<PAGE> 1
KEMPER HORIZON FUND
SUPPLEMENT TO PROSPECTUS
DATED JANUARY 1, 1996
CLASS I SHARES
PORTFOLIOS
KEMPER HORIZON 20+ PORTFOLIO
KEMPER HORIZON 10+ PORTFOLIO
KEMPER HORIZON 5 PORTFOLIO
The Kemper Horizon Fund consists of three investment portfolios, Kemper Horizon
20+ Portfolio ("Horizon 20+ Portfolio"), Kemper Horizon 10+ Portfolio ("Horizon
10+ Portfolio") and Kemper Horizon 5 Portfolio ("Horizon 5 Portfolio")
(collectively the "Portfolios"), each currently offering four classes of shares
to provide investors with different purchasing options. These are Class A, Class
B and Class C shares, which are described in the prospectus, and Class I shares,
which are described in the prospectus as supplemented hereby.
Class I shares are available for purchase exclusively by the following
investors: (a) tax-exempt retirement plans of Kemper Financial Services, Inc.
("KFS") and its affiliates; and (b) the following investment advisory clients of
KFS and its investment advisory affiliates (including Kemper Asset Management
Company ("KAMCO") and Dreman Value Advisors, Inc. ("DVA")) that invest at least
$1 million in a Portfolio: (1) unaffiliated benefit plans, such as qualified
retirement plans (other than individual retirement accounts and self-directed
retirement plans); (2) unaffiliated banks and insurance companies purchasing for
their own accounts; and (3) endowment funds of unaffiliated non-profit
organizations. Class I shares currently are available for purchase only from
Kemper Distributors, Inc., principal underwriter for the Portfolios. Share
certificates are not available for Class I shares.
The primary distinctions among the classes of shares lie in their initial and
contingent deferred sales charge schedules and in their ongoing expenses,
including asset-based sales charges in the form of Rule 12b-1 distribution fees.
Class I shares are offered at net asset value without an initial sales charge
and are not subject to a contingent deferred sales charge or a Rule 12b-1
distribution fee. Also, there is no administrative services fee charged to Class
I shares. As a result of the relatively lower expenses for Class I shares, the
level of income dividends per share (as a percentage of net asset value) and,
therefore, the overall investment return, will be higher for Class I shares than
for Class A, Class B and Class C shares.
The following information supplements the indicated sections of the prospectus.
SUMMARY OF EXPENSES
SHAREHOLDER TRANSACTION EXPENSES (APPLICABLE TO ALL PORTFOLIOS)
<TABLE>
<CAPTION>
CLASS I
-------
<S> <C>
Maximum Sales Charge on Purchases (as a percentage of offering price).................... None
Maximum Sales Charge on Reinvested Dividends............................................. None
Redemption Fees.......................................................................... None
Exchange Fee............................................................................. None
Deferred Sales Charge (as a percentage of redemption proceeds)........................... None
</TABLE>
<PAGE> 2
ANNUAL FUND OPERATING EXPENSES
<TABLE>
<CAPTION>
HORIZON 20+ HORIZON 10+ HORIZON 5
PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ---------
<S> <C> <C> <C>
Management Fees................................................. .58% .58% .58%
12b-1 Fees...................................................... None None None
Other Expenses (after expense reimbursement).................... .15% .15% .15%
Total Operating Expenses........................................ .73% .73% .73%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE PORTFOLIO 1 YEAR 3 YEARS
- -------------------------------------------------------------------- ----------- ------ -------
<S> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, Horizon 20+ $7 $23
assuming (1) 5% annual return and (2) redemption at the end of Horizon 10+ $7 $23
each time period Horizon 5 $7 $23
</TABLE>
The purpose of the preceding table is to assist investors in understanding the
various costs and expenses that an investor in Class I shares of a Portfolio
will bear directly or indirectly.
The Kemper Horizon Fund commenced the public offering of its shares on January
1, 1996; thus, the "Other Expenses" shown above are estimates.
KFS has agreed to temporarily reduce its management fee and reimburse or pay
certain operating expenses as described in the prospectus.
The Example assumes a 5% annual rate of return pursuant to requirements of the
Securities and Exchange Commission. This hypothetical rate of return is not
intended to be representative of past or future performance of any Portfolio of
the Fund. THE EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
SPECIAL FEATURES
Shareholders of a Portfolio's Class I shares may exchange their shares for (i)
shares of Kemper Money Market Fund--Money Market Portfolio if the shareholders
of Class I shares have purchased shares because they are participants in
tax-exempt retirement plans of KFS and its affiliates and (ii) Class I shares of
any other "Kemper Mutual Fund" listed under "Special Features--Class A
Shares--Combined Purchases" in the prospectus. Conversely, shareholders of
Kemper Money Market Fund--Money Market Portfolio who have purchased shares
because they are participants in tax-exempt retirement plans of KFS and its
affiliates may exchange their shares for Class I shares of "Kemper Mutual Funds"
to the extent that they are available through their plan. Exchanges will be made
at the relative net asset values of the shares. Exchanges are subject to the
limitations set forth in the prospectus under "Special Features--Exchange
Privilege--General."
January 1, 1996
KHF-1I (1/96)
<PAGE> 3
<TABLE>
<CAPTION>
TABLE OF CONTENTS
- --------------------------------------------
<S> <C>
Summary 1
- -------------------------------------------------
Summary of Expenses 3
- -------------------------------------------------
Investment Objectives, Policies and Risk 4
Factors
- -------------------------------------------------
Investment Manager and Underwriter 16
- -------------------------------------------------
Dividends and Taxes 19
- -------------------------------------------------
Net Asset Value 20
- -------------------------------------------------
Purchase of Shares 21
- -------------------------------------------------
Redemption or Repurchase of Shares 26
- -------------------------------------------------
Special Features 30
- -------------------------------------------------
Performance 33
- -------------------------------------------------
Capital Structure 34
- -------------------------------------------------
</TABLE>
This prospectus contains information about the Fund that you should know before
investing and should be retained for future reference. A Statement of Additional
Information dated January 1, 1996, has been filed with the Securities and
Exchange Commission and is incorporated herein by reference. It is available
upon request without charge from the Fund at the address or telephone number on
this cover or the firm from which this prospectus was obtained.
THE FUND'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, NOR ARE THEY FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. INVESTMENT IN THE
FUND'S SHARES INVOLVES RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
KEMPER(LOGO)
KEMPER
HORIZON
FUND
PROSPECTUS JANUARY 1, 1996
KEMPER HORIZON FUND
120 South LaSalle Street, Chicago, Illinois 60603 1-800-621-1048
Kemper Horizon Fund (the "Fund") offers a choice of three investment portfolios.
KEMPER HORIZON 20+ PORTFOLIO
KEMPER HORIZON 10+ PORTFOLIO
KEMPER HORIZON 5 PORTFOLIO
<PAGE> 4
KEMPER HORIZON FUND
120 SOUTH LASALLE STREET, CHICAGO, ILLINOIS 60603, TELEPHONE 1-800-621-1048
SUMMARY
INVESTMENT OBJECTIVES. The Kemper Horizon Fund (the "Fund") is an open-end,
diversified management investment company. The Fund consists of three investment
portfolios ("Portfolios"), designed for investors with different investment
horizons. The three Portfolios are as follows:
KEMPER HORIZON 20+ PORTFOLIO ("Horizon 20+ Portfolio"). The Horizon 20+
Portfolio seeks growth of capital, with income as a secondary objective. Under
normal conditions, the Horizon 20+ Portfolio expects to maintain an asset
allocation of approximately 80% equity securities and 20% fixed income
securities.
KEMPER HORIZON 10+ PORTFOLIO ("Horizon 10+ Portfolio"). The Horizon 10+
Portfolio seeks a balance between growth of capital and income, consistent with
moderate risk. Under normal conditions, the Horizon 10+ Portfolio expects to
maintain an asset allocation of approximately 60% equity securities and 40%
fixed income securities.
KEMPER HORIZON 5 PORTFOLIO ("Horizon 5 Portfolio"). The Horizon 5 Portfolio
seeks income consistent with preservation of capital, with growth of capital as
a secondary objective. Under normal conditions, the Horizon 5 Portfolio expects
to maintain an asset allocation of approximately 40% equity securities and 60%
fixed income securities.
The Portfolios may purchase and write put and call options, engage in financial
futures transactions, invest in other derivatives, invest in collateralized
obligations, invest in foreign securities, engage in related foreign currency
transactions, lend portfolio securities and engage in delayed delivery
transactions. See "Investment Objectives, Policies and Risk Factors."
RISK FACTORS. There is no assurance that the investment objective of any
Portfolio will be achieved and investment in each Portfolio includes risks that
vary in kind and degree depending upon the investment objective and policies of
that Portfolio. The returns and net asset value of each Portfolio will
fluctuate. Foreign investments by the Portfolios involve risk and opportunity
considerations not typically associated with investing in U.S. companies. 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. Thus, the U.S. Dollar value of foreign securities in a
Portfolio, and the Portfolio's net asset value, may change in response to
changes in currency exchange rates even though the value of the foreign
securities in local currency terms may not have changed. While a Portfolio's
investments in foreign securities will principally be in developed countries,
the Portfolio may invest a portion of its assets in developing or "emerging"
markets, 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 limited portion of the assets of each Portfolio may be
invested in lower rated or unrated high yield bonds, which entail greater risk
of loss of principal and interest than higher rated fixed income securities.
There are special risks associated with options, financial futures and foreign
currency transactions and other derivatives and there is no assurance that use
of those investment techniques will be successful. See "Investment Objectives,
Policies and Risk Factors."
1
<PAGE> 5
PURCHASES AND REDEMPTIONS. The Fund provides investors with the option of
purchasing shares in the following ways:
<TABLE>
<S> <C>
Class A Shares..................... Offered at net asset value plus a maximum sales charge of
5.75% of the offering price. Reduced sales charges apply to
purchases of $50,000 or more. The redemption within one year
of Class A shares purchased at net asset value under the Large
Order NAV Purchase Privilege may be subject to a 1% contingent
deferred sales charge.
Class B Shares..................... Offered at net asset value, subject to a Rule 12b-1
distribution fee and a contingent deferred sales charge that
declines from 4% to zero on certain redemptions made within
six years of purchase. Class B shares automatically convert
into Class A shares (which have lower ongoing expenses) six
years after purchase.
Class C Shares..................... Offered at net asset value without an initial or contingent
deferred sales charge, but subject to a Rule 12b-1
distribution fee. Class C shares do not convert into another
class.
</TABLE>
Shares of all classes of a Portfolio represent interests in the same pool of
investments. The minimum initial investment is $1,000 and investments thereafter
must be at least $100. Shares are redeemable at net asset value, which may be
more or less than original cost, subject, in the case of Class A shares
purchased under the Large Order NAV Purchase Privilege and for Class B shares,
to any applicable contingent deferred sales charge. See "Purchase of Shares" and
"Redemption or Repurchase of Shares."
INVESTMENT MANAGER AND UNDERWRITER. Kemper Financial Services, Inc. ("KFS")
serves as investment manager for the Fund. KFS is paid an investment management
fee by each Portfolio based upon average daily net assets of that Portfolio at
an annual rate ranging from .58% to .42%. Dreman Value Advisors, Inc. ("DVA"), a
wholly-owned subsidiary of KFS, is the sub-adviser for the Fund. KFS pays DVA a
fee at the annual rate of .25% of the portion of the average daily net assets of
each Portfolio allocated by KFS to DVA for management. Kemper Distributors, Inc.
("KDI"), a wholly owned subsidiary of KFS, is principal underwriter and
administrator for the Fund. For Class B shares and Class C shares, KDI receives
a Rule 12b-1 distribution fee at the annual rate of .75% of average daily net
assets. KDI also receives the amount of any contingent deferred sales charges
paid on the redemption of shares. Administrative services are provided to
shareholders under an administrative services agreement with KDI for which KDI
receives an administrative services fee at the annual rate of up to .25% of
average daily net assets of each class of each Portfolio, which KDI, in turn,
pays to financial services firms. See "Investment Manager and Underwriter."
DIVIDENDS. Each Portfolio normally distributes dividends of net investment
income as follows: annually for the Horizon 20+ Portfolio; semi-annually for
Horizon 10+ Portfolio; and quarterly for the Horizon 5 Portfolio. Each Portfolio
distributes any net realized short-term and long-term capital gains at least
annually. Income and capital gain dividends of a Portfolio are automatically
reinvested in additional shares of that Portfolio, without a sales charge,
unless the shareholder makes a different election. See "Dividends and Taxes."
2
<PAGE> 6
SUMMARY OF EXPENSES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
(APPLICABLE TO ALL PORTFOLIOS)(1) CLASS A CLASS B CLASS C
------- -------------------- -------
<S> <C> <C> <C>
Maximum Sales Charge on Purchases
(as a percentage of offering price)........................ 5.75%(2) None None
Maximum Sales Charge on Reinvested Dividends............... None None None
Redemption Fees............................................ None None None
Exchange Fee............................................... None None None
Deferred Sales Charge (as a percentage of redemption None(3) 4% during the first None
proceeds)................................................ year, 3% during the
second and third
years, 2% during the
fourth and fifth
years and 1% in the
sixth year
</TABLE>
- ---------------
(1) Investment dealers and other firms may independently charge additional fees
for shareholder transactions or for advisory services; please see their
materials for details.
(2) Reduced sales charges apply to purchases of $50,000 or more. See "Purchase
of Shares--Initial Sales Charge Alternative--Class A Shares."
(3) The redemption within one year of shares purchased at net asset value under
the Large Order NAV Purchase Privilege may be subject to a 1% contingent
deferred sales charge. See "Purchase of Shares--Initial Sales Charge
Alternative--Class A Shares."
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
CLASS A SHARES HORIZON 20+ HORIZON 10+ HORIZON 5
- ---------------------------------------------------------------- ----------- ----------- ---------
<S> <C> <C> <C>
Management Fees................................................. .58% .58% .58%
12b-1 Fees...................................................... None None None
Other Expenses.................................................. .90% .90% .90%
----------- ----------- ---------
Total Operating Expenses........................................ 1.48% 1.48% 1.48%
========= ========= =======
</TABLE>
<TABLE>
<CAPTION>
CLASS B SHARES HORIZON 20+ HORIZON 10+ HORIZON 5
- ---------------------------------------------------------------- ----------- ----------- ---------
<S> <C> <C> <C>
Management Fees................................................. .58% .58% .58%
12b-1 Fees(4)................................................... .75% .75% .75%
Other Expenses.................................................. .93% .93% .93%
----------- ----------- ---------
Total Operating Expenses........................................ 2.26% 2.26% 2.26%
========= ========= =======
</TABLE>
<TABLE>
<CAPTION>
CLASS C SHARES HORIZON 20+ HORIZON 10+ HORIZON 5
- ---------------------------------------------------------------- ----------- ----------- ---------
<S> <C> <C> <C>
Management Fees................................................. .58% .58% .58%
12b-1 Fees(5)................................................... .75% .75% .75%
Other Expenses.................................................. .90% .90% .90%
----------- ----------- ---------
Total Operating Expenses........................................ 2.23% 2.23% 2.23%
========= ========= =======
</TABLE>
- ---------------
(4) Long-term shareholders may pay more than the economic equivalent of the
maximum initial sales charges permitted by the National Association of
Securities Dealers, although KDI believes that it is unlikely because of the
automatic conversion feature described under "Purchase of Shares--Deferred
Sales Charge Alternative--Class B Shares."
(5) As a result of the accrual of 12b-1 fees, long-term shareholders may pay
more than the economic equivalent of the maximum initial sales charges
permitted by the National Association of Securities Dealers.
3
<PAGE> 7
EXAMPLE
<TABLE>
<CAPTION>
CLASS A SHARES PORTFOLIO 1 YEAR 3 YEARS
------ -------
<S> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming Horizon 20+ $72 $102
(1) 5% annual return and (2) redemption at the end of each time Horizon 10+ $72 $102
period: Horizon 5 $72 $102
CLASS B SHARES(6)
You would pay the following expenses on a $1,000 investment, assuming Horizon 20+ $53 $ 91
5% annual return and (2) redemption at the end of each time period: Horizon 10+ $53 $ 91
Horizon 5 $53 $ 91
You would pay the following expenses on the same investment, assuming Horizon 20+ $23 $ 71
no redemption: Horizon 10+ $23 $ 71
Horizon 5 $23 $ 71
CLASS C SHARES
You would pay the following expenses on a $1,000 investment, assuming Horizon 20+ $23 $ 70
(1) 5% annual return and (2) redemption at the end of each time Horizon 10+ $23 $ 70
period: Horizon 5 $23 $ 70
</TABLE>
- ---------------
(6) Calculated based upon the assumption that the shareholder was an owner of
the shares on the first day of the first year and the contingent deferred
sales charge was applied as follows: 1 year (3%) and 3 years (2%). See
"Redemption or Repurchase of Shares--Contingent Deferred Sales Charge--Class
B Shares" for more information regarding the calculation of the contingent
deferred sales charge.
The purpose of the preceding table is to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. See "Investment Manager and Underwriter" for more information.
The Fund commenced the public offering of its shares on January 1, 1996, thus
the "Other Expenses" shown above are estimates for the current fiscal year. KFS
has agreed to temporarily reduce its management fee and reimburse or pay certain
operating expenses to the extent necessary to limit each Portfolio's "Total
Operating Expenses" to the levels indicated in the tables above.
The Example assumes a 5% annual rate of return pursuant to requirements of the
Securities and Exchange Commission. This hypothetical rate of return is not
intended to be representative of past or future performance of any Portfolio.
The Example should not be considered to be a representation of past or future
expenses. Actual expenses may be greater or less than those shown.
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The Kemper Horizon Fund (the "Fund") consists of three investment portfolios
("Portfolios"), designed for investors with different investment horizons.
Investors are encouraged to choose the appropriate Portfolio based upon their
evaluation of their individual circumstances, including the anticipated timing
of major investment goals, such as sending a child to college, retirement or
purchasing a home, as well as their individual risk tolerance and investment
objective. As investors' horizons change, or as their investment goals change,
they are encouraged to re-evaluate their Portfolio choices to determine whether
they should move all or a portion of their investment to a different Portfolio
with a more appropriate objective and asset mix. The investment horizon of each
Portfolio should not be the sole factor in considering a Portfolio. Investors
should also review the investment objectives and policies of each Portfolio.
- - The Horizon 20+ Portfolio is designed for investors with approximately a 20+
year investment horizon.
- - The Horizon 10+ Portfolio is designed for investors with approximately a 10+
year investment horizon.
- - The Horizon 5 Portfolio is designed for investors with approximately a 5 year
investment horizon.
4
<PAGE> 8
Through professional management and diversification, each Portfolio seeks to
control risk for its given time horizon. Each Portfolio's investment objectives
and investment policies are described below.
HORIZON 20+ PORTFOLIO. The Horizon 20+ Portfolio seeks growth of capital, with
income as a secondary objective. Under normal conditions, the Horizon 20+
Portfolio expects to maintain an asset allocation of approximately 80% equity
securities and 20% fixed income securities.
HORIZON 10+ PORTFOLIO. The Horizon 10+ Portfolio seeks a balance between growth
of capital and income, consistent with moderate risk. Under normal conditions,
the Horizon 10+ Portfolio expects to maintain an asset allocation of
approximately 60% equity securities and 40% fixed income securities.
HORIZON 5 PORTFOLIO. The Horizon 5 Portfolio seeks income consistent with
preservation of capital, with growth of capital as a secondary objective. Under
normal conditions, the Horizon 5 Portfolio expects to maintain an asset
allocation of approximately 40% equity securities and 60% fixed income
securities.
<TABLE>
<CAPTION>
HORIZON 20+ HORIZON 10+ HORIZON 5
TARGET ALLOCATION TARGET ALLOCATION TARGET ALLOCATION
----------------- ----------------- -----------------
<S> <C> <C> <C>
Equities............................................. 80% 60% 40%
Fixed Income......................................... 20% 40% 60%
</TABLE>
Although each Portfolio has a target asset allocation of equity and fixed income
securities, the Fund's investment manager may adjust each Portfolio's asset mix
somewhat based upon cash flow, market conditions and an evaluation of the
anticipated returns and risk for various asset classes. For example, if equities
are considered to have greater appreciation potential relative to fixed income
securities during a given period, a Portfolio's percentage weighting of equities
may be increased. Allocating assets permits the Fund's investment manager to
seek optimum performance for each Portfolio consistent with its investment
objective and investment horizon. Allocation decisions are normally based upon
long-term considerations and it is expected that, over the long-term, the target
allocation percentages will be closely approximated.
When the investment manager determines that adverse market or economic
conditions exist and considers a temporary defensive position advisable, each
Portfolio may invest without limitation in high-grade debt securities,
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, and high quality money market instruments, including
repurchase agreements, or retain cash or cash equivalents. Each Portfolio may
also purchase and write options, engage in financial futures transactions,
engage in foreign currency transactions, lend its portfolio securities and
engage in delayed delivery transactions.
The Portfolios do not generally make investments for short-term profits nor do
they have separate portfolio turnover policies for the equity and fixed income
asset classes. The Portfolios are not restricted in policy with regard to
portfolio turnover and will make changes in their investments from time to time
as business and economic conditions or market prices may dictate and as their
investment objectives and policies may require.
EQUITIES. Each Portfolio's investment in equity securities will be comprised
primarily of common stocks of U.S. and foreign (or "international") companies,
but may also include preferred stocks, securities convertible into and
exchangeable for common or preferred stocks (including other preferred stocks,
warrants and rights, but not including convertible debt securities), equity
investments in partnerships, joint ventures and other forms of noncorporate
investments and warrants and rights exercisable for equity securities.
Investments will primarily include stocks of large, established companies, but
may also include stocks of smaller companies. Each Portfolio's equity securities
will be divided between U.S. and international as described below. The U.S.
equity portion of the Portfolio is divided further into two parts, one invested
in growth stocks and one invested in value stocks. As with the overall asset
allocation, the Fund's investment manager may, from time to time, adjust the
equity asset class of each Portfolio. It is expected, however, that adjustments
to the mix of the equity asset class will be more dynamic than adjustments to
the overall mix.
5
<PAGE> 9
U.S./INTERNATIONAL. The target mix between U.S. equities and international
equities seeks the optimum balance of risk reduction and return enhancement
available from international investing. This allows investors in each Portfolio
the opportunity to invest a portion of their assets in a diversified portfolio
of foreign securities. Under normal conditions, each Portfolio's equity
securities will consist of approximately 70% U.S. and 30% international. In the
case of the international equity exposure, allocations may range from 20% to
40%, although the investment manager may decrease the Portfolios' exposure to
zero if investments in foreign securities appear to be relatively unattractive
in the judgment of the investment manager because of current or anticipated
adverse political or economic conditions.
Foreign securities can be attractive because they increase diversification, as
compared to a portfolio comprised solely of U.S. securities. In addition, many
foreign economies have, from time to time, grown faster than the U.S. economy,
and the returns on investments in these countries have exceeded those of similar
U.S. investments, although there can be no assurance that these conditions will
continue. International diversification allows an investor to achieve greater
portfolio diversification and to take advantage of changes in foreign economies
and market conditions. Although international investing entails special risks,
the mixture of U.S. and international stocks is designed to reduce risk, while
also increasing potential return, relative to investing in U.S. or international
stocks alone. There is no assurance, however, that any specific allocation will
reduce risk or increase returns. See "Special Risk Factors--Foreign Securities"
below.
U.S. GROWTH/U.S. VALUE. The allocation between U.S. growth stocks and U.S. value
stocks seeks to reduce the risk, over a full market cycle, of holding growth
stocks or value stocks alone.
Growth stocks are stocks of companies whose earnings per share are expected by
the investment manager to grow faster than the market average. Growth stocks
tend to trade at higher price to earnings (P/E) ratios than the general market,
but the investment manager believes that the potential of such stocks for above
average earnings more than justifies their price. Value stocks are considered
"bargain stocks" because they are perceived as undervalued, i.e., attractively
priced in relation to their earnings potential (low P/E ratios). Value stocks
typically have dividend yields higher than the average of the companies
represented in the Standard & Poor's 500 Stock Index.
