LONG-TERM
INVESTING
IN A
SHORT-TERM
WORLD(SM)
December 1, 2000
Prospectus
--------------------------------------------------------------------------------
KEMPER HORIZON FUNDS
Kemper Horizon 20+ Portfolio
Kemper Horizon 10+ Portfolio
Kemper Horizon 5 Portfolio
As with all mutual funds, the Securities and Exchange Commission (SEC) does not
approve or disapprove these shares or determine whether the information in this
prospectus is truthful or complete. It is a criminal offense for anyone to
inform you otherwise.
[LOGO] KEMPER FUNDS
<PAGE>
HOW THE INVESTING IN
FUNDS WORK THE FUNDS
2 Kemper Horizon 20+ 31 Choosing A Share
Portfolio Class
8 Kemper Horizon 10+ 36 How To Buy Shares
Portfolio
14 Kemper Horizon 5 37 How To Exchange Or
Portfolio Sell Shares
20 Other Policies And 38 Policies You Should
Risks Know About
21 Financial Highlights 44 Understanding
Distributions
And Taxes
<PAGE>
How The Funds Work
The three funds in this prospectus use an asset allocation strategy. All three
funds invest in stocks and bonds, but in different proportions. As their names
suggest, each fund is designed for investors with a particular time horizon in
mind, from relatively short-term to relatively long-term.
Remember that mutual funds are investments, not bank deposits. They're not
guaranteed or insured by the FDIC or any other government agency. Their share
prices will go up and down, so be aware that you could lose money.
<PAGE>
TICKER SYMBOLS CLASS: A) KHOAX B) KHOBX C) KHOCX
Kemper
Horizon 20+ Portfolio
--------------------------------------------------------------------------------
FUND GOAL To seek growth of capital, with income a
secondary goal.
Fund's Main Strategy
A GRAPH IN THE FORM OF A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA
POINTS IN THE TABLE BELOW.
20% Net assets in fixed-income securities
80% Net assets in equity securities:
40% in large cap U.S.
16% in small cap U.S.
24% in foreign
2 | Kemper Horizon 20+ Portfolio
<PAGE>
The Fund's Main Strategy
The fund normally allocates assets as shown in the "Fund's Main Strategy" pie
chart.
Equity portion. Most of this portion is normally invested in common stocks. In
choosing stocks, the managers use proprietary models to rank stocks according to
factors such as book value, earnings per share, expected earnings growth and
other factors. The model uses the same criteria for all stocks, but ranks growth
stocks (stocks of companies with above-average growth of revenue or earnings)
and value stocks (stocks whose price-to-earnings ratios are below average)
separately. Based on market, economic and other factors, the managers determine
their desired mix of growth and value stocks (between 40% and 60% of each) and
choose stocks from among the top-ranked in each category. In addition, when
choosing foreign stocks, the managers generally focus on established companies
in countries with developed economies, although the fund can invest in stocks of
any size and from any country. The fund will normally sell a stock when the
managers believe its growth potential has declined, it's too highly valued, its
fundamental qualities have deteriorated or its potential risks have increased.
Fixed-income portion. This portion is divided among government and agency
securities (including mortgage- and asset-backed securities), corporate
securities, bank obligations and cash equivalents. All of the fund's
fixed-income securities must be denominated in U.S. dollars, and 90% of the
fixed-income portion must be rated in the top four credit grades, with an
average credit quality within the top two credit grades. Although the managers
may adjust the duration (a measure of sensitivity to interest rates) of the
fund's fixed-income portion, they generally intend to keep it between 1.5 and
3.5 years, with an average of approximately 2.5 years.
[LOGO]
--------------------------------------------------------------------------------
ALLOCATION ADJUSTMENTS
While the managers expect that, over time, the fund's actual allocations will
average out to be similar to its target allocations, the actual allocations may
be different from the target allocations at any given time. This is because the
managers may adjust the fund's actual allocations in seeking to take advantage
of current or expected market conditions, or to manage risk.
3 | Kemper Horizon 20+ Portfolio
<PAGE>
The Main Risks Of Investing In The Fund
There are several factors that could hurt fund performance, cause you to lose
money or make the fund perform less well than other investments.
The most important factor is how stock markets perform -- something that depends
on many influences, including economic, political and demographic trends. When
stock prices fall, the value of your investment is likely to fall as well.
Because a stock represents ownership in its issuer, stock prices can be hurt by
poor management, shrinking product demand and other business risks. Small
company stocks tend to be more volatile than stocks of larger companies, in part
because small companies tend to be less established than larger companies and
more vulnerable to competitive challenges and bad economic news.
Foreign stocks tend to be more volatile than their American counterparts, for
reasons ranging from political and economic uncertainties to a higher risk that
essential information may be incomplete or wrong. In addition, there is the risk
with foreign investments that changing currency rates could add to market losses
or reduce market gains. These risks tend to be greater in emerging markets.
Because the fund invests some of its assets in bonds, it may perform less well
in the long run than a fund investing entirely in stocks. In addition, the
fund's bond component means that its performance could be hurt somewhat by poor
performance in the bond market or from the particular bonds it owns. With
mortgage- or asset-backed securities, any unexpected behavior in interest rates
could increase the volatility of the fund's share price and yield.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
countries, industries, companies, the attractiveness of asset classes
or other matters
o bond prices could be hurt by rising interest rates or declines in
credit quality
o at times, it could be hard to value some investments or to get an
attractive price for them
o derivatives could produce disproportionate losses
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
This fund may make sense for investors with a time horizon of 20 years or longer
who want an investment that uses an asset allocation strategy to pursue growth
and manage risk.
4 | Kemper Horizon 20+ Portfolio
<PAGE>
Performance
The bar chart shows how the total returns for the fund's Class A shares have
varied from year to year, which may give some idea of risk. The chart doesn't
reflect sales loads; if it did, returns would be lower. The table shows how the
fund's returns over different periods average out.
For context, the table has two broad-based market indices (which, unlike the
fund, have no fees or expenses). All figures on this page assume reinvestment of
dividends and distributions. As always, past performance is no guarantee of
future results.
------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A shares
------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1996 15.11
1997 18.90
1998 10.98
1999 6.26
Best quarter: 14.22%, Q4 1998 YTD return as of 9/30/2000: -6.43%
Worst quarter: -12.85%, Q3 1998
------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1999)
------------------------------------------------------------------------------
Since 12/31/98 Since 12/29/95
1 Year Life of Class
------------------------------------------------------------------------------
Class A 0.18% 11.03%
------------------------------------------------------------------------------
Class B 2.54 11.38
------------------------------------------------------------------------------
Class C 5.21 11.65
------------------------------------------------------------------------------
Index 1 21.03 26.35
------------------------------------------------------------------------------
Index 2 -2.15 4.87
------------------------------------------------------------------------------
Index 1: Standard and Poor's 500 Composite Stock Price Index (S&P 500), an
unmanaged capitalization-weighted index that includes 500 large-cap U.S. stocks.
Index 2: Lehman Brothers Government/Corporate Bond Index, an unmanaged index
comprised of intermediate and long-term government and investment-grade
corporate debt securities.
The table includes the effects of maximum sales loads. In both the table and the
chart, total returns for 1995 through 1996 would have been lower if operating
expenses hadn't been reduced.
5 | Kemper Horizon 20+ Portfolio
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
------------------------------------------------------------------------------
Fee Table Class A Class B Class C
------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed On Purchases 5.75% None None
(as % of offering price)
------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as % of None* 4.00% 1.00%
redemption proceeds)
------------------------------------------------------------------------------
Annual Operating Expenses, deducted from fund assets
------------------------------------------------------------------------------
Management Fee 0.58% 0.58% 0.58%
------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.75 0.75
------------------------------------------------------------------------------
Other Expenses** 1.11 1.21 1.60
------------------------------------------------------------------------------
Total Annual Operating Expenses 1.69 2.54 2.93
------------------------------------------------------------------------------
* Shares bought without a sales charge and sold within a year after
purchase are subject to a contingent deferred sales charge of 1.00%
which is reduced to 0.50% if sold during the second year. See "Choosing
A Share Class, Class A Shares."
** Includes costs of shareholder servicing, custody and similar expenses,
which may vary with fund size and other factors.
Based on the figures above, this example is designed to help you compare the
expenses of each share class to those of other mutual funds. The example assumes
operating expenses remain the same and that you invested $10,000, earned 5%
annual returns and reinvested all dividends and distributions. This is only an
example; actual expenses will be different.
------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
------------------------------------------------------------------------------
Class A shares $737 $1,077 $1,440 $2,458
------------------------------------------------------------------------------
Class B shares 657 1,091 1,550 2,476
------------------------------------------------------------------------------
Class C shares 396 907 1,543 3,252
------------------------------------------------------------------------------
Expenses, assuming you kept your shares
------------------------------------------------------------------------------
Class A shares $737 $1,077 $1,440 $2,458
------------------------------------------------------------------------------
Class B shares 257 791 1,350 2,476
------------------------------------------------------------------------------
Class C shares 296 907 1,543 3,252
------------------------------------------------------------------------------
6 | Kemper Horizon 20+ Portfolio
<PAGE>
THE INVESTMENT ADVISOR
The fund's investment advisor is Scudder Kemper Investments, Inc., 345 Park
Avenue, New York, NY 10154-0010. Scudder Kemper has more than 80 years of
experience managing mutual funds and currently has more than $290 billion in
assets under management.
Scudder Kemper takes a team approach to asset management, bringing together
professionals from many investment disciplines. Supporting each team are Scudder
Kemper's many economists, research analysts, traders and other investment
specialists, located across the United States and around the world.
For serving as the fund's investment advisor, Scudder Kemper receives a
management fee. For the most recent fiscal year, the actual amount the fund paid
in management fees was 0.58% of average daily net assets.
[ICON]
--------------------------------------------------------------------------------
FUND MANAGERS
The following people handle the fund's day-to-day management:
Robert D. Tymoczko Richard D. Scargill
Lead Portfolio Manager o Began investment career
o Began investment career in 1990
in 1996 o Joined the advisor in
o Joined the advisor in 1997 1990
o Joined the fund team o Joined the fund team
in 1999 in 2000
Shahram Tajbakhsh
o Began investment career
in 1991
o Joined the advisor in 1996
o Joined the fund team
in 1999
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
The fund is managed by a team of investment professionals who work together to
develop the fund's investment strategies.
7 | Kemper Horizon 20+ Portfolio
<PAGE>
TICKER SYMBOLS CLASS: A) KHRAX B) KHRBX C) KHRCX
Kemper
Horizon 10+ Portfolio
--------------------------------------------------------------------------------
FUND GOAL To seek a balance between growth of capital
and income, consistent with moderate risk.
Fund's Main Strategy
A GRAPH IN THE FORM OF A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA
POINTS IN THE TABLE BELOW.
40% Net assets in fixed-income securities
60% Net assets in equity securities:
28% in large cap U.S.
14% in small cap U.S.
18% in foreign
8 | Kemper Horizon 10+ Portfolio
<PAGE>
The Fund's Main Strategy
The fund normally allocates assets as shown in the "Fund's Main Strategy" pie
chart.
Equity portion. Most of this portion is normally invested in common stocks. In
choosing stocks, the managers use proprietary models to rank stocks according to
factors such as book value, earnings per share, expected earnings growth and
other factors. The model uses the same criteria for all stocks, but ranks growth
stocks (stocks of companies with above-average growth of revenue or earnings)
and value stocks (stocks whose price-to-earnings ratios are below average)
separately. Based on market, economic and other factors, the managers determine
their desired mix of growth and value stocks (between 40% and 60% of each) and
choose stocks from among the top-ranked in each category. In addition, when
choosing foreign stocks, the managers generally focus on established companies
in countries with developed economies, although the fund can invest in stocks of
any size and from any country. The fund will normally sell a stock when the
managers believe its growth potential has declined, it's too highly valued, its
fundamental qualities have deteriorated or its potential risks have increased.
Fixed-income portion. This portion is divided among government and agency
securities (including mortgage- and asset-backed securities), corporate
securities, bank obligations and cash equivalents. All of the fund's
fixed-income securities must be denominated in U.S. dollars, and 90% of the
fixed-income portion must be rated in the top four credit grades, with an
average credit quality within the top two credit grades. Although the managers
may adjust the duration (a measure of sensitivity to interest rates) of the
fund's fixed-income portion, they generally intend to keep it between 1.5 and
3.5 years, with an average of approximately 2.5 years.
[LOGO]
--------------------------------------------------------------------------------
ALLOCATION ADJUSTMENTS
While the managers expect that, over time, the fund's actual allocations will
average out to be similar to its target allocations, the actual allocations may
be different from the target allocations at any given time. This is because the
managers may adjust the fund's actual allocations in seeking to take advantage
of current or expected market conditions, or to manage risk.
9 | Kemper Horizon 10+ Portfolio
<PAGE>
The Main Risks Of Investing In The Fund
There are several factors that could hurt fund performance, cause you to lose
money or make the fund perform less well than other investments.
The most important factor is how stock markets perform -- something that depends
on many influences, including economic, political and demographic trends. When
stock prices fall, the value of your investment is likely to fall as well. Stock
prices can be hurt by poor management, shrinking product demand and other
business risks. Small company stocks tend to be more volatile than stocks of
larger companies, in part because small companies tend to be less established
than larger companies and more vulnerable to competitive challenges and bad
economic news.
Foreign stocks tend to be more volatile than their American counterparts. There
is also the risk with foreign investments that changing currency rates could add
to market losses or reduce market gains. These risks tend to be greater in
emerging markets.
The fund is also affected by how bond markets perform. Bonds could be hurt by
rises in market interest rates. (As a rule, a 1% rise in interest rates means a
1% fall in value for every year of duration.) Some bonds could be paid off
earlier than expected if interest rates fall which may hurt the fund's
performance. With mortgage- or asset-backed securities, any unexpected behavior
in interest rates could increase the volatility of the fund's share price and
yield. Corporate bonds could perform less well than other types of bonds in a
weak economy.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
countries, industries, companies, the attractiveness of asset classes
or other matters
o a bond could fall in credit quality or go into default
o at times, it could be hard to value some investments or to get an
attractive price for them
o derivatives could produce disproportionate losses
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
Investors who are looking for a balanced portfolio of stock and bond investments
and whose time horizon is approximately ten or more years may be interested in
this fund.
10 | Kemper Horizon 10+ Portfolio
<PAGE>
Performance
The bar chart shows how the total returns for the fund's Class A shares have
varied from year to year, which may give some idea of risk. The chart doesn't
reflect sales loads; if it did, returns would be lower. The table shows how the
fund's returns over different periods average out.
For context, the table has two broad-based market indices (which, unlike the
fund, have no fees or expenses). All figures on this page assume reinvestment of
dividends and distributions. As always, past performance is no guarantee of
future results.
------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A shares
------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1996 12.30
1997 15.98
1998 12.39
1999 5.62
Best quarter: 10.44%, Q4 1998 YTD return as of 9/30/2000: -3.13%
Worst quarter: -7.77%, Q3 1998
------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1999)
------------------------------------------------------------------------------
Since 12/31/98 Since 12/29/95
1 Year Life of Class
------------------------------------------------------------------------------
Class A -0.45% 9.85%
------------------------------------------------------------------------------
Class B 1.88 10.19
------------------------------------------------------------------------------
Class C 4.55 10.46
------------------------------------------------------------------------------
Index 1 21.03 26.35
------------------------------------------------------------------------------
Index 2 -2.15 4.87
------------------------------------------------------------------------------
Index 1: Standard and Poor's 500 Composite Stock Price Index (S&P 500), an
unmanaged capitalization-weighted index that includes 500 large-cap U.S. stocks.
Index 2: Lehman Brothers Government/Corporate Bond Index, an unmanaged index
comprised of intermediate and long-term government and investment-grade
corporate debt securities.
The table includes the effects of maximum sales loads. In both the table and the
chart, total returns for 1995 through 1996 would have been lower if operating
expenses hadn't been reduced.
11 | Kemper Horizon 10+ Portfolio
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
------------------------------------------------------------------------------
Fee Table Class A Class B Class C
------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed On Purchases 5.75% None None
(as % of offering price)
------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as % of None* 4.00% 1.00%
redemption proceeds)
------------------------------------------------------------------------------
Annual Operating Expenses, deducted from fund assets
------------------------------------------------------------------------------
Management Fee 0.58% 0.58% 0.58%
------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.75 0.75
------------------------------------------------------------------------------
Other Expenses** 0.93 1.10 1.26
------------------------------------------------------------------------------
Total Annual Operating Expenses 1.51 2.43 2.59
------------------------------------------------------------------------------
* Shares bought without a sales charge and sold within a year after
purchase are subject to a contingent deferred sales charge of 1.00%
which is reduced to 0.50% if sold during the second year. See "Choosing
A Share Class, Class A Shares."
** Includes costs of shareholder servicing, custody and similar expenses,
which may vary with fund size and other factors.
Based on the figures above, this example is designed to help you compare the
expenses of each share class to those of other mutual funds. The example assumes
operating expenses remain the same and that you invested $10,000, earned 5%
annual returns and reinvested all dividends and distributions. This is only an
example; actual expenses will be different.
------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
------------------------------------------------------------------------------
Class A shares $720 $1,025 $1,351 $2,273
------------------------------------------------------------------------------
Class B shares 646 1,058 1,496 2,329
------------------------------------------------------------------------------
Class C shares 362 805 1,375 2,925
------------------------------------------------------------------------------
Expenses, assuming you kept your shares
------------------------------------------------------------------------------
Class A shares $720 $1,025 $1,351 $2,273
------------------------------------------------------------------------------
Class B shares 246 758 1,296 2,329
------------------------------------------------------------------------------
Class C shares 262 805 1,375 2,925
------------------------------------------------------------------------------
12 | Kemper Horizon 10+ Portfolio
<PAGE>
THE INVESTMENT ADVISOR
The fund's investment advisor is Scudder Kemper Investments, Inc., 345 Park
Avenue, New York, NY 10154-0010. Scudder Kemper has more than 80 years of
experience managing mutual funds and currently has more than $290 billion in
assets under management.
Scudder Kemper takes a team approach to asset management, bringing together
professionals from many investment disciplines. Supporting each team are Scudder
Kemper's many economists, research analysts, traders and other investment
specialists, located across the United States and around the world.
For serving as the fund's investment advisor, Scudder Kemper receives a
management fee. For the most recent fiscal year, the actual amount the fund paid
in management fees was 0.58% of average daily net assets.
[ICON]
--------------------------------------------------------------------------------
FUND MANAGERS
The following people handle the fund's day-to-day management:
Robert D. Tymoczko Richard D. Scargill
Lead Portfolio Manager o Began investment career
o Began investment career in 1990
in 1996 o Joined the advisor in
o Joined the advisor 1990
in 1997 o Joined the fund team
o Joined the fund team in 2000
in 1999
Shahram Tajbakhsh
o Began investment career
in 1991
o Joined the advisor
in 1996
o Joined the fund team
in 1999
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
The fund is managed by a team of investment professionals who work together to
develop the fund's investment strategies.
13 | Kemper Horizon 10+ Portfolio
<PAGE>
TICKER SYMBOLS CLASS: A) KHZAX B) KHZBX C) KHZCX
Kemper
Horizon 5 Portfolio
--------------------------------------------------------------------------------
FUND GOAL To seek income consistent with capital
preservation; growth of capital is a secondary goal.
Fund's Main Strategy
A GRAPH IN THE FORM OF A PIE CHART APPEARS HERE, ILLUSTRATING THE EXACT DATA
POINTS IN THE TABLE BELOW.
40% Net assets in equity securities:
19.6% in large cap U.S.
8.4% in small cap U.S.
12% in foreign
60% Net assets in fixed-income securities
14 | Kemper Horizon 5 Portfolio
<PAGE>
The Fund's Main Strategy
The fund normally allocates assets as shown by the "Fund's Main Strategy" pie
chart.
Fixed-income portion. This portion is divided among government and agency
securities (including mortgage- and asset-backed securities), corporate
securities, bank obligations and cash equivalents. All of the fund's
fixed-income securities must be denominated in U.S. dollars, and 90% of the
fixed-income portion must be rated in the top four credit grades, with an
average credit quality within the top two credit grades. Although the managers
may adjust the duration (a measure of sensitivity to interest rates) of the
fund's fixed-income portion, they generally intend to keep it between 1.5 and
3.5 years, with an average of approximately 2.5 years.
Equity portion. Most of this portion is normally invested in common stocks. In
choosing stocks, the managers use proprietary models to rank stocks according to
factors such as book value, earnings per share, expected earnings growth and
other factors. The model uses the same criteria for all stocks, but ranks growth
stocks (stocks of companies with above-average growth of revenue or earnings)
and value stocks (stocks whose price-to-earnings ratios are below average)
separately. Based on market, economic and other factors, the managers determine
their desired mix of growth and value stocks (between 40% and 60% of each) and
choose stocks from among the top-ranked in each category. In addition, when
choosing foreign stocks, the managers generally focus on established companies
in countries with developed economies, although the fund can invest in stocks of
any size and from any country. The fund will normally sell a stock when the
managers believe its growth potential has declined, it's too highly valued, its
fundamental qualities have deteriorated or its potential risks have increased.
[LOGO]
--------------------------------------------------------------------------------
ALLOCATION ADJUSTMENTS
While the managers expect that, over time, the fund's actual allocations will
average out to be similar to its target allocations, the actual allocations may
be different from the target allocations at any given time. This is because the
managers may adjust the fund's actual allocations in seeking to take advantage
of current or expected market conditions, or to manage risk.
15 | Kemper Horizon 5 Portfolio
<PAGE>
The Main Risks Of Investing In The Fund
There are several factors that could hurt fund performance, cause you to lose
money or make the fund perform less well than other investments.
The fund is affected by how bond markets perform. Bonds could be hurt by rises
in market interest rates. (As a rule, a 1% rise in interest rates means a 1%
fall in value for every year of duration.) Some bonds could be paid off earlier
than expected if interest rates fall which may hurt the fund's performance. With
mortgage- or asset-backed securities, any unexpected behavior in interest rates
could increase the volatility of the fund's share price and yield. Corporate
bonds could perform less well than other types of bonds in a weak economy.
The fund is also affected by how stock markets perform -- something that depends
on many influences, including economic, political and demographic trends. When
stock prices fall, the value of your investment is likely to fall as well. Stock
prices can be hurt by poor management, shrinking product demand and other
business risks. Small company stocks tend to be more volatile than stocks of
larger companies, in part because small companies tend to be less established
than larger companies and more vulnerable to competitive challenges and bad
economic news.
Foreign stocks tend to be more volatile than their American counterparts. There
is also the risk with foreign investments that changing currency rates could add
to market losses or reduce market gains. These risks tend to be greater in
emerging markets.
Other factors that could affect performance include:
o the managers could be wrong in their analysis of economic trends,
countries, industries, companies, the attractiveness of asset classes
or other matters
o a bond could fall in credit quality or go into default
o at times, it could be hard to value some investments or to get an
attractive price for them
o derivatives could produce disproportionate losses
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
Investors who are about five years away from their financial goals, or who want
a fund that takes a more conservative asset allocation, may want to consider
this fund.
16 | Kemper Horizon 5 Portfolio
<PAGE>
Performance
The bar chart shows how the total returns for the fund's Class A shares have
varied from year to year, which may give some idea of risk. The chart doesn't
reflect sales loads; if it did, returns would be lower. The table shows how the
fund's returns over different periods average out.
For context, the table has two broad-based market indices (which, unlike the
fund, have no fees or expenses). All figures on this page assume reinvestment of
dividends and distributions. As always, past performance is no guarantee of
future results.
------------------------------------------------------------------------------
Annual Total Returns (%) as of 12/31 each year Class A shares
------------------------------------------------------------------------------
THE ORIGINAL DOCUMENT CONTAINS A BAR CHART HERE
BAR CHART DATA:
1996 9.43
1997 11.82
1998 10.00
1999 4.54
Best quarter: 7.46%, Q4 1998 YTD return as of 9/30/2000: -1.08%
Worst quarter: -4.77%, Q3 1998
------------------------------------------------------------------------------
Average Annual Total Returns (as of 12/31/1999)
------------------------------------------------------------------------------
Since 12/31/98 Since 12/29/95
1 Year Life of Class
------------------------------------------------------------------------------
Class A -1.48% 7.29%
------------------------------------------------------------------------------
Class B 0.76 7.78
------------------------------------------------------------------------------
Class C 3.49 8.10
------------------------------------------------------------------------------
Index 1 21.03 26.35
------------------------------------------------------------------------------
Index 2 -2.15 4.87
------------------------------------------------------------------------------
Index 1: Standard and Poor's 500 Composite Stock Price Index (S&P 500), an
unmanaged capitalization-weighted index that includes 500 large-cap U.S. stocks.
Index 2: Lehman Brothers Government/Corporate Bond Index, an unmanaged index
comprised of intermediate and long-term government and investment-grade
corporate debt securities.
The table includes the effects of maximum sales loads. In both the table and the
chart, total returns for 1995 through 1996 would have been lower if operating
expenses hadn't been reduced.
17 | Kemper Horizon 5 Portfolio
<PAGE>
How Much Investors Pay
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
------------------------------------------------------------------------------
Fee Table Class A Class B Class C
------------------------------------------------------------------------------
Shareholder Fees, paid directly from your investment
------------------------------------------------------------------------------
Maximum Sales Charge (Load) Imposed On Purchases
(as % of offering price) 5.75% None None
------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as % of
redemption proceeds) None* 4.00% 1.00%
------------------------------------------------------------------------------
Annual Operating Expenses, deducted from fund assets
------------------------------------------------------------------------------
Management Fee 0.58% 0.58% 0.58%
------------------------------------------------------------------------------
Distribution (12b-1) Fee None 0.75 0.75
------------------------------------------------------------------------------
Other Expenses** 1.00 1.00 1.16
------------------------------------------------------------------------------
Total Annual Operating Expenses 1.58 2.33 2.49
------------------------------------------------------------------------------
* Shares bought without a sales charge and sold within a year after
purchase are subject to a contingent deferred sales charge of 1.00%
which is reduced to 0.50% if sold during the second year. See "Choosing
A Share Class, Class A Shares."
** Includes costs of shareholder servicing, custody and similar expenses,
which may vary with fund size and other factors.
Based on the figures above, this example is designed to help you compare the
expenses of each share class to those of other mutual funds. The example assumes
operating expenses remain the same and that you invested $10,000, earned 5%
annual returns and reinvested all dividends and distributions. This is only an
example; actual expenses will be different.
