KEMPER HORIZON FUND
STATEMENT OF ADDITIONAL INFORMATION
November 30, 1998
Kemper Horizon 20+ Portfolio
Kemper Horizon 10+ Portfolio
Kemper Horizon 5 Portfolio
222 South Riverside Plaza, Chicago, Illinois 60606
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 November 30, 1998. The
prospectus may be obtained without charge from the Fund and is also available
along with other related materials on the SEC's Internet web site
(http://www.sec.gov).
TABLE OF CONTENTS
INVESTMENT RESTRICTIONS ......................................................2
INVESTMENT POLICIES AND TECHNIQUES............................................5
PORTFOLIO TRANSACTIONS ......................................................13
INVESTMENT MANAGER AND UNDERWRITER...........................................14
PURCHASE AND REDEMPTION OF SHARES............................................21
DIVIDENDS AND TAXES .........................................................22
PERFORMANCE .................................................................26
OFFICERS AND TRUSTEES .......................................................30
SHAREHOLDER RIGHTS ..........................................................34
APPENDIX -- RATINGS OF FIXED INCOME INVESTMENTS..............................36
The financial statements appearing in the Fund's Annual Report to Shareholders
are incorporated herein by reference. The Report for the Fund accompanies this
document.
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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.
Kemper Horizon 10+ Portfolio may not, 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
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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 the
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.
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 Horizon
10+ Portfolio did not borrow money as permitted by investment restriction number
4 during the last fiscal period, and has no present intention of borrowing
during the current year. The Horizon 10+ Portfolio has adopted the following
non-fundamental restrictions, which may be changed by the Board of Trustees
without shareholder approval. The Horizon 10+ Portfolio may not:
(i) Invest for the purpose of exercising control or management of
another issuer.
(ii) 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.
(iii) Invest more than 15% of its net assets in illiquid securities.
(iv) 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.
Kemper Horizon 5 Portfolio and Kemper Horizon 20+ Portfolio may not, 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*, except that all or substantially all of the
assets of the Portfolio may be invested in another registered
investment company having the same investment objective and
substantially similar investment policies as the Portfolio.
(2) Purchase more than 10% of any class of voting securities of
any issuer, except that all or substantially all of the assets
of the Portfolio may be invested in another registered
investment company having the same investment objective and
substantially similar investment policies as the Portfolio.
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(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*, except that all or
substantially all of the assets of the Portfolio may be
invested in another registered investment company having the
same investment objective and substantially similar investment
policies as the Portfolio.
(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, except that all or substantially all of
the assets of the Portfolio may be invested in another
registered investment company having the same investment
objective and substantially similar investment policies as the
Portfolio.
(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
these Portfolios invest in loan participations, these Portfolios, as a
non-fundamental policy, consider 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 did not borrow money as permitted by investment restriction number 4
during the last fiscal period, and have no present intention of borrowing during
the current year. The Horizon 5 Portfolio and Horizon 20+ Portfolio have adopted
the following non-fundamental restrictions, which may be changed by the Board of
Trustees without shareholder approval. Neither Portfolio may:
(i) Invest for the purpose of exercising control or management of
another issuer.
(ii) 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.
(iii) Invest more than 15% of its net assets in illiquid securities.
(iv) 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.
Master/feeder fund structure. The Board of Trustees of the Kemper Horizon 5
Portfolio and the Kemper Horizon 20+ Portfolio has the discretion to retain the
current distribution arrangement for a Fund while investing in a master fund in
a master/feeder fund structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder fund"), instead
of investing directly in a portfolio of securities, invests most or all of its
investment assets in a separate registered investment company (the "master
fund") with substantially the same investment objective and policies as the
feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
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 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
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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 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.
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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 obligated, in return for the
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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
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markets could result. Price distortions could also result if investors in
futures contracts decide to make or take delivery of underlying securities or
other assets rather than engage in closing transactions because of the resultant
reduction in the liquidity of the futures market. In addition, because, from the
point of view of speculators, the margin requirements in the futures markets are
less onerous than margin requirements in the cash market, increased
participation by speculators in the futures market could cause temporary price
distortions. Due to the possibility of price distortions in the futures market
and because of the imperfect correlation between movements in the prices of
securities or other assets and movements in the prices of futures contracts, a
correct forecast of market trends by the investment manager may still not result
in a successful hedging transaction. If any of these events should occur, the
Portfolio could lose money on the financial futures contracts and also on the
value of its portfolio assets.
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 or liquid securities 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
9
<PAGE>
owner the right, but not the obligation, to sell the currency. The option seller
(writer) is obligated to fulfill the terms of the option sold if it is
exercised. However, either seller or buyer may close its position during the
option period in the secondary market for such options any time prior to
expiration.
A call rises in value if the underlying currency appreciates. Conversely, a put
rises in value if the underlying currency depreciates. While purchasing a
foreign currency option can protect the Portfolio against an adverse movement in
the value of a foreign currency, it does not limit the gain which might result
from a favorable movement in the value of such currency. For example, if a
Portfolio were holding securities denominated in an appreciating foreign
currency and had purchased a foreign currency put to hedge against a decline in
the value of the currency, it would not have to exercise its put. Similarly, if
the Portfolio had entered into a contract to purchase a security denominated in
a foreign currency and had purchased a foreign currency call to hedge against a
rise in value of the currency but instead the currency had depreciated in value
between the date of purchase and the settlement date, the Portfolio would not
have to exercise its call but could acquire in the spot market the amount of
foreign currency needed for settlement.
FOREIGN CURRENCY FUTURES TRANSACTIONS. As part of their financial futures
transactions (see "Financial Futures Contracts" and "Options on Financial
Futures Contracts" above), the Portfolios may use foreign currency futures
contracts and options on such futures contracts. Through the purchase or sale of
such contracts, a Portfolio may be able to achieve many of the same objectives
as through forward foreign currency exchange contracts more effectively and
possibly at a lower cost.
Unlike forward foreign currency exchange contracts, foreign currency futures
contracts and options on foreign currency futures contracts are standardized as
to amount and delivery period and are traded on boards of trade and commodities
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
10
<PAGE>
securities to the extent required by applicable regulation in connection with
forward foreign currency exchange contracts entered into for the purchase of a
foreign currency. A Portfolio generally does not enter into a forward contract
with a term longer than one year.