The allocation between growth and value stocks will be made by the investment
manager with the assistance of its Quantitative Research Department, which has a
proprietary model that evaluates macro-economic factors such as the strength of
the economy, interest rates and special factors concerning growth and value
stocks. Historically, the performance of growth and value stocks has tended to
be counter-cyclical, i.e., when one was in favor, the other was out of favor
relative to the equity market in general. Through the allocation process, the
investment manager will seek to weight the portfolio more heavily in the type of
stocks that are believed to present greater total return opportunities at the
time. The neutral allocation between growth and value stocks would be 50%/50%.
Although allocations in favor of growth or value normally would not be expected
to exceed 60%, the allocation to growth or value may be up to 75% at any time.
Allocation decisions are normally based upon long-term considerations and
changes would normally be expected to be gradual. There is no assurance that the
allocation process will improve investment results.
KFS manages the growth portion of the Fund. In managing the growth portion of
the portfolio, KFS emphasizes stock selection and fundamental research in
seeking to enhance long-term performance potential. KFS considers a number of
quantitative and qualitative factors in considering whether to invest in a stock
including high return on equity and earnings growth rate, low level of debt,
strong balance sheet, good management and industry leadership. DVA manages the
value portion of the Fund. DVA seeks stocks it believes to be undervalued. The
principal factor considered is P/E ratios. In selecting among stocks with low
P/E ratios, DVA considers other factors such as financial strength, book to
market value, earnings and dividend growth rates, return on equity and earnings
estimates.
FIXED INCOME. The fixed income portion of each Portfolio may be invested in a
broad variety of fixed income securities including, without limitation: (a)
obligations issued or guaranteed by the U.S. Government or by its agencies or
instrumentalities; (b) bonds, debentures, convertible debt instruments,
assignments or participation in loans, notes, commercial paper, and other debt
securities of corporations, trusts and other entities; (c) certificates of
6
<PAGE> 10
deposit, bankers' acceptances and time deposits and (d) cash and cash
equivalents, including repurchase agreements. The fixed income portion of each
Portfolio will be comprised of U.S. Dollar denominated instruments.
Each portfolio attempts to limit its exposure to credit risk by imposing limits
on the quality of specific securities in the Portfolio and by maintaining a
relatively high average weighted credit quality. Credit quality refers to a
fixed income security issuer's expected ability to make all required interest
and principal payments in a timely manner. Higher rated fixed income securities
generally represent less risk than lower or non-rated securities. Ratings
published by nationally recognized rating agencies such as Standard & Poor's
("S&P") and Moody's Investors Service, Inc. ("Moody's") are widely accepted
measures of credit risk. The fixed income portion of each Portfolio will be
invested in securities that are rated at the time of purchase within the four
highest grades assigned by Moody's, S&P, Fitch Investors Service, Inc. ("Fitch")
or Duff & Phelps Credit Rating Co. ("Duff") or any other Nationally Recognized
Statistical Rating Organization ("NRSRO") as designated by the Securities and
Exchange Commission, or will be of comparable quality as determined by the
Fund's investment manager, provided that up to 10% of the fixed income portion
of each Portfolio may be invested in securities that are lower rated ("junk
bonds"). The top four ratings currently assigned by these organizations are as
follows: Moody's (Aaa, Aa, A or Baa), S&P (AAA, AA, A or BBB), Fitch (AAA, AA, A
or BBB) and Duff (AAA, AA, A or BBB). In addition, under normal conditions, each
Portfolio expects to maintain a relatively high average dollar-weighted credit
quality (i.e., within the top two rating categories of an NRSRO or comparable as
determined by the investment manager). Average dollar-weighted credit quality is
calculated by averaging the ratings of each fixed income security held by a
Portfolio with each rating "weighted" according to the percentage of assets that
it represents. Average dollar-weighted credit quality is not a precise measure
of the credit risk presented by a Portfolio of fixed income securities. For
instance, a combination of securities that are rated AAA and securities that are
rated BB that together result in an average weighted credit quality of AA may
present more risk than a group of just AA rated securities.
After a Portfolio purchases a security, its quality level may fall below that at
which it was purchased (i.e., downgraded). In such instance, the Portfolio would
not be required to sell the security, but the investment manager will consider
such an event in determining whether the Portfolio should continue to hold the
security. The ratings of NRSROs represent their opinions as to the quality of
the securities that they undertake to rate. It should be emphasized, however,
that ratings, and other opinions as to quality, are relative and subjective and
are not absolute standards of quality. For a discussion of lower rated and
non-rated securities and related risks, see "Special Risk Factors--High Yield
(High Risk) Bonds" below.
Each 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 the
Portfolio is approximately 2.5 years, although it may range from 1.5 to 3.5
years depending upon market conditions. "Duration," and the more traditional
"average dollar-weighted maturity," are measures of how a fixed income portfolio
tend to react to interest rate changes. Each fixed income security held by a
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 the 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 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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RISKS. All investments, including those in mutual funds, have risks. No
investment is suitable for all investors. None of the Portfolios is intended to
be a complete investment program, and there is no assurance that any Portfolio
will achieve its objective.
The risks, the returns and the net asset value of each Portfolio will vary and
fluctuate depending upon the weightings of each asset class. Historically,
equities have experienced a higher level of volatility due to market
fluctuations than fixed income securities; and equities have also provided
higher levels of return over time. The value of equities typically change in
response to general market and economic conditions and the activities and
changing circumstances of individual issues. The value of equities may decline
over short or even extended periods of time.
The value of fixed income securities typically changes in response to changes in
economic conditions, interest rates and the creditworthiness of individual
issues. In general, the value of the fixed income securities held by each
Portfolio will vary inversely with changes in interest rates. Thus, a decrease
in interest rates will generally result in an increase in value of the fixed
income securities held by each Portfolio. Conversely, during periods of rising
interest rates, the value of the fixed income securities held by each Portfolio
will generally decline. The magnitude of these fluctuations will generally be
greater for securities with longer maturities or durations. Fixed income
securities are subject to varying degrees of risk of default depending upon,
among other factors, the creditworthiness of the issuer and the ability of the
issuer to meet its obligations.
Investing in securities of smaller, less well-known companies may present
greater opportunities for capital appreciation, but may also involve greater
risks. These companies may have limited product lines, markets or financial
resources, or may depend upon a limited management group. Their securities may
trade less frequently and in limited volume. As a result, the prices of these
securities may fluctuate more than the prices of securities of larger, more
established companies.
SPECIAL RISK FACTORS--FOREIGN SECURITIES. Each Portfolio normally invests a
portion of its assets in foreign securities that are traded principally in
securities markets outside the United States. Each Portfolio may also invest in
U.S. Dollar denominated American Depository Receipts ("ADRs"), which are bought
and sold in the United States. For purposes of the allocation between U.S. and
international securities, ADRs are viewed as U.S. securities. In connection with
its foreign securities investments, each Portfolio may, to a limited extent,
engage in foreign currency exchange, options and futures transactions as a hedge
and not for speculation. Additional information concerning foreign securities
and related techniques is contained under "Additional Investment Information"
below and "Investment Policies and Techniques" in the Statement of Additional
Information.
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 upon 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.
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 possible 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 that could affect investment in these
countries.
EMERGING MARKETS. While each Portfolio's investments in foreign securities will
principally be in developed countries, a Portfolio may make investments in
developing or "emerging" countries, which involve exposure to
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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 costs 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 due to
settlement problems could cause the Portfolio to miss attractive investment
opportunities. Inability to dispose of a portfolio security caused by settlement
problems could result either in losses to a Portfolio due to subsequent declines
in value of the portfolio security or, if a Portfolio has entered into a
contract to sell the security, 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 securities may cease or may be
substantially curtailed and prices for such securities in emerging markets may
not be readily available. In that case, securities in the affected markets will
be valued at fair value determined in good faith by or under the direction of
the Board of Trustees.
Investment in certain emerging market securities is restricted or controlled to
varying degrees. These restrictions or controls may at times limit or preclude
foreign investment in certain emerging market securities and increase the costs
and expenses of a Portfolio. Emerging markets may require governmental approval
for the repatriation of
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investment income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging market's
balance of payments, the market could impose temporary restrictions on foreign
capital remittances.
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 upon 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 foreign entities, such as a Portfolio,
to participate in privatizations may be limited by local law, or the price or
terms on which the Portfolio 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 privatization 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 may invest, large blocks of
the stock of those enterprises may be held by a small group of stockholders,
even after the initial equity offerings by those enterprises. The sale of some
portion or all of those blocks could have an adverse effect on the price of the
stock of any such enterprise.
Prior to making an initial equity offering, most state enterprises or former
state enterprises go through an internal reorganization of 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
operate effectively in a competitive market and may suffer losses or experience
bankruptcy due to such competition.
DEPOSITORY RECEIPTS. For many foreign securities, there are U.S. Dollar
denominated ADRs, which are bought and sold in the United States and are issued
by domestic banks. ADRs represent the right to receive securities of foreign
issuers deposited in the domestic bank or a correspondent bank. ADRs do not
eliminate all the risk inherent in investing in the securities of foreign
issuers, such as changes in foreign currency exchange rates. However, by
investing in ADRs rather than directly in foreign issuers' stock, the Fund
avoids currency risks during the settlement period. In general, there is a
large, liquid market in the United States for most ADRs. Each Portfolio may also
invest in European Depository Receipts ("EDRs"), which are receipts evidencing
an arrangement with a European bank similar to that for ADRs and are designed
for use in the European securities markets. EDRs are not necessarily denominated
in the currency of the underlying security.
SPECIAL RISK FACTORS--HIGH YIELD (HIGH RISK) BONDS. As stated above, each
Portfolio may invest a portion of its assets in fixed income securities that are
in the lower rating categories (below the fourth category) of recognized rating
agencies or are non-rated. These lower rated and non-rated fixed income
securities are considered, on balance, as predominantly speculative with respect
to capacity to pay interest and repay principal in accordance with the terms of
the obligation and generally will involve more credit risk than securities in
the higher rating categories. Lower rated and non-rated securities, which are
commonly referred to as "junk bonds," have
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widely varying characteristics and quality. The market values of such securities
tend to reflect individual corporate developments to a greater extent than do
those of higher rated securities, which react primarily to fluctuations in the
general level of interest rates. Such lower rated securities also are more
sensitive to economic conditions than are higher rated securities. Adverse
publicity and investor perceptions regarding lower rated bonds, whether or not
based upon fundamental analysis, may depress the prices for such securities.
These and other factors adversely affecting the market value of high yield
securities will adversely affect a Portfolio's net asset value. Although some
risk is inherent in all securities ownership, holders of fixed income securities
have a claim on the assets of the issuer prior to the holders of common stock.
Therefore, an investment in fixed income securities generally entails less risk
than an investment in common stock of the same issuer. A Portfolio may have
difficulty disposing of certain high yield securities because they may have a
thin trading market. The lack of a liquid secondary market may have an adverse
effect on market price and a Portfolio's ability to dispose of particular issues
and may also make it more difficult for a Portfolio to obtain accurate market
quotations for purposes of valuing these assets. Additional information
concerning high yield securities appears under "Investment Policies and
Techniques--Other Considerations--High Yield (High Risk) Bonds" and
"Appendix--Ratings of Fixed Income Investments" in the Statement of Additional
Information.
ADDITIONAL INVESTMENT INFORMATION. It is anticipated that, under normal
circumstances, the portfolio turnover rate for each Portfolio will not exceed
100%. Higher portfolio turnover involves correspondingly greater brokerage
commissions or other transaction costs. Higher portfolio turnover may result in
the realization of greater net short-term capital gains. In order to continue to
qualify as a regulated investment company for federal income tax purposes, less
than 30% of the annual gross income of a Portfolio must be derived from the sale
or other disposition of securities and certain other investments held by a
Portfolio for less than three months. See "Dividends and Taxes" in the Statement
of Additional Information.
No Portfolio may borrow money except as a temporary measure for extraordinary or
emergency purposes and not for leverage purposes, and then only in an amount up
to one-third of the value of its total assets in order to meet redemption
requests without immediately selling any portfolio securities or other assets.
If, for any reason, the current value of a Portfolio's total assets falls below
an amount equal to three times the amount of its indebtedness from money
borrowed, the Portfolio will, within three days (not including Sundays and
holidays), reduce its indebtedness to the extent necessary. A Portfolio may
pledge up to 15% of its total assets to secure any such borrowings.
No Portfolio will purchase illiquid securities, including repurchase agreements
maturing in more than seven days, if, as a result thereof, more than 15% of the
Portfolio's net assets, valued at the time of the transaction, would be invested
in such securities. If a Portfolio holds a material percentage of its assets in
illiquid securities, there may be a question concerning the ability of the
Portfolio to make payment within seven days of the date its shares are tendered
for redemption. SEC guidelines to Form N-1A provide that the usual limit on
aggregate holdings by an open-end investment company of illiquid assets is 15%
of its net assets. See "Investment Policies and Techniques-- Over-the-Counter
Options" in the Statement of Additional Information for a description of the
extent to which over-the-counter traded options are in effect considered as
illiquid for purposes of the limit on illiquid securities for the Portfolios.
Each Portfolio may invest in securities eligible for resale pursuant to Rule
144A under the Securities Act of 1933. This rule permits otherwise restricted
securities to be sold to certain institutional buyers, such as the Portfolios.
Such securities may be illiquid and subject to the Portfolio's limitation on
illiquid securities. A "Rule 144A" security may be treated as liquid, however,
if so determined pursuant to procedures adopted by the Board of Trustees.
Investing in Rule 144A securities could have the effect of increasing the level
of illiquidity in the portfolios to the extent that qualified institutional
buyers become uninterested for a time in purchasing Rule 144A securities.
Each Portfolio has adopted certain fundamental investment restrictions, which
are presented in the Statement of Additional Information and that, together with
the investment objective cannot be changed without approval by holders of a
majority of its outstanding voting shares. As defined in the Investment Company
Act of 1940, 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
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outstanding shares are present in person or by proxy; or (b) more than 50% of
the outstanding shares of a Portfolio. Each Portfolio's investment policies that
are not incorporated into any of the fundamental investment restrictions
referred to above are not fundamental and may be changed by the Board of
Trustees without shareholder approval.
OPTIONS AND FINANCIAL FUTURES TRANSACTIONS. Each Portfolio may each deal in
options on securities, securities indexes and foreign currencies, which options
may be listed for trading on a national securities exchange or traded
over-the-counter. Each Portfolio may write (sell) covered call and secured put
options on up to 25% of net assets and may purchase put and call options
provided that no more than 5% of its net assets may be invested in premiums on
such options.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security or other asset at the exercise price
during the option period. A put option gives the purchaser the right to sell,
and the writer the obligation to buy, the underlying security or other asset at
the exercise price during the option period. The writer of a covered call owns
securities or other assets that are acceptable for escrow and the writer of a
secured put invests an amount not less than the exercise price in eligible
securities or other assets to the extent that it is obligated as a writer. If a
call written by a Portfolio is exercised, the Portfolio foregoes any possible
profit from an increase in the market price of the underlying security or other
asset over the exercise price plus the premium received. In writing puts, there
is a risk that a Portfolio may be required to take delivery of the underlying
security or other asset at a disadvantageous price.
Over-the-counter traded options ("OTC options") differ from exchange traded
options in several respects. They are transacted directly with dealers and not
with a clearing corporation, and there is a risk of non-performance by the
dealer as a result of the insolvency of such dealer or otherwise, in which event
a Portfolio may experience material losses. However, in writing options the
premium is paid in advance by the dealer. OTC options are available for a
greater variety of securities or other assets, and a wider range of expiration
dates and exercise prices, than for exchange traded options.
Each Portfolio may engage in financial futures transactions. Financial futures
contracts are commodity contracts that obligate the long or short holder to take
or make delivery of a specified quantity of a financial instrument, such as a
security, or the cash value of a securities index during a specified future
period at a specified price. A Portfolio will "cover" futures contracts sold by
the Portfolio and maintain in a segregated account certain liquid assets in
connection with futures contracts purchased by the Portfolio as described under
"Investment Policies and Techniques" in the Statement of Additional Information.
In connection with their foreign securities investments, the Portfolios may also
engage in foreign currency financial futures transactions. A Portfolio will not
enter into any futures contracts or options on futures contracts if the
aggregate of the contract value of the outstanding futures contracts of the
Portfolio and futures contracts subject to outstanding options written by the
Portfolio would exceed 50% of the total assets of the Portfolio.
The Portfolios may engage in financial futures transactions and may use index
options as an attempt to hedge against market risks. For example, when the
near-term market view is bearish but the portfolio composition is judged
satisfactory for the longer term, exposure to temporary declines in the market
may be reduced by entering into futures contracts to sell securities or the cash
value of a securities index. Conversely, where the near-term view is bullish,
but the Portfolio is believed to be well positioned for the longer term with a
high cash position, the Portfolio can hedge against market increases by entering
into futures contracts to buy securities or the cash value of a securities
index. In either case, the use of futures contracts would tend to reduce
portfolio turnover and facilitate the Portfolio's pursuit of its investment
objective.
Futures contracts entail risks. If the investment manager's judgment about the
general direction of interest rates, markets or exchange rates is wrong, the
overall performance may be poorer than if no such contracts had been entered
into. There may be an imperfect correlation between movements in prices of
futures contracts and portfolio assets being hedged. In addition, the market
prices of futures contracts may be affected by certain factors. If participants
in the futures market elect to close out their contracts through offsetting
transactions rather than meet margin requirements, distortions in the normal
relationship between the assets and futures market could result.
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Price distortions also could result if investors in futures contracts decide to
make or take delivery of underlying securities or other assets rather than
engage in closing transactions because of the resultant reduction in the
liquidity of the futures market. In addition, because, from the point of view of
speculators, margin requirements in the futures market are less onerous than
margin requirements in the cash market, increased participation by speculators
in the futures market could cause temporary price distortions. Because of the
possibility of price distortions in the futures market, and because of imperfect
correlation between movements in the prices of securities or other assets and
movements in the prices of futures contracts, a correct forecast of market
trends by the investment manager still may not result in a successful hedging
transaction. Any of these factors could cause a Portfolio to lose money on the
financial futures contracts and also on the value of its portfolio assets. The
costs incurred in connection with futures transactions could reduce a
Portfolio's return.
Index options involve risks similar to those risks relating to transactions in
financial futures contracts described above. Also, an option purchased by a
Portfolio may expire worthless, in which case a Portfolio would lose the premium
paid therefor.
A Portfolio may engage in futures transactions only on commodities exchanges or
boards of trade. A Portfolio will not engage in transactions in index options,
financial futures contracts or related options for speculation, but only as an
attempt to hedge against changes in interest rates or market conditions
affecting the values of securities that the Portfolio owns or intends to
purchase.
FOREIGN CURRENCY TRANSACTIONS. The Portfolios may invest a portion of their
assets in securities denominated in foreign currencies. The Portfolios may
engage in foreign currency transactions in connection with their investments in
foreign securities but will not speculate in foreign currency exchange.
The value of the foreign securities investments of a Portfolio measured in U.S.
Dollars (including ADRs) may be affected favorably or unfavorably by changes in
foreign currency exchange rates and exchange control regulations, and the
Portfolio may incur costs in connection with conversions between various
currencies. A Portfolio will conduct its foreign currency exchange transactions
either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market, or through forward contracts to purchase or sell
foreign currencies. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are traded
directly between currency traders (usually large commercial banks) and their
customers.
When a Portfolio enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may want to establish the U.S. Dollar cost
or proceeds, as the case may be. By entering into a forward contract in U.S.
Dollars for the purchase or sale of the amount of foreign currency involved in
an underlying security transaction, the Portfolio is able to protect itself
against a possible loss between trade and settlement dates resulting from an
adverse change in the relationship between the U.S. Dollar and such foreign
currency. However, this tends to limit potential gains that might result from a
positive change in such currency relationships. A Portfolio may also hedge its
foreign currency exchange rate risk by engaging in currency financial futures
and options transactions.
When the investment manager believes that the currency of a particular foreign
country may suffer a substantial decline against the U.S. Dollar, it may enter
into a forward contract to sell an amount of foreign currency approximating the
value of some or all of the Portfolio's securities denominated in such foreign
currency. The forecasting of short-term currency market movement is extremely
difficult and whether such a short-term hedging strategy will be successful is
highly uncertain.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of a contract. Accordingly, it may be
necessary for a Portfolio to purchase additional currency on the spot market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of foreign currency the Portfolio is obligated to deliver
when a decision is made to sell the security and make delivery of the foreign
currency in settlement of a forward contract. Conversely, it may be necessary to
sell on the spot market some of the
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foreign currency received upon the sale of the portfolio security if its market
value exceeds the amount of foreign currency the Portfolio is obligated to
deliver.
A Portfolio will not speculate in foreign currency exchange. A Portfolio will
not enter into such forward contracts or maintain a net exposure in such
contracts where the Portfolio would be obligated to deliver an amount of foreign
currency in excess of the value of the Portfolio's securities or other assets
denominated in that currency. The Portfolios do not intend to enter into such
forward contracts if they would have more than 15% of the value of their total
assets committed to forward contracts for the purchase of a foreign currency. A
Portfolio segregates cash or liquid high-grade securities in an amount not less
than the value of the Portfolio's total assets committed to forward foreign
currency exchange contracts entered into for the purchase of a foreign currency.
If the value of the securities segregated declines, additional cash or
securities are added so that the segregated amount is not less than the amount
of the Portfolio's commitments with respect to such contracts. A Portfolio
generally does not enter into a forward contract with a term longer than one
year.
DERIVATIVES. In addition to options, financial futures and foreign currency
transactions, consistent with its objective, each Portfolio may invest in a
broad array of financial instruments and securities in which the value of the
instrument or security is "derived" from the performance of an underlying asset
or a "benchmark" such as a security index, an interest rate or a currency
("derivatives"). Derivatives are most often used to manage investment risk, to
increase or decrease exposure to an asset class or benchmark (as a hedge or to
enhance return), or to create an investment position indirectly (often because
it is more efficient or less costly than direct investment). The types of
derivatives used by each Portfolio and the techniques employed by the investment
manager may change over time as new derivatives and strategies are developed or
regulatory changes occur.
SPECIAL RISK FACTORS--OPTIONS, FUTURES, FOREIGN CURRENCIES AND OTHER
DERIVATIVES. The Statement of Additional Information contains further
information about the characteristics, risks and possible benefits of options,
futures, foreign currency and other derivative transactions. See "Investment
Policies and Techniques" in the Statement of Additional Information. The
principal risks are: (a) possible imperfect correlation between movements in the
prices of options, currencies, futures contracts or other derivatives and
movements in the prices of the securities or currencies hedged, used for cover
or that the derivative intended to replicate; (b) lack of assurance that a
liquid secondary market will exist for any particular option, futures, foreign
currency or other derivatives contract at any particular time; (c) the need for
additional skills and techniques beyond those required for normal portfolio
management; (d) losses on futures contracts resulting from market movements not
anticipated by the investment manager; (e) the possible need to defer closing
out certain options, futures contracts or other derivatives in order to continue
to qualify for beneficial tax treatment afforded "regulated investment
companies" under the Internal Revenue Code; and (f) the possible non-performance
of the counter-party to the derivative contract.
LENDING OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, the Portfolios 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 U.S. Government securities) equal to
no less than the market value, determined daily, of the securities loaned. The
Portfolios will receive amounts equal to dividends or interest on the securities
loaned. The Portfolios 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 investment manager to be of good standing, and when the investment
manager believes the potential earnings justify the attendant risk. Management
will limit such lending to not more than one-third of the value of a Portfolio's
total assets.
DELAYED DELIVERY TRANSACTIONS. Each Portfolio 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 a 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 transactions. The value of fixed yield
14
<PAGE> 18
securities to be delivered in the future will fluctuate as interest rates vary.
Because a Portfolio must set aside cash or liquid high grade securities to
satisfy its commitments to purchase when-issued or delayed delivery securities,
flexibility to manage the Portfolio's investments may be limited if commitments
to purchase when-issued or delayed delivery securities were to exceed 25% of the
value of its assets.
