<PAGE> 1
KEMPER EUROPE FUND
SUPPLEMENT TO PROSPECTUS
DATED APRIL 1, 1997
CLASS I SHARES
The Kemper Europe Fund (the "Fund") currently offers four classes of shares
of a single investment portfolio to provide investors with different purchasing
options. These are Class A, Class B and Class C shares, which are described in
the prospectus, and Class I shares, which are described in the prospectus as
supplemented hereby.
Class I shares are available for purchase exclusively by the following
investors: (a) tax-exempt retirement plans of Zurich Kemper Investments, Inc.
("ZKI") and its affiliates; and (b) the following investment advisory clients of
ZKI and its investment advisory affiliates (including Zurich Investment
Management, Inc.) that invest at least $1 million in the Fund: (1) unaffiliated
benefit plans, such as qualified retirement plans (other than individual
retirement accounts and self-directed retirement plans); (2) unaffiliated banks
and insurance companies purchasing for their own accounts; and (3) endowment
funds of unaffiliated non-profit organizations. Class I shares currently are
available for purchase only from Kemper Distributors, Inc., principal
underwriter for the Fund. Share certificates are not available for Class I
shares.
The primary distinctions among the classes of the Fund's shares lie in
their initial and contingent deferred sales charge schedules and in their
ongoing expenses, including asset-based sales charges in the form of Rule 12b-1
distribution fees. Class I shares are offered at net asset value without an
initial sales charge and are not subject to a contingent deferred sales charge
or a Rule 12b-1 distribution fee. Also, there is no administrative services fee
charged to Class I shares. As a result of the relatively lower expenses for
Class I shares, the overall investment return will typically be higher for Class
I shares than for Class A, Class B and Class C shares.
The following information supplements the indicated sections of the
prospectus.
SUMMARY OF EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
CLASS I
-------
<S> <C>
Maximum Sales Charge on Purchases (as a percentage of
offering price)........................................... None
Maximum Sales Charge on Reinvested Dividends................ None
Redemption Fees............................................. None
Exchange Fee................................................ None
Deferred Sales Charge (as a percentage of redemption
proceeds)................................................. None
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<S> <C>
Management Fees............................................. .75%
12b-1 Fees.................................................. None
Other Expenses.............................................. .35%
----
Total Operating Expenses.................................... 1.10%
====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS
------- ------ -------
<S> <C> <C>
You would pay the following expenses on
a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at
the end of each time period................................. $11 $35
</TABLE>
The purpose of the preceding table is to assist investors in understanding
the various costs and expenses that an investor in Class I shares of the Fund
will bear directly or indirectly.
ZKI has waived its investment management fee by .25% until the earlier of
May 1, 1997 or the date the Fund's net assets reach $100 million. The table for
the Fund reflects the full management fee rate without any waiver and "Other
Expenses" is an estimate for the current fiscal year, since no Class I shares
have been issued as of the Fund's fiscal year end. The Example assumes a 5%
annual rate of return pursuant to requirements of the Securities and Exchange
Commission. This hypothetical rate of return is not intended to be
representative of past or future performance of the Fund. See "Investment
Manager and Underwriter" for more information.
THE EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
SPECIAL FEATURES
Shareholders of the Fund's Class I shares may exchange their shares for (i)
shares of Kemper Money Funds--Kemper Money Market Fund if the shareholders of
Class I shares have purchased shares because they are participants in tax-exempt
retirement plans of ZKI and its affiliates and (ii) Class I shares of any other
"Kemper Mutual Fund" listed under "Special Features--Class A Shares--Combined
Purchases" in the prospectus. Conversely, shareholders of Kemper Money
Funds--Kemper Money Market Fund who have purchased shares because they are
participants in tax-exempt retirement plans of ZKI and its affiliates may
exchange their shares for Class I shares of "Kemper Mutual Funds" to the extent
that they are available through their plan. Exchanges will be made at the
relative net asset values of the shares. Exchanges are subject to the
limitations set forth in the prospectus under "Special Features--Exchange
Privilege--General."