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, but not limited to, deferring realization of loss when
deemed advantageous for federal income tax purposes. A short sale
"against-the-box" is a short sale in which 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
11
<PAGE>
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 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.
12
<PAGE>
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 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
Allocation of brokerage is supervised by the Adviser.
The primary objective of the Adviser in placing orders for the purchase and sale
of securities for a Portfolio is to obtain the most favorable net results,
taking into account such factors as price, commission where applicable, size of
order, difficulty of execution and skill required of the executing
broker/dealer. The Adviser seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through the familiarity of
the Distributor with commissions charged on comparable transactions, as well as
by comparing commissions paid by a Portfolio to reported commissions paid by
others. The Adviser reviews on a routine basis commission rates, execution and
settlement services performed, making internal and external comparisons.
The Portfolios' purchases and sales of fixed-income securities are generally
placed by the Adviser with primary market makers for these securities on a net
basis, without any brokerage commission being paid by the Portfolios. Trading
does, however, involve transaction costs. Transactions with dealers serving as
primary market makers reflect the spread between the bid and asked prices.
Purchases of underwritten issues may be made, which will include an underwriting
fee paid to the underwriter.
When it can be done consistently with the policy of obtaining the most favorable
net results, it is the Adviser's practice to place such orders with
broker/dealers who supply research, market and statistical information to the
Portfolios. The term "research, market and statistical information" includes
advice as to the value of securities; the advisability of investing in,
purchasing or selling securities; the availability of securities or purchasers
or sellers of securities; and analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy and the
performance of accounts. The Adviser is authorized when placing portfolio
transactions for the Portfolios to pay a brokerage commission in excess of that
which another broker might charge for executing the same transaction on account
of execution services and the receipt of research, market or statistical
information. In effecting transactions in over-the-counter securities, orders
are placed with the principal market makers for the security being traded
unless, after exercising care, it appears that more favorable results are
available elsewhere.
13
<PAGE>
In selecting among firms believed to meet the criteria for handling a particular
transaction, the Adviser may give consideration to those firms that have sold or
are selling shares of a Fund or Portfolio managed by the Adviser.
To the maximum extent feasible, it is expected that the Adviser will place
orders for portfolio transactions through Scudder Investors Services, Inc.
("SIS"), which is a corporation registered as a broker-dealer and a subsidiary
of the Adviser. SIS will place orders on behalf of the Portfolios with issuers,
underwriters or other brokers and dealers. SIS will not receive any commission,
fee or other remuneration from the Portfolios for this service.
Although certain research, market and statistical information from
broker/dealers may be useful to the Portfolios and to the Adviser, it is the
opinion of the Adviser that such information only supplements the Adviser's own
research effort since the information must still be analyzed, weighed, and
reviewed by the Adviser's staff. Such information may be useful to the Adviser
in providing services to clients other than the Portfolios, and not all such
information is used by the Adviser in connection with the Portfolios.
Conversely, such information provided to the Adviser by broker/dealers through
whom other clients of the Adviser effect securities transactions may be useful
to the Adviser in providing services to the Portfolios.
The Trustees review from time to time whether the recapture for the benefit of
the Fund of some portion of the brokerage commissions or similar fees paid by
the Portfolios on portfolio transactions is legally permissible and advisable.
The table below shows total brokerage commissions paid by each Portfolio for the
fiscal year ended July 31 1998, July 31, 1997, for the period December 29, 1995
(commencement of operations) to July 31, 1996 and, for the most recent fiscal
year, the percentage thereof that was allocated to firms based upon research
information provided.
<TABLE>
<CAPTION>
Allocated to Firms Based on December 29, 1995
Portfolio Fiscal 1998 Research in Fiscal 1998 Fiscal 1997 to July 31, 1996
--------- ----------- ----------------------- ----------- ----------------
<S> <C> <C> <C> <C>
Horizon 20+ $188,000 91% $137,000 $54,000
Horizon 10+ $141,000 89% $104,000 $40,000
Horizon 5 $52,000 91% $ 43,000 $15,000
</TABLE>
INVESTMENT MANAGER AND UNDERWRITER
INVESTMENT MANAGER. Scudder Kemper Investments, Inc. ("Scudder Kemper" or the
"Adviser"), 345 Park Avenue, New York, New York, is the Fund's investment
manager. Scudder Kemper is approximately 70% owned by Zurich Financial Services,
Inc., a newly formed global insurance and financial services company. The
balance of the Adviser is owned by its officers and employees. Pursuant to an
investment management agreement, Scudder Kemper acts as the Fund's investment
adviser, manages its investments, administers its business affairs, furnishes
office facilities and equipment, provides clerical, 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 Scudder Kemper), independent auditors, counsel,
custodian and transfer agent and the cost of share certificates, reports and
notices to shareholders, brokerage commissions or transaction costs, costs of
calculating net asset value and maintaining all accounting records thereto,
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.
14
<PAGE>
The investment management agreement provides that Scudder Kemper shall not be
liable for any error of judgment or of law, or for any loss suffered by the Fund
in connection with the matters to which the agreements relate, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
Scudder Kemper in the performance of its obligations and duties, or by reason of
its reckless disregard of its obligations and duties under each agreement.
The Fund's investment management agreement 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.
At December 31, 1997, pursuant to the terms of an agreement, Scudder, Stevens &
Clark, Inc. ("Scudder") and Zurich Insurance Company ("Zurich") formed a new
global organization by combining Scudder with Zurich Kemper Investments, Inc., a
former subsidiary of Zurich and former investment manager of the Fund, and
Scudder changed it name to Scudder Kemper Investments, Inc. As a result of the
transaction, Zurich owned approximately 70% of the Adviser, with the balance
owned by the Adviser's officers and employees.
On September 7, 1998, the businesses of Zurich (including Zurich's 70% interest
in Scudder Kemper) and the financial services businesses of B.A.T Industries
p.l.c. ("B.A.T") were combined to form a new global insurance and financial
services company known as Zurich Financial Services, Inc. By way of a dual
holding company structure, former Zurich shareholder initially owned
approximately 57% of Zurich Financial Services, Inc., with the balance initially
owned by former B.A.T shareholders.
Upon consummation of this transaction, the Fund's existing investment management
agreement with Scudder Kemper was deemed to have been assigned and, therefore,
terminated. The Board has approved a new investment management agreement with
Scudder Kemper, which is substantially identical to the current investment
management agreement, except for the date of execution and termination. This
agreement became effective upon the termination of the then current investment
management agreement and will be submitted for shareholder approval at a special
meeting currently scheduled to conclude in December 1998.
