distributions. As always, past performance is no
guarantee of future results.
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
1990 8.08
1991 5.90
1992 3.43
1993 2.85
1994 3.95
1995 5.66
1996 5.03
1997 5.25
1998 5.15
1999 4.84
Best Quarter: 1.99%, Q2 1990 Worst Quarter: 0.69%, Q2 1993
Year-to-date Total Return as of 3/31/2000: 1.38%
Average Annual Total Returns as of 12/31/1999
1 Year 5 Years 10 Years Since 4/6/82
Life of Portfolio
- --------------------------------------------------------------------------------
Portfolio 4.84% 5.18% 5.00% 6.56%
- --------------------------------------------------------------------------------
On 12/31/1999, the portfolio's 7-day annualized yield was 5.75%.
The Portfolio Managers
The following people handle the portfolio's day-to-day management:
Frank Rachwalski, Jr. Jerri I. Cohen
Lead Portfolio Manager o Began investment career in 1992
o Began investment career in 1973 o Joined the advisor in 1981
o Joined the advisor in 1973 o Joined the portfolio team in 1998
o Joined the portfolio team in 1984
Kemper Money Market Portfolio | 39
<PAGE>
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance for the period reflected below. The figures in the first part of the
table are for a single share. The total return figures show what a shareholder
in the portfolio would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by Ernst &
Young LLP whose report, along with the portfolio's financial statements, is
included in the portfolio's annual report, which is available upon request by
calling Scudder Kemper Investments at 1-800-778-1482.
<TABLE>
<CAPTION>
Kemper Money Market Portfolio
- ------------------------------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $1.00 1.00 1.00 1.00 1.00
---------------------------------------------
- ------------------------------------------------------------------------------------------------------
Income from investment operations:
- ------------------------------------------------------------------------------------------------------
Net investment income .05 .05 .05 .05 .06
---------------------------------------------
- ------------------------------------------------------------------------------------------------------
Total from investment operations
- ------------------------------------------------------------------------------------------------------
Less distributions from:
- ------------------------------------------------------------------------------------------------------
Net Investment income (.05) (.05) (.05) (.05) (.06)
---------------------------------------------
- ------------------------------------------------------------------------------------------------------
Total distributions
- ------------------------------------------------------------------------------------------------------
Net asset value, end of period $1.00 1.00 1.00 1.00 1.00
---------------------------------------------
- ------------------------------------------------------------------------------------------------------
Total return (%) 4.84 5.15 5.25 5.03 5.66(a)
- ------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 231,099 151,930 100,143 70,601 61,078
- ------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) .54 .54 .55 .60 .55
- ------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) .54 .54 .55 .60 .55
- ------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 8.42 5.02 5.14 4.90 5.52
- ------------------------------------------------------------------------------------------------------
</TABLE>
(a)The total return for 1995 includes the effect of a capital contribution from
the investment manager. Without the capital contribution, the total return
would have been 5.11%.
40 | Kemper Money Market Portfolio
<PAGE>
Kemper New Europe Portfolio
(formerly Kemper International Growth and Income Portfolio)
Portfolio Goal
The portfolio seeks long-term capital appreciation.
The Portfolio's Main Strategy
The portfolio normally invests at least 65% of total assets in European common
stocks and other equities (equities that are traded mainly on European markets
or are issued by companies that are based in Europe or do more than half of
their business there). The portfolio generally focuses on common stocks of
companies in the more established markets of Western and Southern Europe such as
Finland, Germany, France, Italy, Spain and Portugal.
In choosing stocks, the portfolio managers use a combination of three analytical
disciplines:
Bottom-up research. The managers look for individual companies with new or
dominant products or technologies, among other factors.
Growth orientation. The managers look for stocks that seem to offer the
potential for sustainable above-average growth of revenues or earnings relative
to each stock's own market and whose market prices are reasonable in light of
their potential growth.
Top-down analysis. The managers consider the outlook for economic, political,
industrial and demographic trends and how they may affect various countries,
sectors and industries represented.
The managers may favor securities from different countries and industries at
different times, while still maintaining variety in terms of the countries and
industries represented.
The portfolio will normally sell a stock when it has reached a target price, the
managers believe other investments offer better opportunities or when adjusting
its exposure to a given country or industry.
Other investments
The portfolio may invest up to 20% of total assets in European debt securities
of any credit quality, including junk bonds (i.e., grade BB and below). Compared
to investment-grade bonds, junk bonds may pay higher yields and have higher
volatility and risk of default.
The Main Risks Of Investing In The Portfolio
There are several factors that could hurt portfolio performance, cause you to
lose money or make the portfolio perform less well than other investments.
The most important factor with this portfolio is how European stock markets
perform -- something that depends on a large number of factors, including
economic, political and demographic trends. When European stock prices fall, you
should expect the value of your investment to fall as well.
The fact that the portfolio focuses on a single geographical region could affect
portfolio performance. For example, European companies could be hurt by such
factors as regional economic downturns or difficulties with the European
Economic and Monetary Union (EMU). Eastern European companies can be very
sensitive to political and economic developments. Foreign stocks may at times be
more volatile than their U.S. counterparts, for reasons ranging from political
and economic uncertainties to a higher risk that essential information may be
incomplete or wrong. In addition, changing currency rates could add to the
portfolio's investment losses or reduce its investment gains.
Because a stock represents ownership in its issuer, stock prices can be hurt by
poor management, shrinking product demand and other business risks. These may
affect single companies as well as groups of companies.
Kemper New Europe Portfolio | 41
<PAGE>
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
countries, industries, companies or other matters
o growth stocks may be out of favor for certain periods
o bond investments could be hurt by rising interest rates or declines in
credit quality
o at times, market conditions might make it hard to value some investments or
to get an attractive price for them
This fund may appeal to investors who seek long-term growth and want to gain
exposure to Europe's established markets.
Performance
The bar chart shows the total return for the portfolio for its first calendar
year of operations, which may give some idea of risk. The chart doesn't reflect
sales loads and fees associated with a separate account that invests in the
portfolio or any insurance contract for which the portfolio is an investment
option; if it did, returns would be lower.
For context, the table has a broad-based market index (which, unlike the
portfolio, has no fees or expenses). All figures on this page assume
reinvestment of dividends and distributions. As always, past performance is no
guarantee of future results.
Annual Total Returns (%) as of 12/31*
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
1999 14.09
Best Quarter: 10.04%, Q4 1999 Worst Quarter: -2.66%, Q1 1999
Year-to-date Total Return as of 3/31/2000: 0.57%
Average Annual Total Returns as of 12/31/1999*
Since 5/5/98
1 Year Life of Portfolio
- --------------------------------------------------------------------------------
Portfolio 14.09% 2.40%
Index 26.96 18.33**
- --------------------------------------------------------------------------------
Index: The EAFE Index (Morgan Stanley Capital International Europe,
Austral-Asia, Far East Index) is a generally accepted benchmark for performance
of major overseas markets.
* Prior to 5/1/2000, the portfolio was named Kemper International Growth and
Income Portfolio and operated with a different goal and investment
strategy. Performance would have been different if the portfolio's current
policies had been in effect.
** Since 4/30/98.
42 | Kemper New Europe Portfolio
<PAGE>
The Portfolio Managers
The following people handle the portfolio's day-to-day management:
Carol L. Franklin Joan R. Gregory
Lead Portfolio Manager o Began investment career in 1989
o Began investment career in 1975 o Joined the advisor in 1992
o Joined the advisor in 1981 o Joined the portfolio team in 2000
o Joined the portfolio team in 2000
Marc Slendebroek
Nicholas Bratt o Began investment career in 1990
o Began investment career in 1974 o Joined the advisor in 1994
o Joined the advisor in 1976 o Joined the portfolio team in 2000
o Joined the portfolio team in 2000
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance for the period reflected below. The figures in the first part of the
table are for a single share. The total return figures show what a shareholder
in the portfolio would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by Ernst &
Young LLP whose report, along with the portfolio's financial statements, is
included in the portfolio's annual report, which is available upon request by
calling Scudder Kemper Investments at 1-800-778-1482. Prior to 5/1/2000, the
portfolio was named International Growth and Income Portfolio and operated with
a different goal and investment strategy. Performance would have been different
if the portfolio's current policies had been in effect.
Kemper New Europe Portfolio
- --------------------------------------------------------------------------------
Periods Ended December 31, 1999 1998(b)
- --------------------------------------------------------------------------------
Net asset value, beginning of period $ .912 1.000
------------------
- --------------------------------------------------------------------------------
Income from investment operations:
- --------------------------------------------------------------------------------
Net investment income (loss) .013(a) .003
- --------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investment transactions .115 (.091)
------------------
- --------------------------------------------------------------------------------
Total from investment operations .128 (.088)
- --------------------------------------------------------------------------------
Less distributions from:
- --------------------------------------------------------------------------------
Net investment income (.005) --
- --------------------------------------------------------------------------------
Total distributions (.005) --
- --------------------------------------------------------------------------------
Net asset value, end of period $1.035 .912
------------------
- --------------------------------------------------------------------------------
Total return (%) 14.09 (8.80)**
- --------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- --------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 6,677 3,003
- --------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 4.30 19.55*
- --------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.10 1.13*
- --------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 1.44 1.13*
- --------------------------------------------------------------------------------
Portfolio turnover rate (%) 146 100*
- --------------------------------------------------------------------------------
(a) Based on monthly average shares outstanding during the period.
(b) For the period from May 5, 1998 (commencement of operations) to December
31, 1998.
* Annualized
** Not annualized
Kemper New Europe Portfolio | 43
<PAGE>
Kemper Small Cap Growth Portfolio
Portfolio Goal
The portfolio seeks maximum appreciation of investors' capital.
The Portfolio's Main Strategy
The portfolio normally invests at least 65% of total assets in small
capitalization stocks similar in size to those comprising the Russell 2000
Index.
In choosing stocks, the portfolio manager looks for individual companies with a
history of revenue growth, effective management and strong balance sheets, among
other factors. In particular, the manager seeks companies that may benefit from
technological advances, new marketing methods and economic and demographic
changes.
The manager also considers the economic outlooks for various sectors and
industries, typically favoring those where high growth companies tend to be
clustered, such as medical technology, software and specialty retailing.
The manager may favor securities from different industries and companies at
different times, while still maintaining variety in terms of the industries and
companies represented.
The portfolio normally will sell a stock when the manager believes its price is
unlikely to go much higher, its fundamental qualities have deteriorated or other
investments offer better opportunities. The portfolio also may sell securities
of companies that have grown in market capitalization above the maximum of the
Russell 2000 Index, as necessary to keep focused on smaller companies.
Other investments
While the portfolio invests mainly in U.S. stocks, it could invest up to 25% of
total assets in foreign securities.
The Main Risks Of Investing In The Portfolio
There are several risk factors that could hurt portfolio performance, cause you
to lose money or make the portfolio perform less well than other investments.
As with most stock funds, the most important factor with this portfolio is how
stock markets perform -- in this case, the small company portion of the U.S.
stock market. When prices of these stocks decline, you should expect the value
of your investment to decline as well. Small stocks tend to be more volatile
than stocks of larger companies, in part because small companies tend to be less
established than larger companies and the valuation of their stocks often
depends on future expectations. Because a stock represents ownership in its
issuer, stock prices can be hurt by poor management, shrinking product demand
and other business risks. These may affect single companies as well as groups of
companies.
To the extent that the portfolio focuses on a given industry, any factors
affecting that industry could affect portfolio securities. For example, the
emergence of new technologies could hurt electronics or medical technology
companies.
Other factors that could affect performance include:
o the manager could be wrong in the analysis of companies, industries,
economic trends or other matters
o growth stocks may be out of favor for certain periods
o foreign securities may be more volatile than their U.S. counterparts,
for reasons such as currency fluctuations and political and economic
uncertainty
o derivatives could produce disproportionate losses
o at times, it might be hard to value some investments or to get an
attractive price for them
Investors who are looking to add the growth potential of smaller companies or to
diversify a large-cap growth portfolio may want to consider this portfolio.
44 | Kemper Small Cap Growth Portfolio
<PAGE>
Performance
The bar chart shows how the total returns for the portfolio have varied from
year to year, which may give some idea of risk. The chart doesn't reflect sales
loads and fees associated with a separate account that invests in the portfolio
or any insurance contract for which the portfolio is an investment option; if it
did, returns would be lower. The table shows how the portfolio's returns over
different periods average out.
For context, the table has three broad-based market indices (which, unlike the
portfolio, have no fees or expenses). All figures on this page assume
reinvestment of dividends and distributions. As always, past performance is no
guarantee of future results.
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
30.07 28.04 34.20 18.37 34.56
- --------------------------------------------------------------------------------
1995 1996 1997 1998 1999
Best Quarter: 30.96%, Q4 1999 Worst Quarter: -16.72%, Q3 1998
Year-to-date Total Return as of 3/31/2000: 21.77%
Average Annual Total Returns as of 12/31/1999
Since 5/2/94
1 Year 5 Years Life of Portfolio
- --------------------------------------------------------------------------------
Portfolio 34.56% 28.92% 25.97%
Index 1 21.04 28.56 25.68
Index 2 21.26 16.69 14.65
Index 3 43.09 18.99 16.90
- --------------------------------------------------------------------------------
Index 1: Standard and Poor's 500 Composite Stock Price Index (S&P 500), an
unmanaged capitalization-weighted index that includes 500 large-cap U.S. stocks.
Index 2: Russell 2000 Index, an unmanaged capitalization-weighted measure of
approximately 2000 small U.S. stocks.
Index 3: Russell 2000 Growth Index, an unmanaged capitalization-weighted index
containing the growth stocks in the Russell 2000.
The Portfolio Manager
The following person handles the portfolio's day-to-day management:
Jesus A. Cabrera
Lead Portfolio Manager
o Began investment career in 1984
o Joined the advisor in 1999
o Joined the portfolio team in 1999
45 | Kemper Small Cap Growth Portfolio
<PAGE>
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance for the period reflected below. The figures in the first part of the
table are for a single share. The total return figures show what a shareholder
in the portfolio would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by Ernst &
Young LLP whose report, along with the portfolio's financial statements, is
included in the portfolio's annual report, which is available upon request by
calling Scudder Kemper Investments at 1-800-778-1482.
Kemper Small Cap Growth Portfolio
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $1.971 1.969 1.677 1.346 1.039
---------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (.006)(a) -- .004 .002 .005
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments transactions .689 .342 .488 .369 .307
---------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .683 .342 .492 .371 .312
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions from
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income -- -- (.010) -- (.005)
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions -- (.340) (.190) (.040) --
---------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions -- (.340) (.200) (.040) (.005)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $2.654 1.971 1.969 1.677 1.346
---------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total return (%) 34.56 18.37 34.20 28.04 30.07
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 264,602 208,335 137,415 69,137 35,373
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) .71 .70 .71 .75 .87
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) .71 .70 .71 .75 .87
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) (.30) (.01) .20 .15 .42
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 208 276 330 156 81
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
46 | Kemper Small Cap Growth Portfolio
<PAGE>
Kemper Small Cap Value Portfolio
Portfolio Goal
The portfolio seeks long-term capital appreciation.
The Portfolio's Main Strategy
The portfolio normally invests at least 65% of total assets in undervalued
common stocks of small U.S. companies, which the portfolio defines as companies
that are similar in market value to those in the Russell 2000 Index (market
values of $1.4 billion or less as of December 31, 1999).
The portfolio managers begin by screening for small companies whose stock prices
appear low relative to other companies in the same sector (rather than on an
absolute basis). A quantitative stock valuation model compares each company's
stock price to the company's earnings, book value, sales and other measures of
performance potential. The managers also look for factors that may signal a
rebound for a company, whether through a recovery in its markets, a change in
business strategy or other factors.
The managers then assemble the portfolio's investments from among the qualifying
stocks, using portfolio optimization software that combines information about
the potential return and risks of each stock.
The managers diversify the portfolio's investments among many companies
(typically over 150), and expect to keep the portfolio's sector weightings
similar to those of the overall small-cap market.
The portfolio normally will sell a stock when it no longer qualifies as a small
company, when it is no longer considered undervalued or when the managers
believe other investments offer better opportunities.
Other investments
While the portfolio invests mainly in U.S. stocks, it could invest up to 20% of
total assets in securities of foreign companies in the form of U.S.
dollar-denominated American Depositary Receipts.
The Main Risks Of Investing In The Portfolio
There are several factors that could hurt portfolio performance, cause you to
lose money or make the portfolio perform less well than other investments.
As with most stock funds, the most important factor with this portfolio is how
stock markets perform -- in this case, the small company portion of the U.S.
stock market. When small company stock prices fall, you should expect the value
of your investment to fall as well. Small company stocks tend to be more
volatile than stocks of larger companies, in part because small companies tend
to be less established than larger companies and more vulnerable to competitive
challenges and bad economic news. Because a stock represents ownership in its
issuer, stock prices can be hurt by poor management, shrinking product demand
and other business risks. These may affect single companies as well as groups of
companies.
To the extent that the portfolio focuses on a given sector, any factors
affecting that sector could affect portfolio securities. For example, the
emergence of new technologies could hurt electronics or medical technology
companies.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of companies, industries,
economic trends or other matters
o value stocks may be out of favor for certain periods
o foreign stocks may be more volatile than their U.S. counterparts, for
reasons such as currency fluctuations and political and economic
uncertainty
o derivatives could produce disproportionate losses
o at times, it could be hard to value some investments or to get an
attractive price for them
This portfolio may make sense for value-oriented investors who are interested in
small-cap market exposure with potentially lower risk than a growth-oriented
small-cap portfolio.
47 | Kemper Small Cap Value Portfolio
<PAGE>
Performance
The bar chart shows how the total returns for the portfolio have varied from
year to year, which may give some idea of risk. The chart doesn't reflect sales
loads and fees associated with a separate account that invests in the portfolio
or any insurance contract for which the portfolio is an investment option; if it
did, returns would be lower. The table shows how the portfolio's returns over
different periods average out.
For context, the table has a broad-based market index (which, unlike the
portfolio, has no fees or expenses). All figures on this page assume
reinvestment of dividends and distributions. As always, past performance is no
guarantee of future results.
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
21.73 -11.25 2.80
- --------------------------------------------------------------------------------
1997 1998 1999
Best Quarter: 16.49%, Q2 1997 Worst Quarter: -22.47%, Q3 1998
Year-to-date Total Return as of 3/31/2000: 0.19%
Average Annual Total Returns as of 12/31/1999
Since 5/1/96
1 Year Life of Portfolio
- ----------------------------------------------------------------------
Portfolio 2.80% 3.42%
Index 21.26 12.12
- ----------------------------------------------------------------------
Index: Russell 2000 Index, an unmanaged capitalization-weighted measure of
approximately 2000 small U.S stocks.
The Portfolio Managers
The following people handle the portfolio's day-to-day management:
James M. Eysenbach Calvin S. Young
Lead Portfolio Manager o Began investment career in 1988
o Began investment career in 1984 o Joined the advisor in 1990
o Joined the advisor in 1991 o Joined the portfolio team in 1999
o Joined the portfolio team in 1999
48 | Kemper Small Cap Value Portfolio
<PAGE>
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance for the period reflected below. The figures in the first part of the
table are for a single share. The total return figures show what a shareholder
in the portfolio would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by Ernst &
Young LLP whose report, along with the portfolio's financial statements, is
included in the portfolio's annual report, which is available upon request by
calling Scudder Kemper Investments at 1-800-778-1482.
Kemper Small Cap Value Portfolio
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Periods Ended December 31, 1999 1998 1997 1996(b)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $1.065 1.227 1.019 1.000
------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) .007(a) .009 .012 .013
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions .023 (.141) .206 .006
------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .030 (.132) .218 .019
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (.010) -- (.010) --
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions -- (.030) -- --
------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.010) (.030) (.010) --
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $1.085 1.065 1.227 1.019
------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total return (%) 2.80 (11.25) 21.73 1.86**
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 95,193 102,009 76,108 13,307
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) .84 .80 .84 .92*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) .83 .80 .84 .90*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) .69 1.15 1.18 2.23*
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 72 43 22 61*
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the period from May 1, 1996 (commencement of operations) to
December 31, 1996.
* Annualized
** Not annualized
49 | Kemper Small Cap Value Portfolio
<PAGE>
Kemper Strategic Income Portfolio
(formerly Kemper Global Income Portfolio)
Portfolio Goal
The portfolio seeks high current return.
The Portfolio's Main Strategy
The portfolio invests mainly in bonds issued by U.S. and foreign corporations
and governments. The portfolio may invest up to 50% of total assets in foreign
bonds, including emerging market issuers.
In deciding which types of securities to buy and sell, the portfolio managers
evaluate each major type of security the portfolio invests in -- U.S. junk
bonds, investment-grade corporate bonds, emerging markets securities, foreign
government bonds and U.S. government and agency securities. The managers
typically consider a number of factors, including the relative attractiveness of
different types of securities, the potential impact of interest rate movements,
the outlook for various types of foreign bonds (including currency
considerations) and the relative yields and risks of bonds of various
maturities.
The managers may shift the proportions of the portfolio's holdings, favoring
different types of securities at different times, while still maintaining
variety in terms of the issuers and industries represented.
The managers may adjust the duration (a measure of sensitivity to interest rate
movements) of the portfolio, depending on their outlook for interest rates.
Credit quality policies
The credit quality of the portfolio's investments may vary; the portfolio may
invest up to 100% of total assets in either investment-grade bonds or in junk
bonds, which are those below the fourth credit grade (i.e., grade BB/Ba and
below). Compared to investment-grade bonds, junk bonds may pay higher yields and
have higher volatility and risk of default.
The Main Risks Of Investing In The Portfolio
There are several factors that could reduce the yield you get from the
portfolio, cause you to lose money or make the portfolio perform less well than
other investments.
For this portfolio, the main risk factor will vary depending on the portfolio's
weighting of various types of securities. To the extent that the portfolio
invests in junk bonds, one of the main risk factors is the economy. Because the
companies that issue high yield bonds may be in uncertain financial health, the
prices of their bonds can be more vulnerable to bad economic news or even the
expectation of bad news, than investment-grade bonds. In some cases, bonds may
decline in credit quality or go into default. Also, negative corporate news may
have a significant impact on individual bond prices.
To the extent that the portfolio invests in higher quality bonds, a major factor
is market interest rates. A rise in interest rates generally means a fall in
bond prices -- and, in turn, a fall in the value of your investment. An increase
in the portfolio's duration could make the portfolio more sensitive to this
risk.
Foreign securities tend to be more volatile than their U.S. counterparts, for
reasons ranging from political and economic uncertainties to a higher risk that
essential information may be incomplete or wrong. To the extent the portfolio
emphasizes emerging markets where these risks are greater, it takes on greater
risk.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
issuers, industries or other matters
o currency fluctuations could cause foreign investments to lose value
o some bonds could be paid off earlier than expected, which could hurt
the portfolio's performance
o at times, it could be hard to value some investments or to get an
attractive price for them
Investors looking for a bond portfolio that emphasizes different types of bonds
depending on market and economic outlooks, and who can accept risk of loss of
principal, may want to invest in this portfolio.
50 | Kemper Strategic Income Portfolio
<PAGE>
Performance
The bar chart shows how the total returns for the portfolio have varied from
year to year, which may give some idea of risk. The chart doesn't reflect sales
loads and fees associated with a separate account that invests in the portfolio
or any insurance contract for which the portfolio is an investment option; if it
did, returns would be lower. The table shows how the portfolio's returns over
different periods average out.
For comparison, the table has a broad-based market index (which, unlike the
portfolio, has no fees or expenses). All figures on this page assume
reinvestment of dividends and distributions. As always, past performance is no
guarantee of future results.
Annual Total Returns (%) as of 12/31 each year*
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
10.98 -5.85
- --------------------------------------------------------------------------------
1998 1999
Best Quarter: 6.35%, Q3 1998 Worst Quarter: -3.33%, Q2 1999
Year-to-date Total Return as of 3/31/2000: -0.28%
Average Annual Total Returns as of 12/31/1999*
1 Year Since 5/1/97
Life of Portfolio
- --------------------------------------------------------------------------------
Portfolio -5.85% 2.74%
Index -4.27 5.87
- --------------------------------------------------------------------------------
Index: The Salomon Brothers World Government Bond Index, an unmanaged index
comprised of government bonds from 18 developed countries (including the U.S.)
with maturities greater than one year.
* Prior to 5/1/2000, the portfolio was named Kemper Global Income
Portfolio and operated with a different goal and investment strategy.
Performance would have been different if the portfolio's current
policies were in effect.