To the extent a Portfolio engages in when-issued or delayed delivery
transactions, it will generally do so for the purpose of actually acquiring
portfolio securities consistent with the Portfolio's investment objective and
policies. A Portfolio reserves the right to sell these securities before the
settlement date if deemed advisable. In some instances, the third-party seller
of when-issued or delayed delivery securities may determine prior to the
settlement date that it will be unable to meet its existing transaction
commitments without borrowing securities. If advantageous from a yield
perspective, a Portfolio may, in that event, agree to resell its purchase
commitment to the third-party seller at the current market price on the date of
sale and concurrently enter into another purchase commitment for such securities
at a later date. As an inducement for a Portfolio to "roll over" its purchase
commitment, the Portfolio may receive a negotiated fee.
REPURCHASE AGREEMENTS. Each Portfolio may invest in repurchase agreements, under
which it acquires ownership of a security and a broker-dealer or bank agrees to
repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the Portfolio's holding period. The investment
manager will evaluate the creditworthiness of all entities with which the Fund
intends to engage in repurchase agreements pursuant to procedures adopted by the
Board of Trustees of the Fund. Maturity of the securities subject to repurchase
may exceed one year. 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. Repurchase agreements maturing in more
than seven days will be considered illiquid for purposes of the Portfolios'
limitations on illiquid securities.
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 (such as credit card or automobile loan receivables). 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.
Since the 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.
Each 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
15
<PAGE> 19
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.
Additional information concerning collateralized obligations is contained in the
Statement of Additional Information under "Investment Policies and
Techniques--Collateralized Obligations."
INVESTMENT MANAGER AND UNDERWRITER
INVESTMENT MANAGER. Kemper Financial Services, Inc. ("KFS"), 120 South LaSalle
Street, Chicago, Illinois 60603, is the investment manager of the Fund and
provides each Portfolio with continuous professional investment supervision.
Dreman Value Advisors, Inc. ("DVA") is the sub-adviser for the Fund. KFS is one
of the largest investment managers in the country and has been engaged in the
management of investment funds for more than forty-five years. KFS and its
affiliates provide investment advice and manage investment portfolios for the
Kemper Funds, the Kemper insurance companies, Kemper Corporation and other
corporate, pension, profit-sharing and individual accounts representing
approximately $60 billion under management. KFS acts as investment manager for
27 open-end and seven closed-end investment companies, with 67 separate
investment portfolios, representing more than 3 million shareholder accounts.
KFS is a wholly-owned subsidiary of Kemper Financial Companies, Inc., which is a
financial services holding company that is more than 99% owned by Kemper
Corporation, a diversified insurance and financial services holding company.
Kemper Corporation has entered into a definitive agreement with an investor
group led by Zurich Insurance Company ("Zurich") pursuant to which Kemper
Corporation would be acquired by the investor group in a merger transaction. As
part of the transaction, Zurich or an affiliate would purchase KFS. The Kemper
Corporation and Zurich boards have approved the transaction. In addition,
because the transaction would constitute an assignment of the Fund's investment
management agreement with KFS and, potentially, Rule 12b-1 agreements under the
Investment Company Act of 1940, and therefore a termination of such agreements,
KFS has received approval of new agreements from the Fund's board and
shareholders. The investor group has informed Kemper Corporation that it expects
the transaction to close early in 1996.
Responsibility for overall management of the Fund rests with its Board of
Trustees and officers. Professional investment supervision is provided by KFS.
The investment management agreement provides that KFS shall act as the Fund's
investment adviser, manage its investments and provide it with various services
and facilities. KFS will from time to time use the services of Kemper Investment
Management Company Limited, 1 Fleet Place, London EC4M 7RQ, a wholly-owned
subsidiary of KFS, with respect to foreign securities investments of the Fund
including analysis, research, execution and trading services.
Thomas M. Regner has been the portfolio manager of the Fund since its inception
in 1995. Mr. Regner is a vice president of the Fund and is senior vice president
and equity strategist of KFS. He is responsible for managing the asset mix of
each Portfolio. He is assisted in managing the various asset classes by
investment personnel who specialize in certain areas. For the value portion of
the U.S. equities portion of each Portfolio, asset management is performed by
DVA as sub-adviser. Mr. Regner joined KFS in December, 1994. Immediately prior
to joining KFS he was a financial adviser for a major investment manager and
research company prior thereto, he was the chief investment officer and senior
portfolio manager for a professional association. Mr. Regner received his B.A.
and M.S. from the University of Wisconsin, Madison, Wisconsin. He is a Chartered
Financial Analyst.
KFS has an Equity Investment Committee that determines overall investment
strategy for equity portfolios managed by KFS. The Equity Investment Committee
is currently comprised of the following members: Daniel J. Bukowski, Tracy
McCormick Chester, James H. Coxon, Richard A. Goers, Karen A. Hussey, Frank D.
Korth, Gary A. Langbaum, James R. Neel, Thomas M. Regner, Steven H. Reynolds and
Stephen B. Timbers. The portfolio manager works together with the Equity
Investment Committee and various equity analysts and equity traders as a team to
16
<PAGE> 20
manage each Portfolio's investments. Equity analysts--through research, analysis
and evaluation--work to develop investment ideas appropriate for each Portfolio.
These ideas are studied and debated by the Equity Investment Committee and, if
approved, are added to a list of eligible investments. The portfolio manager
uses the list of eligible investments to help them structure the Portfolio
investments in a manner consistent with the Portfolios' objectives. The KFS
International Equity Investments area, directed by Dennis H. Ferro, and the KFS
International Fixed Income Investments area, directed by Gordon K. Johns,
provide research and analysis regarding foreign investments to the portfolio
managers. After investment decisions are made, equity traders execute the
portfolio manager's instructions through various broker-dealer firms.
KFS also has a Fixed Income Investment Committee that determines overall
investment strategy for fixed income portfolios managed by KFS. The Fixed Income
Committee is currently comprised of the following members: J. Patrick Beimford,
Jr., Robert S. Cessine, Frank E. Collecchia, George Klein, Michael A. McNamara,
Christopher J. Mier, Frank J. Rachwalski, Jr., Harry E. Resis, Jr., Robert H.
Schumacher, John E. Silvia, Stephen B. Timbers, Jonathan W. Trutter and
Christopher T. Vincent. The portfolio manager works together with the Fixed
Income Committee and various fixed income analysts and traders as a team to
manage the Portfolios' fixed income investments. Analysts provide market,
economic and financial research and analysis that is used by the Fixed Income
Committee to establish broad parameters for the Portfolios, including duration
and cash levels. In addition, credit research by analysts is used by the
portfolio manager in selecting securities appropriate for the Portfolios. After
investment decisions are made, fixed income traders execute the portfolio
manager's instructions through various broker-dealer firms.
KFS is paid an investment management fee, monthly, by each Portfolio, at the
annual rates shown below.
<TABLE>
<CAPTION>
MANAGEMENT FEE
AVERAGE DAILY NET ASSETS OF A PORTFOLIO RATES
-------------------------------------------------------------------- --------------
<S> <C>
$0 - $250 million................................................... .58%
$250 million - $1 billion........................................... .55
$1 billion - $2.5 billion........................................... .53
$2.5 billion - $5 billion........................................... .51
$5 billion - $7.5 billion........................................... .48
$7.5 billion - $10 billion.......................................... .46
$10 billion - $12.5 billion......................................... .44
Over $12.5 billion.................................................. .42
</TABLE>
KFS has agreed to temporarily reduce its investment management fee and reimburse
or pay operating expenses of each Portfolio to the extent necessary to limit the
Portfolio's operating expenses to the levels described under "Summary of
Expenses." For this purpose "operating expenses" do not include taxes, interest,
extraordinary expenses, brokerage commissions or transaction costs. KFS can
terminate this arrangement at any time upon notice to the Fund.
DVA. As mentioned above, DVA is the sub-adviser for the Fund. Under the terms of
the Sub-Advisory Agreement, DVA will manage the value portion of each Portfolio
and will provide such other investment advice, research and assistance as KFS
may, from time to time, reasonably request. DVA, which was formed in October,
1994, has served as investment manager for mutual funds and certain
institutional accounts since August, 1995 when it acquired substantially all the
assets of Dreman Value Management, L.P. DVA is a wholly-owned subsidiary of KFS
and is located at 10 Exchange Place, Suite 2050, Jersey City, New Jersey 07302.
KFS pays DVA for its services a sub-advisory fee, payable monthly at the annual
rate of .25% of the portion of the average daily net assets of each Portfolio
allocated by KFS to DVA for management.
David N. Dreman has been primarily responsible for management of the value
portion of each Portfolio since the Fund's inception in 1995. Mr. Dreman is the
Chairman and a Director of DVA. Mr. Dreman is a pioneer of the philosophy of
contrarian investing (buying what is out of favor) and a leading proponent of
the low P/E investment style. He is a columnist for Forbes and the author of
several books on the value style of investing. Mr. Dreman received a Bachelor of
Finance in Commerce from the University of Manitoba, Winnipeg, Manitoba, Canada.
17
<PAGE> 21
PRINCIPAL UNDERWRITER. Pursuant to an underwriting and distribution services
agreement ("distribution agreement") with the Fund, Kemper Distributors, Inc.
("KDI"), 120 South LaSalle Street, Chicago, Illinois, 60603, a wholly-owned
subsidiary of KFS, is the principal underwriter and distributor of the Fund's
shares and acts as agent of the Fund in the sale of its shares. KDI bears all
its expenses of providing services pursuant to the distribution agreement,
including the payment of any commissions. KDI provides for the preparation of
advertising or sales literature and bears the cost of printing and mailing
prospectuses to persons other than shareholders. KDI bears the cost of
qualifying and maintaining the qualification of Fund shares for sale under the
securities laws of the various states and the Fund bears the expense of
registering its shares with the Securities and Exchange Commission. KDI may
enter into related selling group agreements with various broker-dealers,
including affiliates of KDI, that provide distribution services to investors.
KDI also may provide some of the distribution services.
CLASS A SHARES. KDI receives no compensation from the Fund as principal
underwriter for Class A shares and pays all expenses of distribution of the
Fund's Class A shares under the distribution agreements not otherwise paid by
dealers or other financial services firms. As indicated under "Purchase of
Shares," KDI retains the sales charge upon the purchase of shares and pays or
allows concessions or discounts to firms for the sale of the Fund's shares.
CLASS B SHARES. For its services under the distribution agreement, KDI receives
a fee from each Portfolio, payable monthly, at the annual rate of .75% of
average daily net assets of the Portfolio attributable to Class B shares. This
fee is accrued daily as an expense of Class B shares. KDI also receives any
contingent deferred sales charges. See "Redemption or Repurchase of
Shares--Contingent Deferred Sales Charge--Class B Shares." KDI currently
compensates firms for sales of Class B shares at a commission rate of 3.75%.
CLASS C SHARES. For its services under the distribution agreement, KDI receives
a fee from each Portfolio, payable monthly, at the annual rate of .75% of
average daily net assets of the Portfolio attributable to Class C shares. This
fee is accrued daily as an expense of Class C shares. KDI currently pays firms
for sales of Class C shares a distribution fee, payable quarterly, at an annual
rate of .75% of net assets attributable to Class C shares maintained and
serviced by the firm. A firm becomes eligible for the distribution fee based
upon assets in accounts in the month of purchase and the fee continues until
terminated by KDI or the Fund.
RULE 12B-1 PLAN. Since the distribution agreement provides for fees payable as
an expense of the Class B shares and the Class C shares that are used by KDI to
pay for distribution services for those classes, that agreement is approved and
reviewed separately for the Class B shares and the Class C shares in accordance
with Rule 12b-1 under the Investment Company Act of 1940, which regulates the
manner in which an investment company may, directly or indirectly, bear the
expenses of distributing its shares.
If the Rule 12b-1 Plan is terminated for any class of any Portfolio in
accordance with its terms, the obligation of the Fund to make payments to KDI
pursuant to the Plan for such class will cease and the Fund will not be required
to make any payments for such class past the termination date. Thus, there is no
legal obligation for the Fund to pay any expenses incurred by KDI in excess of
its fees under a Plan, if for any reason the Plan is terminated in accordance
with its terms. Future fees under a Plan may or may not be sufficient to
reimburse KDI for its expenses incurred.
ADMINISTRATIVE SERVICES. KDI also provides information and administrative
services for shareholders of the Fund pursuant to an administrative services
agreement ("administrative agreement"). KDI may enter into related arrangements
with various financial services firms, such as broker-dealer firms or banks
("firms"), that provide services and facilities for their customers or clients
who are shareholders of the Fund. Such administrative services and assistance
may include, but are not limited to, establishing and maintaining shareholder
accounts and records, processing purchase and redemption transactions, answering
routine inquiries regarding the Fund and its special features, and such other
services as may be agreed upon from time to time and permitted by applicable
statute, rule or regulation. KDI bears all its expenses of providing services
pursuant to the administrative agreement, including the payment of any service
fees. For services under the administrative agreement, KDI is paid a fee
monthly, at the annual rate of up to .25% of average daily net assets of each
class of each Portfolio. KDI then pays each firm a service fee at an annual rate
of up to .25% of net assets of each class of those accounts that it maintains
and services
18
<PAGE> 22
for each Portfolio. Firms to which service fees may be paid include
broker-dealers affiliated with KDI. A firm becomes eligible for the service fee
based on assets in the accounts in the month following the month of purchase (in
the month of purchase for Class C Shares) and the fee continues until terminated
by KDI or the Fund. The fees are calculated monthly and paid quarterly. KDI may
advance to financial services firms the first year service fee related to Class
B shares sold by such firms at a rate of up to .25% of the purchase price of
such shares. As compensation therefor, KDI may retain the administrative
services fee with respect to such shares for the first year after purchase.
Financial services firms will become eligible for future service fees with
respect to such shares commencing in the thirteenth month following the month of
purchase.
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreements not paid to firms to compensate
itself for administrative functions performed for the Fund. Currently, the
administrative services fee payable to KDI is based only upon Portfolio assets
in accounts for which there is a firm listed on the Fund's records and it is
intended that KDI will pay all the administrative services fee that it receives
from a Portfolio to firms in the form of service fees. The effective
administrative services fee rate to be charged against all assets of a Portfolio
while this procedure is in effect will depend upon the proportion of Portfolio
assets that is in accounts for which there is a firm of record.
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT. Investors Fiduciary
Trust Company ("IFTC"), 127 West 10th Street, Kansas City, Missouri 64105, as
custodian, and State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, as sub-custodian, have custody of all securities and cash
of the Fund maintained in the United States. The Chase Manhattan Bank, N.A.,
Chase MetroTech Center, Brooklyn, New York 11245, as custodian, has custody of
all securities and cash of the Fund held outside the United States. IFTC also is
the Fund's transfer agent and dividend-paying agent. Pursuant to a services
agreement with IFTC, Kemper Service Company, an affiliate of KFS, serves as
"Shareholder Service Agent" of the Fund and, as such, performs all of IFTC's
duties as transfer agent and dividend-paying agent. For a description of
custodian, transfer agent and shareholder service agent fees, see "Investment
Manager and Underwriter" in the Statement of Additional Information.
PORTFOLIO TRANSACTIONS. KFS places all orders for purchases and sales of each
Portfolio's securities (except that DVA places all orders for the value portion
of each Portfolio). Subject to seeking best execution of orders, KFS or DVA may
consider sales of shares of the Fund and other funds managed by KFS and DVA as a
factor in selecting broker-dealers. See "Portfolio Transactions" in the
Statement of Additional Information.
DIVIDENDS AND TAXES
DIVIDENDS. Each Portfolio normally distributes dividends of net investment
income as follows: annually for the Horizon 20+ Portfolio; semi-annually for the
Horizon 10+ Portfolio and quarterly for the Horizon 5 Portfolio. Each Portfolio
distributes any net realized short-term and long-term capital gains at least
annually.
Dividends paid for a Portfolio as to each class of its shares will be calculated
in the same manner, at the same time and on the same day. The level of income
dividends per share (as a percentage of net asset value) will be lower for Class
B and Class C shares than for Class A shares primarily as a result of the
distribution services fee applicable to Class B and Class C shares.
Distributions of capital gains, if any, will be paid in the same amount for each
class.
Income and capital gain dividends, if any, of a Portfolio will be credited to
shareholder accounts in full and fractional shares of the same class of that
Portfolio at net asset value on the reinvestment date, except that, upon written
request to the Shareholder Service Agent, a shareholder may select one of the
following options:
(1) To receive income and short-term capital gain dividends in cash and
long-term capital gain dividends in shares of the same class at net asset
value; or
(2) To receive income and capital gain dividends in cash.
19
<PAGE> 23
Any dividends of a Portfolio that are reinvested normally will be reinvested in
shares of the same class of that same Portfolio. However, upon written request
to the Shareholder Service Agent, a shareholder may elect to have dividends of a
Portfolio invested in shares of the same class of another Kemper Fund at the net
asset value of such class of such other fund. See "Special Features--Class A
Shares--Combined Purchases" for a list of such other Kemper Funds. To use this
privilege of investing dividends of a Portfolio in shares of another Kemper
Fund, shareholders must maintain a minimum account value of $1,000 in the
Portfolio distributing the dividends and a minimum account value of $1,000 in
the Kemper Fund in which dividends are reinvested. Each Portfolio will reinvest
dividend checks (and future dividends) in shares of that same Portfolio and
class if checks are returned as undeliverable.
TAXES. The Fund intends each Portfolio to qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code (the "Code") and, if so
qualified, a Portfolio will not be liable for federal income taxes to the extent
its earnings are distributed. Dividends derived from net investment income and
net short-term capital gains are taxable to shareholders as ordinary income and
long-term capital gain dividends are taxable to shareholders as long-term
capital gain regardless of how long the shares have been held and whether
received in cash or shares. Long-term capital gain dividends received by
individual shareholders are taxed at a maximum rate of 28%. Dividends declared
in October, November or December to shareholders of record as of a date in one
of those months and paid during the following January are treated as paid on
December 31 of the calendar year declared. A portion of the dividends paid by
the Fund may qualify for the dividends received deduction available to corporate
shareholders.
A dividend received shortly after the purchase of shares reduces the net asset
value of the shares by the amount of the dividend and, although in effect a
return of capital, will be taxable to the shareholder. If the net asset value of
shares were reduced below the shareholder's cost by dividends representing gains
realized on sales of securities, such dividends would be a return of investment
though taxable as stated above.
The Fund is required by law to withhold 31% of taxable dividends and redemption
proceeds paid to certain shareholders who do not furnish a correct taxpayer
identification number (in the case of individuals, a social security number) and
in certain other circumstances. Trustees of qualified retirement plans and
403(b)(7) accounts are required by law to withhold 20% of the taxable portion of
any distribution that is eligible to be "rolled over." The 20% withholding
requirement does not apply to distributions from Individual Retirement Accounts
(IRAs) or any part of a distribution that is transferred directly to another
qualified retirement plan, 403(b)(7) account, or IRA. Shareholders should
consult with their tax advisers regarding the 20% withholding requirement.
After each transaction, shareholders will receive a confirmation statement
giving complete details of the transaction except that statements will be sent
quarterly for transactions involving reinvestment of dividends, periodic
investment and redemption programs and reinvestment programs for unit investment
trusts sponsored by Everen Securities, Inc. Information for income tax purposes,
including, when appropriate, information regarding any foreign taxes and
credits, will be provided after the end of the calendar year. Shareholders are
encouraged to retain copies of their account confirmation statements or year-end
statements for tax reporting purposes. However, those who have incomplete
records may obtain historical account transaction information at a reasonable
fee.
NET ASSET VALUE
The net asset value per share of a Portfolio is determined separately for each
class by dividing the value of the Portfolio's net assets attributable to that
class by the number of shares of that class outstanding. The per share net asset
value of the Class B and Class C shares of a Portfolio will generally be lower
than that of the Class A shares of the Portfolio because of the higher expenses
borne by Class B and Class C shares. Securities that are primarily traded on a
domestic securities exchange or securities listed on the NASDAQ National Market
are valued at the last sale price on the exchange or market where primarily
traded or listed or, if there is no recent sale price available, at the last
current bid quotation. Securities that are primarily traded on foreign
securities exchanges are generally valued at the preceding closing values of
such securities on their respective exchanges where primarily traded. A
20
<PAGE> 24
security that is listed or traded on more than one exchange is valued at the
quotation on the exchange determined to be the primary market for such security
by the Board of Trustees or its delegates. Securities not so traded or listed
are valued at the last current bid quotation if market quotations are available.
Fixed income securities are valued by using market quotations, or independent
pricing services that use prices provided by market makers or estimates of
market values obtained from yield data relating to instruments or securities
with similar characteristics. Equity options are valued at the last sale price
unless the bid price is higher or the asked price is lower, in which event such
bid or asked priced is used. Exchange traded fixed income options are valued at
the last sale price unless there is no sale price, in which event current prices
provided by market makers are used. Over-the-counter traded options are valued
based upon current prices provided by market makers. Financial futures and
options thereon are valued at the settlement price established each day by the
board of trade or exchange on which they are traded. Other securities and assets
are valued at fair value as determined in good faith by the Board of Trustees.
Because of the need to obtain prices as of the close of trading on various
exchanges throughout the world, the calculation of net asset value of a
Portfolio investing in foreign securities does not necessarily take place
contemporaneously with the determination of the prices of the Portfolio's
foreign securities, which may be made prior to the determination of net asset
value. For purposes of determining a Portfolio's net asset value that invests in
foreign securities, all assets and liabilities initially expressed in foreign
currency values will be converted into U.S. Dollar values at the mean between
the bid and offered quotations of such currencies against U.S. Dollars as last
quoted by a recognized dealer. If an event were to occur, after the value of a
security was so established but before the net asset value per share was
determined, which was likely to materially change the net asset value, then that
security would be valued using fair value considerations by the Board of
Trustees or its delegates. On each day the New York Stock Exchange (the
"Exchange") is open for trading, the net asset value is determined as of the
earlier of 3:00 p.m. Chicago time or the close of the Exchange.
PURCHASE OF SHARES
ALTERNATIVE PURCHASE ARRANGEMENTS. Class A shares of the Fund are sold to
investors subject to an initial sales charge. Class B shares are sold without an
initial sales charge but are subject to higher ongoing expenses than Class A
shares and a contingent deferred sales charge payable upon certain redemptions.
Class B shares automatically convert to Class A shares six years after issuance.
Class C shares are sold without an initial or a contingent deferred sales charge
but are subject to higher ongoing expenses than Class A shares and do not
convert into another class. When placing purchase orders, investors must specify
whether the order is for Class A, Class B or Class C shares.
The primary distinctions among the classes of shares lie in their initial and
contingent deferred sales charge structures and in their ongoing expenses,
including asset-based sales charges in the form of Rule 12b-1 distribution fees.
These differences are summarized in the table below. See, also, "Summary of
Expenses." Each class has distinct advantages and disadvantages for different
investors, and investors may choose the class that best suits their
circumstances and objectives.
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
Class A Maximum initial sales charge None Initial sales charge waived
of 5.75% of the public or reduced for certain
offering price purchases
Class B Maximum contingent deferred 0.75% Shares convert to Class A
sales charge of 4% of shares six years after
redemption proceeds; issuance
declines to zero after six
years
Class C None 0.75% No conversion feature
</TABLE>
The minimum initial investment for each Portfolio is $1,000 and the minimum
subsequent investment is $100. The minimum initial investment for an Individual
Retirement Account is $250 and the minimum subsequent investment
21
<PAGE> 25
is $50. Under an automatic investment plan, such as Bank Direct Deposit, Payroll
Direct Deposit or Government Direct Deposit, the minimum initial and subsequent
investment is $50. These minimum amounts may be changed at any time in
management's discretion.
Share certificates will not be issued unless requested in writing. It is
recommended that investors not request share certificates unless needed for a
specific purpose. You cannot redeem shares by telephone or wire transfer or use
the telephone exchange privilege if share certificates have been issued. A lost
or destroyed certificate is difficult to replace and can be expensive to the
shareholder (a bond worth 2% or more of the certificate value is normally
required).
SPECIAL PROMOTION. From the date of this prospectus until at least March 29,
1996 ("Special Offering Period"), KDI intends to reallow the full applicable
sales charge with respect to Class A shares purchased during the Special
Offering Period (not including shares acquired at net asset value) and to pay an
additional commission of .50% with respect to Class B shares purchased during
the Special Offering Period not including exchanges or other transactions for
which commissions are not paid.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES. The public offering price of
Class A shares for purchasers choosing the initial sales charge alternative is
the net asset value plus a sales charge, as set forth below.