Scudder Kemper is paid a monthly investment management fee, by each Portfolio,
at the annual rates shown below.
<TABLE>
<CAPTION>
Average Daily Net Assets of a Portfolio Management Fee Rates
--------------------------------------- --------------------
<S> <C>
$0 - $250 million 0.58%
$250 million - $1 billion 0.55%
$1 billion - $2.5 billion 0.53%
$2.5 billion - $5 billion 0.51%
$5 billion - $7.5 billion 0.48%
$7.5 billion - $10 billion 0.46%
$10 billion - $12.5 billion 0.44%
Over $12.5 billion 0.42%
</TABLE>
The table below shows investment management fees paid by each Portfolio for the
fiscal year ended July 31, 1998, July 31 1997, and for the period December 29,
1995 (commencement of operations) to July 31, 1996.
15
<PAGE>
<TABLE>
<CAPTION>
December 29, 1995
Portfolio Fiscal 1998 Fiscal 1997 to July 31, 1996
--------- ----------- ----------- ----------------
<S> <C> <C> <C>
Horizon 20+ $495,000 225,000 26,000
Horizon 10+ $495,000 234,000 27,000
Horizon 5 $242,000 130,000 16,000
</TABLE>
Fund Accounting Agent. Scudder Fund Accounting Corporation ("SFAC"), a
subsidiary of Scudder Kemper, is responsible for determining the daily net asset
value per share of the Fund and maintaining all accounting records related
thereto. Currently, SFAC receives no fee for its services to the Fund; however,
subject to Board approval, at some time in the future, SFAC may seek payment for
its services under this agreement.
PRINCIPAL UNDERWRITER. Pursuant to separate underwriting and distribution
services agreements ("distribution agreements"), Kemper Distributors, Inc.
("KDI"), a wholly-owned subsidiary of Scudder Kemper, 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 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 A Shares. The following information concerns the underwriting commissions
paid in connection with the distribution of each Portfolio's Class A shares for
the fiscal year ended July 31, 1998, July 31, 1997 and for the period December
29, 1995 (commencement of operations) to July 31, 1996.
<TABLE>
<CAPTION>
Commissions Commissions Commissions
Retained KDI Paid Paid to KDI
Portfolio Year by KDI to All Firms Affiliated Firms
--------- ---- ------ ------------ ----------------
<S> <C> <C> <C> <C>
Horizon 20+ 1998 $26,000 303,000 0
1997 $23,000 198,000 0
1996 $ 7,000 160,000 16,000
Horizon 10+ 1998 $30,000 300,000 0
1997 $31,000 219,000 0
16
<PAGE>
1996 $14,000 235,000 21,000
Horizon 5 1998 $13,000 156,000 0
1997 $20,000 127,000 0
1996 $ 7,000 154,000 10,000
</TABLE>
Class B Shares and Class C Shares. Each Portfolio has adopted a plan under Rule
12b-1 (the "Rule 12b-1 Plan") that provides for fees payable as an expense of
the Class B shares and Class C shares that are used by KDI to pay for
distribution and services for those classes. Because 12b-1 fees are paid out of
fund assets on an ongoing basis they will, over time, increase the cost of the
investment and may cost more than other types of sales charges. Expenses of the
Portfolios and of KDI, in connection with the Rule 12b-1 Plans for the Class B
and Class C shares for the fiscal year ended July 31, 1998, July 31, 1997 and
for the period December 29, 1995 (commencement of operations) to July 31, 1996
are set forth below. A portion of the marketing, sales and operating expenses
shown below could be considered overhead expenses.
17
<PAGE>
<TABLE>
<CAPTION>
Portfolio Class B Shares
------------------------
Horizon 20+ Horizon 10+ Horizon 5
----------- ----------- ---------
1998 1997 1996 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Distribution Fees Paid $305,000 148,000 16,000 265,000 141,000 17,000 150,000 90,000 11,000
- ----------------------
by Fund to KDI
- --------------
Contingent Deferred $72,000 20,000 3,000 49,000 19,000 1,000 20,000 14,000 6,000
Sales Charges to KDI
Total Commissions Paid $689,000 565,000 270,000 555,000 490,000 261,000 312,000 264,000 186,000
by KDI to Firms
Distribution Fees Paid 0 0 32,000 0 0 32,000 0 0 15,000
by KDI to Affiliated
Firms
Advertising and $81,000 106,000 37,000 61,000 90,000 36,000 29,000 50,000 28,000
Literature
Other Distribution
Expenses Paid by KDI
Prospectus Printing $6,000 8,000 2,000 5,000 6,000 2,000 , 2,000 4,000 2,000
Marketing and Sales $162,000 260,000 79,000 128,000 223,000 76,000 62,000 122,000 57,000
Expenses
Misc. Operating $41,000 43,000 12,000 38,000 38,000 12,000 27,000 29,000 10,000
Expenses
Interest Expenses $149,000 80,000 9,000 131,000 75,000 8,000 79,000 49,000 6,000
Portfolio Class C Shares
------------------------
Horizon 20+ Horizon 10+ Horizon 5
----------- ----------- ---------
1998 1997 1996 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
Distribution Fees Paid $45,000 17,000 2,000 61,000 27,000 2,000 31,000 14,000 1,000
- ----------------------
by Fund to KDI
- --------------
Contingent Deferred $1,000 0 0 1,000 4,000 0 1,000 1,000 0
Sales Charges to KDI
Total Distribution Fees $60,000 22,000 5,000 70,000 24,000 5,000 34,000 15,000 4,000
Paid by KDI to Firms
Distribution Fees Paid 0 0 0 0 0 0 0 0 0
by KDI to Affiliated
Firms
Advertising and $19,000 18,000 5,000 20,000 24,000 5,000 11,000 12,000 4,000
Literature
Other Distribution
Expenses Paid by KDI
Prospectus Printing $1,000 1,000 0 1,000 2,000 0 1,000 1,000 0
Marketing and Sales $27,000 44,000 9,000 40,000 58,000 10,000 22,000 28,000 8,000
Expenses
Misc. Operating $7,000 15,000 2,000 10,000 16,000 1,000 19,000 14,000 1,000
Expenses
Interest Expenses $12,000 5,000 0 13,000 6,000 0 8,000 4,000 0
</TABLE>
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
18
<PAGE>
payment of service fees. Each Portfolio pays KDI an administrative services fee,
payable monthly, at an annual rate of up to 0.25% of average daily net assets of
the Class A, B and C shares of each Portfolio.