The Portfolio Managers
The following people handle the portfolio's day-to-day management:
J. Patrick Beimford M. Isabel Saltzman
Lead Portfolio Manager o Began investment career in 1981
o Began investment career in 1976 o Joined the advisor in 1990
o Joined the advisor in 1976 o Joined the fund team in 1999
o Joined the fund team in 1996
Richard L. Vandenberg
Robert S. Cessine o Began investment career in 1973
o Began investment career in 1982 o Joined the advisor in 1996
o Joined the advisor in 1993 o Joined the fund team in 1999
o Joined the fund team in 1994
Daniel J. Doyle
o Began investment career in 1984
o Joined the advisor in 1986
o Joined the fund team in 1999
51 | Kemper Strategic Income Portfolio
<PAGE>
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance for the period reflected below. The figures in the first part of the
table are for a single share. The total return figures show what a shareholder
in the portfolio would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by Ernst &
Young LLP whose report, along with the portfolio's financial statements, is
included in the portfolio's annual report, which is available upon request by
calling Scudder Kemper Investments at 1-800-778-1482. Prior to 5/1/2000, the
portfolio was named International Growth and Income Portfolio and operated with
a different goal and investment strategy. Performance would have been different
if the portfolio's current policies had been in effect.
<TABLE>
<CAPTION>
Kemper Strategic Income Portfolio
- ---------------------------------------------------------------------------------------------------------------------------
Periods Ended December 31, 1999 1998 1997(b)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $1.109 1.029 1.000
---------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) .047(a) .024 .036
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions (.110) .086 (.007)
---------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations (.063) .110 .029
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (.040) (.020) --
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (.020) (.010) --
---------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.060) (.030) --
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ .986 1.109 1.029
---------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total return (%) (5.85) 10.98 2.87**
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 5,599 5,023 2,145
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.03 1.08 1.10*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.01 1.08 1.10*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 4.57 4.32 5.36*
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 212 330 290*
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the period from May 1, 1997 (commencement of operations) to
December 31, 1997.
* Annualized
** Not annualized
52 | Kemper Strategic Income Portfolio
<PAGE>
Kemper Technology Growth Portfolio
Portfolio Goal
The portfolio seeks growth of capital.
The Portfolio's Main Strategy
The portfolio normally invests at least 65% of total assets in common stocks of
U.S. companies in the technology sector. This may include companies of any size
that commit at least half of their assets to the technology sector, or derive at
least half of their revenues or net income from that sector. Examples of
industries within the technology sector are aerospace, electronics,
computers/software, medicine/biotechnology, geology and oceanography.
In choosing stocks, the portfolio managers look for individual companies that
have robust and sustainable earnings momentum, large and growing markets,
innovative products and services and strong balance sheets, among other factors.
The managers may favor securities from different industries and companies within
the technology sector at different times, while still maintaining variety in
terms of the industries and companies represented.
The portfolio will normally sell a stock when the managers believe its price is
unlikely to go much higher, its fundamental qualities have deteriorated or other
investments offer better opportunities.
Other investments
While the portfolio invests mainly in U.S. stocks, it could invest up to 25% of
total assets in foreign securities.
The Main Risks Of Investing In The Portfolio
There are several risk factors that could hurt portfolio performance, cause you
to lose money or make the portfolio perform less well than other investments.
As with most stock funds, the most important factor with this portfolio is how
stock markets perform. When stock prices decline, you should expect the value of
your investment to decline as well. The fact that the portfolio concentrates in
one sector increases this risk, because factors affecting this sector affect
portfolio performance. For example, technology companies could be hurt by such
factors as market saturation, price competition and competing technologies.
Because a stock represents ownership in its issuer, stock prices can be hurt by
poor management, shrinking product demand and other business risks. These may
affect single companies as well as groups of companies. Many technology
companies are smaller companies that may have limited business lines and
financial resources, making them highly vulnerable to business and economic
risks.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of companies, industries,
economic trends or other matters
o growth stocks may be out of favor for certain periods
o foreign securities may be more volatile than their U.S. counterparts,
for reasons such as currency fluctuations and political and economic
uncertainty
o derivatives could produce disproportionate losses
o at times, it might be hard to value some investments or to get an
attractive price for them
This portfolio may appeal to investors who want exposure to a sector that offers
attractive long-term growth potential and who can accept above-average risks.
Performance
No performance information is provided because the portfolio has not yet been in
operation for a full calendar year.
53 | Kemper Technology Growth Portfolio
<PAGE>
The Portfolio Managers
The following people handle the portfolio's day-to-day management:
James B. Burkart Robert L. Horton
Co-lead Portfolio Manager o Began investment career in 1993
o Began investment career in 1970 o Joined the advisor in 1996
o Joined the advisor in 1998 o Joined the portfolio team in 1999
o Joined the portfolio team in 1999
Tracy McCormick
Deborah L. Koch o Began investment career in 1980
Co-lead Portfolio Manager o Joined the advisor in 1994
o Began investment career in 1985 o Joined the portfolio team in 1998
o Joined the advisor in 1992
o Joined the portfolio team in 1999 Virginea Stuart
o Began investment career in 1995
J. Brooks Dougherty o Joined the advisor in 1996
o Began investment career in 1984 o Joined the portfolio team in 1999
o Joined the advisor in 1993
o Joined the portfolio team in 1999
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance for the period reflected below. The figures in the first part of the
table are for a single share. The total return figures show what a shareholder
in the portfolio would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by Ernst &
Young LLP whose report, along with the portfolio's financial statements, is
included in the portfolio's annual report, which is available upon request by
calling Scudder Kemper Investments at 1-800-778-1482.
Kemper Technology Growth Portfolio
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Period Ended December 31, 1999(b)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $1.000
---------
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (a) .005
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments transactions .772
---------
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .777
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $1.777
---------
- ---------------------------------------------------------------------------------------------------------------------------
Total return (%) 77.70**
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 84,209
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.19*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) .94*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) .60*
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 34*
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the period from May 1, 1999 (commencement of operations) to
December 31, 1999.
* Annualized
** Not annualized
54 | Kemper Technology Growth Portfolio
<PAGE>
Kemper Total Return Portfolio
Portfolio Goal
The portfolio seeks high total return, a combination of income and capital
appreciation.
The Portfolio's Main Strategy
The portfolio follows a flexible investment program, investing in a mix of
growth stocks and bonds.
The portfolio can buy many types of securities, among them common stocks,
convertible securities, corporate bonds, U.S. government bonds and mortgage- and
asset-backed securities. Generally, the portfolio invests in bonds from U.S.
issuers, but the portfolio may invest up to 25% of total assets in foreign
securities.
The portfolio managers may shift the proportion of the portfolio's holdings, at
different times favoring stocks or bonds (and within those asset classes,
different types of securities), while still maintaining variety in terms of the
securities, issuers and economic sectors represented.
In choosing individual stocks, the managers favor large companies with a history
of above-average growth, attractive prices relative to potential growth, sound
financial strength and effective management, among other factors.
The portfolio will normally sell a stock when it reaches a target price or when
the managers believe its fundamental qualities have deteriorated.
In deciding what types of bonds to buy and sell, the managers consider their
relative potential for stability and attractive income, and other factors such
as credit quality and market conditions. The portfolio may invest in bonds of
any duration.
Other investments
Normally, this portfolio's bond component consists mainly of investment-grade
bonds (those in the top four grades of credit quality). However, the portfolio
could invest up to 35% of its total assets in junk bonds (i.e., grade BB and
below). Compared to investment-grade bonds, junk bonds may pay higher yields and
have higher volatility and risk of default.
The Main Risks Of Investing In The Portfolio
There are several risk factors that could hurt portfolio performance, cause you
to lose money or make the portfolio perform less well than other investments.
The most important factor is how stock markets perform -- something that depends
on many influences, including economic, political and demographic trends. When
stock prices decline, the value of your investment is likely to decline as well.
Stock prices can be hurt by poor management, shrinking product demand and other
business risks. Stock risks tend to be greater with smaller companies.
The portfolio is also affected by the performance of bonds. A rise in interest
rates generally means a decline in bond prices and, in turn, a decline in the
value of your investment. Some bonds could be paid off earlier than expected,
which would hurt the portfolio's performance; with mortgage- or asset-backed
securities, any unexpected behavior in interest rates could increase the
volatility of the portfolio's share price and yield. Corporate bonds could
perform less well than other bonds in a weak economy. Compared to
investment-grade bonds, junk bonds may pay higher yields and have higher
volatility and higher risk of default on payments.
55 | Kemper Total Return Portfolio
<PAGE>
Other factors that could affect performance include:
o the managers could be wrong in their analysis of industries, companies,
the relative attractiveness of stocks and bonds or other matters
o foreign securities may be more volatile than their U.S. counterparts,
for reasons such as currency fluctuations and political and economic
uncertainty
o growth stocks may be out of favor for certain periods
o a bond could decline in credit quality or go into default
o derivatives could produce disproportionate losses
o at times, it might be hard to value some investments or to get an
attractive price for them
Because the portfolio invests in a mix of stocks and bonds, this portfolio could
make sense for investors seeking asset class diversification in a single
investment portfolio.
Performance
The bar chart shows how the total returns for the portfolio have varied from
year to year, which may give some idea of risk. The chart doesn't reflect sales
loads and fees associated with a separate account that invests in the portfolio
or any insurance contract for which the portfolio is an investment option; if it
did, returns would be lower. The table shows how the portfolio's returns over
different periods average out.
For context, the table has three broad-based market indices (which, unlike the
portfolio, have no fees or expenses). All figures on this page assume
reinvestment of dividends and distributions. As always, past performance is no
guarantee of future results.
Annual Total Returns (%) as of 12/31 each year
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
5.05 37.88 1.69 12.11 -9.49 25.97 16.76 19.96 15.14 14.81
- -------------------------------------------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
</TABLE>
Best Quarter: 14.92%, Q1 1991 Worst Quarter: -9.01%, Q3 1990
Year-to-date Total Return as of 3/31/2000: 1.69%
Average Annual Total Returns as of 12/31/1999
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Portfolio 14.81% 18.46% 13.31%
Index 1 21.04 28.56 18.84
Index 2 -2.15 7.61 8.07
Index 3 33.16 32.41 21.61
- --------------------------------------------------------------------------------
Index 1: Standard and Poor's 500 Composite Stock Price Index (S&P 500), an
unmanaged capitalization-weighted index that includes 500 large-cap U.S. stocks
Index 2: Lehman Brothers Government/Corporate Bond Index, an unmanaged index
that includes intermediate and long-term government and investment-grade
corporate debt securities.
Index 3: Russell 1000 Growth Index, an unmanaged capitalization-weighted index
containing the growth stocks in the Russell 1000 Index.
56 | Kemper Total Return Portfolio
<PAGE>
The Portfolio Managers
The following people handle the portfolio's day-to-day management:
Gary A. Langbaum Tracy McCormick
Lead Portfolio Manager o Began investment career in 1980
o Began investment career in 1970 o Joined the advisor in 1994
o Joined the advisor in 1988 o Joined the portfolio team in 1998
o Joined the portfolio team in 1995
Robert S. Cessine
o Began investment career in 1982
o Joined the advisor in 1993
o Joined the portfolio team in 1999
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance for the period reflected below. The figures in the first part of the
table are for a single share. The total return figures show what a shareholder
in the portfolio would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by Ernst &
Young LLP whose report, along with the portfolio's financial statements, is
included in the portfolio's annual report, which is available upon request by
calling Scudder Kemper Investments at 1-800-778-1482.
Kemper Total Return Portfolio
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $2.735 2.822 2.815 2.579 2.112
---------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) .084(a) .086 .090 .084 .084
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions .303 .317 .377 .322 .453
---------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .387 .403 .467 .406 .537
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (.090) (.090) (.090) (.090) (.070)
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (.150) (.400) (.370) (.080) --
---------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.240) (.490) (.460) (.170) (.070)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $2.882 2.735 2.822 2.815 2.579
---------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total return (%) 14.81 15.14 19.96 16.76 25.97
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 952,485 865,423 786,996 697,102 659,894
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) .61 .60 .60 .59 .60
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) .61 .60 .60 .59 .60
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 3.12 3.33 3.32 3.21 3.52
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 80 81 122 90 118
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
57 | Kemper Total Return Portfolio
<PAGE>
Kemper Value+Growth Portfolio
Portfolio Goal
The portfolio seeks growth of capital through a portfolio of growth and value
stocks. A secondary objective of the portfolio is the reduction of risk over a
full market cycle compared to a portfolio of only growth stocks or only value
stocks.
The Portfolio's Main Strategy
The portfolio normally invests at least 65% of total assets in U.S. common
stocks. Although the portfolio can invest in companies of any size, it mainly
chooses stocks from the 1,000 largest companies (as measured by market
capitalization). The portfolio manages risk by investing in both growth and
value stocks.
While the portfolio's neutral mix is 50% for growth stocks and 50% for value
stocks, the managers may shift the portfolio's holdings depending on their
outlook, at different times favoring growth stocks or value stocks, while still
maintaining variety in terms of the securities, issuers and economic sectors
represented. Typically, adjustments in the portfolio's growth/value proportions
will be gradual. The allocation to growth or value stocks may be up to 75% at
any time.
In choosing growth stocks, the manager looks for companies with a history of
above-average growth, attractive prices relative to potential growth and sound
financial strength, among other factors. With value stocks, the manager looks
for companies whose stock prices are low in light of earnings, cash flow and
other valuation measures, while also considering such factors as dividend growth
rates and earnings estimates.
The portfolio normally will sell a stock when the manager believes its price is
unlikely to go much higher, its fundamental qualities have deteriorated or to
adjust the proportions of its growth and value stocks.
Other investments
While the portfolio invests mainly in U.S. common stocks, it could invest up to
25% of total assets in foreign securities.
The Main Risks Of Investing In The Portfolio
There are several risk factors that could hurt portfolio performance, cause you
to lose money or make the portfolio perform less well than other investments.
As with most stock funds, the most important factor with this portfolio is how
stock markets perform -- in this case, the large company portion of the U.S.
stock market. When large company stock prices decline, you should expect the
value of your investment to decline as well. Large company stocks at times may
not perform as well as stocks of smaller or mid-size companies. Because a stock
represents ownership in its issuer, stock prices can be hurt by poor management,
shrinking product demand and other business risks. These may affect single
companies as well as groups of companies.
In any given period, either growth stocks or value stocks will generally lag the
other; because the portfolio invests in both, it is likely to lag any portfolio
that focuses on the type of stock that outperforms during that period, and at
times may lag both.
Other factors that could affect performance include:
o the manager could be wrong in the analysis of industries, companies,
the relative attractiveness of growth stocks and value stocks or other
matters
o foreign securities may be more volatile than their U.S. counterparts,
for reasons such as currency fluctuations and political and economic
uncertainty
o derivatives could produce disproportionate losses
o at times, it might be hard to value some investments or to get an
attractive price for them
This portfolio is designed for investors with long-term goals who want to gain
exposure to both growth and value stocks in a single portfolio.
58 | Kemper Value+Growth Portfolio
<PAGE>
Performance
The bar chart shows how the total returns for the portfolio have varied from
year to year, which may give some idea of risk. The chart doesn't reflect sales
loads and fees associated with a separate account that invests in the portfolio
or any insurance contract for which the portfolio is an investment option; if it
did, returns would be lower. The table shows how the portfolio's returns over
different periods average out.
For context, the table has two broad-based market indices (which, unlike the
portfolio, have no fees or expenses). All figures on this page assume
reinvestment of dividends and distributions. As always, past performance is no
guarantee of future results.
Annual Total Returns (%) as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
25.47 20.17 16.52
- -------------------------------------------------------------------------------
1997 1998 1999
Best Quarter: 23.51%, Q4 1998 Worst Quarter: -14.36%, Q3 1998
Year-to-date Total Return as of 3/31/2000: 4.27%
Average Annual Total Returns as of 12/31/1999
Since 5/1/96
1 Year Life of Portfolio
- ----------------------------------------------------------------
Portfolio 16.52% 21.02%
Index 1 21.04 26.78
Index 2 20.91 25.98
- ----------------------------------------------------------------
Index 1: Standard and Poor's 500 Composite Stock Price Index (S&P 500), an
unmanaged capitalization-weighted index that includes 500 large-cap U.S. stocks.
Index 2: Russell 1000 Index, an unmanaged capitalization-weighted price only
index that includes the 1000 largest capitalized U.S. companies whose common
stocks are traded in the United States.
The Portfolio Manager
The following person handles the portfolio's day-to-day management:
Donald E. Hall
Lead Portfolio Manager
o Began investment career in 1982
o Joined the advisor in 1982
o Joined the portfolio team in 1999
59 | Kemper Value+Growth Portfolio
<PAGE>
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance for the period reflected below. The figures in the first part of the
table are for a single share. The total return figures show what a shareholder
in the portfolio would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by Ernst &
Young LLP whose report, along with the portfolio's financial statements, is
included in the portfolio's annual report, which is available upon request by
calling Scudder Kemper Investments at 1-800-778-1482.
Kemper Value+Growth Portfolio
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Periods ended December 31, 1999 1998 1997 1996(b)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $1.671 1.425 1.146 1.000
------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) .008(a) .008 .012 .008
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments transactions .262 .278 .277 .138
------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .270 .286 .289 .146
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (.010) -- (.010) --
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (.035) (.040) -- --
------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.045) (.040) (.010) --
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $1.896 1.671 1.425 1.146
------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total return (%) 16.52 20.17 25.47 14.60**
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 172,066 152,321 69,094 10,196
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) .83 .78 .84 1.01*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) .82 .78 .84 .90*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) .46 .80 .95 .97*
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 102 102 50 25*
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the period from May 1, 1996 (commencement of operations) to
December 31, 1996.
* Annualized
** Not annualized
60 | Kemper Value+Growth Portfolio
<PAGE>
KVS Dreman Financial Services Portfolio
Portfolio Goal
The portfolio seeks to provide long-term capital appreciation.
The Portfolio's Main Strategy
The portfolio normally invests at least 65% of total assets in equity securities
(mainly common stocks) of financial services companies. This may include
companies of any size that commit at least half of their assets to the financial
services sector, or derive at least half of their revenues or net income from
that sector. The major types of financial services companies are banks,
insurance companies, savings and loans, securities brokerage firms and
diversified financial companies.
The portfolio manager begins by screening for financial services stocks whose
price-to-earnings ratios are below the average for the S&P 500 Index. The
manager then compares a company's stock price to its book value, cash flow and
yield, and analyze individual companies to identify those that are financially
sound and appear to have strong potential for long-term growth.
The manager assembles the portfolio from among the most attractive stocks,
drawing on analysis of economic outlooks for various financial industries. The
manager may favor securities from different industries in the financial sector
at different times, while still maintaining variety in terms of industries and
companies represented.
The portfolio normally will sell a stock when it reaches a target price, its
fundamental factors have changed or it has performed below the manager's
expectations.
Other investments
While the portfolio invests mainly in U.S. stocks, it could invest up to 30% of
total assets in foreign securities, and up to 35% of total assets in
investment-grade debt securities.
The Main Risks Of Investing In The Portfolio
There are several factors that could hurt portfolio performance, cause you to
lose money or make the portfolio perform less well than other investments.
As with most stock funds, the most important factor with this portfolio is how
stock markets perform, and in this case, financial services stocks. When stock
prices decline, you should expect the value of your investment to decline as
well. The fact that the portfolio focuses on a single sector increases this
risk, because factors affecting that sector could affect portfolio performance.
For example, financial services companies could be hurt by such factors as
changing government regulations, increasing competition and interest rate
movements.
Similarly, because the portfolio isn't diversified and can invest a larger
percentage of assets in a given stock than a diversified fund, factors affecting
that stock could affect the portfolio's performance. Because a stock represents
ownership in its issuer, stock prices can be hurt by poor management, shrinking
product demand and other business risks. These may affect single companies as
well as groups of companies.
Other factors that could affect performance include:
o the manager could be wrong in the analysis of companies, industries,
economic trends or other matters
o value stocks may be out of favor for certain periods
o foreign securities may be more volatile than their U.S. counterparts,
for reasons such as currency fluctuations and political and economic
uncertainty
o the bond portion of the portfolio could be hurt by rising interest
rates or declines in credit quality
o derivatives could produce disproportionate losses
o at times, it could be hard to value some investments or to get an
attractive price for them
This portfolio may be appropriate for long-term investors who want to gain
exposure to the financial services sector and can accept the above-average risks
of a sector-specific investment.
61 | KVS Dreman Financial Services Portfolio
<PAGE>
Performance
The bar chart shows the total return for the portfolio for its first calendar
year of operations, which may give some idea of risk. The chart doesn't reflect
sales loads and fees associated with a separate account that invests in the
portfolio or any insurance contract for which the portfolio is an investment
option; if it did, returns would be lower.
For context, the table has a broad-based market index (which, unlike the
portfolio, has no fees or expenses). All figures on this page assume
reinvestment of dividends and distributions. As always, past performance is no
guarantee of future results.
Annual Total Returns (%) as of 12/31
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
-5.05
- --------------------------------------------------------------------------------
1999
Best Quarter: 4.57%, Q1 1999 Worst Quarter: -13.07%, Q3 1999
Year-to-date Total Return as of 3/31/2000: 0.89%
Average Annual Total Returns as of 12/31/1999
Since 5/4/98
1 Year Life of Portfolio
- --------------------------------------------------------------------------------
Portfolio -5.05% -4.37%
Index 21.04 19.85%*
- --------------------------------------------------------------------------------
Index: Standard & Poor's 500 Composite Stock Price Index (S&P 500), an unmanaged
capitalization-weighted index that includes 500 large-cap U.S. stocks.
* Since 4/30/98.
The Portfolio Manager
The portfolio manager is David N. Dreman, founder and chairman of Dreman Value
Management, the portfolio's subadvisor. Widely regarded as a leading proponent
of value-style investment management, Mr. Dreman began his investment career in
1957 and has managed the portfolio since its inception.
62 | KVS Dreman Financial Services Portfolio
<PAGE>
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance for the period reflected below. The figures in the first part of the
table are for a single share. The total return figures show what a shareholder
in the portfolio would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by Ernst &
Young LLP whose report, along with the portfolio's financial statements, is
included in the portfolio's annual report, which is available upon request by
calling Scudder Kemper Investments at 1-800-778-1482.
KVS Dreman Financial Services Portfolio
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Periods Ended December 31, 1999 1998(b)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $ .978 1.000
-------------------
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) .018(a) .004
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions (.067) (.026)
-------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations (.049) (.022)
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------
From net investment income (.005) --
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ .924 .978
-------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total return (%) (5.05) (2.20)**
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 27,319 15,516
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 1.04 1.73*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) .99 .99*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 1.75 1.29*
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 13 6*
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the period from May 4, 1998 (commencement of operations) to
December 31, 1998.
* Annualized
** Not annualized
63 | KVS Dreman Financial Services Portfolio
<PAGE>
KVS Dreman High Return Equity Portfolio
Portfolio Goal
The portfolio seeks to achieve a high rate of total return.
The Portfolio's Main Strategy
The portfolio normally invests at least 65% of total assets in common stocks and
other equity securities. The portfolio focuses on stocks of large U.S. companies
(those with a market value of $1 billion or more) that the portfolio manager
believes are undervalued. Although the portfolio can invest in stocks of any
economic sector, at times it may emphasize the financial services sector or
other sectors (in fact, it may invest more than 25% of total assets in a single
sector). As of December 31, 1999, companies in which the portfolio invests had a
median market capitalization of approximately $5.13 billion and an average
market capitalization of $17 billion.
The portfolio manager begins by screening for stocks whose price-to-earnings
ratios are below the average for the S&P 500 Index. The manager then compares a
company's stock price to its book value, cash flow and yield, and analyze
individual companies to identify those that are financially sound and appear to
have strong potential for long-term growth and income.
The manager assembles the portfolio from among the most attractive stocks,
drawing on analysis of economic outlooks for various sectors and industries. The
manager may favor securities from different sectors and industries at different
times, while still maintaining variety in terms of sectors and industries
represented.
The portfolio normally will sell a stock when it reaches a target price, its
fundamental factors have changed or it has performed below the manager's
expectations.
Other investments
The portfolio may invest up to 20% of total assets in U.S. dollar-denominated
American Depositary Receipts and in securities of foreign companies traded
principally in securities markets outside the U.S.
The manager may, but is not required to, use various types of derivatives
(contracts whose value is based on, for example, indices, currencies or
securities), particularly exchange-traded stock index futures, which offer the
portfolio exposure to future stock market movements without direct ownership of
stocks.
The Main Risks Of Investing In The Portfolio
There are several factors that could hurt portfolio performance, cause you to
lose money or make the portfolio perform less well than other investments.
As with most stock funds, the most important factor with this portfolio is how
stock markets perform -- in this case, the large company portion of the U.S.
stock market. When large company stock prices decline, you should expect the
value of your investment to decline as well. Large company stocks may not
perform as well as stocks of smaller or mid-size companies. Because a stock
represents ownership in its issuer, stock prices can be hurt by poor management,
shrinking product demand and other business risks. These may affect single
companies as well as groups of companies.
To the extent that the portfolio concentrates in one or more sectors, any
factors affecting those sectors could affect portfolio performance. For example,
financial services companies could be hurt by such factors as changing
government regulations, increasing competition and interest rate movements.