------------------------------------------------------------------------------
Example 1 Year 3 Years 5 Years 10 Years
------------------------------------------------------------------------------
Expenses, assuming you sold your shares at the end of each period
------------------------------------------------------------------------------
Class A shares $726 $1,045 $1,386 $2,345
------------------------------------------------------------------------------
Class B shares 636 1,027 1,445 2,307
------------------------------------------------------------------------------
Class C shares 352 776 1,326 2,826
------------------------------------------------------------------------------
Expenses, assuming you kept your shares
------------------------------------------------------------------------------
Class A shares $726 $1,045 $1,386 $2,345
------------------------------------------------------------------------------
Class B shares 236 727 1,245 2,307
------------------------------------------------------------------------------
Class C shares 252 776 1,326 2,826
------------------------------------------------------------------------------
18 | Kemper Horizon 5 Portfolio
<PAGE>
THE INVESTMENT ADVISOR
The fund's investment advisor is Scudder Kemper Investments, Inc., 345 Park
Avenue, New York, NY 10154-0010. Scudder Kemper has more than 80 years of
experience managing mutual funds and currently has more than $290 billion in
assets under management.
Scudder Kemper takes a team approach to asset management, bringing together
professionals from many investment disciplines. Supporting each team are Scudder
Kemper's many economists, research analysts, traders and other investment
specialists, located across the United States and around the world.
For serving as the fund's investment advisor, Scudder Kemper receives a
management fee. For the most recent fiscal year, the actual amount the fund paid
in management fees was 0.58% of average daily net assets.
[ICON]
--------------------------------------------------------------------------------
FUND MANAGERS
The following people handle the fund's day-to-day management:
Robert D. Tymoczko Richard D. Scargill
Lead Portfolio Manager o Began investment career
o Began investment career in 1990
in 1996 o Joined the advisor in
o Joined the advisor in 1997 1990
o Joined the fund team o Joined the fund team
in 1999 in 2000
Shahram Tajbakhsh
o Began investment career
in 1991
o Joined the advisor in 1996
o Joined the fund team
in 1999
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
The fund is managed by a team of investment professionals who work together to
develop the fund's investment strategies.
19 | Kemper Horizon 5 Portfolio
<PAGE>
Other Policies and Risks
While the fund-by-fund sections on the previous pages describe the main points
of each fund's strategy and risks, there are a few other issues to know about:
o Although major changes tend to be infrequent, a fund's Board could
change that fund's investment goal without seeking shareholder
approval.
o As a temporary defensive measure, any of these funds could shift up to
100% of their assets into investments such as money market securities.
This could prevent losses, but would mean that the funds were not
pursuing their goals.
o Scudder Kemper establishes a security's credit quality when it buys the
security, using independent ratings or, for unrated securities, its own
credit determination. When ratings don't agree, a fund may use the
higher rating. If a security's credit quality falls, the advisor will
determine whether selling it would be in the shareholders' best
interests.
o Although the managers are permitted to use various types of derivatives
(contracts whose value is based on, for example, indices, currencies or
securities), the managers don't intend to use them as principal
investments, and may not use them at all. With derivatives there is a
risk that they could produce disproportionate losses.
Keep in mind that there is no assurance that any mutual fund will achieve its
goal.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
This prospectus doesn't tell you about every policy or risk of investing in a
fund. For more information, you may want to request a copy of the SAI (the back
cover has additional information on how to do this).
20
<PAGE>
Financial Highlights
These tables are designed to help you understand each fund's financial
performance in recent years. The figures in the first part of each table are for
a single share. The total return figures represent the percentage that an
investor in a particular fund would have earned (or lost), assuming all
dividends and distributions were reinvested. This information has been audited
by Ernst & Young LLP, whose report, along with each fund's financial statements,
is included in that fund's annual report (see "Shareholder reports" on the back
cover).
Kemper Horizon 20+ Portfolio
Class A
------------------------------------------------------------------------------
From
December 29,
1995
Year ended July 31, to July
----------------------------------- 31,
2000 1999 1998 1997 1996
------------------------------------------------------------------------------
Per share operating performance
------------------------------------------------------------------------------
Net asset value,
beginning of year $14.01 $13.48 $12.89 $9.72 $9.50
------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income
(loss) .08(a) .13(a) .04 .12 .18(a)
------------------------------------------------------------------------------
Net realized and
unrealized gain (loss)
on investment
transactions (.57) .44 1.07 3.15 .04
------------------------------------------------------------------------------
Total from net investment
income (.49) .57 1.11 3.27 .22
------------------------------------------------------------------------------
Less distributions from:
Net investment income (.13) (.02) (.04) (.10) --
------------------------------------------------------------------------------
Net realized gain on
investment transactions (1.14) (.02) (.48) -- --
------------------------------------------------------------------------------
Total distributions (1.27) (.04) (.52) (.10) --
------------------------------------------------------------------------------
Net asset value, end of
period $12.25 $14.01 $13.48 $12.89 $9.72
------------------------------------------------------------------------------
Total return (%) (c) (3.85) 4.21 9.04 33.90 2.32**(b)
Ratios to average net assets and supplemental data
------------------------------------------------------------------------------
Net assets, end of period 42,959 63,294 49,276 25,696 8,073
($ in thousands)
------------------------------------------------------------------------------
Ratio of expenses before
expense reductions (%) 1.70 1.90 2.00 1.69 1.54*
------------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) 1.69 1.90 2.00 1.69 1.48*
------------------------------------------------------------------------------
Ratio of net investment
income (loss) (%) .59 .95 .49 1.08 1.51*
------------------------------------------------------------------------------
Portfolio turnover rate
(%) 72 72 44 130 122*
------------------------------------------------------------------------------
21
<PAGE>
Kemper Horizon 20+ Portfolio
Class B
------------------------------------------------------------------------------
From
December 29,
1995
Year ended July 31, to July
----------------------------------- 31,
2000 1999 1998 1997 1996
------------------------------------------------------------------------------
Per share operating performance
------------------------------------------------------------------------------
Net asset value,
beginning of year $13.72 $13.28 $12.79 $9.65 $9.50
------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income
(loss) (.03)(a) .03(a) (.03) .03 .11(a)
------------------------------------------------------------------------------
Net realized and
unrealized gain (loss)
on investment
transactions (.55) .43 1.00 3.15 .04
------------------------------------------------------------------------------
Total from net investment
income (.58) .46 .97 3.18 .15
------------------------------------------------------------------------------
Less distributions from:
Net investment income (.03) -- -- (.04) --
------------------------------------------------------------------------------
Net realized gain on
investment transactions (1.14) (.02) (.48) -- --
------------------------------------------------------------------------------
Total distributions (1.17) (.02) (.48) (.04) --
------------------------------------------------------------------------------
Net asset value, end of
period $11.97 $13.72 $13.28 $12.79 $9.65
------------------------------------------------------------------------------
Total return (%) (c) (4.68) 3.55 7.98 33.01 1.58**(b)
Ratios to average net assets and supplemental data
------------------------------------------------------------------------------
Net assets, end of period
($ in thousands) 41,347 59,209 50,253 32,159 8,431
------------------------------------------------------------------------------
Ratio of expenses before
expense reductions (%) 2.54 2.61 2.79 2.47 2.32*
------------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) 2.54 2.61 2.79 2.47 2.26*
------------------------------------------------------------------------------
Ratio of net investment
income (loss) (%) (.25) .24 (.30) .30 .73*
------------------------------------------------------------------------------
Portfolio turnover rate
(%) 72 72 44 130 122*
------------------------------------------------------------------------------
22
<PAGE>
Kemper Horizon 20+ Portfolio
Class C
------------------------------------------------------------------------------
From
December 29,
1995
Year ended July 31, to July
----------------------------------- 31,
2000 1999 1998 1997 1996
------------------------------------------------------------------------------
Per share operating performance
------------------------------------------------------------------------------
Net asset value,
beginning of year $13.70 $13.29 $12.80 $9.67 $9.50
------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income
(loss) (.08)(a) (.01)(a) (.05) .04 .13(a)
------------------------------------------------------------------------------
Net realized and
unrealized gain (loss)
on investment
transactions (.56) .44 1.02 3.13 .04
------------------------------------------------------------------------------
Total from net investment
income (.64) .43 .97 3.17 .17
------------------------------------------------------------------------------
Less distributions from:
Net investment income -- -- -- (.04) --
------------------------------------------------------------------------------
Net realized gain on
investment transactions (1.14) (.02) (.48) -- --
------------------------------------------------------------------------------
Total distributions (1.14) (.02) (.48) (.04) --
------------------------------------------------------------------------------
Net asset value, end of
year $11.92 $13.70 $13.29 $12.80 $9.67
------------------------------------------------------------------------------
Total return (%) (c) (5.07) 3.24 7.97 32.80 1.79**(b)
Ratios to average net assets and supplemental data
------------------------------------------------------------------------------
Net assets, end of period 9,677 13,156 9,310 3,948 798
($ in thousands)
------------------------------------------------------------------------------
Ratio of expenses before
expense reductions (%) 2.93 2.88 3.03 2.48 2.29*
------------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) 2.93 2.88 3.03 2.48 2.23*
------------------------------------------------------------------------------
Ratio of net investment
income (loss) (%) (.64) (.03) (.54) .29 .76*
------------------------------------------------------------------------------
Portfolio turnover rate
(%) 72 72 44 130 122*
------------------------------------------------------------------------------
23
<PAGE>
Kemper Horizon 10+ Portfolio
Class A
------------------------------------------------------------------------------
From
December 29,
1995
Year ended July 31, to July
----------------------------------- 31,
2000 1999 1998 1997 1996
------------------------------------------------------------------------------
Per share operating performance
------------------------------------------------------------------------------
Net asset value, $12.79 $12.49 $12.01 $9.60 $9.50
beginning of year
------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income
(loss) .26(a) .31(a) .24 .25 .20(a)
------------------------------------------------------------------------------
Net realized and
unrealized gain (loss)
on investment
transactions (.36) .35 .87 2.36 (.04)
------------------------------------------------------------------------------
Total from net investment
income (.10) .66 1.11 2.61 .16
------------------------------------------------------------------------------
Less distributions from:
Net investment income (.34) (.25) (.22) (.20) (.06)
------------------------------------------------------------------------------
Net realized gain on
investment transactions (1.13) (.11) (.41) -- --
------------------------------------------------------------------------------
Total distributions (1.47) (.36) (.63) (.20) (.06)
------------------------------------------------------------------------------
Net asset value, end of
period $11.22 $12.79 $12.49 $12.01 $9.60
------------------------------------------------------------------------------
Total return (%) (c) (.94) 5.37 9.75 27.43 1.70**(b)
Ratios to average net assets and supplemental data
------------------------------------------------------------------------------
Net assets, end of period 46,622 72,534 58,101 27,476 9,338
($ in thousands)
------------------------------------------------------------------------------
Ratio of expenses before
expense reductions (%) 1.52 1.46 1.48 1.51 1.52*
------------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) 1.51 1.46 1.48 1.51 1.48*
------------------------------------------------------------------------------
Ratio of net investment
income (loss) (%) 2.13 2.47 2.26 2.36 2.40*
------------------------------------------------------------------------------
Portfolio turnover rate
(%) 61 64 37 126 87*
------------------------------------------------------------------------------
24
<PAGE>
Kemper Horizon 10+ Portfolio
Class B
------------------------------------------------------------------------------
From
December 29,
1995
Year ended July 31, to July
----------------------------------- 31,
2000 1999 1998 1997 1996
------------------------------------------------------------------------------
Per share operating performance
------------------------------------------------------------------------------
Net asset value,
beginning of year $12.78 $12.48 $12.00 $9.60 $9.50
------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income
(loss) .15(a) .20(a) .15 .16 .17(a)
------------------------------------------------------------------------------
Net realized and
unrealized gain (loss)
on investment
transactions (.36) .35 .86 2.35 (.04)
------------------------------------------------------------------------------
Total from net investment
income (.21) .55 1.01 2.51 .13
------------------------------------------------------------------------------
Less distributions from:
Net investment income (.23) (.14) (.12) (.11) (.03)
------------------------------------------------------------------------------
Net realized gain on
investment transactions (1.13) (.11) (.41) -- --
------------------------------------------------------------------------------
Total distributions (1.36) (.25) (.53) (.11) (.03)
------------------------------------------------------------------------------
Net asset value, end of
period $11.21 $12.78 $12.48 $12.00 $9.60
------------------------------------------------------------------------------
Total return (%) (c) (1.83) 4.46 8.85 26.25 1.38**(b)
Ratios to average net assets and supplemental data
------------------------------------------------------------------------------
Net assets, end of period 40,199 51,365 42,522 29,602 8,622
($ in thousands)
------------------------------------------------------------------------------
Ratio of expenses before
expense reductions (%) 2.44 2.34 2.36 2.36 2.30*
------------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) 2.43 2.34 2.36 2.36 2.26*
------------------------------------------------------------------------------
Ratio of net investment
income (loss) (%) 1.25 1.59 1.38 1.51 1.62*
------------------------------------------------------------------------------
Portfolio turnover rate
(%) 61 64 37 126 87*
------------------------------------------------------------------------------
25
<PAGE>
Kemper Horizon 10+ Portfolio
Class C
------------------------------------------------------------------------------
From
December 29,
1995
Year ended July 31, to July
----------------------------------- 31,
2000 1999 1998 1997 1996
------------------------------------------------------------------------------
Per share operating performance
------------------------------------------------------------------------------
Net asset value,
beginning of year $12.73 $12.44 $11.98 $9.60 $9.50
------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income
(loss) .13(a) .18(a) .14 .14 .17(a)
------------------------------------------------------------------------------
Net realized and
unrealized gain (loss)
on investment
transactions (.35) .35 .87 2.34 (.04)
------------------------------------------------------------------------------
Total from net investment
income (.22) .53 1.01 2.48 .13
------------------------------------------------------------------------------
Less distributions from:
Net investment income (.21) (.13) (.14) (.10) (.03)
------------------------------------------------------------------------------
Net realized gain on
investment transactions (1.13) (.11) (.41) -- --
------------------------------------------------------------------------------
Total distributions (1.34) (.24) (.55) (.10) (.03)
------------------------------------------------------------------------------
Net asset value, end of
year $11.17 $12.73 $12.44 $11.98 $9.60
------------------------------------------------------------------------------
Total return (%) (c) (1.90) 4.29 8.83 25.97 1.39**(b)
Ratios to average net assets and supplemental data
------------------------------------------------------------------------------
Net assets, end of period
($ in thousands) 9,964 14,034 10,697 5,921 850
------------------------------------------------------------------------------
Ratio of expenses before
expense reductions (%) 2.59 2.50 2.39 2.61 2.27*
------------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) 2.59 2.50 2.39 2.61 2.23*
------------------------------------------------------------------------------
Ratio of net investment
income (loss) (%) 1.09 1.43 1.35 1.26 1.65*
------------------------------------------------------------------------------
Portfolio turnover rate
(%) 61 64 37 126 87*
------------------------------------------------------------------------------
26
<PAGE>
Kemper Horizon 5 Portfolio
Class A
------------------------------------------------------------------------------
From
December 29,
1995
Year ended July 31, to July
----------------------------------- 31,
2000 1999 1998 1997 1996
------------------------------------------------------------------------------
Per share operating performance
------------------------------------------------------------------------------
Net asset value,
beginning of year $11.31 $11.26 $11.06 $9.57 $9.50
------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income
(loss) .33(a) .38(a) .35 .34 .25(a)
------------------------------------------------------------------------------
Net realized and
unrealized gain (loss)
on investment
transactions (.30) .17 .47 1.45 (.07)
------------------------------------------------------------------------------
Total from net investment
income (.03) .55 .82 1.79 .18
------------------------------------------------------------------------------
Less distributions from:
Net investment income (.34) (.38) (.35) (.30) (.11)
------------------------------------------------------------------------------
Net realized gain on
investment transactions (.40) (.12) (.27) -- --
------------------------------------------------------------------------------
Total distributions (.74) (.50) (.62) (.30) (.11)
------------------------------------------------------------------------------
Net asset value, end of
year $10.60 $11.31 $11.26 $11.06 $9.57
------------------------------------------------------------------------------
Total return (%) (c) .37 4.94 7.74 19.02 1.84**(b)
Ratios to average net assets and supplemental data
------------------------------------------------------------------------------
Net assets, end of period 39,098 29,714 26,449 11,832 4,411
($ in thousands)
------------------------------------------------------------------------------
Ratio of expenses before
expense reductions (%) 1.59 1.54 1.64 1.51 1.53*
------------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) 1.58 1.54 1.64 1.51 1.48*
------------------------------------------------------------------------------
Ratio of net investment
income (loss) (%) 3.00 3.34 3.28 3.30 3.20*
------------------------------------------------------------------------------
Portfolio turnover rate
(%) 72 58 43 150 57*
------------------------------------------------------------------------------
27
<PAGE>
Kemper Horizon 5 Portfolio
Class B
------------------------------------------------------------------------------
From
December 29,
1995
Year ended July 31, to July
----------------------------------- 31,
2000 1999 1998 1997 1996
------------------------------------------------------------------------------
Per share operating performance
------------------------------------------------------------------------------
Net asset value,
beginning of year $11.31 $11.28 $11.06 $9.57 $9.50
------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income
(loss) .24(a) .30(a) .30 .27 .21(a)
------------------------------------------------------------------------------
Net realized and
unrealized gain (loss)
on investment
transactions (.29) .16 .47 1.44 (.07)
------------------------------------------------------------------------------
Total from net investment
income (.05) .46 .77 1.71 .14
------------------------------------------------------------------------------
Less distributions from:
Net investment income (.27) (.31) (.28) (.22) (.07)
------------------------------------------------------------------------------
Net realized gain on
investment transactions (.40) (.12) (.27) -- --
------------------------------------------------------------------------------
Total distributions (.67) (.43) (.55) (.22) (.07)
------------------------------------------------------------------------------
Net asset value, end of
year $10.59 $11.31 $11.28 $11.06 $9.57
------------------------------------------------------------------------------
Total return (%) (c) (.49) 4.24 7.27 18.15 1.44**(b)
Ratios to average net assets and supplemental data
------------------------------------------------------------------------------
Net assets, end of period 18,643 24,454 23,669 15,632 5,705
($ in thousands)
------------------------------------------------------------------------------
Ratio of expenses before
expense reductions (%) 2.34 2.20 2.17 2.15 2.31*
------------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) 2.33 2.20 2.17 2.15 2.26*
------------------------------------------------------------------------------
Ratio of net investment
income (loss) (%) 2.23 2.68 2.75 2.66 2.42*
------------------------------------------------------------------------------
Portfolio turnover rate
(%) 72 58 43 150 57*
------------------------------------------------------------------------------
28
<PAGE>
Kemper Horizon 5 Portfolio
Class C
------------------------------------------------------------------------------
From
December 29,
1995
Year ended July 31, to July
----------------------------------- 31,
2000 1999 1998 1997 1996
------------------------------------------------------------------------------
Per share operating performance
------------------------------------------------------------------------------
Net asset value,
beginning of year $11.30 $11.27 $11.07 $9.57 $9.50
------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income
(loss) .23(a) .28(a) .28 .28 .21(a)
------------------------------------------------------------------------------
Net realized and
unrealized gain (loss)
on investment
transactions (.30) .18 .47 1.43 (.07)
------------------------------------------------------------------------------
Total from net investment
income (.07) .46 .75 1.71 .14
------------------------------------------------------------------------------
Less distributions from:
Net investment income (.25) (.31) (.28) (.21) (.07)
------------------------------------------------------------------------------
Net realized gain on
investment transactions (.40) (.12) (.27) -- --
------------------------------------------------------------------------------
Total distributions (.65) (.43) (.55) (.21) (.07)
------------------------------------------------------------------------------
Net asset value, end of
period $10.58 $11.30 $11.27 $11.07 $9.57
------------------------------------------------------------------------------
Total return (%) (c) (.63) 4.20 7.10 18.13 1.45**(b)
Ratios to average net assets and supplemental data
------------------------------------------------------------------------------
Net assets, end of period 4,486 5,620 5,006 3,108 614
($ in thousands)
------------------------------------------------------------------------------
Ratio of expenses before
expense reductions (%) 2.49 2.39 2.18 2.16 2.28*
------------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) 2.49 2.39 2.18 2.16 2.23*
------------------------------------------------------------------------------
Ratio of net investment
income (loss) (%) 2.08 2.49 2.74 2.65 2.45*
------------------------------------------------------------------------------
Portfolio turnover rate
(%) 72 58 43 150 57*
------------------------------------------------------------------------------
(a) Based on monthly average shares outstanding during the period.
(b) Total return would have been lower had certain expenses not been
reduced.
(c) Total return does not reflect the effect of sales change.
* Annualized.
** Not Annualized.
29
<PAGE>
Investing In The Funds
The following pages tell you about many of the services, choices and benefits of
being a Kemper Funds shareholder. You'll also find information on how to check
the status of your account using the method that's most convenient for you.
You can find out more about the topics covered here by speaking with your
financial representative or a representative of your workplace retirement plan
or other investment provider.
<PAGE>
Choosing A Share Class
In this prospectus, there are three share classes for each fund. Each class has
its own fees and expenses, offering you a choice of cost structures.
Before you invest, take a moment to look over the characteristics of each share
class, so that you can be sure to choose the class that's right for you. You may
want to ask your financial representative to help you with this decision.
We describe each share class in detail on the following pages. But first, you
may want to look at the table below, which gives you a brief comparison of the
main features of each class.
------------------------------------------------------------------------------
Classes and features Points to help you compare
------------------------------------------------------------------------------
Class A
o Sales charges of up to 5.75%, o Some investors may be able to
charged when you buy shares reduce or eliminate their sales
charges; see next page
o In most cases, no charges when you
sell shares o Total annual operating expenses
are lower than those for Class B
o No distribution fee or Class C
------------------------------------------------------------------------------
Class B
o No charges when you buy shares o The deferred sales charge rate
falls to zero after six years
o Deferred sales charge of up to
4.00%, charged when you sell shares o Shares automatically convert to
you bought within the last six years Class A after six years, which
means lower annual expenses going
o 0.75% distribution fee forward
------------------------------------------------------------------------------
Class C
o No charges when you buy shares o The deferred sales charge rate is
lower, but your shares never
o Deferred sales charge of 1.00%, convert to Class A, so annual
charged when you sell shares you expenses remain higher
bought within the last year
o 0.75% distribution fee
------------------------------------------------------------------------------
31
<PAGE>
Class A shares
Class A shares have a sales charge that varies with the
amount you invest:
Your investment Sales charge Sales charge
as a % of as a % of your
offering price net investment*
---------------------------------------------------------
Up to $50,000 5.75% 6.10%
---------------------------------------------------------
$50,000-$99,999 4.50 4.71
---------------------------------------------------------
$100,000-$249,999 3.50 3.63
---------------------------------------------------------
$250,000-$499,999 2.60 2.67
---------------------------------------------------------
$500,000-$999,999 2.00 2.04
---------------------------------------------------------
$1 million or more See below and next page
---------------------------------------------------------
* Rounded to the nearest one-hundredth percent.
The offering price includes the sales charge.
You may be able to lower your Class A sales charges if:
o you plan to invest at least $50,000 over the next 24 months ("letter of
intent")
o the amount of Kemper shares you already own (including shares in
certain other Kemper funds) plus the amount you're investing now is at
least $50,000 ("cumulative discount")
o you are investing a total of $50,000 or more in several Kemper funds at
once ("combined purchases")
The point of these three features is to let you count investments made at other
times for purposes of calculating your present sales charge. Any time you can
use the privileges to "move" your investment into a lower sales charge category
in the table above, it's generally beneficial for you to do so. You can take
advantage of these methods by filling in the appropriate sections of your
application or by speaking with your financial representative.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
Class A shares may make sense for long-term investors, especially those who are
eligible for reduced or eliminated sales charges.
32
<PAGE>
You may be able to buy Class A shares without sales charges when you are:
o reinvesting dividends or distributions
o investing through certain workplace retirement plans
o participating in an investment advisory program under which you pay a
fee to an investment advisor or other firm for portfolio management
services
There are a number of additional provisions that apply in order to be eligible
for a sales charge waiver. The fund may waive the sales charges for investors in
other situations as well. Your financial representative or Kemper can answer
your questions and help you determine if you are eligible.
If you're investing $1 million or more, either as a lump sum or through one of
the sales charge reduction features described on the previous page, you may be
eligible to buy Class A shares without sales charges. However, you may be
charged a contingent deferred sales charge (CDSC) of 1.00% on any shares you
sell within the first year of owning them, and a similar charge of 0.50% on
shares you sell within the second year of owning them ("Large Order NAV Purchase
Privilege"). This CDSC is waived under certain circumstances (see "Policies You
Should Know About"). Your financial representative or Kemper can answer your
questions and help you determine if you're eligible.
33
<PAGE>
Class B shares
With Class B shares, you pay no up-front sales charges to the fund. Class B
shares do have a 12b-1 plan, under which a distribution fee of 0.75% is deducted
from fund assets each year. This means the annual expenses for Class B shares
are somewhat higher (and their performance correspondingly lower) compared to
Class A shares, which don't have a 12b-1 fee. After six years, Class B shares
automatically convert to Class A, which has the net effect of lowering the
annual expenses from the seventh year on.
Class B shares have a contingent deferred sales charge (CDSC). This charge
declines over the years you own shares, and disappears completely after six
years of ownership. But for any shares you sell within those six years, you may
be charged as follows:
Year after you bought shares CDSC on shares you sell
-----------------------------------------------------------
First year 4.00%
-----------------------------------------------------------
Second or third year 3.00
-----------------------------------------------------------
Fourth or fifth year 2.00
-----------------------------------------------------------
Sixth year 1.00
-----------------------------------------------------------
Seventh year and later None (automatic conversion
to Class A)
-----------------------------------------------------------
This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Kemper can answer your questions and
help you determine if you're eligible.
While Class B shares don't have any front-end sales charges, their higher annual
expenses (due to 12b-1 fees) mean that over the years you could end up paying
more than the equivalent of the maximum allowable front-end sales charge.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
Class B shares can make sense for long-term investors who would prefer to see
all of their investment go to work right away, and can accept somewhat higher
annual expenses in exchange.
34
<PAGE>
Class C shares
Like Class B shares, Class C shares have no up-front sales charges and have a
12b-1 plan under which a distribution fee of 0.75% is deducted from fund assets
each year. Because of this fee, the annual expenses for Class C shares are
similar to those of Class B shares, but higher than those for Class A shares
(and the performance of Class C shares is correspondingly lower than that of
Class A).
Unlike Class B shares, Class C shares do NOT automatically convert to Class A
after six years, so they continue to have higher annual expenses.