April 1, 1997
KEUF-1I 4/97
2
<PAGE> 3
TABLE OF CONTENTS
- ---------------------------------------------------------
<TABLE>
<S> <C>
Summary 1
- ------------------------------------------------
Summary of Expenses 2
- ------------------------------------------------
Financial Highlights 4
- ------------------------------------------------
Investment Objective, Policies and Risk
Factors 5
- ------------------------------------------------
Investment Manager and Underwriter 12
- ------------------------------------------------
Dividends and Taxes 15
- ------------------------------------------------
Net Asset Value 16
- ------------------------------------------------
Purchase of Shares 17
- ------------------------------------------------
Redemption or Repurchase of Shares 23
- ------------------------------------------------
Special Features 27
- ------------------------------------------------
Performance 31
- ------------------------------------------------
Capital Structure 32
- ------------------------------------------------
</TABLE>
This prospectus contains information about the Fund that a prospective investor
should know before investing and should be retained for future reference. A
Statement of Additional Information dated April 1, 1997, has been filed with the
Securities and Exchange Commission and is incorporated herein by reference. It
is available upon request without charge from the Fund at the address or
telephone number on this cover or the firm from which this prospectus was
received.
THE FUND'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, NOR ARE THEY FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. INVESTMENT IN THE
FUND'S SHARES INVOLVES RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
KEMPER LOGO
KEMPER
EUROPE
FUND
PROSPECTUS APRIL 1, 1997
KEMPER EUROPE FUND
222 South Riverside Plaza, Chicago, Illinois 60606
1-800-621-1048
The objective of Kemper Europe Fund is to provide long-term capital growth. The
Fund pursues its objective by investing primarily in the equity securities of
European companies.
There is no assurance that the Fund's objective will be achieved.
<PAGE> 4
KEMPER EUROPE FUND
222 SOUTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606, TELEPHONE 1-800-621-1048
SUMMARY
INVESTMENT OBJECTIVE. Kemper Europe Fund (the "Fund") is registered as an
open-end, diversified, management investment company. The Fund's investment
objective is to provide long-term capital growth. The Fund seeks to achieve its
objective by investing in a diversified portfolio consisting primarily of equity
securities of European companies. No assurance can be given that the Fund's
investment objective will be achieved. Any current income generated from these
securities is incidental to the investment objective of the Fund. The Fund may
also engage in options, financial futures and foreign currency transactions and
may lend its portfolio securities. See "Investment Objective, Policies and Risk
Factors."
RISK FACTORS. The Fund may invest without limit in securities of foreign
issuers. Foreign investments involve risk and opportunity considerations not
typically associated with investing in United States companies. The U.S. Dollar
value of a foreign security tends to decrease when the value of the U.S. Dollar
rises against the foreign currency in which the security is denominated and
tends to increase when the value of the U.S. Dollar falls against such currency.
Thus, the U.S. Dollar value of foreign securities in the Fund's portfolio, and
the Fund's net asset value, may change in response to changes in currency
exchange rates even though the value of the foreign securities in local currency
terms may not have changed. Concentration of the Fund's investments in European
companies may present greater risk than investment in a more diversified
portfolio of foreign securities. While the Fund's investments in foreign
securities will principally be in developed countries, the Fund may invest up to
25% of its assets in countries considered by the Fund's investment manager to be
developing or "emerging" markets, which involve exposure to economic structures
that are generally less diverse and mature than in the United States, and to
political systems that may be less stable. There are special risks associated
with options, financial futures, foreign currency and other derivative
transactions and there is no assurance that use of those investment techniques
will be successful. The Fund's returns and net asset value will fluctuate. See
"Investment Objective, Policies and Risk Factors."
PURCHASES AND REDEMPTIONS. The Fund provides investors with the option of
purchasing shares in the following ways:
<TABLE>
<S> <C>
Class A Shares....................... Offered at net asset value plus a maximum sales charge of
5.75% of the offering price. Reduced sales charges apply to
purchases of $50,000 or more. Class A shares purchased at
net asset value under the Large Order NAV Purchase Privilege
may be subject to a 1% contingent deferred sales charge if
redeemed within one year of purchase and a .50% contingent
deferred sales charge if redeemed within the second year of
purchase.