KDI has entered into related arrangements with various broker-dealer firms and
other service or administrative firms ("firms"), that provide services and
facilities for their customers or clients who are investors 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 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 administrative services as may be
agreed upon from time to time and permitted by applicable statute, rule or
regulation. For Class A shares, KDI pays each firm a service fee, normally
payable quarterly, at an annual rate of up to 0.25% of the net assets in each
Portfolio account that it maintains and services attributable to Class A shares,
commencing with the month after investment. For Class B and Class C shares, KDI
currently advances to firms the first-year service fee at a rate of up to 0.25%
of the purchase price of such shares. For periods after the first year, KDI
currently intends to pay firms a service fee at a rate of up to 0.25%
(calculated monthly and normally paid quarterly) of the net assets attributable
to Class B and Class C shares maintained and serviced by the firm. After the
first year, a firm becomes eligible for the quarterly service fee and the fee
continues until terminated by KDI or the Fund. Firms to which service fees may
be paid include broker-dealers affiliated with KDI.
19
<PAGE>
The following information concerns the administrative services fee paid by each
Portfolio for the fiscal year ended July 31, 1998, July 31, 1997 and the period
December 29, 1995 (commencement of operations) to July 31, 1996.
<TABLE>
<CAPTION>
Service Fees Service Fees
Paid by Paid by KDI to
Portfolio Year Administrative Service Fees Paid by Fund KDI to Firms Affiliated Firms
--------- ---- ---------------------------------------- ------------ ----------------
Class A Class B Class C
------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Horizon 20+ 1998 $86,000 103,000 15,000 213,000 0
1997 $34,000 49,000 5,000 96,000 0
1996 $ 4,000 5,000 1,000 25,000 3,000
Horizon 10+ 1998 $98,000 88,000 20,000 212,000 0
1997 $40,000 47,000 9,000 100,000 0
1996 $ 4,000 6,000 1,000 26,000 3,000
Horizon 5 1998 $41,000 50,000 10,000 109,000 0
1997 $19,000 30,000 5,000 57,000 0
1996 $ 2,000 4,000 0 17,000 1,000
</TABLE>
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 a firm provides administrative services 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 a firm of record provides administrative services. The
Board of Trustees, in its discretion, may approve basing the fee to KDI on all
Portfolio assets in the future.
Certain trustees or officers of the Fund are also directors or officers of
Scudder Kemper or KDI as indicated under "Officers and Trustees."
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT. Investors Fiduciary
Trust Company ("IFTC"), 801 Pennsylvania Avenue, 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, 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 Scudder
Kemper, serves as "Shareholder Service Agent" of the Fund and, as such, performs
all of IFTC's duties as transfer agent and dividend paying agent. IFTC receives
as transfer agent, and pays to KSvC, 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. Effective January 1, 1999 IFTC will receive as transfer agent and
will pay to KSvC annual account fees of $10 ($18 for retirement plans) for set
up charges and annual fees associated with the contingent deferred sales charge
and an asset-based fee of 0.08% plus an out of pocket expense reimbursement.
20
<PAGE>
The following shows for each Portfolio, for the fiscal year ended July 31, 1998,
July 31, 1997 and for the period December 29, 1995 (commencement of operations)
to July 31, 1996, the shareholder service fees IFTC remitted to KSvC.
<TABLE>
<CAPTION>
December 29, 1995
Fiscal 1998 Fiscal 1997 to July 31, 1996
Portfolio Fees IFTC Paid to KSvC Fees IFTC Paid to KSvC Fees IFTC Paid to KSvC
--------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Horizon 20+ $756,000 224,000 20,000
Horizon 10+ $441,000 179,000 12,000
Horizon 5 $167,000 65,000 5,000
</TABLE>
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.
LEGAL COUNSEL. Vedder, Price, Kaufman & Kammholz, 222 North LaSalle Street,
Chicago, Illinois 60601, serves as legal counsel to the Fund.
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.
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 or Class C 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 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
21
<PAGE>
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.
The Fund has authorized certain members of the National Association of
Securities Dealers, Inc. ("NASD"), other than Kemper Distributors, Inc. ("KDI")
to accept purchase and redemption orders for the Fund's shares. Those brokers
may also designate other parties to accept purchase and redemption orders on the
Fund's behalf. Orders for purchase or redemption will be deemed to have been
received by the Fund when such brokers or their authorized designees accept the
orders. Subject to the terms of the contract between the Fund and the broker,
ordinarily orders will be priced as the Fund's net asset value next computed
after acceptance by such brokers or their authorized designees. Further, if
purchases or redemptions of the Fund's shares are arranged and settlement is
made at an investor's election through any other authorized NASD member, that
member may, at its discretion, charge a fee for that service. The Board of
Trustees or Directors as the case may be ("Board") of the Fund and KDI each has
the right to limit the amount of purchases by, and to refuse to sell to, any
person. The Board and KDI may suspend or terminate the offering of shares of the
Fund at any time for any reason.
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
proportion for each class.
TAXES. Each Portfolio intends to continue to qualify as a regulated investment
company under Subchapter M of the Code and, if so qualified, a Portfolio
generally will not be liable for federal income taxes to the extent its earnings
are distributed. To so qualify, each Portfolio must satisfy certain income and
asset diversification requirements, and must distribute to its shareholders at
least 90% of its investment company taxable income (including net short-term
capital gain).
Each Portfolio is subject to a 4% nondeductible excise tax on amounts required
to be but not distributed under a prescribed formula. The formula requires
payment to shareholders during a calendar year of distributions representing at
least 98% of the each Portfolio's ordinary income for each calendar year, at
least 98% of the excess of its capital gains over capital losses (adjusted for
certain ordinary losses) realized during the one-year period ending October 31
during such year, and all ordinary income and capital gains for prior years that
were not previously distributed.
22
<PAGE>
Investment company taxable income includes dividends, interest and net
short-term capital gains in excess of net long-term capital losses, less
expenses. Net realized capital gains for a fiscal year are computed by taking
into account any capital loss carryforward of the Portfolios.