<TABLE>
<CAPTION>
SALES CHARGE
----------------------------------------------------------
ALLOWED TO
DEALERS AS A
AS A PERCENTAGE AS A PERCENTAGE PERCENTAGE OF
AMOUNT OF PURCHASE OF OFFERING PRICE OF NET ASSET VALUE* OFFERING PRICE
----------------- ------------------- --------------
<S> <C> <C> <C>
Less than $50,000..................................... 5.75% 6.10% 5.20%
$50,000 but less than $100,000........................ 4.50 4.71 4.00
$100,000 but less than $250,000....................... 3.50 3.63 3.00
$250,000 but less than $500,000....................... 2.60 2.67 2.25
$500,000 but less than $1 million..................... 2.00 2.04 1.75
$1 million and over................................... 0.00** 0.00** ***
</TABLE>
- ---------------
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales charge as
discussed below.
*** Commissions payable by KDI as discussed below.
Each Portfolio receives the entire net asset value of all its Class A shares
sold. KDI, the Fund's principal underwriter, retains the sales charge on sales
of Class A shares from which it allows discounts from the applicable public
offering price to investment dealers, which discounts are uniform for all
dealers in the United States and its territories. The normal discount allowed to
dealers is set forth in the above table. Upon notice to all dealers with whom it
has sales agreements, KDI may reallow up to the full applicable sales charge, as
shown in the above table, during periods and for transactions specified in such
notice and such reallowances may be based upon attainment of minimum sales
levels. During periods when 90% or more of the sales charge is reallowed, such
dealers may be deemed to be underwriters as that term is defined in the
Securities Act of 1933.
Class A shares may be purchased at net asset value to the extent that the amount
invested represents the net proceeds from a redemption of shares of a mutual
fund for which KFS or DVA does not serve as investment manager ("non-Kemper
fund") provided that: (a) the investor has previously paid either an initial
sales charge in connection with the purchase of the non-Kemper fund shares
redeemed or a contingent deferred sales charge in connection with the redemption
of the non-Kemper fund shares, and (b) the purchase of Fund shares is made
within 90 days after the date of such redemption. To make such a purchase at net
asset value, the investor or the investor's dealer must, at the time of
purchase, submit a request that the purchase be processed at net asset value
pursuant to this privilege. During the Special Offering Period, dealers will be
paid a commission of .50% of the amount of shares of
22
<PAGE> 26
the Fund purchased pursuant to this net asset value purchase privilege. The
redemption of the shares of the non-Kemper fund is, for federal income tax
purposes, a sale upon which a gain or loss may be realized.
Class A shares may be purchased at net asset value by: (a) any purchaser
provided that the amount invested in a Portfolio or other Kemper Mutual Funds
listed under "Special Features--Class A Shares--Combined Purchases" totals at
least $1,000,000 including purchases of Class A shares pursuant to the "Combined
Purchases," "Letter of Intent" and "Cumulative Discount" features described
under "Special Features"; or (b) a participant-directed qualified retirement
plan described in Code Section 401(a) or a participant-directed non-qualified
deferred compensation plan described in Code Section 457 provided in either case
that such plan has not less than 200 eligible employees (the "Large Order NAV
Purchase Privilege"). Redemption within one year of shares purchased under the
Large Order NAV Purchase Privilege may be subject to a contingent deferred sales
charge. See "Redemption or Repurchase of Shares--Contingent Deferred Sales
Charge--Large Order NAV Purchase Privilege."
KDI may in its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of the Fund to
employer sponsored employee benefit plans using the subaccount recordkeeping
system made available through the Shareholder Service Agent at net asset value
in accordance with the Large Order NAV Purchase Privilege up to the following
amounts: 1.00% of the net asset value of shares sold on amounts up to $5 million
in any calendar year, .50% on the next $5 million and .25% on amounts over $10
million in such calendar year. KDI may in its discretion compensate investment
dealers or other financial services firms in connection with the sale of Class A
shares to other purchasers at net asset value in accordance with the Large Order
NAV Purchase Privilege up to the following amounts: 1.00% of the net asset value
of shares sold on amounts up to $3 million, .50% on the next $2 million and .25%
on amounts over $5 million. For purposes of determining the appropriate
commission percentage to be applied to a particular sale under the foregoing
schedules, KDI will consider the cumulative amount invested by the purchaser in
the Fund and other Kemper Mutual Funds listed under "Special Features--Class A
Shares--Combined Purchases," including purchases pursuant to the "Combined
Purchases," "Letter of Intent" and "Cumulative Discount" features referred to
above. The privilege of purchasing Class A shares at net asset value under the
Large Order NAV Purchase Privilege is not available if another net asset value
purchase privilege is also applicable.
Effective on February 1, 1996, Class A shares of the Fund or any other Kemper
Mutual Fund listed under "Special Features--Class A Shares--Combined Purchases"
may be purchased at net asset value in any amount by members of the plaintiff
class in the proceeding known as Howard and Audrey Tabankin, et al. v. Kemper
Short-Term Global Income Fund, et al., Case No. 93 C 5231 (N.D. IL). This
privilege is generally non-transferrable and continues for the lifetime of
individual class members and for a ten year period for non-individual class
members. To make a purchase at net asset value under this privilege, the
investor must, at the time of purchase, submit a written request that the
purchase be processed at net asset value pursuant to this privilege specifically
identifying the purchaser as a member of the "Tabankin Class." Shares purchased
under this privilege will be maintained in a separate account that includes only
shares purchased under this privilege. For more details concerning this
privilege, class members should refer to the Notice of (1) Proposed Settlement
with Defendants; and (2) Hearing to Determine Fairness of Proposed Settlement,
dated August 31, 1995, issued in connection with the aforementioned court
proceeding. For sales of Fund shares at net asset value pursuant to this
privilege, KDI may at its discretion pay investment dealers and other financial
services firms a concession, payable quarterly, at an annual rate of up to .25%
of net assets attributable to such shares maintained and serviced by the firm. A
firm becomes eligible for the concession based upon assets in accounts
attributable to shares purchased under this privilege in the month after the
month of purchase and the concession continues until terminated by KDI. The
privilege of purchasing Class A shares of the Fund at net asset value under this
privilege is not available if another net asset value purchase privilege also
applies.
Class A shares may be sold at net asset value in any amount to: (a) officers,
trustees, directors, employees (including retirees) and sales representatives of
the Fund, its investment manager, its principal underwriter or certain
affiliated companies, for themselves or members of their families; (b)
registered representatives and employees of broker-dealers having selling group
agreements with KDI; (c) officers, directors and employees of service agents of
the Fund; (d) shareholders who owned shares of Kemper Dreman Fund, Inc. ("KDF")
on September 8, 1995, and have
23
<PAGE> 27
continuously owned shares of KDF (or a Kemper Fund acquired by exchange of KDF
shares) since that date, for themselves or members of their families; and (e)
any trust, pension, profit-sharing or other benefit plan for only such persons.
Class A shares may be sold at net asset value in any amount to selected
employees (including their spouses and dependent children) of banks and other
financial services firms that provide administrative services related to order
placement and payment to facilitate transactions in shares of the Fund for their
clients pursuant to an agreement with KDI or one of its affiliates. Only those
employees of such banks and other firms who as part of their usual duties
provide services related to transactions in Fund shares may purchase Class A
shares at net asset value hereunder. Class A shares may be sold at net asset
value in any amount to unit investment trusts sponsored by Everen Securities,
Inc. In addition, unitholders of unit investment trusts sponsored by Everen
Securities, Inc. or its predecessors may purchase Class A shares at net asset
value through reinvestment programs described in the prospectuses of such trusts
which have such programs. Class A shares may be sold at net asset value through
certain investment advisers registered under the Investment Advisers Act of 1940
and other financial services firms that adhere to certain standards established
by KDI, including a requirement that such shares be sold for the benefit of
their clients participating in a "wrap account" or similar program under which
such clients pay a fee to the investment adviser or other firm. Such shares are
sold for investment purposes and on the condition that they will not be resold
except through redemption or repurchase by the Fund. The Fund may also issue
Class A shares at net asset value in connection with the acquisition of the
assets of or merger or consolidation with another investment company, or to
shareholders in connection with the investment or reinvestment of income and
capital gain dividends.
The sales charge scale is applicable to purchases made at one time by any
"purchaser" which includes: an individual; or an individual, his or her spouse
and children under the age of 21; or a trustee or other fiduciary of a single
trust estate or single fiduciary account; or an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Code; or a pension,
profit-sharing or other employee benefit plan whether or not qualified under
Section 401 of the Code; or other organized group of persons whether
incorporated or not, provided the organization has been in existence for at
least six months and has some purpose other than the purchase of redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales charge, all orders from an organized group will have to be
placed through a single investment dealer or other firm and identified as
originating from a qualifying purchaser.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES. Investors choosing the
deferred sales charge alternative may purchase Class B shares at net asset value
per share without any sales charge at the time of purchase. Since Class B shares
are being sold without an initial sales charge, the full amount of the
investor's purchase payment will be invested in Class B shares for his or her
account. A contingent deferred sales charge may be imposed upon redemption of
Class B shares. See "Redemption or Repurchase of Shares--Contingent Deferred
Sales Charge--Class B Shares."
KDI compensates firms for sales of Class B shares at the time of sale at a
commission rate of up to 3.75% of the amount of Class B shares purchased. KDI is
compensated by the Fund for services as distributor and principal underwriter
for Class B shares. See "Investment Manager and Underwriter."
Class B shares of a Portfolio will automatically convert to Class A shares of
the same Portfolio six years after issuance on the basis of the relative net
asset value per share. Class B shareholders who originally acquired their shares
as Initial Shares of Kemper Portfolios, formerly known as Kemper Investment
Portfolios ("KIP"), hold them subject to the same conversion period schedule as
that of their KIP Portfolio. Class B shares representing Initial Shares of a
former KIP Portfolio will automatically convert to Class A shares of the
applicable Portfolio six years after issuance of the Initial Shares for shares
issued on or after February 1, 1991 and seven years after issuance of the
Initial Shares for shares issued before February 1, 1991. The purpose of the
conversion feature is to relieve holders of Class B shares from the distribution
services fee when they have been outstanding long enough for KDI to have been
compensated for distribution related expenses. For purposes of conversion to
Class A shares, shares purchased through the reinvestment of dividends and other
distributions paid with respect to Class B shares in a shareholder's account
will be converted to Class A shares on a pro rata basis.
24
<PAGE> 28
PURCHASE OF CLASS C SHARES. The public offering price of the Class C shares of a
Portfolio is the next determined net asset value. No initial or contingent
deferred sales charge is imposed. Since Class C shares are sold without an
initial sales charge, the full amount of the investor's purchase payment will be
invested in Class C shares for his or her account. KDI pays firms for sales of
Class C shares a distribution fee, payable quarterly, at an annual rate of .75
of 1% of net assets attributable to Class C shares maintained and serviced by
the firm. KDI is compensated by the Fund for services as distributor and
principal underwriter for Class C shares. See "Investment Manager and
Underwriter."
WHICH ARRANGEMENT IS BETTER FOR YOU? The decision as to which class of shares
provides a more suitable investment for an investor depends on a number of
factors, including the amount and intended length of the investment. Investors
making investments that qualify for reduced sales charges might consider Class A
shares. Investors who prefer not to pay an initial sales charge and who plan to
hold their investment for more than six years might consider Class B shares.
Investors who prefer not to pay an initial sales charge but who plan to redeem
their shares within six years might consider Class C shares. Orders for Class B
shares or Class C shares for $500,000 or more will be declined. Orders for Class
B shares or Class C shares by employer sponsored employee benefit plans using
the subaccount record keeping system made available through the Shareholder
Service Agent will be invested instead in Class A shares at net asset value
where the combined subaccount value in a Portfolio or other Kemper Mutual Funds
listed under "Special Features--Class A Shares--Combined Purchases" is in excess
of $5 million including purchases pursuant to the "Combined Purchases," "Letter
of Intent" and "Cumulative Discount" features described under "Special
Features." For more information about the three sales arrangements, consult your
financial representative or the Shareholder Service Agent. Financial services
firms may receive different compensation depending upon which class of shares
they sell.
GENERAL. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of a Portfolio for their clients, and KDI may pay them a transaction fee
up to the level of the discount or commission allowable or payable to dealers,
as described above. Banks are currently prohibited under the Glass-Steagall Act
from providing certain underwriting or distribution services. Banks or other
financial services firms may be subject to various state laws regarding the
services described above and may be required to register as dealers pursuant to
state law. If banking firms were prohibited from acting in any capacity or
providing any of the described services, management would consider what action,
if any, would be appropriate. KDI does not believe that termination of a
relationship with a bank would result in any material adverse consequences to
any Portfolio.
In addition to the discounts or commissions described above, KDI will, from time
to time, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash or other compensation, to firms that sell shares
of the Fund. Non cash compensation includes luxury merchandise and trips to
luxury resorts. 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
Fund, or other funds underwritten by KDI.
Orders for the purchase of shares of a Portfolio will be confirmed at a price
based on the net asset value of that Portfolio next determined after receipt by
KDI of the order accompanied by payment. However, orders received by dealers or
other financial services firms prior to the determination of net asset value
(see "Net Asset Value") and received by KDI prior to the close of its business
day will be confirmed at a price based on the net asset value effective on that
day. The Fund reserves the right to determine the net asset value more
frequently than once a day if deemed desirable. Dealers and other financial
services firms are obligated to transmit orders promptly. Collection may take
significantly longer for a check drawn on a foreign bank than for a check drawn
on a domestic bank. Therefore, if an order is accompanied by a check drawn on a
foreign bank, funds must normally be collected before shares will be purchased.
See "Purchase and Redemption of Shares" in the Statement of Additional
Information.
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem the Fund's shares. Some may establish higher
minimum investment requirements than set forth above. Firms may
25
<PAGE> 29
arrange with their clients for other investment or administrative services. Such
firms may independently establish and charge additional amounts to their clients
for such services, which charges would reduce the clients' return. Firms also
may hold the Fund's shares in nominee or street name as agent for and on behalf
of their customers. In such instances, the Fund's transfer agent will have no
information with respect to or control over the accounts of specific
shareholders. Such shareholders may obtain access to their accounts and
information about their accounts only from their firm. Certain of these firms
may receive compensation from the Fund through the Shareholder Service Agent for
recordkeeping and other expenses relating to these nominee accounts. In
addition, certain privileges with respect to the purchase and redemption of
shares or the reinvestment of dividends may not be available through such firms.
Some firms may participate in a program allowing them access to their clients'
accounts for servicing including, without limitation, transfers of registration
and dividend payee changes; and may perform functions such as generation of
confirmation statements and disbursement of cash dividends. Such firms,
including affiliates of KDI, may receive compensation from the Fund through the
Shareholder Service Agent for these services. This prospectus should be read in
connection with such firms' material regarding their fees and services.
The Fund reserves the right to withdraw all or any part of the offering made by
this prospectus and to reject purchase orders. Also, from time to time, the Fund
may temporarily suspend the offering of any class of its shares of a Portfolio
to new investors. During the period of such suspension, persons who are already
shareholders of such class of such Portfolio normally are permitted to continue
to purchase additional shares of such class and to have dividends reinvested.
Shareholders should direct their inquiries to Kemper Service Company, 811 Main
Street, Kansas City, Missouri 64105-2005 or to the firm from which they received
this prospectus.
REDEMPTION OR REPURCHASE OF SHARES
GENERAL. Any shareholder may require the Fund to redeem his or her shares. When
shares are held for the account of a shareholder by the Fund's transfer agent,
the shareholder may redeem them by sending a written request with signatures
guaranteed to Kemper Mutual Funds, Attention: Redemption Department, P.O. Box
419557, Kansas City, Missouri 64141-6557. When certificates for shares have been
issued, they must be mailed to or deposited with the Shareholder Service Agent,
along with a duly endorsed stock power and accompanied by a written request for
redemption. Redemption requests and a stock power must be endorsed by the
account holder with signatures guaranteed by a commercial bank, trust company,
savings and loan association, federal savings bank, member firm of a national
securities exchange or other eligible financial institution. The redemption
request and stock power must be signed exactly as the account is registered
including any special capacity of the registered owner. Additional documentation
may be requested, and a signature guarantee is normally required, from
institutional and fiduciary account holders, such as corporations, custodians
(e.g., under the Uniform Transfers to Minors Act), executors, administrators,
trustees or guardians.
The redemption price for shares of a Portfolio will be the net asset value per
share of that Portfolio next determined following receipt by the Shareholder
Service Agent of a properly executed request with any required documents as
described above. Payment for shares redeemed will be made in cash as promptly as
practicable but in no event later than seven days after receipt of a properly
executed request accompanied by any outstanding share certificates in proper
form for transfer. When the Fund is asked to redeem shares for which it may not
have yet received good payment, it may delay transmittal of redemption proceeds
until it has determined that collected funds have been received for the purchase
of such shares, which will be up to 15 days from receipt by the Fund of the
purchase amount. The redemption within one year of Class A shares purchased at
net asset value under the Large Order NAV Purchase Privilege may be subject to a
1% contingent deferred sales charge (see "Purchase of Shares") and the
redemption of Class B shares may be subject to a contingent deferred sales
charge (see "Contingent Deferred Sales Charge--Class B Shares" below).
26
<PAGE> 30
Because of the high cost of maintaining small accounts, the Fund reserves the
right to redeem an account (and, in the case of Class B shares, impose any
applicable contingent deferred sales charge) that falls below the minimum
investment level, currently $1,000 for a Portfolio, as a result of redemptions.
Currently, Individual Retirement Accounts and employee benefit plan accounts are
not subject to this procedure. A shareholder will be notified in writing and
will be allowed 60 days to make additional purchases to bring the account value
up to the minimum investment level before the Fund redeems the shareholder's
account. The investment required to reach that level may be made at net asset
value (without any initial sales charge in the case of Class A shares).
Shareholders can request the following telephone privileges: expedited wire
transfer redemptions and EXPRESS-Transfer transactions (see "Special Features")
and exchange transactions for individual and institutional accounts and
pre-authorized telephone redemption transactions for certain institutional
accounts. Shareholders may choose these privileges on the account application or
by contacting the Shareholder Service Agent for appropriate instructions. Please
note that the telephone exchange privilege is automatic unless the shareholder
refuses it on the account application. A Fund or its agents may be liable for
any losses, expenses or costs arising out of fraudulent or unauthorized
telephone requests pursuant to these privileges unless the Fund or its agents
reasonably believe, based upon reasonable verification procedures, that the
telephonic instructions are genuine. The SHAREHOLDER WILL BEAR THE RISK OF LOSS,
including loss resulting from fraudulent or unauthorized transactions, so long
as reasonable verification procedures are followed. Verification procedures
include recording instructions, requiring certain identifying information before
acting upon instructions and sending written confirmations.
TELEPHONE REDEMPTIONS. If the proceeds of the redemption (prior to the
imposition of any contingent deferred sales charge in the case of Class B
shares) are $50,000 or less and the proceeds are payable to the shareholder of
record at the address of record, normally a telephone request or a written
request by any one account holder without a signature guarantee is sufficient
for redemptions by individual or joint account holders, and trust, executor and
guardian account holders (excluding custodial accounts for gifts and transfers
to minors), provided the trustee, executor or guardian is named in the account
registration. Other institutional account holders and guardian account holders
of custodial accounts for gifts and transfers to minors may exercise this
special privilege of redeeming shares by telephone request or written request
without signature guarantee subject to the same conditions as individual account
holders and subject to the limitations on liability described under "General"
above, provided that this privilege has been pre-authorized by the institutional
account holder or guardian account holder by written instruction to the
Shareholder Service Agent with signatures guaranteed. Telephone requests may be
made by calling 1-800-621-1048. Shares purchased by check or through
EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this privilege
of redeeming shares by telephone request until such shares have been owned for
at least 15 days. This privilege of redeeming shares by telephone request or by
written request without a signature guarantee may not be used to redeem shares
held in certificated form and may not be used if the shareholder's account has
had an address change within 30 days of the redemption request. During periods
when it is difficult to contact the Shareholder Service Agent by telephone, it
may be difficult to use the telephone redemption privilege, although investors
can still redeem by mail. The Fund reserves the right to terminate or modify
this privilege at any time.
REPURCHASES (CONFIRMED REDEMPTIONS). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to KDI, which the Fund has authorized to act as its agent. There
is no charge by KDI with respect to repurchases; however, dealers or other firms
may charge customary commissions for their services. Dealers and other financial
services firms are obligated to transmit orders promptly. The repurchase price
of a Portfolio will be the net asset value of that Portfolio next determined
after receipt of a request by KDI. However, requests for repurchases received by
dealers or other firms prior to the determination of net asset value (see "Net
Asset Value") and received by KDI prior to the close of KDI's business day will
be confirmed at the net asset value effective on that day. The offer to
repurchase may be suspended at any time. Requirements as to stock powers,
certificates, payments and delay of payments are the same as for redemptions.
EXPEDITED WIRE TRANSFER REDEMPTIONS. If the account holder has given
authorization for expedited wire redemption to the account holder's brokerage or
bank account, shares of the Fund can be redeemed and proceeds
27
<PAGE> 31
sent by federal wire transfer to a single previously designated account.
Requests received by the Shareholder Service Agent prior to the determination of
net asset value will result in shares being redeemed that day at the net asset
value of the Portfolio effective on that day and normally the proceeds will be
sent to the designated account the following business day. Delivery of the
proceeds of a wire redemption of $250,000 or more may be delayed by the Fund for
up to seven days if the investment manager deems it appropriate under then
current market conditions. Once authorization is on file, the Shareholder
Service Agent will honor requests by telephone at 1-800-621-1048 or in writing,
subject to the limitations on liability described under "General" above. The
Fund is not responsible for the efficiency of the federal wire system or the
account holder's financial services firm or bank. The Fund currently does not
charge the account holder for wire transfers. The account holder is responsible
for any charges imposed by the account holder's firm or bank. There is a $1,000
wire redemption minimum (including any contingent deferred sales charge). To
change the designated account to receive wire redemption proceeds, send a
written request to the Shareholder Service Agent with signatures guaranteed as
described above or contact the firm through which shares of the Fund were
purchased. Shares purchased by check or through EXPRESS-Transfer or Bank Direct
Deposit may not be redeemed by wire transfer until such shares have been owned
for at least 15 days. Account holders may not use this privilege to redeem
shares held in certificated form. During periods when it is difficult to contact
the Shareholder Service Agent by telephone, it may be difficult to use the
expedited redemption privilege. The Fund reserves the right to terminate or
modify this privilege at any time.
CONTINGENT DEFERRED SALES CHARGE--LARGE ORDER NAV PURCHASE PRIVILEGE. A
contingent deferred sales charge of 1% may be imposed upon redemption of Class A
shares that are purchased under the Large Order NAV Purchase Privilege if they
are redeemed within one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The charge is applied
to the value of the shares redeemed excluding amounts not subject to the charge.
The contingent deferred sales charge will be waived in the event of: (a)
redemptions by a participant-directed qualified retirement plan described in
Code Section 401(a) or a participant-directed non-qualified deferred
compensation plan described in Code Section 457; (b) redemptions by employer
sponsored employee benefit plans using the subaccount record keeping system made
available through the Shareholder Service Agent; (c) redemption of shares of a
shareholder (including a registered joint owner) who has died; (d) redemption of
shares of a shareholder (including a registered joint owner) who after purchase
of the shares being redeemed becomes totally disabled (as evidenced by a
determination by the federal Social Security Administration); and (e)
redemptions under the Fund's Systematic Withdrawal Plan at a maximum of 10% per
year of the net asset value of the account.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. A contingent deferred sales
charge may be imposed upon redemption of Class B shares. There is no such charge
upon redemption of any share appreciation or reinvested dividends on Class B
shares. The charge is computed at the following rates applied to the value of
the shares redeemed excluding amounts not subject to the charge.