Class C shares have a contingent deferred sales charge (CDSC), but only on
shares you sell within one year of buying them:
Year after you bought shares CDSC on shares you sell
-------------------------------------------------------
First year 1.00%
-------------------------------------------------------
Second year and later None
-------------------------------------------------------
This CDSC is waived under certain circumstances (see "Policies You Should Know
About"). Your financial representative or Kemper can answer your questions and
help you determine if you're eligible.
While Class C shares don't have any front-end sales charges, their higher annual
expenses (due to 12b-1 fees) mean that over the years you could end up paying
more than the equivalent of the maximum allowable front-end sales charge.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
Class C shares may appeal to investors who plan to sell some or all shares
within six years of buying them, or who aren't certain of their investment time
horizon.
35
<PAGE>
How To Buy Shares
Once you've chosen a share class, use these instructions to make investments.
Make out any checks to "Kemper Funds."
------------------------------------------------------------------------------
First investment Additional investments
------------------------------------------------------------------------------
$1,000 or more for regular accounts $100 or more for regular accounts
$250 or more for IRAs $50 or more for IRAs
$50 or more with an Automatic $50 or more with an Automatic
Investment Plan Investment Plan
------------------------------------------------------------------------------
Through a financial representative
o Contact your representative using o Contact your representative using
the method that's most convenient the method that's most convenient
for you for you
------------------------------------------------------------------------------
By mail or express mail (see below)
o Fill out and sign an application o Send a check and a Kemper
investment slip to us at the
o Send it to us at the appropriate appropriate address below
address, along with an investment
check o If you don't have an investment
slip, simply include a letter
with your name, account number,
the full name of the fund and the
share class and your investment
instructions
------------------------------------------------------------------------------
By wire
o Call (800) 621-1048 for instructions o Call (800) 621-1048 for
instructions
------------------------------------------------------------------------------
By phone
-- o Call (800) 621-1048 for
instructions
------------------------------------------------------------------------------
With an automatic investment plan
-- o To set up regular investments,
call (800) 621-1048
------------------------------------------------------------------------------
On the Internet
o Follow the instructions at o Follow the instructions at
www.kemper.com www.kemper.com
------------------------------------------------------------------------------
Regular mail: Kemper Funds, PO Box 219415, Kansas City, MO 64121-9415
Express, registered, or certified mail:
Kemper Service Company, 811 Main Street, Kansas City, MO 64105-2005
Fax number: (800) 818-7526 (for exchanging and selling only)
36
<PAGE>
How To Exchange Or Sell Shares
Use these instructions to exchange or sell shares in your account.
------------------------------------------------------------------------------
Exchanging into another fund Selling shares
------------------------------------------------------------------------------
$1,000 or more to open a new account Some transactions, including most
for over $50,000, can only be
$100 or more for exchanges between ordered in writing with a signature
existing accounts guarantee; if you're in doubt, see
page 40
------------------------------------------------------------------------------
Through a financial representative
o Contact your representative by the o Contact your representative by
method that's most convenient for the method that's most convenient
you for you
------------------------------------------------------------------------------
By phone or wire
o Call (800) 621-1048 for instructions o Call (800) 621-1048 for
instructions
------------------------------------------------------------------------------
By mail, express mail or fax
(see previous page)
Write a letter that includes: Write a letter that includes:
o the fund, class and account number o the fund, class and account
you're exchanging out of number from which you want to
sell shares
o the dollar amount or number of
shares you want to exchange o the dollar amount or number of
shares you want to sell
o the name and class of the fund you
want to exchange into o your name(s), signature(s) and
address, as they appear on your
o your name(s), signature(s) and account
address, as they appear on your
account o a daytime telephone number
o a daytime telephone number
------------------------------------------------------------------------------
With a systematic exchange plan With a systematic withdrawal plan
o To set up regular exchanges from a o To set up regular cash payments
Kemper fund account, call from a Kemper fund account, call
(800) 621-1048 (800) 621-1048
------------------------------------------------------------------------------
On the Internet
o Follow the instructions at o Follow the instructions at
www.kemper.com www.kemper.com
------------------------------------------------------------------------------
37
<PAGE>
Policies You Should Know About
Along with the instructions on the previous pages, the policies below may affect
you as a shareholder.
If you are investing through an investment provider, check the materials you got
from them. As a general rule, you should follow the information in those
materials wherever it contradicts the information given here. Please note that
an investment provider may charge its own fees.
In order to reduce the amount of mail you receive and to help reduce fund
expenses, we generally send a single copy of any shareholder report and
prospectus to each household. If you do not want the mailing of these documents
to be combined with those for other members of your household, please call (800)
621-1048.
Policies about transactions
The funds are open for business each day the New York Stock Exchange is open.
Each fund calculates its share price every business day, as of the close of
regular trading on the Exchange (typically 3 p.m. Central time, but sometimes
earlier, as in the case of scheduled half-day trading or unscheduled suspensions
of trading).
You can place an order to buy or sell shares at any time. Once your order is
received by Kemper Service Company, and they have determined that it is a "good
order," it will be processed at the next share price calculated.
Because orders placed through investment providers must be forwarded to Kemper
Service Company before they can be processed, you'll need to allow extra time. A
representative of your investment provider should be able to tell you when your
order will be processed.
38
<PAGE>
KemperACCESS, the Kemper Automated Information Line, is available 24 hours a day
by calling (800) 972-3060. You can use Kemper ACCESS to get information on
Kemper funds generally and on accounts held directly at Kemper. You can also use
it to make exchanges and sell shares.
EXPRESS-Transfer lets you set up a link between a Kemper account and a bank
account. Once this link is in place, you can move money between the two with a
phone call. You'll need to make sure your bank has Automated Clearing House
(ACH) services. Transactions take two to three days to be completed, and there
is a $100 minimum. To set up EXPRESS-Transfer on a new account, see the account
application; to add it to an existing account, call (800) 621-1048.
Share certificates are available on written request. However, we don't recommend
them unless you want them for a specific purpose, because they can only be sold
by mailing them in, and if they're ever lost they're difficult and expensive to
replace.
When you sell shares by phone or over the Internet, we may record the call, ask
you for certain information or take other steps designed to prevent fraudulent
orders. It's important to understand that, with respect to certain
pre-authorized transactions, as long as we take reasonable steps to ensure that
an order appears genuine, we are not responsible for any losses that may occur.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
The Kemper Web site can be a valuable resource for shareholders with Internet
access. Go to www. kemper.com to get up-to-date information, review balances or
even place orders for exchanges.
39
<PAGE>
When you ask us to send or receive a wire, please note that while we don't
charge a fee to send or receive wires, it's possible that your bank may do so.
Wire transactions are completed within 24 hours. The funds can only send or
accept wires of $1,000 or more.
Exchanges among Kemper funds are an option for most shareholders. Exchanges are
a shareholder privilege, not a right: we may reject any exchange order,
particularly when there appears to be a pattern of "market timing" or other
frequent purchases and sales. We may also reject or limit purchase orders, for
these or other reasons.
When you want to sell more than $50,000 worth of shares, or send the proceeds to
a third party or to a new address, you'll usually need to place your order in
writing and include a signature guarantee. The only exception is if you want
money wired to a bank account that is already on file with us; in that case, you
don't need a signature guarantee. Also, you don't need a signature guarantee for
an exchange, although we may require one in certain other circumstances.
A signature guarantee is simply a certification of your signature -- a valuable
safeguard against fraud. You can get a signature guarantee from most brokers,
banks, savings institutions and credit unions. Note that you can't get a
signature guarantee from a notary public.
When you sell shares that have a contingent deferred sales charge (CDSC), we
calculate the CDSC as a percentage of what you paid for the shares or what you
are selling them for -- whichever results in the lowest charge to you. In
processing orders to sell shares, we turn to the shares with the lowest CDSC
first. Exchanges from one Kemper fund into another don't affect CDSCs: for each
investment you make, the date you first bought Kemper shares is the date we use
to calculate a CDSC on that particular investment.
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
If you ever have difficulty placing an order by phone or fax, you can always
send us your order in writing.
40
<PAGE>
There are certain cases in which you may be exempt from a CDSC. These include:
o the death or disability of an account owner (including a joint owner)
o withdrawals made through a systematic withdrawal plan
o withdrawals related to certain retirement or benefit plans
o redemptions for certain loan advances, hardship provisions or returns
of excess contributions from retirement plans
In each of these cases, there are a number of additional provisions that apply
in order to be eligible for a CDSC waiver. Your financial representative or
Kemper can answer your questions and help you determine if you are eligible.
If you sell shares in a Kemper fund and then decide to invest with Kemper again
within six months, you can take advantage of the "reinstatement feature." With
this feature, you can put your money back into the same class of a Kemper fund
at its current NAV and for purposes of sales charges it will be treated as if it
had never left Kemper. You'll be reimbursed (in the form of fund shares) for any
CDSC you paid when you sold. Future CDSC calculations will be based on your
original investment date, rather than your reinstatement date. There is also an
option that lets investors who sold Class B shares buy Class A shares with no
sales charge, although they won't be reimbursed for any CDSC they paid. You can
only use the reinstatement feature once for any given group of shares. To take
advantage of this feature, contact Kemper or your financial representative.
41
<PAGE>
Money from shares you sell is normally sent out within one business day of when
your order is processed (not when it is received), although it could be delayed
for up to seven days. There are also two circumstances when it could be longer:
when you are selling shares you bought recently by check and that check hasn't
cleared yet (maximum delay: 10 days) or when unusual circumstances prompt the
SEC to allow further delays. Certain expedited redemption processes may also be
delayed when you are selling recently purchased shares.
How the funds calculate share price
The price at which you buy shares is as follows:
Class A shares -- net asset value per share, or NAV, adjusted to allow for any
applicable sales charges (see "Choosing A Share Class")
Class B and Class C shares-- net asset value per share, or NAV
To calculate NAV, each share class of each fund uses the following equation:
TOTAL ASSETS - TOTAL LIABILITIES
------------------------------------- = NAV
TOTAL NUMBER OF SHARES OUTSTANDING
For each fund and share class in this prospectus, the price at which you sell
shares is also the NAV, although for Class B and Class C investors a contingent
deferred sales charge may be taken out of the proceeds (see "Choosing A Share
Class").
We typically use market prices to value securities. However, when a market price
isn't available, or when we have reason to believe it doesn't represent market
realities, we may use fair value methods approved by a fund's Board. In such a
case, the fund's value for a security is likely to be different from quoted
market prices.
42
<PAGE>
Other rights we reserve
For each fund in this prospectus, you should be aware that we may do any of the
following:
o withhold 31% of your distributions as federal income tax if we have
been notified by the IRS that you are subject to backup withholding, or
if you fail to provide us with a correct taxpayer ID number or
certification that you are exempt from backup withholding
o reject a new account application if you don't provide a correct Social
Security or other tax ID number; if the account has already been
opened, we may give you 30 days' notice to provide the correct number
o charge you $9 each calendar quarter if your account balance is below
$1,000 for the entire quarter; this policy doesn't apply to most
retirement accounts or if you have an automatic investment plan
o pay you for shares you sell by "redeeming in kind," that is, by giving
you marketable securities (which typically will involve brokerage costs
for you to liquidate) rather than cash; in most cases, a fund won't
make a redemption in kind unless your requests over a 90-day period
total more than $250,000 or 1% of the fund's assets, whichever is less
o change, add or withdraw various services, fees and account policies
(for example, we may change or terminate the exchange privilege at any
time)
43
<PAGE>
Understanding Distributions And Taxes
By law, a mutual fund is required to pass through to its shareholders virtually
all of its net earnings. A fund can earn money in two ways: by receiving
interest, dividends or other income from securities it holds, and by selling
securities for more than it paid for them. (A fund's earnings are separate from
any gains or losses stemming from your own purchase of shares.) A fund may not
always pay a distribution for a given period.
Each fund intends to pay dividends and distributions to its shareholders in
November or December, and if necessary may do so at other times as needed.
You can choose how to receive your dividends and distributions. You can have
them all automatically reinvested in fund shares or all sent to you by check.
Tell us your preference on your application. If you don't indicate a preference,
your dividends and distributions will all be reinvested. For retirement plans,
reinvestment is the only option.
Buying and selling fund shares will usually have tax consequences for you
(except in an IRA or other tax-advantaged account). Your sales of shares may
result in a capital gain or loss for you; whether long-term or short-term
depends on how long you owned the shares. For tax purposes, an exchange is the
same as a sale.
The tax status of the fund earnings you receive, and your own fund transactions,
generally depends on their type:
Generally taxed at ordinary income rates
-----------------------------------------------------------
o short-term capital gains from selling fund shares
-----------------------------------------------------------
o taxable income dividends you receive from a fund
-----------------------------------------------------------
o short-term capital gains distributions you receive from
a fund
-----------------------------------------------------------
Generally taxed at capital gains rates
-----------------------------------------------------------
o long-term capital gains from selling fund shares
-----------------------------------------------------------
o long-term capital gains distributions you receive from
a fund
-----------------------------------------------------------
THE FOLLOWING SIDEBAR TEXT APPEARS NEXT TO THE PRECEDING PARAGRAPHS.
--------------------------------------------------------------------------------
Because each shareholder's tax situation is unique, it's always a good idea to
ask your tax professional about the tax consequences of your investments,
including any state and local tax consequences
44
<PAGE>
You may be able to claim a tax credit or deduction for your share of any foreign
taxes your fund pays.
Your fund will send you detailed tax information every January. These statements
tell you the amount and the tax category of any dividends or distributions you
received. They also have certain details on your purchases and sales of shares.
The tax status of dividends and distributions is the same whether you reinvest
them or not. Dividends or distributions declared in the last quarter of a given
year are taxed in that year, even though you may not receive the money until the
following January.
If you invest right before a fund pays a dividend, you'll be getting some of
your investment back as a taxable dividend. You can avoid this, if you want, by
investing after the fund declares a dividend. In tax-advantaged retirement
accounts you don't need to worry about this.
Corporations may be able to take a dividends-received deduction for a portion of
income dividends they receive.
45
<PAGE>
To Get More Information
Shareholder reports -- These include commentary from each fund's management team
about recent market conditions and the effects of a fund's strategies on its
performance. For each fund, they also have detailed performance figures, a list
of everything the fund owns, and the fund's financial statements. Shareholders
get these reports automatically. For more copies, call (800) 621-1048.
Statement of Additional Information (SAI) -- This tells you more about each
fund's features and policies, including additional risk information. The SAI is
incorporated by reference into this document (meaning that it's legally part of
this prospectus).
If you'd like to ask for copies of these documents, or if you're a shareholder
and have questions, please contact Kemper or the SEC (see below). Materials you
get from Kemper are free; those from the SEC involve a copying fee. If you like,
you can look over these materials in person at the SEC's Public Reference Room
in Washington, DC. or request them electronically at [email protected].
SEC
450 Fifth Street, N.W.
Washington, DC 20549-0102
www.sec.gov
Tel (202) 942-8090
Kemper Funds
222 South Riverside Plaza
Chicago, IL 60606-5808
www.kemper.com
Tel (800) 621-1048
--------------------------------------------------------------------------------
SEC File Numbers
Kemper Horizon 20+ Portfolio 811-7365
Kemper Horizon 10+ Portfolio 811-7365
Kemper Horizon 5 Portfolio 811-7365
Principal Underwriter
Kemper Distributors, Inc.
222 South Riverside Plaza Chicago, IL 60606-5808
www.kemper.com E-mail [email protected]
Tel (800) 621-1048
[LOGO] KEMPER FUNDS
Long-term investing in a short-term world(SM)
<PAGE>
KEMPER HORIZON FUNDS
SUPPLEMENT TO PROSPECTUS
DATED DECEMBER 1, 2000
------------------------------------
CLASS I SHARES
------------------------------------
KEMPER HORIZON 20+ PORTFOLIO
KEMPER HORIZON 10+ PORTFOLIO
KEMPER HORIZON 5 PORTFOLIO
------------------------------------
The above funds currently offer four classes of shares to provide investors with
different purchasing options. These are Class A, Class B and Class C shares,
which are described in the funds' prospectus, and Class I shares, which are
described in the prospectus as supplemented hereby. When placing purchase
orders, investors must specify whether the order is for Class A, Class B, Class
C or Class I shares.
Class I shares are available for purchase exclusively by the following
categories of institutional investors: (1) tax-exempt retirement plans (Profit
Sharing, 401(k), Money Purchase Pension and Defined Benefit Plans) of Scudder
Kemper Investments, Inc. ("Scudder Kemper") and its affiliates and rollover
accounts from those plans; (2) the following investment advisory clients of
Scudder Kemper and its investment advisory affiliates that invest at least $1
million in a fund: unaffiliated benefit plans, such as qualified retirement
plans (other than individual retirement accounts and self-directed retirement
plans); unaffiliated banks and insurance companies purchasing for their own
accounts; and endowment funds of unaffiliated non-profit organizations; (3)
investment-only accounts for large qualified plans, with at least $50 million in
total plan assets or at least 1000 participants; (4) trust and fiduciary
accounts of trust companies and bank trust departments providing fee-based
advisory services that invest at least $1 million in a Fund on behalf of each
trust; (5) policy holders under Zurich-American Insurance Group's collateral
investment program investing at least $200,000 in a Fund; and (6) investment
companies managed by Scudder Kemper that invest primarily in other investment
companies.
Class I shares currently are available for purchase only from Kemper
Distributors, Inc. ("KDI"), principal underwriter for the funds, and, in the
case of category 4 above, selected dealers authorized by KDI. Share certificates
are not available for Class I shares.
1
<PAGE>
The following information supplements the indicated sections of the prospectus.
PERFORMANCE
The following table shows how the funds' Class I Shares' returns over different
periods average out. For context, the table has two broad-based market indices
(which, unlike the fund, have no fees or expenses). All figures in this section
assume reinvestment of dividends and distributions. As always, past performance
is no guarantee of future results.
Average Annual Total Returns -- Class I Shares (as of 12/31/1999)
Since 12/31/98 Since April 8, 1996
1 Year Life of Class
------ -------------
Kemper Horizon 20+
Portfolio 7.24% 13.07%
Kemper Horizon 10+
Portfolio 6.04 11.90
Kemper Horizon 5 Portfolio 4.82 9.33
Index 1 21.03 26.60*
Index 2 -2.15 5.88*
* Since 3/31/96
Index 1: Standard and Poor's 500 Composite Stock Price Index (S&P 500), an
unmanaged capitalization-weighted index that includes 500 large-cap U.S. stocks.
Index 2: Lehman Brothers Government/Corporate Bond Index, an unmanaged index
comprised of intermediate and long-term government and investment-grade
corporate debt securities.
In the table total returns for 1996 would have been lower if operating expenses
hadn't been reduced.
2
<PAGE>
HOW MUCH INVESTORS PAY
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
Shareholder fees: Fees paid directly from your investment.
Maximum
Sales Maximum
Charge Deferred
(Load) Sales Maximum Redemption
Imposed on Charge Sales Charge Fee (as %
Purchases (Load) on of amount
(as % of (as % of Reinvested redeemed,
offering redemption Dividends/ if Exchange
price) proceeds) Distributions applicable) Fee
------ --------- ------------- ----------- ---
Kemper Horizon
20+ Portfolio None None None None None
Kemper Horizon
10+ Portfolio None None None None None
Kemper Horizon
5 Portfolio None None None None None
Annual fund operating expenses: Expenses that are deducted from fund assets.
Investment Distribution Other Total annual fund
management fee (12b-1) fees expenses* operating expenses
-------------- ------------ --------- ------------------
Kemper
Horizon 20+
Portfolio 0.58% None 0.50% 1.08%
Kemper
Horizon 10+
Portfolio 0.58% None 0.50% 1.08%
Kemper
Horizon 5
Portfolio 0.58% None 0.74% 1.32%
* "Other Expenses" are restated to reflect current shareholder servicing fees.
3
<PAGE>
Example
Based on the figures above, this example is designed to help you compare the
expenses of a fund to those of other funds. The example assumes operating
expenses remain the same and that you invested $10,000, earned 5% annual returns
and reinvested all dividends and distributions. This is only an example; actual
expenses will be different.
Fees and expenses if you sold shares after:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Kemper
Horizon 20+
Portfolio $110 $343 $595 $1,317
Kemper
Horizon 10+
Portfolio $110 $343 $595 $1,317
Kemper
Horizon 5
Portfolio $134 $418 $723 $1,590
4
<PAGE>
FINANCIAL HIGHLIGHTS
Kemper Horizon 20+ Portfolio
----------------------------------------------------------------------------
From
Year ended July 31, April 6, 1996
------------------------------ to July 31,
2000 1999 1998 1997 1996
----------------------------------------------------------------------------
Per share operating performance
----------------------------------------------------------------------------
Net asset value,
beginning of year $14.16 $13.62 $12.96 $9.73 $10.03
----------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income
(loss) .16(a) .27(a) .17 .19 .07
----------------------------------------------------------------------------
Net realized and
unrealized gain (loss)
on investment
transactions (.60) .46 1.09 3.17 (.37)
----------------------------------------------------------------------------
Total from net investment
income (.44) .73 1.26 3.36 (.30)
----------------------------------------------------------------------------
Less distributions from:
Net investment income (.28) (.17) (.12) (.13) --
----------------------------------------------------------------------------
Net realized gain on
investment transactions (1.14) (.02) (.48) -- --
----------------------------------------------------------------------------
Total distributions (1.42) (.19) (.60) (.13) --
----------------------------------------------------------------------------
Net asset value, end of
year $12.30 $14.16 $13.62 $12.96 $9.73
----------------------------------------------------------------------------
Total return (%) (.3.47) 5.43 10.29 34.84 2.99**(b)
Ratios to average net assets and supplemental data
----------------------------------------------------------------------------
Net assets, end of period
($ in thousands) 382 1,312 1,237 870 949
----------------------------------------------------------------------------
Ratio of expenses before
expense reductions (%) 1.09 .84 .85 1.04 79*
----------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) 1.08 .84 .85 1.04 .73*
----------------------------------------------------------------------------
Ratio of net investment
income (loss) (%) 1.23 2.01 1.64 1.73 2.32*
----------------------------------------------------------------------------
Portfolio turnover rate(%) 72 72 44 130 122*
----------------------------------------------------------------------------
(a) Based on monthly average shares outstanding during the period.
(b) Total return would have been lower had certain expenses not been reduced.
* Annualized.
** Not annualized.
5
<PAGE>
Kemper Horizon 10+ Portfolio
----------------------------------------------------------------------------
From
Year ended July 31, April 8, 1996
------------------------------ to July 31,
2000 1999 1998 1997 1996
----------------------------------------------------------------------------
Per share operating performance
----------------------------------------------------------------------------
Net asset value,
beginning of year $12.76 $12.46 $11.97 $9.57 $9.83
----------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income
(loss) .31(a) .36(a) .35 .26 .09(a)
----------------------------------------------------------------------------
Net realized and
unrealized gain (loss)
on investment
transactions (.35) .36 .84 2.40 (.26)
----------------------------------------------------------------------------
Total from net investment
income (.04) .72 1.19 2.66 (.17)
----------------------------------------------------------------------------
Less distributions from:
Net investment income (.38) (.31) (.29) (.26) (.09)
----------------------------------------------------------------------------
Net realized gain on
investment transactions (1.13) (.11) (.41) -- --
----------------------------------------------------------------------------
Total distributions (1.51) (.42) (.70) (.26) (.09)
----------------------------------------------------------------------------
Net asset value, end of
year $11.21 $12.76 $12.46 $11.97 $9.57
----------------------------------------------------------------------------
Total return (%) (.46) 5.86 10.47 28.09 (1.74)**(b)
Ratios to average net assets and supplemental data
----------------------------------------------------------------------------
Net assets, end of period
($ in thousands) 121 177 367 401 102
----------------------------------------------------------------------------
Ratio of expenses before
expense reductions (%) 1.09 1.07 .99 1.06 .77*
----------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) 1.08 1.07 .99 1.06 .73*
----------------------------------------------------------------------------
Ratio of net investment
income (loss) (%) 2.56 3.10 2.75 2.81 3.21*
----------------------------------------------------------------------------
Portfolio turnover rate (%) 61 64 37 126 87*
----------------------------------------------------------------------------
(a) Based on monthly average shares outstanding during the period.
(b) Total return would have been lower had certain expenses not been reduced.
* Annualized.
** Not annualized.
6
<PAGE>
Kemper Horizon 5 Portfolio
----------------------------------------------------------------------------
From
Year ended July 31, April 8, 1996
------------------------------ to July 31,
2000 1999 1998 1997 1996
----------------------------------------------------------------------------
Per share operating performance
----------------------------------------------------------------------------
Net asset value, $11.31 $11.28 $11.06 $9.58 $9.69
beginning of year
----------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income
(loss) .35(a) .41(a) .41 .32 .08(a)
----------------------------------------------------------------------------
Net realized and
unrealized gain (loss)
on investment
transactions (.28) .18 .47 1.49 (.11)
----------------------------------------------------------------------------
Total from net investment
income .07 .59 .88 1.81 (.03)
----------------------------------------------------------------------------
Less distributions from: (.39) (.44) (.39) (.33) (.08)
Net investment income
----------------------------------------------------------------------------
Net realized gain on (.40) (.12) (.27) -- --
investment transactions
----------------------------------------------------------------------------
Total distributions (.79) (.56) (.66) (.33) (.08)
----------------------------------------------------------------------------
Net asset value, end of
period $10.59 $11.31 $11.28 $11.06 $9.58
----------------------------------------------------------------------------
Total return (%) .61 5.47 8.29 19.27 (.31)**(b)
Ratios to average net assets and supplemental data
----------------------------------------------------------------------------
Net assets, end of period
($ in thousands) 164 165 211 128 101
----------------------------------------------------------------------------
Ratio of expenses before
expense reductions (%) 1.32 1.13 1.03 1.20 .78*
----------------------------------------------------------------------------
Ratio of expenses after
expense reductions (%) 1.32 1.13 1.03 1.20 .73*
----------------------------------------------------------------------------
Ratio of net investment
income (loss) (%) 3.26 3.75 3.89 3.61 4.11*
----------------------------------------------------------------------------
Portfolio turnover rate (%) 72 58 43 150 57*
----------------------------------------------------------------------------
(a) Based on monthly average shares outstanding during the period.
(b) Total return would have been lower had certain expenses not been reduced.
* Annualized.
** Not annualized.
7
<PAGE>
SPECIAL FEATURES
Shareholders of a Fund's Class I shares may exchange their shares for (i) shares
of Zurich Money Funds -- Zurich Money Market Fund if the shareholders of Class I
shares have purchased shares because they are participants in tax-exempt
retirement plans of Scudder Kemper and its affiliates and (ii) Class I shares of
any other "Kemper Mutual Fund" listed in the prospectus. Conversely,
shareholders of Zurich Money Funds -- Zurich Money Market Fund who have
purchased shares because they are participants in tax-exempt retirement plans of
Scudder Kemper and its affiliates may exchange their shares for Class I shares
of "Kemper Mutual Funds" to the extent that they are available through their
plan. Exchanges will be made at the relative net asset values of the shares.