Class B Shares....................... Offered at net asset value, subject to a Rule 12b-1
distribution fee and a contingent deferred sales charge that
declines from 4% to zero on certain redemptions made within
six years of purchase. Class B shares automatically convert
into Class A shares (which have lower ongoing expenses) six
years after purchase.
Class C Shares....................... Offered at net asset value without an initial sales charge,
but subject to a Rule 12b-1 distribution fee and a 1%
contingent deferred sales charge on redemptions made within
one year of purchase. Class C shares do not convert into
another class.
</TABLE>
Each class of shares represents interests in the same portfolio of investments
of the Fund. The minimum initial investment is $1,000 and investments thereafter
must be at least $100. Shares are redeemable at net asset value, which may be
more or less than original cost, subject to any applicable contingent deferred
sales charge. See "Purchase of Shares" and "Redemption or Repurchase of Shares."
1
<PAGE> 5
INVESTMENT MANAGER AND UNDERWRITER. Zurich Kemper Investments, Inc. ("ZKI")
serves as the Fund's investment manager. ZKI is paid an investment management
fee by the Fund at an annual rate ranging from .75% to .62% of its average daily
net assets. Zurich Investment Management Limited ("ZIML"), an affiliate of ZKI,
is the sub-adviser for the Fund and is paid by ZKI a fee of .35% for the portion
of the average daily net assets of the Fund allocated by ZKI to ZIML for
management. Kemper Distributors, Inc. ("KDI"), a wholly owned subsidiary of ZKI,
is principal underwriter and administrator for the Fund. For Class B and Class C
shares, KDI receives a Rule 12b-1 distribution fee of .75% of average daily net
assets. KDI also receives the amount of any contingent deferred sales charges
paid on the redemption of shares. The expenses of the Fund, and of other
investment companies investing in foreign securities, can be expected to be
higher than for investment companies investing primarily in domestic securities
since the costs of operation are higher, including custody and transaction costs
for foreign securities and investment management fees. Administrative services
are provided to shareholders under an administrative services agreement with
KDI. The Fund pays an administrative services fee at an annual rate of up to
.25% of average daily net assets of Class A, B and C shares of the Fund, which
KDI pays to financial services firms. See "Investment Manager and Underwriter."
DIVIDENDS. The Fund normally distributes annual dividends of net investment
income and any net realized short-term and long-term capital gains. Income and
capital gain dividends of the Fund are automatically reinvested in additional
shares of the Fund, without a sales charge, unless the investor makes a
different election. See "Dividends and Taxes."
SUMMARY OF EXPENSES
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES(1)
Maximum Sales Charge on Purchases (as a percentage
of offering price)............................... 5.75%(2) None None
Maximum Sales Charge on Reinvested Dividends....... None None None
Redemption Fees.................................... None None None
Exchange Fee....................................... None None None
Deferred Sales Charge (as a percentage of
redemption proceeds)............................. None(3) 4% during the first year, 1% during
3% during the second and the first
third years, 2% during year
the fourth and fifth
years and 1% in the sixth
year
</TABLE>
- ---------------
(1) Investment dealers and other firms may independently charge additional fees
for shareholder transactions or for advisory services; please see their
materials for details.
(2) Reduced sales charges apply to purchases of $50,000 or more. See "Purchase
of Shares--Initial Sales Charge Alternative--Class A Shares."
(3) The redemption 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 of 1% the first year and .50% the second year. See "Purchase of
Shares--Initial Sales Charge Alternative--Class A Shares."