If any net realized long-term capital gains in excess of net realized short-term
capital losses are retained by a Portfolio for reinvestment, requiring federal
income taxes to be paid thereon by the Portfolio, the Portfolios intend to elect
to treat such capital gains as having been distributed to shareholders. As a
result, each shareholder will report such capital gains as long-term capital
gains, will be able to claim a relative share of federal income taxes paid by
the Portfolio on such gains as a credit against personal federal income tax
liability, and will be entitled to increase the adjusted tax basis on Portfolio
shares by the difference between a pro rata share of such gains owned and the
individual tax credit.
Distributions of investment company taxable income are taxable to shareholders
as ordinary income.
Properly designated distributions of the excess of net long-term capital gain
over net short-term capital loss are taxable to shareholders as long-term
capital gains, regardless of the length of time the shares of the Portfolio have
been held by such shareholders. Such distributions are not eligible for the
dividends-received deduction. Any loss realized upon the redemption of shares
held at the time of redemption for six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long- term capital gain during such six-month period.
Distributions of investment company taxable income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
All distributions of investment company taxable income and net realized capital
gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends and capital gains
distributions declared in October, November or December and payable to
shareholders of record in such a month will be deemed to have been received by
shareholders on December 31 if paid during January of the following year.
Redemptions of shares, including exchanges for shares of another Scudder Kemper
fund, may result in tax consequences (gain or loss) to the shareholder and are
also subject to these reporting requirements.
A qualifying individual may make a deductible IRA contribution for any taxable
year only if (i) the individual is not an active participant in an employer's
retirement plan, or (ii) if the individual is an active participant in an
employee retirement plan and the individual has an adjusted gross income below a
certain level ($50,000 for married individuals filing a joint return, with a
phase-out of the deduction for adjusted gross income between $50,000 and
$60,000; $30,000 for a single individual, with a phase-out for adjusted gross
income between $30,000 and $40,000). An individual is not considered an active
participant in an employer's retirement plan if the individual's spouse is an
active participant in such a plan. However, in the case of a joint return, the
amount of the deductible contribution by the individual who is not an active
participant (but whose spouse is) is phased out for adjusted gross income
between $150,000 and $160,000. However, an individual not permitted to make a
deductible contribution to an IRA for any such taxable year may nonetheless make
nondeductible contributions up to $2,000 to an IRA (up to $2,000 per individual
for married couples if only one spouse has earned income) for that year. There
are special rules for determining how withdrawals are to be taxed if an IRA
contains both deductible and nondeductible amounts. In general, a proportionate
amount of each withdrawal will be deemed to be made from nondeductible
contributions; amounts treated as a return of nondeductible contributions will
not be taxable. Also, annual contributions may be made to a spousal IRA even if
the spouse has earnings in a given year if the spouse elects to be treated as
having no earnings (for IRA contribution purposes) for the year.
If shares are held in a tax-deferred account, such as a retirement plan, income
and gain will not be taxable each year. Instead, the taxable portion of amounts
held in a tax-deferred account generally will be subject to tax as ordinary
income only when distributed from that account.
Distributions by a Portfolio result in a reduction in the net asset value of the
Portfolio's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis such distribution would nevertheless
23
<PAGE>
be taxable to the shareholder as ordinary income or capital gain as described
above even though, from an investment standpoint, it may constitute a partial
return of capital. In particular, investors should consider the tax implications
of buying shares just prior to a distribution. The price of shares purchased at
that time includes the amount of the forthcoming distribution. Those purchasing
just prior to a distribution will then receive a partial return of capital upon
the distribution, which will nevertheless be taxable to them.
Dividend and interest income received by the Portfolios from sources outside the
U.S. may be subject to withholding and other taxes imposed by such foreign
jurisdictions. Tax conventions between certain countries and the U.S. may reduce
or eliminate these foreign taxes, however, and foreign countries generally do
not impose taxes on capital gains respecting investments by foreign investors.
The Portfolios may invest in shares of certain foreign corporations which may be
classified under the Code as passive foreign investment companies ("PFICs"). If
a Portfolio receives a so-called "excess distribution" with respect to PFIC
stock, the Portfolio itself may be subject to a tax on a portion of the excess
distribution. Certain distributions from a PFIC as well as gains from the sale
of the PFIC shares are treated as "excess distributions." In general, under the
PFIC rules, an excess distribution is treated as having been realized ratably
over the period during which the Portfolio held the PFIC shares. The Portfolio
will be subject to tax on the portion, if any, of an excess distribution that is
allocated to prior Portfolio taxable years and an interest factor will be added
to the tax, as if the tax had been payable in such prior taxable years. Excess
distributions allocated to the current taxable year are characterized as
ordinary income even though, absent application of the PFIC rules, certain
excess distributions might have been classified as capital gain.
The Portfolios may make an election to mark to market its shares of these
foreign investment companies in lieu of being subject to U.S. federal income
taxation. At the end of each taxable year to which the election applies, a
Portfolio would report as ordinary income the amount by which the fair market
value of the foreign company's stock exceeds the Portfolio's adjusted basis in
these shares; any mark to market losses and any loss from an actual disposition
of shares would be deductible as ordinary loss to the extent of any net mark to
market gains included in income in prior years. The effect of the election would
be to treat excess distributions and gain on dispositions as ordinary income
which is not subject to the Portfolio level tax when distributed to shareholders
as a dividend. Alternatively, the Portfolios may elect to include as income and
gain its share of the ordinary earnings and net capital gain of certain foreign
investment companies in lieu of being taxed in the manner described above.
Equity options (including covered call options on portfolio stock) written or
purchased by the Portfolios will be subject to tax under Section 1234 of the
Code. In general, no loss is recognized by a Portfolio upon payment of a premium
in connection with the purchase of a put or call option. The character of any
gain or loss recognized (i.e., long-term or short-term) will generally depend,
in the case of a lapse or sale of the option, on the Portfolio's holding period
for the option and, in the case of an exercise of the option, on the Portfolio's
holding period for the underlying security. The purchase of a put option may
constitute a short sale for federal income tax purposes, causing an adjustment
in the holding period of the underlying security or substantially identical
security in the Portfolio's portfolio. If a Portfolio writes a call option, no
gain is recognized upon its receipt of a premium. If the option lapses or is
closed out, any gain or loss is treated as a short-term capital gain or loss. If
a call option is exercised, any resulting gain or loss is short-term or
long-term capital gain or loss depending on the holding period of the underlying
security. The exercise of a put option written by a Portfolio is not a taxable
transaction for the Portfolio.