Exchanges are subject to the limitations set forth in the prospectus.
As a result of the relatively lower expenses for Class I shares, the level of
income dividends per share (as a percentage of net asset value) and, therefore,
the overall investment return, typically will be higher for Class I shares than
for Class A, Class B and Class C shares.
December 1, 2000
<PAGE>
Supplement to the currently effective Prospectus of each of the listed funds:
<TABLE>
<S> <C>
Kemper Asian Growth Fund Kemper Income and Capital Preservation Fund
Classic Growth Fund (Classes A, B and C only) Kemper Intermediate Municipal Bond Fund
Kemper Global Blue Chip Fund Kemper International Fund
Kemper Global Income Fund Kemper Municipal Bond Fund
Kemper High Yield Opportunity Fund Kemper Ohio Tax-Free Income Fund
Kemper High Yield Fund II Kemper Short-Term U.S. Government Fund
Kemper Horizon 20+ Portfolio Kemper U.S. Growth and Income Fund
Kemper Horizon 10+ Portfolio Kemper U.S. Mortgage Fund
Kemper Horizon 5 Portfolio Value Fund (Classes A, B and C only)
</TABLE>
The applicable Board of each of the above-mentioned funds (identified in the
table below under the heading "Acquired Fund") recently approved an Agreement
and Plan of Reorganization (the "Plan") between each Fund and the corresponding
Acquiring Fund identified in the chart below. The proposed transaction is part
of Scudder Kemper's initiative to restructure and streamline the management and
operations of the funds it manages.
The Plan applicable to each Fund provides for the transfer of substantially all
of the assets and the assumption of all of the liabilities of the Fund solely in
exchange for voting shares of the corresponding Acquiring Fund. Following the
exchange, the Fund will distribute shares of the corresponding Acquiring Fund to
the Fund's shareholders as part of the Fund's cessation of operations as
provided for in the Plan. (Each transaction contemplated by a Plan is referred
to as a "Reorganization.")
Each Reorganization can be consummated only if, among other things, it is
approved by a majority vote of shareholders of the applicable Fund. A Special
Meeting (the "Meeting") of the shareholders of each Fund will be held on or
about May 15, 2001 or May 24, 2001 and shareholders will be given the
opportunity to vote on the Plan and any other matters affecting the Fund at that
time. In connection with each Meeting, the applicable Fund will deliver to its
shareholders: (i) a Proxy Statement/Prospectus describing in detail the
Reorganization and the Board's considerations in recommending that shareholders
approve the Reorganization, and (ii) a Prospectus for the Acquiring Fund.
If the Plan for a Fund is approved at the applicable Meeting and certain
conditions required by the Plan are satisfied, the Reorganization is expected to
become effective at 9:00 a.m. Eastern standard time on or about the appropriate
Proposed Reorganization Date identified in the chart below. If shareholder
approval of a Plan is delayed due to failure to obtain a quorum or otherwise,
the Reorganization will become effective as soon as practicable after the
receipt of shareholder approval.
In the event the shareholders of a Fund fail to approve the Plan for that Fund,
the Fund will continue to operate and the Fund's Board may resubmit the Plan for
shareholder approval or consider other proposals.
<TABLE>
<CAPTION>
Acquired Fund Acquiring Fund Proposed Reorganization Date
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Kemper Asian Growth Fund Scudder Pacific Opportunities Fund May 28, 2001
------------------------------------------------------------------------------------------------------------------------------------
Classic Growth Fund Scudder Capital Growth Fund June 25, 2001
------------------------------------------------------------------------------------------------------------------------------------
Kemper Global Blue Chip Fund Scudder Global Fund June 18, 2001
------------------------------------------------------------------------------------------------------------------------------------
Kemper Global Income Fund Scudder Global Bond Fund June 18, 2001
------------------------------------------------------------------------------------------------------------------------------------
Kemper High Yield Opportunity Fund Scudder High Yield Bond Fund (to be renamed June 25, 2001
Scudder High Yield Opportunity Fund)
------------------------------------------------------------------------------------------------------------------------------------
Kemper High Yield Fund II Kemper High Yield Fund May 28, 2001
------------------------------------------------------------------------------------------------------------------------------------
Kemper Horizon 20+ Portfolio Kemper Total Return Fund June 11, 2001
------------------------------------------------------------------------------------------------------------------------------------
Kemper Horizon 10+ Portfolio Kemper Total Return Fund June 11, 2001
------------------------------------------------------------------------------------------------------------------------------------
Kemper Horizon 5 Portfolio Kemper Total Return Fund June 11, 2001
------------------------------------------------------------------------------------------------------------------------------------
Kemper Income and Capital Preservation Fund Scudder Income Fund June 25, 2001
------------------------------------------------------------------------------------------------------------------------------------
Kemper Intermediate Municipal Bond Fund Scudder Medium Term Tax Free Fund June 11, 2001
------------------------------------------------------------------------------------------------------------------------------------
Kemper International Fund Scudder International Fund June 18, 2001
------------------------------------------------------------------------------------------------------------------------------------
Kemper Municipal Bond Fund Scudder Managed Municipal Bonds June 11, 2001
------------------------------------------------------------------------------------------------------------------------------------
Kemper Ohio Tax-Free Income Fund Scudder Managed Municipal Bonds June 11, 2001
------------------------------------------------------------------------------------------------------------------------------------
Kemper Short-Term U.S. Government Fund Scudder Short Term Bond Fund June 25, 2001
------------------------------------------------------------------------------------------------------------------------------------
Kemper U.S. Growth and Income Fund Scudder Growth and Income Fund June 11, 2001
------------------------------------------------------------------------------------------------------------------------------------
Kemper U.S. Mortgage Fund Kemper U.S. Government Securities Fund May 28, 2001
------------------------------------------------------------------------------------------------------------------------------------
Value Fund Scudder Large Company Value Fund June 25, 2001
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
November 30, 2000
<PAGE>
KEMPER HORIZON FUND
STATEMENT OF ADDITIONAL INFORMATION
December 1, 2000
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 December 1, 2000. The
prospectus may be obtained without charge from the Fund and is also available
along with other related materials on the Securities and Exchange Commission's
("SEC") internet web site (http://www.sec.gov).
TABLE OF CONTENTS
INVESTMENT RESTRICTIONS.....................................................2
INVESTMENT POLICIES AND TECHNIQUES..........................................4
PORTFOLIO TRANSACTIONS.....................................................19
INVESTMENT MANAGER AND UNDERWRITER.........................................20
PURCHASE AND REDEMPTION OF SHARES..........................................28
DIVIDENDS AND TAXES........................................................29
PERFORMANCE................................................................47
OFFICERS AND TRUSTEES......................................................35
SHAREHOLDER RIGHTS.........................................................52
APPENDIX -- RATINGS OF FIXED INCOME INVESTMENTS............................55
The financial statements appearing in the Fund's Annual Report to Shareholders
dated July 31, 2000 are incorporated herein by reference. The Report for the
Fund accompanies this document.
<PAGE>
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, as amended (the
"1940 Act"), 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.
Each Portfolio may not, as a fundamental policy:
(1) borrow money, except as permitted under the Investment Company
Act of 1940, as amended, (the "1940 Act") and as interpreted
or modified by regulatory authority having jurisdiction, from
time to time;
(2) issue senior securities, except as permitted under the 1940
Act, and as interpreted or modified by regulatory authority
having jurisdiction, from time to time;
(3) concentrate its investments in a particular industry, as the
term is used in the 1940 Act, and as interpreted or modified
by regulatory authority having jurisdiction, from time to
time;
(4) engage in the business of underwriting securities issued by
others, except to the extent that the Fund may be deemed to be
an underwriter in connection with the disposition of portfolio
securities;
(5) purchase or sell real estate, which does not include
securities of companies which deal in real estate or mortgages
or investments secured by real estate or interest therein,
except that the Fund reserves the freedom of action to hold
and to sell real estate acquired as a result of the Fund's
ownership of securities;
(6) purchase physical commodities or contracts relating to
physical commodities;
(7) make loans except as permitted under the 1940 Act, and as
interpreted or modified by regulatory authority having
jurisdiction, from time to time.
The following policies are non-fundamental, and may be changed or eliminated for
a Portfolio by its Board without a vote of shareholders:
(1) lend portfolio securities in an amount greater than 5% of its
total assets;
(2) enter into either of reverse repurchase agreements or dollar
rolls in an amount greater than 5% of its total assets;
(3) purchase securities on margin or make short sales, except (i)
short sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with
futures contracts, options or other permitted investments,
(iv) that transactions in futures contracts and options shall
not be deemed to constitute selling securities short, and (v)
that the Fund may obtain such short-term credits as may be
necessary for the clearance of securities transactions;
(4) purchase options, unless the aggregate premiums paid on all
such options held by a Portfolio at any time do not exceed 20%
of its total assets; or sell put options, if as a
2
<PAGE>
result, the aggregate value of the obligations underlying such
put options would exceed 50% of its total assets;
(5) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to such futures
contracts entered into on behalf of a Portfolio and the
premiums paid for such options on futures contracts does not
exceed 5% of the fair market value of a Portfolio's total
assets; provided that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount
may be excluded in computing the 5% limit;
(6) purchase warrants if as a result, such securities, taken at
the lower of cost or market value, would represent more than
5% of the value of a Portfolio's total assets (for this
purpose, warrants acquired in units or attached to securities
will be deemed to have no value);
(7) invest more than 15% of net assets in illiquid securities; and
(8) borrow money in an amount greater than 5% of its total assets,
except (i) for temporary or emergency purposes; and (ii) by
engaging in reverse repurchase agreements, dollar rolls, or
other investments or transactions described in the Fund's
registration statement which may be deemed to be borrowings.
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.
Interfund Borrowing and Lending Program. The Fund has received exemptive relief
from the SEC which permits the Fund to participate in an interfund lending
program among certain investment companies advised by the Advisor. The interfund
lending program allows the participating funds to borrow money from and loan
money to each other for temporary or emergency purposes. The program is subject
to a number of conditions designed to ensure fair and equitable treatment of all
participating funds, including the following: (1) no fund may borrow money
through the program unless it receives a more favorable interest rate than a
rate approximating the lowest interest rate at which bank loans would be
available to any of the participating funds under a loan agreement; and (2) no
fund may lend money through the program unless it receives a more favorable
return than that available from an investment in repurchase agreements and, to
the extent applicable, money market cash sweep arrangements. In addition, a fund
may participate in the program only if and to the extent that such participation
is consistent with the fund's investment objectives and policies (for instance,
money market funds would normally participate only as lenders and tax exempt
funds only as borrowers). Interfund loans and borrowings may extend overnight,
but could have a maximum duration of seven days. Loans may be called on one
day's notice. A fund may have to borrow from a bank at a higher interest rate if
an interfund loan is called or not renewed. Any delay in repayment to a lending
fund could result in a lost investment opportunity or additional costs. The
program is subject to the oversight and periodic review of the Boards of the
participating funds. To the extent the Trust is actually engaged in borrowing
through the interfund lending program, the Trust, as a matter of non-fundamental
policy, may not borrow for other than temporary or emergency purposes (and not
for leveraging).
3
<PAGE>
INVESTMENT POLICIES AND TECHNIQUES
General. Descriptions in this Statement of Additional Information of a
particular investment practice or technique in which the Fund may engage (such
as hedging, etc.) or a financial instrument which the Fund may purchase (such as
options, forward foreign currency contracts, etc.) are meant to describe the
spectrum of investments that Scudder Kemper Investments, Inc. (the "Advisor"),
in its discretion, might, but is not required to, use in managing the Fund's
portfolio assets. The Advisor may, in its discretion, at any time employ such
practice, technique, or instrument for one or more funds but not for all funds
advised by it. Furthermore, it is possible that certain types of financial
instruments or investment techniques described herein may not be available,
permissible, economically feasible or effective for their intended purposes in
all markets. Certain practices, techniques, or instruments may not be principal
activities of the Fund, but to the extent employed, could from time to time have
a material impact on the Fund's performance.
When a defensive position is deemed advisable, all or a significant portion of
each Portfolio's assets may be held temporarily in cash or defensive type
securities, such as high-grade debt securities, securities of the U.S.
Government or its agencies and high quality money market instruments, including
repurchase agreements. It is impossible to predict for how long such alternative
strategies may be utilized.
Common Stocks. Under normal circumstances, each Portfolio invests its equity
portion primarily in common stocks. Common stock is issued by companies to raise
cash for business purposes and represents a proportionate interest in the
issuing companies. Therefore, a Portfolio participates in the success or
failure of any company in which it holds stock. The market values of common
stock can fluctuate significantly, reflecting the business performance of the
issuing company, investor perception and general economic and financial market
movements. Despite the risk of price volatility, however, common stocks have
traditionally offered a greater potential for gain on investment, compared to
other classes of financial assets such as bonds or cash equivalents.
Warrants. Each Portfolio may invest in warrants up to 5% of the value of its
total assets. The holder of a warrant has the right, until the warrant expires,
to purchase a given number of shares of a particular issuer at a specified
price. Such investments can provide a greater potential for profit or loss than
an equivalent investment in the underlying security. Prices of warrants do not
necessarily move, however, in tandem with the prices of the underlying
securities and are, therefore, considered speculative investments. Warrants pay
no dividends and confer no rights other than a purchase option. Thus, if a
warrant held by a Portfolio were not exercised by the date of its expiration,
that Portfolio would lose the entire purchase price of the warrant.
Convertible Securities. Each Portfolio may invest in convertible securities,
that is, bonds, notes, debentures, preferred stocks and other securities which
are convertible into common stock. Investments in convertible securities can
provide an opportunity for capital appreciation and/or income through interest
and dividend payments by virtue of their conversion or exchange features.
The convertible securities in which a Portfolio may invest are either fixed
income or zero coupon debt securities which may be converted or exchanged at a
stated or determinable exchange ratio into underlying shares of common stock.
The exchange ratio for any particular convertible security may be adjusted from
time to time due to stock splits, dividends, spin-offs, other corporate
distributions or scheduled changes in the exchange ratio. Convertible debt
securities and convertible preferred stocks, until converted, have general
characteristics similar to both debt and equity securities. Although to a lesser
extent than with debt securities generally, the market value of convertible
securities tends to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. In addition, because of the conversion or
exchange feature, the market value of convertible securities typically changes
as the market value of the underlying common stocks changes, and, therefore,
also tends to follow movements in the general market for equity securities. A
unique feature of convertible securities is that as the market price of the
underlying common stock declines, convertible securities tend to trade
increasingly on a yield basis, and so may not experience market value declines
to the same extent as the underlying common stock. When the market price of the
underlying common stock increases, the prices of the convertible securities tend
to rise as a reflection of the value of the underlying common stock, although
typically not as much as the underlying common stock.
4
<PAGE>
While no securities investments are without risk, investments in convertible
securities generally entail less risk than investments in common stock of the
same issuer.
As debt securities, convertible securities are investments which provide for a
stream of income (or in the case of zero coupon securities, accretion of income)
with generally higher yields than common stocks. Of course, like all debt
securities, there can be no assurance of income or principal payments because
the issuers of the convertible securities may default on their obligations.
Convertible securities generally offer lower yields than non-convertible
securities of similar quality because of their conversion or exchange features.
Borrowing. As a matter of fundamental policy, the Fund will not borrow money,
except as permitted under the 1940 Act, as amended, and as interpreted or
modified by regulatory authority having jurisdiction, from time to time. While
the Fund does not currently intend to borrow for investment leveraging purposes,
if such a strategy were implemented in the future it would increase the Fund's
volatility and the risk of loss in a declining market. Borrowing by the Fund
will involve special risk considerations. Although the principal of the Fund's
borrowing will be fixed, the Fund's assets may change in value during the time a
borrowing is outstanding, thus increasing exposure to capital risk.
Illiquid Securities. The Fund may purchase securities other than in the open
market. While such purchases may often offer attractive opportunities for
investment not otherwise available on the open market, the securities so
purchased are often "restricted securities" or "not readily marketable," i.e.,
securities which cannot be sold to the public without registration under the
Securities Act of 1933, as amended (the "1933 Act"), or the availability of an
exemption from registration (such as Rule 144A) or because they are subject to
other legal or contractual delays in or restrictions on resale. The absence of a
trading market can make it difficult to ascertain a market value for these
instruments. This investment practice, therefore, could have the effect of
increasing the level of illiquidity of the Fund. It is the Fund's policy that
illiquid securities (including repurchase agreements of more than seven days
duration, certain restricted securities, and other securities which are not
readily marketable) may not constitute, at the time of purchase, more than 15%
of the value of the Fund's net assets. A security is deemed illiquid if so
determined pursuant to procedures adopted by the Board of Trustees.
Generally speaking, restricted securities may be sold (i) only to qualified
institutional buyers; (ii) in a privately negotiated transaction to a limited
number of purchasers; (iii) in limited quantities after they have been held for
a specified period of time and other conditions are met pursuant to an exemption
from registration; or (iv) in a public offering for which a registration
statement is in effect under the 1933 Act. Issuers of restricted securities may
not be subject to the disclosure and other investor protection requirements that
would be applicable if their securities were publicly traded. If adverse market
conditions were to develop during the period between the Fund's decision to sell
a restricted or illiquid security and the point at which the Fund is permitted
or able to sell such security, the Fund might obtain a price less favorable than
the price that prevailed when it decided to sell. Where a registration statement
is required for the resale of restricted securities, the Fund may be required to
bear all or part of the registration expenses. The Fund may be deemed to be an
"underwriter" for purposes of the 1933 Act when selling restricted securities to
the public and, in such event, the Fund may be liable to purchasers of such
securities if the registration statement prepared by the issuer is materially
inaccurate or misleading.
Since it is not possible to predict with assurance that the market for
securities eligible for resale under Rule 144A will continue to be liquid, the
Advisor will monitor such restricted securities subject to the supervision of
the Board of Trustees. Among the factors the Advisor may consider in reaching
liquidity decisions relating to Rule 144A securities are: (1) the frequency of
trades and quotes for the security; (2) the number of dealers wishing to
purchase or sell the security and the number of other potential purchasers; (3)
dealer undertakings to make a market in the security; and (4) the nature of the
security and the nature of the market for the security (i.e., the time needed to
dispose of the security, the method of soliciting offers, and the mechanics of
the transfer).
Foreign Securities. Each Portfolio normally invests a portion of its assets in
foreign securities that are traded principally in securities markets outside the
United States. Each Portfolio may also invest in U.S.
5
<PAGE>
Dollar denominated American Depository Receipts ("ADRs"), which are bought and
sold in the United States. For purposes of the allocation between U.S. and
international securities, ADRs are viewed as U.S. securities. In connection with
its foreign securities investments, each Portfolio may, to a limited extent,
engage in foreign currency exchange, options and futures transactions as a hedge
and not for speculation. Additional information concerning foreign securities
and related techniques is contained below.
Foreign securities involve currency risks. The U.S. Dollar value of a foreign
security tends to decrease when the value of the U.S. Dollar rises against the
foreign currency in which the security is denominated and tends to increase when
the value of the U.S. Dollar falls against such currency. Fluctuations in
exchange rates may also affect the earning power and asset value of the foreign
entity issuing the security. Dividend and interest payments may be repatriated
based upon the exchange rate at the time of disbursement or payment, and
restrictions on capital flows may be imposed. Losses and other expenses may be
incurred in converting between various currencies.
Foreign securities may be subject to foreign government taxes that reduce their
attractiveness. Other risks of investing in such securities include political or
economic instability in the country involved, the difficulty of predicting
international trade patterns and the possible imposition of exchange controls.
The prices of such securities may be more volatile than those of domestic
securities and the markets for such securities may be less liquid. In addition,
there may be less publicly available information about foreign issuers than
about domestic issuers. Many foreign issuers are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic issuers. There is generally less regulation of stock
exchanges, brokers, banks and listed companies abroad than in the United States.
With respect to certain foreign countries, there is a possibility of
expropriation or diplomatic developments that could affect investment in these
countries.
Emerging Markets. While each Portfolio's investments in foreign securities will
principally be in developed countries, a Portfolio may make investments in
developing or "emerging" countries, which involve exposure to economic
structures that are generally less diverse and mature than in the United States,
and to political systems that may be less stable. A developing or emerging
market country can be considered to be a country that is in the initial stages
of its industrialization cycle. Currently, emerging markets generally include
every country in the world other than the United States, Canada, Japan,
Australia, New Zealand, Hong Kong, Singapore and most Western European
countries. Currently, investing in many emerging markets may not be desirable or
feasible because of the lack of adequate custody arrangements for a Portfolio's
assets, overly burdensome repatriation and similar restrictions, the lack of
organized and liquid securities markets, unacceptable political risks or other
reasons. As opportunities to invest in securities in emerging markets develop, a
Portfolio may expand and further broaden the group of emerging markets in which
it invests. In the past, markets of developing or emerging market countries have
been more volatile than the markets of developed countries; however, such
markets often have provided higher rates of return to investors. The investment
manager believes that these characteristics can be expected to continue in the
future.
Many of the risks described above relating to foreign securities generally will
be greater for emerging markets than for developed countries. For instance,
economies in individual developing markets may differ favorably or unfavorably
from the U.S. economy in such respects as growth of domestic product, rates of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency and balance of payments positions. Many emerging markets have
experienced substantial rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on the economies and securities markets of certain developing markets.
Economies in emerging markets generally are dependent heavily upon international
trade and, accordingly, have been and may continue to be affected adversely by
trade barriers, exchange controls, managed adjustments in relative currency
values and other protectionist measures imposed or negotiated by the countries
with which they trade. These economies also have been and may continue to be
affected adversely by economic conditions in the countries with which they
trade.
Also, the securities markets of developing countries are substantially smaller,
less developed, less liquid and more volatile than the securities markets of the
United States and other more developed countries.
6
<PAGE>
Disclosure, regulatory and accounting standards in many respects are less
stringent than in the United States and other developed markets. There also may
be a lower level of monitoring and regulation of developing markets and the
activities of investors in such markets, and enforcement of existing regulations
has been extremely limited.
In addition, brokerage commissions, custodial services and other costs relating
to investment in foreign markets generally are more expensive than in the United
States; this is particularly true with respect to emerging markets. Such markets
have different settlement and clearance procedures. In certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Such settlement problems may cause emerging market securities to be illiquid.
The inability of a Portfolio to make intended securities purchases due to
settlement problems could cause the Portfolio to miss attractive investment
opportunities. Inability to dispose of a portfolio security caused by settlement
problems could result either in losses to a Portfolio due to subsequent declines
in value of the portfolio security or, if a Portfolio has entered into a
contract to sell the security, could result in possible liability to the
purchaser. Certain emerging markets may lack clearing facilities equivalent to
those in developed countries. Accordingly, settlements can pose additional risks
in such markets and ultimately can expose a Portfolio to the risk of losses
resulting from the Portfolio's inability to recover from a counterparty.
The risk also exists that an emergency situation may arise in one or more
emerging markets as a result of which trading securities may cease or may be
substantially curtailed and prices for such securities in emerging markets may
not be readily available. In that case, securities in the affected markets will
be valued at fair value determined in good faith by or under the direction of
the Board of Trustees.
Investment in certain emerging market securities is restricted or controlled to
varying degrees. These restrictions or controls may at times limit or preclude
foreign investment in certain emerging market securities and increase the costs
and expenses of a Portfolio. Emerging markets may require governmental approval
for the repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments, the market could impose temporary
restrictions on foreign capital remittances.
Depository Receipts. For many foreign securities, there are U.S. Dollar
denominated ADRs, which are bought and sold in the United States and are issued
by domestic banks. ADRs represent the right to receive securities of foreign
issuers deposited in the domestic bank or a correspondent bank. ADRs do not
eliminate all the risk inherent in investing in the securities of foreign
issuers, such as changes in foreign currency exchange rates. However, by
investing in ADRs rather than directly in foreign issuers' stock, the Fund
avoids currency risks during the settlement period. In general, there is a
large, liquid market in the United States for most ADRs. Each Portfolio may also
invest in European Depository Receipts ("EDRs"), which are receipts evidencing
an arrangement with a European bank similar to that for ADRs and are designed
for use in the European securities markets. EDRs are not necessarily denominated
in the currency of the underlying security.
Privatized Enterprises. Investments in foreign securities may include securities
issued by enterprises that have undergone or are currently undergoing
privatization. The governments of certain foreign countries have, to varying
degrees, embarked upon privatization programs contemplating the sale of all or
part of their interests in state enterprises. A Portfolio's investments in the
securities of privatized enterprises include privately negotiated investments in
a government- or state-owned or controlled company or enterprise that has not
yet conducted an initial equity offering, investments in the initial offering of
equity securities of a state enterprise or former state enterprise and
investments in the securities of a state enterprise following its initial equity
offering.
In certain jurisdictions, the ability of foreign entities, such as a Portfolio,
to participate in privatizations may be limited by local law, or the price or
terms on which the Portfolio may be able to participate may be less advantageous
than for local investors. Moreover, there can be no assurance that governments
that have embarked on privatization programs will continue to divest their
ownership of state enterprises, that
7
<PAGE>
proposed privatization will be successful or that governments will not
re-nationalize enterprises that have been privatized.
In the case of the enterprises in which a Portfolio may invest, large blocks of
the stock of those enterprises may be held by a small group of stockholders,
even after the initial equity offerings by those enterprises. The sale of some
portion or all of those blocks could have an adverse effect on the price of the
stock of any such enterprise.
Prior to making an initial equity offering, most state enterprises or former
state enterprises go through an internal reorganization of management. Such
reorganizations are made in an attempt to better enable these enterprises to
compete in the private sector. However, certain reorganizations could result in
a management team that does not function as well as the enterprise's prior
management and may have a negative effect on such enterprise. In addition, the
privatization of an enterprise by its government may occur over a number of
years, with the government continuing to hold a controlling position in the
enterprise even after the initial equity offering for the enterprise.
Prior to privatization, most of the state enterprises in which a Portfolio may
invest enjoy the protection of and receive preferential treatment from the
respective sovereigns that own or control them. After making an initial equity
offering these enterprises may no longer have such protection or receive such
preferential treatment and may become subject to market competition from which
they were previously protected. Some of these enterprises may not be able to
operate effectively in a competitive market and may suffer losses or experience
bankruptcy due to such competition.