2
<PAGE> 6
ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets)
<TABLE>
<S> <C>
CLASS A SHARES
Management Fees............................................. .75%
12b-1 Fees.................................................. None
Other Expenses.............................................. .92%
----
Total Operating Expenses.................................... 1.67%
====
CLASS B SHARES
Management Fees............................................. .75%
12b-1 Fees(4)............................................... .75%
Other Expenses.............................................. 1.07%
----
Total Operating Expenses.................................... 2.57%
====
</TABLE>
- ---------------
(4) Long-term shareholders may pay more than the economic equivalent of the
maximum initial sales charges permitted by the National Association of
Securities Dealers, although KDI believes that it is unlikely because of the
automatic conversion feature described under "Purchase of Shares--Deferred
Sales Charge Alternative--Class B Shares."
<TABLE>
<S> <C>
CLASS C SHARES
Management Fees............................................. .75%
12b-1 Fees(5)............................................... .75%
Other Expenses.............................................. 1.04%
----
Total Operating Expenses.................................... 2.54%
====
</TABLE>
- ---------------
(5) As a result of the accrual of 12b-1 fees, long-term shareholders may pay
more than the economic equivalent of the maximum initial sales charges
permitted by the National Association of Securities Dealers.
EXAMPLE
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
CLASS A SHARES ------ -------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, $74 $107
assuming (1) 5% annual return and (2) redemption at the end
of each time period:
</TABLE>
<TABLE>
<CAPTION>
CLASS B SHARES(6)
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, $56 $100
assuming (1) 5% annual return and (2) redemption at the end
of each time period:
You would pay the following expenses on the same investment, $26 $ 80
assuming no redemption:
</TABLE>
<TABLE>
<CAPTION>
CLASS C SHARES(7)
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, $26 $ 79
assuming (1) 5% annual return and (2) redemption at the end
of each time period:
</TABLE>
- ---------------
(6) Assumes conversion to Class A shares six years after purchase and was
calculated based upon the assumption that the shareholder was an owner of
the shares on the first day of the first year and the contingent deferred
sales charge was applied as follows: 1 year (3%) and 3 years (2%). See
"Redemption or Repurchase of Shares--Contingent Deferred Sales Charge--Class
B Shares" for more information regarding the calculation of the contingent
deferred sales charge.
(7) Assumes that the shareholder was the owner on the first day of the first
year and the contingent deferred sales charge was not applicable for either
of the periods shown. See "Redemption or Repurchase of Shares--Contingent
Deferred Sales Charge--Class C Shares."
The purpose of the preceding table is to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly.
ZKI has waived its investment management fee by .25% until the earlier of May 1,
1997 or the date the Fund's net assets reach $100 million. The table for the
Fund reflects the full management fee rate without any waiver. The Fund
commenced operations on May 1, 1996, thus "Other Expenses" is an estimate for
the current fiscal year. See "Investment Manager and Underwriter" for more
information.
The Example assumes a 5% annual rate of return pursuant to requirements of the
Securities and Exchange Commission. This hypothetical rate of return is not
intended to be representative of past or future performance of the Fund. THE
EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
3
<PAGE> 7
FINANCIAL HIGHLIGHTS
The tables below show financial information for the Fund expressed in terms of
one share outstanding throughout the period. The information in the table for
the Fund is covered by the report of the Fund's independent auditors. The report
for the Fund is contained in its Registration Statement and is available from
the Fund. The financial statements contained in the Fund's 1996 Annual Report to
Shareholders are incorporated herein by reference and may be obtained by writing
or calling the Fund.