Other factors that could affect performance include:
o the manager could be wrong in the analysis of companies, industries,
economic trends or other matters
o value stocks may be out of favor for certain periods
o derivatives could produce disproportionate losses
o foreign stocks may be more volatile than their U.S. counterparts, for
reasons such as currency fluctuations and political and economic
uncertainty
o at times, it could be hard to value some investments or to get an
attractive price for them
This portfolio may serve investors with long-term goals who are interested in a
large-cap value portfolio may focus on certain sectors of the economy.
64 | KVS Dreman High Return Equity Portfolio
<PAGE>
Performance
The bar chart shows the total return for the portfolio for its first calendar
year of operations, which may give some idea of risk. The chart doesn't reflect
sales loads and fees associated with a separate account that invests in the
portfolio or any insurance contract for which the portfolio is an investment
option; if it did, returns would be lower.
For context, the table has a broad-based market index (which, unlike the
portfolio, has no fees or expenses). All figures on this page assume
reinvestment of dividends and distributions. As always, past performance is no
guarantee of future results.
Annual Total Returns (%) as of 12/31
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
-11.16
- --------------------------------------------------------------------------------
1999
Best Quarter: 8.66%, Q2 1999 Worst Quarter: -12.29%, Q3 1999
Year-to-date Total Return as of 3/31/2000: -1.49%
Average Annual Total Returns as of 12/31/1999
Since 5/4/98
1 Year Life of Portfolio
- -------------------------------------------------------------------------------
Portfolio -11.16% -5.28%
Index 21.04 19.85*
- -------------------------------------------------------------------------------
Index: Standard & Poor's 500 Composite Stock Price Index (S&P 500), an unmanaged
capitalization-weighted index that includes 500 large-cap U.S. stocks.
* Since 4/30/98.
The Portfolio Manager
The portfolio manager is David N. Dreman, founder and chairman of Dreman Value
Management. Widely regarded as a leading proponent of value-style investment
management, Mr. Dreman began his investment career in 1957 and has managed the
portfolio since its inception.
65 | KVS Dreman High Return Equity Portfolio
<PAGE>
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance for the period reflected below. The figures in the first part of the
table are for a single share. The total return figures show what a shareholder
in the portfolio would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by Ernst &
Young LLP whose report, along with the portfolio's financial statements, is
included in the portfolio's annual report, which is available upon request by
calling Scudder Kemper Investments at 1-800-778-1482.
KVS Dreman High Return Equity Portfolio
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Periods Ended December 31, 1999 1998(b)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $1.028 1.000
------------------
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) .026(a) .008
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions (.138) .020
------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations (.112) .028
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions from:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (.010) --
- ---------------------------------------------------------------------------------------------------------------------------
Net realized gains on investment transactions (.010) --
------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.020) --
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ .896 1.028
------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total return (%) (11.16) 2.80**
Ratios to Average Net Assets and Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 113,448 59,294
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) .86 1.20*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) .86 .87*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 2.57 2.77*
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 24 5*
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the period from May 4, 1998 (commencement of operations) to
December 31, 1998.
* Annualized
** Not annualized
66 | KVS Dreman High Return Equity Portfolio
<PAGE>
KVS Focused Large Cap Growth Portfolio
Portfolio Goal
The portfolio seeks growth through long-term capital appreciation.
The Portfolio's Main Strategy
The portfolio normally invests at least 65% of total assets in the equity
securities of seasoned, financially strong U.S. growth companies (typically
those with a market value of $10 billion or more). Growth stocks are stocks of
companies with above-average earnings growth potential. The portfolio uses a
"bottom-up" method of analysis based on fundamental research to determine which
common stocks to purchase. The portfolio focuses on companies that the portfolio
manager considers likely to have long-term returns greater than the average for
companies included in the Standard & Poor's 500 Composite Stock Price Index. The
portfolio seeks companies that have at the time of purchase one or more of the
following characteristics:
o earnings-per-share or revenue growth greater than the average of the
S&P 500 Index;
o a dominant company in its industry with a sustainable competitive
advantage; or
o an exceptional management team with a clearly articulated vision of
their company's future.
If the stock price appreciates to a level that the portfolio manager believes is
not sustainable, the portfolio generally will sell the stock to realize the
existing profits and avoid a potential price correction.
Main Risks Of Investing In The Portfolio
There are several risk factors that could hurt portfolio performance, cause you
to lose money or make the portfolio perform less well than other investments.
As with most stock funds, the most important factor with this portfolio is how
stock markets perform -- in this case, the large company portion of the U.S.
stock market. When prices of these stocks fall, you should expect the value of
your investment to fall as well. Large company stocks at times may not perform
as well as stocks of smaller or mid-size companies. Because a stock represents
ownership in its issuer, stock prices can be hurt by poor management, shrinking
product demand and other business risks. These may affect single companies as
well as groups of companies.
To the extent that the portfolio focuses on a given industry, any factors
affecting that industry could affect portfolio securities. For example, a rise
in unemployment could hurt manufacturers of consumer goods.
Other factors that could affect performance include:
o the manager could be wrong in the analysis of companies, industries,
risk factors or other matters
o growth stocks may be out of favor for certain periods
o foreign securities may be more volatile than their U.S. counterparts,
for reasons such as currency fluctuations and political and economic
uncertainty
o derivatives could produce disproportionate losses
o at times, it might be hard to value some investments or to get an
attractive price for them
The portfolio expects to trade securities actively. This strategy could increase
transaction costs, result in taxable capital gains and reduce performance.
The portfolio manager's skill in choosing appropriate investments for the
portfolio will determine in large part the portfolio's ability to achieve its
investment objective.
67 | KVS Focused Large Cap Growth Portfolio
<PAGE>
Past Performance
No performance information is provided because the portfolio has not yet been in
operation for a full calendar year.
The Portfolio Manager
The portfolio's subadvisor is Eagle Asset Management, Inc., St. Petersburg,
Florida. The portfolio manager is Ashi Parikh. Mr. Parikh joined Eagle Asset
Management, Inc. in 1999 and has managed the portfolio since its inception.
Prior to 1999 he was employed by an unaffiliated investment advisor.
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance for the period reflected below. The figures in the first part of the
table are for a single share. The total return figures show what a shareholder
in the portfolio would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by Ernst &
Young LLP whose report, along with the portfolio's financial statements, is
included in the portfolio's annual report, which is available upon request by
calling Scudder Kemper Investments at 1-800-778-1482.
KVS Focused Large Cap Growth Portfolio
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Period Ended December 31, 1999(b)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period $1.000
---------
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (a) --
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions .284
---------
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .284
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $1.284
---------
- ---------------------------------------------------------------------------------------------------------------------------
Total return (%) 28.40**
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 2,920
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 7.49*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.10*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) (.19)*
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 336*
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the period from October 29, 1999 (commencement of operations) to
December 31, 1999.
* Annualized
** Not annualized
68 | KVS Focused Large Cap Growth Portfolio
<PAGE>
KVS Growth And Income Portfolio
Portfolio Goal
The portfolio seeks long-term capital growth and current income.
The Portfolio's Main Strategy
The portfolio applies a "bottom-up" approach in choosing investments. In other
words, it looks mostly for equity and income-producing securities that meet its
investment criteria one at a time. If the portfolio is unable to find such
investments, much of the portfolio's assets may be in cash or similar
investments.
The portfolio normally emphasizes investments in common stocks. It normally will
invest up to 75% of its total assets in equity securities selected primarily for
their growth potential and at least 25% of its total assets in securities the
portfolio manager believes have income potential.
The portfolio may invest substantially all of its assets in common stocks if the
portfolio manager believes that common stocks have the potential to appreciate
in value. The portfolio manager generally seeks to identify common stocks of
companies with earnings growth potential that may not be recognized by the
market at large. The portfolio manager makes this assessment by looking at
companies one at a time, regardless of size, country of organization, place of
principal business activity, or other similar selection criteria.
The portfolio may invest without limit in foreign securities either indirectly
(e.g., depositary receipts) or directly in foreign markets. Foreign securities
are generally selected on a stock-by-stock basis without regard to any defined
allocation among countries or geographic regions. However, certain factors such
as expected levels of inflation, government policies influencing business
conditions, currency exchange rates, and prospects for economic growth among
countries or geographic regions may warrant greater consideration in selecting
foreign securities.
The portfolio shifts assets between the growth and income components of its
holdings based on the portfolio manager's analysis of relevant market, financial
and economic conditions. If the portfolio manager believes that growth
securities may provide better returns than the yields then available or expected
on income-producing securities, the portfolio will place a greater emphasis on
the growth component of its holdings.
The growth component of the portfolio is expected to consist primarily of common
stocks, but may also include warrants, preferred stocks or convertible
securities selected primarily for their growth potential.
The income component of the portfolio will consist of securities that the
portfolio manager believes have income potential. Such securities may include
equity securities, convertible securities and all types of debt securities.
Equity securities may be included in the income component of the portfolio if
they currently pay dividends or if the portfolio manager believes they have the
potential for either increasing their dividends or commencing dividends, if none
are currently paid.
Other investments
The portfolio may invest in debt securities, indexed/structured securities,
high-yield/high-risk bonds (less than 35% of the portfolio's total assets) and
securities purchased on a when-issued, delayed delivery or forward commitment
basis.
69 | KVS Growth And Income Portfolio
<PAGE>
The Main Risks Of Investing In The Portfolio
There are several risk factors that could hurt portfolio performance, cause you
to lose money or make the portfolio perform less well than other investments.
As with most stock funds, the most important factor with this portfolio is how
stock markets perform -- in this case, the large company portion of the U.S.
stock market. When prices of these stocks fall, you should expect the value of
your investment to fall as well. Large company stocks at times may not perform
as well as stocks of smaller or mid-size companies. Because a stock represents
ownership in its issuer, stock prices can be hurt by poor management, shrinking
product demand and other business risks. These may affect single companies as
well as groups of companies.
To the extent that the portfolio focuses on a given industry, any factors
affecting that industry could affect portfolio securities. For example, a rise
in unemployment could hurt manufacturers of consumer goods.
Other factors that could affect performance include:
o the manager could be wrong in the analysis of companies, industries,
risk factors or other matters
o growth stocks may be out of favor for certain periods
o foreign securities may be more volatile than their U.S. counterparts,
for reasons such as currency fluctuations and political and economic
uncertainty
o derivatives could produce disproportionate losses
o at times, it might be hard to value some investments or to get an
attractive price for them
The portfolio expects to trade securities actively. This strategy could increase
transaction costs, result in taxable capital gains and reduce performance.
The portfolio manager's skill in choosing appropriate investments for the
portfolio will determine in large part the portfolio's ability to achieve its
investment objective.
Past Performance
No performance information is provided for the portfolio because it has not yet
been in operation for a full calendar year.
The Portfolio Manager
The portfolio's subadvisor is Janus Capital Corporation, Denver, Colorado. The
portfolio manager is David J. Corkins. Mr. Corkins joined Janus Capital
Corporation in 1995 and has managed the portfolio since its inception.
70 | KVS Growth And Income Portfolio
<PAGE>
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance for the period reflected below. The figures in the first part of the
table are for a single share. The total return figures show what a shareholder
in the portfolio would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by Ernst &
Young LLP whose report, along with the portfolio's financial statements, is
included in the portfolio's annual report, which is available upon request by
calling Scudder Kemper Investments at 1-800-778-1482.
KVS Growth And Income Portfolio
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Period Ended December 31, 1999(b)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period $1.000
---------
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (a) --
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions .149
---------
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .149
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $1.149
---------
- ---------------------------------------------------------------------------------------------------------------------------
Total return (%) 14.93**
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 15,794
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 2.58*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.10*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) (.05)*
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 53*
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the period from October 29, 1999 (commencement of operations) to
December 31, 1999.
* Annualized
** Not annualized
71
<PAGE>
KVS Growth Opportunities Portfolio
Portfolio Goal
The portfolio seeks long-term growth of capital in a manner consistent with the
preservation of capital.
The Portfolio's Main Strategy
The portfolio applies a "bottom-up" approach in choosing investments. In other
words, it looks for companies with earnings growth potential one at a time. If
the portfolio is unable to find investments with earnings growth potential, a
significant portion of the portfolio's assets may be in cash or similar
investments.
The portfolio invests primarily in common stocks selected for their growth
potential. Although the portfolio can invest in companies of any size, it
generally invests in larger, more established companies.
The portfolio may invest substantially all of its assets in common stocks if the
portfolio manager believes that common stocks will appreciate in value. The
portfolio manager generally seeks to identify individual companies with earnings
growth potential that may not be recognized by the market at large. The
portfolio manager makes this assessment by looking at companies one at a time,
regardless of size, country of organization, place of principal business
activity, or other similar selection criteria. Realization of income is not a
significant consideration when choosing investments for the portfolio.
The portfolio may invest without limit in foreign securities either indirectly
(e.g., depositary receipts) or directly in foreign markets. Foreign securities
are generally selected on a stock-by-stock basis without regard to any defined
allocation among countries or geographic regions. However, certain factors such
as expected levels of inflation, government policies influencing business
conditions, currency exchange rates, and prospects for economic growth among
countries, regions or geographic area may warrant greater consideration in
selecting foreign securities.
Other investments
The portfolio may invest in debt securities, indexed/structured securities,
high-yield/high-risk bonds (less than 35% of the portfolio's total assets) and
securities purchased on a when-issued, delayed delivery or forward commitment
basis.
The Main Risks Of Investing In The Portfolio
There are several risk factors that could hurt portfolio performance, cause you
to lose money or make the portfolio perform less well than other investments.
As with most stock funds, the most important factor with this portfolio is how
stock markets perform -- in this case, the large company portion of the U.S.
stock market. When prices of these stocks fall, you should expect the value of
your investment to fall as well. Large company stocks at times may not perform
as well as stocks of smaller or mid-size companies. Because a stock represents
ownership in its issuer, stock prices can be hurt by poor management, shrinking
product demand and other business risks. These may affect single companies as
well as groups of companies.
To the extent that the portfolio focuses on a given industry, any factors
affecting that industry could affect portfolio securities. For example, a rise
in unemployment could hurt manufacturers of consumer goods.
Other factors that could affect performance include:
o the manager could be wrong in the analysis of companies, industries,
risk factors or other matters
o growth stocks may be out of favor for certain periods
o foreign securities may be more volatile than their U.S. counterparts,
for reasons such as currency fluctuations and political and economic
uncertainty
o derivatives could produce disproportionate losses
o at times, it might be hard to value some investments or to get an
attractive price for them
72 | KVS Growth Opportunities Portfolio
<PAGE>
Past Performance
No performance information is provided for the portfolio because it has not yet
been in operation for a full calendar year.
The Portfolio Manager
The portfolio's subadvisor is Janus Capital Corporation, Denver, Colorado. The
portfolio manager is E. Marc Pinto. Mr. Pinto joined Janus Capital Corporation
in 1994 and has managed the portfolio since its inception.
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance for the period reflected below. The figures in the first part of the
table are for a single share. The total return figures show what a shareholder
in the portfolio would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by Ernst &
Young LLP whose report, along with the portfolio's financial statements, is
included in the portfolio's annual report, which is available upon request by
calling Scudder Kemper Investments at 1-800-778-1482.
KVS Growth Opportunities Portfolio
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Period Ended December 31, 1999(b)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period $1.000
---------
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (a) --
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions .164
---------
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .164
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $1.164
---------
- ---------------------------------------------------------------------------------------------------------------------------
Total return (%) 16.43**
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 17,159
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) 2.60*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) 1.10*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) (.34)*
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 1*
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the period from October 29, 1999 (commencement of operations) to
December 31, 1999.
* Annualized
** Not annualized
73 | KVS Growth Opportunities Portfolio
<PAGE>
KVS Index 500 Portfolio
Portfolio Goal
The portfolio seeks returns that, before expenses, correspond to the total
return of U.S. common stocks as represented by the Standard & Poor's 500
Composite Stock Price Index.
The Portfolio's Main Strategy
The portfolio pursues its goal by normally investing at least 80% of its total
assets in common stocks of the large U.S.
companies that comprise the index.
In choosing stocks, the portfolio uses an indexing strategy. The portfolio buys
the largest stocks of the S&P 500 Index in roughly the same proportion as the
index. With the smaller stocks, the portfolio manager uses a statistical process
known as sampling to select stocks whose overall performance is expected to be
similar to that of the smaller companies in the S&P 500 Index. The portfolio
seeks to keep the composition of its portfolio similar to the index in industry
distribution, market capitalization and significant fundamental characteristics
(such as price-to-book ratios and dividend yields). Over the long term, the
portfolio manager seeks a correlation between the performance of the portfolio,
before expenses, and the index, of 98% or better. A figure of 100% would
indicate perfect correlation.
The portfolio normally will sell a stock when it is removed from the index or as
a result of its statistical process.
Other investments
The portfolio may also invest up to 20% of its total assets in stock index
futures and options, as well as short-term debt securities. The portfolio
typically invests new flows of money in index futures in order to gain immediate
exposure to the index.
The Main Risks Of Investing In The Portfolio
There are several risk factors that could hurt portfolio performance, cause you
to lose money or make the portfolio perform less well than other investments.
As with most stock funds, the most important factor with this portfolio is how
stock markets perform -- in this case, the large company portion of the U.S.
market. When large company stock prices decline, you should expect the value of
your investment to decline as well. Large company stocks at times may not
perform as well as stocks of smaller or mid-size companies. Because a stock
represents ownership in its issuer, stock prices can be hurt by poor management,
shrinking product demand and other business risks. These may affect single
companies as well as groups of companies.
The portfolio's index strategy involves several risks. The portfolio could
underperform the index during short periods or over the long term, either
because its selection of stocks failed to track the index or because of the
effects of expenses or shareholder transactions. In addition, derivatives could
produce disproportionate losses.
This portfolio is designed for long-term investors who want a portfolio that is
designed to avoid substantially underperforming the overall large-cap stock
market.
74 | KVS Index 500 Portfolio
<PAGE>
Performance
No performance is provided because the portfolio does not yet have a full
calendar year of operations.
The Portfolio Manager
The portfolio's subadvisor is Bankers Trust Company. The portfolio manager is
Kai Yee Wong. Ms. Wong joined Bankers Trust Company in 1993 and began day-to-day
management of the portfolio in 1999.
Financial Highlights
This table is designed to help you understand the portfolio's financial
performance for the period reflected below. The figures in the first part of the
table are for a single share. The total return figures show what a shareholder
in the portfolio would have earned (or lost), assuming all dividends and
distributions were reinvested. This information has been audited by Ernst &
Young LLP whose report, along with the portfolio's financial statements, is
included in the portfolio's annual report, which is available upon request by
calling Scudder Kemper Investments at 1-800-778-1482.
KVS Index 500 Portfolio
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Period Ended December 31, 1999(b)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period $1.000
---------
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (a) .010
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment transactions .086
---------
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .096
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $1.096
---------
- ---------------------------------------------------------------------------------------------------------------------------
Total return (%) 9.55**
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets and Supplemental Data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 32,333
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses before expense reductions (%) .84*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses after expense reductions (%) .55*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss) (%) 3.72*
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 1*
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) For the period from September 1, 1999 (commencement of operations) to
December 31, 1999.
* Annualized
** Not annualized
75 | KVS Index 500 Portfolio
<PAGE>
Other Policies And Risks
While the previous pages describe the main points of each portfolio's strategy
and risks, there are a few other issues to know about:
o Although major changes tend to be infrequent, Kemper Variable Series'
Board could change a portfolio's investment goal without seeking
shareholder approval.
o As a temporary defensive measure, each of the non-money market
portfolios could shift 100% of its assets into investments such as
money market securities. This could prevent losses, but would mean the
portfolio would not be pursuing its goal.
o Although all the portfolios except the Money Market Portfolio are
permitted to use various types of derivatives (contracts whose value is
based on, for example, indices, currencies or securities), the managers
don't intend to use them as principal investments, and might not use
them at all. With derivatives there is a risk that they could produce
disproportionate losses.
o The portfolios may trade securities actively. This strategy could raise
transaction costs and lower performance.
o Although most of the portfolios' equity investments are in common
stocks, they may include other types of equities, such as convertible
and preferred stocks.
o Scudder Kemper establishes a security's credit quality when its buys
the security, using independent ratings, or for unrated securities, its
own credit determination. When ratings don't agree, a portfolio may use
the higher rating. If a security's credit quality falls, the advisor
will determine whether selling it would be in the shareholder's best
interest.
76 | Other Policies And Risks
<PAGE>
About Your Investment
Investment Advisor
The portfolios' investment advisor is Scudder Kemper Investments, Inc., 345 Park
Avenue, New York, New York. Scudder Kemper Investments, Inc. is one of the
largest and most experienced investment management organizations worldwide,
managing more than $290 billion in assets globally for mutual fund investors,
retirement and pension plans, institutional and corporate clients, and private
family and individual accounts.
Each portfolio pays the investment advisor a monthly investment management fee.
Management fees paid for the most recently completed fiscal year for the
portfolios operating at least one year are shown below:
<TABLE>
<CAPTION>
% of Average Net Assets on an % of Average Net Assets on an
Annual Basis (including effect of Annual Basis (without effect of
Portfolio Name any fee waivers) fee waivers)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Kemper Aggressive Growth Portfolio 0.75% 0.00%
Kemper Blue Chip Portfolio 0.65% 0.65%
Kemper Contrarian Value Portfolio 0.75% 0.75%
Kemper Global Blue Chip Portfolio 1.00% 0.00%
Kemper Government Securities Portfolio 0.55% 0.55%
Kemper Growth Portfolio 0.60% 0.60%
Kemper High Yield Portfolio 0.60% 0.60%
Kemper Horizon 5 Portfolio 0.60% 0.60%
Kemper Horizon 10+ Portfolio 0.60% 0.60%
Kemper Horizon 20+ Portfolio 0.60% 0.60%
Kemper International Portfolio 0.75% 0.75%
Kemper Investment Grade Bond Portfolio 0.60% 0.60%
Kemper Money Market Portfolio 0.50% 0.50%
Kemper New Europe Portfolio 1.00% 0.00%
Kemper Small Cap Growth Portfolio 0.65% 0.65%
Kemper Small Cap Value Portfolio 0.75% 0.75%
Kemper Strategic Income Portfolio* 0.75% 0.75%
Kemper Technology Growth Portfolio 0.75% 0.50%
Kemper Total Return Portfolio 0.55% 0.55%
Kemper Value+Growth Portfolio 0.75% 0.75%
KVS Dreman Financial Services Portfolio 0.75% 0.70%
KVS Dreman High Return Equity Portfolio 0.75% 0.75%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Effective 5/1/2000, the new advisory fee for the Strategic Income
Portfolio is 0.65% of average net assets.
77 | About Your Investment
<PAGE>
KVS Focused Large Cap Growth Portfolio, KVS Growth And Income Portfolio and KVS
Growth Opportunities Portfolio each pay the investment advisor a graduated
investment management fee based on the average daily net assets of the
portfolio, payable monthly, at the annual rates shown below:
Average Daily Net Assets of the Portfolio Annual Management Fee Rate
- --------------------------------------------------------------------------------
$0-$250 million 0.950%
$250 million-$500 million 0.925%
$500 million-$1 billion 0.900%
$1 billion-$2.5 billion 0.875%
Over $2.5 billion 0.850%
- --------------------------------------------------------------------------------
Kemper Index 500 Portfolio pays the investment advisor a graduated investment
management fee based on the average daily net assets of the portfolio, payable
monthly, at the annual rates shown below:
Average Daily Net Assets of the Portfolio Annual Management Fee Rate
- --------------------------------------------------------------------------------
$0-$200 million 0.450%
$200 million-$750 million 0.420%
$750 million-$2 billion 0.400%
$2 billion-$5 billion 0.380%
Over $5 billion 0.350%
- --------------------------------------------------------------------------------
Subadvisor for Kemper Index 500 Portfolio
Bankers Trust Company, 130 Liberty Street, New York, New York, is the
portfolio's subadvisor. Bankers Trust Company is a New York banking corporation
and is a wholly owned subsidiary of Bankers Trust Corporation. On June 4, 1999,
Bankers Trust Corporation merged with and into a subsidiary of Deutsche Bank AG.
Deutsche Bank AG is a major global banking institution that is engaged in a wide
range of financial services, including investment management, mutual funds,
retail and commercial banking, investment banking and insurance. Bankers Trust
Company will handle day-to-day investment and trading functions for the
portfolio under the guidance of the portfolio manager. The subadvisor has
managed stock index investments since 1977.
Scudder Kemper Investments, Inc. pays a fee to Bankers Trust Company for acting
as subadvisor to the KVS Index 500 Portfolio. The rate decreases with successive
increases in net assets. The minimum annual fee is set at $100,000, however, the
minimum fee does not apply during the portfolio's first year of operations.