Investment of Uninvested Cash Balances. Each Fund may have cash balances that
have not been invested in portfolio securities ("Uninvested Cash"). Uninvested
Cash may result from a variety of sources, including dividends or interest
received from portfolio securities, unsettled securities transactions, reserves
held for investment strategy purposes, scheduled maturity of investments,
liquidation of investment securities to meet anticipated redemptions and
dividend payments, and new cash received from investors. Uninvested Cash may be
invested directly in money market instruments or other short-term debt
obligations. Pursuant to an Exemptive Order issued by the SEC, each Fund may use
Uninvested Cash to purchase shares of affiliated funds including money market
funds, short-term bond funds and Scudder Cash Management Investment Trust, or
one or more future entities for which Scudder Kemper Investments acts as trustee
or investment advisor that operate as cash management investment vehicles and
that are excluded from the definition of investment company pursuant to section
3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 (collectively, the
"Central Funds") in excess of the limitations of Section 12(d)(1) of the
Investment Company Act. Investment by each Fund in shares of the Central Funds
will be in accordance with the Fund's investment policies and restrictions as
set forth in its registration statement.
Certain of the Central Funds comply with rule 2a-7 under the Act. The other
Central Funds are or will be short-term bond funds that invest in fixed-income
securities and maintain a dollar weighted average maturity of three years or
less. Each of the Central Funds will be managed specifically to maintain a
highly liquid portfolio, and access to them will enhance each Fund's ability to
manage Uninvested Cash.
Each Fund will invest Uninvested Cash in Central Funds only to the extent that
each Fund's aggregate investment in the Central Funds does not exceed 25% of its
total assets in shares of the Central Funds. Purchase and sales of shares of
Central Funds are made at net asset value.
Strategic Transactions and Derivatives. The Portfolios may, but are not required
to, utilize various other investment strategies as described below for a variety
of purposes, such as hedging various market risks, managing the effective
maturity or duration of fixed-income securities in a Portfolio, or enhancing
potential gain. These strategies may be executed through the use of derivative
contracts.
In the course of pursuing these investment strategies, the Portfolios may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other instruments, purchase and
sell futures contracts and options thereon, enter into various transactions such
as swaps, caps, floors, collars, currency forward contracts, currency futures
contracts, currency swaps or
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options on currencies, or currency futures and various other currency
transactions (collectively, all the above are called "Strategic Transactions").
In addition, Strategic Transactions may also include new techniques, instruments
or strategies that are permitted as regulatory changes occur. Strategic
Transactions may be used without limit (subject to certain limitations imposed
by the 1940 Act) to attempt to protect against possible changes in the market
value of securities held in or to be purchased for a Portfolio resulting from
securities markets or currency exchange rate fluctuations, to protect a
Portfolio's unrealized gains in the value of its portfolio securities, to
facilitate the sale of such securities for investment purposes, to manage the
effective maturity or duration of fixed-income securities in a Portfolio, or to
establish a position in the derivatives markets as a substitute for purchasing
or selling particular securities. Some Strategic Transactions may also be used
to enhance potential gain although no more than 5% of a Portfolio's assets will
be committed to Strategic Transactions entered into for non-hedging purposes.
Any or all of these investment techniques may be used at any time and in any
combination, and there is no particular strategy that dictates the use of one
technique rather than another, as use of any Strategic Transaction is a function
of numerous variables including market conditions. The ability of the Portfolios
to utilize these Strategic Transactions successfully will depend on the
Advisor's ability to predict pertinent market movements, which cannot be
assured. The Portfolios will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. Strategic
Transactions will not be used to alter fundamental investment purposes and
characteristics of the Portfolios, and the Portfolios will segregate assets (or
as provided by applicable regulations, enter into certain offsetting positions)
to cover its obligations under options, futures and swaps to limit leveraging of
the Portfolios.
Strategic Transactions, including derivative contracts, have risks associated
with them including possible default by the other party to the transaction,
illiquidity and, to the extent the Advisor's view as to certain market movements
is incorrect, the risk that the use of such Strategic Transactions could result
in losses greater than if they had not been used. Use of put and call options
may result in losses to the Portfolios, force the sale or purchase of portfolio
securities at inopportune times or for prices higher than (in the case of put
options) or lower than (in the case of call options) current market values,
limit the amount of appreciation the Portfolios can realize on its investments
or cause the Portfolios to hold a security it might otherwise sell. The use of
currency transactions can result in the Portfolios incurring losses as a result
of a number of factors including the imposition of exchange controls, suspension
of settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of a
Portfolio creates the possibility that losses on the hedging instrument may be
greater than gains in the value of a Portfolio's position. In addition, futures
and options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Portfolios might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Portfolio assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. For
instance, a Portfolio's purchase of a put option on a security might be designed
to protect its holdings in the underlying instrument (or, in some cases, a
similar instrument) against a substantial decline in the market value by giving
the Portfolios the right to sell such instrument
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at the option exercise price. A call option, upon payment of a premium, gives
the purchaser of the option the right to buy, and the seller the obligation to
sell, the underlying instrument at the exercise price. A Portfolio's purchase of
a call option on a security, financial future, index, currency or other
instrument might be intended to protect the Portfolios against an increase in
the price of the underlying instrument that it intends to purchase in the future
by fixing the price at which it may purchase such instrument. An American style
put or call option may be exercised at any time during the option period while a
European style put or call option may be exercised only upon expiration or
during a fixed period prior thereto. The Portfolios is authorized to purchase
and sell exchange listed options and over-the-counter options ("OTC options").
Exchange listed options are issued by a regulated intermediary such as the
Options Clearing Corporation ("OCC"), which guarantees the performance of the
obligations of the parties to such options. The discussion below uses the OCC as
an example, but is also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally settle
by physical delivery of the underlying security or currency, although in the
future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
Each Portfolio's ability to close out its position as a purchaser or seller of
an OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Portfolios will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Portfolios to require the
Counterparty to sell the option back to the Portfolios at a formula price within
seven days. The Portfolios expect generally to enter into OTC options that have
cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Portfolios or fails to make a cash
settlement payment due in accordance with the terms of that option, the
Portfolios will lose any premium it paid for the option as well as any
anticipated benefit of the transaction. Accordingly, the Advisor must assess the
creditworthiness of each such Counterparty or any guarantor or credit
enhancement of the Counterparty's credit to determine the likelihood that the
terms of the OTC option will be satisfied. The Portfolios will engage in OTC
option transactions only with U.S. government securities dealers recognized by
the Federal Reserve Bank of New York as "primary dealers" or broker/dealers,
domestic or foreign banks or other
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financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any nationally recognized statistical
rating organization ("NRSRO") or, in the case of OTC currency transactions, are
determined to be of equivalent credit quality by the Advisor. The staff of the
SEC currently takes the position that OTC options purchased by the Portfolios,
and portfolio securities "covering" the amount of a Portfolio's obligation
pursuant to an OTC option sold by it (the cost of the sell-back plus the
in-the-money amount, if any) are illiquid, and are subject to the Portfolios'
limitation on investing no more than 15% of its net assets in illiquid
securities.
If a Portfolio sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase a Portfolio's income. The sale of put options can also provide income.
The Portfolios may purchase and sell call options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, foreign sovereign
debt, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets, and on securities
indices, currencies and futures contracts. All calls sold by the Portfolios must
be "covered" (i.e., the Portfolios must own the securities or futures contract
subject to the call) or must meet the asset segregation requirements described
below as long as the call is outstanding. Even though the Portfolios will
receive the option premium to help protect it against loss, a call sold by the
Portfolios exposes the Portfolios during the term of the option to possible loss
of opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Portfolios to hold a security or
instrument which it might otherwise have sold.
The Portfolios will not sell put options if, as a result, more than 50% of the
Portfolio's assets would be required to be segregated to cover its potential
obligations under such put options other than those with respect to futures and
options thereon. In selling put options, there is a risk that the Portfolios may
be required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures. The Portfolios may enter into futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate, currency or equity market changes, and for
duration management, risk management and return enhancement purposes. Futures
are generally bought and sold on the commodities exchanges where they are listed
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by the Portfolios, as seller, to
deliver to the buyer the specific type of financial instrument called for in the
contract at a specific future time for a specified price (or, with respect to
index futures and Eurodollar instruments, the net cash amount). Options on
futures contracts are similar to options on securities except that an option on
a futures contract gives the purchaser the right in return for the premium paid
to assume a position in a futures contract and obligates the seller to deliver
such position.
The Portfolios' use of futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into for bona fide hedging, risk management (including duration management) or
other portfolio and return enhancement management purposes. Typically,
maintaining a futures contract or selling an option thereon requires the
Portfolios to deposit with a financial intermediary as security for its
obligations an amount of cash or other specified assets (initial margin) which
initially is typically 1% to 10% of the face amount of the contract (but may be
higher in some circumstances). Additional cash or assets (variation margin) may
be required to be deposited thereafter on a daily basis as the mark to market
value of the contract fluctuates. The purchase of an option on financial futures
involves payment of a premium for the option without any further obligation on
the part of the Portfolios. If the Portfolios exercise an option on a futures
contract it will be obligated to post initial margin (and potential subsequent
variation margin) for the resulting futures position just as it would for any
position. Futures contracts and options thereon are generally settled by
entering into an offsetting transaction but there can be no assurance that the
position can be offset prior to settlement at an advantageous price, nor that
delivery will occur.
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The Portfolios will not enter into a futures contract or related option (except
for closing transactions) if, immediately thereafter, the sum of the amount of
its initial margin and premiums on open futures contracts and options thereon
would exceed 5% of a Portfolio's total assets (taken at current value); however,
in the case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
Options on Securities Indices and Other Financial Indices. The Portfolios also
may purchase and sell call and put options on securities indices and other
financial indices and in so doing can achieve many of the same objectives it
would achieve through the sale or purchase of options on individual securities
or other instruments. Options on securities indices and other financial indices
are similar to options on a security or other instrument except that, rather
than settling by physical delivery of the underlying instrument, they settle by
cash settlement, i.e., an option on an index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is specified). This amount of cash
is equal to the excess of the closing price of the index over the exercise price
of the option, which also may be multiplied by a formula value. The seller of
the option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Currency Transactions. The Portfolios may engage in currency transactions with
Counterparties primarily in order to hedge, or manage the risk of the value of
portfolio holdings denominated in particular currencies against fluctuations in
relative value. Currency transactions include forward currency contracts,
exchange listed currency futures, exchange listed and OTC options on currencies,
and currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional difference among two or more currencies and operates similarly to an
interest rate swap, which is described below. The Portfolios may enter into
currency transactions with Counterparties which have received (or the guarantors
of the obligations which have received) a credit rating of A-1 or P-1 by S&P or
Moody's, respectively, or that have an equivalent rating from a NRSRO or (except
for OTC currency options) are determined to be of equivalent credit quality by
the Advisor.
Each Portfolio's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps generally
will be limited to hedging involving either specific transactions or portfolio
positions except as described below. Transaction hedging is entering into a
currency transaction with respect to specific assets or liabilities of the
Portfolios, which will generally arise in connection with the purchase or sale
of its portfolio securities or the receipt of income therefrom. Position hedging
is entering into a currency transaction with respect to portfolio security
positions denominated or generally quoted in that currency.
The Portfolios generally will not enter into a transaction to hedge currency
exposure to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.
The Portfolios may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Portfolios has or in which the
Portfolios expects to have portfolio exposure.
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To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Portfolios may also engage in
proxy hedging. Proxy hedging is often used when the currency to which a
Portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of a Portfolio's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of the Portfolio's securities
denominated in correlated currencies. For example, if the Advisor considers that
the Austrian schilling is correlated to the German deutschemark (the "D-mark"),
the Portfolios hold securities denominated in schillings and the Advisor
believes that the value of schillings will decline against the U.S. dollar, the
Advisor may enter into a commitment or option to sell D-marks and buy dollars.
Currency hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to the Portfolios if the currency being hedged fluctuates in value to a
degree or in a direction that is not anticipated. Further, there is the risk
that the perceived correlation between various currencies may not be present or
may not be present during the particular time that the Portfolios are engaging
in proxy hedging. If a Portfolio enters into a currency hedging transaction,
that Portfolio will comply with the asset segregation requirements described
below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Portfolios if it is unable to deliver or receive currency or
funds in settlement of obligations and could also cause hedges it has entered
into to be rendered useless, resulting in full currency exposure as well as
incurring transaction costs. Buyers and sellers of currency futures are subject
to the same risks that apply to the use of futures generally. Further,
settlement of a currency futures contract for the purchase of most currencies
must occur at a bank based in the issuing nation. Trading options on currency
futures is relatively new, and the ability to establish and close out positions
on such options is subject to the maintenance of a liquid market which may not
always be available. Currency exchange rates may fluctuate based on factors
extrinsic to that country's economy.
Combined Transactions. The Portfolios may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
currency transactions (including forward currency contracts) and multiple
interest rate transactions and any combination of futures, options, currency and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Advisor, it is in the best interests of the Portfolios to do so.
A combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Advisor's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Portfolios may enter are interest rate, currency, index and other swaps and the
purchase or sale of related caps, floors and collars. The Portfolios expect to
enter into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Portfolios anticipate purchasing at a
later date. The Portfolios will not sell interest rate caps or floors where they
do not own securities or other instruments providing the income stream the
Portfolios may be obligated to pay. Interest rate swaps involve the exchange by
the Portfolios with another party of their respective commitments to pay or
receive interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. A currency swap is an
agreement to exchange cash flows on a notional amount of two or more currencies
based on the relative value differential among them and an index swap is an
agreement to swap cash flows on a notional amount based on changes in the values
of the reference indices. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling such cap
to the extent that a specified index exceeds a predetermined interest rate or
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amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Portfolios will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Portfolios receiving or paying, as the
case may be, only the net amount of the two payments. Inasmuch as the Portfolios
will segregate assets (or enter into offsetting positions) to cover its
obligations under swaps, the Advisor and the Portfolios believe such obligations
do not constitute senior securities under the 1940 Act and, accordingly, will
not treat them as being subject to its borrowing restrictions. The Portfolios
will not enter into any swap, cap, floor or collar transaction unless, at the
time of entering into such transaction, the unsecured long-term debt of the
Counterparty, combined with any credit enhancements, is rated at least A by S&P
or Moody's or has an equivalent rating from a NRSRO or is determined to be of
equivalent credit quality by the Advisor. If there is a default by the
Counterparty, the Portfolios may have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid. Caps, floors and collars
are more recent innovations for which standardized documentation has not yet
been fully developed and, accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Portfolios may make investments in Eurodollar
instruments. Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon which are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency-denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. The Portfolios might use Eurodollar futures contracts and options
thereon to hedge against changes in LIBOR, to which many interest rate swaps and
fixed income instruments are linked.
Risks of Strategic Transactions Outside the U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in a Portfolio's ability to act upon
economic events occurring in foreign markets during non-business hours in the
U.S., (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the U.S., and (v) lower trading
volume and liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Portfolios segregate cash or
liquid assets with its custodian to the extent Portfolio obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
the Portfolios to pay or deliver securities or assets must be covered at all
times by the securities, instruments or currency required to be delivered, or,
subject to any regulatory restrictions, an amount of cash or liquid assets at
least equal to the current amount of the obligation must be segregated with the
custodian. The segregated assets cannot be sold or transferred unless equivalent
assets are substituted in their place or it is no longer necessary to segregate
them. For example, a call option written by the Portfolios will require the
Portfolios to hold the securities subject to the call (or securities convertible
into the needed securities without additional consideration) or to segregate
cash or liquid assets sufficient to purchase and deliver the securities if the
call is exercised. A call option sold by the Portfolios on an index will require
the Portfolios to own portfolio securities which correlate with the index or to
segregate cash or liquid assets equal to the excess of the index value over the
exercise price on a current basis. A put option written by the Portfolios
requires the Portfolios to segregate cash or liquid assets equal to the exercise
price.
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Except when the Portfolios enter into a forward contract for the purchase or
sale of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates the Portfolios to buy or sell
currency will generally require the Portfolios to hold an amount of that
currency or liquid assets denominated in that currency equal to a Portfolio's
obligations or to segregate cash or liquid assets equal to the amount of a
Portfolio's obligation.
OTC options entered into by the Portfolios, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when the
Portfolios sell these instruments they will only segregate an amount of cash or
liquid assets equal to its accrued net obligations, as there is no requirement
for payment or delivery of amounts in excess of the net amount. These amounts
will equal 100% of the exercise price in the case of a non cash-settled put, the
same as an OCC guaranteed listed option sold by the Portfolios, or the
in-the-money amount plus any sell-back formula amount in the case of a
cash-settled put or call. In addition, when the Portfolios sell a call option on
an index at a time when the in-the-money amount exceeds the exercise price, the
Portfolios will segregate, until the option expires or is closed out, cash or
cash equivalents equal in value to such excess. OCC issued and exchange listed
options sold by the Portfolios other than those above generally settle with
physical delivery, or with an election of either physical delivery or cash
settlement and the Portfolios will segregate an amount of cash or liquid assets
equal to the full value of the option. OTC options settling with physical
delivery, or with an election of either physical delivery or cash settlement
will be treated the same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Portfolios must
deposit initial margin and possible daily variation margin in addition to
segregating cash or liquid assets sufficient to meet its obligation to purchase
or provide securities or currencies, or to pay the amount owed at the expiration
of an index-based futures contract. Such liquid assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets.
With respect to swaps, the Portfolios will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid assets having a value
equal to the accrued excess. Caps, floors and collars require segregation of
assets with a value equal to the Portfolio's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Portfolios may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Portfolios could purchase a put option if the
strike price of that option is the same or higher than the strike price of a put
option sold by the Portfolios. Moreover, instead of segregating cash or liquid
assets if the Portfolios held a futures or forward contract, it could purchase a
put option on the same futures or forward contract with a strike price as high
or higher than the price of the contract held. Other Strategic Transactions may
also be offset in combinations. If the offsetting transaction terminates at the
time of or after the primary transaction no segregation is required, but if it
terminates prior to such time, cash or liquid assets equal to any remaining
obligation would need to be segregated.
Delayed Delivery Transactions. 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
15
<PAGE>
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.
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.
Fixed Income. The fixed income portion of each Portfolio may be invested in a
broad variety of fixed income securities including, without limitation: (a)
obligations issued or guaranteed by the U.S. Government or by its agencies or
instrumentalities; (b) bonds, debentures, convertible debt instruments,
assignments or participation in loans, notes, commercial paper, and other debt
securities of corporations, trusts and other entities; (c) certificates of
deposit, bankers' acceptances and time deposits and (d) cash and cash
equivalents, including repurchase agreements. The fixed income portion of each
Portfolio will be comprised of U.S. Dollar denominated instruments.
Each portfolio attempts to limit its exposure to credit risk by imposing limits
on the quality of specific securities in the Portfolio and by maintaining a
relatively high average weighted credit quality. Credit quality refers to a
fixed income security issuer's expected ability to make all required interest
and principal payments in a timely manner. Higher rated fixed income securities
generally represent less risk than lower or non-rated securities. Ratings
published by nationally recognized rating agencies such as Standard & Poor's
("S&P") and Moody's Investors Service, Inc. ("Moody's") are widely accepted
measures of credit risk. The fixed income portion of each Portfolio will be
invested in securities that are rated at the time of purchase within the four
highest grades assigned by Moody's, S&P, Fitch Investors Service, Inc. ("Fitch")
or Duff & Phelps Credit Rating Co. ("Duff") or any other Nationally Recognized
Statistical Rating Organization ("NRSRO") as designated by the Securities and
Exchange Commission, or will be of comparable quality as determined by the
Fund's investment manager, provided that up to 10% of the fixed income portion
of each Portfolio may be invested in securities that are lower rated ("junk
bonds"). The top four ratings currently assigned by these organizations are as
follows: Moody's (Aaa, Aa, A or Baa), S&P (AAA, AA, A or BBB), Fitch (AAA, AA, A
or BBB) and Duff (AAA, AA, A or BBB). In addition, under normal conditions, each
Portfolio expects to maintain a relatively high average dollar-weighted credit
quality (i.e., within the top two rating categories of an NRSRO or comparable as
determined by the investment manager). Average dollar-weighted credit quality is
calculated by averaging the ratings of each fixed income security held by a
Portfolio with each rating "weighted" according to the percentage of assets that
it represents. Average dollar-weighted credit quality is not a precise measure
of the credit risk presented by a Portfolio of fixed income securities. For
instance, a combination of securities that are rated AAA and securities that are
rated BB that together result in an average weighted credit quality of AA may
present more risk than a group of just AA rated securities.
16
<PAGE>
After a Portfolio purchases a security, its quality level may fall below that at
which it was purchased (i.e., downgraded). In such instance, the Portfolio would
not be required to sell the security, but the investment manager will consider
such an event in determining whether the Portfolio should continue to hold the
security. The ratings of NRSROs represent their opinions as to the quality of
the securities that they undertake to rate. It should be emphasized, however,
that ratings, and other opinions as to quality, are relative and subjective and
are not absolute standards of quality. For a discussion of lower rated and
non-rated securities and related risks, see "Other Considerations -- High Yield
(High Risk) Bonds" below.
Each Portfolio attempts to limit its exposure to interest rate risk by
maintaining a relatively short duration. Interest rate risk is the risk that the
value of the fixed income securities may rise or fall as interest rates change.
Under normal conditions, the target duration of the fixed-income portion of the
Portfolio is approximately 2.5 years, although it may range from 1.5 to 3.5
years depending upon market conditions. "Duration," and the more traditional
"average dollar-weighted maturity," are measures of how a fixed income portfolio
tend to react to interest rate changes. Each fixed income security held by a
Portfolio has a stated maturity. The stated maturity is the date when the issuer
must repay the entire principal amount to an investor. A security's term to
maturity is the time remaining to maturity. A security will be treated as having
a maturity earlier than its stated maturity date if the security has technical
features (such as puts or demand features) or a variable rate of interest that,
in the judgment of the investment manager, will result in the security being
valued in the market as though it has the earlier maturity. Average
dollar-weighted maturity is calculated by averaging the terms to maturity of
each fixed income security held by the Portfolio with each maturity "weighted"
according to the percentage of assets that it represents. Unlike average
dollar-weighted maturity, duration reflects both principal and interest payments
and is designed to measure more accurately a portfolio's sensitivity to
incremental changes in interest rates than does average weighted maturity. By
way of example, if the duration of a Portfolio's fixed income securities were
two years, and interest rates decreased by 100 basis points (a basis point is
one-hundredth of one percent), the market price of that portfolio of fixed
income securities would be expected to increase by approximately 2%.
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 10% of its net assets in junk bonds. These lower rated or non-rated
fixed income securities are considered, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation and generally will involve more credit risk than
securities in the higher rating categories.
The market values of such securities tend to reflect individual corporate
developments to a greater extent than do those of higher rated securities, which
react primarily to fluctuations in the general level of interest rates. Such
lower rated securities also tend to be more sensitive to economic conditions
than are higher rated securities. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, regarding lower rated bonds may
depress the prices for such securities. These and other factors adversely
affecting the market value of high yield securities will adversely affect a
Portfolio's net asset value. Although some risk is inherent in all securities
ownership, holders of fixed income securities have a claim on the assets of the
issuer prior to the holders of common stock. Therefore, an investment in fixed
income securities generally entails less risk than an investment in common stock
of the same issuer.
High yield securities frequently are issued by corporations in the growth stage
of their development. They may also be issued in connection with a corporate
reorganization or a corporate takeover. Companies that issue such high yielding
securities often are highly leveraged and may not have available to them more
traditional methods of financing. Therefore, the risk associated with acquiring
the securities of such issuers generally is greater than is the case with higher
rated securities. For example, during an economic downturn or recession, highly
leveraged issuers of high yield securities may experience financial stress.
During such periods, such issuers may not have sufficient revenues to meet their
interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific corporate developments,
or the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss from default by the
issuer is significantly greater for the holders of
17
<PAGE>
high yielding securities because such securities are generally unsecured and are
often subordinated to other creditors of the issuer.
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.
Payments of principal and interest on the underlying collateral securities are
not passed through directly to the holders of the collateralized obligations as
such. Collateralized obligations often are issued in two or more classes with
varying maturities and stated rates of interest. Because interest and principal
payments on the underlying securities are not passed through directly to holders
of collateralized obligations, such obligations of varying maturities may be
secured by a single portfolio or pool of securities, the payments on which are
used to pay interest on each class and to retire successive maturities in
sequence. These relationships may in effect "strip" the interest payments from
principal payments of the underlying securities and allow for the separate
purchase of either the interest or the principal payments, sometimes called
interest only ("IO") and principal only ("PO") securities. Collateralized
obligations are designed to be retired as the underlying securities are repaid.
In the event of prepayment on or call of such securities, the class of
collateralized obligation first to mature generally will be paid down first.
Therefore, although in most cases the issuer of collateralized obligations will
not supply additional collateral in the event of such prepayment, there will be
sufficient collateral to secure collateralized obligations that remain
outstanding. It is anticipated that no more than 5% of a Portfolio's net assets
will be invested in IO and PO securities. Governmentally-issued and
privately-issued IO's and PO's will be considered illiquid for purposes of a
Portfolio's limitation on illiquid securities, however, the Board of Trustees
may adopt guidelines under which governmentally-issued IO's and PO's may be
determined to be liquid.
In reliance on an interpretation by the SEC, a Portfolio's investments in
certain qualifying collateralized obligations are not subject to the limitations
in the 1940 Act regarding investments by a registered investment company, such
as the Fund, in another investment company.
Zero Coupon Government Securities. Subject to its investment objective and
policies, a Portfolio may invest in zero coupon U.S. Government securities. Zero
coupon bonds are purchased at a discount from the face amount. The buyer
receives only the right to receive a fixed payment on a certain date in the
future and does not receive any periodic interest payments. These securities may
include those created directly by the U.S. Treasury and those created as
collateralized obligations through various proprietary custodial, trust or other
relationships. The effect of 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
18
<PAGE>
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.
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.
Investment Company Securities. A Portfolio may acquire securities of other
investment companies to the extent consistent with its investment objective and
subject to the limitations of the 1940 Act. The Portfolios will indirectly bear
its proportionate share of any management fees and other expenses paid by such
other investment companies.
For example, the Portfolio may invest in a variety of investment companies that
seek to track the composition and performance of a specific index. These
index-based investments hold substantially all of their assets in securities
representing their specific index, or a specific portion of an index.
Accordingly, the main risk of investing in index-based investments is the same
as investing in a portfolio of equity securities comprising the index. The
market prices of index-based investments will fluctuate in accordance with both
changes in the market value of their underlying portfolio securities and due to
supply and demand for the instruments on the exchanges on which they are traded
(which may result in their trading at a discount or premium to their NAV).