<TABLE>
<CAPTION>
FOR THE PERIOD FROM MAY 1, 1996
(COMMENCEMENT OF OPERATIONS)
TO NOVEMBER 30, 1996
--------------------------------------------------
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 9.50 9.50 9.50
- -----------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) .01 (.02) (.01)
- -----------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain 1.51 1.49 1.48
- -----------------------------------------------------------------------------------------------------------------
Total from investment operations 1.52 1.47 1.47
- -----------------------------------------------------------------------------------------------------------------
Net asset value, end of period $11.02 10.97 10.97
- -----------------------------------------------------------------------------------------------------------------
Total Return (not annualized) 16.00% 15.47 15.47
- -----------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS AFTER EXPENSE ABSORPTION
(ANNUALIZED):
Expenses 1.49% 2.44 2.34
- -----------------------------------------------------------------------------------------------------------------
Net investment income (loss) .46% (.49) (.39)
- -----------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS BEFORE EXPENSE ABSORPTION
(ANNUALIZED):
Expenses 4.74% 5.63 5.50
- -----------------------------------------------------------------------------------------------------------------
Net investment loss (2.79)% (3.68) (3.55)
- -----------------------------------------------------------------------------------------------------------------
ALL CLASSES
SUPPLEMENTAL DATA:
Net assets at end of period $ 3,856,000
- ----------------------------------------------------------------------------
Portfolio turnover rate (annualized) 96%
- ----------------------------------------------------------------------------
Average commission rate paid per share on stock transactions for the period
ended November 30, 1996 was $.0313. Foreign commissions usually are lower
than U.S. commissions when expressed as cents per share due to the lower per
share price of many non-U.S. securities.
- ----------------------------------------------------------------------------
</TABLE>
NOTES: (1) Total return does not reflect the effect of any sales charges.
(2) ZKI has waived its investment management fee by .25% until the
earlier of May 1, 1997 or the date the Fund's net assets reach $100
million. In addition, ZKI has agreed to temporarily waive or absorb
certain operating expenses of the Fund.
4
<PAGE> 8
INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
The following information sets forth the Fund's investment objective, policies
and risk factors. The Fund's returns and net asset value will fluctuate and
there is no assurance that the Fund will achieve its objective.
The objective of the Fund is long-term capital growth. The Fund seeks to achieve
its objective by investing in a diversified portfolio consisting primarily of
equity securities of European companies ("European Equity Securities"). European
Equity Securities include common stocks, preferred stocks, securities
convertible into or exchangeable for common or preferred stocks, equity
investments in partnerships, joint ventures and other forms of non-corporate
investment and warrants, options and rights exercisable for equity securities
that are issued by European companies as defined below.
The Fund considers an issuer of securities to be a European company if: (i) it
is organized under the laws of a European country and has a principal office in
a European country; (ii) it derives 50% or more of its total revenues from
business in Europe; or (iii) its equity securities are traded principally on a
stock exchange in Europe. Under normal circumstances, the Fund will invest at
least 85% of its total assets in European Equity Securities and will invest at
least 65% of its total assets in European Equity Securities of issuers meeting
at least one of the first two criteria described in the preceding sentence. For
purposes of the foregoing policies, the Fund also considers European Equity
Securities to include: (i) shares of closed-end management investment companies,
the assets of which are invested primarily in European Equity Securities and
(ii) depository receipts (such as American Depository Receipts and European
Depository Receipts) where the underlying or deposited securities are European
Equity Securities.
The Fund invests principally in developed countries, but it may invest up to 25%
of its total assets in developing or "emerging" countries (see "Special Risk
Factors--Emerging Markets" below). Currently, the developed European countries
in which the Fund may invest without limit include Austria, France, Germany, the
Netherlands, Switzerland, Spain, Italy, Luxembourg, United Kingdom, Ireland,
Belgium, Denmark, Sweden, Norway and Finland. The Fund may, in the discretion of
the Fund's investment manager, invest without limit in other European countries
in the future if they become developed countries. Some examples of emerging
European countries are Portugal, Greece, Turkey, Hungary, Poland and the Czech
Republic.
In pursuing its objective, the Fund invests primarily in European Equity
Securities believed to have potential for capital growth. However, there is no
requirement that the Fund invest exclusively in European Equity Securities.
Subject to limits described above, the Fund may invest in any other type of
security including, but not limited to, equity securities of non-European
companies, bonds, notes and other debt securities of domestic or foreign
companies (including Euro-currency instruments and securities) and obligations
of domestic or foreign governments and their political subdivisions. Currently,
the Fund does not intend to invest more than 5% of its net assets in debt
securities during the coming year (except for temporary defensive investments
described below).