The fee is calculated as follows:
Average Daily Net Assets of the Portfolio Annual Subadvisor Fee Rate
- --------------------------------------------------------------------------------
$0-$200 million 0.080%
$550 million-$750 million 0.050%
Over $750 million 0.025%
- --------------------------------------------------------------------------------
78 | About Your Investment
<PAGE>
Subadvisor for KVS Focused Large Cap Growth Portfolio
Eagle Asset Management, Inc., 880 Carillon Parkway, St. Petersburg, Florida, is
the portfolio's subadvisor. Eagle Asset Management, Inc. manages more than $5.5
billion in assets for institutional, high net worth individuals and subadvisory
clients. Eagle Asset Management, Inc. will handle day-to-day investment and
trading functions for the KVS Focused Large Cap Growth Portfolio under the
guidance of the portfolio manager.
Scudder Kemper Investments, Inc. pays a fee to Eagle Asset Management, Inc. for
acting as subadvisor to the KVS Focused Large Cap Growth Portfolio.
The fee is calculated as follows:
Average Daily Net Assets of the Portfolio Annual Subadvisor Fee Rate
- -------------------------------------------------------------------------------
$0-$50 million 0.450%
$50 million-$300 million 0.400%
Over $300 million 0.300%
- -------------------------------------------------------------------------------
Prior performance of the Eagle Asset Management Growth Equity Composite
Provided below are historical performance figures representing the total returns
for the Eagle Asset Management's Growth Equity Institutional Composite. The
Growth Equity Composite is comprised of institutional large cap growth accounts
of $2 million or more with respect to which Eagle Asset Management, Inc. has
trading discretion and does not include the KVS Focused Large Cap Growth
Portfolio. One of the accounts is a registered investment company. The accounts
that comprise the Growth Equity Composite have investment objectives, policies
and strategies that are substantially similar to those of the KVS Focused Large
Cap Growth Portfolio. This information is provided merely to illustrate the past
performance of a composite group of similar accounts, as measured against a
specified market index, and does not represent the performance of KVS Focused
Large Cap Growth Portfolio, which does not yet have a performance record of its
own. The information does not reflect charges and fees associated with a
separate account that invests in the portfolio or any insurance contract for
which KVS Focused Large Cap Growth Portfolio is an investment option. These
charges and fees will reduce returns. If KVS Focused Large Cap Growth Portfolio
fees and expenses had been used in calculating the Growth Equity Composite's
performance, the performance of the composite would have been lower. Investors
should not consider this performance data as an indication of future performance
of KVS Focused Large Cap Growth Portfolio, the investment manager or the
subadvisor to KVS Focused Large Cap Growth Portfolio.
The performance information below is for Growth Equity Composite and is
presented net of fees and expenses. Certain of the accounts that comprise the
Growth Equity Composite are private accounts, which are not subject to frequent
inflows and outflows of assets as are most mutual funds, including KVS Focused
Large Cap Growth Portfolio. Such inflows and outflows of assets make it more
difficult to manage the portfolio and thus may adversely affect its performance
relative to these private accounts. In addition, the private accounts are not
subject to the diversification requirements, specific tax restrictions and
investment limitations imposed on the portfolio by the Investment Company Act of
1940 and Subchapter M of the Internal Revenue Code. Consequently, the
performance results for the composite could have been lower than what is shown
had these private accounts been regulated as registered investment companies
under the federal securities laws.
79 | About Your Investment
<PAGE>
Total returns of the Growth Equity Composite as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-9.32 37.44 9.22 17.10 -1.74 27.26 23.57 37.53 37.11 62.18
- -------------------------------------------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
</TABLE>
Best Quarter: 42.13%, Q4 1999 Worst Quarter: -15.58%, Q3 1990
Year-to-date Total Return as of 3/31/2000: 15.12%
Average Annual Total Returns (as of 12/31/1999)
One Year Five Years Ten Years
- --------------------------------------------------------------------------------
Growth Equity Composite 62.18% 36.90% 22.37%
Index 21.04 28.56 18.21
- --------------------------------------------------------------------------------
Index: The Standard & Poor's 500 Composite Stock Price Index (S&P 500) is an
unmanaged capitalization-weighted index that includes 500 large-cap U.S. stocks.
Subadvisor for KVS Growth And Income Portfolio and KVS Growth Opportunities
Portfolio
Janus Capital Corporation, 100 Fillmore Street, Denver, Colorado, is the
subadvisor for the portfolios. As of December 31, 1999, Janus Capital
Corporation managed more than $248 billion in assets for variable annuities,
mutual funds and separately managed institutional accounts. They began serving
as investment advisor to Janus Fund in 1970 and currently serve as investment
advisor to all of the Janus Funds, act as subadvisor for a number of
private-label mutual funds and provide separate account advisory services for
institutional accounts. Janus Capital Corporation will handle day-to-day
investment and trading functions for the portfolios under the guidance of the
portfolio managers.
Scudder Kemper Investments, Inc. pays a fee to Janus Capital Corporation for
acting as subadvisor to the KVS Growth And Income Portfolio and the KVS Growth
Opportunities Portfolio.
The fee is calculated as follows:
Average Daily Net Assets of the Portfolios Annual Subadvisor Fee Rate
- --------------------------------------------------------------------------------
$0-$100 million 0.550%
$100 million-$500 million 0.500
On the balance over $500 million 0.450
- --------------------------------------------------------------------------------
80 | About Your Investment
<PAGE>
Prior performance of the Janus Capital's Growth And Income Composite
Provided below are historical performance figures representing the total returns
for the Janus Capital's Growth And Income Composite. This composite is comprised
of Janus Growth and Income Fund and Janus Aspen Series Growth and Income Fund,
two registered investment companies for which Janus Capital Corporation serves
as investment advisor. The funds that comprise the Growth And Income Composite
have investment objectives, policies and strategies that are substantially
similar to those of the KVS Growth And Income Portfolio. This information is
provided merely to illustrate the past performance of a composite group of
similar funds, as measured against a specified market index, and does not
represent the performance of the KVS Growth And Income Portfolio, which does not
yet have a performance record of its own. The information does not reflect
charges and fees associated with a separate account that invests in the
portfolio or any insurance contract for which KVS Growth And Income Portfolio is
an investment option. These charges and fees will reduce returns. If KVS Growth
And Income Portfolio's fees and expenses had been used in calculating the
composite's performance, the performance of the composite would have been lower.
Investors should not consider this performance data as an indication of future
performance of the portfolio, the investment manager or the subadvisor to KVS
Growth And Income Portfolio.
The performance information below is for the subadvisor's Growth And Income
Composite and is presented net of fees and expenses.
Total returns of the Growth And Income Composite as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
5.34 6.68 -4.88 36.35 26.05 34.67 34.87 51.30
- --------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997 1998 1999
Best Quarter: 29.28%, Q4 1999 Worst Quarter: -8.96%, Q3 1998
Year-to-date Total Return as of 3/31/2000: 9.00%
Average Annual Total Returns as of 12/31/1999
<TABLE>
<CAPTION>
One Year Five Years Since Inception*
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth And Income Composite 51.30% 36.41% 25.27%
Index 21.04 28.56 20.36
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Index: The Standard & Poor's 500 Composite Stock Price Index (S&P 500), an
unmanaged capitalization-weighted index that includes 500 large-cap U.S. stocks.
* Since 10/91.
81 | About Your Investment
<PAGE>
Prior performance of the Janus Capital's Large Cap Growth Composite
Provided below are historical performance figures representing the total returns
for the Janus Capital's Large Cap Growth Composite. The Large Cap Growth
Composite is comprised of institutional large cap accounts of $5 million or more
for which Janus Capital Corporation has trading discretion as well as mutual
funds. Prior to 1995, all discretionary accounts are included regardless of
asset size, and there has been no restatement of pre-1995 performance. The
accounts that comprise the Large Cap Growth Composite have investment
objectives, policies and strategies that are substantially similar to those of
the KVS Growth Opportunities Portfolio. This information is provided merely to
illustrate the past performance of a composite group of similar accounts,
measured against a specified market indices, and does not represent the
performance of the KVS Growth Opportunities Portfolio, which does not yet have a
performance record of its own. The information does not reflect charges and fees
associated with a separate account that invests in the portfolio or any
insurance contract for which the portfolio is an investment option. These
charges and fees will reduce returns. If the KVS Growth Opportunities Portfolio
fees and expenses had been used in calculating the composite's performance, the
performance of the Large Cap Growth Composite would have been lower. Investors
should not consider this performance data as an indication of future performance
of the portfolio, the investment manager or the subadvisor to KVS Growth
Opportunities Portfolio.
The performance information below is for the subadvisor's Large Cap Growth
Composite and is presented net of fees and expenses. Certain of the accounts
that comprise the Large Cap Growth Composite are private accounts, which are not
subject to frequent inflows and outflows of assets as are most mutual funds,
including the portfolio. Such inflows and outflows of assets make it more
difficult to manage the portfolio and thus may adversely affect its performance
relative to these private accounts. In addition, the private accounts are not
subject to the diversification requirements, specific tax restrictions and
investment limitations imposed on the portfolio by the Investment Company Act of
1940 and Subchapter M of the Internal Revenue Code. Consequently, the
performance results for the Large Cap Growth Composite could have been lower
than what is shown had these private accounts been regulated as registered
investment companies under the federal securities laws.
Total returns of the Large Cap Growth Composite as of 12/31 each year
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-0.3 63.99 1.78 4.43 -6.24 40.24 25.63 26.47 42.29 44.20
- -------------------------------------------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
</TABLE>
Best Quarter: 30.98%, Q4 1999 Worst Quarter: -17.10%, Q3 1990
Year-to-date Total Return as of 3/31/2000: 11.78%
Average Annual Total Returns as of 12/31/1999
<TABLE>
<CAPTION>
One Year Five Years Ten Years
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Large Cap Growth Composite 44.20% 35.53% 22.24%
Index 1 21.04 28.56 18.21
Index 2 33.16 32.41 20.32
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Index 1: The Standard & Poor's 500 Composite Stock Price Index (S&P 500), an
unmanaged capitalization-weighted index that includes 500 large-cap U.S. stocks.
Index 2: Russell 1000 Growth Index, an unmanaged capitalization-weighted index
containing the growth stocks in the Russell 1000 Index.
82 | About Your Investment
<PAGE>
Subadvisor for Kemper International Portfolio
Scudder Investments (U.K.) Limited, 1 South Place, London, U.K., an affiliate of
Scudder Kemper Investments, Inc., is the subadvisor for Kemper International
Portfolio. Scudder Investments (U.K.) Limited has served as subadvisor for
mutual funds since December 1996, and investment advisor for certain
institutional accounts since August 1998.
For its services as subadvisor, Scudder Investments (U.K.) received an annual
fee from Scudder Kemper Investments of 0.35% for Kemper International Portfolio
for the fiscal year ended December 31, 1999.
Subadvisor for KVS Dreman Financial Services Portfolio and KVS Dreman High
Return Equity Portfolio
Dreman Value Management L.L.C., 10 Exchange Place, Jersey City, New Jersey, is
the subadvisor for the KVS Dreman Financial Services Portfolio and KVS Dreman
High Return Equity Portfolio and receives a fee for its services from Scudder
Kemper Investments, Inc. Founded in 1977, Dreman Value Management, L.L.C.
manages over $7 billion in assets.
Scudder Kemper Investments, Inc. pays a fee to Dreman Value Management, L.L.C.
for acting as subadvisor to the KVS Dreman Financial Services Portfolio and the
KVS Dreman High Return Equity Portfolio.
The fee is calculated as follows:
Average Daily Net Assets of each Portfolio Annual Subadvisor Fee Rate
- --------------------------------------------------------------------------------
$0-$250 million 0.240%
$250 million-$1 billion 0.230%
$1 billion-$2.5 billion 0.224%
$2.5 billion-$5 billion 0.218%
$5 billion-$7.5 billion 0.208%
$7.5 billion-$10 billion 0.205%
$10 billion-$12.5 billion 0.202%
Over $12.5 billion 0.198%
- --------------------------------------------------------------------------------
Euro conversion
Portfolios that invest in foreign securities could be affected by accounting
differences, changes in tax treatment or other issues related to the conversion
of certain European currencies into the euro, which is already underway. Scudder
Kemper is working to address euro-related issues as they occur and understands
that other key service providers are taking similar steps. Still, there's some
risk that this problem could materially affect a portfolio's operation
(including its ability to calculate net asset value and to handle purchases and
redemptions), its investments or securities markets in general.
83 | About Your Investment
<PAGE>
Share Price
Scudder Fund Accounting Corporation determines the net asset value per share as
of the close of regular trading on the New York Stock Exchange (normally 4:00
p.m. eastern time) on each day the New York Stock Exchange is open for trading.
For the Money Market Portfolio, net asset value per share of the portfolio is
normally $1.00 calculated at amortized cost in accordance with a rule of the
Securities and Exchange Commission (Rule 2a-7). For all other portfolios, market
prices are used to determine the value of a portfolio's assets, but when
reliable market quotations are unavailable, a portfolio may use procedures
established by the Kemper Variable Series' Board of Trustees.
The net asset value per share of each portfolio is the value of one share and is
determined by dividing the value of the portfolio's net assets by the number of
shares of that portfolio outstanding.
To the extent that the portfolios invest in foreign securities, these securities
may be listed on foreign exchanges that trade on days when the portfolios do not
price their shares. As a result, the net asset value per share of the portfolios
may change at a time when shareholders are not able to purchase or redeem their
shares.
Purchase And Redemption
The separate accounts of the participating insurance companies place orders to
purchase and redeem shares of each portfolio based on, among other things, the
amount of premium payments to be invested and surrender and transfer requests to
be effected on that day pursuant to VLI and VA contracts. The shares of each
portfolio are purchased and redeemed at the net asset value of the portfolio's
shares determined that same day or, in the case of an order not resulting
automatically from contract transactions, next determined after an order in
proper form is received. An order is considered to be in proper form if it is
communicated by telephone or wire by an authorized employee of the participating
insurance company.
From time to time, Kemper Variable Series may temporarily suspend the offering
of shares of one or more of its portfolios. During the period of such
suspension, shareholders of such portfolio are normally permitted to continue to
purchase additional shares and to have dividends reinvested.
Kemper Variable Series seeks to have its Money Market Portfolio as fully
invested as possible at all times in order to achieve maximum income. Since the
Money Market Portfolio will be investing in instruments that normally require
immediate payment in Federal portfolios (monies credited to a bank's account
with its regional Federal Reserve Bank), the portfolio has adopted certain
procedures for the convenience of its shareholders and to ensure that the Money
Market Portfolio receives investable portfolios.
No fee is charged the shareholders when they purchase or redeem portfolio
shares.
84 | About Your Investment
<PAGE>
Distributions And Taxes
Dividends and capital gains distributions
All portfolios except Money Market Portfolio. These portfolios normally declare
and distribute dividends of net investment income annually. Each portfolio
distributes any net realized short-term and long-term capital gains at least
annually.
Money Market Portfolio. The Money Market Portfolio declares its net investment
income as a dividend daily. Shareholders will receive dividends monthly in
additional shares. If a shareholder withdraws its entire account, all dividends
accrued to the time of withdrawal will be paid at that time.
Taxes
Each portfolio intends to comply with the diversification requirements of
Internal Revenue Code section 817(h). By meeting this and other requirements,
the participating insurance companies, rather than the holders of variable
annuity contracts and variable life insurance policies, should be subject to tax
on distributions received with respect to portfolio shares. For further
information concerning federal income tax consequences for the holders of
variable annuity contracts and variable life insurance policies, such holders
should consult the prospectus used in connection with the issuance of their
particular contracts or policies.
Distributions of net investment income are treated by shareholders as ordinary
income. Long-term capital gains distributions are treated by shareholders as
long-term capital gains, regardless of how long they have owned their shares.
Short-term capital gains and any other taxable income distributions are treated
by shareholders as ordinary income. Participating insurance companies should
consult their own tax advisors as to whether portfolio distributions are subject
to federal income tax if they are retained as part of policy reserves.
The preceding is a brief summary of certain of the relevant tax considerations.
Because each shareholder and contract holder's tax situation is unique, it's
always a good idea to ask your tax professional about the tax consequences of
your investments.
85 | About Your Investment
<PAGE>
Additional information about the portfolios may be found in Kemper Variable
Series; Statement of Additional Information and in shareholder reports.
Shareholder inquiries may be made by calling the toll-free telephone number
listed below. The Statement of Additional Information contains information on
portfolio investments and operations. The semiannual and annual shareholder
reports contain a discussion of the market conditions and the investment
strategies that significantly affected the portfolios' performance during the
last fiscal year, as well as a listing of portfolio holdings and financial
statements. These and other portfolio documents may be obtained without charge
from the following sources:
- --------------------------------------------------------------------------------
By Phone: Call Kemper at:
1-800-778-1482
In Person: Public Reference Room
Securities and Exchange Commission,
Washington, D.C.
(Call 1-202-942-8090
for more information.)
By Mail: Kemper Distributors, Inc.
222 South Riverside Plaza
Chicago, IL 60606-5808
or
Public Reference Section,
Securities and Exchange Commission,
Washington, D.C. 20549-0102
(a duplication fee is charged)
By Internet: http://www.sec.gov
http://www.kemper.com
e-mail: [email protected]
- --------------------------------------------------------------------------------
The Statement of Additional Information is incorporated by reference into this
prospectus (is legally a part of this prospectus).
SEC File Number:
Kemper Variable Series 811-5002
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
May 1, 2000
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, 2000. 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 Securities and Exchange Commission Internet web
site (http://www.sec.gov). The prospectus is also available from Participating
Insurance Companies.
Kemper Variable Series offers a choice of 26 investment portfolios (each a
"Portfolio") to investors applying for certain variable life insurance and
variable annuity contracts offered by Participating Insurance Companies.
The 26 portfolios are:
<TABLE>
<S> <C>
Kemper Aggressive Growth Portfolio "Aggressive Growth Portfolio"
Kemper Blue Chip Portfolio "Blue Chip Portfolio"
Kemper Contrarian Value Portfolio "Contrarian Portfolio"
Kemper Global Blue Chip Portfolio "Global Blue Chip Portfolio"
Kemper Government Securities Portfolio "Government Securities Portfolio"
Kemper Growth Portfolio "Growth Portfolio"
Kemper High Yield Portfolio "High Yield Portfolio"
Kemper Horizon 5 Portfolio
Kemper Horizon 10+ Portfolio Collectively, the "Horizon Portfolios"
Kemper Horizon 20+ Portfolio
Kemper International Portfolio "International Portfolio"
Kemper Investment Grade Bond Portfolio "Investment Grade Bond Portfolio"
Kemper Money Market Portfolio "Money Market Portfolio"
Kemper New Europe Portfolio "New Europe Portfolio"
(formally Kemper International Growth and
Income Portfolio)
Kemper Small Cap Growth Portfolio "Small Cap Growth Portfolio"
Kemper Small Cap Value Portfolio "Small Cap Value Portfolio"
Kemper Strategic Income Portfolio "Strategic Income Portfolio"
(formally Kemper Global Income Portfolio)
Kemper Total Return Portfolio "Total Return Portfolio"
Kemper Technology Growth Portfolio "Technology Portfolio"
Kemper Value+Growth Portfolio "Value+Growth Portfolio"
KVS Dreman Financial Services Portfolio "Financial Services Portfolio"
KVS Dreman High Return Equity Portfolio "High Return Equity Portfolio"
KVS Focused Large Cap Growth Portfolio "Large Cap Growth Portfolio"
KVS Growth And Income Portfolio "Growth And Income Portfolio"
KVS Growth Opportunities Portfolio "Growth Opportunities Portfolio"
KVS Index 500 Portfolio "Index 500 Portfolio"
</TABLE>
1
<PAGE>
TABLE OF CONTENTS
Page
INVESTMENT RESTRICTIONS.......................................................3
INVESTMENT POLICIES AND TECHNIQUES............................................4
PORTFOLIO TRANSACTIONS.......................................................21
INVESTMENT MANAGER AND DISTRIBUTOR...........................................25
PURCHASE AND REDEMPTION OF SHARES............................................33
OFFICERS AND TRUSTEES........................................................33
NET ASSET VALUE..............................................................37
DIVIDENDS AND TAXES..........................................................38
SHAREHOLDER RIGHTS...........................................................38
APPENDIX --RATINGS OF INVESTMENTS
The financial statements appearing in the Fund's Annual Report for the
fiscal year ended December 31, 1999 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 that cannot be changed for a Portfolio without approval by a
"majority" of the outstanding voting shares of that Portfolio. As defined in the
Investment Company Act of 1940, as amended (the "1940 Act"), this means the
lesser of the vote of (a) 67% of the shares of a Portfolio present at a meeting
where more than 50% of the outstanding shares are present in person or by proxy
or (b) more than 50% of the outstanding shares of a Portfolio.
Each Portfolio except the Financial Services and Aggressive Growth
Portfolios is classified as a diversified open-end management investment
company. The Financial Services and Aggressive Growth Portfolios
are non-diversified open-end investment management companies.
Each Portfolio may not, as a fundamental policy:
(1) borrow money, except as permitted under the 1940 Act, and as
interpreted or modified by regulatory authority having jurisdiction,
from time to time;
(2) issue senior securities, except as permitted under the 1940 Act, and as
interpreted or modified by regulatory authority having jurisdiction,
from time to time;
(3) For all Portfolios except Money Market Portfolio: concentrate its
investments in a particular industry, as that term is used in the 1940
Act, and as interpreted or modified by regulatory authority having
jurisdiction, from time to time;
For Money Market Portfolio: concentrate its investments in a particular
industry, as that term is used in the 1940 Act, and as interpreted or
modified by regulatory authority having jurisdiction, from time to
time, except that the Portfolio intends to invest more than 25% of its
net assets in instruments issued by banks.
(4) engage in the business of underwriting securities issued by others,
except to the extent that the Portfolio 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 Portfolio reserves
freedom of action to hold and to sell real estate acquired as a result
of the Portfolio's ownership of securities;
(6) purchase physical commodities or contracts relating to physical
commodities; or
(7) make loans except as permitted under the 1940 Act, and as interpreted
or modified by regulatory authority having jurisdiction, from time to
time.
With regard to Restriction (3) above, for purposes of determining the
percentage of a Portfolio's assets invested in securities of issuers having
their principal business activities in a particular industry, asset backed
securities will be classified separately, based on the nature of the underlying
assets. Currently, the following categories are used: captive auto, diversified,
retail and consumer loans, captive equipment and business, business trade
receivables, nuclear fuel and capital and mortgage lending.
If a percentage restriction is adhered to at the time of the
investment, a later increase or decrease in percentage beyond the specified
limit resulting from a change in values or net assets will not be considered a
violation. The Fund has also adopted the following non-fundamental policies,
which may be changed or eliminated for each Portfolio by the Fund's Board of
Trustees without a vote of the shareholders:
As a matter of non-fundamental policy, each Portfolio, except Money Market
Portfolio, does not intend to:
(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 Portfolios' registration statement
which may be deemed to be borrowings;
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(2) purchase securities on margin or make short sales, except (i) short
sales against the box, (ii) in connection with arbitrage transactions,
(iii) for margin deposits in connection with futures contracts, options
or other permitted investments, (iv) that transactions in futures
contracts and options shall not be deemed to constitute selling
securities short, and (v) that the Portfolio may obtain such short-term
credits as may be deemed necessary for the clearance of securities
transactions;
(3) purchase options, unless the aggregate premiums paid on all such
options held by a 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;
(4) 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
a Portfolio and the premium paid for such options on futures
contracts does not exceed 5% of the fair market value of a
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;
(5) 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
a Portfolio's total assets (for this purpose, warrants acquired in
units or attached to securities will be deemed to have no value); and
(6) invest more than 15% of net assets in illiquid securities.
For all portfolios except Money Market Portfolio, Strategic Income
Portfolio, Government Securities Portfolio, High Yield Portfolio and Investment
Grade Bond Portfolio:
(7) enter into either of reverse repurchase agreements or dollar rolls in
an amount greater than 5% of its total assets.
For Global Blue Chip Portfolio only:
(8) lend portfolio securities in an amount greater than 5% of its total
assets.
For all portfolios except Global Blue Chip:
(9) lend portfolio securities in an amount greater than one third of its
total assets.
For Kemper Money Market Portfolio:
(10) borrow money in an amount greater than 5% of its total assets, except
for temporary emergency purposes; and
(11) lend portfolio securities in an amount greater than 5% 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", "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.
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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.
Strategic Transactions and Derivatives (All Portfolios except Money Market
Portfolio). A Portfolio may, but is not required to, utilize various other
investment strategies as described below for a variety of purposes, such as
hedging various market risks, managing the effective maturity or duration of
fixed-income securities in a Portfolio's portfolio, or enhancing potential gain.
These strategies may be executed through the use of derivative contracts.