Index-based investments may no replicate exactly the performance of their
specified index because of transaction costs and because of the temporary
unavailability of certain component securities of the index:
Examples of index-based investments include:
SPDRs: SPDRs, an acronym for "Standard & Poor's Depositary Receipts," are based
on the Standard & Poor's 500 Composite Stock Price Index. They are issued by the
SPDR Trust, a unit investment trust that holds shares of substantially all the
companies in the S&P 500 in substantially the same weighting and seeks to
closely track the price performance and dividend yield of the Index. MidCap
SPDRs:
MidCap SPDRs are based on the S&P MidCap 400 Index. They are issued by the
MidCap SPDR Trust, a unit investment trust that holds a portfolio of securities
consisting of substantially all of the common stocks in the S&P MidCap 400 Index
in substantially the same weighting and seeks to closely track the price
performance and dividend yield of the Index.
Select Sector SPDRs: Select Sector SPDRs are based on a particular sector or
group of industries that are represented by a specified Select Sector Index
within the Standard & Poor's 500 Composite Stock Price Index. They are issued by
The Select Sector SPDR Trust, an open-end management investment company with
nine portfolios that each seeks to closely track the price performance and
dividend yield of a particular Select Sector Index.
DIAMONDS (SM): DIAMONDS are based on the Dow Jones Industrial Average(SM). They
are issued by the DIAMONDS Trust, a unit investment trust that holds a portfolio
of all the component common stocks of the Dow Jones Industrial Average and seeks
to closely track the price performance and dividend yield of the Dow.
Nasdaq - 100 Shares: Nasdaq - 100 Shares are based on the Nasdaq 100 Index. They
are issued by the Nasdaq - 100 Trust, a unit investment trust that holds a
portfolio consisting of substantially all of the securities, in substantially
the same weighting, as the component stocks of the Nasdaq - 100 Index and seeks
to closely track the price performance and dividend yield of the Index.
19
<PAGE>
WEBs: WEBs, an acronym for "World Equity Benchmark Shares," are based on 17
country-specific Morgan Stanley Capital International Indexes. They are issued
by the WEBs Index Fund, Inc. that seeks to generally correspond to the price and
yield performance of a specific Morgan Stanley Capital International Index.
INVESTMENT MANAGER AND UNDERWRITER
Investment Manager. Scudder Kemper Investments, Inc. ("Scudder Kemper" or the
"Advisor"), 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 Advisor is owned by its officers and employees. Pursuant to an
investment management agreement with each Portfolio, Scudder Kemper acts as the
Fund's investment advisor, 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. Each 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 and, effective January 1, 2000, pays the cost of qualifying and
maintaining the qualification of the Fund's shares for sale under the securities
laws of the various states ("Blue Sky expenses"). Prior to January 1, 2000,
Kemper Distributors, Inc. ("KDI"), as principal underwriter, paid the Blue Sky
expenses.
The investment management agreements provide that Scudder Kemper shall not be
liable for any error of judgment or of law, or for any loss suffered by the Fund
in connection with the matters to which the agreements relate, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
Scudder Kemper in the performance of its obligations and duties, or by reason of
its reckless disregard of its obligations and duties under each agreement.
Each Portfolio'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. Each Portfolio'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. 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 Advisor, with the balance
owned by the Advisor's officers and employees.
On September 7, 1998, Zurich Insurance Company ("Zurich") the majority owner of
the Advisor, entered into an agreement with B.A.T. Industries p.l.c. ("B.A.T."),
pursuant to which the financial services business of B.A.T. were combined with
Zurich's businesses to form a new global insurance and financial services
company known as Zurich Financial Services. Upon consummation of the
transaction, each Fund's existing investment management agreement with the
Advisor was deemed to have been assigned and, therefore, terminated. The Board
of Trustees of each Fund and the shareholders of each Fund have approved a new
investment management agreement with the Advisor, which is substantially
identical to the former investment management agreement, except for the dates of
execution and termination. On October 17, 2000, the dual holding company
structure of Zurich Financial Services Group, comprised of Allied
20
<PAGE>
Zurich p.l.c. in the United Kingdom and Zurich Allied A.G. in Switzerland, was
unified into a single Swiss holding company, Zurich Financial Services.
Scudder Kemper is paid a monthly investment management fee, by each Portfolio,
at the annual rates shown below.
<TABLE>
<S> <C> <C>
Average Daily Net Assets of a Portfolio Management Fee Rates
--------------------------------------- --------------------
$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 years ended July 31, 2000, 1999 and 1998, respectively.
<TABLE>
<S> <C> <C> <C> <C>
Portfolio Fiscal 2000 Fiscal 1999 Fiscal 1998
--------- ----------- ----------- -----------
Horizon 20+ $681,127 $713,000 495,000
Horizon 10+ $707,252 $732,000 495,000
Horizon 5 $408,320 $333,000 242,000
</TABLE>
Code of Ethics. The Fund, the Advisor and principal underwriter have each
adopted codes of ethics under rule 17j-1 of the Investment Company Act. Board
members, officers of the Fund and employees of the Advisor and principal
underwriter are permitted to make personal securities transactions, including
transactions in securities that may be purchased or held by the Fund, subject to
requirements and restrictions set forth in the applicable Code of Ethics. The
Advisor's Code of Ethics contains provisions and requirements designed to
identify and address certain conflicts of interest between personal investment
activities and the interests of the Fund. Among other things, the Advisor's Code
of Ethics prohibits certain types of transactions absent prior approval, imposes
time periods during which personal transactions may not be made in certain
securities, and requires the submission of duplicate broker confirmations and
quarterly reporting of securities transactions. Additional restrictions apply to
portfolio managers, traders, research analysts and others involved in the
investment advisory process. Exceptions to these and other provisions of the
Advisor's Code of Ethics may be granted in particular circumstances after review
by appropriate personnel.
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.
21
<PAGE>
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 years ended July 31, 2000, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
Commissions Commissions
Commissions KDI Paid Paid to KDI
Portfolio Year Retained by KDI to All Firms Affiliated Firms
--------- ---- --------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Horizon 20+ 2000 $8,432 694,135 0
1999 $18,000 637,000 0
1998 $26,000 303,000 0
Horizon 10+ 2000 $7,628 589,312 0
1999 $20,000 546,000 0
1998 $30,000 300,000 0
Horizon 5 2000 $1,375 285,605 0
1999 $12,000 271,000 0
1998 $13,000 156,000 0
</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, 1999, July 31, 1998
and July 31, 1997and are set forth below. A portion of the marketing, sales and
operating expenses shown below could be considered overhead expenses.
<TABLE>
<CAPTION>
Portfolio Class B Shares
Horizon 20+ Horizon 10+ Horizon 5
----------- ----------- ---------
2000 1999 1998 2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Distribution Fees Paid 413,648 305,000 412,593 365,457 265,000 196,660 180,042 150,000
by Fund to KDI $453,543
Contingent Deferred 142,315 72,000 185,757 93,073 49,000 94,124 52,033 20,000
22
<PAGE>
Sales Charges to KDI $295,639
Total Commissions Paid 619,815 689,000 305,449 493,125 555,000 108,924 276,552 312,000
by KDI to Firms $439,876
Distribution Fees Paid $0 0 0 0 0 0 0 0 0
by KDI to Affiliated
Firms
Advertising and $49,710 50,228 81,000 35,194 42,129 61,000 12,307 25,655 29,000
Literature
Other Distribution
-------------------
Expenses Paid by KDI
--------------------
Prospectus Printing $5,972 6,405 6,000 4,191 5,299 5,000 1,498 3,153 2,000
Marketing and Sales $94,625 131,022 162,000 70,100 109,887 128,000 25,395 66,540 62,000
Expenses
Misc. Operating $24,155 29,268 41,000 20,339 26,018 38,000 16,311 21,417 27,000
Expenses
Interest Expenses 194,510 149,000 239,967 169,735 131,000 111,526 83,641 79,000
$271,337
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Portfolio Class C Shares
------------------------
Horizon 20+ Horizon 10+ Horizon 5
----------- ----------- ---------
2000 1999 1998 2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Distribution Fees $102,051 $87,689 45,000 110,408 94,943 61,000 45,006 42,629 31,000
-----------------
Paid by Fund to KDI
-------------------
Contingent Deferred $1,667 $2,574 1,000 1,415 1,249 1,000 1,471 3,963 1,000
Sales Charges to KDI
Total Distribution Fees $113,042 $89,757 60,000 119,827 102,425 70,000 47,956 46,981 34,000
Paid by KDI to Firms
Distribution Fees Paid
by KDI to Affiliated $0 0 0 0 0 0 0 0 0
Firms
Advertising and $18,010 $16,655 19,000 13,762 16,039 20,000 4,811 7,080 11,000
Literature
Other Distribution
------------------
Expenses Paid by KDI
--------------------
Prospectus Printing $2,236 $2,135 1,000 1,733 2,016 1,000 586 875 1,000
Marketing and Sales $36,508 $44,765 27,000 29,697 42,660 40,000 9,809 18,808 22,000
Expenses
Misc. Operating $15,594 $16,499 7,000 15,100 15,323 10,000 13,942 12,100 19,000
Expenses
Interest Expenses $33,094 $18,693 12,000 34,415 19,902 13,000 20,180 12,441 8,000
</TABLE>
Rule 12b-1 Plan. If a Rule 12b-1 Plan (the "Plan") is terminated in accordance
with its terms, the obligation of a Fund to make payments to KDI pursuant to the
Plan will cease and the Fund will not be required to make any payments past the
termination date. Thus, there is no legal obligation for the Fund to pay any
expenses incurred by KDI in excess of its fees under a Plan, if for any reason
the Plan is terminated in accordance with its terms. Future fees under a Plan
may or may not be sufficient to reimburse KDI for its expenses incurred.
Each distribution agreement and Rule 12b-1 Plan 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. Each agreement automatically terminates in the event
of its assignment and may be terminated for a class at any time without penalty
by a Fund or by KDI upon 60 days' notice. Termination by a Fund with respect to
a class 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 of the Fund, as defined under the
1940 Act. The agreement may not be amended for a class to increase the fee to be
paid by a Fund with respect to such class without approval by a majority of the
outstanding voting securities of such class of the Fund 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 Fund by Fund basis and for each Fund on a class
by class basis.
24
<PAGE>
Administrative Services. Administrative services are provided to the Fund under
an administrative services agreement ("administrative agreement") with KDI. KDI
bears all its expenses of providing services pursuant to the administrative
agreement between KDI and the Fund, including the payment of service fees. Each
Portfolio pays KDI an administrative services fee, payable monthly, at an annual
rate of up to 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.
The following information concerns the administrative service fee paid by each
Portfolio for the fiscal year ended July 31, 2000, 1999 and 1998.
<TABLE>
<CAPTION>
Service
Fee KDI
Service Fee Paid to
Administrative Service Fees KDI Paid to Affiliate
Portfolio Year Paid by the Fund Firms Firms
---------------- ------- ------------------------------------------- ------------- ------------
Class A Class B Class C
------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Horizon 20+ 2000 $131,551 $128,992 $31,477 $448,891 $0
1999 $82,305 $83,683 $18,577 $184,559 $0
1998 $86,000 $103,000 $15,000 $213,000 $0
Horizon 10+ 2000 $152,670 $116,842 $31,590 $339,543 $0
1999 $97,180 $73,398 $19,578 $190,150 $0
1998 $98,000 $88,000 $20,000 $212,000 $0
Horizon 5 2000 $103,522 $55,426 $12,951 $118,750 $0
1999 $41,785 $35,538 $8,441 $85,765 $0
1998 $41,000 $50,000 $10,000 $109,000 $0
</TABLE>
Also, KDI may provide some of the above services. As well, KDI 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 payable at an
annual rate of 0.25% based upon Portfolio assets in accounts for which a firm
provides administrative services and, effective January 1, 2000, at the annual
rate of 0.15% based upon Fund assets in accounts for which there is no firm of
record (other than KDI) listed on the Fund's records. 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 paying the fee
to KDI at the annual rate of 0.25% on all Portfolio assets in the future.
25
<PAGE>
Certain trustees or officers of the Fund are also directors or officers of
Scudder Kemper or KDI as indicated in the prior section entitled, "Officers and
Trustees."
Custodian, Transfer Agent and Shareholder Service Agent. State Street Bank and
Trust Company, 225 Franklin Street, Boston, Massachusetts 02110, as custodian,
has custody of all securities and cash of the Fund. It attends to the collection
of principal and income, and payment for and collection of proceeds of
securities bought and sold by each portfolio. State Street also acts as the
Fund's transfer agent and dividend-paying agent. Pursuant to a service 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 fees as
the transfer agent, and compensates KSvC as follows:
o 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.
Prior to August 31, 2000, Investors Fiduciary Trust Company ("IFTC"), acted as
Transfer Agent for the funds. IFTC's fee is reduced by certain earnings credits
in favor of the Portfolios.
The following shows for each Portfolio, the shareholder service fees IFTC
remitted to KSvC for the fiscal years ending July 31, 2000, 1999 and 1998.
<TABLE>
<CAPTION>
Fiscal 2000 Fiscal 1999 Fiscal 1998
Portfolio Fees IFTC Paid to KSvC Fees IFTC Paid to KSvC Fees IFTC Paid to KSvC
--------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Horizon 20+ $613,906 $1,202,000 $756,000
Horizon 10+ $435,626 $788,000 $441,000
Horizon 5 $264,595 $331,000 $167,000
</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.
PORTFOLIO TRANSACTIONS
Brokerage
Allocation of brokerage is supervised by the Advisor.
The primary objective of the Advisor in placing orders for the purchase and sale
of securities for each 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 Advisor seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through the familiarity of
Scudder Investor Services ("SIS") with commissions charged on comparable
transactions, as well as by comparing commissions paid by the Fund to reported
commissions paid by others. The Advisor routinely reviews commission rates,
execution and settlement services making performed and makes internal and
external comparisons.
26
<PAGE>
Each Portfolio's purchases and sales of fixed-income securities are generally
placed by the Advisor with primary market makers for these securities on a net
basis, without any brokerage commission being paid by a Portfolio. Trading does,
however, involve transaction costs. Transactions with dealers serving as primary
market makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most favorable
net results, it is the Advisor's practice to place such orders with
broker/dealers who supply brokerage and research services to the Advisor or the
Fund. The term "research services" includes advice as to the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities or purchasers or sellers of securities; and
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy and the performance of accounts. The
Advisor is authorized when placing portfolio transactions, if applicable, for
the Portfolio to pay a brokerage commission in excess of that which another
broker might charge for executing the same transaction on account of execution
services and the receipt of research services. The Advisor has negotiated
arrangements, which are not applicable to most fixed-income transactions, with
certain broker/dealers pursuant to which a broker/dealer will provide research
services, to the Advisor or the Portfolio in exchange for the direction by the
Advisor of brokerage transactions to the broker/dealer. These arrangements
regarding receipt of research services generally apply to equity security
transactions. The Advisor may place orders with a broker/dealer on the basis
that the broker/dealer has or has not sold shares of the Portfolio. 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.
To the maximum extent feasible, it is expected that the Advisor will place
orders for portfolio transactions through SIS, which is a corporation registered
as a broker/dealer and a subsidiary of the Advisor; SIS will place orders on
behalf of the Portfolio with issuers, underwriters or other brokers and dealers.
SIS will not receive any commission, fee or other remuneration from the
Portfolio for this service.
Although certain research services from broker/dealers may be useful to the
Portfolio and to the Advisor, it is the opinion of the Advisor that such
information only supplements the Advisor's own research effort since the
information must still be analyzed, weighed, and reviewed by the Advisor's
staff. Such information may be useful to the Advisor in providing services to
clients other than the Fund, and not all such information is used by the Advisor
in connection with the Portfolio. Conversely, such information provided to the
Advisor by broker/dealers through whom other clients of the Advisor effect
securities transactions may be useful to the Advisor in providing services to
the Portfolio.
The Trustees review, from time to time, whether the recapture for the benefit of
the Portfolio of some portion of the brokerage commissions or similar fees paid
by the Fund on portfolio transactions is legally permissible and advisable.
The table below shows total brokerage commissions paid by each Portfolio for the
fiscal years ended July 31 2000, 1999 and 1998, respectively and, for the most
recent fiscal year, the percentage thereof that was allocated to firms based
upon research information provided.
27
<PAGE>
<TABLE>
<CAPTION>
Allocated to Firms Based
------------------------
Portfolio Fiscal 2000 on Research in Fiscal 2000 Fiscal 1999 Fiscal 1998
--------- ----------- -------------------------- ----------- -----------
<S> <C> <C> <C> <C>
Horizon 20+ $157,513 $94,024 $177,324 $188,000
Horizon 10+ $130,096 $73,962 $138,708 $141,000
Horizon 5 $60,280 $38,920 $39,679 $52,000
</TABLE>
PURCHASE, REPURCHASE 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 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
28
<PAGE>
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.
Alternative Purchase Arrangements. Class A shares of each Portfolio are sold to
investors subject to an initial sales charge. Class B shares are sold without an
initial sales charge but are subject to higher ongoing expenses than Class A
shares and a contingent deferred sales charge payable upon certain redemptions.
Class B shares automatically convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales charge but are subject to
higher ongoing expenses than Class A shares, are subject to a contingent
deferred sales charge payable upon certain redemptions within the first year
following purchase, and do not convert into another class. When placing purchase
orders, investors must specify whether the order is for Class A, Class B or
Class C shares.
The primary distinctions among the classes of each Portfolio's shares lie in
their initial and contingent deferred sales charge structures and in their
ongoing expenses, including asset-based sales charges in the form of Rule 12b-1
distribution fees. These differences are summarized in the table below. See,
also, "Summary of Expenses." Each class has distinct advantages and
disadvantages for different investors, and investors may choose the class that
best suits their circumstances and objectives.
<TABLE>
<CAPTION>
------------------ -------------------- --------------------------------------------- -----------------------
Sales Charge Annual 12b-1 fees (as a % of average Other Information
daily net assets)
------------------ -------------------- --------------------------------------------- -----------------------
<S> <C> <C> <C>
Class A Maximum initial None Initial sales charge
sales charge of waived or reduced for
5.75% of the certain purchases
public offering
price
------------------ -------------------- --------------------------------------------- -----------------------
------------------ -------------------- --------------------------------------------- -----------------------
Class B Maximum 0.75% Shares convert to
contingent Class A shares six
deferred sales years after issuance
charge of 4% of
redemption
proceeds;
declines to zero
after four years
------------------ -------------------- --------------------------------------------- -----------------------
------------------ -------------------- --------------------------------------------- -----------------------
Class C Contingent 0.75% No conversion feature
deferred sales
charge of 1% of
redemption
proceeds for
redemptions made
during first year
after purchase
------------------ -------------------- --------------------------------------------- -----------------------
</TABLE>
The minimum initial investment for each Portfolio is $1,000 and the minimum
subsequent investment is $100. The minimum initial investment for an Individual
Retirement Account is $250 and the minimum subsequent investment is $50. Under
an automatic investment plan, such as Bank Direct Deposit, Payroll Direct
Deposit or Government Direct Deposit, the minimum initial and subsequent
investment is $50. These minimum amounts may be changed at any time in
management's discretion.
Share certificates will not be issued unless requested in writing and may not be
available for certain types of account registrations. It is recommended that
investors not request share certificates unless needed for a specific purpose.
You cannot redeem shares by telephone or wire transfer or use the telephone
exchange privilege if share certificates have been issued. A lost or destroyed
certificate is difficult to replace and can be expensive to the shareholder (a
bond worth 2% or more of the certificate value is normally required).
Initial Sales Charge Alternative--Class A Shares. The public offering price of
Class A shares for purchasers choosing the initial sales charge alternative is
the net asset value plus a sales charge, as set forth below.
29
<PAGE>
<TABLE>
<CAPTION>
Sales Charge
------------
Allowed
to Dealers
As a As a as a
Percentage Percentage Percentage of
of of Net Offering
Amount of Purchase Offering Price Asset Value* Price
------------------ -------------- ------------ -----
<S> <C> <C> <C>
Less than $50,000 5.75% 6.10% 5.20%
$50,000 but less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 3.50 3.63 3.00
$250,000 but less than $500,000 2.60 2.67 2.25
$500,000 but less than $1 million 2.00 2.04 1.75
$1 million and over 0.00** 0.00** ***
</TABLE>
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales
charge as discussed below.
*** Commission is payable by KDI as discussed below.
Each Portfolio receives the entire net asset value of all its Class A shares
sold. KDI, the Portfolios' principal underwriter, retains the sales charge on
sales of Class A shares from which it allows discounts from the applicable
public offering price to investment dealers, which discounts are uniform for all
dealers in the United States and its territories. The normal discount allowed to
dealers is set forth in the above table. Upon notice to all dealers with whom it
has sales agreements, KDI may reallow up to the full applicable sales charge, as
shown in the above table, during periods and for transactions specified in such
notice and such reallowances may be based upon attainment of minimum sales
levels. During periods when 90% or more of the sales charge is reallowed, such
dealers may be deemed to be underwriters as that term is defined in the
Securities Act of 1933.
Class A shares of a Portfolio may be purchased at net asset value by: (a) any
purchaser provided that the amount invested in such Portfolio or other Kemper
Mutual Funds listed under "Special Features--Class A Shares--Combined Purchases"
totals at least $1,000,000 including purchases of Class A shares pursuant to the
"Combined Purchases," "Letter of Intent" and "Cumulative Discount" features
described under "Special Features"; or (b) a participant-directed qualified
retirement plan described in Code Section 401(a), a participant-directed
non-qualified deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district, provided in each
case that such plan has not less than 200 eligible employees (the "Large Order
NAV Purchase Privilege"). Redemption within two years of shares purchased under
the Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge. See "Redemption or Repurchase of Shares--Contingent Deferred Sales
Charge--Large Order NAV Purchase Privilege."
KDI may in its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of a Portfolio at
net asset value in accordance with the Large Order NAV Purchase Privilege up to
the following amounts: 1.00% of the net asset value of shares sold on amounts up
to $5 million, 0.50% on the next $45 million and 0.25% on amounts over $50
million. The commission schedule will be reset on a calendar year basis for
sales of shares pursuant to the Large Order NAV Purchase Privilege to employer
sponsored employee benefit plans using the subaccount recordkeeping system made
available through KSvC. For purposes of determining the appropriate commission
percentage to be applied to a particular sale, KDI will consider the cumulative
amount invested by the purchaser in a Portfolio and other Kemper Mutual Funds
listed under "Special Features--Class A Shares--Combined Purchases," including
purchases pursuant to the "Combined Purchases," "Letter of Intent" and
"Cumulative Discount" features referred to above. The privilege of purchasing
Class A shares of a Portfolio at net asset value under the Large Order NAV
Purchase Privilege is not available if another net asset value purchase
privilege also applies.
Effective on February 1, 1996, Class A shares of a Portfolio or any other Kemper
Mutual Fund listed under "Special Features--Class A Shares--Combined Purchases"
may be purchased at net asset value in any amount by members of the plaintiff
class in the proceeding known as Howard and Audrey Tabankin, et al. v. Kemper
Short-Term Global Income Fund, et al., Case No. 93 C 5231 (N.D. IL). This
privilege is
30
<PAGE>
generally non-transferable and continues for the lifetime of individual class
members and for a ten year period for non-individual class members. To make a
purchase at net asset value under this privilege, the investor must, at the time
of purchase, submit a written request that the purchase be processed at net
asset value pursuant to this privilege specifically identifying the purchaser as
a member of the "Tabankin Class." Shares purchased under this privilege will be
maintained in a separate account that includes only shares purchased under this
privilege. For more details concerning this privilege, class members should
refer to the Notice of (1) Proposed Settlement with Defendants; and (2) Hearing
to Determine Fairness of Proposed Settlement, dated August 31, 1995, issued in
connection with the aforementioned court proceeding. For sales of Portfolio
shares at net asset value pursuant to this privilege, KDI may in its discretion
pay investment dealers and other financial services firms a concession, payable
quarterly, at an annual rate of up to 0.25% of net assets attributable to such
shares maintained and serviced by the firm. A firm becomes eligible for the
concession based upon assets in accounts attributable to shares purchased under
this privilege in the month after the month of purchase and the concession
continues until terminated by KDI. The privilege of purchasing Class A shares of
a Portfolio at net asset value under this privilege is not available if another
net asset value purchase privilege also applies.
Class A shares of a Portfolio may be purchased at net asset value by persons who
purchase such shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm.
Class A shares of a Portfolio may be purchased at net asset value in any amount
by certain professionals who assist in the promotion of Kemper Funds pursuant to
personal services contracts with KDI, for themselves or members of their
families. KDI in its discretion may compensate financial services firms for
sales of Class A shares under this privilege at a commission rate of 0.50% of
the amount of Class A shares purchased.
Class A shares of a Portfolio may be purchased at net asset value by persons who
purchase shares of the Portfolio through KDI as part of an automated billing and
wage deduction program administered by RewardsPlus of America for the benefit of
employees of participating employer groups.
Class A shares may be sold at net asset value in any amount to: (a) officers,
trustees, directors, employees (including retirees) and sales representatives of
a Portfolio, its investment manager, its principal underwriter or certain
affiliated companies, for themselves or members of their families; (b)
registered representatives and employees of broker-dealers having selling group
agreements with KDI and officers, directors and employees of service agents of
the Portfolios, for themselves or their spouses or dependent children; (c)
shareholders who owned shares of Kemper Value Series, Inc. ("KVS") on September
8, 1995, and have continuously owned shares of KVS (or a Kemper Fund acquired by
exchange of KVS shares) since that date, for themselves or members of their
families; and (d) any trust, pension, profit-sharing or other benefit plan for
only such persons. Class A shares may be sold at net asset value in any amount
to selected employees (including their spouses and dependent children) of banks
and other financial services firms that provide administrative services related
to order placement and payment to facilitate transactions in shares of the
Portfolios for their clients pursuant to an agreement with KDI or one of its
affiliates. Only those employees of such banks and other firms who as part of
their usual duties provide services related to transactions in Portfolio shares
may purchase Portfolio Class A shares at net asset value hereunder. Class A
shares may be sold at net asset value in any amount to unit investment trusts
sponsored by Ranson & Associates, Inc. In addition, unitholders of unit
investment trusts sponsored by Ranson & Associates, Inc. or its predecessors may
purchase a Portfolio's Class A shares at net asset value through reinvestment
programs described in the prospectuses of such trusts that have such programs.
Class A shares of a Portfolio may be sold at net asset value through certain
investment advisors registered under the Investment Advisors Act of 1940 and
other financial services firms acting solely as agent for their clients that
adhere to certain standards established by KDI, including a requirement that
such shares be sold for the benefit of their clients participating in an
investment advisory program or agency commissions program under which such
clients pay a fee to the Advisor or other firm for portfolio management and
brokerage services. Such shares are sold for investment purposes and on the
condition that they will not be resold except through redemption or repurchase
by the Portfolios. The Portfolios may also issue Class A shares at net asset
value in connection with the acquisition of the assets of or merger or
consolidation with another investment company, or to shareholders in connection
with the investment or reinvestment of income and capital gain dividends.