Many futures and forward contracts entered into by a Portfolio and all listed
nonequity options written or purchased by a Portfolio (including covered call
options written on debt securities and options purchased or written on futures
contracts) will be governed by Section 1256 of the Code. Absent a tax election
to the contrary, gain or loss attributable to the lapse, exercise or closing out
of any such position will be treated as 60% long-term and 40% short-term, and on
the last trading day of the Portfolio's fiscal year (and generally, on October
31 for purposes of the 4% excise tax), all outstanding Section 1256 positions
will be marked-to-market (i.e., treated as if such positions were closed out at
their closing price on such day), with any resulting gain or loss recognized as
60% long-term and 40% short-term. Under Section 988 of the Code, discussed
below, foreign currency gain or loss from foreign currency-related forward
contracts, certain futures and options and similar financial instruments entered
into or acquired by a Portfolio will be treated as ordinary
24
<PAGE>
income or loss. Under certain circumstances, entry into a futures contract to
sell a security may constitute a short sale for federal income tax purposes,
causing an adjustment in the holding period of the underlying security or a
substantially identical security in the Portfolio's portfolio.
Positions of the Portfolios consisting of at least one stock and at least one
stock option or other position with respect to a related security which
substantially diminishes the Portfolios' risk of loss with respect to such stock
could be treated as a "straddle" which is governed by Section 1092 of the Code,
the operation of which may cause deferral of losses, adjustments in the holding
periods of stock or securities and conversion of short-term capital losses into
long-term capital losses. An exception to these straddle rules exists for any
"qualified covered call options" on stock written by a Portfolio.
Positions of a Portfolio consisting of at least one position not governed by
Section 1256 and at least one future, forward, or nonequity option contract
which is governed by Section 1256 which substantially diminishes the Portfolio's
risk of loss with respect to such other position will be treated as a "mixed
straddle." Although mixed straddles are subject to the straddle rules of Section
1092 of the Code, certain tax elections exist for them which reduce or eliminate
the operation of these rules. Each Portfolio will monitor its transactions in
options and futures and may make certain tax elections in connection with these
investments.
Notwithstanding any of the foregoing, recent tax law changes may require a
Portfolio to recognize gain (but not loss) from a constructive sale of certain
"appreciated financial positions" if a Portfolio enters into a short sale,
offsetting notional principal contract, futures or forward contract transaction
with respect to the appreciated position or substantially identical property.
Appreciated financial positions subject to this constructive sale treatment are
interests (including options, futures and forward contracts and short sales) in
stock, partnership interests, certain actively traded trust instruments and
certain debt instruments. Constructive sale treatment of appreciated financial
positions does not apply to certain transactions closed in the 90-day period
ending with the 30th day after the close of the Portfolio's taxable year, if
certain conditions are met.
Similarly, if a Portfolio enters into a short sale of property that becomes
substantially worthless, the Portfolio will be required to recognize gain at
that time as though it had closed the short sale. Future regulations may apply
similar treatment to other strategic transactions with respect to property that
becomes substantially worthless.
Under the Code, gains or losses attributable to fluctuations in exchange rates
which occur between the time a Portfolio accrues receivables or liabilities
denominated in a foreign currency and the time the Portfolio actually collects
such receivables or pays such liabilities generally are treated as ordinary
income or ordinary loss. Similarly, on disposition of debt securities
denominated in a foreign currency, and on disposition of certain futures,
forward or options contracts, gains or losses attributable to fluctuations in
the value of foreign currency between the date of acquisition of the security or
contracts and the date of disposition are also treated as ordinary gain or loss.
These gains or losses, referred to under the Code as "Section 988" gains or
losses, may increase or decrease the amount of a Portfolio's investment company
taxable income to be distributed to its shareholders as ordinary income.
If a Portfolio holds zero coupon securities or other securities which are issued
at a discount a portion of the difference between the issue price and the face
value of such securities ("original issue discount") will be treated as income
to the Portfolio each year, even though the Portfolio will not receive cash
interest payments from these securities. This original issue discount (imputed
income) will comprise a part of the investment company taxable income of the
Portfolio which must be distributed to shareholders in order to maintain the
qualification of the Portfolio as a regulated investment company and to avoid
federal income tax at the Portfolio level. In addition, if a Portfolio invests
in certain high yield original issue discount obligations issued by
corporations, a portion of the original issue discount accruing on the
obligation may be eligible for the deduction for dividends received by
corporations. In such an event, properly designated dividends of investment
company taxable income received from the Portfolio by its corporate
shareholders, to the extent attributable to such portion of the accrued original
issue discount, may be eligible for the deduction received by corporations.
If a Portfolio acquires a debt instrument at a market discount, a portion of the
gain recognized (if any) on disposition of such instrument may be treated as
ordinary income.
25
<PAGE>
The Portfolios will be required to report to the IRS all distributions of
taxable income and capital gains as well as gross proceeds from the redemption
or exchange of Portfolio shares, except in the case of certain exempt
shareholders. Under the backup withholding provisions of Section 3406 of the
Code, distributions of taxable income and capital gains and proceeds from the
redemption or exchange of the shares of a regulated investment company may be
subject to withholding of federal income tax at the rate of 31% in the case of
non-exempt shareholders who fail to furnish the investment company with their
taxpayer identification numbers and with required certifications regarding their
status under the federal income tax law. Withholding may also be required if the
Portfolios are notified by the IRS or a broker that the taxpayer identification
number furnished by the shareholder is incorrect or that the shareholder has
previously failed to report interest or dividend income. If the withholding
provisions are applicable, any such distributions and proceeds, whether taken in
cash or reinvested in additional shares, will be reduced by the amounts required
to be withheld.
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 any 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 a Portfolio or in shares of the other
Kemper Mutual Funds within six months of the redemption as described in the
prospectus under "Redemption or Repurchase of Shares-Reinvestment Privilege." If
redeemed shares were held less than 91 days, then the lesser of (a) the sales
charge waived on the reinvested shares, or (b) the sales charge incurred on the
redeemed shares, is included in the basis of the reinvested shares and is not
included in the basis of the redeemed shares. If a shareholder realizes a loss
on the redemption or exchange of a Portfolio's shares and reinvests in shares of
another Portfolio within 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.