In the course of pursuing these investment strategies, a Portfolio may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other instruments, purchase and
sell futures contracts and options thereon, enter into various transactions such
as swaps, caps, floors, collars, currency forward contracts, currency futures
contracts, currency swaps or options on currencies, or currency futures and
various other currency transactions (collectively, all the above are called
"Strategic Transactions"). In addition, strategic transactions may also include
new techniques, instruments or strategies that are permitted as regulatory
changes occur. Strategic Transactions may be used without limit (subject to
certain limitations imposed by the 1940 Act) to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for a Portfolio's portfolio resulting from securities markets or currency
exchange rate fluctuations, to protect a Portfolio's unrealized gains in the
value of its portfolio securities, to facilitate the sale of such securities for
investment purposes, to manage the effective maturity or duration of
fixed-income securities in a Portfolio's portfolio, or to establish a position
in the derivatives markets as a substitute for purchasing or selling particular
securities. Some Strategic Transactions may also be used to enhance potential
gain although no more than 5% of a Portfolio's assets will be committed to
Strategic Transactions entered into for non-hedging purposes. Any or all of
these investment techniques may be used at any time and in any combination, and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of a Portfolio to utilize
these Strategic Transactions successfully will depend on the Adviser's ability
to predict pertinent market movements, which cannot be assured. A Portfolio will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions will not be used
to alter fundamental investment purposes and characteristics of a Portfolio, and
each Fund will segregate assets (or as provided by applicable regulations, enter
into certain offsetting positions) to cover its obligations under options,
futures and swaps to limit leveraging of a Portfolio.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to a Portfolio, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation a Portfolio can realize on its
investments or cause a Portfolio to hold a security it might otherwise sell. The
use of currency transactions can result in a Portfolio incurring losses as a
result of a number of factors including the imposition of exchange controls,
suspension of settlements, or the inability to deliver or receive a specified
currency. The use of options and futures transactions entails certain other
risks. In particular, the variable degree of correlation between price movements
of futures contracts and price movements in the related portfolio position of a
Portfolio creates the possibility that losses on the hedging instrument may be
greater than gains in the value of a Portfolio's position. In addition, futures
and options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets, a
Portfolio might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.
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General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, a Portfolio's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving a Portfolio the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. A Portfolio's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect a Portfolio against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase such instrument. An American style put or call
option may be exercised at any time during the option period while a European
style put or call option may be exercised only upon expiration or during a fixed
period prior thereto. A Portfolio is authorized to purchase and sell exchange
listed options and over-the-counter options ("OTC options"). Exchange listed
options are issued by a regulated intermediary such as the Options Clearing
Corporation ("OCC"), which guarantees the performance of the obligations of the
parties to such options. The discussion below uses the OCC as an example, but is
also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which the
option is "in-the-money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.
A Portfolio's ability to close out its position as a purchaser or
seller of an OCC or exchange listed put or call option is dependent, in part,
upon the liquidity of the option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (i) insufficient trading
interest in certain options; (ii) restrictions on transactions imposed by an
exchange; (iii) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities
including reaching daily price limits; (iv) interruption of the normal
operations of the OCC or an exchange; (v) inadequacy of the facilities of an
exchange or OCC to handle current trading volume; or (vi) a decision by one or
more exchanges to discontinue the trading of options (or a particular class or
series of options), in which event the relevant market for that option on that
exchange would cease to exist, although outstanding options on that exchange
would generally continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all 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 (other than OTC currency options) that are
subject to a buy-back provision permitting a Portfolio to require the
Counterparty to sell the option back to a Portfolio at a formula price within
seven days. A 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, currency or other instrument underlying
an OTC option it has entered into with a Portfolio or fails to make a cash
settlement payment due in accordance with the terms of that option, a Portfolio
will lose any premium it paid for the option as well as any anticipated benefit
of the transaction. Accordingly, the Adviser must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be satisfied.
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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") or, in the case of OTC currency transactions, are determined to be of
equivalent credit quality by the Adviser. The staff of the Securities and
Exchange Commission (the "SEC") currently takes the position that OTC options
purchased by a Portfolio, and portfolio securities "covering" the amount of a
Portfolio's obligation pursuant to an OTC option sold by it (the cost of the
sell-back plus the in-the-money amount, if any) are illiquid, and are subject to
a Portfolio's limitation on investing no more than 15% of its net assets in
illiquid securities.
If a Portfolio sells a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase a Portfolio's income. The sale of put options can
also provide income.
A Portfolio may purchase and sell call options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, foreign
sovereign debt, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments that are traded on U.S. and
foreign securities exchanges and in the over-the-counter markets, and on
securities indices, currencies and futures contracts. All calls sold by a
Portfolio must be "covered" (i.e., a Portfolio must own the securities or
futures contract subject to the call) or must meet the asset segregation
requirements described below as long as the call is outstanding. Even though a
Portfolio will receive the option premium to help protect it against loss, a
call sold by a Portfolio exposes a Portfolio during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require a Portfolio to hold a security
or instrument which it might otherwise have sold.
A Portfolio may purchase and sell put options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, foreign
sovereign debt, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments (whether or not it holds the
above securities in its portfolio), and on securities indices, currencies and
futures contracts other than futures on individual corporate debt and individual
equity securities. A Portfolio will not sell put options if, as a result, more
than 50% of a Portfolio's total assets would be required to be segregated to
cover its potential obligations under such put options other than those with
respect to futures and options thereon. In selling put options, there is a risk
that a Portfolio may be required to buy the underlying security at a
disadvantageous price above the market price.
General Characteristics of Futures. A Portfolio may enter into futures contracts
or purchase or sell put and call options on such futures as a hedge against
anticipated interest rate, currency or equity market changes, and for duration
management, risk management and return enhancement purposes. Futures are
generally bought and sold on the commodities exchanges where they are listed
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by a Portfolio, as seller, to deliver
to the buyer the specific type of financial instrument called for in the
contract at a specific future time for a specified price (or, with respect to
index futures and Eurodollar instruments, the net cash amount). Options on
futures contracts are similar to options on securities except that an option on
a futures contract gives the purchaser the right in return for the premium paid
to assume a position in a futures contract and obligates the seller to deliver
such position.
A Portfolio's use of futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into for bona fide hedging, risk management (including duration management) or
other portfolio and return enhancement management purposes. Typically,
maintaining a futures contract or selling an option thereon requires a Portfolio
to deposit with a financial intermediary as security for its obligations an
amount of cash or other specified assets (initial margin) which initially is
typically 1% to 10% of the face amount of the contract (but may be higher in
some circumstances). Additional cash or assets (variation margin) may be
required to be deposited thereafter on a daily basis as the mark to market value
of the contract fluctuates. The purchase of an option on financial futures
involves payment of a premium for the option without any further obligation on
the part of a Portfolio. If a Portfolio exercises an option on a futures
contract it will be obligated to post initial margin (and potential subsequent
variation margin) for the resulting futures position just as it would for any
position. Futures contracts and options thereon are generally settled by
entering into an offsetting transaction but there can be no assurance that the
position can be offset prior to settlement at an advantageous price, nor that
delivery will occur.
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A Portfolio will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of a 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 segregation requirements with respect to futures contracts and
options thereon are described below.
Options on Securities Indices and Other Financial Indices. A Portfolio also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Currency Transactions. A Portfolio may engage in currency transactions with
Counterparties primarily in order to hedge, or manage the risk of the value of
portfolio holdings denominated in particular currencies against fluctuations in
relative value. Currency transactions include forward currency contracts,
exchange listed currency futures, exchange listed and OTC options on currencies,
and currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional difference among two or more currencies and operates similarly to an
interest rate swap, which is described below. A Portfolio may enter into
currency transactions with Counterparties which have received (or the guarantors
of the obligations which have received) a credit rating of A-1 or P-1 by S&P or
Moody's, respectively, or that have an equivalent rating from a NRSRO or (except
for OTC currency options) are determined to be of equivalent credit quality by
the Adviser.
A Portfolio's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps generally
will be limited to hedging involving either specific transactions or portfolio
positions except as described below. Transaction hedging is entering into a
currency transaction with respect to specific assets or liabilities of a
Portfolio, which will generally arise in connection with the purchase or sale of
its portfolio securities or the receipt of income therefrom. Position hedging is
entering into a currency transaction with respect to portfolio security
positions denominated or generally quoted in that currency.
A Portfolio generally will not enter into a transaction to hedge
currency exposure to an extent greater, after netting all transactions intended
wholly or partially to offset other transactions, than the aggregate market
value (at the time of entering into the transaction) of the securities held in
its portfolio that are denominated or generally quoted in or currently
convertible into such currency, other than with respect to proxy hedging or
cross hedging as described below.
A Portfolio may also cross-hedge currencies by entering into
transactions to purchase or sell one or more currencies that are expected to
decline in value relative to other currencies to which a Portfolio has or in
which a Portfolio expects to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, a Portfolio may also engage in
proxy hedging. Proxy hedging is often used when the currency to which a
Portfolio's portfolio is exposed is difficult to hedge or to hedge against the
dollar. Proxy hedging entails entering into a commitment or option to sell a
currency whose changes in value are generally considered to be correlated to a
currency or currencies in which some or all of a Portfolio's portfolio
securities are or are expected to be denominated, in exchange for U.S. dollars.
The amount of the commitment or option would not exceed the value of a
Portfolio's securities denominated in correlated currencies. For example, if the
Adviser considers that the Austrian schilling is correlated to the German
deutschemark (the "D-mark"), a Portfolio holds securities denominated in
schillings and the Adviser believes that the value of schillings will decline
against the U.S. dollar, the Adviser may enter into a commitment or option to
sell D-marks and buy dollars. Currency hedging involves some of the same risks
and considerations as other transactions with similar instruments. Currency
transactions can result in losses to a Portfolio if the currency being
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hedged fluctuates in value to a degree or in a direction that is not
anticipated. Further, there is the risk that the perceived correlation between
various currencies may not be present or may not be present during the
particular time that a Portfolio is engaging in proxy hedging. If a Portfolio
enters into a currency hedging transaction, a Portfolio will comply with the
asset segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to a Portfolio if it is unable to deliver or receive currency or funds
in settlement of obligations and could also cause hedges it has entered into to
be rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Combined Transactions. A Portfolio may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
currency transactions (including forward currency contracts) and multiple
interest rate transactions and any combination of futures, options, currency and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of a Portfolio to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which a
Portfolio may enter are interest rate, currency, index and other swaps and the
purchase or sale of related caps, floors and collars. A Portfolio expects to
enter into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities a Portfolio anticipates purchasing at a
later date. A Portfolio will not sell interest rate caps or floors where it does
not own securities or other instruments providing the income stream a Portfolio
may be obligated to pay. Interest rate swaps involve the exchange by a Portfolio
with another party of their respective commitments to pay or receive interest,
e.g., an exchange of floating rate payments for fixed rate payments with respect
to a notional amount of principal. A currency swap is an agreement to exchange
cash flows on a notional amount of two or more currencies based on the relative
value differential among them and an index swap is an agreement to swap cash
flows on a notional amount based on changes in the values of the reference
indices. The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling such cap to the extent that a
specified index exceeds a predetermined interest rate or amount. The purchase of
a floor entitles the purchaser to receive payments on a notional principal
amount from the party selling such floor to the extent that a specified index
falls below a predetermined interest rate or amount. A collar is a combination
of a cap and a floor that preserves a certain return within a predetermined
range of interest rates or values.
A Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Portfolio receiving or paying, as the case
may be, only the net amount of the two payments. Inasmuch as a Portfolio will
segregate assets (or enter into offsetting positions) to cover its obligations
under swaps, the Adviser and a Portfolio believe such obligations do not
constitute senior securities under the 1940 Act and, accordingly, will not treat
them as being subject to its borrowing restrictions. A Portfolio will not enter
into any swap, cap, floor or collar transaction unless, at the time of entering
into such transaction, the unsecured long-term debt of the Counterparty,
combined with any credit enhancements, is rated at least A by S&P or Moody's or
has an equivalent rating from a NRSRO or is determined to be of equivalent
credit quality by the Adviser. If there is a default by the Counterparty, a
Portfolio may have contractual remedies pursuant to the agreements related to
the transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
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Eurodollar Instruments. A Portfolio may make investments in Eurodollar
instruments. Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon which are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency-denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. A Portfolio might use Eurodollar futures contracts and options
thereon to hedge against changes in LIBOR, to which many interest rate swaps and
fixed income instruments are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in a Portfolio's ability to act upon
economic events occurring in foreign markets during non-business hours in the
U.S., (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the U.S., and (v) lower trading
volume and liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that a Portfolio segregate cash or
liquid assets with its custodian to the extent Fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
a Portfolio to pay or deliver securities or assets must be covered at all times
by the securities, instruments or currency required to be delivered, or, subject
to any regulatory restrictions, an amount of cash or liquid assets at least
equal to the current amount of the obligation must be segregated with the
custodian. The segregated assets cannot be sold or transferred unless equivalent
assets are substituted in their place or it is no longer necessary to segregate
them. For example, a call option written by a Portfolio will require a Portfolio
to hold the securities subject to the call (or securities convertible into the
needed securities without additional consideration) or to segregate cash or
liquid assets sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by a Portfolio on an index will require a
Portfolio to own portfolio securities which correlate with the index or to
segregate cash or liquid assets equal to the excess of the index value over the
exercise price on a current basis. A put option written by a Portfolio requires
a Portfolio to segregate cash or liquid assets equal to the exercise price.
Except when a Portfolio enters into a forward contract for the purchase
or sale of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates a Portfolio to buy or sell
currency will generally require a Portfolio to hold an amount of that currency
or liquid assets denominated in that currency equal to a Portfolio's obligations
or to segregate cash or liquid assets equal to the amount of a Portfolio's
obligation.
OTC options entered into by a Portfolio, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when a
Portfolio sells these instruments it will only segregate an amount of cash or
liquid assets equal to its accrued net obligations, as there is no requirement
for payment or delivery of amounts in excess of the net amount. These amounts
will equal 100% of the exercise price in the case of a non cash-settled put, the
same as an OCC guaranteed listed option sold by a Portfolio, or the in-the-money
amount plus any sell-back formula amount in the case of a cash-settled put or
call. In addition, when a Portfolio sells a call option on an index at a time
when the in-the-money amount exceeds the exercise price, a Portfolio will
segregate, until the option expires or is closed out, cash or cash equivalents
equal in value to such excess. OCC issued and exchange listed options sold by a
Portfolio other than those above generally settle with physical delivery, or
with an election of either physical delivery or cash settlement and a Portfolio
will segregate an amount of cash or liquid assets equal to the full value of the
option. OTC options settling with physical delivery, or with an election of
either physical delivery or cash settlement will be treated the same as other
options settling with physical delivery.
In the case of a futures contract or an option thereon, a Portfolio
must deposit initial margin and possible daily variation margin in addition to
segregating cash or liquid assets sufficient to meet its obligation to purchase
or provide securities or currencies, or to pay the amount owed at the expiration
of an index-based futures contract. Such liquid assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets.
With respect to swaps, a Portfolio will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid assets
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to a Portfolio's net obligation, if
any.
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Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. A Portfolio may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, a Portfolio could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by a Portfolio. Moreover, instead of segregating cash or liquid assets if a
Portfolio held a futures or forward contract, it could purchase a put option on
the same futures or forward contract with a strike price as high or higher than
the price of the contract held. Other Strategic Transactions may also be offset
in combinations. If the offsetting transaction terminates at the time of or
after the primary transaction no segregation is required, but if it terminates
prior to such time, cash or liquid assets equal to any remaining obligation
would need to be segregated.
Delayed Delivery Transactions. The Total Return, High Yield, Growth, Government
Securities, Investment Grade Bond, Horizon, Strategic Income, Financial
Services, Global Blue Chip, Aggressive Growth, Technology, New Europe, Focused
Large Cap Growth, Growth And Income, Growth Opportunities and Index 500
Portfolios may purchase or sell portfolio securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased by the Portfolio with payment and delivery to take
place in the future in order to secure what is considered to be an advantageous
price and yield to the Portfolio at the time of entering into the transaction.
When the Portfolio enters into a delayed delivery transaction, it becomes
obligated to purchase securities and it has all of the rights and risks
attendant to ownership of a security, although delivery and payment occur at a
later date. The value of fixed-income securities to be delivered in the future
will fluctuate as interest rates vary. At the time a Portfolio makes the
commitment to purchase a security on a when-issued or delayed delivery basis, it
will record the transaction and reflect the liability for the purchase and the
value of the security in determining its net asset value. Likewise, at the time
a Portfolio makes the commitment to sell a security on a delayed delivery basis,
it will record the transaction and include the proceeds to be received in
determining its net asset value; accordingly, any fluctuations in the value of
the security sold pursuant to a delayed delivery commitment are ignored in
calculating net asset value so long as the commitment remains in effect. The
Portfolio generally has the ability to close out a purchase obligation on or
before the settlement date, rather than take delivery of the security.
Real Estate Investment Trusts (REITs). Certain Portfolios may invest in REITs.
REITs are sometimes informally characterized as equity REITs, mortgage REITs and
hybrid REITs. Investment in REITs may subject the Portfolio to risks associated
with the direct ownership of real estate, such as decreases in real estate
values, overbuilding, increased competition and other risks related to local or
general economic conditions, increases in operating costs and property taxes,
changes in zoning laws, casualty or condemnation losses, possible environmental
liabilities, regulatory limitations on rent and fluctuations in rental income.
Equity REITs generally experience these risks directly through fee or leasehold
interests, whereas mortgage REITs generally experience these risks indirectly
through mortgage interests, unless the mortgage REIT forecloses on the
underlying real estate. Changes in interest rates may also affect the value of
the Portfolio's investment in REITs. For instance, during periods of declining
interest rates, certain mortgage REITs may hold mortgages that the mortgagors
elect to prepay, which prepayment may diminish the yield on securities issued by
those REITs.
Certain REITs have relatively small market capitalization, which may
tend to increase the volatility of the market price of their securities.
Furthermore, REITs are dependent upon specialized management skills, have
limited diversification and are, therefore, subject to risks inherent in
operating and financing a limited number of projects. REITs are also subject to
heavy cash flow dependency, defaults by borrowers and the possibility of failing
to qualify for tax-free pass-through of income under the Code and to maintain
exemption from the registration requirements of the 1940 Act. By investing in
REITs indirectly through the Fund, a shareholder will bear not only his or her
proportionate share of the expenses of the Portfolio, but also, indirectly,
similar expenses of the REITs. In addition, REITs depend generally on their
ability to generate cash flow to make distributions to shareholders.
Collateralized Obligations. Subject to its investment objectives and policies, a
Portfolio may purchase collateralized obligations, including interest only
("IO") and principal only ("PO") securities. A collateralized obligation is a
debt security issued by a corporation, trust or custodian, or by a U.S.
Government agency or instrumentality, that is collateralized by a portfolio or
pool of mortgages, mortgage-backed securities, U.S. Government securities or
other assets. The issuer's obligation to make interest and principal payments is
secured by the underlying pool or portfolio of securities. Collateralized
obligations issued or guaranteed by a U.S. Government agency or instrumentality,
such as the Federal Home Loan Mortgage Corporation, are considered U.S.
Government securities for purposes of this prospectus. Privately-issued
collateralized obligations collateralized by a portfolio of U.S. Government
securities are not direct obligations of the U.S. Government or any of its
agencies or instrumentalities and are not considered U.S. Government securities
for purposes of this prospectus. A variety of types of collateralized
obligations are available currently and others may become available in the
future.
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Collateralized obligations, depending on their structure and the rate
of prepayments, can be volatile. Some collateralized obligations may not be as
liquid as other securities. Since collateralized obligations may be issued in
classes with varying maturities and interest rates, the investor may obtain
greater predictability of maturity than with direct investments in
mortgage-backed securities. Classes with shorter maturities may have lower
volatility and lower yield while those with longer maturities may have higher
volatility and higher yield. This provides the investor with greater control
over the characteristics of the investment in a changing interest rate
environment. With respect to interest only and principal only securities, an
investor has the option to select from a pool of underlying collateral the
portion of the cash flows that most closely corresponds to the investor's
forecast of interest rate movements. These instruments tend to be highly
sensitive to prepayment rates on the underlying collateral and thus place a
premium on accurate prepayment projections by the investor.
A Portfolio, other than the Money Market Portfolio, may invest in
collateralized obligations whose yield floats inversely against a specified
index rate. These "inverse floaters" are more volatile than conventional fixed
or floating rate collateralized obligations and the yield thereon, as well as
the value thereof, will fluctuate in inverse proportion to changes in the index
upon which rate adjustments are based. As a result, the yield on an inverse
floater will generally increase when market yields (as reflected by the index)
decrease and decrease when market yields increase. The extent of the volatility
of inverse floaters depends on the extent of anticipated changes in market rates
of interest. Generally, inverse floaters provide for interest rate adjustments
based upon a multiple of the specified interest index, which further increases
their volatility. The degree of additional volatility will be directly
proportional to the size of the multiple used in determining interest rate
adjustments.
A Portfolio will currently invest in only those collateralized
obligations that are fully collateralized and that meet the quality standards
otherwise applicable to the Portfolio's investments. Fully collateralized means
that the collateral will generate cash flows sufficient to meet obligations to
holders of the collateralized obligations under even the most conservative
prepayment and interest rate projections. Thus, the collateralized obligations
are structured to anticipate a worst case prepayment condition and to minimize
the reinvestment rate risk for cash flows between coupon dates for the
collateralized obligations. A worst case prepayment condition generally assumes
immediate prepayment of all securities purchased at a premium and zero
prepayment of all securities purchased at a discount. Reinvestment rate risk may
be minimized by assuming very conservative reinvestment rates and by other means
such as by maintaining the flexibility to increase principal distributions in a
low interest rate environment. The effective credit quality of the
collateralized obligations in such instances is the credit quality of the issuer
of the collateral. The requirements as to collateralization are determined by
the issuer or sponsor of the collateralized obligation in order to satisfy
rating agencies, if rated. None of the Portfolios currently intends to invest
more than 5% of its total assets in collateralized obligations that are
collateralized by a pool of credit card or automobile receivables or other types
of assets rather than a pool of mortgages, mortgage-backed securities or U.S.
Government securities. Currently, none of the Portfolios intends to invest more
than 5% of its net assets in inverse floaters as described in the prospectus
(see "Investment Techniques -- Collateralized Obligations"). The Money Market
Portfolio does not invest in inverse floaters.
Payments of principal and interest on the underlying collateral
securities are not passed through directly to the holders of the collateralized
obligations as such. Collateralized obligations, depending on their structure
and the rate of prepayments, can be volatile. Some collateralized obligations
may not be as liquid as other securities.
Collateralized obligations often are issued in two or more classes with
varying maturities and stated rates of interest. Because interest and principal
payments on the underlying securities are not passed through directly to holders
of collateralized obligations, such obligations of varying maturities may be
secured by a single portfolio or pool of securities, the payments on which are
used to pay interest on each class and to retire successive maturities in
sequence. These relationships may in effect "strip" the interest payments from
principal payments of the underlying securities and allow for the separate
purchase of either the interest or the principal payments. Collateralized
obligations are designed to be retired as the underlying securities are repaid.
In the event of prepayment on or call of such securities, the class of
collateralized obligation first to mature generally will be paid down first.
Therefore, although in most cases the issuer of collateralized obligations will
not supply additional collateral in the event of such prepayment, there will be
sufficient collateral to secure collateralized obligations that remain
outstanding. It is anticipated that no more than 5% of a Portfolio's net assets
will be invested in IO and PO securities. Governmentally-issued and
privately-issued IO's and PO's will be considered illiquid for purposes of a
Portfolio's limitation on illiquid securities, however, the Board of Trustees
may adopt guidelines under which governmentally-issued IO's and PO's may be
determined to be liquid.
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In reliance on an interpretation by the SEC, a Portfolio's investments
in certain qualifying collateralized obligations are not subject to the
limitations in the 1940 Act regarding investments by a registered investment
company, such as a Portfolio, in another investment company.
Zero Coupon Government Securities. Subject to its investment objective and
policies, a Portfolio may invest in zero coupon U.S. Government Securities. Zero
coupon bonds are purchased at a discount from the face amount. The buyer
receives only the right to receive a fixed payment on a certain date in the
future and does not receive any periodic interest payments. These securities may
include those created directly by the U.S. Treasury and those created as
collateralized obligations through various proprietary custodial, trust or other
relationships. The effect of owning instruments which do not make current
interest payments is that a fixed yield is earned not only on the original
investment but also, in effect, on all discount accretion during the life of the
obligations. This implicit reinvestment of earnings at the same rate eliminates
the risk of being unable to reinvest distributions at a rate as high as the
implicit yield on the zero coupon bond, but at the same time eliminates any
opportunity to reinvest earnings at higher rates. For this reason, zero coupon
bonds are subject to substantially greater price fluctuations during periods of
changing market interest rates than those of comparable securities that pay
interest currently, which fluctuation is greater as the period to maturity is
longer. Zero coupon bonds created as collateralized obligations are similar to
those created through the U.S. Treasury, but the former investments do not
provide absolute certainty of maturity or of cash flows after prior classes of
the collateralized obligations are retired. No Portfolio currently intends to
invest more than 20% of its net assets in zero coupon U.S. Government securities
during the current year.