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED
SALES
YEAR OF REDEMPTION AFTER PURCHASE CHARGE
----------------------------------------------------------------------- ----------
<S> <C>
First.................................................................. 4%
Second................................................................. 3%
Third.................................................................. 3%
Fourth................................................................. 2%
Fifth.................................................................. 2%
Sixth.................................................................. 1%
</TABLE>
28
<PAGE> 32
Class B shareholders who originally acquired their shares as Initial Shares of
Kemper Portfolios, formerly known as Kemper Investment Portfolios, hold them
subject to the same CDSC schedule that applied when those shares were purchased,
as follows:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
----------------------------------------------------------------------------------------
SHARES PURCHASED ON OR AFTER
YEAR OF REDEMPTION AFTER SHARES PURCHASED ON OR AFTER FEBRUARY 1, 1991 AND BEFORE SHARES PURCHASED BEFORE
PURCHASE MARCH 1, 1993 MARCH 1, 1993 FEBRUARY 1, 1991
- -------------------------------- ----------------------------- ----------------------------- ------------------------
<S> <C> <C> <C>
First........................... 4% 3% 5%
Second.......................... 3% 3% 4%
Third........................... 3% 2% 3%
Fourth.......................... 2% 2% 2%
Fifth........................... 2% 1% 2%
Sixth........................... 1% 1% 1%
</TABLE>
The following example will illustrate the operation of the contingent deferred
sales charge. Assume that an investor makes a single purchase of $10,000 of
Class B shares and that 16 months later the value of the shares has grown by
$1,000 through reinvested dividends and by an additional $1,000 in appreciation
to a total of $12,000. If the investor were then to redeem the entire $12,000 in
share value, the contingent deferred sales charge would be payable only with
respect to $10,000 because neither the $1,000 of reinvested dividends nor the
$1,000 of share appreciation is subject to the charge. The charge would be at
the rate of 3% ($300) because it was in the second year after the purchase was
made.
The rate of the contingent deferred sales charge under the schedule above is
determined by the length of the period of ownership. Investments are tracked on
a monthly basis. The period of ownership for this purpose begins the first day
of the month in which the order for the investment is received. For example, an
investment made in December, 1995 will be eligible for the 3% charge if redeemed
on or after December 1, 1996. In the event no specific order is requested, the
redemption will be made first from Class B shares representing reinvested
dividends and then from the earliest purchase of Class B shares. KDI receives
any contingent deferred sales charge directly.
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special
Features--Systematic Withdrawal Plan" below), (d) for redemptions made pursuant
to any IRA systematic withdrawal based on the shareholder's life expectancy
including, but not limited to, substantially equal periodic payments described
in Internal Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2 and (e) for
redemptions to satisfy required minimum distributions after age 70 1/2 from an
IRA account (with the maximum amount subject to this waiver being based only
upon the shareholder's Kemper IRA accounts). The contingent deferred sales
charge will also be waived in connection with the following redemptions of
shares held by employer sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service
Agent: (a) redemptions to satisfy participant loan advances (note that loan
repayments constitute new purchases for purposes of the contingent deferred
sales charge and the conversion privilege), (b) redemptions in connection with
retirement distributions (limited at any one time to 10% of the total value of
plan assets invested in a Portfolio), (c) redemptions in connection with
distributions qualifying under the hardship provisions of the Internal Revenue
Code and (d) redemptions representing returns of excess contributions to such
plans.
REINVESTMENT PRIVILEGE. A shareholder who has redeemed Class A shares of the
Fund or any other Kemper Mutual Fund listed under "Special Features--Class A
Shares--Combined Purchases" (other than shares of the Kemper Cash Reserves Fund
purchased directly at net asset value) may reinvest up to the full amount
redeemed at net asset value at the time of the reinvestment in Class A shares of
the Fund or of the other listed Kemper Mutual
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<PAGE> 33
Funds. A shareholder of the Fund or other Kemper Mutual Fund who redeems Class A
shares purchased under the Large Order NAV Purchase Privilege (see "Purchase of
Shares") or Class B shares and incurs a contingent deferred sales charge may
reinvest up to the full amount redeemed at net asset value at the time of the
reinvestment, in Class A shares or Class B shares, as the case may be, of the
Fund or of other Kemper Mutual Funds. The amount of any contingent deferred
sales charge also will be reinvested. These reinvested shares will retain their
original cost and purchase date for purposes of the contingent deferred sales
charge. Also, a holder of Class B shares who has redeemed shares may reinvest up
to the full amount redeemed, less any applicable contingent deferred sales
charge that may have been imposed upon the redemption of such shares, at net
asset value in Class A shares of the Fund or of the other Kemper Mutual Funds
listed under "Special Features--Class A Shares--Combined Purchases." Purchases
through the reinvestment privilege are subject to the minimum investment
requirements applicable to the shares being purchased and may only be made for
Kemper Funds available for sale in the shareholder's state of residence as
listed under "Special Features--Exchange Privilege." The reinvestment privilege
can be used only once as to any specific shares and reinvestment must be
effected within six months of the redemption. If a loss is realized on the
redemption of shares of a Portfolio, the reinvestment in shares of the same
Portfolio may be subject to the "wash sale" rules if made within 30 days of the
redemption, resulting in a postponement of the recognition of such loss for
federal income tax purposes. The reinvestment privilege may be terminated or
modified at any time.
SPECIAL FEATURES
CLASS A SHARES--COMBINED PURCHASES. Class A shares (or the equivalent) may be
purchased at the rate applicable to the discount bracket attained by combining
concurrent investments in Class A shares of any of the following funds: Kemper
Technology Fund, Kemper Total Return Fund, Kemper Growth Fund, Kemper Small
Capitalization Equity Fund, Kemper Income and Capital Preservation Fund, Kemper
Municipal Bond Fund, Kemper Diversified Income Fund, Kemper High Yield Fund,
Kemper U.S. Government Securities Fund, Kemper International Fund, Kemper State
Tax-Free Income Series, Kemper Adjustable Rate U.S. Government Fund, Kemper Blue
Chip Fund, Kemper Global Income Fund, Kemper Target Equity Fund (series are
subject to a limited offering period), Kemper Intermediate Municipal Bond Fund,
Kemper Cash Reserves Fund, Kemper U.S. Mortgage Fund, Kemper Short-Intermediate
Government Fund, Kemper Value+Growth Fund, Kemper-Dreman Fund, Inc. and Kemper
Horizon Fund ("Kemper Mutual Funds"). Except as noted below, there is no
combined purchase credit for direct purchases of shares of Kemper Money Market
Fund, Cash Equivalent Fund, Tax-Exempt California Money Market Fund, Cash
Account Trust, Tax-Exempt New York Money Market Fund or Investors Cash Trust
("Money Market Funds"), which are not considered "Kemper Mutual Funds" for
purposes hereof. For purposes of the Combined Purchases feature described above
as well as for the Letter of Intent and Cumulative Discount features described
below, employer sponsored employee benefit plans using the subaccount record
keeping system made available through the Shareholder Service Agent may include:
(a) Money Market Funds as "Kemper Mutual Funds", (b) all classes of shares of
any Kemper Mutual Fund and (c) the value of any other plan investment, such as
guaranteed investment contracts and employer stock, maintained on such
subaccount record keeping system.
CLASS A SHARES--LETTER OF INTENT. The same reduced sales charges for Class A
shares, as shown in the applicable prospectus, also apply to the aggregate
amount of purchases of such Kemper Mutual Funds listed above made by any
purchaser within a 24-month period under a written Letter of Intent ("Letter")
provided by KDI. The Letter, which imposes no obligation to purchase or sell
additional Class A shares, provides for a price adjustment depending upon the
actual amount purchased within such period. The Letter provides that the first
purchase following execution of the Letter must be at least 5% of the amount of
the intended purchase, and that 5% of the amount of the intended purchase
normally will be held in escrow in the form of shares pending completion of the
intended purchase. If the total investments under the Letter are less than the
intended amount and thereby qualify only for a higher sales charge than actually
paid, the appropriate number of escrowed shares are redeemed and the proceeds
used toward satisfaction of the obligation to pay the increased sales charge.
The Letter for an employer sponsored employee benefit plan maintained on the
subaccount record keeping system available through the Shareholder Service Agent
may have special provisions regarding payment of any increased sales charge
resulting from a failure to complete the intended purchase under the Letter. A
shareholder may include the value (at the
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<PAGE> 34
maximum offering price) of all shares of such Kemper Mutual Funds held of record
as of the initial purchase date under the Letter as an "accumulation credit"
toward the completion of the Letter, but no price adjustment will be made on
such shares. Only investments in Class A shares are included in this privilege.
CLASS A SHARES--CUMULATIVE DISCOUNT. Class A shares may also be purchased at the
rate applicable to the discount bracket attained by adding to the cost of shares
of the Portfolio being purchased, the value of all Class A shares of the above
mentioned Kemper Mutual Funds (computed at the maximum offering price at the
time of the purchase for which the discount is applicable) already owned by the
investor.
CLASS A SHARES--AVAILABILITY OF QUANTITY DISCOUNTS. An investor or the
investor's dealer or other financial services firm must notify the Shareholder
Service Agent or KDI whenever a quantity discount or reduced sales charge is
applicable to a purchase. Upon such notification, the investor will receive the
lowest applicable sales charge. Quantity discounts described above may be
modified or terminated at any time.
EXCHANGE PRIVILEGE. Shareholders of Class A, Class B and Class C shares may
exchange their shares for shares of the corresponding class of other Kemper
Mutual Funds in accordance with the provisions below.
CLASS A SHARES. Class A shares of the Kemper Mutual Funds and shares of the
Money Market Funds listed under "Special Features--Class A Shares--Combined
Purchases" above may be exchanged for each other at their relative net asset
values. Shares of Money Market Funds and the Kemper Cash Reserves Fund that were
acquired by purchase (not including shares acquired by dividend reinvestment)
are subject to the applicable sales charge on exchange. Series of Kemper Target
Equity Fund are available on exchange only during the Offering Period for such
series as described in the applicable prospectus. Cash Equivalent Fund,
Tax-Exempt California Money Market Fund, Cash Account Trust, Tax-Exempt New York
Money Market Fund and Investors Cash Trust are available on exchange but only
through a financial services firm having a services agreement with KDI.
Class A shares purchased under the Large Order NAV Purchase Privilege may be
exchanged for Class A shares of another Kemper Mutual Fund or a Money Market
Fund under the exchange privilege described above without paying any contingent
deferred sales charge at the time of exchange. If the Class A shares received on
exchange are redeemed thereafter, a contingent deferred sales charge may be
imposed in accordance with the foregoing requirements provided that the shares
redeemed will retain their original cost and purchase date for purposes of the
contingent deferred sales charge.
CLASS B SHARES. Class B shares of the Fund and Class B shares of any other
Kemper Mutual Fund listed under "Special Features--Class A Shares--Combined
Purchases" may be exchanged for each other at their relative net asset values.
Class B shares may be exchanged without a contingent deferred sales charge being
imposed at the time of exchange. For purposes of the contingent deferred sales
charge that may be imposed upon the redemption of the shares received on
exchange, amounts exchanged retain their original cost and purchase date.
CLASS C SHARES. Class C shares of the Fund and Class C shares of any other
Kemper Mutual Fund listed under "Special Features--Class A Shares--Combined
Purchases" may be exchanged for each other at their relative net asset values.
GENERAL. Shares purchased by check or through EXPRESS-Transfer or Bank Direct
Deposit may not be exchanged until they have been owned for at least 15 days. In
addition, shares of a Kemper Mutual Fund (except Kemper Cash Reserves Fund)
acquired by exchange from another Kemper Mutual Fund, or from a Money Market
Fund, may not be exchanged thereafter until they have been owned for 15 days.
The total value of shares being exchanged must at least equal the minimum
investment requirement of the fund into which they are being exchanged.
Exchanges are made based on relative dollar values of the shares involved in the
exchange. There is no service fee for an exchange; however, dealers or other
firms may charge for their services in effecting exchange transactions.
Exchanges will be effected by redemption of shares of the fund held and purchase
of shares of the other fund. For federal income tax purposes, any such exchange
constitutes a sale upon which a gain or loss may be realized, depending upon
whether the value of the shares being exchanged is more or less than the
shareholder's adjusted cost basis of such shares. Shareholders interested in
exercising the exchange privilege may obtain prospectuses of the other funds
from dealers, other firms or KDI. Exchanges may be accomplished by a written
request to Kemper Mutual Funds,
31
<PAGE> 35
Attention: Exchange Department, P.O. Box 419557, Kansas City, Missouri
64141-6557, or by telephone if the shareholder has given authorization. Once the
authorization is on file, the Shareholder Service Agent will honor requests by
telephone at 1-800-621-1048, subject to the limitations on liability under
"Redemption or Repurchase of Shares--General." Any share certificates must be
deposited prior to any exchange of such shares. During periods when it is
difficult to contact the Shareholder Service Agent by telephone, it may be
difficult to use the telephone exchange privilege. The exchange privilege is not
a right and may be suspended, terminated or modified at any time. Exchanges may
only be made for funds that are available for sale in the shareholder's state of
residence. Currently, Tax-Exempt California Money Market Fund is available for
sale only in California and Tax-Exempt New York Money Market Fund is available
for sale only in New York, Connecticut, New Jersey and Pennsylvania. Except as
otherwise permitted by applicable regulations, 60 days' prior written notice of
any termination or material change will be provided.
SYSTEMATIC EXCHANGE PRIVILEGE. The owner of $1,000 or more of any class of the
shares of a Kemper Mutual Fund or Money Market Fund may authorize the automatic
exchange of a specified amount ($100 minimum) of such shares for shares of the
same class of another such Kemper Fund. If selected, exchanges will be made
automatically until the privilege is terminated by the shareholder or the Kemper
Fund. Exchanges are subject to the terms and conditions described above under
"Exchange Privilege," including the $1,000 minimum investment requirement for
the Kemper Fund acquired on exchange. This privilege may not be used for the
exchange of shares held in certificated form.
EXPRESS-TRANSFER. EXPRESS-Transfer permits the transfer of money via the
Automated Clearing House System (minimum $100 and maximum $2,500) from a
shareholder's bank, savings and loan, or credit union account to purchase shares
of the Fund. Shareholders can also redeem shares (minimum $500 and maximum
$2,500) from their Fund account and transfer the proceeds to their bank, savings
and loan, or credit union checking account. By enrolling in EXPRESS-Transfer,
the shareholder authorizes the Shareholder Service Agent to rely upon telephone
instructions from any person to transfer the specified amounts between the
shareholder's Fund account and the predesignated bank, savings and loan or
credit union account, subject to the limitations on liability under "Redemption
or Repurchase of Shares--General." Once enrolled in EXPRESS-Transfer, a
shareholder can initiate a transaction by calling Kemper Shareholder Services
toll free at 1-800-621-1048 Monday through Friday, 8:00 a.m. to 3:00 p.m.
Chicago time. Shareholders may terminate this privilege by sending written
notice to Kemper Service Company, P.O. Box 419415, Kansas City, Missouri
64141-6415. Termination will become effective as soon as the Shareholder Service
Agent has had a reasonable time to act upon the request. EXPRESS-Transfer cannot
be used with passbook savings accounts or for tax-deferred plans such as
Individual Retirement Accounts ("IRAs").
BANK DIRECT DEPOSIT. A shareholder may purchase additional shares of the Fund
through an automatic investment program. With the Bank Direct Deposit Purchase
Plan, monthly investments are made automatically from the shareholder's account
at a bank, savings and loan or credit union into the shareholder's Fund account.
By enrolling in Bank Direct Deposit, the shareholder authorizes the Fund and its
agents to either draw checks or initiate Automated Clearing House debits against
the designated account at a bank or other financial institution. This privilege
may be selected by completing the appropriate section on the Account Application
or by contacting the Shareholder Service Agent for appropriate forms. A
shareholder may terminate his or her Plan by sending written notice to Kemper
Service Company, P.O. Box 419415, Kansas City, Missouri 64141-6415. Termination
by a shareholder will become effective within thirty days after the Shareholder
Service Agent has received the request. The Fund may immediately terminate a
shareholder's Plan in the event that any item is unpaid by the shareholder's
financial institution. The Fund may terminate or modify this privilege at any
time.
PAYROLL DIRECT DEPOSIT AND GOVERNMENT DIRECT DEPOSIT. A shareholder may invest
in the Fund through Payroll Direct Deposit or Government Direct Deposit. Under
these programs, all or a portion of a shareholder's net pay or government check
is automatically invested in a Portfolio each payment period. A shareholder may
terminate participation in these programs by giving written notice to the
shareholder's employer or government agency, as appropriate. (A reasonable time
to act is required.) The Fund is not responsible for the
32
<PAGE> 36
efficiency of the employer or government agency making the payment or any
financial institutions transmitting payments.
SYSTEMATIC WITHDRAWAL PLAN. The owner of $5,000 or more of a class of a
Portfolio's shares at the offering price (net asset value plus, in the case of
Class A shares, the initial sales charge) may provide for the payment from the
owner's account of any requested dollar amount to be paid to the owner or a
designated payee monthly, quarterly, semiannually or annually. The $5,000
minimum account size is not applicable to Individual Retirement Accounts. The
minimum periodic payment is $100. The maximum annual rate at which Class B
shares may be redeemed under a systematic withdrawal plan is 10% of the net
asset value of the account. Shares are redeemed so that the payee will receive
payment approximately the first of the month. Any income and capital gain
dividends will be automatically reinvested at net asset value. A sufficient
number of full and fractional shares will be redeemed to make the designated
payment. Depending upon the size of the payments requested and fluctuations in
the net asset value of the shares redeemed, redemptions for the purpose of
making such payments may reduce or even exhaust the account.
The purchase of Class A shares while participating in a systematic withdrawal
plan will ordinarily be disadvantageous to the investor because the investor
will be paying a sales charge on the purchase of shares at the same time that
the investor is redeeming shares upon which a sales charge may have already been
paid. Therefore, the Fund will not knowingly permit additional investments of
less than $2,000 if the investor is at the same time making systematic
withdrawals. KDI will waive the contingent deferred sales charge on redemptions
of Class B shares made pursuant to a systematic withdrawal plan. The right is
reserved to amend the systematic withdrawal plan on 30 days' notice. The plan
may be terminated at any time by the investor or the Fund.
TAX-SHELTERED RETIREMENT PLANS. KFS provides retirement plan services and
documents and KDI can establish investor accounts in any of the following types
of retirement plans:
- - Individual Retirement Accounts ("IRAs") trusteed by IFTC. This includes
Simplified Employee Pension Plan ("SEP") IRA accounts and prototype documents.
- - 403(b)(7) Custodial Accounts also trusteed by IFTC. This type of plan is
available to employees of most non-profit organizations.
- - Prototype money purchase pension and profit-sharing plans may be adopted by
employers. The maximum annual contribution per participant is the lesser of
25% of compensation or $30,000.
Brochures describing the above plans as well as model defined benefit plans,
target benefit plans, 457 plans, 401(k) plans and materials for establishing
them are available from KDI upon request. The brochures for plans trusteed by
IFTC describe the current fees payable to IFTC for its services as trustee.
Investors should consult with their own tax advisers before establishing a
retirement plan.
PERFORMANCE
The Fund may advertise several types of performance information for each
Portfolio and each class of shares of each Portfolio, including "average annual
total return" and "total return." Performance information will be computed
separately for Class A, Class B and Class C shares. Each of these figures is
based upon historical results and is not representative of the future
performance of any class of any Portfolio.
Average annual total return and total return figures measure both the net
investment income generated by, and the effect of any realized and unrealized
appreciation or depreciation of, the underlying investments held by a portfolio
for the period referenced, assuming the reinvestment of all dividends. Thus,
these figures reflect the change in the value of an investment in a Portfolio
during a specified period. Average annual total return will be quoted for at
least the one, five and ten year periods ending on a recent calendar quarter (or
if such periods have not yet elapsed, at the end of a shorter period
corresponding to the life of the Portfolio for performance purposes). Average
annual total
33
<PAGE> 37
return figures represent the average annual percentage change over the period in
question. Total return figures represent the aggregate percentage or dollar
value change over the period in question.
A Portfolio's performance may be compared to that of the Consumer Price Index or
various unmanaged equity indexes including, but not limited to, the Dow Jones
Industrial Average, the Standard & Poor's 500 Stock Index, the Russell 1000(R)
Growth Index, the Wilshire Large Company Growth Index, the Wilshire 750 Mid Cap
Company Growth Index, the Standard & Poor's/Barra Value Index, Standard &
Poor's/Barra Growth Index and the Russell 1000(R) Value Index. The performance
of a Portfolio may also be compared to the combined performance of several
indexes. The performance of a Portfolio may also be compared to the performance
of other mutual funds or mutual fund indexes with similar objectives and
policies as reported by independent mutual fund reporting services such as
Lipper Analytical Services, Inc. ("Lipper"). Lipper performance calculations are
based upon changes in net asset value with all dividends reinvested and do not
include the effect of any sales charges.
Information may be quoted from publications such as Morningstar, Inc., The Wall
Street Journal, Money Magazine, Forbes, Barron's, Fortune, The Chicago Tribune,
USA Today, Institutional Investor and Registered Representative. Also, investors
may want to compare the historical returns of various investments, performance
indexes of those investments or economic indicators, including but not limited
to stocks, bonds, certificates of deposit, money market funds and U.S. Treasury
obligations. Bank product performance may be based upon, among other things, the
BANK RATE MONITOR National Index(TM) or various certificate of deposit indexes.
Money market fund performance may be based upon, among other things, the
IBC/Donoghue's Money Fund Report(R) or Money Market Insight(R), reporting
services on money market funds. Performance of U.S. Treasury obligations may be
based upon, among other things, various U.S. Treasury bill indexes. Certain of
these alternative investments may offer fixed rates of return and guaranteed
principal and may be insured.
The Fund may depict the historical performance of the securities in which the
Portfolios may invest over periods reflecting a variety of market or economic
conditions either alone or in comparison with alternative investments,
performance indexes of those investments or economic indicators. The Fund may
also describe each Portfolio's holdings and depict their size or relative size
compared to other mutual funds, the number and make-up of its shareholder base
and other descriptive factors concerning the Portfolios. The relative
performance of growth stocks versus value stocks may also be discussed.
Class A shares are sold at net asset value plus a maximum sales charge of 5.75%
of the offering price. While the maximum sales charge is normally reflected in a
Portfolio's Class A performance figures, certain total return calculations may
not include such charge and those results would be reduced if it were included.
Class B shares and Class C shares are sold at net asset value. Redemptions of
Class B shares within the first six years after purchase may be subject to a
contingent deferred sales charge that ranges from 4% during the first year to 0%
after six years. Average annual total return figures do, and total return
figures may, include the effect of the contingent deferred sales charge for the
Class B shares that may be imposed at the end of the period in question.
Performance figures for the Class B shares not including the effect of the
applicable contingent deferred sales charge would be reduced if it were
included.
Each Portfolio's returns and net asset value will fluctuate. Shares of each
Portfolio are redeemable by an investor at the then current net asset value,
which may be more or less than original cost. Redemption of Class B shares may
be subject to a contingent deferred sales charge as described above. Additional
information concerning each Portfolio's performance appears in the Statement of
Additional Information. Additional information about each Portfolio's
performance will also be contained in its Annual Report to Shareholders, which,
after the end of the Fund's first fiscal year, will be available without charge
from the Fund.
CAPITAL STRUCTURE
The Fund is an open-end management investment company, organized as a business
trust under the laws of Massachusetts. The investment manager invested the "seed
money" as the sole shareholder of each class of each
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<PAGE> 38
Portfolio of the Fund before the public offering of its shares and therefore as
of the date of this prospectus controls the Fund.