The Fund makes investments in various European countries. Under normal
circumstances, business activities in not less than five different European
countries will be represented in the Fund's portfolio. The Fund may, from time
to time, have 25% or more of its assets invested in any major European
industrial or developed country which, in the view of the Fund's investment
manager, poses no unique investment risk. Investments may include securities
issued by enterprises that have undergone or are currently undergoing
privatization.
In determining the appropriate distribution of investments among various
European countries and geographic regions, the Fund's investment manager
ordinarily considers such factors as prospects for relative economic growth
among European countries; expected levels of inflation; relative price levels of
the various capital markets; government policies influencing business
conditions; the outlook for currency relationships and the range of individual
investment opportunities available to investors in European companies.
When the investment manager deems it appropriate to invest for temporary
defensive purposes, such as during periods of adverse market conditions, up to
100% of the Fund's assets may be invested in cash (including foreign currency)
or cash equivalent short-term obligations, either rated as high quality or
considered to be of
5
<PAGE> 9
comparable quality in the opinion of the investment manager, including, but not
limited to, certificates of deposit, commercial paper, short-term notes,
obligations issued or guaranteed by the U.S. Government or any of its agencies
or instrumentalities, and repurchase agreements secured thereby. In particular,
for temporary defensive purposes the Fund's assets may be invested without
limitation in U.S. Dollar-denominated obligations to reduce the risks inherent
in non-U.S. Dollar-denominated assets.
Generally, the Fund will not trade in securities for short-term profits but,
when circumstances warrant, securities may be sold without regard to the length
of time held.
The Fund may purchase and write (sell) options and engage in financial futures
and foreign currency transactions and may lend its portfolio securities. See
"Additional Investment Information" below.
SPECIAL RISK FACTORS. There are risks inherent in investing in any security,
including shares of the Fund. The investment manager attempts to reduce risk
through fundamental research; however, there is no guarantee that such efforts
will be successful and the Fund's returns and net asset value will fluctuate
over time. There are special risks associated with the Fund's investments that
are discussed 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 on the exchange rate at the time of disbursement or payment, and
restrictions on capital flows may be imposed. Losses and other expenses may be
incurred in converting between various currencies in connection with purchases
and sales of foreign securities.
Foreign securities may be subject to foreign government taxes that reduce their
attractiveness. Other risks of investing in such securities include political or
economic instability in the country involved, the difficulty of predicting
international trade patterns and the 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.
Because the Fund concentrates its investments in European companies, the
performance of the Fund is closely tied to economic and political conditions
within Europe. Some European countries, particularly those in Eastern Europe,
have less stable economies than those in Western Europe. The movement of many
Eastern European countries toward market economies and the movement toward a
unified common market may significantly affect European economies and markets.
Economic growth transformation and renewal are currently taking place in
different areas and different ways including: a trend toward privatizations and
corporate restructurings, deregulation and modernization of securities markets;
reduction in trade barriers and currency restrictions; global expansion by major
European companies of both exports and production; steps toward the broadening
of the European Community; economic reform and modernization of the former
communist countries of Eastern Europe; expected further growth of an already
large middle class and a general increase in consumer spending; and anticipated
labor market restructuring. There can be no assurance, of course, that these
trends and conditions will continue or that anticipated economic benefits will
be realized. Concentration of the Fund's investments in European companies may
present greater risk than investment in a more diversified portfolio of foreign
securities.
EMERGING MARKETS. While the Fund's investments in foreign securities will be
principally in developed countries, the Fund may invest up to 25% of its total
assets in countries considered by the Fund's investment manager to be developing
or "emerging" markets, which involve exposure to economic structures that are
generally less diverse and mature than in the United States, and to political
systems that may be less stable. A developing country or
6
<PAGE> 10
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 developed European countries
listed above, the United States, Canada, Japan, Australia, New Zealand, Hong
Kong and Singapore. The characteristics of markets can change over time.
Currently, investing in many emerging markets may not be desirable or feasible
because of the lack of adequate custody arrangements for the Fund'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, the Fund may
expand and further broaden the group of emerging markets in which it invests. In
the past, markets of developing countries have been more volatile than the
markets of developed countries; however, such markets often have provided higher
rates of return to investors. The Fund's 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 gross domestic product,
rates of inflation, currency depreciation, capital reinvestment, resource
self-sufficiency and balance of payments positions. Many emerging markets have
experienced substantial rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on the economies and securities markets of certain developing markets.