SPECIAL RISK FACTORS. There are risks inherent in investing in any security,
including shares of each Portfolio. The investment manager attempts to reduce
risk through fundamental research and, for certain Portfolios, the use of a
sub-adviser; however, there is no guarantee that such efforts will be successful
and each Portfolio's returns and net asset value will fluctuate over time. There
are special risks associated with each Portfolio's investments that are
discussed below.
Special Risk Factors -- Foreign Securities. The Total Return, High Yield,
Growth, Small Cap Growth, Investment Grade Bond, Value+Growth, Blue Chip,
Aggressive Growth, Technology, Financial Services and Focused Large Cap Growth
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. 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, along with Growth and
Income and Growth Opportunities Portfolio may also invest without limit in U.S.
Dollar denominated American Depository Receipts ("ADRs") which are bought and
sold in the United States and are not subject to the preceding limitation. The
Financial Services Portfolio may invest up to 30% of its total assets in foreign
securities, including ADRs. The Value and Small Cap Value Portfolios may invest
up to 20% of their assets in securities of foreign companies in the form of
ADRs. High Return Equity may invest up to 20% of its assets in securities of
foreign companies through the acquisition of ADRs as well as through the
purchase of securities of foreign companies that are publicly traded in the
United States and securities of foreign companies that are traded principally in
securities markets outside the United States. 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, Strategic Income, Global Blue Chip, Growth and
Income, Growth Opportunities and New Europe 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.
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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 New Europe
Portfolio, which does not invest in emerging markets) may make investments in
developing or "emerging" countries, which involve exposure to economic
structures that are generally less diverse and mature than in the United States,
and to political systems that may be less stable. A developing or emerging
market country can be considered to be a country that is in the initial stages
of its industrialization cycle. Currently, emerging markets generally include
every country in the world other than the United States, Canada, Japan,
Australia, New Zealand, Hong Kong, Singapore and most Western European
countries. Currently, investing in many emerging markets may not be desirable or
feasible because of the lack of adequate custody arrangements for a Portfolio's
assets, overly burdensome repatriation and similar restrictions, the lack of
organized and liquid securities markets, unacceptable political risks or other
reasons. As opportunities to invest in securities in emerging markets develop, a
Portfolio may expand and further broaden the group of emerging markets in which
it invests. In the past, markets of developing or emerging market countries have
been more volatile than the markets of developed countries; however, such
markets often have provided higher rates of return to investors. The investment
manager believes that these characteristics can be expected to continue in the
future.
Many of the risks described above relating to foreign securities
generally will be greater for emerging markets than for developed countries. For
instance, economies in individual developing markets may differ favorably or
unfavorably from the U.S. economy in such respects as growth of domestic
product, rates of inflation, currency depreciation, capital reinvestment,
resource self-sufficiency and balance of payments positions. Many emerging
markets have experienced substantial rates of inflation for many years.
Inflation and rapid fluctuations in inflation rates have had and may continue to
have very negative effects on the economies and securities markets of certain
developing markets. Economies in emerging markets generally are dependent
heavily upon international trade and, accordingly, have been and may continue to
be affected adversely by trade barriers, exchange controls, managed adjustments
in relative currency values and other protectionist measures imposed or
negotiated by the countries with which they trade. These economies also have
been and may continue to be affected adversely by economic conditions in the
countries with which they trade.
Also, the securities markets of developing countries are substantially
smaller, less developed, less liquid and more volatile than the securities
markets of the United States and other more developed countries. Disclosure,
regulatory and accounting standards in many respects are less stringent than in
the United States and other developed markets. There also may be a lower level
of monitoring and regulation of developing markets and the activities of
investors in such markets, and enforcement of existing regulations has been
extremely limited.
In addition, brokerage commissions, custodial services and other needs
relating to investment in foreign markets generally are more expensive than in
the United States; this is particularly true with respect to emerging markets.
Such markets have different settlement and clearance procedures. In certain
markets there have been times when settlements have been unable to keep pace
with the volume of securities transactions, making it difficult to conduct such
transactions. Such settlement problems may cause emerging market securities to
be illiquid. The inability of a Portfolio to make intended securities purchases
because of settlement problems could cause the Portfolio to miss attractive
investment opportunities. Inability to dispose of a portfolio security because
of settlement problems could result in losses to a Portfolio from subsequent
declines in value of the portfolio security or, if a Portfolio has entered into
a contract to sell the security, it could result in possible liability to the
purchaser. Certain emerging markets may lack clearing facilities equivalent to
those in developed countries. Accordingly, settlements can pose additional risks
in such markets 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.
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Investment in certain emerging market securities is restricted or
controlled to varying degrees. These restrictions or controls may at times limit
or preclude foreign investment in certain emerging market securities and
increase the costs and expenses of a Portfolio. Emerging markets may require
governmental approval for the repatriation of investment income, capital or the
proceeds of sales of securities by foreign investors. In addition, if a
deterioration occurs in an emerging market country's balance of payments, the
market could impose temporary restrictions on foreign capital remittances.
Fixed-Income. Since most foreign fixed-income securities are not rated, a
Portfolio will invest in foreign fixed-income securities based upon the
investment manager's analysis without relying on published ratings. Since such
investments will be based upon the investment manager's analysis rather than
upon published ratings, achievement of a Portfolio's goals may depend more upon
the abilities of the investment manager than would otherwise be the case.
The value of the foreign fixed-income securities held by a Portfolio,
and thus the net asset value of the Portfolio's shares, generally will fluctuate
with (a) changes in the perceived creditworthiness of the issuers of those
securities, (b) movements in interest rates, and (c) changes in the relative
values of the currencies in which a Portfolio's investments in fixed-income
securities are denominated with respect to the U.S. Dollar. The extent of the
fluctuation will depend on various factors, such as the average maturity of a
Portfolio's investments in foreign fixed-income securities, and the extent to
which a Portfolio hedges its interest rate, credit and currency exchange rate
risks. Many of the foreign fixed-income obligations in which a Portfolio will
invest will have long maturities. A longer average maturity generally is
associated with a higher level of volatility in the market value of such
securities in response to changes in market conditions.
Investments in sovereign debt, including Brady Bonds, involve special
risks. Brady Bonds are debt securities issued under a plan implemented to allow
debtor nations to restructure their outstanding commercial bank indebtedness.
Foreign governmental issuers of debt or the governmental authorities that
control the repayment of the debt may be unable or unwilling to repay principal
or pay interest when due. In the event of default, there may be limited or no
legal recourse in that, generally, remedies for defaults must be pursued in the
courts of the defaulting party. Political conditions, especially a sovereign
entity's willingness to meet the terms of its fixed-income securities, are of
considerable significance. Also, there can be no assurance that the holders of
commercial bank loans to the same sovereign entity may not contest payments to
the holders of sovereign debt in the event of default under commercial bank loan
agreements. In addition, there is no bankruptcy proceeding with respect to
sovereign debt on which a sovereign has defaulted, and a Portfolio may be unable
to collect all or any part of its investment in a particular issue.
Foreign investment in certain sovereign debt is restricted or
controlled to varying degrees, including requiring governmental approval for the
repatriation of income, capital or proceeds of sales by foreign investors. These
restrictions or controls may at times limit or preclude foreign investment in
certain sovereign debt or increase the costs and expenses of a Portfolio. A
significant portion of the sovereign debt in which a Portfolio may invest is
issued as part of debt restructuring and such debt is to be considered
speculative. There is a history of defaults with respect to commercial bank
loans by public and private entities issuing Brady Bonds. All or a portion of
the interest payments and/or principal repayment with respect to Brady Bonds may
be uncollateralized.
Privatized Enterprises. Investments in foreign securities may include securities
issued by enterprises that have undergone or are currently undergoing
privatization. The governments of certain foreign countries have, to varying
degrees, embarked on privatization programs contemplating the sale of all or
part of their interests in state enterprises. A Portfolio's investments in the
securities of privatized enterprises include privately negotiated investments in
a government or state-owned or controlled company or enterprise that has not yet
conducted an initial equity offering, investments in the initial offering of
equity securities of a state enterprise or former state enterprise and
investments in the securities of a state enterprise following its initial equity
offering.
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.
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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.
Depositary 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.
Investment Company Securities (except Index 500 Portfolio). Each Portfolio may
acquire securities of other investment companies to the extent consistent with
its investment objective and subject to the limitations of the 1940 Act. The
Portfolio will indirectly bear its proportionate share of any management fees
and other expenses paid by such other investment companies. For example, a
Portfolio may invest in a variety of investment companies which seek to track
the composition and performance of specific indexes or a specific portion of an
index. These index-based investments hold substantially all of their assets in
securities representing their specific index or a specific portion of an index.
Accordingly, the main risk of investing in index-based investments is the same
as investing in a portfolio of equity securities comprising the index. The
market prices of index-based investments will fluctuate in accordance with both
changes in the market value of their underlying portfolio securities and due to
supply and demand for the instruments on the exchanges on which they are traded
(which may result in their trading at a discount or premium to their NAVs).
Index-based investments may not replicate exactly the performance of
their specified index because of transaction costs and because of the temporary
unavailability of certain component securities of the index.
Examples of index-based investments include:
SPDRs(R): SPDRs, an acronym for "Standard & Poor's Depositary Receipts," are
based on the S&P 500 Composite Stock Price Index. They are issued by the SPDR
Trust, a unit investment trust that holds shares of substantially all the
companies in the S&P 500 in substantially the same weighting and seeks to
closely track the price performance and dividend yield of the Index.
MidCap SPDRs(R): MidCap SPDRs are based on the S&P MidCap 400 Index. They are
issued by the MidCap SPDR Trust, a unit investment trust that holds a portfolio
of securities consisting of substantially all of the common stocks in the S&P
MidCap 400 Index in substantially the same weighting and seeks to closely track
the price performance and dividend yield of the Index.
Select Sector SPDRs(R): Select Sector SPDRs are based on a particular sector or
group of industries that are represented by a specified Select Sector Index
within the Standard & Poor's Composite Stock Price Index. They are issued by The
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Select Sector SPDR Trust, an open-end management investment company with nine
portfolios that each seeks to closely track the price performance and dividend
yield of a particular Select Sector Index.
DIAMONDS(SM): DIAMONDS are based on the Dow Jones Industrial Average(SM). They
are issued by the DIAMONDS Trust, a unit investment trust that holds a portfolio
of all the component common stocks of the Dow Jones Industrial Average and seeks
to closely track the price performance and dividend yield of the Dow.
Nasdaq-100 Shares: Nasdaq-100 Shares are based on the Nasdaq 100 Index. They are
issued by the Nasdaq-100 Trust, a unit investment trust that holds a portfolio
consisting of substantially all of the securities, in substantially the same
weighting, as the component stocks of the Nasdaq-100 Index and seeks to closely
track the price performance and dividend yield of the Index.
WEBs(SM): WEBs, an acronym for "World Equity Benchmark Shares," are based on
17country-specific Morgan Stanley Capital International Indexes. They are issued
by the WEBs Index Fund, Inc., an open-end management investment company that
seeks to generally correspond to the price and yield performance of a specific
Morgan Stanley Capital International Index.
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. All Portfolios (except Money Market Portfolio) 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
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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. Financial Services and Aggressive Growth Portfolios
each operate 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. 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.
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
Index. 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 Portfolio, 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.
Each Horizon Portfolio attempts to limit its exposure to interest rate
risk by maintaining a relatively short duration. Interest rate risk is the risk
that the value of the fixed income securities may rise or fall as interest rates
change. Under normal conditions, the target duration of the fixed-income portion
of each Horizon Portfolio is approximately 2.5 years, although it may range from
1.5 to 3.5 years depending upon market conditions. "Duration," and the more
traditional "average dollar-weighted maturity," are measures of how a fixed
income portfolio tends to react to interest rate changes. Each fixed income
security held by a Horizon Portfolio has a stated maturity. The stated maturity
is the date when the issuer must repay the entire principal amount to an
investor. A security's term to maturity is the time remaining to maturity. A
security will be treated as having a maturity earlier than its stated maturity
date if the security has technical features (such as puts or demand features) or
a variable rate of interest that, in the judgment of the investment manager,
will result in the security being valued in the market as though it has the
earlier maturity. Average dollar-weighted maturity is calculated by averaging
the terms to maturity of each fixed income security held by each Horizon
Portfolio with each maturity "weighted" according to the percentage of assets
that it represents. Unlike average dollar-weighted maturity, duration reflects
both principal and interest payments and is designed to measure more accurately
a portfolio's sensitivity to incremental changes in interest rates than does
average weighted maturity. By way of example, if the duration of a Horizon
Portfolio's fixed income securities were two years, and interest rates decreased
by 100 basis points (a basis point is one-hundredth of one percent), the market
price of that portfolio of fixed income securities would be expected to increase
by approximately 2%.
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The Portfolios do not generally make investments for short-term
profits, but are not restricted in policy with regard to portfolio turnover
and will make changes in their investment portfolios from time to time as
business and economic conditions and market prices may dictate and as its
investment policy may require.
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. A
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.
Borrowing. Each Portfolio is authorized to borrow money for purposes of
liquidity and to provide for redemptions and distributions. Each Portfolio will
borrow only when the investment manager believes that borrowing will benefit the
Portfolio after taking into account considerations such as the costs of the
borrowing. Borrowing by each Portfolio will involve special risk considerations.
Although the principal of each Portfolio's borrowings will be fixed, a
Portfolio's assets may change in value during the time a borrowing is
outstanding, thus increasing exposure to capital risk.
Interfund Borrowing and Lending Program. The Portfolios have received exemptive
relief from the SEC which permits a Portfolio to participate in an interfund
lending program among certain investment companies advised by the investment
manager. The interfund lending program allows the participating portfolios to
borrow money from and loan money to each other for temporary or emergency
purposes. The program is subject to a number of conditions designed to ensure
fair and equitable treatment of all participating funds, including the
following: (1) no Portfolio may borrow money through the program unless it
receives a more favorable interest rate than a rate approximating the lowest
interest rate at which bank loans would be available to any of the participating
portfolio under a loan agreement; and (2) no Portfolio may lend money through
the program unless it receives a more favorable return than that available from
an investment in repurchase agreements and, to the extent applicable, money
market cash sweep arrangements. In addition, a Portfolio may participate in the
program only if and to the extent that such participation is consistent with the
Portfolio's investment objectives and policies (for instance, money market funds
would normally participate only as lenders and tax exempt funds only as
borrowers). Interfund loans and borrowings may extend overnight, but could have
a maximum duration of seven days. Loans may be called on one day's notice. A
Portfolio may have to borrow from a bank at a higher interest rate if an
interfund loan is called or not renewed. Any delay in repayment to a lending
Portfolio could result in a lost investment opportunity or additional costs. The
program is subject to the oversight and periodic review of the Boards of the
participating funds. To the extent a Portfolio is actually engaged in borrowing
through the interfund lending program, the Portfolio, as a matter of
non-fundamental policy, may not borrow for other than temporary or emergency
purposes (and not for leveraging), except that the Portfolio may engage in
reverse repurchase agreements and dollar rolls for any purpose.
Short Sales Against-the-Box. The Technology, Global Blue Chip, Focused Large
Cap, New Europe, Growth Opportunities, Aggressive Growth and Blue Chip
Portfolios may make short sales against-the-box for the purpose of, but not
limited to, deferring realization of loss when deemed advantageous for federal
income tax purposes. A short sale "against-the-box" is a short sale in which a
Portfolio owns at least an equal amount of the securities sold short or
securities convertible into or exchangeable for, without payment of any further
consideration, securities of the same issue as, and at least equal in amount to,
the securities sold short. As a non-fundamental policy, a Portfolio may engage
in such short sales only to the extent that not more than 10% of the Portfolio's
total assets (determined at the time of the short sale) is held as collateral
for such sales. Each Portfolio does not currently intend, however, to engage in
such short sales to the extent that more than 5% of its net assets will be held
as collateral therefor during the current year.
Repurchase Agreements. Each Portfolio may invest in repurchase agreements, which
are instruments under which it acquires ownership of a security from a
broker-dealer or bank that agrees to repurchase the security at a mutually
agreed upon time and price (which is higher than the purchase price), thereby
determining the yield during the Portfolio's holding period. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Portfolio
might have expenses in enforcing its rights, and could experience losses,
including a decline in the value of the underlying securities and loss of
income. The securities underlying a repurchase agreement will be
marked-to-market every business
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day so that the value of such securities is at least equal to the investment
value of the repurchase agreement, including any accrued interest thereon.
Reverse Repurchase Agreements. Each Portfolio (except Money Market Portfolio)
may enter into "reverse 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.
Section 4(2) Paper. Subject to its investment objectives and policies, each
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, each
Portfolio (except Money Market Portfolio) 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
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may default on their obligations. Convertible securities generally offer lower
yields than non-convertible securities of similar quality because of their
conversion or exchange features.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar
non-convertible securities.
Convertible securities may be issued as fixed-income obligations that
pay current income or as zero coupon notes and bonds, including Liquid Yield
Option Notes ("LYONs"(TM)). Zero coupon securities pay no cash income and are
sold at substantial discounts from their value at maturity. When held to
maturity, their entire income, which consists of accretion of discount, comes
from the difference between the issue price and their value at maturity. Zero
coupon convertible securities offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follow the
movements in the market value of the underlying common stock. Zero coupon
convertible securities generally are expected to be less volatile than the
underlying common stocks as they usually are issued with shorter maturities (15
years or less) and are issued with options and/or redemption features
exercisable by the holder of the obligation entitling the holder to redeem the
obligation and receive a defined cash payment.
PORTFOLIO TRANSACTIONS
Brokerage -- Scudder Kemper
Allocation of brokerage is supervised by the investment manager (which
also includes Scudder UK for purposes of the following disclosure).
The primary objective of the investment manager in placing orders for
the purchase and sale of securities for a Portfolio is to obtain the most
favorable net results, taking into account such factors as price, commission
where applicable, size of order, difficulty of execution and skill required of
the executing broker/dealer. The investment manager seeks to evaluate the
overall reasonableness of brokerage commissions paid (to the extent applicable)
through the familiarity of Scudder Investor Services, Inc. ("SIS"), a
corporation registered as a broker-dealer and a subsidiary of Scudder Kemper,
with commissions charged on comparable transactions, as well as by comparing
commissions paid by a Portfolio to reported commissions paid by others. The
investment manager routinely reviews commission rates, execution and settlement
services performed and makes internal and external comparisons.
Each Portfolio's purchases and sales of fixed-income securities are
generally placed by the investment manager with primary market makers for these
securities on a net basis, without any brokerage commission being paid by a
Portfolio. Trading does, however, involve transaction costs. Transactions with
dealers serving as primary market makers reflect the spread between the bid and
asked prices. Purchases of underwritten issues may be made, which will include
an underwriting fee paid to the underwriter.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the investment manager's practice to place such
orders with broker/dealers who supply brokerage and research services to the
investment manager or a Portfolio. The term "research services" includes advice
as to the value of securities; the advisability of investing in, purchasing or
selling securities; the availability of securities or purchasers or sellers of
securities; and analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts.
The investment manager is authorized when placing portfolio transactions, if
applicable, for a Portfolio to pay a brokerage commission in excess of that
which another broker might charge for executing the same transaction on account
of execution services and the receipt of research services. The investment
manager has negotiated arrangements, which are not applicable to most
fixed-income transactions, with certain broker/dealers pursuant to which a
broker/dealer will provide research services to the investment manager or a
Portfolio in exchange for the direction by the investment manager of brokerage
transactions to the broker/dealer. These arrangements regarding receipt of
research services generally apply to equity security transactions. The
investment manager may place orders with a broker/dealer on the basis that the
broker/dealer has or has not sold shares of a fund managed by Scudder Kemper. In
effecting transactions in over-the-counter securities, orders are placed with
the principal market makers for the security being traded unless, after
exercising care, it appears that more favorable results are available elsewhere.
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Subject to the foregoing, the investment manager may consider sales of
variable life insurance policies and variable annuity contracts for which the
Portfolios are an investment option as a factor in the selection of firms to
execute portfolio transactions.
To the maximum extent feasible, it is expected that the investment
managers will place orders for portfolio transactions through SIS. SIS will
place orders on behalf of the Portfolios with issuers, underwriters or other
brokers and dealers. SIS will not receive any commission, fee or other
remuneration from the Portfolios for this service.
In addition to the discounts or commissions described above, SIS will,
from time to time, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash, to firms that sell shares of the Portfolios. In
some instances, such discounts, commissions or other incentives will be offered
only to certain firms that sell, or are expected to sell during specified time
periods, certain minimum amounts of shares of the Portfolios, or other funds
underwritten by SIS.
Although certain research services from broker/dealers may be useful to
a Portfolio and to the investment manager, it is the opinion of the investment
manager that such information only supplements the investment manager's own
research effort since the information must still be analyzed, weighed and
reviewed by the investment manager's staff. Such information may be useful to
the investment manager in providing services to clients other than the
Portfolios, and not all such information is used by the investment manager in
connection with the Portfolios. Conversely, such information provided to the
investment manager by broker/dealers through whom other clients of the
investment manager effect securities transactions may be useful to the
investment manager in providing services to a Portfolio.
The Trustees for the Fund review, from time to time, whether the
recapture for the benefit of a Portfolio of some portion of the brokerage
commissions or similar fees paid by a Portfolio on portfolio transactions is
legally permissible and advisable.
Brokerage -- Dreman Value Management, L.L.C.
Under the sub-advisory agreement between Scudder Kemper and Dreman
Value Management, L.L.C. ("DVM"), DVM places all orders for purchases and sales
of the High Return Equity and Financial Services Portfolios' securities. At
times investment decisions may be made to purchase or sell the same investment
securities of a Portfolio and for one or more of the other clients managed by
DVM. When two or more of such clients are simultaneously engaged in the purchase
or sale of the same security through the same trading facility, the transactions
are allocated as to amount and price in a manner considered equitable to each.
Position limits imposed by national securities exchanges may restrict the number
of options the Portfolio will be able to write on a particular security.
The above mentioned factors may have a detrimental effect on the
quantities or prices of securities, options or future contracts available to the
Portfolios. On the other hand, the ability of the Portfolios to participate in
volume transactions may produce better executions for the Portfolios 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 Portfolios, will implement each 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 Portfolios 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 Portfolios and of other funds managed by Scudder
Kemper and its affiliates, as well as to those firms that provide market,
statistical and other research information to the Portfolios 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
22
<PAGE>
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) the Portfolio
could pay a firm that provides research services commissions for effecting a
securities transaction for the Portfolio in excess of the amount other firms
would have charged for the transaction if DVM determines in good faith that the
greater commission is reasonable in relation to the value of the brokerage and
research services provided by the executing firm viewed in terms either of a
particular transaction or DVM's overall responsibilities to the Portfolio and
other clients. Not all of such research services may be useful or of value in
advising the Portfolio. Research benefits will be available for all clients of
DVM. The sub-advisory fee paid by Scudder Kemper to DVM is not reduced because
these research services are received.
Brokerage Commissions -- Bankers Trust Company
Under the sub-advisory agreement between Scudder Kemper and Bankers
Trust Company ("Bankers Trust"), Bankers Trust will place orders for the
purchase and sale of the Index 500 Portfolio's securities.
The primary objective of Bankers Trust in placing orders for the
purchase and sale of securities for the Portfolio is to obtain the most
favorable net results, taking into account such factors as price, commission,
where applicable, size of order, difficulty of execution and skill required of
the executing broker/dealer. Bankers Trust routinely reviews commission rates,
execution and settlement services performed and makes internal and external
comparisons.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is Bankers Trust's practice to place orders with
broker/dealers who supply brokerage and research services to Bankers Trust or
the Portfolio. The term "research services" includes advice as to the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities or purchasers or sellers of securities; and
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy and the performance of accounts. Bankers
Trust is authorized when placing portfolio transactions, as applicable, for the
Portfolio to pay a brokerage commission in excess of that which another broker
might charge for executing the same transaction on account of execution services
and the receipt of research services. Bankers Trust has negotiated arrangements,
which are not applicable to most fixed-income transactions, with certain
broker/dealers pursuant to which a broker/dealer will provide research services
to Bankers Trust or the Portfolio in exchange for the direction by Bankers Trust
of brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity transactions. Bankers
Trust will not place orders with broker/dealers on the basis that the
broker/dealer has or has not sold variable life insurance policies and variable
annuity contracts for which the Portfolio is an investment option. In effecting
transactions in over-the-counter securities, orders are placed with the
principal market makers for the security being traded unless, after exercising
care, it appears that more favorable results are available elsewhere.