Shareholders of each Portfolio may be subject to state and local taxes on
distributions received from the Portfolio and on redemptions of the Portfolio's
shares.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. In January of each year the Portfolios issue to
each shareholder a statement of the federal income tax status of all
distributions.
The foregoing discussion of U.S. federal income tax law relates solely to the
application of that law to U.S. persons, i.e., U.S. citizens and residents and
U.S. corporations, partnerships, trusts and estates. Each shareholder who is not
a U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of a Portfolio, including the possibility that such a shareholder may
be subject to a U.S. withholding tax at a rate of 30% (or at a lower rate under
an applicable income tax treaty) on amounts constituting ordinary income
received by him or her, where such amounts are treated as income from U.S.
sources under the Code.
Shareholders should consult their tax advisers about the application of the
provisions of tax law in light of their particular tax situations.
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.
26
<PAGE>
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 or Class C 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 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.
<TABLE>
<CAPTION>
Average Annual Total Return for the year ended July 31, 1998
(Adjusted for the maximum sales charge)
1-Year Life of
Fund*
<S> <C> <C> <C>
Horizon 20+ Class A 2.75% 14.12%
Class B 4.98 14.78
Class C 7.97 15.72
Horizon 10+ Class A 3.46 11.98
Class B 5.85 12.70
Class C 8.83 13.55
Horizon 5 Class A 1.59 8.35
Class B 4.27 9.19
Class C 7.10 10.12
* Since 12/29/95.
</TABLE>
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 and Class C 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 and Class C shares would be reduced if such charges
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. Redemption of Class C shares may be
subject to a 1% contingent deferred sales charge in the first year following
purchase. 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
27
<PAGE>
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 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.
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.
From time to time the Portfolios may include in their sales communications,
ranking and rating information received from various organizations, to include
but not be limited to ratings from Morningstar, Inc. and rankings from Lipper
Analytical Services, Inc. ("Lipper"), New York, New York, which is a mutual fund
reporting service.
The following tables compare the performance of the Class A shares of each
Portfolio over various periods with that of other mutual funds within the
categories described below according to data reported by Lipper . Lipper
performance figures are based on changes in net asset value, with all income and
capital gain dividends reinvested. Such calculations do not include the effect
of any sales charges. Future performance cannot be guaranteed. Lipper publishes
performance analyses on a regular basis. Each category includes funds with a
variety of objectives, policies and market and credit risks that should be
considered in reviewing these rankings.
<TABLE>
<CAPTION>
Lipper Perfomance Analysis
Horizon 20+ A Shares Flexible Portfolio Funds
-------------------- ------------------------
<S> <C> <C> <C>
One year (period ended 7/31/98) 117 of 204
28
<PAGE>
Lipper Perfomance Analysis
Horizon 10+ A Shares Balanced Portfolio Funds
-------------------- ------------------------
One year (period ended 7/31/98) 188 of 379
Lipper Perfomance Analysis
Horizon 5 A Shares Income Portfolio Funds
------------------ ----------------------
One year (period ended 7/31/98) 42 of 78
</TABLE>
29
<PAGE>
OFFICERS AND TRUSTEES
The officers and trustees of the Fund, their birthdates, their principal
occupations and their affiliations, if any, with the Adviser and KDI are listed
below:
JAMES E. AKINS (10/15/26), Trustee, 2904 Garfield Terrace, N.W., Washington,
D.C.; Consultant on International, Political and Economic Affairs; formerly, a
career United States Foreign Service Officer, Energy Adviser for the White
House; United States Ambassador to Saudi Arabia, 1973-76.
ARTHUR R. GOTTSCHALK (2/13/25), Trustee, 10642 Brookridge Drive, Frankfort,
Illinois, Retired; formerly, President, Illinois Manufacturers Association;
Trustee, Illinois Masonic Medical Center; formerly, Illinois State Senator;
formerly, Vice President, The Reuben H. Donnelly Corp.
FREDERICK T. KELSEY (4/25/27), Trustee, 4010 Arbor Lane, Unit 402, Northfield,
Illinois; Retired; formerly, consultant to Goldman, Sachs & Co.; formerly,
President, Treasurer and Trustee of Institutional Liquid Assets and its
affiliated mutual funds; Trustee of the Benchmark Funds; formerly, Trustee of
the Pilot Funds.
DANIEL PIERCE (3/18/34), Trustee and Chairman*, Two International Place, Boston,
Massachusetts; Managing Director, Adviser.
FRED B. RENWICK (2/1/30), Trustee, 3 Hanover Square, New York, New York;
Professor of Finance, New York University, Stern School of Business; Director,
TIFF Investment Program, Inc.; Director, the Wartburg Home Foundation; Chairman,
Investment Committee of Morehouse College Board of Trustees; Chairman, American
Bible Society Investment Committee; formerly, member of the Investment Committee
of Atlanta University Board of Trustees; formerly, Director of Board of Pensions
Evangelical Lutheran Church of America.
JOHN B. TINGLEFF (5/4/35), Trustee, 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.
EDMOND D. VILLANI (3/4/47), Trustee*, 345 Park Avenue, New York, New York;
President, Chief Executive Officer and Managing Director, Adviser.
JOHN G. WEITHERS (8/8/33), Trustee, 311 Spring Lake, Hinsdale, Illinois;
Retired; formerly, Chairman of the Board and Chief Executive Officer, Chicago
Stock Exchange; Director, Federal Life Insurance Company, President of the
Members of the Corporation and Trustee, DePaul University; Director, Systems
Imagineering, Inc.
30
<PAGE>
PHILIP J. COLLORA (11/15/45), Vice President and Secretary*, 222 South Riverside
Plaza, Chicago, Illinois; Attorney, Senior Vice President and Assistant
Secretary, Scudder Kemper.
ELIZABETH C. WERTH (10/1/47), Assistant Secretary*, 222 South Riverside Plaza,
Chicago, Illinois; Vice President, Scudder Kemper; Vice President and Director
of State Registrations, KDI.
THOMAS W. LITTAUER (4/26/55), Vice President*, Two International Place, Boston,
Massachusetts; Managing Director, Adviser; Head of Broker Dealer Division of an
unaffiliated investment management firm during 1997; prior thereto, President of
Client Management Services of an unaffiliated investment management firm from
1991 to 1996.