Economies in emerging markets generally are dependent heavily upon international
trade and, accordingly, have been and may continue to be affected adversely by
trade barriers, exchange controls, managed adjustments in relative currency
values and other protectionist measures imposed or negotiated by the countries
with which they trade. These economies also have been and may continue to be
affected adversely by economic conditions in the countries with which they
trade.
Also, the securities markets of developing countries are substantially smaller,
less developed, less liquid and more volatile than the securities markets of the
United States and other more developed countries. Disclosure, regulatory and
accounting standards in many respects are less stringent than in the United
States and other developed markets. There also may be a lower level of
monitoring and regulation of developing markets and the activities of investors
in such markets, and enforcement of existing regulations has been extremely
limited.
In addition, brokerage commissions, custodial services and other costs relating
to investment in foreign markets generally are more expensive than in the United
States; this is particularly true with respect to emerging markets. Such markets
have different settlement and clearance procedures. In certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Such settlement problems may cause emerging market securities to be illiquid.
The inability of the Fund to make intended securities purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of a portfolio security caused by settlement
problems could result either in losses to the Fund due to subsequent declines in
value of the portfolio security or, if the Fund 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 the Fund to the risk of losses resulting from the
Fund'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 the Fund's portfolio securities in such
markets may not be readily available. The Fund's portfolio 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 the Fund. 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
7
<PAGE> 11
occurs in an emerging market's balance of payments, the market could impose
temporary restrictions on foreign capital remittances.
PRIVATIZED ENTERPRISES. Investments in foreign securities may include securities
issued by enterprises that have undergone or are currently undergoing
privatization. The governments of certain foreign countries have, to varying
degrees, embarked on privatization programs contemplating the sale of all or
part of their interests in state enterprises. The Fund'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 the Fund, to
participate in privatizations may be limited by local law, or the price or terms
on which the Fund may be able to participate may be less advantageous than for
local investors. Moreover, there can be no assurance that governments that have
embarked on privatization programs will continue to divest their ownership of
state enterprises, that proposed privatizations will be successful or that
governments will not re-nationalize enterprises that have been privatized.
In the case of the enterprises in which the Fund may invest, large blocks of the
stock of those enterprises may be held by a small group of stockholders, even
after the initial equity offerings by those enterprises. The sale of some
portion or all of those blocks could have an adverse effect on the price of the
stock of any such enterprise.
Prior to making an initial equity offering, most state enterprises or former
state enterprises go through an internal reorganization or management. Such
reorganizations are made in an attempt to better enable these enterprises to
compete in the private sector. However, certain reorganizations could result in
a management team that does not function as well as the enterprise's prior
management and may have a negative effect on such enterprise. In addition, the
privatization of an enterprise by its government may occur over a number of
years, with the government continuing to hold a controlling position in the
enterprise even after the initial equity offering for the enterprise.
Prior to privatization, most of the state enterprises in which the Fund may
invest enjoy the protection of and receive preferential treatment from the
respective sovereigns that own or control them. After making an initial equity
offering these enterprises may no longer have such protection or receive such
preferential treatment and may become subject to market competition from which
they were previously protected. Some of these enterprises may not be able to
effectively operate in a competitive market and may suffer losses or experience
bankruptcy due to such competition.
DEPOSITORY RECEIPTS. The Fund may invest in securities of foreign issuers in the
form of American Depository Receipts ("ADRs"). 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 a 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. The Fund may also
invest in securities of foreign issuers in the form of European Depository
Receipts ("EDRs") and Global Depository Receipts ("GDRs"), which are receipts
evidencing an arrangement with a bank similar to that for ADRs and are designed
for use in the European and other foreign securities markets. EDRs and GDRs are
not necessarily denominated in the currency of the underlying security.