The Fund may issue an unlimited number of shares of beneficial interest in one
or more series or "Portfolios," all having no par value, which may be divided by
the Board of Trustees into classes of shares. Currently, the Fund offers three
Portfolios each with four classes of shares. These are Class A, Class B and
Class C shares, as well as Class I shares, which are available for purchase
exclusively by the following investors: (a) tax-exempt retirement plans of KFS
and its affiliates; and (b) the following investment advisory clients of KFS and
its investment advisory affiliates that invest at least $1 million in a
Portfolio: (1) unaffiliated benefit plans, such as qualified retirement plans
(other than individual retirement accounts and self-directed retirement plans);
(2) unaffiliated banks and insurance companies purchasing for their own
accounts; and (3) endowment funds of unaffiliated non-profit organizations. The
Board of Trustees may authorize the issuance of additional classes and
additional Portfolios if deemed desirable, each with its own investment
objectives, policies and restrictions. Since the Fund may offer multiple
Portfolios, it is known as a "series company." Shares of the Fund have equal
noncumulative voting rights except that Class B and Class C shares have separate
and exclusive voting rights with respect to the Rule 12b-1 Plan. Shares of each
class also have equal rights with respect to dividends, assets and liquidation
of a Portfolio subject to any preferences (such as resulting from different Rule
12b-1 distribution fees), rights or privileges of any classes of shares of the
Portfolio. Shares of each Portfolio are fully paid and nonassessable when
issued, are transferable without restriction and have no preemptive or
conversion rights. The Fund is not required to hold annual shareholder 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 management agreement. Subject to the
Agreement and Declaration of Trust of the Fund, shareholders may remove
trustees. Shareholders will vote by Portfolio and not in the aggregate or by
class except when voting in the aggregate is required, under the Investment
Company Act of 1940, such as for the election of trustees or when voting by
class is appropriate.
35
<PAGE> 39
PROSPECTUS
KEMPER
HORIZON FUND
January 1, 1996
-----------------
KEMPER HORIZON
20+ PORTFOLIO
KEMPER HORIZON
10+ PORTFOLIO
KEMPER HORIZON
5 PORTFOLIO
----------------
KEMPER
[KEMPER FUNDS LOGO]
Kemper Distributors, Inc.
120 South LaSalle Street
Chicago, IL 60603
[RECYCLE LOGO]
KHF-1(1/96)
<PAGE> 40
KEMPER HORIZON FUND
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 1, 1996
KEMPER HORIZON 20+ PORTFOLIO
KEMPER HORIZON 10+ PORTFOLIO
KEMPER HORIZON 5 PORTFOLIO
120 SOUTH LASALLE STREET, CHICAGO, ILLINOIS 60603
1-800-621-1048
This Statement of Additional Information is not a prospectus. It is the
Statement of Additional Information for each of the portfolios (the
"Portfolios") of the Kemper Horizon Fund (the "Fund"). It should be read in
conjunction with the prospectus of the Fund dated January 1, 1996. The
prospectus may be obtained without charge from the Fund.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Restrictions............................................. B-1
Investment Policies and Techniques.................................. B-2
Portfolio Transactions.............................................. B-10
Investment Manager and Underwriter.................................. B-11
Purchase and Redemption of Shares................................... B-14
Dividends and Taxes................................................. B-15
Performance......................................................... B-16
Officers and Trustees............................................... B-18
Shareholder Rights.................................................. B-19
Report of Independent Auditors...................................... B-21
Statement of Net Assets............................................. B-22
Appendix--Ratings of Fixed Income Investments....................... B-23
</TABLE>
KHF-13 1/96 (LOGO)printed on recycled paper
<PAGE> 41
INVESTMENT RESTRICTIONS
Each Portfolio has adopted certain fundamental investment restrictions that,
together with its investment objective and any fundamental policies, cannot be
changed without approval of a majority of the outstanding voting shares of the
Portfolio. As defined in the Investment Company Act of 1940, this means the
lesser of the vote of (a) 67% of the shares of the 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 the Portfolio.
NO PORTFOLIO MAY, AS A FUNDAMENTAL POLICY:
(1) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the U.S. Government, its agencies or instrumentalities) if, as a result,
more than 5% of the total value of the its assets would be invested in
securities of that issuer.*
(2) Purchase more than 10% of any class of voting securities of any issuer.
(3) Make loans to others provided that it may purchase debt obligations or
repurchase agreements and it may lend its securities in accordance with its
investment objective and policies.
(4) Borrow money except as a temporary measure for extraordinary or emergency
purposes, and then only in an amount up to one-third of the value of its total
assets, in order to meet redemption requests without immediately selling any
portfolio securities. If, for any reason, the current value of the Portfolio's
total assets falls below an amount equal to three times the amount of its
indebtedness from money borrowed, the Portfolio will, within three days (not
including Sundays and holidays), reduce its indebtedness to the extent
necessary. The Portfolio will not purchase securities or make investments while
borrowings are in excess of 5% of its total assets.
(5) Pledge, hypothecate, mortgage or otherwise encumber more than 15% of its
total assets and then only to secure borrowings permitted by restriction number
(4) above. (The collateral arrangements with respect to options, financial
futures and delayed delivery transactions and any margin payments in connection
therewith are not deemed to be pledges or other encumbrances.)
(6) Purchase securities on margin, except to obtain such short-term credits as
may be necessary for the clearance of transactions; however, the Portfolio may
make margin deposits in connection with options and financial futures
transactions.
(7) Make short sales of securities or maintain a short position for its account
unless at all times when a short position is open it owns an equal amount of
such securities or owns securities which, without payment of any further
consideration, are convertible into or exchangeable for securities of the same
issue as, and equal in amount to, the securities sold short and unless not more
than 10% of the Portfolio's total assets is held as collateral for such sales at
any one time.
(8) Purchase securities (other than securities of the U.S. Government, its
agencies or instrumentalities) if as a result of such purchase 25% or more of
its total assets would be invested in any one industry.*
(9) Invest in commodities or commodity futures contracts, although it may buy or
sell financial futures contracts and options on such contracts, and engage in
foreign currency transactions; or in real estate (including real estate limited
partnership interests), although it may invest in securities that are secured by
real estate and securities of issuers that invest or deal in real estate.
(10) Underwrite securities issued by others except to the extent it may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
(11) Issue senior securities except as permitted under the Investment Company
Act of 1940.
- ---------------
* For purposes of investment restrictions (1) and (8), to the extent a Portfolio
invests in loan participations, the Portfolio, as a non-fundamental policy,
considers both the lender and the borrower to be an issuer of such loan
participation.
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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. The
Portfolios do not have a present intention of borrowing as permitted by
investment restriction number 4 during the current year. Each Portfolio has
adopted the following non-fundamental restrictions, which may be changed by the
Board of Trustees without shareholder approval. No Portfolio may:
(i) Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of the Fund or its investment adviser owns beneficially
more than 1/2 of 1% of the securities of such issuer and together own more than
5% of the securities of such issuer.
(ii) Invest for the purpose of exercising control or management of another
issuer.
(iii) Invest in interests in oil, gas or other mineral exploration or
development programs, although it may invest in the securities of issuers that
invest in or sponsor such programs.
(iv) Purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization, or by purchase in
the open market of securities of closed-end investment companies where no
underwriter or dealer's commission or profit, other than customary broker's
commission, is involved and only if immediately thereafter not more than (i) 3%
of the total outstanding voting stock of such company is owned by it, (ii) 5% of
its total assets would be invested in any one such company, and (iii) 10% of
total assets would be invested in such securities.
(v) Invest more than 5% of its total assets in securities of issuers (other than
obligations of, or guaranteed by, the U.S. Government, its agencies or
instrumentalities) that with their predecessors have a record of less than three
years continuous operation and equity securities of issuers that are not readily
marketable.
(vi) Invest more than 15% of its net assets in illiquid securities.
(vii) Invest in warrants if more than 5% of its net assets would be invested in
warrants. Included within that amount, but not to exceed 2% of the Portfolio's
net assets, may be warrants not listed on the New York or American Stock
Exchange. Warrants acquired in units or attached to securities may be deemed to
be without value for such purposes.
(viii) Invest in oil, gas, and other mineral leases.
(ix) Purchase or sell real property (including limited partnership interests but
excluding readily marketable interests in real estate investment trusts and
readily marketable securities of companies that invest in real estate).
(x) Invest more than 5% of its total assets in restricted securities, excluding
restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 that have been determined to be liquid pursuant to
procedures adopted by the Board of Trustees, provided that the total amount of
its assets invested in restricted securities and securities of issuers that with
their predecessors have a record of less than three years continuous operation
will not exceed 15% of total assets.
(xi) Invest more than 10% of its total assets in securities of real estate
investment trusts.
(xii) Write or sell put or call options, combinations thereof or similar options
on more than 25% of the its net assets; nor may it purchase put or call options
if more than 5% of the its net assets would be invested in premiums on put and
call options, combinations thereof or similar options; however, the Portfolio
may buy or sell options on financial futures contracts.
INVESTMENT POLICIES AND TECHNIQUES
GENERAL. Each Portfolio may engage in options transactions and may engage in
financial futures transactions in accordance with its respective investment
objectives and policies. Each 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 investment objective and also to hedge against the effects of market
risks but not for speculative purposes. The use of futures
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and options, and possible benefits and attendant risks, are discussed below
along with information concerning other investment policies and techniques.
OPTIONS ON SECURITIES. Each Portfolio may write (sell) "covered" call options on
securities as long as it owns the underlying securities subject to the option or
an option to purchase the same underlying securities, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain for the term of the option a segregated account
consisting of cash, U.S. Government securities or other liquid high-grade debt
obligations ("eligible securities") having a value at least equal to the
fluctuating market value of the optioned securities. Each Portfolio may write
"covered" put options provided that, as long as the Portfolio is obligated as a
writer of a put option, the Portfolio will own an option to sell the underlying
securities subject to the option, having an exercise price equal to or greater
than the exercise price of the "covered" option, or it will deposit and maintain
in a segregated account eligible securities having a value equal to or greater
than the exercise price of the option. A call option gives the purchaser the
right to buy, and the writer the obligation to sell, the underlying security at
the exercise price during or at the end of the option period. A put option gives
the purchaser the right to sell, and the writer the obligation to buy, the
underlying security at the exercise price during or at the end of the option
period. The premium received for writing an option will reflect, among other
things, the current market price of the underlying security, the relationship of
the exercise price to such market price, the price volatility of the underlying
security, the option period, supply and demand and interest rates. The Portfolio
may write or purchase spread options, which are options for which the exercise
price may be a fixed dollar spread or yield spread between the security
underlying the option and another security that is used as a bench mark. The
exercise price of an option may be below, equal to or above the current market
value of the underlying security at the time the option is written. The buyer of
a put who also owns the related security is protected by ownership of a put
option against any decline in that security's price below the exercise price
less the amount paid for the option. The ability to purchase put options allows
a Portfolio to protect capital gains in an appreciated security it owns, without
being required to actually sell that security. At times a Portfolio would like
to establish a position in a security upon which call options are available. By
purchasing a call option, a Portfolio is able to fix the cost of acquiring the
security, this being the cost of the call plus the exercise price of the option.
This procedure also provides some protection from an unexpected downturn in the
market, because a Portfolio is only at risk for the amount of the premium paid
for the call option which it can, if it chooses, permit to expire.
During the option period the covered call writer gives up the potential for
capital appreciation above the exercise price should the underlying security
rise in value, and the secured put writer retains the risk of loss should the
underlying security decline in value. For the covered call writer, substantial
appreciation in the value of the underlying security would result in the
security being "called away." For the secured put writer, substantial
depreciation in the value of the underlying security would result in the
security being "put to" the writer. If a covered call option expires
unexercised, the writer realizes a gain in the amount of the premium received.
If the covered call option writer has to sell the underlying security because of
the exercise of a call option, it realizes a gain or loss from the sale of the
underlying security, with the proceeds being increased by the amount of the
premium.
If a secured put option expires unexercised, the writer realizes a gain from the
amount of the premium, plus the interest income on the eligible securities that
have been segregated. If the secured put writer has to buy the underlying
security because of the exercise of the put option, the secured put writer
incurs an unrealized loss to the extent that the current market value of the
underlying security is less than the exercise price of the put option. However,
this would be offset in whole or in part by gain from the premium received and
any interest income earned on the eligible securities that have been segregated.
OVER-THE-COUNTER OPTIONS. As indicated in the prospectus (see "Investment
Objectives, Policies and Risk Factors"), the Portfolios may deal in
over-the-counter traded options ("OTC options"). OTC options differ from
exchange traded options in several respects. They are transacted directly with
dealers and not with a clearing corporation, and there is a risk of
nonperformance by the dealer as a result of the insolvency of such dealer or
otherwise, in which event a Portfolio may experience material losses. However,
in writing options the premium is paid in advance by the dealer. OTC options are
available for a greater variety of securities, and a wider range of
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<PAGE> 44
expiration dates and exercise prices, than are exchange traded options. Since
there is no exchange, pricing is normally done by reference to information from
market makers, which information is carefully monitored by the investment
manager and verified in appropriate cases.
A writer or purchaser of a put or call option can terminate it voluntarily only
by entering into a closing transaction. In the case of OTC options, there can be
no assurance that a continuous liquid secondary market will exist for any
particular option at any specific time. Consequently, a Portfolio may be able to
realize the value of an OTC option it has purchased only by exercising it or
entering into a closing sale transaction with the dealer that issued it.
Similarly, when a Portfolio writes an OTC option, it generally can close out
that option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Portfolio originally wrote it. If a
covered call option writer cannot effect a closing transaction, it cannot sell
the underlying security until the option expires or the option is exercised.
Therefore, a covered call option writer of an OTC option may not be able to sell
an underlying security even though it might otherwise be advantageous to do so.
Likewise, a secured put writer of an OTC option may be unable to sell the
securities pledged to secure the put for other investment purposes while it is
obligated as a put writer. Similarly, a purchaser of such put or call option
might also find it difficult to terminate its position on a timely basis in the
absence of a secondary market.
The Fund understands the position of the staff of the Securities and Exchange
Commission ("SEC") to be that purchased OTC options and the assets used as
"cover" for written OTC options are illiquid securities. The investment manager
disagrees with this position and has found the dealers with which it engages in
OTC options transactions generally agreeable to and capable of entering into
closing transactions. The Portfolios have adopted procedures for engaging in OTC
options for the purpose of reducing any potential adverse effect of such
transactions upon the liquidity of the Portfolios. A brief description of such
procedures is set forth below.
A Portfolio will only engage in OTC options transactions with dealers that have
been specifically approved by the investment manager pursuant to procedures
adopted by the Board of Trustees of the Fund. The investment manager believes
that the approved dealers should be able to enter into closing transactions if
necessary and, therefore, present minimal credit risks to a Portfolio. The
investment manager will monitor the credit-worthiness of the approved dealers on
an ongoing basis. A Portfolio currently will not engage in OTC options
transactions if the amount invested by the Portfolio in OTC options, plus a
"liquidity charge" related to OTC options written by the Portfolio, plus the
amount invested by the Portfolio in illiquid securities, would exceed 15% of the
Portfolio's net assets. The "liquidity charge" referred to above is computed as
described below.
The Portfolio anticipates entering into agreements with dealers to which a
Portfolio sells OTC options. Under these agreements the Portfolio would have the
absolute right to repurchase the OTC options from the dealer at any time at a
price no greater than a price established under the agreements (the "Repurchase
Price"). The "liquidity charge" referred to above for a specific OTC option
transaction will be the Repurchase Price related to the OTC option less the
intrinsic value of the OTC option. The intrinsic value of an OTC call option for
such purposes will be the amount by which the current market value of the
underlying security exceeds the exercise price. In the case of an OTC put
option, intrinsic value will be the amount by which the exercise price exceeds
the current market value of the underlying security. If there is no such
agreement requiring a dealer to allow a Portfolio to repurchase a specific OTC
option written by the Portfolio, the "liquidity charge" will be the current
market value of the assets serving as "cover" for such OTC option.
OPTIONS ON SECURITIES INDICES. Each Portfolio may purchase and write, call and
put options on securities indices in an attempt to hedge against market
conditions affecting the value of securities that the Portfolio owns or intends
to purchase, and not for speculation. Through the writing or purchase of index
options, a Portfolio can achieve many of the same objectives as through the use
of options on individual securities. Options on securities indices are similar
to options on a security except that, rather than the right to take or make
delivery of a security at a specified price, an option on a securities index
gives the holder the right to receive, upon exercise of the option, an amount of
cash if the closing level of the securities index upon which the option is based
is greater than, in the case of a call, or less than, in the case of a put, the
exercise price of the option. This amount of cash is equal to such difference
between the closing price of the index and the exercise price of the option. The
writer of the option is
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<PAGE> 45
obligated, in return for the premium received, to make delivery of this amount.
Unlike security options, all settlements are in cash and gain or loss depends
upon price movements in the market generally (or in a particular industry or
segment of the market), rather than upon price movements in individual
securities. Price movements in securities that the Portfolio owns or intends to
purchase will probably not correlate perfectly with movements in the level of an
index since the prices of such securities may be affected by somewhat different
factors and, therefore, the Portfolio bears the risk that a loss on an index
option would not be completely offset by movements in the price of such
securities.
When a Portfolio writes an option on a securities index, it will segregate, and
mark-to-market, eligible securities equal in value to 100% of the exercise price
in the case of a put, or the contract value in the case of a call. In addition,
where the Portfolio writes a call option on a securities index at a time when
the contract value exceeds the exercise price, the Portfolio will segregate and
mark-to-market, until the option expires or is closed out, cash or cash
equivalents equal in value to such excess.
A Portfolio may also purchase and sell options on other appropriate indices, as
available, such as foreign currency indices. Options on futures contracts and
index options involve risks similar to those risks relating to transactions in
financial futures contracts described below. Also, an option purchased by a
Portfolio may expire worthless, in which case the Portfolio would lose the
premium paid therefor.
FINANCIAL FUTURES CONTRACTS. The Portfolios may enter into financial futures
contracts for the future delivery of a financial instrument, such as a security,
or an amount of foreign currency or the cash value of a securities index. This
investment technique is designed primarily to hedge (i.e., protect) against
anticipated future changes in market conditions or foreign exchange rates which
otherwise might affect adversely the value of securities or other assets which
the Portfolio holds or intends to purchase. A "sale" of a futures contract means
the undertaking of a contractual obligation to deliver the securities or the
cash value of an index or foreign currency called for by the contract at a
specified price during a specified delivery period. A "purchase" of a futures
contract means the undertaking of a contractual obligation to acquire the
securities or cash value of an index or foreign currency at a specified price
during a specified delivery period. At the time of delivery, in the case of
fixed income securities pursuant to the contract, adjustments are made to
recognize differences in value arising from the delivery of securities with a
different interest rate than that specified in the contract. In some cases,
securities called for by a futures contract may not have been issued at the time
the contract was written.
Although some futures contracts by their terms call for the actual delivery or
acquisition of securities or other assets, in most cases a party will close out
the contractual commitment before delivery without having to make or take
delivery of the underlying assets by purchasing (or selling, as the case may be)
on a commodities exchange an identical futures contract calling for delivery in
the same month. Such a transaction, if effected through a member of an exchange,
cancels the obligation to make or take delivery of the underlying securities or
other assets. All transactions in the futures market are made, offset or
fulfilled through a clearing house associated with the exchange on which the
contracts are traded. A Portfolio will incur brokerage fees when it purchases or
sells contracts, and will be required to maintain margin deposits. At the time a
Portfolio enters into a futures contract, it is required to deposit with its
custodian, on behalf of the broker, a specified amount of cash or eligible
securities, called "initial margin." The initial margin required for a futures
contract is set by the exchange on which the contract is traded. Subsequent
payments, called "variation margin," to and from the broker are made on a daily
basis as the market price of the futures contract fluctuates. The costs incurred
in connection with futures transactions could reduce a Portfolio's return.
Futures contracts entail risks. If the investment manager's judgment about the
general direction of markets or exchange rates is wrong, the overall performance
may be poorer than if no such contracts had been entered into.
There may be an imperfect correlation between movements in prices of futures
contracts and portfolio assets being hedged. In addition, the market prices of
futures contracts may be affected by certain factors. If participants in the
futures market elect to close out their contracts through offsetting
transactions rather than meet margin requirements, distortions in the normal
relationship between the assets and futures markets could result. Price
distortions could also result if investors in futures contracts decide to make
or take delivery of underlying securities
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<PAGE> 46
or other assets rather than engage in closing transactions because of the
resultant reduction in the liquidity of the futures market. In addition,
because, from the point of view of speculators, the margin requirements in the
futures markets are less onerous than margin requirements in the cash market,
increased participation by speculators in the futures market could cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and because of the imperfect correlation between movements in the
prices of securities or other assets and movements in the prices of futures
contracts, a correct forecast of market trends by the investment manager may
still not result in a successful hedging transaction. If any of these events
should occur, the Portfolio could lose money on the financial futures contracts
and also on the value of its portfolio assets.
OPTIONS ON FINANCIAL FUTURES CONTRACTS. A Portfolio may purchase and write call
and put options on financial futures contracts. An option on a futures contract
gives the purchaser the right, in return for the premium paid, to assume a
position in a futures contract at a specified exercise price at any time during
the period of the option. Upon exercise, the writer of the option delivers the
futures contract to the holder at the exercise price. A Portfolio would be
required to deposit with its custodian initial margin and maintenance margin
with respect to put and call options on futures contracts written by it. A
Portfolio will establish segregated accounts or will provide cover with respect
to written options on financial futures contracts in a manner similar to that
described under "Options on Securities." Options on futures contracts involve
risks similar to those risks relating to transactions in financial futures
contracts described above. Also, an option purchased by a Portfolio may expire
worthless, in which case the Portfolio would lose the premium paid therefor.
DELAYED DELIVERY TRANSACTIONS. A Portfolio may purchase or sell portfolio
securities on a when-issued or delayed delivery basis. When-issued or delayed
delivery transactions involve a commitment by a Portfolio to purchase or sell
securities with payment and delivery to take place in the future in order to
secure what is considered to be an advantageous price or yield to the Portfolio
at the time of entering into the transaction. When a Portfolio enters into a
delayed delivery purchase, it becomes obligated to purchase securities and it
has all 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. A Portfolio generally has the ability to close out or "roll
over" a purchase obligation on or before the settlement date, rather than take
delivery of the security.
REGULATORY RESTRICTIONS. To the extent required to comply with SEC Release No.
IC-10666, when purchasing a futures contract, writing a put option or entering
into a forward currency exchange purchase or a delayed delivery purchase, a
Portfolio will maintain in a segregated account cash, U.S. Government securities
or liquid high-grade debt obligations equal to the value of such contracts. A
Portfolio will use cover in connection with selling a futures contract.
A Portfolio will not engage in transactions in financial futures contracts or
options thereon for speculation, but only in an attempt to hedge against changes
in interest rates or market conditions affecting the value of securities which
the Portfolio holds or intends to purchase.
FOREIGN CURRENCY OPTIONS. The Portfolios may engage in foreign currency options
transactions. A foreign currency option provides the option buyer with the right
to buy or sell a stated amount of foreign currency at the exercise price at a
specified date or during the option period. A call option gives its owner the
right, but not the obligation, to buy the currency, while a put option gives its
owner the right, but not the obligation, to sell the currency. The option seller
(writer) is obligated to fulfill the terms of the option sold if it is
exercised. However, either seller or buyer may close its position during the
option period in the secondary market for such options any time prior to
expiration.
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A call rises in value if the underlying currency appreciates. Conversely, a put
rises in value if the underlying currency depreciates. While purchasing a
foreign currency option can protect the Portfolio against an adverse movement in
the value of a foreign currency, it does not limit the gain which might result
from a favorable movement in the value of such currency. For example, if a
Portfolio were holding securities denominated in an appreciating foreign
currency and had purchased a foreign currency put to hedge against a decline in
the value of the currency, it would not have to exercise its put. Similarly, if
the Portfolio had entered into a contract to purchase a security denominated in
a foreign currency and had purchased a foreign currency call to hedge against a
rise in value of the currency but instead the currency had depreciated in value
between the date of purchase and the settlement date, the Portfolio would not
have to exercise its call but could acquire in the spot market the amount of
foreign currency needed for settlement.
FOREIGN CURRENCY FUTURES TRANSACTIONS. As part of their financial futures
transactions (see "Financial Futures Contracts" and "Options on Financial
Futures Contracts" above), the Portfolios may use foreign currency futures
contracts and options on such futures contracts. Through the purchase or sale of
such contracts, a Portfolio may be able to achieve many of the same objectives
as through forward foreign currency exchange contracts more effectively and
possibly at a lower cost.