31
<PAGE>
The sales charge scale is applicable to purchases made at one time by any
"purchaser" which includes: an individual; or an individual, his or her spouse
and children under the age of 21; or a trustee or other fiduciary of a single
trust estate or single fiduciary account; or an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Code; or a pension,
profit-sharing or other employee benefit plan whether or not qualified under
Section 401 of the Code; or other organized group of persons whether
incorporated or not, provided the organization has been in existence for at
least six months and has some purpose other than the purchase of redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales charge, all orders from an organized group will have to be
placed through a single investment dealer or other firm and identified as
originating from a qualifying purchaser.
Deferred Sales Charge Alternative--Class B Shares. Investors choosing the
deferred sales charge alternative may purchase Class B shares at net asset value
per share without any sales charge at the time of purchase. Since Class B shares
are being sold without an initial sales charge, the full amount of the
investor's purchase payment will be invested in Class B shares for his or her
account. A contingent deferred sales charge may be imposed upon redemption of
Class B shares. (See "Redemption or Repurchase of Shares--Contingent Deferred
Sales Charge--Class B Shares.")
KDI compensates firms for sales of Class B shares at the time of sale at a
commission rate of up to 3.75% of the amount of Class B shares purchased. KDI is
compensated by each Portfolio for services as distributor and principal
underwriter for Class B shares. See "Investment Manager and Underwriter."
Class B shares of a Portfolio will automatically convert to Class A shares of
the same Portfolio six years after issuance on the basis of the relative net
asset value per share. Class B shareholders of the Portfolios who originally
acquired their shares as Initial Shares of Kemper Portfolios, formerly known as
Kemper Investment Portfolios ("KIP"), hold them subject to the same conversion
period schedule as that of their KIP. Class B shares representing Initial Shares
of a former KIP Portfolio will automatically convert to Class A shares of the
applicable Portfolio six years after issuance. The purpose of the conversion
feature is to relieve holders of Class B shares from the distribution services
fee when they have been outstanding long enough for KDI to have been compensated
for distribution related expenses. For purposes of conversion to Class A shares,
shares purchased through the reinvestment of dividends and other distributions
paid with respect to Class B shares in a shareholder's Portfolio account will be
converted to Class A shares on a pro rata basis.
Purchase of Class C Shares. The public offering price of the Class C shares of a
Portfolio is the next determined net asset value. No initial sales charge is
imposed. Since Class C shares are sold without an initial sales charge, the full
amount of the investor's purchase payment will be invested in Class C shares for
his or her account. A contingent deferred sales charge may be imposed upon the
redemption of Class C shares if they are redeemed within one year of purchase.
See "Redemption or Repurchase of Shares--Contingent Deferred Sales Charge--Class
C Shares." KDI currently advances to firms the first year distribution fee at a
rate of 0.75% of the purchase price of such shares. For periods after the first
year, KDI currently intends to pay firms for sales of Class C shares a
distribution fee, payable quarterly, at an annual rate of 0.75% of net assets
attributable to Class C shares maintained and serviced by the firm. KDI is
compensated by each Portfolio for services as distributor and principal
underwriter for Class C shares. See "Investment Manager and Underwriter."
Which Arrangement is Better for You? The decision as to which class of shares
provides a more suitable investment for an investor depends on a number of
factors, including the amount and intended length of the investment. Investors
making investments that qualify for reduced sales charges might consider Class A
shares. Investors who prefer not to pay an initial sales charge and who plan to
hold their investment for more than six years might consider Class B shares.
Investors who prefer not to pay an initial sales charge but who plan to redeem
their shares within six years might consider Class C shares. Orders for Class B
shares or Class C shares for $500,000 or more will be declined. Orders for Class
B shares or Class C shares by employer sponsored employee benefit plans using
the subaccount record keeping system made available through the Shareholder
Service Agent will be invested instead in Class A shares at net asset value
where the combined subaccount value in a Portfolio or other Kemper Mutual Funds
listed under "Special Features -- Class A Shares -- Combined Purchases" is in
excess of $5 million including purchases pursuant to the "Combined Purchases,"
"Letter of Intent" and "Cumulative Discount" features described under "Special
Features." For more information about the three sales arrangements, consult your
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financial representative or the Shareholder Service Agent. Financial services
firms may receive different compensation depending upon which class of shares
they sell.
General. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of a Portfolio for their clients, and KDI may pay them a transaction fee
up to the level of the discount or commission allowable or payable to dealers,
as described above. Banks or other financial services firms may be subject to
various federal and state laws regarding the services described above and may be
required to register as dealers pursuant to state law. If banking firms were
prohibited from acting in any capacity or providing any of the described
services, management would consider what action, if any, would be appropriate.
KDI does not believe that termination of a relationship with a bank would result
in any material adverse consequences to a Portfolio.
KDI may, from time to time, pay or allow to firms a 1% commission on the amount
of shares of the Portfolio sold under the following conditions: (i) the
purchased shares are held in a Kemper IRA account, (ii) the shares are purchased
as a direct "roll over" of a distribution from a qualified retirement plan
account maintained on a participant subaccount record keeping system provided by
KSvC, (iii) the registered representative placing the trade is a member of
ProStar, a group of persons designated by KDI in acknowledgment of their
dedication to the employee benefit plan area; and (iv) the purchase is not
otherwise subject to a commission.
In addition to the discounts or commissions described above, KDI will, from time
to time, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash, to firms that sell shares of the Portfolios. In
some instances, such discounts, commissions or other incentives will be offered
only to certain firms that sell or are expected to sell during specified time
periods certain minimum amounts of shares of the Portfolios, or other funds
underwritten by KDI.
Orders for the purchase of shares of a Portfolio will be confirmed at a price
based on the net asset value of that Portfolio next determined after receipt by
KDI of the order accompanied by payment. However, orders received by dealers or
other financial services firms prior to the determination of net asset value
(see "Net Asset Value") and received by KDI prior to the close of its business
day will be confirmed at a price based on the net asset value effective on that
day ("trade date"). The Portfolios reserve the right to determine the net asset
value more frequently than once a day if deemed desirable. Dealers and other
financial services firms are obligated to transmit orders promptly. Collection
may take significantly longer for a check drawn on a foreign bank than for a
check drawn on a domestic bank. Therefore, if an order is accompanied by a check
drawn on a foreign bank, funds must normally be collected before shares will be
purchased.
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem the Portfolios' shares. Some may establish higher
minimum investment requirements than set forth above. Firms may arrange with
their clients for other investment or administrative services. Such firms may
independently establish and charge additional amounts to their clients for such
services, which charges would reduce the clients' return. Firms also may hold
the Portfolios' shares in nominee or street name as agent for and on behalf of
their customers. In such instances, the Portfolios' transfer agent will have no
information with respect to or control over the accounts of specific
shareholders. Such shareholders may obtain access to their accounts and
information about their accounts only from their firm. Certain of these firms
may receive compensation from the Portfolios through the Shareholder Service
Agent for recordkeeping and other expenses relating to these nominee accounts.
In addition, certain privileges with respect to the purchase and redemption of
shares or the reinvestment of dividends may not be available through such firms.
Some firms may participate in a program allowing them access to their clients'
accounts for servicing including, without limitation, transfers of registration
and dividend payee changes; and may perform functions such as generation of
confirmation statements and disbursement of cash dividends. Such firms,
including affiliates of KDI, may receive compensation from the Portfolios
through the Shareholder Service Agent for these services. This statement of
additional information should be read in connection with such firms' material
regarding their fees and services.
The Portfolios reserve the right to withdraw all or any part of the offering
made by this statement of additional information and to reject purchase orders.
Also, from time to time, each Portfolio may temporarily suspend the offering of
any class of its shares to new investors. During the period of such
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suspension, persons who are already shareholders of such class of such Portfolio
normally are permitted to continue to purchase additional shares of such class
and to have dividends reinvested.
Shareholders should direct their inquiries to KSvC, 811 Main Street, Kansas
City, Missouri 64105-2005 or to the firm from which they received this statement
of additional information.
As described herein, 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. 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 Portfolio 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. The amount received by a shareholder upon redemption or
repurchase may be more or less than the amount paid for such shares depending on
the market value of the Portfolio's portfolio securities at the time.
Upon receipt by the Shareholder Service Agent of a request for redemption,
shares of a Portfolio will be redeemed by the Portfolio at the applicable net
asset value per share of such Portfolio as described herein.
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 or Class C shares, by certain classes of persons or
through certain types of transactions, are provided because of anticipated
economies in sales and sales related efforts.
A Portfolio 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
Portfolio to determine the value of its net assets, or (c) for such other
periods as the SEC may by order permit for the protection of a Portfolio'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 each Portfolio 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 the 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 herein.
The Portfolios have 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 Portfolio's shares. Those
brokers may also designate other parties to accept purchase and redemption
orders on the Portfolio's behalf. Orders for purchase or redemption will be
deemed to have been received by the Portfolio when such brokers or their
authorized designees accept the orders. Subject to the terms of the contract
between the Portfolio and the broker, ordinarily orders will be priced as the
Portfolio's net asset value next computed after acceptance by such brokers or
their authorized designees. Further, if purchases or redemptions of the
Portfolio'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 Portfolio at any time for any
reason.
REDEMPTION OR REPURCHASE OF SHARES
General. Any shareholder may require a Portfolio to redeem his or her shares.
When shares are held for the account of a shareholder by the Portfolios'
transfer agent, the shareholder may redeem them by
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sending a written request with signatures guaranteed to Kemper Mutual Funds,
Attention: Redemption Department, P.O. Box 419557, Kansas City, Missouri
64141-6557. When certificates for shares have been issued, they must be mailed
to or deposited with the Shareholder Service Agent, along with a duly endorsed
stock power and accompanied by a written request for redemption. Redemption
requests and a stock power must be endorsed by the account holder with
signatures guaranteed by a commercial bank, trust company, savings and loan
association, federal savings bank, member firm of a national securities exchange
or other eligible financial institution. The redemption request and stock power
must be signed exactly as the account is registered including any special
capacity of the registered owner. Additional documentation may be requested, and
a signature guarantee is normally required, from institutional and fiduciary
account holders, such as corporations, custodians (e.g., under the Uniform
Transfers to Minors Act), executors, administrators, trustees or guardians.
The redemption price for shares of a Portfolio will be the net asset value per
share of that Portfolio next determined following receipt by the Shareholder
Service Agent of a properly executed request with any required documents as
described above. Payment for shares redeemed will be made in cash as promptly as
practicable but in no event later than seven days after receipt of a properly
executed request accompanied by any outstanding share certificates in proper
form for transfer. When a Portfolio is asked to redeem shares for which it may
not have yet received good payment (i.e., purchases by check, Express-Transfer
or Bank Direct Deposit), it may delay transmittal of redemption proceeds until
it has determined that collected funds have been received for the purchase of
such shares, which will be up to 10 days from receipt by a Portfolio of the
purchase amount. The redemption within two years of Class A shares purchased at
net asset value under the Large Order NAV Purchase Privilege may be subject to a
contingent deferred sales charge (see "Purchase of Shares--Initial Sales Charge
Alternative--Class A Shares"), the redemption of Class B shares within six years
may be subject to a contingent deferred sales charge (see "Contingent Deferred
Sales Charge--Class B Shares" below), and the redemption of Class C shares
within the first year following purchase may be subject to a contingent deferred
sales charge (see "Contingent Deferred Sales Charge--Class C Shares" below).
Because of the high cost of maintaining small accounts the Portfolios may assess
a quarterly fee of $9 on an account with a balance below $1,000 for the quarter.
The fee will not apply to accounts enrolled in an automatic investment program,
Individual Retirement Accounts or employer sponsored employee benefit plans
using the subaccount record keeping system made available through the
Shareholder Service Agent.
Shareholders can request the following telephone privileges: expedited wire
transfer redemptions and EXPRESS-Transfer transactions (see "Special Features")
and exchange transactions for individual and institutional accounts and
pre-authorized telephone redemption transactions for certain institutional
accounts. Shareholders may choose these privileges on the account application or
by contacting the Shareholder Service Agent for appropriate instructions. Please
note that the telephone exchange privilege is automatic unless the shareholder
refuses it on the account application. A Portfolio or its agents may be liable
for any losses, expenses or costs arising out of fraudulent or unauthorized
telephone requests pursuant to these privileges unless the Portfolio or its
agents reasonably believe, based upon reasonable verification procedures, that
the telephonic instructions are genuine. The shareholder will bear the risk of
loss, including loss resulting from fraudulent or unauthorized transactions, so
long as reasonable verification procedures are followed. Verification procedures
include recording instructions, requiring certain identifying information before
acting upon instructions and sending written confirmations.
Telephone Redemptions. If the proceeds of the redemption (prior to the
imposition of any contingent deferred sales charge) are $50,000 or less and the
proceeds are payable to the shareholder of record at the address of record,
normally a telephone request or a written request by any one account holder
without a signature guarantee is sufficient for redemptions by individual or
joint account holders, and trust, executor, guardian or custodian account
holders, provided the trustee, executor, guardian or custodian is named in the
account registration. Other institutional account holders may exercise this
special privilege of redeeming shares by telephone request or written request
without signature guarantee subject to the same conditions as individual account
holders and subject to the limitations on liability described under "General"
above, provided that this privilege has been pre-authorized by the institutional
account holder or guardian account holder by written instruction to the
Shareholder Service Agent with signatures guaranteed. Telephone requests may be
made by calling 1-800-621-1048. Shares purchased by check or through
EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this privilege
of redeeming shares by
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telephone request until such shares have been owned for at least 10 days. This
privilege of redeeming shares by telephone request or by written request without
a signature guarantee may not be used to redeem shares held in certificated form
and may not be used if the shareholder's account has had an address change
within 30 days of the redemption request. During periods when it is difficult to
contact the Shareholder Service Agent by telephone, it may be difficult to use
the telephone redemption privilege, although investors can still redeem by mail.
The Portfolios reserve the right to terminate or modify this privilege at any
time.
Repurchases (Confirmed Redemptions). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to KDI, which each Portfolio has authorized to act as its agent.
There is no charge by KDI with respect to repurchases; however, dealers or other
firms may charge customary commissions for their services. Dealers and other
financial services firms are obligated to transmit orders promptly. The
repurchase price will be the net asset value of the Portfolio next determined
after receipt of a request by KDI. However, requests for repurchases received by
dealers or other firms prior to the determination of net asset value (see "Net
Asset Value") and received by KDI prior to the close of KDI's business day will
be confirmed at the net asset value effective on that day. The offer to
repurchase may be suspended at any time. Requirements as to stock powers,
certificates, payments and delay of payments are the same as for redemptions.
Expedited Wire Transfer Redemptions. If the account holder has given
authorization for expedited wire redemption to the account holder's brokerage or
bank account, shares of a Portfolio can be redeemed and proceeds sent by federal
wire transfer to a single previously designated account. Requests received by
the Shareholder Service Agent prior to the determination of net asset value will
result in shares being redeemed that day at the net asset value of the Portfolio
effective on that day and normally the proceeds will be sent to the designated
account the following business day. Delivery of the proceeds of a wire
redemption of $250,000 or more may be delayed by the Portfolio for up to seven
days if Scudder Kemper deems it appropriate under then current market
conditions. Once authorization is on file, the Shareholder Service Agent will
honor requests by telephone at 1-800-621-1048 or in writing, subject to the
limitations on liability described under "General" above. The Portfolios are not
responsible for the efficiency of the federal wire system or the account
holder's financial services firm or bank. The Portfolios currently do not charge
the account holder for wire transfers. The account holder is responsible for any
charges imposed by the account holder's firm or bank. There is a $1,000 wire
redemption minimum (including any contingent deferred sales charge). To change
the designated account to receive wire redemption proceeds, send a written
request to the Shareholder Service Agent with signatures guaranteed as described
above or contact the firm through which shares of the Portfolio were purchased.
Shares purchased by check or through EXPRESS-Transfer or Bank Direct Deposit may
not be redeemed by wire transfer until such shares have been owned for at least
10 days. Account holders may not use this privilege to redeem shares held in
certificated form. During periods when it is difficult to contact the
Shareholder Service Agent by telephone, it may be difficult to use the expedited
wire transfer redemption privilege. The Portfolios reserve the right to
terminate or modify this privilege at any time.
Contingent Deferred Sales Charge--Large Order NAV Purchase Privilege. A
contingent deferred sales charge may be imposed upon redemption of Class A
shares that are purchased under the Large Order NAV Purchase Privilege as
follows: 1% if they are redeemed within one year of purchase and 0.50% if they
are redeemed during the second year after purchase. The charge will not be
imposed upon redemption of reinvested dividends or share appreciation. The
charge is applied to the value of the shares redeemed excluding amounts not
subject to the charge. The contingent deferred sales charge will be waived in
the event of: (a) redemptions by a participant-directed qualified retirement
plan described in Code Section 401(a), a participant-directed non-qualified
deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district; (b) redemptions by
employer sponsored employee benefit plans using the subaccount record keeping
system made available through the Shareholder Service Agent; (c) redemption of
shares of a shareholder (including a registered joint owner) who has died; (d)
redemption of shares of a shareholder (including a registered joint owner) who
after purchase of the shares being redeemed becomes totally disabled (as
evidenced by a determination by the federal Social Security Administration); (e)
redemptions under a Portfolio's Systematic Withdrawal Plan at a maximum of 10%
per year of the net asset value of the account; and (f) redemptions of shares
whose dealer of record at the
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time of the investment notifies KDI that the dealer waives the commission
applicable to such Large Order NAV Purchase.
Contingent Deferred Sales Charge--Class B Shares. A contingent deferred sales
charge may be imposed upon redemption of Class B shares. There is no such charge
upon redemption of any share appreciation or reinvested dividends on Class B
shares. The charge is computed at the following rates applied to the value of
the shares redeemed excluding amounts not subject to the charge.
Contingent
Deferred
Year of Redemption Sales
After Purchase Charge
-------------- ------
First 4%
Second 3%
Third 3%
Fourth 2%
Fifth 2%
Sixth 1%
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special
Features--Systematic Withdrawal Plan" below), (d) for redemptions made pursuant
to any IRA systematic withdrawal based on the shareholder's life expectancy
including, but not limited to, substantially equal periodic payments described
in Internal Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2 and (e) for
redemptions to satisfy required minimum distributions after age 70 1/2 from an
IRA account (with the maximum amount subject to this waiver being based only
upon the shareholder's Kemper IRA accounts). The contingent deferred sales
charge will also be waived in connection with the following redemptions of
shares held by employer sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service
Agent: (a) redemptions to satisfy participant loan advances (note that loan
repayments constitute new purchases for purposes of the contingent deferred
sales charge and the conversion privilege), (b) redemptions in connection with
retirement distributions (limited at any one time to 10% of the total value of
plan assets invested in a Portfolio), (c) redemptions in connection with
distributions qualifying under the hardship provisions of the Internal Revenue
Code and (d) redemptions representing returns of excess contributions to such
plans.
Contingent Deferred Sales Charge--Class C Shares. A contingent deferred sales
charge of 1% may be imposed upon redemption of Class C shares if they are
redeemed within one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The charge is applied
to the value of the shares redeemed excluding amounts not subject to the charge.
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (limited to 10% of the
net asset value of the account during the first year, see "Special
Features--Systematic Withdrawal Plan"), (d) for redemptions made pursuant to any
IRA systematic withdrawal based on the shareholder's life expectancy including,
but not limited to, substantially equal periodic payments described in Internal
Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2, (e) for redemptions to
satisfy required minimum distributions after age 70 1/2 from an IRA account
(with the maximum amount subject to this waiver being based only upon the
shareholder's Kemper IRA accounts), (f) for any participant-directed redemption
of shares held by employer sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service Agent
and (g) redemption of shares by an employer sponsored employee benefit plan that
offers funds in addition to Kemper Funds and whose dealer of record has waived
the advance of the first year administrative service and distribution fees
applicable to such shares and agrees to receive such fees quarterly.
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Contingent Deferred Sales Charge--General. The following example will illustrate
the operation of the contingent deferred sales charge. Assume that an investor
makes a single purchase of $10,000 of a Portfolio's Class B shares and that 16
months later the value of the shares has grown by $1,000 through reinvested
dividends and by an additional $1,000 of share appreciation to a total of
$12,000. If the investor were then to redeem the entire $12,000 in share value,
the contingent deferred sales charge would be payable only with respect to
$10,000 because neither the $1,000 of reinvested dividends nor the $1,000 of
share appreciation is subject to the charge. The charge would be at the rate of
3% ($300) because it was in the second year after the purchase was made.
The rate of the contingent deferred sales charge is determined by the length of
the period of ownership. Investments are tracked on a monthly basis. The period
of ownership for this purpose begins the first day of the month in which the
order for the investment is received. For example, an investment made in
December, 1996 will be eligible for the second year's charge if redeemed on or
after December 1, 1997. In the event no specific order is requested when
redeeming shares subject to a contingent deferred sales charge, the redemption
will be made first from shares representing reinvested dividends and then from
the earliest purchase of shares. KDI receives any contingent deferred sales
charge directly.
Reinvestment Privilege. A shareholder who has redeemed Class A shares of a
Portfolio or any other Kemper Mutual Fund listed under "Special Features--Class
A Shares--Combined Purchases" (other than shares of the Kemper Cash Reserves
Fund purchased directly at net asset value) may reinvest up to the full amount
redeemed at net asset value at the time of the reinvestment in Class A shares of
a Portfolio or of the other listed Kemper Mutual Funds. A shareholder of a
Portfolio or other Kemper Mutual Fund who redeems Class A shares purchased under
the Large Order NAV Purchase Privilege (see "Purchase of Shares--Initial Sales
Charge Alternative--Class A Shares") or Class B shares or Class C shares and
incurs a contingent deferred sales charge may reinvest up to the full amount
redeemed at net asset value at the time of the reinvestment, in Class A shares,
Class B shares or Class C shares, as the case may be, of a Portfolio or of other
Kemper Mutual Funds. The amount of any contingent deferred sales charge also
will be reinvested. These reinvested shares will retain their original cost and
purchase date for purposes of the contingent deferred sales charge. Also, a
holder of Class B shares who has redeemed shares may reinvest up to the full
amount redeemed, less any applicable contingent deferred sales charge that may
have been imposed upon the redemption of such shares, at net asset value in
Class A shares of a Portfolio or of the other Kemper Mutual Funds listed under
"Special Features--Class A Shares--Combined Purchases." Purchases through the
reinvestment privilege are subject to the minimum investment requirements
applicable to the shares being purchased and may only be made for Kemper Mutual
Funds available for sale in the shareholder's state of residence as listed under
"Special Features--Exchange Privilege." The reinvestment privilege can be used
only once as to any specific shares and reinvestment must be effected within six
months of the redemption. If a loss is realized on the redemption of shares of a
Portfolio, the reinvestment in shares of a Portfolio may be subject to the "wash
sale" rules if made within 30 days of the redemption, resulting in a
postponement of the recognition of such loss for federal income tax purposes.
The reinvestment privilege may be terminated or modified at any time.
SPECIAL FEATURES
Class A Shares--Combined Purchases. Each Portfolio's Class A shares (or the
equivalent) may be purchased at the rate applicable to the discount bracket
attained by combining concurrent investments in Class A shares of any of the
following funds: Classic Growth Fund, Kemper Technology Fund, Kemper Total
Return Fund, Kemper Growth Fund, Kemper Small Capitalization Equity Fund, Kemper
Income and Capital Preservation Fund, Kemper Municipal Bond Fund, Kemper
Strategic Income Fund, Kemper High Yield Series, Kemper U.S. Government
Securities Fund, Kemper International Fund, Kemper State Tax-Free Income Series,
Kemper Blue Chip Fund, Kemper Global Income Fund, Kemper Target Equity Fund
(series are subject to a limited offering period), Kemper Intermediate Municipal
Bond Fund, Kemper Cash Reserves Fund, Kemper U.S. Mortgage Fund, Kemper
Short-Intermediate Government Fund, Kemper Value Plus Growth Fund, Kemper
Horizon Fund, Kemper New Europe Fund, Inc., Kemper Asian Growth Fund, Kemper
Equity Trust, Kemper Securities Trust, Kemper Aggressive Growth Fund, Kemper
Global/International Series, Inc., Scudder 21st Century Fund, The Japan Fund,
Inc., Scudder High Yield Tax Free Fund, Global Discovery Fund, and Value Fund,
("Scudder Kemper Mutual Funds"). Except as noted below, there is no combined
purchase credit for direct purchases of shares of Zurich Money Funds, Cash
Equivalent Fund, Tax-Exempt California Money Market Fund, Cash Account Trust,
Investors
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Municipal Cash Fund or Investors Cash Trust ("Money Market Funds"), which are
not considered "Scudder Kemper Mutual Funds" for purposes hereof. For purposes
of the Combined Purchases feature described above as well as for the Letter of
Intent and Cumulative Discount features described below, employer sponsored
employee benefit plans using the subaccount record keeping system made available
through the Shareholder Service Agent may include: (a) Money Market Funds as
"Kemper Mutual Funds", (b) all classes of shares of any Scudder Kemper Mutual
Fund and (c) the value of any other plan investment, such as guaranteed
investment contracts and employer stock, maintained on such subaccount record
keeping system.
Class A Shares--Letter of Intent. The same reduced sales charges for Class A
shares, as shown in the applicable prospectus or herein, also apply to the
aggregate amount of purchases of such Scudder Kemper Mutual Funds listed above
made by any purchaser within a 24-month period under a written Letter of Intent
("Letter") provided by KDI. The Letter, which imposes no obligation to purchase
or sell additional Class A shares, provides for a price adjustment depending
upon the actual amount purchased within such period. The Letter provides that
the first purchase following execution of the Letter must be at least 5% of the
amount of the intended purchase, and that 5% of the amount of the intended
purchase normally will be held in escrow in the form of shares pending
completion of the intended purchase. If the total investments under the Letter
are less than the intended amount and thereby qualify only for a higher sales
charge than actually paid, the appropriate number of escrowed shares are
redeemed and the proceeds used toward satisfaction of the obligation to pay the
increased sales charge. The Letter for an employer sponsored employee benefit
plan maintained on the subaccount record keeping system available through the
Shareholder Service Agent may have special provisions regarding payment of any
increased sales charge resulting from a failure to complete the intended
purchase under the Letter. A shareholder may include the value (at the maximum
offering price) of all shares of such Scudder Kemper Mutual Funds held of record
as of the initial purchase date under the Letter as an "accumulation credit"
toward the completion of the Letter, but no price adjustment will be made on
such shares. Only investments in Class A shares are included in this privilege.