Although certain research services from broker/dealers may be useful to
the Portfolio and to Bankers Trust, it is the opinion of Bankers Trust that such
information only supplements Bankers Trust's own research effort since the
information must still be analyzed, weighed, and reviewed by Bankers Trust's
staff. Such information may be useful to Bankers Trust in providing services to
clients other than the Portfolio, and not all such information is used by
Bankers Trust in connection with the Portfolio. Conversely, such information
provided to Bankers Trust by broker/dealers through whom other clients of
Bankers Trust effect securities transactions may be useful to Bankers Trust in
providing services to the Portfolio.
The Trustees review, from time to time, whether the recapture for the
benefit of the Portfolio of some portion of the brokerage commissions or similar
fees paid by the Portfolio on portfolio transactions is legally permissible and
advisable.
Brokerage Commissions -- Eagle Asset Management and Janus Capital Corporation
Under the sub-advisory agreements between Scudder Kemper and Eagle
Asset Management, Inc. ("EAM") and Scudder Kemper and Janus Capital Corporation
("JCC"), EAM places all orders for purchase and sales of the Focused Large Cap
Portfolios' securities and JCC places all orders for the purchase of Growth And
Income and Growth Opportunities Portfolios' securities. At times investment
decisions may be made to purchase or sell the same investment securities of a
Portfolio and for one or more of the other clients managed by EAM or JCC,
respectively. When two or
23
<PAGE>
more of such clients are simultaneously engaged in the purchase or sale of the
same security through the same trading facility, the transactions are allocated
as to amount and price in a manner considered equitable to each. Position limits
imposed by national securities exchanges may restrict the number of options a
Portfolio will be able to write on a particular security.
The above mentioned factors may have a detrimental effect on the
quantities or prices of securities, options or future contracts available to a
Portfolio. On the other hand, the ability of a Portfolio to participate in
volume transactions may produce better executions for a Portfolio in some cases.
The Board of Trustees believes that the benefits of EAM and JCC's organizations
each outweigh any limitations that may arise from simultaneous transactions or
position limitations.
EAM and JCC, in effecting purchases and sales of portfolio securities
for the account of the Portfolios, will implement the Portfolios' policy of
seeking best execution of orders. EAM and JCC may each be permitted to pay
higher brokerage commissions for research services as described below.
Consistent with this policy, orders for portfolio transactions are placed with
broker-dealer firms giving consideration to the quality, quantity and nature of
each firm's professional services, which include execution, financial
responsibility, responsiveness, clearance procedures, wire service quotations
and statistical and other research information provided to the Portfolios, EAM
and JCC. Subject to seeking best execution of an order, brokerage is allocated
on the basis of all services provided. Any research benefits derived are
available for all clients of EAM and JCC. In selecting among firms believed to
meet the criteria for handling a particular transaction, EAM and JCC may each
give consideration to those firms that have sold or are selling shares of the
Portfolios and of other funds managed by Scudder Kemper and its affiliates, as
well as to those firms that provide market, statistical and other research
information to the Portfolio, EAM and JCC, although EAM and JCC are not
authorized to pay higher commissions to firms that provide such services, except
as described below.
EAM and JCC may in certain instances be permitted to pay higher
brokerage commissions for receipt of market, statistical and other research
services as defined in Section 28(e) of the Securities Exchange Act of 1934 and
interpretations thereunder. Such services may include among other things:
economic, industry or company research reports or investment recommendations;
computerized databases; quotation and execution equipment and software; and
research or analytical computer software and services. Where products or
services have a "mixed use," a good faith effort is made to make a reasonable
allocation of the cost of products or services in accordance with the
anticipated research and non-research uses and the cost attributable to
non-research use is paid by EAM and JCC in cash. Subject to Section 28(e) the
Portfolios could pay a firm that provides research services commissions for
effecting a securities transaction for the Portfolio in excess of the amount
other firms would have charged for the transaction if EAM and JCC determines in
good faith that the greater commission is reasonable in relation to the value of
the brokerage and research services provided by the executing firm viewed in
terms either of a particular transaction or EAM and JCC's overall
responsibilities to the Portfolios and other clients. Not all of such research
services may be useful or of value in advising the Portfolios. Research benefits
will be available for all clients of EAM and JCC. The sub-advisory fees paid by
Scudder Kemper to EAM and JCC are not reduced because these research services
are received.
Brokerage Commissions
The table below shows total brokerage commissions paid by each
Portfolio (other than the Aggressive Growth and Technology Portfolios, which
commenced operations on May 1, 1999, the Index 500 Portfolio, which commenced
operations on September 1, 1999 and the Focused Large Cap Growth, Growth And
Income, and Growth Opportunities Portfolios, which each commenced operations on
October 29, 1999) then existing for the last three fiscal years and, for the
most recent fiscal year, the percentage thereof that was allocated to firms
based upon research information provided.
<TABLE>
Allocated to Firms
Based on
Research in
Portfolio Fiscal 1999 Fiscal 1999+ Fiscal 1998 Fiscal 1997
- --------- ----------- ------------ ----------- -----------
- ---------------------------------------- ------------------- -------------------- ------------------ -----------------------
- ---------------------------------------- ------------------- -------------------- ------------------ -----------------------
<S> <C> <C> <C> <C>
Blue Chip $187,770 $153,227 $134,000 $31,000**
- ---------------------------------------- ------------------- -------------------- ------------------ -----------------------
Contrarian Value 325,888 280,223 292,000 92,000
- ---------------------------------------- ------------------- -------------------- ------------------ -----------------------
Financial Services* 19,392 17,364 8,000 N/A
- ---------------------------------------- ------------------- -------------------- ------------------ -----------------------
Global Blue Chip* 30,186 22,588 6,000 N/A
- ---------------------------------------- ------------------- -------------------- ------------------ -----------------------
Government Securities 0 0 14,000 16,000
- ---------------------------------------- ------------------- -------------------- ------------------ -----------------------
Growth 848,978 636,021 1,325,000 1,936,000
- ---------------------------------------- ------------------- -------------------- ------------------ -----------------------
24
<PAGE>
Allocated to Firms
Based on
Research in
Portfolio Fiscal 1999 Fiscal 1999+ Fiscal 1998 Fiscal 1997
- --------- ----------- ------------ ----------- -----------
High Return Equity* 122,405 110,148 38,000 N/A
- ---------------------------------------- ------------------- -------------------- ------------------ -----------------------
High Yield 0 0 4,933,000 3,627,000
- ---------------------------------------- ------------------- -------------------- ------------------ -----------------------
Horizon 10+ 62,311 50,083 82,000 37,000
- ---------------------------------------- ------------------- -------------------- ------------------ -----------------------
Horizon 20+ 47,122 34,611 79,000 35,000
- ---------------------------------------- ------------------- -------------------- ------------------ -----------------------
Horizon 5 39,679 31,897 37,000 17,000
- ---------------------------------------- ------------------- -------------------- ------------------ -----------------------
International 1,206,888 925,557 928,000 747,000
- ---------------------------------------- ------------------- -------------------- ------------------ -----------------------
Investment Grade Bond 0 0 37,000 31,000
- ---------------------------------------- ------------------- -------------------- ------------------ -----------------------
Money Market 0 0 0 0
- ---------------------------------------- ------------------- -------------------- ------------------ -----------------------
New Europe* 25,078 21,355 10,000 N/A
- ---------------------------------------- ------------------- -------------------- ------------------ -----------------------
Small Cap Growth 473,333 397,403 1,115,000 2,658,000
- ---------------------------------------- ------------------- -------------------- ------------------ -----------------------
Small Cap Value 277,982 222,732 190,000 31,000
- ---------------------------------------- ------------------- -------------------- ------------------ -----------------------
Strategic Income 0 0 0 0**
- ---------------------------------------- ------------------- -------------------- ------------------ -----------------------
Total Return 956,177 798,760 2,772,000 1,512,000
- ---------------------------------------- ------------------- -------------------- ------------------ -----------------------
Value+Growth 219,962 184,288 275,000 97,000
- ---------------------------------------- ------------------- -------------------- ------------------ -----------------------
</TABLE>
* Commencement of Operations on May 4, 1998 for High Return Equity and
Financial Services, May 5, 1998 for New Europe and Income and Global
Blue Chip through December 31, 1998.
** Commencement of Operations on May 1, 1997 through December 31, 1997.
INVESTMENT MANAGER AND DISTRIBUTOR
Investment Manager. Scudder Kemper Investments, Inc., 345 Park Avenue, New York,
New York is the investment manager for each Portfolio. Scudder Kemper is
approximately 70% owned by Zurich Insurance Company, a leading internationally
recognized provider of insurance and financial services in property/casualty and
life insurance, reinsurance and structured financial solutions as well as asset
management. The balance of Scudder Kemper is owned by its officers and
employees. Pursuant to investment management agreements, Scudder Kemper acts as
investment manager to each Portfolio, manages its investments, administers its
business affairs, furnishes office facilities and equipment, provides clerical
and administrative services, and permits any of its officers or employees to
serve without compensation as trustees or officers of the Fund if elected to
such positions. The investment management agreements provide that each Portfolio
shall pay the charges and expenses of its operations, including the fees and
expenses of the trustees (except those who are affiliates of Scudder Kemper),
independent auditors, counsel, custodian and transfer agent and the cost of
share certificates, reports and notices to shareholders, brokerage commissions
or transaction costs, costs of calculating net asset value and maintaining all
accounting records related thereto, taxes and membership dues. The Fund bears
the expenses of registration of its shares with the SEC and the cost of
qualifying and maintaining the qualification of the Fund's shares for sale under
the securities laws of the various states, if any.
The investment management agreements provide that Scudder Kemper shall
not be liable for any error of judgment or of law, or for any loss suffered by
the Fund in connection with the matters to which the agreements relate, except a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of the Scudder Kemper in the performance of its obligations and duties, or
by reason of its reckless disregard of its obligations and duties under each
agreement.
Each investment management agreement continues in effect from year to
year so long as its continuation is approved at least annually by a majority of
the trustees who are not parties to such agreement or interested persons of any
such party except in their capacity as trustees of the Fund and by the
shareholders of the Portfolio subject thereto or the Board of Trustees. Each
Portfolio's agreement may be terminated at any time upon 60 days' notice by
either party, or by a majority vote of the outstanding shares, and will
terminate automatically upon assignment. If additional Portfolios may become
subject to an investment management agreement, the provisions concerning
continuation, amendment and termination and the allocation of the management
fees and the application of the expense limitation shall be on a Portfolio by
Portfolio basis. Additional Portfolios may be subject to different agreements.
Certain investments may be appropriate for the Portfolios and for other
clients advised by the investment manager or subadvisers. Investment decisions
for the Portfolios and other clients are made with a view to achieving their
25
<PAGE>
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 or
subadviser 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 or subadviser 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 manage one or more other mutual funds advised by Scudder
Kemper that have similar names, objectives and investment styles as a Portfolio.
You should be aware that the Portfolios are likely to differ from these other
mutual funds in size, cash flow pattern and tax matters. Accordingly, the
holdings and performance of the Portfolios can be expected to vary from those of
the other mutual funds.
The investment manager maintains a large research department, which
conducts continuous studies of the factors that affect the position of various
industries, companies and individual securities. The investment manager receives
published reports and statistical compilations from issuers and other sources,
as well as analyses from brokers and dealers who may execute portfolio
transactions for the investment manager's clients. However, the investment
manager regards this information and material as an adjunct to its own research
activities. The investment manager's international investment management team
travels the world, researching hundreds of companies. In selecting the
securities in which each Portfolio may invest, the conclusions and investment
decisions of the investment manager with respect to the Fund are based primarily
on the analyses of its own research department.
Responsibility for overall management of each Portfolio rests with the
Fund's Board of Trustees and officers. Professional investment supervision is
provided by Scudder Kemper. The investment management agreements provide that
Scudder Kemper shall act as each Portfolio's investment adviser, manage its
investments and provide it with various services and facilities.
On December 31, 1997, pursuant to the terms of an agreement, Scudder,
Stevens & Clark, Inc. ("Scudder"), and Zurich Insurance Company ("Zurich"),
formed a new global investment organization by combining Scudder with Zurich
Kemper Investments, Inc. ("ZKI") and Zurich Kemper Value Advisors, Inc.
("ZKVA"), former subsidiaries of Zurich. ZKI, the former investment manager for
each Portfolio. Upon completion of the transaction, Scudder changed its name to
Scudder Kemper Investments, Inc. As a result of the transaction, Zurich owns
approximately 70% of Scudder Kemper, with the balance owned by Scudder Kemper's
officers and employees.
On September 7, 1998, the businesses of Zurich (including Zurich's 70%
interest in Scudder Kemper) and the financial services businesses of B.A.T
Industries p.l.c. ("B.A.T") were combined to form a new global insurance and
financial services company known as Zurich Financial Services Group. By way of a
dual holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services, Inc., with the balance initially
owned by former B.A.T shareholders.
Upon consummation of this transaction, each Portfolio's then 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 then current investment management agreements, except for the date of
execution (now September 7, 1999) 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 1999. The investment management agreements for the
Aggressive Growth Portfolio and the Technology Portfolio are effective as of
their inception, May 1, 1999, for the Index 500 Portfolio, September 1, 1999 and
for the Focused Large Cap Growth, Growth And Income and Growth Opportunities
Portfolios, October 29, 1999.
Each Portfolio pays Scudder Kemper an investment management fee, based
on the average daily net assets of the Portfolio, payable monthly, at the annual
rates shown below:
Portfolio Annual Management Fee Rate
- --------- --------------------------
26
<PAGE>
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%
Strategic Income 0.65%*
New Europe 1.00%
* Prior to May 1, 2000, the advisory fee rate paid by the Strategic
Income Portfolio was 0.75%.
The High Return Equity, Financial Services, Aggressive Growth, and
Technology Growth Portfolios each pay Scudder Kemper a graduated investment
management fee, based on the average daily net assets of the Portfolio, payable
monthly, at the annual rates shown below:
Average Daily Net Assets of the Portfolio Annual Management Fee Rate
- ----------------------------------------- --------------------------
$0-$250 million 0.75%
$250 million-$1 billion 0.72%
$1 billion-$2.5 billion 0.70%
$2.5 billion-$5 billion 0.68%
$5 billion-$7.5 billion 0.65%
$7.5 billion-$10 billion 0.64%
$10 billion-$12.5 billion 0.63%
Over $12.5 billion 0.62%
The Global Blue Chip Portfolio pays Scudder Kemper a graduated
investment management fee, based on the average daily net assets of the
Portfolio, payable monthly, at the annual rates shown below:
Average Daily Net Assets of the Portfolio Annual Management Fee Rate
- ----------------------------------------- --------------------------
$0-$250 million 1.00%
$250 million-$1 billion 0.95%
Over $1 billion 0.90%
The Index 500 Portfolio pays Scudder Kemper a graduated investment
management fee, based on the average daily net assets of the Portfolio, payable
monthly, at the annual rates shown below:
Average Daily Net Assets of the Portfolio Annual Management Fee Rate
- ----------------------------------------- --------------------------
$0-$200 million 0.45%
$200 million-$750 million 0.42%
$750 million-$2.0 billion 0.40%
$2.0 billion-$5.0 billion 0.38%
Over $5.0 billion 0.35%
KVS Focused Large Cap Growth Portfolio, KVS Growth And Income Portfolio
and KVS Growth Opportunities Portfolio each pay the investment manager a
graduated investment management fee based on the average daily net assets of the
Portfolio, payable monthly, at the annual rates shown below:
27
<PAGE>
Average Daily Net Assets of the Portfolio Annual Management Fee Rate
- ----------------------------------------- --------------------------
$0-$250 million 0.950%
$250 million-$500 million 0.925%
$500 million-$1 billion 0.900%
$1 billion-$2.5 billion 0.875%
Over $2.5 billion 0.850%
The investment management fees paid by each Portfolio (other than the
Aggressive Growth and Technology Portfolios, which commenced operations on May
1, 1999, the Index 500 Portfolio, which commenced operations on September 1,
1999 and the Focused Large Cap Growth, Growth And Income and Growth
Opportunities Portfolios, which each commenced operations on October 29, 1999)
for its last three fiscal years are shown in the table below:
<TABLE>
<CAPTION>
Portfolio Fiscal 1999 Fiscal 1998 Fiscal 1997
- --------- ----------- ----------- -----------
<S> <C> <C> <C>
Blue Chip $802,000 $306,000 $27,000*
Contrarian Value 2,079,000 1,641,000 604,000
Financial Services 184,000 26,000**+ N/A
Global Blue Chip 94,000 9,000**# N/A
Government Securities 760,000 564,000 460,000
Growth 3,808,000 3,600,000 3,142,000
High Return Equity 752,000 100,000**+ N/A
High Yield 2,648,000 2,606,000 1,991,000
Horizon 10+ 385,000 223,000 77,000
Horizon 20+ 228,000 164,000 56,000
Horizon 5 234,000 137,000 44,000
International 1,506,000 1,613,000 1,419,000
Investment Grade Bond 385,000 184,000 46,000
Money Market 910,000 600,000 497,000
New Europe 47,998 6,000**# N/A
Small Cap Growth 1,298,000 1,060,000 633,000
Small Cap Value 728,000 702,000 307,000
Strategic Income 43,290 31,000 9,000*
Total Return 4,935,000 4,521,000 4,072,000
Value+Growth 1,171,000 825,000 257,000
</TABLE>
* Commencement of Operations on May 1, 1997 through December 31, 1997.
** Commencement of Operations (May 4, 1998 for High Return Equity and
Financial Services, May 5, 1998 for New Europe and Global Blue Chip)
through December 31, 1998.
+ Amount shown after voluntary fee waiver by the investment manager of
$25,000 and $15,000 for the High Return Equity and Financial Services
Portfolios, respectively.
# Amount shown after contractual fee reduction by the investment manager
of $2,000 and $3,000 for the New Europe, and Global Blue Chip
Portfolios, respectively.
Fund Sub-Adviser for the International Portfolio. Scudder Investments (U.K.)
Ltd. ("Scudder UK"), 1 South Place, London, U.K. EC2M 2ZS, an affiliate of
Scudder Kemper, is the sub-adviser for the International Portfolio and prior to
May 1, 2000 served as subadviser to the Strategic Income Portfolio. Scudder UK
acts as sub-adviser pursuant to the terms of a sub-advisory agreement between it
and Scudder Kemper for the International Portfolio. 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
Portfolio, Scudder UK renders investment advisory and management services with
regard to that portion of the Portfolio's assets as may be allocated to Scudder
UK by the investment manager from time to time for management, including
services related to foreign securities, foreign currency transactions and
related investments. Scudder UK may, under the terms of the sub-advisory
agreement, render similar services to others including other investment
companies. For its services, Scudder UK will receive from Scudder Kemper a
monthly fee at 1/12 of the following annual rates applied to the portion of the
average daily net assets of the Portfolio allocated by Scudder Kemper to Scudder
UK for management: 0.35% for the International 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.
28
<PAGE>
The 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.
The 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. The sub-advisory
agreement may be terminated at any time for the 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 Portfolio's investment management
agreement. If additional Portfolios become subject to the sub-advisory
agreement, the provisions concerning continuation, amendment and termination
shall be on a Portfolio by Portfolio basis. Additional Portfolios may be subject
to a different agreement.
The sub-adviser fees paid by Scudder Kemper to Scudder UK for the
International and Strategic Income Portfolios for the period from May 1, 1997
(inception) through December 31, 1997 were $657,013 and $3,176, for fiscal year
1998 were (estimated) $753,000 and $12,000, respectively and for fiscal year
1999 were $813,000 and $0, respectively.
Fund Sub-Adviser for the High Return Equity and Financial Services Portfolios.
Dreman Value Management, L.L.C. ("DVM"), Ten Exchange Place, Jersey City, New
Jersey 07302, is the sub-adviser for the High Return Equity Portfolio and the
Financial Services Portfolio. DVM is controlled by David N. Dreman. DVM serves
as sub-adviser pursuant to the terms of a sub-advisory agreement between it and
Scudder Kemper 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, 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%
29
<PAGE>
$10 billion-$12.5 billion 0.202%
Over $12.5 billion 0.198%
The sub-adviser fees paid by Scudder Kemper Investments, Inc. to DVM
for the High Return Equity and Dreman Financial Services Portfolios for the
period from May 4, 1998 (inception) through December 31, 1998 were $13,268 and
$40,717, respectively and for fiscal year 1999 were $11,552,373 and $549,628,
respectively.
Fund Sub-Adviser for the Index 500 Portfolio. Pursuant to a sub-advisory
agreement entered into between Scudder Kemper and Bankers Trust Company
("Bankers Trust") on September 1, 1999, Bankers Trust provides sub-advisory
services relating to the management of the Index 500 Portfolio. Bankers Trust, a
New York banking corporation with principal offices at 130 Liberty Street, New
York, New York, 10006, is a wholly owned subsidiary of Deutsche Bank AG, and one
of the nation's leading managers of index funds.
Under the terms of the sub-advisory agreement, Bankers Trust manages
the investment and reinvestment of the Portfolio's assets and will provide such
investment advice, research and assistance as Scudder Kemper may, from time to
time, reasonably request.
The sub-advisory agreement provides that Bankers Trust will not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Portfolio in connection with matters to which the sub-advisory agreement
relates, except a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of Bankers Trust in the performance of its duties or from
reckless disregard by Bankers Trust of its obligations and duties under the
sub-advisory agreement.
The sub-advisory agreement shall remain in full force and effect
through September 30, 2000, and is renewable annually thereafter by specific
approval of the Board of Trustees of the Fund or by the affirmative vote of a
majority of the outstanding voting securities of the Portfolio. Any such renewal
shall be approved by the vote of a majority of the Trustees of the Fund who are
not interested persons under the 1940 Act, cast in person at a meeting called
for the purpose of voting on such renewal. The sub-advisory agreement may be
terminated without penalty at any time by the Trustees, by vote of a majority of
the outstanding voting securities of the Portfolio, or by the Adviser or Bankers
Trust upon 60 days' written notice, and will automatically terminate in the
event of its assignment by either party to the agreement, as defined in the 1940
Act, or upon termination of the Investment Management Agreement between the
Scudder Kemper and the Portfolio. In addition, the Adviser or the Portfolio may
terminate the sub-advisory agreement upon immediate notice if Bankers Trust
becomes statutorily disqualified from performing its duties under this agreement
or otherwise is legally prohibited from operating as an investment adviser.
The fee paid to Bankers Trust or the investment manager is calculated
on a monthly basis and is based upon the average daily net assets in the
Portfolio. The annual fee rate decreases as the level of the Portfolio's net
assets increases. The minimum annual fee is not applicable for the first year of
the sub-advisory agreement. The fee is paid to Bankers Trust monthly, at the
annual rates shown below:
Average Daily Net Assets of the Portfolio Annual Management Fee Rate
- ----------------------------------------- --------------------------
$0-$200 million 0.08%
$200 million-$750 million 0.05%
Over $750 million 0.025%
On March 11, 1999, Bankers Trust announced that it had reached an
agreement with the United States Attorney's Office in the Southern District of
New York to resolve an investigation concerning inappropriate transfers of
unclaimed funds and related record-keeping problems that occurred between 1994
and early 1996. Bankers Trust pleaded guilty to misstating entries in the bank's
books and records and agreed to pay a $63.5 million fine to state and federal
authorities. On July 26, 1999, the federal criminal proceedings were concluded
with Bankers Trust's formal sentencing. The events leading up to the guilty
pleas did not arise out of the investment advisory or mutual fund management
activities of Bankers Trust or its affiliates.
As a result of the plea, absent an order from the SEC, Bankers Trust
would not be able to continue to provide investment advisory services to the
Fund. The SEC has granted a temporary order to permit Bankers Trust and its
affiliates to continue to provide investment advisory services to registered
investment companies. There is no assurance that the SEC will grant a permanent
order.
30
<PAGE>
The sub-adviser fee paid by Scudder Kemper Investments, Inc. to Bankers
Trust for Index 500 Portfolio for the period September 1, 1999 (inception)
through December 31, 1999 was $3,808, all of which was unpaid at December 31,
1999.
Fund Sub-Adviser for the Focused Large Cap Growth Portfolio. Eagle Asset
Management, 880 Carillon Parkway, St. Petersburg, Florida, 33716, is the
sub-adviser for the Focused Large Cap Growth Portfolio. EAM manages more than
$5.5 billion in assets for institutional, high net worth individuals and
subadvisory clients.
Under the terms of the sub-advisory agreement, EAM manages the
investment and reinvestment of the Portfolio's assets and will provide such
investment advice, research and assistance as the investment manager may, from
time to time, reasonably request.
Each sub-advisory agreement provides that EAM will not be liable for
any error of judgment or mistake of law or for any loss suffered by the
Portfolio in connection with matters to which the sub-advisory agreement
relates, except a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of EAM in the performance of its duties or from reckless
disregard by EAM of its obligations and duties under the sub-advisory agreement.