ANN M. McCREARY (11/6/56), Vice President*, 345 Park Avenue, New York, New York;
Managing Director, Adviser.
KATHRYN L. QUIRK (12/3/52), Vice President*, 345 Park Avenue, New York, New
York; Managing Director, Adviser.
LINDA J. WONDRACK (9/12/64), Vice President*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.
JOHN R. HEBBLE (6/27/58), Treasurer*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.
BRENDA LYONS (2/21/63) Assistant Treasurer*, Two International Place, Boston,
Massachusetts; Senior Vice President, Adviser.
CAROLINE PEARSON (4/1/62), Assistant Secretary*, Two International Place,
Boston, Massachusetts; Senior Vice President, Adviser; formerly, Associate,
Dechert Price & Rhoads (law firm) 1989 to 1997.
MAUREEN E. KANE (2/14/62), Assistant Secretary*, Two International Place,
Boston, Massachusetts; Vice President, Adviser; formerly, Assistant Vice
President of an unaffiliated investment management firm; prior thereto,
Associate Staff Attorney of an unaffiliated investment management firm;
Associate, Peabody & Arnold (law firm).
MARK S. CASADY (9/21/60), President*, Two International Place, Boston,
Massachusetts; Managing Director, Adviser; formerly, Institutional Sales Manager
of an unaffiliated mutual fund distributor.
PHILIP S. FORTUNA (11/30/57), Vice President*, 101 California Street, San
Francisco, California; Managing Director, Adviser.
* "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. The table below shows amounts estimated
to be paid or accrued to those trustees who are not designated "interested
persons" during the Fund's 1998 fiscal year and the total compensation that the
Kemper funds paid to such trustees during the calendar year 1997.
<TABLE>
<CAPTION>
Total Compensation
Aggregate Compensation Kemper Funds Paid
Name of Board Member from Fund to Board Members(2)
- -------------------- --------- -------------------
<S> <C> <C>
James E. Akins $5,400 $106,300
Arthur R. Gottschalk(1) $5,900 $121,100
Frederick T. Kelsey $5,400 $111,300
31
<PAGE>
Fred B. Renwick $5,400 $106,300
John B. Tingleff $5,400 $106,300
John G. Weithers $5,400 $106,300
</TABLE>
(1) Includes deferred fees and interest thereon pursuant to deferred
compensation agreements with the Fund. Deferred amounts accrue interest monthly
at a rate equal to the yield of Zurich Money Funds -- Zurich Money Market Fund.
Total deferred fees and interest accrued for the latest and prior fiscal years
for this Fund are $10,400 for Mr. Gottschalk.
(2) Includes compensation for service on the Boards of 13 Kemper funds, with 36
fund portfolios. Each trustee currently serves as a board member of 15 Kemper
Funds with 51 fund portfolios. Total compensation does not reflect amounts paid
by Scudder Kemper Investments, Inc. to the board members for meetings regarding
the combination of Scudder and Zurich Kemper Investments, Inc. Such amounts
totaled $42,800, $40,100, $39,000, $42,900, $42,900 and $42,900 for Messrs.
Akins, Gorrschalk, Kelsey, Renwick, Tingleff and Weithers, respectively.
As of November 2, 1998, the officers and trustees of the Fund as a group owned
less than 1% of each Portfolio.
Principal Holders of Securities
As of October 30, 1998 the following owned of record more than 5% of the
outstanding stock of the Portfolios as set forth below.
<TABLE>
<CAPTION>
HORIZON 20+
-----------
Name and Address Class Percentage
- ---------------- ----- ----------
<S> <C> <C>
National Financial Svcs Corp. B 6.68
200 Liberty Street
New York, NY 10281
Scudder Kemper Investments, Inc. I 13.41
Money Purchase Plan #62524
Attn: Peter Drexler
345 Park Avenue
New York, NY 10154
Scudder Kemper Investments, Inc. I 84.59
Profit Sharing Plan #61486
Attn: Peter Drexler
345 Park Avenue
New York, NY 10154
HORIZON 10+
- -----------
Name and Address Class Percentage
- ---------------- ----- ----------
Prudential Trust FBO A 12.51
Defined Contribution
Plan Customers
30 Scranton Office Park
Scranton, PA 18507
National Financial Svcs Corp. B 11.85
32
<PAGE>
200 Liberty Street
New York, NY 10281
Scudder Kemper Investments, Inc. I 7.70
Money Purchase Plan #62524
Attn: Peter Drexler
345 Park Avenue
New York, NY 10154
ZKI Inc. NON-QUA DEF C I 27.58
Lasalle National Bank TTEE
222 S. Riverside Plaza 24th FL
Chicago, IL 60606
Scudder Kemper Investments, Inc. I 63.93
Profit Sharing Plan #61486
Attn: Peter Drexler
345 Park Avenue
New York, NY 10154
HORIZON 5+
- ----------
Name and Address Class Percentage
- ---------------- ----- ----------
National Financial Svcs Corp., A 5.70
200 Liberty Street
New York, NY 10281
National Financial Svcs Corp., B 8.85
200 Liberty Street
New York, NY 10281
Everen Clearing Corp. B 5.25
Attn: Chris Scotto
111 E. Kilbourn Ave.
Milwaukee, WI 53202
Investors Fiduciary Trust (IFTC) C 5.16
811 Main Street
Kansas City, MO 64105
Rogers Petroleum Company C 5.67
8511 141st Street CT W
Saint Paul, MN 55124
Donaldson Lufkin Jenrette C 6.44
Securities Corp. Inc.
PO Box 2052
Jersey City, NJ 07303
Scudder Kemper Investments, Inc. I 6.59
Money Purchase Plan #62524
Attn: Peter Drexler
345 Park Avenue
New York, NY 10154
ZKI Inc. NON-QUA DEF C I 35.01
Lasalle National Bank TTEE
222 S. Riverside Plaza 24th FL
Chicago, IL 60606
Scudder Kemper Investments, Inc. I 58.35
Profit Sharing Plan #61486
Attn: Peter Drexler
33
<PAGE>
345 Park Avenue
New York, NY 10154
</TABLE>
* Record and beneficial owner.
** Record owner only.
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, supplying any omission, curing any
ambiguity or curing, correcting or 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
34
<PAGE>
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 Scudder Kemper 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.
35
<PAGE>
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.
36
<PAGE>
Ba. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa. Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca. Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
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.
37
<PAGE>
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.
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.
38