Class A Shares--Cumulative Discount. Class A shares of a Portfolio may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of a Portfolio being purchased, the value of all Class A
shares of the above mentioned Scudder Kemper Mutual Funds (computed at the
maximum offering price at the time of the purchase for which the discount is
applicable) already owned by the investor.
Class A Shares--Availability of Quantity Discounts. An investor or the
investor's dealer or other financial services firm must notify the Shareholder
Service Agent or KDI whenever a quantity discount or reduced sales charge is
applicable to a purchase. Upon such notification, the investor will receive the
lowest applicable sales charge. Quantity discounts described above may be
modified or terminated at any time.
Exchange Privilege. Shareholders of Class A, Class B and Class C shares may
exchange their shares for shares of the corresponding class of other Scudder
Kemper Mutual Funds in accordance with the provisions below.
Class A Shares. Class A shares of the Scudder Kemper Mutual Funds and shares of
the Money Market Funds listed under "Special Features--Class A Shares--Combined
Purchases" above may be exchanged for each other at their relative net asset
values. Shares of Money Market Funds and the Kemper Cash Reserves Fund that were
acquired by purchase (not including shares acquired by dividend reinvestment)
are subject to the applicable sales charge on exchange. Series of Kemper Target
Equity Fund are available on exchange only during the Offering Period for such
series as described in the applicable prospectus or statement of additional
information. Cash Equivalent Fund, Tax-Exempt California Money Market Fund, Cash
Account Trust, Investors Municipal Cash Fund and Investors Cash Trust are
available on exchange but only through a financial services firm having a
services agreement with KDI.
Class A shares of a Portfolio purchased under the Large Order NAV Purchase
Privilege may be exchanged for Class A shares of another Kemper Mutual Fund or a
Money Market Fund under the exchange privilege described above without paying
any contingent deferred sales charge at the time of exchange. If the Class A
shares received on exchange are redeemed thereafter, a contingent deferred sales
charge may be imposed in accordance with the foregoing requirements provided
that the shares redeemed will retain their original cost and purchase date for
purposes of the contingent deferred sales charge.
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Class B Shares. Class B shares of a Portfolio and Class B shares of any other
Kemper Mutual Fund listed under "Special Features--Class A Shares--Combined
Purchases" may be exchanged for each other at their relative net asset values.
Class B shares may be exchanged without a contingent deferred sales charge being
imposed at the time of exchange. For purposes of the contingent deferred sales
charge that may be imposed upon the redemption of the Class B shares received on
exchange, amounts exchanged retain their original cost and purchase date.
Class C Shares. Class C shares of a Portfolio and Class C shares of any other
Kemper Mutual Fund listed under "Special Features--Class A Shares--Combined
Purchases" may be exchanged for each other at their relative net asset values.
Class C shares may be exchanged without a contingent deferred sales charge being
imposed at the time of exchange. For determining whether there is a contingent
deferred sales charge that may be imposed upon the redemption of the Class C
shares received by exchange, they retain the cost and purchase date of the
shares that were originally purchased and exchanged.
General. Shares of a Kemper Mutual Fund with a value in excess of $1,000,000
(except Kemper Cash Reserves Fund) acquired by exchange from another Kemper
Mutual Fund, or from a Money Market Fund, may not be exchanged thereafter until
they have been owned for 15 days (the "15-Day Hold Policy"). Effective June 1,
1999, in addition to the current limits on exchanges of shares with a value over
$1,000,000, shares of a Kemper Mutual Fund with a value of $1,000,000 or less
(except Kemper Cash Reserves Fund) acquired by exchange from another Kemper
Mutual Fund, or from a Money Market Fund, may not be exchanged thereafter until
they have been owned for 15 days if, in the investment manager's judgement, the
exchange activity may have an adverse effect on the Portfolio. In, particular, a
pattern of exchanges that coincides a "market timing" strategy may be disruptive
to the Portfolio and therefore may be subject to the 15-Day Hold Policy. For
purposes of determining whether the 15-Day Hold Policy applies to a particular
exchange, the value of the shares to be exchanged shall be computed by
aggregating the value of shares being exchanged for all accounts under common
control, discretion or advice, including without limitation accounts
administered by a financial services firm offering market timing, asset
allocation or similar services. The total value of shares being exchanged must
at least equal the minimum investment requirement of the Kemper Fund into which
they are being exchanged. Exchanges are made based on relative dollar values of
the shares involved in the exchange. There is no service fee for an exchange;
however, dealers or other firms may charge for their services in effecting
exchange transactions. Exchanges will be effected by redemption of shares of the
Portfolio held and purchase of shares of the other Portfolio. For federal income
tax purposes, any such exchange constitutes a sale upon which a gain or loss may
be realized, depending upon whether the value of the shares being exchanged is
more or less than the shareholder's adjusted cost basis of such shares.
Shareholders interested in exercising the exchange privilege may obtain
prospectuses of the other funds from dealers, other firms or KDI. Exchanges may
be accomplished by a written request to KSvC, Attention: Exchange Department,
P.O. Box 419557, Kansas City, Missouri 64141-6557, or by telephone if the
shareholder has given authorization. Once the authorization is on file, the
Shareholder Service Agent will honor requests by telephone at 1-800-621-1048,
subject to the limitations on liability under "Redemption or Repurchase of
Shares--General." Any share certificates must be deposited prior to any exchange
of such shares. During periods when it is difficult to contact the Shareholder
Service Agent by telephone, it may be difficult to use the telephone exchange
privilege. The exchange privilege is not a right and may be suspended,
terminated or modified at any time. Exchanges may only be made for funds that
are available for sale in the shareholder's state of residence. Currently,
Tax-Exempt California Money Market Fund is available for sale only in California
and the portfolios of Investors Municipal Cash Fund are available for sale only
in certain states.
Systematic Exchange Privilege. The owner of $1,000 or more of any class of the
shares of a Kemper Mutual Fund or Money Market Fund may authorize the automatic
exchange of a specified amount ($100 minimum) of such shares for shares of the
same class of another such Kemper Fund. If selected, exchanges will be made
automatically until the privilege is terminated by the shareholder or the Kemper
Fund. Exchanges are subject to the terms and conditions described above under
"Exchange Privilege," except that the $1,000 minimum investment requirement for
the Kemper Fund acquired on exchange is not applicable. This privilege may not
be used for the exchange of shares held in certificated form.
EXPRESS-Transfer. EXPRESS-Transfer permits the transfer of money via the
Automated Clearing House System (minimum $100 and maximum $50,000) from a
shareholder's bank, savings and loan, or credit union account to purchase shares
in a Fund. Shareholders can also redeem shares (minimum $100
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and maximum $50,000) from their Portfolio account and transfer the proceeds to
their bank, savings and loan, or credit union checking account. Shares purchased
by check or through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed
under this privilege until such shares have been owned for at least 10 days. By
enrolling in EXPRESS-Transfer, the shareholder authorizes the Shareholder
Service Agent to rely upon telephone instructions from any person to transfer
the specified amounts between the shareholder's Portfolio account and the
predesignated bank, savings and loan or credit union account, subject to the
limitations on liability under "Redemption or Repurchase of Shares--General."
Once enrolled in EXPRESS-Transfer, a shareholder can initiate a transaction by
calling Kemper Shareholder Services toll free at 1-800-621-1048 Monday through
Friday, 8:00 a.m. to 3:00 p.m. Chicago time. Shareholders may terminate this
privilege by sending written notice to KSvC, P.O. Box 419415, Kansas City,
Missouri 64141-6415. Termination will become effective as soon as the
Shareholder Service Agent has had a reasonable time to act upon the request.
EXPRESS-Transfer cannot be used with passbook savings accounts or for
tax-deferred plans such as Individual Retirement Accounts ("IRAs").
Bank Direct Deposit. A shareholder may purchase additional shares of a Portfolio
through an automatic investment program. With the Bank Direct Deposit Purchase
Plan, investments are made automatically (maximum $50,000) from the
shareholder's account at a bank, savings and loan or credit union into the
shareholder's Portfolio account. By enrolling in Bank Direct Deposit, the
shareholder authorizes the Portfolio and its agents to either draw checks or
initiate Automated Clearing House debits against the designated account at a
bank or other financial institution. This privilege may be selected by
completing the appropriate section on the Account Application or by contacting
the Shareholder Service Agent for appropriate forms. A shareholder may terminate
his or her Plan by sending written notice to KSvC, P.O. Box 419415, Kansas City,
Missouri 64141-6415. Termination by a shareholder will become effective within
thirty days after the Shareholder Service Agent has received the request. A
Portfolio may immediately terminate a shareholder's Plan in the event that any
item is unpaid by the shareholder's financial institution. The Portfolios may
terminate or modify this privilege at any time.
Payroll Direct Deposit and Government Direct Deposit. A shareholder may invest
in a Portfolio through Payroll Direct Deposit or Government Direct Deposit.
Under these programs, all or a portion of a shareholder's net pay or government
check is automatically invested in a Portfolio account each payment period. A
shareholder may terminate participation in these programs by giving written
notice to the shareholder's employer or government agency, as appropriate. (A
reasonable time to act is required.) A Portfolio is not responsible for the
efficiency of the employer or government agency making the payment or any
financial institutions transmitting payments.
Systematic Withdrawal Plan. The owner of $5,000 or more of a class of a
Portfolio's shares at the offering price (net asset value plus, in the case of
Class A shares, the initial sales charge) may provide for the payment from the
owner's account of any requested dollar amount to be paid to the owner or a
designated payee monthly, quarterly, semiannually or annually. The $5,000
minimum account size is not applicable to Individual Retirement Accounts. The
minimum periodic payment is $100. The maximum annual rate at which Class B
shares may be redeemed (and Class A shares purchased under the Large Order NAV
Purchase Privilege and Class C shares in their first year following the
purchase) under a systematic withdrawal plan is 10% of the net asset value of
the account. Shares are redeemed so that the payee will receive payment
approximately the first of the month. Any income and capital gain dividends will
be automatically reinvested at net asset value. A sufficient number of full and
fractional shares will be redeemed to make the designated payment. Depending
upon the size of the payments requested and fluctuations in the net asset value
of the shares redeemed, redemptions for the purpose of making such payments may
reduce or even exhaust the account.
The purchase of Class A shares while participating in a systematic withdrawal
plan will ordinarily be disadvantageous to the investor because the investor
will be paying a sales charge on the purchase of shares at the same time that
the investor is redeeming shares upon which a sales charge may have already been
paid. Therefore, a Portfolio will not knowingly permit additional investments of
less than $2,000 if the investor is at the same time making systematic
withdrawals. KDI will waive the contingent deferred sales charge on redemptions
of Class A shares purchased under the Large Order NAV Purchase Privilege, Class
B shares and Class C shares made pursuant to a systematic withdrawal plan. The
right is reserved to amend the systematic withdrawal plan on 30 days' notice.
The plan may be terminated at any time by the investor or the Portfolios.
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Tax-Sheltered Retirement Plans. The Shareholder Service Agent provides
retirement plan services and documents and KDI can establish investor accounts
in any of the following types of retirement plans:
o Individual Retirement Accounts ("IRAs") with State Street as custodian.
This includes Savings Incentive Match Plan for Employees of Small
Employers ("SIMPLE"), IRA accounts and Simplified Employee Pension Plan
("SEP") IRA accounts and prototype documents.
o 403(b)(7) Custodial Accounts also with State Street as custodian. This
type of plan is available to employees of most non-profit
organizations.
o Prototype money purchase pension and profit-sharing plans may be
adopted by employers. The maximum annual contribution per participant
is the lesser of 25% of compensation or $30,000.
Brochures describing the above plans as well as model defined benefit plans,
target benefit plans, 457 plans, 401(k) plans, SIMPLE 401(k) plans and materials
for establishing them are available from the Shareholder Service Agent upon
request. The brochures for plans with State Street as custodian describe the
current fees payable to State Street for its services as custodian. Investors
should consult with their own tax Advisors before establishing a retirement
plan.
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 Portfolio 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 Portfolio 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.
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,
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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 ($51,000 for married individuals filing a joint return, with a
phase-out of the deduction for adjusted gross income between $51,000 and
$61,000; $31,000 for a single individual, with a phase-out for adjusted gross
income between $31,000 and $41,000). 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 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
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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 PFICs
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 PFIC shares 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 PFICs 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 the tax consequences 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 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.
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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, Section 1259 of the Code 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, under Section 1233(h) of the Code, 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 for dividends 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.
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
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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 shareholder's 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 this Statement of Additional Information 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 this Statement of Additional
Information 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 advisors about the application of the
provisions of tax law in light of their particular tax situations.
NET ASSET VALUE
The net asset value per share of a Portfolio is the value of one share and is
determined separately for each class by dividing the value of a Portfolio's net
assets attributable to the class by the number of shares of that class
outstanding. The per share net asset value of each of Class B and Class C shares
of the Portfolio will generally be lower than that of the Class A shares of a
Portfolio because of the higher expenses borne by the Class B and Class C
shares. The net asset value of shares of a Portfolio is computed as of the close
of regular trading (the "value time") on the New York Stock Exchange (the
"Exchange") on each day the Exchange is open for trading. The Exchange is
scheduled to be closed on the following holidays: New Year's Day, Dr. Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving and Christmas.
Portfolio securities for which market quotations are readily available are
generally valued at market value as of the value time in the manner described
below. All other securities may be valued at fair value as determined in good
faith by or under the direction of the Board.
With respect to the Portfolios with securities listed primarily on foreign
exchanges, such securities may trade on days when the Portfolio's net asset
value is not computed; and therefore, the net asset value of a Portfolio may be
significantly affected on days when the investor has no access to the Portfolio.
46
<PAGE>
An exchange-traded equity security is valued at its most recent sale price.
Lacking any sales, the security is valued at the calculated mean between the
most recent bid quotation and the most recent asked quotation (the "Calculated
Mean"). Lacking a Calculated Mean, the security is valued at the most recent bid
quotation. An equity security which is traded on The Nasdaq Stock Market Inc.
("Nasdaq") is valued at its most recent sale price. Lacking any sales, the
security is valued at the most recent bid quotation. The value of an equity
security not quoted on Nasdaq, but traded in another over-the-counter market, is
its most recent sale price. Lacking any sales, the security is valued at the
Calculated Mean. Lacking a Calculated Mean, the security is valued at the most
recent bid quotation.
Debt securities are valued at prices supplied by a pricing agent(s) which
reflect broker/dealer supplied valuations and electronic data processing
techniques. Money market instruments purchased with an original maturity of
sixty days or less, maturing at par, shall be valued at amortized cost, which
the Board believes approximates market value. If it is not possible to value a
particular debt security pursuant to these valuation methods, the value of such
security is the most recent bid quotation supplied by a bona fide marketmaker.
If it is not possible to value a particular debt security pursuant to the above
methods, the investment manager of the particular fund may calculate the price
of that debt security, subject to limitations established by the Board.
An exchange-traded options contract on securities, currencies, futures and other
financial instruments is valued at its most recent sale price on such exchange.
Lacking any sales, the options contract is valued at the Calculated Mean.
Lacking any Calculated Mean, the options contract is valued at the most recent
bid quotation in the case of a purchased options contract, or the most recent
asked quotation in the case of a written options contract. An options contract
on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate on the
valuation date.
If a security is traded on more than one exchange, or upon one or more exchanges
and in the over-the-counter market, quotations are taken from the market in
which the security is traded most extensively.
If, in the opinion of the Valuation Committee of the Board of Trustees, the
value of a portfolio asset as determined in accordance with these procedures
does not represent the fair market value of the portfolio asset, the value of
the portfolio asset is taken to be an amount which, in the opinion of the
Valuation Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by a Portfolio is
determined in a manner, which, in the discretion of the Valuation Committee,
most fairly reflects market value of the property on the valuation date.
Following the valuations of securities or other portfolios assets in terms of
the currency in which the market quotation used is expressed ("Local Currency"),
the value of these portfolio assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rate on the valuation date.
PERFORMANCE
As described in the prospectus, each Portfolio's historical performance or
return for a class of shares may be shown in the form of "average annual total
return" and "total return" figures. These various measures of performance are
described below. Performance information will be computed separately for each
class of each Portfolio.
Each Portfolio's average annual total return quotation is computed in accordance
with a standardized method prescribed by rules of the Securities and Exchange
Commission. The average annual total return for a Portfolio for a specific
period is found by first taking a hypothetical $1,000 investment ("initial
investment") in the Portfolio's shares on the first day of the period, adjusting
to deduct the maximum sales charge (in the case of Class A shares), and
computing the "redeemable value" of that investment at the end of the period.
The redeemable value in the case of Class B shares 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
47
<PAGE>
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.
Average Annual Total Return for the year ended July 31, 2000
(Adjusted for the maximum sales charge)
1-Year Life of
Fund*
Horizon 20+ Class A -9.35% 7.78%
Class B -7.29% 7.94%
Class C -5.07% 8.11%
Horizon 10+ Class A -6.64% 7.59%
Class B -4.46% 7.74%
Class C -1.90% 7.97%
Horizon 5 Class A -5.41% 5.82%
Class B -3.29% 6.12%
Class C -0.63% 6.39%
* Since 12/29/95
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 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
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<PAGE>
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 the pie chart for each Portfolio 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.
Lipper Perfomance Analysis
Horizon 20+ A Shares Flexible Portfolio Funds
-------------------- ------------------------
One year (period ended 7/31/00) -9.35 % 8.38%
Lipper Perfomance Analysis
Horizon 10+ A Shares Balanced Portfolio Funds
-------------------- ------------------------
One year (period ended 7/31/00) -6.64% 6.04%
Lipper Perfomance Analysis
Horizon 5 A Shares Flexible Income Portfolio Funds
------------------ -------------------------------
One year (period ended 7/31/00) -5.41% 1.07%
49
<PAGE>
OFFICERS AND TRUSTEES
The officers and trustees of the Fund, their principal occupations, employment
history for the past five years, and their affiliations, if any, with Scudder
Kemper or Scudder UK, the investment manager or sub-advisor for the Fund and
KDI, the Fund's principal underwriter or their affiliates, are listed below. All
persons named as trustees also serve in similar capacities for other funds
advised by Scudder Kemper.
JAMES E. AKINS (10/15/26), Trustee, 2904 Garfield Terrace, N.W., Washington,
D.C.; Consultant on International, Political and Economic Affairs; formerly a
career United States Foreign Service Officer, Energy Advisor for the White House
and United States Ambassador to Saudi Arabia, 1973-76.
LINDA C. COUGHLIN (1/1/52), Trustee*, Two International Place, Boston,
Massachusetts; Managing Director, Scudder Kemper.
JAMES R. EDGAR (07/22/46), Trustee, 1927 County Road, 150E, Seymour, Illinois;
Distinguished Fellow, Institute of Government and Public Affairs, University of
Illinois; Director, Kemper Insurance Companies; formerly, Governor of the State
of Illinois, 1991-1999.
ARTHUR R. GOTTSCHALK (02/13/25), Trustee, 10642 Brookridge Drive, Frankfort,
Illinois; Retired; formerly, President, Illinois Manufacturers Association;
Trustee, Illinois Masonic Medical Center; formerly, Illinois State Senator;
formerly, Vice President, The Reuben H. Donnelley Corp.; formerly, attorney.
FREDERICK T. KELSEY (04/25/27), Trustee, 4010 Arbor Lane, Unit 102, Northfield,
Illinois; Retired; formerly, consultant to Goldman, Sachs & Co.; formerly,
President, Treasurer and Trustee of Institutional Liquid Assets and its
affiliated mutual funds; formerly President and Trustee of the Northern
Institutional Funds; formerly President and Trustee of the Pilot Fund.
THOMAS W. LITTAUER* (4/26/55), Chairman, Trustee and Vice President, Two
International Place, Boston, Massachusetts; Managing Director, Scudder Kemper,
formerly, Head of Broker Dealer Division of an unaffiliated investment
management firm during 1997; prior thereto, President of Client Management
Services of an unaffiliated investment management firm from 1991 to 1996.
FRED B. RENWICK (02/01/30), Trustee, 3 Hanover Square, New York, New York;
Professor of Finance, New York University, Stern School of Business; Director,
TIFF Industrial Program, Inc., Director, the Wartburg Foundation; Chairman
Investment Committee of Morehouse College Board of Trustees; Chairman, American
Bible Society Investment Committee; formerly member of the Investment Committee
of Atlanta University Board of Trustees; formerly Director of Board of Pensions
Evangelical Lutheran Church of America.
JOHN G. WEITHERS (08/08/33), Trustee, 311 Spring Lake, Hinsdale, Illinois;
Retired; formerly, Chairman of the Board and Chief Executive Officer, Chicago
Stock Exchange; Director, Federal Life Insurance Company; President of the
Members of the Corporation and Trustee, DePaul University.
MARK S. CASADY* (9/21/60), President, Two International Place, Boston,
Massachusetts; Managing Director, Scudder Kemper; formerly Institutional Sales
Manager of an unaffiliated mutual fund distributor.
PHILIP J. COLLORA* (11/15/45), Vice President and Secretary, 222 South Riverside
Plaza, Chicago, Illinois; Attorney, Senior Vice President, Scudder Kemper.
KATHRYN L. QUIRK* (12/3/52), Vice President, 345 Park Avenue, New York, New
York; Managing Director, Scudder Kemper.
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<PAGE>
WILLIAM F. TRUSCOTT* (9/14/60), Vice President, 345 Park Avenue, New York, New
York; Managing Director, Scudder Kemper.
ROBERT D. TYMOCZKO* (2/3/70), Vice President, 101 California Street, San
Francisco, California; Assistant Vice President, Scudder Kemper.
LINDA J. WONDRACK* (9/12/64), Vice President, Two International Place, Boston,
Massachusetts; Senior Vice President, Scudder Kemper.
JOHN R. HEBBLE* (6/27/58), Treasurer, Two International Place, Boston,
Massachusetts; Senior Vice President, Scudder Kemper.
MAUREEN E. KANE* (2/14/62), Assistant Secretary, Two International Place,
Boston, Massachusetts; Vice President, Scudder Kemper; formerly, Assistant Vice
President of an unaffiliated investment management firm; prior there to,
Associate Staff Attorney of an unaffiliated investment management firm;
Associate, Peabody & Arnold (law firm).
CAROLINE PEARSON* (4/1/62), Assistant Secretary, Two International Place,
Boston, Massachusetts; Senior Vice President, Scudder Kemper; formerly,
Associate, Dechert Price & Rhoads (law firm), 1989 to 1997.
* Interested persons of the Fund as defined in the 1940 Act.
The trustees and officers who are "interested persons" as designated above
receive no compensation from the Fund. The table below shows amounts paid or
accrued to those trustees who are not designated "interested persons" during the
Fund's 2000 fiscal year and the total compensation that the Kemper funds paid to
such trustees during the calendar year 1999.
Total Compensation
Aggregate Compensation Kemper Funds Paid
Name of Board Member From Fund to Board Members(1)
-------------------- --------- ----------------
James E. Akins $6,900 $168,700
James R. Edgar(2) $6,900 $84,600
Arthur R. Gottschalk(3) $6,900 $166,600
Frederick T. Kelsey $6,900 $168,700
Fred B. Renwick $6,900 $168,700
John G. Weithers $6,900 $171,200
(1) 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. As of November 2,
2000, the officers and trustees of the Fund as a group owned less than
1% of each Portfolio.
(2) Elected as Trustee on May 27, 1999.
(3) Pursuant to deferred compensation agreements with the Fund, deferred
amounts interest accrues monthly at a rate equal to the yield of Zurich
Money Funds -- Zurich Money Market Fund. Total deferred fees (including
interest thereon), payable from the Fund to Mr. Gottschalk are $22,200.
Principal Holders of Securities
As of October 30, 2000 the following owned of record more than 5% of the
outstanding stock of the Portfolios as set forth below.
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<PAGE>
HORIZON 20+
-----------
<TABLE>
<CAPTION>
------------------------------------- ----------------------------------- -----------------------------------
NAME CLASS PERCENTAGE
------------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C>
Scudder Kemper Investments I 26.42
Money Purchase Plan
345 Park Avenue
New York, NY 10154
------------------------------------- ----------------------------------- -----------------------------------
Scudder Kemper Investments I 71.18
Profit Sharing Plan
345 Park Avenue
New York, NY 10154
------------------------------------- ----------------------------------- -----------------------------------
HORIZON 10+
-----------
------------------------------------- ----------------------------------- -----------------------------------
NAME CLASS PERCENTAGE
---- ----- ----------
------------------------------------- ----------------------------------- -----------------------------------
National Financial Services Corp. B 8.51
For the benefit of clients
200 Liberty Street
New York, NY 10281
------------------------------------- ----------------------------------- -----------------------------------
Scudder Kemper Investments I 19.36
FBO Zurich Kemper Investments
Asset Reconciliation Plan
P.O. Box 597
Salem, NH 03079
------------------------------------- ----------------------------------- -----------------------------------
Scudder Kemper Investments I 80.59
Profit Sharing Plan
345 Park Avenue
New York, NY 10154
------------------------------------- ----------------------------------- -----------------------------------
HORIZON 5
------------------------------------- ----------------------------------- -----------------------------------
NAME CLASS PERCENTAGE
------------------------------------- ----------------------------------- -----------------------------------
National Financial Services Corp. B 7.47
For the benefit of clients
200 Liberty Street
New York, NY 10281
------------------------------------- ----------------------------------- -----------------------------------
First Clearing Corp. B 5.47
10700 First Wheat Drive
Glen Allen, VA 23060
------------------------------------- ----------------------------------- -----------------------------------
First Clearing Corp. C 20,974
Trustee for IRA
10700 First Wheat Drive
Glen Allen, VA 23060
------------------------------------- ----------------------------------- -----------------------------------
Scudder Trust Company C 6.85
Trustee for IRA
Salem, NH
------------------------------------- ----------------------------------- -----------------------------------
Donaldson, Lufkin & Jenrette C 7.98
P.O. Box 2052
Jersey City, NJ 07303
------------------------------------- ----------------------------------- -----------------------------------
Scudder Kemper Investments I 55.06
FBO Zurich Kemper Investments
Asset Reconciliation Plan
P.O. Box 597
Salem, NH 03079
------------------------------------- ----------------------------------- -----------------------------------
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------------------------------------- ----------------------------------- -----------------------------------
Scudder Kemper Investments I 44.85
Profit Sharing Plan
345 Park Avenue
New York, NY 10154
------------------------------------- ----------------------------------- -----------------------------------
</TABLE>
SHAREHOLDER RIGHTS
The Fund is an open-end management investment company, organized on October 17,
1995 as a business trust under the laws of Massachusetts. 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 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 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
53
<PAGE>
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.
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<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.
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
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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.
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.
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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.
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