The sub-advisory Agreement with EAM shall continue in effect through
September 30, 2001 and year to year thereafter, but only as long as such
continuance is specifically approved at least annually (a) by a majority of the
trustees who are not parties to such agreement or interested persons of any such
party except in their capacity as trustees of the Fund, and (b) by the
shareholders or the Board of Trustees of the Fund. The sub-advisory agreement
may be terminated at any time upon 60 days' notice by EAM, by Scudder Kemper or
by the Board of Trustees of the Fund or by majority vote of the outstanding
shares of the Portfolio, and will terminate automatically upon assignment or
upon termination of the Portfolio's investment management agreement.
The investment manager pays EAM for its services a sub-advisory fee,
payable monthly, at the annual rates shown below:
Average Daily Net Assets of the Portfolio Annual Subadviser Fee Rate
----------------------------------------- --------------------------
$0-$50 million 0.45%
$50 million-$300 million 0.40%
On the balance over $300 million 0.30%
The sub-adviser fee paid by Scudder Kemper Investments, Inc. to EAM for
Focused Large Cap Portfolio for the period October 29, 1999 (inception) through
December 31, 1999 was $1,487, all of which was unpaid at December 31, 1999.
Fund Sub-Adviser for the Growth Opportunities Portfolio and the Growth And
Income Portfolio. Janus Capital Corporation, 100 Fillmore Street, Denver,
Colorado 80206-4928, is the sub-adviser for the Growth Opportunities Portfolio
and the Growth And Income Portfolio. JCC began serving as investment adviser to
Janus Fund in 1970 and currently serves as investment adviser to all of the
Janus Funds, acts as sub-adviser for a number of private-label mutual funds and
provides separate account advisory services for institutional accounts.
Under the terms of each sub-advisory agreement, JCC manages the
investment and reinvestment of each Portfolio's assets and will provide such
investment advice, research and assistance as the investment manager may, from
time to time, reasonably request.
Each sub-advisory agreement provides that JCC will not be liable for
any error of judgment or mistake of law or for any loss suffered by the
Portfolio in connection with matters to which the sub-advisory agreement
relates, except a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of JCC in the performance of its duties or from reckless
disregard by JCC of its obligations and duties under the sub-advisory agreement.
Each sub-advisory agreement with JCC shall continue in effect through
September 30, 2001 and year to year thereafter, but only as long as such
continuance is specifically approved at least annually (a) by a majority of the
trustees who are not parties to such agreement or interested persons of any such
party except in their capacity as trustees of the Fund, and (b) by the
shareholders or the Board of Trustees of the Fund. The sub-advisory agreement
may be terminated at any time upon 60 days' notice by JCC, by Scudder Kemper or
by the Board of Trustees of the Fund or by majority vote of the outstanding
shares of the Portfolio, and will terminate automatically upon assignment or
upon termination of the Portfolio's investment management agreement.
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<PAGE>
The investment manager pays JCC for its services a sub-advisory fee,
payable monthly, at the annual rates shown below:
Average Daily Net Assets of the Portfolios Annual Subadviser Fee Rate
------------------------------------------ --------------------------
$0-$100 million 0.55%
$100 million-$500 million 0.50%
On the balance over $500 million 0.45%
The sub-adviser fees paid by Scudder Kemper Investments, Inc. to JCC
for Growth Opportunities and Growth And Income Portfolios for the period October
29, 1999 (inception) through December 31, 1999 were $6,931 and $7,011,
respectively, all of which was unpaid at December 31, 1999.
Code of Ethics. The Fund, the Adviser and sub-Advisers, and principal
underwriter have each adopted codes of ethics under rule 17j-1 of the Investment
Company Act. Board members, officers of the Fund and employees of the Adviser or
sub-Advisers, and principal underwriter are permitted to make personal
securities transactions, including transactions in securities that may be
purchased or held by the Fund, subject to requirements and restrictions set
forth in the applicable Code of Ethics. The Adviser's Code of Ethics contains
provisions and requirements designed to identify and address certain conflicts
of interest between personal investment activities and the interests of the
Fund. Among other things, the Adviser's Code of Ethics prohibits certain types
of transactions absent prior approval, imposes time periods during which
personal transactions may not be made in certain securities, and requires the
submission of duplicate broker confirmations and quarterly reporting of
securities transactions. Additional restrictions apply to portfolio managers,
traders, research analysts and others involved in the investment advisory
process. Exceptions to these and other provisions of the Adviser's Code of
Ethics may be granted in particular circumstances after review by appropriate
personnel.
Fund Accounting Agent. Scudder Fund Accounting Corp. ("SFAC"), Two International
Place, Boston, Massachusetts, 02210-4103, a subsidiary of Scudder Kemper, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records of each Portfolio. SFAC receives no
fee for its services to each Portfolio, other than the High Return Equity,
Financial Services, Focused Large Cap Growth, Growth And Income, Growth
Opportunities, Global Blue Chip, New Europe, Aggressive Growth, and Technology
Portfolios; however, subject to Board approval, at some time in the future, SFAC
may seek payment for its services to those Portfolios under its agreement with
such Portfolios. The agreements with Aggressive Growth, Technology, High Return
Equity and Financial Services Portfolios state that each portfolio shall each
pay SFAC an annual fee equal to 0.025% of the first $150 million of average
daily net assets of the Portfolio, 0.0075% of the next $850 million of such
assets and 0.0045% of such assets in excess of $1 billion, plus holding and
transaction charges for this service. The agreements with Global Blue Chip and
New Europe Portfolios state that the portfolio shall each pay SFAC an annual fee
equal to 0.065% of the first $150 million of average daily net assets of the
Portfolio, 0.04% of the next $850 million of such assets and 0.02% of such
assets in excess of $1 billion, plus holding and transaction charges for this
service. Certain of the Portfolios incurred no accounting fees for the period
ended December 31, 1999, after a fee reduction by SFAC. Technology Growth
Portfolio. High Return Equity and Financial Services Portfolios incurred
accounting fees, for the period ended December 31, 1999, of $25,000, $41,000 and
$38,000, respectively, of which $16,000, $5,000 and $16,000, respectively, was
unpaid at December 31, 1999.
Principal Underwriter. Kemper Distributors, Inc. ("KDI"), 222 South Riverside
Plaza, Chicago, Illinois 60606, a wholly owned subsidiary of Scudder Kemper, is
the distributor and principal underwriter for shares of each Portfolio in the
continuous offering of its shares. The Fund pays the cost for the prospectus and
shareholder reports to be set in type and printed for existing shareholders, and
KDI pays for the printing and distribution of copies thereof used in connection
with the offering of shares to prospective shareholders. KDI also pays for
supplementary sales literature and advertising costs. Terms of continuation,
termination and assignment under the underwriting agreement are identical to
those described above with regard to the investment management agreements,
except that termination other than upon assignment requires sixty days' notice.
In addition, KDI may, from time to time, from its own resources pay
certain firms additional amounts for ongoing administrative services and
assistance provided to their customers and clients who are shareholders of
Kemper Variable Series.
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 Strategic
Income, International, Global Blue Chip, and New Europe Portfolios). The Chase
Manhattan Bank, Chase MetroTech
32
<PAGE>
Center, Brooklyn, New York 11245, as custodian, has custody of all securities
and cash of the Strategic Income and International Portfolios. Brown Brothers
Harriman & Co., as custodian, has custody of all securities and cash of the
Global Blue Chip and New Europe Portfolios. Each custodian attends to the
collection of principal and income, and payment for and collection of proceeds
of securities bought and sold by those Portfolios. Investors Fiduciary Trust
Company ("IFTC"), 801 Pennsylvania Avenue, Kansas City, Missouri 64105 is the
transfer agent and dividend-paying agent for each Portfolio. For the fiscal year
ended December 31, 1999, no fees were paid to IFTC by any Portfolio.
Independent Auditors And Reports To Shareholders. The Fund's independent
auditors, Ernst & Young LLP, 233 South Wacker Drive, Chicago, Illinois 60606,
audit and report on the Portfolios' annual financial statements, review certain
regulatory reports and the Portfolios' federal income tax returns, and perform
other professional accounting, auditing, tax and advisory services when engaged
to do so by the Fund. Shareholders will receive annual audited financial
statements and semi-annual unaudited financial statements.
Legal Counsel. Vedder, Price, Kaufman & Kammholz, 222 N. LaSalle St., Chicago,
Illinois, serves as legal counsel to each Portfolio other than those noted
below. Dechert Price & Rhoads, Ten Post Office Square South, Boston,
Massachusetts, serves as legal counsel to the Financial Services, Global Blue
Chip, New Europe, Focused Large Cap Growth, Growth And Income, Growth
Opportunities and Index 500 Portfolios.
PURCHASE AND REDEMPTION OF SHARES
Portfolio 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 SEC may by order permit for the
protection of the Fund's shareholders.
OFFICERS AND TRUSTEES
The Fund's activities are supervised by the Fund's Board of Trustees.
The officers and trustees of the Fund, their principal occupations, employment
history for the past five years, and their affiliations, if any, with Scudder
Kemper or Scudder UK, the investment manager or sub-adviser for the Fund and
KDI, the Fund's principal underwriter or their affiliates, are listed below. All
persons named as trustees also serve in similar capacities for other funds
advised by Scudder Kemper.
JAMES E. AKINS (10/15/26), Trustee, 2904 Garfield Terrace, N.W., Washington,
D.C.; Consultant on International, Political and Economic Affairs; formerly a
career United States Foreign Service Officer, Energy Adviser for the White House
and United States Ambassador to Saudi Arabia, 1973-76.
JAMES R. EDGAR (07/22/46), Trustee, 1927 County Road, 150E, Seymour, Illinois;
Distinguished Fellow, Institute of Government and Public Affairs, University of
Illinois; Director, Kemper Insurance Companies; formerly, Governor of the State
of Illinois , 1991-1999.
ARTHUR R. GOTTSCHALK (02/13/25), Trustee, 10642 Brookridge Drive, Frankfort,
Illinois; Retired; formerly, President, Illinois Manufacturers Association;
Trustee, Illinois Masonic Medical Center; formerly, Illinois State Senator;
formerly, Vice President, The Reuben H. Donnelley Corp.; formerly, attorney.
FREDERICK T. KELSEY (04/25/27), Trustee, 4010 Arbor Lane, Unit 102, Northfield,
Illinois; Retired; formerly, consultant to Goldman, Sachs & Co.; formerly,
President, Treasurer and Trustee of Institutional Liquid Assets and its
affiliated mutual funds; Trustee of the Northern Institutional Funds; formerly,
Trustee of the Pilot Fund.
THOMAS W. LITTAUER* (4/26/55), Chairman, Trustee and Vice President, Two
International Place, Boston, Massachusetts; Managing Director, Scudder Kemper,
formerly, Head of Broker Dealer Division of an unaffiliated
33
<PAGE>
investment management firm during 1997; prior thereto, President of Client
Management Services of an unaffiliated investment management firm from 1991 to
1996.
FRED B. RENWICK (02/01/30), Trustee, 3 Hanover Square, New York, New York;
Professor of Finance, New York University, Stern School of Business; Director,
TIFF Industrial Program, Inc., Director, the Wartburg 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.
JAMES BURKART (2/16/47), Vice President, 345 Park Avenue, New York, New York;
Managing Director, Scudder Kemper.
JESUS A. CABRERA (12/25/61), Vice President, 345 Park Avenue, New York, New
York; Managing Director, Scudder Kemper.
IRENE CHENG (6/6/54), Vice President, 345 Park Avenue, New York, New York;
Managing Director; Scudder Kemper.
MARK S. CASADY* (9/21/60), President, Two International Place, Boston,
Massachusetts; Managing Director, Scudder Kemper; formerly Institutional Sales
Manager of an unaffiliated mutual fund distributor.
ROBERT S. CESSINE* (01/05/50), Vice President, 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Scudder Kemper; formerly, Vice President,
Wellington Management Company.
PHILIP J. COLLORA* (11/15/45), Vice President and Secretary, 222 South Riverside
Plaza, Chicago, Illinois; Attorney, Senior Vice President, Scudder Kemper.
JAMES M. EYSENBACH (4/1/62), Vice President, 333 South Hope Street, Los Angeles,
California; Senior Vice President, Scudder Kemper.
JAN C. FALLER (8/8/66), Vice President, Two International Place, Boston,
Massachusetts; Vice President, Scudder Kemper.
GEORGE P. FRAISE (9/28/64), Vice President, 345 Park Avenue, New York, New York;
Managing Director, Scudder Kemper.
DONALD E. HALL (8/22/52) Vice President, 333 South Hope Street, Los Angeles,
California, Managing Director, Scudder Kemper.
SEWALL HODGES (1/9/55) Vice President, 345 Park Avenue, New York, New York;
Managing Director, Scudder Kemper.
GARY A. LANGBAUM (12/16/48), Vice President, 222 South Riverside Plaza, Chicago,
Illinois; Managing Director, Scudder Kemper;
VALERIE F. MALTER (7/25/58), Vice President, 345 Park Avenue, New York, New
York; Managing Director, Scudder Kemper.
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.
ANN M. McCREARY* (11/6/56), Vice President, 345 Park Avenue, New York, New York;
Managing Director, Scudder Kemper.
34
<PAGE>
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.
WILLIAM F. TRUSCOTT* (9/14/60), Vice President, 345 Park Avenue, New York, New
York; Managing Director, Scudder Kemper.
ROBERT D. TYMOCZKO* (2/3/70), Vice President, 101 California Street, San
Francisco, California; Assistant Vice President, Scudder Kemper.
RICHARD L. VANDENBERG* (11/16/49), Vice President, 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Scudder Kemper; formerly, senior vice
president and portfolio manager with an unaffiliated investment management firm.
LINDA J. WONDRACK* (9/12/64), Vice President, Two International Place, Boston,
Massachusetts; Senior Vice President, Scudder Kemper.
JOHN R. HEBBLE* (6/27/58), Treasurer, Two International Place, Boston,
Massachusetts; Senior Vice President, Scudder Kemper.
MAUREEN E. KANE* (2/14/62), Assistant Secretary, Two International Place,
Boston, Massachusetts; Vice President, Scudder Kemper; formerly, Assistant Vice
President of an unaffiliated investment management firm; prior there to,
Associate Staff Attorney of an unaffiliated investment management firm;
Associate, Peabody & Arnold (law firm).
CAROLINE PEARSON* (4/1/62), Assistant Secretary, Two International Place,
Boston, Massachusetts; Senior Vice President, Scudder Kemper; formerly,
Associate, Dechert Price & Rhoads (law firm), 1989 to 1997.
BRENDA LYONS* (2/21/63) Assistant Treasurer, Two International Place, Boston,
Massachusetts; Senior Vice President, Scudder Kemper.
SHERIDAN P. REILLY* (2/27/52) Vice President, Two International Place, Boston,
Massachusetts; Senior Vice President, Scudder Kemper Investments, Inc.
DIEGO ESPINOSA* (6/30/62) Vice President, Two International Place, Boston,
Massachusetts; Senior Vice President, Scudder Kemper Investments, Inc.
* Interested persons of the Fund as defined in the 1940 Act.
35
<PAGE>
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 1999 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 $58,900 $168,700
James R. Edgar* 30,200 84,600
Arthur R. Gottschalk** 59,100 166,600
Frederick T. Kelsey 61,500 168,700
Fred B. Renwick 57,800 168,700
John G. Weithers 58,200 171,200
</TABLE>
* James R. Edgar became a trustee on May 27, 1999.
** Includes deferred fees. Pursuant to deferred compensation agreements
with the Portfolios, deferred amounts accrue interest monthly at a rate
equal to the yield of Zurich Money Funds -- Zurich Money Market Fund.
Total deferred fees (including interest thereon) for the latest fiscal
year payable from the Portfolios to Mr. Gottschalk was $198,300.
*** Includes compensation for service on the Boards of 15 funds managed by
Scudder Kemper and its affiliates with 53 fund portfolios during
calendar year 1999. Each trustee currently serves as a board member of
15 funds managed by Scudder Kemper and its affiliates with 64 fund
portfolios.
As of March 31, 2000, the trustees and officers as a group owned
beneficially less than 1% of the outstanding shares of each Portfolio.
Except as otherwise noted, as of March 31, 2000, all the shares of the
Portfolios were held of record by KILICO Variable Annuity Separate Account
("KVASA"), KILICO Variable Separate Account ("KVSA"), KILICO Variable Series II
("KVS II"), KILICO Variable Series III ("KVS III"), KILICO Variable Series VI
("KVS VI") 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"), Lincoln Life
Variable Annuity Account N ("LLVAA") American General Life Insurance Company
Separate Account VL-R, Farmera Annuity Separate Account A ("Farmers VAA") and
Farmers Variable Life Separate Account A ("Farmers VLA") 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, KVS
II, KVS III and KVS VI, 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, KVS
II, KVS III and KVS VI, 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.
As of March 31, 2000, Scudder Kemper holds less than 5% of each
Portfolio.
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<PAGE>
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, Dr. 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.
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 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
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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 qualify as a regulated investment company under
subchapter M of the Internal Revenue Code ("Code") in order to avoid taxation of
the Portfolio and its shareholders.
Pursuant to the requirements of Section 817(h) of the Code, with
certain limited exceptions, the only shareholders of the Portfolios will be
insurance companies and their separate accounts that fund variable insurance
contracts. The prospectus that describes a particular variable insurance
contract discusses the taxation of separate accounts and the owner of the
particular variable insurance contract.
Each Portfolio intends to comply with the requirements of Section
817(h) and related regulations. Section 817(h) of the Code and the regulations
issued by the Treasury Department impose certain diversification requirements
affecting the securities in which the Portfolios may invest. These
diversification requirements are in addition to the diversification requirements
under subchapter M and the Investment Company Act of 1940. The consequences of
failure to meet the requirements of Section 817(h) could result in taxation of
the insurance company offering the variable insurance contract and immediate
taxation of the owner of the contract to the extent of appreciation on
investment under the contract.
The preceding is a brief summary of certain of the relevant tax
considerations. The summary is not intended as a complete explanation or a
substitute for careful tax planning and consultation with individual tax
advisers.
SHAREHOLDER RIGHTS
The Fund was organized as a business trust under the laws of
Massachusetts on January 22, 1987. On May 1, 1997, the Fund changed its name
from "Kemper Investors Fund" to "Investors Fund Series" and on May 1, 1999 the
Fund changed its name from "Investors Fund Series" to "Kemper Variable Series."
The Fund may issue an unlimited number of shares of beneficial interest all
having no par value. Since the Fund offers multiple Portfolios, it is known as a
"series company." Shares of a Portfolio have equal noncumulative voting rights
and equal rights with respect to dividends, assets and liquidation of such
Portfolio. Shares are fully paid and nonassessable when issued, and have no
preemptive or conversion rights. The Fund is not required to hold annual
shareholders' meetings and does not intend to do so. However, it will hold
special meetings as required or deemed desirable for such purposes as electing
trustees, changing fundamental policies or approving an investment advisory
contract. If shares of more than one Portfolio are outstanding, shareholders
will vote by Portfolio and not in the aggregate except when voting in the
aggregate is required under the 1940 Act, such as for the election of trustees.
The Board of Trustees may authorize the issuance of additional Portfolios if
deemed desirable, each with its own investment objective, policies and
restrictions. The Board of Trustees may also authorize the establishment of a
multiple class fund structure. This would permit the Fund to issue classes that
would differ as to the allocation of certain expenses, such as distribution and
administrative expenses, permitting, among
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other things, different levels of services or methods of distribution among
various classes. Currently, the Fund does not offer a multi-class fund
structure, but it may adopt such a structure at a future date.
On November 3, 1989, KILICO Money Market Separate Account, KILICO Total
Return Separate Account, KILICO Income Separate Account and KILICO Equity
Separate Account (collectively, the Accounts), which were separate accounts
organized as open-end management investment companies, were restructured into
one continuing separate account (KILICO Variable Annuity Separate Account) in
unit investment trust form with subaccounts investing in corresponding
Portfolios of the Fund. An additional subaccount also was created to invest in
the Fund's Government Securities Portfolio. The restructuring and combining of
the Accounts is referred to as the Reorganization. In connection with the
Reorganization, approximately $550,000,000 in assets was added to the Fund
(which at that time consisted of approximately $6,000,000 in assets). Because
the assets added to the Fund as a result of the Reorganization were
significantly greater than the existing assets of the Fund, the per share
financial highlights of the Money Market, Total Return, High Yield and Growth
Portfolios reflect the Accounts as the continuing entities.
Information about the Portfolios' investment performance is contained
in the Fund's 1999 Annual Report to Shareholders, which may be obtained without
charge from the Fund or from Participating Insurance companies which offer the
Portfolios.
Shareholder inquiries should be made by writing the Fund at the address
shown on the front cover or from Participating Insurance companies which offer
the Portfolios.
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 SEC or any state, or as the trustees may
consider necessary or desirable. The shareholders also would vote upon changes
in fundamental investment objectives, policies or restrictions.
Under current interpretations of the 1940 Act, the Fund expects that
Participating Insurance Company shareholders will offer VLI and VA contract
holders the opportunity to instruct them as to how Fund shares attributable to
such contracts will be voted with respect to the matters described above. The
separate prospectuses describing the VLI and VA contracts include additional
disclosure of how contract holder voting rights are computed.
Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain circumstances, be held personally liable for obligations of
the Fund. The Declaration of Trust, however, contains provisions designed to
protect shareholders from liability for acts or obligations of the Fund and
requires that notice of such provisions be given in each agreement, obligation
or instrument entered into or executed by the Fund or the trustees. Moreover,
the Declaration of Trust provides for indemnification out of Fund property for
all losses and expenses of any shareholders held personally liable for the
obligations of the Fund and the Fund will be covered by insurance which the
trustees consider adequate to cover foreseeable tort claims. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
considered by Scudder Kemper remote and not material since it is limited to
circumstances in which the provisions limiting liability are inoperative and the
Fund itself is unable to meet its obligations.
The Declaration of Trust further provides that the trustees will not be
liable for errors of judgment or mistakes of fact or law. The Declaration of
Trust does not protect a trustee against any liability to which he or she should
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties of a trustee. The Declaration of
Trust permits the Trust to purchase insurance against certain liabilities on
behalf of the trustees.
Effective May 1, 1999, the Fund's Board of Trustees approved a name
change of the Fund from Investors Fund Series to Kemper Variable Series.
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ADDITIONAL INFORMATION
Other Information
The CUSIP number of each Portfolio is as follows:
Kemper Aggressive Growth Portfolio 488439 88 6
Kemper Blue Chip Portfolio 488439 70 4
Kemper Contrarian Value Portfolio 488439 74 6
Kemper Global Blue Chip Portfolio 488439 76 1
Kemper Government Securities Portfolio 488439 30 8
Kemper Growth Portfolio 488439 80 3
Kemper High Yield Portfolio 488439 50 6
Kemper Horizon 10+ Portfolio 488439 86 0
Kemper Horizon 20+ Portfolio 488439 87 8
Kemper Horizon 5 Portfolio 488439 85 2
Kemper International Portfolio 488439 75 3
Kemper Investment Grade Bond Portfolio 488439 40 7
Kemper Money Market Portfolio 488439 10 0
Kemper New Europe Portfolio 488439 77 9
Kemper Small Cap Growth Portfolio 488439 84 5
Kemper Small Cap Value Portfolio 488439 81 1
Kemper Strategic Income Portfolio 488439 78 7
Kemper Technology Growth Portfolio 488439 83 7
Kemper Total Return Portfolio 488439 60 5
Kemper Value+Growth Portfolio 488439 82 9
KVS Dreman Financial Services Portfolio 488439 79 5
KVS Dreman High Return Equity Portfolio 488439 20 9
KVS Focused Large Cap Growth Portfolio 488439 72 0
KVS Growth And Income Portfolio 488439 69 6
KVS Growth Opportunities Portfolio 488439 71 2
KVS Index 500 Portfolio 488439 73 8
Each Portfolio 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 investment manager 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 investment manager (including any affiliate of the
investment manager), or both, may pay unaffiliated third parties for providing
recordkeeping and other administrative services with respect to accounts of
participants in retirement plans or other beneficial owners of Fund shares whose
interests are generally held in an omnibus account.
The Portfolios' prospectus and this Statement of Additional Information
omit certain information contained in the Registration Statement and its
amendments which the Fund has filed with the SEC under the Securities Act of
1933 and reference is hereby made to the Registration Statement for further
information with respect to the Fund and the securities offered hereby. The
Registration Statement and its amendments, are available for inspection by the
public at the SEC in Washington, D.C.
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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, 1999 are incorporated herein
by reference and are hereby deemed to be a part of this Statement of Additional
Information.
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APPENDIX -- RATINGS OF INVESTMENTS
COMMERCIAL PAPER RATINGS
A-1, A-2 and Prime-1, Prime-2 Commercial Paper Ratings
Commercial paper rated by Standard & Poor's Ratings Services 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 Ratings Services 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
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protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa. Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca. Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
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