Unlike forward foreign currency exchange contracts, foreign currency futures
contracts and options on foreign currency futures contracts are standardized as
to amount and delivery period and are traded on boards of trade and commodities
exchanges. It is anticipated that such contracts may provide greater liquidity
and lower cost than forward foreign currency exchange contracts.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days ("term") from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
These contracts are traded directly between currency traders (usually large
commercial banks) and their customers. The investment manager believes that it
is important to have the flexibility to enter into such forward contracts when
it determines that to do so is in the best interests of a Portfolio. A Portfolio
will not speculate in foreign currency exchange.
If a Portfolio retains the portfolio security and engages in an offsetting
transaction with respect to a forward contract, the Portfolio will incur a gain
or a loss (as described below) to the extent that there has been movement in
forward contract prices. If the Portfolio engages in an offsetting transaction,
it may subsequently enter into a new forward contract to sell the foreign
currency. Should forward prices decline during the period between a Portfolio's
entering into a forward contract for the sale of foreign currency and the date
it enters into an offsetting contract for the purchase of the foreign currency,
the Portfolio would realize a gain to the extent the price of the currency it
has agreed to sell exceeds the price of the currency it has agreed to purchase.
Should forward prices increase, the Portfolio would suffer a loss to the extent
the price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell. Although such contracts tend to minimize the
risk of loss due to a decline in the value of the hedged currency, they also
tend to limit any potential gain that might result should the value of such
currency increase. A Portfolio may have to convert its holdings of foreign
currencies into U.S. Dollars from time to time in order to meet such needs as
Portfolio expenses and redemption requests. Although foreign exchange dealers do
not charge a fee for conversion, they do realize a profit based on the
difference (the "spread") between the prices at which they are buying and
selling various currencies.
A Portfolio will not enter into forward contracts or maintain a net exposure in
such contracts when the Portfolio would be obligated to deliver an amount of
foreign currency in excess of the value of the Portfolio's securities or other
assets denominated in that currency. A Portfolio segregates cash or liquid
high-grade securities in an amount not less than the value of the Portfolio's
total assets committed to forward foreign currency exchange contracts entered
into for the purchase of a foreign currency. If the value of the securities
segregated declines, additional cash or securities is added so that the
segregated amount is not less than the amount of the Portfolio's commitments
with respect to such contracts. A Portfolio generally does not enter into a
forward contract with a term longer than one year.
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REPURCHASE AGREEMENTS. A Portfolio may invest in repurchase agreements, which
are instruments under which the Portfolio 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 price 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 incur expenses in enforcing its rights, and could experience
losses, including a decline in the value of the underlying securities and loss
of income. The securities underlying a repurchase agreement will be
marked-to-market every business day so that the value of such securities is at
least equal to the investment value of the repurchase agreement, including any
accrued interest thereon. No Portfolio currently intends to invest more than 5%
of its net assets in repurchase agreements during the current year.
SHORT SALES AGAINST-THE-BOX. A Portfolio may make short sales against-the-box
for the purpose of deferring realization of gain or loss for federal income tax
purposes. A short sale "against-the-box" is a short sale in which the 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. 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. No Portfolio
currently intends, 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.
OTHER CONSIDERATIONS--HIGH YIELD (HIGH RISK) BONDS. As reflected in the
prospectus, a Portfolio may invest a portion of its assets in fixed income
securities that are in the lower rating categories of recognized rating agencies
(i.e., junk bonds) or are non-rated. No Portfolio currently intends to invest
more than 5% of its net assets in junk bonds. These lower rated or non-rated
fixed income securities are considered, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation and generally will involve more credit risk than
securities in the higher rating categories.
The market values of such securities tend to reflect individual corporate
developments to a greater extent than do those of higher rated securities, which
react primarily to fluctuations in the general level of interest rates. Such
lower rated securities also tend to be more sensitive to economic conditions
than are higher rated securities. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, regarding lower rated bonds may
depress the prices for such securities. These and other factors adversely
affecting the market value of high yield securities will adversely affect a
Portfolio's net asset value. Although some risk is inherent in all securities
ownership, holders of fixed income securities have a claim on the assets of the
issuer prior to the holders of common stock. Therefore, an investment in fixed
income securities generally entails less risk than an investment in common stock
of the same issuer.
High yield securities frequently are issued by corporations in the growth stage
of their development. They may also be issued in connection with a corporate
reorganization or a corporate takeover. Companies that issue such high yielding
securities often are highly leveraged and may not have available to them more
traditional methods of financing. Therefore, the risk associated with acquiring
the securities of such issuers generally is greater than is the case with higher
rated securities. For example, during an economic downturn or recession, highly
leveraged issuers of high yield securities may experience financial stress.
During such periods, such issuers may not have sufficient revenues to meet their
interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific corporate developments,
or the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss from default by the
issuer is significantly greater for the holders of high yielding securities
because such securities are generally unsecured and are often subordinated to
other creditors of the issuer.
Zero coupon securities and pay-in-kind bonds involve additional special
considerations. Zero coupon securities are debt obligations that do not entitle
the holder to any periodic payments of interest prior to maturity or a specified
cash payment date when the securities begin paying current interest (the "cash
payment date") and therefore are issued and traded at a discount from their face
amount or par value. The market prices of zero coupon securities are generally
more volatile than the market prices of securities that pay interest
periodically and are likely to respond to
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changes in interest rates to a greater degree than do securities paying interest
currently with similar maturities and credit quality. Zero coupon, pay-in-kind
or deferred interest bonds carry additional risk in that unlike bonds that pay
interest throughout the period to maturity, a Portfolio will realize no cash
until the cash payment date unless a portion of such securities is sold and, if
the issuer defaults, the Portfolio may obtain no return at all on its
investment.
Additional information concerning high yield securities appears under
"Appendix--Ratings of Fixed Income Investments."
COLLATERALIZED OBLIGATIONS. Each 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 net 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 (the "Investment Techniques--Collateralized
Obligations").
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 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, sometimes called
interest only ("IO") and principal only ("PO") securities. Collateralized
obligations are designed to be retired as the underlying securities are repaid.
In the event of prepayment on or call of such securities, the class of
collateralized obligation first to mature generally will be paid down first.
Therefore, although in most cases the issuer of collateralized obligations will
not supply additional collateral in the event of such prepayment, there will be
sufficient collateral to secure collateralized obligations that remain
outstanding. It is anticipated that no more than 5% of a Portfolio's net assets
will be invested in IO and PO securities. Governmentally-issued and
privately-issued IO's and PO's will be considered illiquid for purposes of a
Portfolio's limitation on illiquid securities, however, the Board of Trustees
may adopt guidelines under which governmentally-issued IO's and PO's may be
determined to be liquid.
In reliance on an interpretation by the SEC, a Portfolio's investments in
certain qualifying collateralized obligations are not subject to the limitations
in the 1940 Act regarding investments by a registered investment company, such
as the Fund, 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
B-9
<PAGE> 50
owning instruments which do not make current interest payments is that a fixed
yield is earned not only on the original investment but also, in effect, on all
discount accretion during the life of the obligations. This implicit
reinvestment of earnings at the same rate eliminates the risk of being unable to
reinvest distributions at a rate as high as the implicit yield on the zero
coupon bond, but at the same time eliminates any opportunity to reinvest
earnings at higher rates. For this reason, zero coupon bonds are subject to
substantially greater price fluctuations during periods of changing market
interest rates than those of comparable securities that pay interest currently,
which fluctuation is greater as the period to maturity is longer. Zero coupon
bonds created as collateralized obligations are similar to those created through
the U.S. Treasury, but the former investments do not provide absolute certainty
of maturity or of cash flows after prior classes of the collateralized
obligations are retired. No Portfolio currently intends to invest more than 5%
of its net assets in zero coupon U.S. Government securities during the current
year.
PORTFOLIO TRANSACTIONS
KFS is the investment manager for the Kemper Funds and KFS and its affiliates
also furnish investment management services to other clients including Kemper
Corporation and the Kemper insurance companies. KFS is the sole shareholder of
Kemper Asset Management Company and Kemper Investment Management Company
Limited. These three entities share some common research and trading facilities.
Dreman Value Advisors, Inc. ("DVA") is the investment manager for mutual funds
and other institutional accounts and the sub-adviser for the Fund. At times
investment decisions may be made to purchase or sell the same investment
securities for a Portfolio and for one or more of the other clients managed by
KFS or DVA. 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.
National securities exchanges have established limitations governing the maximum
number of options in each class which may be written by a single investor or
group of investors acting in concert. An exchange may order the liquidation of
positions found to be in violation of these limits, and it may impose certain
other sanctions. These position limits 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 futures 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 of the Fund believes that the benefits of KFS's and DVA's organization
outweigh any limitations that may arise from simultaneous transactions or
position limitations.
KFS and DVA, in effecting purchases and sales of portfolio securities for the
account of each Portfolio, will implement the Fund's policy of seeking best
execution of orders, which includes best net prices, except to the extent that
KFS and DVA 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, clearance procedures, wire service quotations and statistical and
other research information provided to a Portfolio and KFS or DVA. Any research
benefits derived are available for all clients, including clients of affiliated
companies. Since it is only supplementary to KFS's and DVA's own research
efforts and must be analyzed and reviewed by KFS' and DVA's staff, the receipt
of research information is not expected to materially reduce expenses. In
selecting among firms believed to meet the criteria for handling a particular
transaction, KFS and DVA may give consideration to those firms that have sold or
are selling shares of the Fund and of other funds managed by KFS and DVA, as
well as to those firms that provide market, statistical and other research
information to a Portfolio and KFS and DVA, although neither KFS nor DVA is
authorized to pay higher commissions or, in the case of principal trades, higher
prices to firms that provide such services, except as described below.
KFS and DVA may in certain instances be permitted to pay higher brokerage
commissions (not including principal trades) solely for receipt of market,
statistical and other research services. Subject to Section 28(e) of the
Securities Exchange Act of 1934 and procedures that may be adopted by the Board
of Trustees, a Portfolio could pay a firm
B-10
<PAGE> 51
that provides research services to KFS or DVA commissions for effecting a
securities transaction for the Portfolio in excess of the amount other firms
would have charged for the transaction if KFS or DVA determines in good faith
that the greater commission is reasonable in relation to the value of the
research services provided by the executing firm viewed in terms either of a
particular transaction or KFS's or DVA's overall responsibilities to the
Portfolio or other clients. Not all of such research services may be useful or
of value in advising a particular Portfolio. Research benefits will be available
for all clients of KFS and its subsidiaries. The investment management fee paid
by a Portfolio to KFS is not reduced because KFS or DVA receives these research
services.
INVESTMENT MANAGER AND UNDERWRITER
INVESTMENT MANAGER. Kemper Financial Services, Inc. ("KFS"), 120 South LaSalle
Street, Chicago, Illinois 60603, is the Fund's investment manager. Pursuant to
an investment management agreement, KFS acts as the Fund's investment adviser,
manages its investments, administers its business affairs, furnishes office
facilities and equipment, provides clerical, bookkeeping 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 agreement provides that the Fund pays the charges and
expenses of its operations, including the fees and expenses of the trustees
(except those who are officers or employees of KFS), 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, taxes and membership dues. The Fund bears
the expenses of registration of its shares with the Securities and Exchange
Commission, while Kemper Distributors, Inc. ("KDI"), as principal underwriter,
pays the cost of qualifying and maintaining the qualification of the Fund's
shares for sale under the securities laws of the various states. KFS has agreed
to reimburse a Portfolio to the extent required by applicable state expense
limitations should all operating expenses of the Portfolio, including the
investment management fees of KFS but excluding taxes, interest, distribution
fees, extraordinary expenses, brokerage commissions or transaction costs and any
other properly excludable expenses, exceed the applicable state expense
limitations. The Fund believes that the most restrictive state expense
limitation currently in effect would require that such operating expenses not
exceed 2.5% of the first $30 million of average daily net assets, 2% of the next
$70 million and 1.5% of average daily net assets over $100 million. Under such
state expense limitation, custodian costs attributable to foreign securities
that are in excess of similar domestic custodian costs are excluded from
operating expenses.
The investment management agreement provides that KFS 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
KFS in the performance of its obligations and duties, or by reason of its
reckless disregard of its obligations and duties under each agreement.
The Fund's investment management agreement is for an initial term ending April
1, 1997 and continues in effect from year to year so long as its continuation is
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. The Fund's investment management agreement may be terminated at any
time for a Portfolio upon 60 days notice by either party, or by a majority vote
of the outstanding shares of the Portfolio, and will terminate automatically
upon assignment. If additional Portfolios become subject to the investment
management 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.
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<PAGE> 52
KFS is paid an investment management fee, monthly, by each Portfolio, at the
annual rates shown below.
<TABLE>
<CAPTION>
MANAGEMENT FEE
AVERAGE DAILY NET ASSETS OF A PORTFOLIO RATES
- ---------------------------------------------------------------------------------- --------------
<S> <C>
$0 - $250 million................................................................. .58%
$250 million - $1 billion......................................................... .55
$1 billion - $2.5 billion......................................................... .53
$2.5 billion - $5 billion......................................................... .51
$5 billion - $7.5 billion......................................................... .48
$7.5 billion - $10 billion........................................................ .46
$10 billion - $12.5 billion....................................................... .44
Over $12.5 billion................................................................ .42
</TABLE>
KFS has agreed to temporarily reduce its investment management fee and reimburse
or pay operating expenses of each Portfolio to the extent necessary to limit the
Portfolio's operating expenses to the levels described under "Summary of
Expenses" in the Prospectus. For this purpose "operating expenses" do not
include taxes, interest, extraordinary expenses, brokerage commissions or
transaction costs. KFS can terminate this arrangement at any time upon notice to
the Fund.
FUND SUB-ADVISER--DREMAN VALUE ADVISORS, INC. Dreman Value Advisors, Inc.
("DVA"), 10 Exchange Place, Jersey City, New Jersey 07302, is the sub-adviser
for the value portion of each Portfolio. DVA is a wholly owned subsidiary of
KFS. DVA will act as sub-adviser pursuant to the terms of a Sub-Advisory
Agreement between it and KFS.
Under the terms of the Sub-Advisory Agreement, DVA will manage the value portion
of each Portfolio and will provide such investment advice, research and
assistance as KFS may, from time to time, reasonably request. DVA may, under the
terms of the Sub-Advisory Agreement, render similar services to others including
other investment companies. For its services, DVA will receive from KFS a
monthly fee at the annual rate of .25% of the portion of the average daily net
assets of each Portfolio allocated by KFS to DVA for management. DVA permits any
of its officers or employees to serve without compensation as trustees or
officers of the Fund if elected to such positions.
The Sub-Advisory Agreement provides that DVA 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
DVA in the performance of its duties or from reckless disregard by DVA of its
obligations and duties under the Sub-Advisory Agreement.
The Sub-Advisory Agreement is for an initial term ending April 1, 1997 and
continues in effect from year to year so long as its continuation is 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. The
Sub-Advisory Agreement may be terminated at any time for a Portfolio upon 60
days notice by KFS, DVA or the Board of Trustees, or by a majority vote of the
outstanding shares of the Portfolio, and will terminate automatically upon
assignment or upon the termination of the Fund's investment management
agreement. If additional Portfolios become subject to the Sub-Advisory
Agreement, the provisions concerning continuation, amendment and termination
shall be on a Portfolio-by-Portfolio basis. Additional Portfolios may be subject
to a different agreement.
PRINCIPAL UNDERWRITER. Pursuant to separate underwriting and distribution
services agreements ("distribution agreements"), Kemper Distributors, Inc.
("KDI"), a wholly-owned subsidiary of KFS, is the principal underwriter and
distributor for the shares of the Fund and acts as agent of the Fund in the
continuous offering of its shares. KDI bears all its expenses of providing
services pursuant to the distribution agreements, including the payment of any
commissions. The Fund pays the cost for the prospectus and shareholder reports
to be set in type and printed for existing shareholders, and KDI, as principal
underwriter, pays for the printing and distribution of
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<PAGE> 53
copies thereof used in connection with the offering of shares to prospective
investors. KDI also pays for supplementary sales literature and advertising
costs.
The distribution agreement continues in effect from year to year so long as such
continuance is approved for each class at least annually by a vote of the Board
of Trustees of the Fund, including the Trustees who are not interested persons
of the Fund and who have no direct or indirect financial interest in the
agreement. The agreement automatically terminates in the event of its assignment
and may be terminated for a class or a Portfolio at any time without penalty by
the Fund or by KDI upon 60 days' notice. Termination by the Fund with respect to
a class or a Portfolio may be by vote of a majority of the Board of Trustees, or
a majority of the Trustees who are not interested persons of the Fund and who
have no direct or indirect financial interest in the agreement, or a "majority
of the outstanding voting securities" of the class or the Portfolio, as defined
under the Investment Company Act of 1940. The agreement may not be amended for a
class to increase the fee to be paid by the Portfolio with respect to such class
without approval by a majority of the outstanding voting securities of such
class of such Portfolio and all material amendments must in any event be
approved by the Board of Trustees in the manner described above with respect to
the continuation of the agreement. The provisions concerning the continuation,
amendment and termination of the distribution agreement are on a
Portfolio-by-Portfolio basis and for the Portfolio on a class by class basis.
CLASS B SHARES AND CLASS C SHARES. Since the distribution agreement provides for
fees charged to Class B and Class C shares that are used by KDI to pay for
distribution services (see the prospectus under "Investment Manager and
Underwriter"), the agreement (the "Plan") is approved and renewed separately for
the Class B and Class C shares in accordance with Rule 12b-1 under the
Investment Company Act of 1940, which regulates the manner in which an
investment company may, directly or indirectly, bear expenses of distributing
its shares.
ADMINISTRATIVE SERVICES. Administrative services are provided to the Fund under
an administrative services agreement ("administrative agreement") with KDI. KDI
bears all its expenses of providing services pursuant to the administrative
agreement between KDI and the Fund, including the payment of service fees. Each
Portfolio pays KDI an administrative services fee, payable monthly, at an annual
rate of up to .25% of average daily net assets of each class of the Portfolio.
KDI has entered into related arrangements with various financial services firms,
such as broker-dealers or banks ("firms"), that provide services and facilities
for their customers or clients who are shareholders of the Fund. The firms
provide such office space and equipment, telephone facilities and personnel as
is necessary or beneficial for providing information and services to their
clients. Such services and assistance may include, but are not limited to,
establishing and maintaining shareholder accounts and records, processing
purchase and redemption transactions, answering routine inquiries regarding the
Fund, assistance to clients in changing dividend and investment options, account
designations and addresses and such other services as may be agreed upon from
time to time and permitted by applicable statute, rule or regulation. KDI pays
each firm a service fee, payable quarterly, at an annual rate of up to .25% of
the net assets in each Portfolio account that it maintains and services
attributable to Class A, Class B and Class C shares, respectively, in each case
commencing with the month after investment (month of investment for Class C
shares); provided, however, KDI may advance the first year service fee as
described in the prospectus under "Investment Manager and Underwriter." Firms to
which service fees may be paid include broker-dealers affiliated with KDI.
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreement not paid to firms to compensate
itself for administrative functions performed for the Portfolio. Currently, the
administrative services fee payable to KDI is based only upon Portfolio assets
in accounts for which there is a firm listed on the Fund's records and it is
intended that KDI will pay all the administrative services fee that it receives
from a Portfolio to firms in the form of service fees. The effective
administrative services fee rate to be charged against all assets of a Portfolio
while this procedure is in effect will depend upon the proportion of Portfolio
assets that is in accounts for which there is a firm of record. The Board of
Trustees, in its discretion, may approve basing the fee to KDI on all Portfolio
assets in the future.
B-13
<PAGE> 54
Certain trustees or officers of the Fund are also directors or officers of KFS
or KDI as indicated under "Officers and Trustees."
CUSTODIAN AND SHAREHOLDER SERVICE AGENT. Investors Fiduciary Trust Company
("IFTC"), 127 West 10th Street, Kansas City, Missouri 64105, as custodian and
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110, as sub-custodian, have custody of all securities and cash of the Fund
maintained in the United States. The Chase Manhattan Bank, N.A., Chase MetroTech
Center, Brooklyn, New York 11245, as custodian, has custody of all securities
and cash of the Fund held outside of the United States. They attend to the
collection of principal and income, and payment for and collection of proceeds
of securities bought and sold by each Portfolio. IFTC is also the Fund's
transfer agent and dividend-paying agent. Pursuant to a services agreement with
IFTC, Kemper Service Company ("KSvC"), an affiliate of KFS, serves as
"Shareholder Service Agent." IFTC receives an annual fee as custodian for the
Fund, payable monthly, at a rate of $.10 per $1,000 of average monthly net
assets of each Portfolio plus certain transaction charges and out-of-pocket
expense reimbursement. IFTC receives as transfer agent, and pays to KSvC, annual
account fees of $6 per account plus account set up, transaction and maintenance
charges, annual fees associated with the contingent deferred sales charge (Class
B only) and out-of-pocket expense reimbursement. IFTC's fee is reduced by
certain earnings credits in favor of the Portfolios.
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 Fund's annual financial statements, review certain
regulatory reports and the Fund's 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.
PURCHASE AND REDEMPTION OF SHARES
As described in the Fund's prospectus, shares of a Portfolio are sold at their
public offering price, which is the net asset value per share of the Portfolio
next determined after an order is received in proper form plus, with respect to
Class A shares, an initial sales charge. The minimum initial investment is
$1,000 and the minimum subsequent investment is $100 but such minimum amounts
may be changed at any time. See the prospectus for certain exceptions to these
minimums. An order for the purchase of shares that is accompanied by a check
drawn on a foreign bank (other than a check drawn on a Canadian bank in U.S.
Dollars) will not be considered in proper form and will not be processed unless
and until the Fund determines that it has received payment of the proceeds of
the check. The time required for such a determination will vary and cannot be
determined in advance.
Upon receipt by the Shareholder Service Agent of a request for redemption,
shares of a Portfolio will be redeemed by the Fund at the applicable net asset
value per share of such Portfolio as described in the Fund's prospectus. The
redemption within one year of Class A shares purchased at net asset value under
the Large Order NAV Purchase Privilege described in the prospectus may be
subject to a 1% contingent deferred sales charge (see "Purchase of Shares" in
the prospectus). Redemption of Class B shares may be subject to a contingent
deferred sales charge. When the Fund is asked to redeem shares for which it may
not yet have received good payment, it may delay the mailing of a redemption
check until it has determined that collected funds have been received for the
purchase of such shares, which will be up to 15 days.
Scheduled variations in or the elimination of the initial sales charge for
purchases of Class A shares or the contingent deferred sales charge for
redemptions of Class B shares by certain classes of persons or through certain
types of transactions as described in the prospectus is provided because of
anticipated economies in sales and sales related efforts.
The Fund may suspend the right of redemption or delay payment more than seven
days (a) during any period when the New York Stock Exchange (the "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
B-14
<PAGE> 55
practicable for the Fund to determine the value of a Portfolio's net assets, or
(c) for such other periods as the Securities and Exchange Commission may by
order permit for the protection of the Fund's shareholders.
The conversion of Class B shares to Class A shares may be subject to the
continuing availability of an opinion of counsel, ruling by the Internal Revenue
Service or other assurance acceptable to the Fund to the effect that (a) the
assessment of the distribution services fee with respect to Class B shares and
not Class A shares does not result in a Portfolio's dividends constituting
"preferential dividends" under the Internal Revenue Code, and (b) that the
conversion of Class B shares to Class A shares does not constitute a taxable
event under the Internal Revenue Code. The conversion of Class B shares to Class
A shares may be suspended if such assurance is not available. In that event, no
further conversions of Class B shares would occur, and shares might continue to
be subject to the distribution services fee for an indefinite period that may
extend beyond the proposed conversion date as described in the prospectus.
DIVIDENDS AND TAXES
DIVIDENDS. Each Portfolio normally distributes dividends of net investment
income as follows: annually for the Horizon 20+ Portfolio; semi-annually for the
Horizon 10+ Portfolio and quarterly for the Horizon 5 Portfolio. Each Portfolio
distributes any net realized short-term and long-term capital gains at least
annually.
The Fund may at any time vary its foregoing dividend practices and, therefore,
reserves the right from time to time to either distribute or retain for
reinvestment such of a Portfolio's net investment income and net short-term and
long-term capital gains as the Board of Trustees determines appropriate under
the then current circumstances. In particular, and without limiting the
foregoing, the Fund may make additional distributions of a Portfolio's net
investment income or capital gain net income in order to satisfy the minimum
distribution requirements contained in the Internal Revenue Code (the "Code").
Dividends will be reinvested in shares of the Portfolio paying such dividends
unless shareholders indicate in writing that they wish to receive them in cash
or in shares of other Kemper Funds as described in the prospectus.
The level of income dividends per share (as a percentage of net asset value)
will be lower for Class B and Class C shares than for Class A shares primarily
as a result of the distribution services fee applicable to Class B and Class C
shares. Distributions of capital gains, if any, will be paid in the same amount
for each class.
TAXES. The Fund intends each Portfolio to qualify as a regulated investment
company under Subchapter M of the Code and, if so qualified, a Portfolio will
not be liable for federal income taxes to the extent its earnings are
distributed. One of the Subchapter M requirements to be satisfied is that less
than 30% of a Portfolio's gross income during its fiscal year must be derived
from gains (not reduced by losses) from the sale or other disposition of
securities and certain other investments held for less than three months. A
Portfolio may be limited in its options, futures and foreign currency
transactions in order to prevent recognition of such gains.
A Portfolio's options, futures and foreign currency transactions are subject to
special tax provisions that may accelerate or defer recognition of certain gains
or losses, change the character of certain gains or losses, or alter the holding
periods of certain of the Portfolio's securities.
The mark-to-market rules of the Code may require a Portfolio to recognize
unrealized gains and losses on certain options and futures held by the Portfolio
at the end of the fiscal year. Under these provisions, 60% of any capital gain
net income or loss recognized will generally be treated as long-term and 40% as
short-term. However, although certain forward contracts and futures contracts on
foreign currency are marked-to-market, the gain or loss is generally ordinary
under Section 988 of the Code. In addition, the straddle rules of the Code would
require deferral of certain losses realized on positions of a straddle to the
extent that the Portfolio had unrealized gains in offsetting positions at year
end.
Gains and losses attributable to fluctuations in the value of foreign currencies
will be characterized generally as ordinary gain or loss under Section 988 of
the Code. For example, if a Portfolio sold a foreign security and part of
B-15
<PAGE> 56
the gain or loss on the sale was attributable to an increase or decrease in the
value of a foreign currency, then the currency gain or loss may be treated as
ordinary income or loss. If such transactions result in greater net ordinary
income, the dividends paid on behalf of the Portfolio will be increased; if the
result of such transactions is lower net ordinary income, a portion of dividends
paid could be classified as a return of capital.
A 4% excise tax is imposed on the excess of the required distribution for a
calendar year over the distributed amount for such calendar year. The required
distribution is the sum of 98% of the Portfolio's net investment income for the
calendar year plus 98% of its capital gain net income for the one-year period
ending October 31, plus any undistributed net investment income from the prior
calendar year, plus any undistributed capital gain net income from the one year
period ended October 31 of the prior calendar year, minus any overdistribution
in the prior calendar year. For purposes of calculating the required
distribution, foreign currency gains or losses occurring after October 31 are
taken into account in the following calendar year. The Fund intends to declare
or distribute dividends of the Portfolios during the appropriate periods of an
amount sufficient to prevent imposition of the 4% excise tax.
A shareholder who redeems shares of a Portfolio will recognize capital gain or
loss for federal income tax purposes measured by the difference between the
value of the shares redeemed and the adjusted cost basis of the shares. Any loss
recognized on the redemption of Portfolio shares held six months or less will be
treated as long-term capital loss to the extent that the shareholder has
received any long-term capital gain dividends on such shares. A shareholder who
has redeemed shares of a Portfolio or other Kemper Mutual Fund listed in the
prospectus under "Special Features--Class A Shares--Combined Purchases" (other
than shares of Kemper Cash Reserves Fund not acquired by exchange from another
Kemper Mutual Fund) may reinvest the amount redeemed at net asset value at the
time of the reinvestment in shares of the Portfolio or in shares of a Kemper
Mutual Fund within six months of the redemption as described in the prospectus
under "Redemption or Repurchase of Shares--Reinvestment Privilege." If a
shareholder realized a loss on the redemption or exchange of a Portfolio's
shares and reinvests in shares of the same Portfolio 30 days before or after the
redemption or exchange, the transactions may be subject to the wash sale rules
resulting in a postponement of the recognition of such loss for federal income
tax purposes. An exchange of a Portfolio's shares for shares of another fund is
treated as a redemption and reinvestment for federal income tax purposes upon
which gain or loss may be recognized.
A Portfolio's investment income derived from foreign securities may be subject
to foreign income taxes withheld at the source. Because the amount of a
Portfolio's investments in various countries will change from time to time, it
is not possible to determine the effective rate of such taxes in advance.
Shareholders who are non-resident aliens are subject to U.S. withholding tax on
ordinary income dividends (whether received in cash or shares) at a rate of 30%
or such lower rate as prescribed by any applicable tax treaty.
PERFORMANCE
As described in the prospectus, each Portfolio's historical performance or
return for a class of shares may be shown in the form of "average annual total
return" and "total return" figures. These various measures of performance are
described below. Performance information will be computed separately for each
class of each Portfolio.
Each Portfolio's average annual total return quotation is computed in accordance
with a standardized method prescribed by rules of the Securities and Exchange
Commission. The average annual total return for a Portfolio for a specific
period is found by first taking a hypothetical $1,000 investment ("initial
investment") in the Portfolio's shares on the first day of the period, adjusting
to deduct the maximum sales charge (in the case of Class A shares), and
computing the "redeemable value" of that investment at the end of the period.
The redeemable value in the case of Class B shares includes the effect of the
applicable contingent deferred sales charge that may be imposed at the end of
the period. The redeemable value is then divided by the initial investment, and
this quotient is taken to the Nth root (N representing the number of years in
the period) and 1 is subtracted from the result, which is then expressed as a
percentage. The calculation assumes that all income and capital gains dividends
paid by the Portfolio
B-16
<PAGE> 57
have been reinvested at net asset value on the reinvestment dates during the
period. Average annual total return may also be calculated without deducting the
maximum sales charge.
Calculation of a Portfolio's total return is not subject to a standardized
formula, except when calculated for purposes of the Portfolio's "Financial
Highlights" table in the Fund's financial statements and prospectus. Total
return performance for a specific period is calculated by first taking an
investment ("initial investment") in a Portfolio's shares on the first day of
the period, either adjusting or not adjusting to deduct the maximum sales charge
(in the case of Class A shares), and computing the "ending value" of that
investment at the end of the period. The total return percentage is then
determined by subtracting the initial investment from the ending value and
dividing the remainder by the initial investment and expressing the result as a
percentage. The ending value in the case of Class B shares may or may not
include the effect of the applicable contingent deferred sales charge that may
be imposed at the end of the period. The calculation assumes that all income and
capital gains dividends paid by the Portfolio have been reinvested at net asset
value on the reinvestment dates during the period. Total return may also be
shown as the increased dollar value of the hypothetical investment over the
period. Total return calculations that do not include the effect of the sales
charge for Class A shares or the contingent deferred sales charge for Class B
shares would be reduced if such charge were included.
A Portfolio's performance figures are based upon historical results and are not
representative of future performance. Each Portfolio's Class A shares are sold
at net asset value plus a maximum sales charge of 5.75% of the offering price.
Class B shares and Class C shares are sold at net asset value. Redemptions of
Class B shares may be subject to a contingent deferred sales charge that is 4%
in the first year following the purchase, declines by a specified percentage
thereafter and becomes zero after six years. Returns and net asset value will
fluctuate. Factors affecting each Portfolio's performance include general market
conditions, operating expenses and investment management. Any additional fees
charged by a dealer or other financial services firm would reduce the returns
described in this section. Shares of each Portfolio are redeemable at the then
current net asset value, which may be more or less than original cost.
Investors may want to compare the performance of a Portfolio to certificates of
deposit issued by banks and other depository institutions. Certificates of
deposit may offer fixed or variable interest rates and principal is guaranteed
and may be insured. Withdrawal of deposits prior to maturity will normally be
subject to a penalty. Rates offered by banks and other depository institutions
are subject to change at any time specified by the issuing institution.
Information regarding bank products may be based upon, among other things, the
BANK RATE MONITOR National Index(TM) for certificates of deposit, which is an
unmanaged index and is based on stated rates and the annual effective yields of
certificates of deposit in the ten largest banking markets in the United States,
or the CDA Investment Technologies, Inc. Certificate of Deposit Index, which is
an unmanaged index based on the average monthly yields of certificates of
deposit.
Investors also may want to compare the performance of a Portfolio to that of
U.S. Treasury bills, notes or bonds. Treasury obligations are issued in selected
denominations. Rates of Treasury obligations are fixed at the time of issuance
and payment of principal and interest is backed by the full faith and credit of
the U.S. Treasury. The market value of such instruments will generally fluctuate
inversely with interest rates prior to maturity and will equal par value at
maturity. Information regarding the performance of Treasury obligations may be
based upon, among other things, the Towers Data Systems U.S. Treasury Bill
index, which is an unmanaged index based on the average monthly yield of
treasury bills maturing in six months. Due to their short maturities, Treasury
bills generally experience very low market value volatility.
Investors may want to compare the performance of a Portfolio to the performance
of two indexes, such as, in the case of the Horizon 10+ Portfolio, a
hypothetical portfolio weighted 60% in the Standard & Poor's 500 Stock Index (an
unmanaged index generally representative of the U.S. stock market) and 40% in
the Lehman Brothers Government/Corporate Bond Index (an unmanaged index
generally representative of intermediate and long-term government and investment
grade corporate debt securities). For the percentage of a Portfolio's assets
invested in each type of security, see "Investment Objectives, Policies and Risk
Factors" in the Prospectus.
B-17
<PAGE> 58
Investors may want to compare the performance of a Portfolio to that of money
market funds. Money market funds seek to maintain a stable net asset value and
yield fluctuates. Information regarding the performance of money market funds
may be based upon, among other things, IBC/Donoghue's Money Fund Averages(R)
(All Taxable). As reported by IBC/Donoghue's, all investment results represent
total return (annualized results for the period net of management fees and
expenses) and one year investment results are effective annual yields assuming
reinvestment of dividends.
OFFICERS AND TRUSTEES
The officers and trustees of the Fund, their birthdates, their principal
occupations and their affiliations, if any, with KFS, the investment manager,
DVA, the sub-adviser, and KDI, the principal underwriter, are as follows (The
number following each person's title is the number of investment companies
managed by KFS and its affiliates for which he or she holds similar positions):
JAMES E. AKINS (10/15/26), Trustee (12), 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; United States Ambassador to Saudi Arabia, 1973-76.
ARTHUR R. GOTTSCHALK (2/13/25), Trustee (12), 10642 Brookridge Drive, Frankfort,
Illinois, Retired; formerly, President, Illinois Manufacturers Association;
Trustee, Illinois Masonic Medical Center; Member, Board of Governors, Heartland
Institute/Illinois; formerly, Illinois State Senator.
FREDERICK T. KELSEY (4/25/27), Trustee (12), 3133 Laughing Gull Court, John's
Island, South Carolina; Retired; formerly, consultant to Goldman, Sachs & Co.;
formerly, President, Treasurer and Trustee of Institutional Liquid Assets and
its affiliated mutual funds; Trustee of the Benchmark Fund and the Pilot Fund.
*DAVID B. MATHIS (4/13/38), Trustee (34), Kemper Center, Long Grove, Illinois;
Chairman, Chief Executive Officer and Director, Kemper Corporation; Director,
KFS, Kemper Financial Companies, Inc., several other Kemper Corporation
subsidiaries and IMC Global, Inc.; Chairman of the Board, Kemper National
Insurance Companies.
FRED B. RENWICK (2/1/30), Trustee (12), 3 Hanover Square, New York, New York;
Professor of Finance, New York University, Stern School of Business; Director;
TIFF Industrial Program, Inc., Director, the Wartberg Home Foundation; Chairman
Investment Committee of Morehouse College Board of Trustees; Chairman, American
Bible Society Investment Committee; previously member of the Investment
Committee of Atlanta University Board of Trustees; previously Director of Board
of Pensions Evangelical Lutheran Church of America.
*STEPHEN B. TIMBERS (8/8/44), President and Trustee (34), 120 South LaSalle
Street, Chicago, Illinois; President, Chief Operating Officer and Director,
Kemper Corporation; Chairman, Chief Executive Officer, Chief Investment Officer
and Director, KFS; Director, Kemper Financial Companies, Inc., KDI, DVA, several
other Kemper Corporation subsidiaries and LTV Corporation.
JOHN B. TINGLEFF (5/4/35), Trustee (12), 2015 South Lake Shore Drive, Harbor
Springs, Michigan; Retired; formerly, President, Tingleff & Associates
(management consulting firm); formerly, Senior Vice President, Continental
Illinois National Bank & Trust Company.
JOHN G. WEITHERS (8/8/33), Trustee (12), 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.
*JOHN E. NEAL (3/9/50), Vice President (3), 120 South LaSalle Street, Chicago,
Illinois; President, Chief Operating Officer and Director, KFS; Director, DVA,
KDI and several other Kemper Corporation subsidiaries; prior thereto, Senior
Vice President, Kemper Real Estate Management Company.
*JOHN E. PETERS (11/4/47), Vice President (34), 120 South LaSalle Street,
Chicago, Illinois; Senior Executive Vice President and Director, KFS; President
and Director, KDI; Director, DVA.
B-18
<PAGE> 59
*THOMAS M. REGNER (7/1/52), Vice President (1), 120 South LaSalle Street,
Chicago, Illinois; Senior Vice President, KFS.
*STEVEN H. REYNOLDS (9/11/43), Vice President (11), 120 South LaSalle Street,
Chicago, Illinois; Executive Vice President and Chief Investment
Officer--Equities, KFS.
*CHARLES F. CUSTER (8/19/28), Vice President and Assistant Secretary (34), 222
North LaSalle Street, Chicago, Illinois; Partner, Vedder, Price, Kaufman &
Kammholz (attorneys), Legal Counsel to the Fund.
*JEROME L. DUFFY (6/29/36), Treasurer (34), 120 South LaSalle Street, Chicago,
Illinois; Senior Vice President, KFS.
*PHILIP J. COLLORA (11/15/45), Vice President and Secretary (34), 120 South
LaSalle Street, Chicago, Illinois; Attorney, Senior Vice President and Assistant
Secretary, KFS.
*ELIZABETH C. WERTH (10/1/47), Assistant Secretary (26), 120 South LaSalle
Street, Chicago, Illinois; Vice President, KFS and Vice President and Director
of State Registrations, KDI.
- ---------------
* "Interested persons" as defined in the Investment Company Act of 1940.
The trustees and officers who are "interested persons" as designated above
receive no compensation from the Fund, except that Mr. Custer's law firm
receives fees from the Fund as counsel to the Fund. The table below shows
amounts estimated to be paid or accrued to those trustees who are not designated
"interested persons" during the Fund's first full fiscal year and the total
compensation that the Kemper funds paid to such trustees during the calendar
year 1994.
<TABLE>
<CAPTION>
PENSION OR
AGGREGATE RETIREMENT BENEFITS TOTAL COMPENSATION
COMPENSATION ACCRUED AS PART OF KEMPER FUNDS PAID
NAME OF BOARD MEMBER FROM FUND FUND EXPENSES TO BOARD MEMBERS(2)
- --------------------------------------------------- ------------ ------------------- -------------------
<S> <C> <C> <C>
James E. Akins..................................... $8,100 $ 0 $66,600
Arthur R. Gottschalk(1)............................ $8,100 $ 0 $72,000
Frederick T. Kelsey(1)............................. $8,100 $ 0 $73,800
Fred B. Renwick.................................... $8,100 $ 0 $66,600
John B. Tingleff................................... $8,100 $ 0 $70,500
John G. Weithers................................... $8,100 $ 0 $70,100
</TABLE>
- ---------------
(1) Includes deferred fees and interest thereon pursuant to deferred
compensation agreements with Kemper funds. Deferred amounts accrue interest
monthly at a rate equal to the yield of Kemper Money Market Fund--Money
Market Portfolio.
(2) Includes estimated compensation for service for calendar year 1994 on the
Boards of 12 Kemper funds, with 28 fund portfolios and amounts for new funds
as if the fund had existed at the beginning of the year and for one fund as
if it had been affiliated with the Kemper funds for all of 1994 and the
Board Members had been such for all the Kemper funds during the period.
As of December 13, 1995, KFS owned all the shares of each class of each
Portfolio of the Fund, except the Class I shares for which there were no holders
of record.
SHAREHOLDER RIGHTS
The Fund generally is not required to hold meetings of the 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 shareholder approval is
required by the Investment Company Act of 1940 ("1940 Act"); (c) any termination
of the Fund, a Portfolio or a class 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
B-19
<PAGE> 60
supplementing any defective or inconsistent provision thereof); and (e) such
additional matters as may be required by law, the Declaration of Trust, the
By-laws of the Fund, or any registration of the Fund with the Securities and
Exchange Commission or any state, or as the trustees may consider necessary or
desirable. The shareholders also would vote upon changes in fundamental
investment objectives, policies or restrictions.
Each trustee serves until the next meeting of shareholders, if any, called for
the purpose of electing trustees and until the election and qualification of a
successor or until such trustee sooner dies, resigns, retires or is removed by a
majority vote of the shares entitled to vote (as described below) or a majority
of the trustees. In accordance with the 1940 Act (a) the Fund will hold a
shareholder meeting for the election of trustees at such time as less than a
majority of the trustees have been elected by shareholders, and (b) if, as a
result of a vacancy in the Board of Trustees, less than two-thirds of the
trustees have been elected by the shareholders, that vacancy will be filled only
by a vote of the shareholders.
Trustees may be removed from office by a vote of the holders of a majority of
the outstanding shares of the Fund at a meeting called for that purpose, which
meeting shall be held upon the written request of the holders of not less than
10% of the outstanding shares. Upon the written request of ten or more
shareholders who have been such for at least six months and who hold shares
constituting at least 1% of the outstanding shares of the Fund stating that such
shareholders wish to communicate with the other shareholders for the purpose of
obtaining the signatures necessary to demand a meeting to consider removal of a
trustee, the Fund has undertaken to disseminate appropriate materials at the
expense of the requesting shareholders.
The Fund's Declaration of Trust provides that the presence at a shareholder
meeting in person or by proxy of at least 30% of the shares entitled to vote on
a matter shall constitute a quorum. Thus, a meeting of shareholders of the Fund
could take place even if less than a majority of the shareholders was
represented on its scheduled date. Shareholders would in such a case be
permitted to take action that does not require a larger vote than a majority of
a quorum, such as the election of trustees and ratification of the selection of
auditors. Some matters requiring a larger vote under the Declaration of Trust,
such as termination or reorganization of the Fund and certain amendments of the
Declaration of Trust, would not be affected by this provision; nor would matters
that under the 1940 Act require the vote of a "majority of the outstanding
voting securities" as defined in the 1940 Act.
The Fund's Declaration of Trust specifically authorizes the Board of Trustees to
terminate the Fund or any Portfolio or class by notice to the shareholders
without shareholder approval.
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, disclaims shareholder liability for
acts or obligations of the Fund and requires that notice of such disclaimer be
given in each agreement, obligation, or instrument entered into or executed by
the Fund or the Fund's trustees. Moreover, the Declaration of Trust provides for
indemnification out of Fund property for all losses and expenses of any
shareholder 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 KFS remote and not
material, since it is limited to circumstances in which a disclaimer is
inoperative and the Fund itself is unable to meet its obligations.
B-20
<PAGE> 61
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholder
Kemper Horizon Fund
We have audited the accompanying statement of net assets of Kemper Horizon 20+
Portfolio, Kemper Horizon 10+ Portfolio and Kemper Horizon 5 Portfolio,
comprising Kemper Horizon Fund as of December 11, 1995. This statement of net
assets is the responsibility of the Fund's management. Our responsibility is to
express an opinion on this statement of net assets based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of net assets is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement of net assets. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall statement of net assets
presentation. We believe that our audit of the statement of net assets provides
a reasonable basis for our opinion.
In our opinion, the statement of net assets referred to above presents fairly,
in all material respects, the financial position of each of the Portfolios of
Kemper Horizon Fund at December 11, 1995 in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Chicago, Illinois
December 11, 1995
B-21
<PAGE> 62
KEMPER HORIZON FUND
STATEMENT OF NET ASSETS--DECEMBER 11, 1995
<TABLE>
<CAPTION>
HORIZON HORIZON HORIZON
20+ PORTFOLIO 10+ PORTFOLIO 5 PORTFOLIO
------------- ------------- -----------
<S> <C> <C> <C>
ASSETS
Cash.......................................................... $ 100,000 $ 100,000 $ 100,000
========== ========== ========
NET ASSETS
Net assets, applicable to shares of beneficial interest
(unlimited number of shares authorized, no par value)
outstanding for each Portfolio as follows:
Class A 3,473.684
Class B 3,473.684
Class C 3,578.947 $ 100,000 $ 100,000 $ 100,000
========== ========== ========
THE PRICING OF SHARES
Net asset value and redemption price per share, applicable to
all Portfolios..............................................
Class A ($33,000 / 3,473.684 shares outstanding)............ $ 9.50
Class B* ($33,000 / 3,473.684 shares outstanding)........... $ 9.50
Class C ($34,000 / 3,578.947 shares outstanding)............ $ 9.50
Maximum offering price per share, applicable to all
Portfolios..................................................
Class A (net asset value, plus 6.10% of net asset value or
5.75% of offering price)................................. $ 10.08
Class B (net asset value)................................... $ 9.50
Class C (net asset value)................................... $ 9.50
</TABLE>
- ---------------
* Subject to contingent deferred sales charge.
NOTES:
Kemper Horizon Fund (the "Fund"), was organized as a business trust under the
laws of The Commonwealth of Massachusetts on June 12, 1995; all Class A, Class B
and Class C shares of beneficial interest of each Portfolio of the Fund were
issued to Kemper Financial Services, Inc. ("KFS"), the investment manager on
December 11, 1995. The Fund may establish multiple portfolios; currently, three
portfolios have been established.
The costs of organization of the Fund will be paid by KFS.
B-22
<PAGE> 63
APPENDIX--RATINGS OF FIXED INCOME INVESTMENTS
STANDARD & POOR'S CORPORATION BOND RATINGS
AAA. Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C. Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI. The rating CI is reserved for income bonds on which no interest is being
paid.
D. Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears. Moody's Investors Service, Inc. Bond Ratings.
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of 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.
B-23
<PAGE> 64
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.
FITCH INVESTORS SERVICE, INC. BOND RATINGS
AAA. Bonds rated AAA are considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA. Bonds rated AA are considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated AAA.
A. Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB. Bonds rated BBB are considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment.
BB. Bonds rated BB are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
B. Bonds rated B are considered highly speculative. While these bonds in this
class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC. Bonds rated CCC have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC. Bonds rated CC are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C. Bonds rated C are in imminent default in payment of interest or principal.
DDD, DD AND D. Bonds rated DDD, DD and D are in default on interest and/or
principal payments. Such bonds are extremely speculative and should be valued on
the basis of their ultimate recovery value in liquidation or reorganization of
the obligor. DDD represents the highest potential for recovery on these bonds,
and D represents the lowest potential for recovery.
DUFF & PHELPS RATING CO. BOND RATINGS
AAA. Bonds rated AAA have the highest rating assigned to a debt obligation. They
are of the highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA. Bonds rated AA are of high credit quality. Protection factors are strong.
Risk is modest but may vary slightly from time to time because of economic
conditions.
B-24
<PAGE> 65
A. Bonds rated A have protection factors that are average but adequate. However,
risk factors are more variable and greater in periods of economic stress.
BBB. Bonds rated BBB have below average protection factors but are still
considered sufficient for prudent investment. They have considerable volatility
in risk during economic cycles.
BB. Bonds rated BB are below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.
B. Bonds rated B are below investment grade and possessing risk that obligations
will not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.
CCC. Bonds rated CCC are well below investment grade securities. Considerable
uncertainty exists as to timely payment of principal or interest. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
D. Bonds rated D are in default. The issuer failed to meet scheduled principal
and/or principal payments.
B-25