ADDITIONAL INVESTMENT INFORMATION. It is anticipated that, under normal
circumstances, the portfolio turnover rate for the Fund will not exceed 100%.
Higher portfolio turnover involves correspondingly greater brokerage commissions
or other transaction costs. Higher portfolio turnover may result in the
realization of greater net short-term capital gains. In order to continue to
qualify as a regulated investment company for federal income tax purposes, less
than 30% of the annual gross income of the Fund must be derived from the sale
8
<PAGE> 12
or other disposition of securities and certain other investments held by the
Fund for less than three months. See "Dividends and Taxes" in the Statement of
Additional Information.
The Fund may not borrow money except as a temporary measure for extraordinary or
emergency purposes, and then only in an amount up to one-third of the value of
its total assets, in order to meet redemption requests without immediately
selling any portfolio securities or other assets. If, for any reason, the
current value of the Fund's total assets falls below an amount equal to three
times the amount of its indebtedness from money borrowed, the Fund will, within
three days (not including Sundays and holidays), reduce its indebtedness to the
extent necessary. The Fund will not borrow for leverage purposes. The Fund may
pledge up to 15% of its total assets to secure any such borrowings.
The Fund may invest in repurchase agreements and engage in short sales
against-the-box. See "Investment Policies and Techniques--Repurchase Agreements
and--Short Sales Against-The-Box" in the Statement of Additional Information.
The Fund will not purchase illiquid securities, including repurchase agreements
maturing in more than seven days, if, as a result thereof, more than 15% of the
Fund's net assets valued at the time of the transaction, would be invested in
such securities. If the Fund holds a material percentage of its assets in
illiquid securities, there may be a question concerning the ability of the Fund
to make payment within seven days of the date its shares are tendered for
redemption. SEC guidelines provide that the usual limit on aggregate holdings by
an open-end investment company of illiquid assets is 15% of its net assets. See
"Investment Policies and Techniques--Over-the-Counter Options" in the Statement
of Additional Information for a description of the extent to which
over-the-counter traded options are in effect considered as illiquid for
purposes of the Fund's limit on illiquid securities. The Fund may invest in
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933. This rule permits otherwise restricted securities to be sold to certain
institutional buyers, such as the Fund. Such securities may be illiquid and
subject to the Fund's limitation on illiquid securities. A "Rule 144A" security
may be treated as liquid, however, if so determined pursuant to procedures
adopted by the Board of Trustees. Investing in Rule 144A securities could have
the effect of increasing the level of illiquidity in the Fund to the extent that
qualified institutional buyers become uninterested for a time in purchasing Rule
144A securities.
The Fund has adopted certain fundamental investment restrictions which are
presented in the Statement of Additional Information and which, together with
the investment objective of the Fund, cannot be changed without approval by
holders of a majority of its outstanding voting shares. As defined in the
Investment Company Act of 1940 ("1940 Act"), this means the lesser of the vote
of (a) 67% of the shares of the Fund 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 Fund. Policies of the Fund that are not
incorporated into any of the fundamental investment restrictions referred to
above may be changed by the Board of Trustees of the Fund without shareholder
approval.
OPTIONS AND FINANCIAL FUTURES TRANSACTIONS. The Fund may deal in options on
securities, securities indexes and foreign currencies, which options may be
listed for trading on a national securities exchange or traded over-the-counter.
The Fund may write (sell) covered call options and secured put options on up to
25% of its net assets and may purchase put and call options, provided that no
more than 5% of its net assets may be invested in premiums on such options.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security or other asset at the exercise price
during or at the end of the option period. A put option gives the purchaser the
right to sell, and the writer the obligation to buy, the underlying security or
other asset at the exercise price during or at the end of the option period. The
writer of a covered call owns securities or other assets that are acceptable for
escrow and the writer of a secured put invests an amount not less than the
exercise price in eligible securities or other assets to the extent that it is
obligated as a writer. If a call written by the Fund is exercised, the Fund
foregoes any possible profit from an increase in the market price of the
underlying security or other asset over the
9
<PAGE> 13
exercise price plus the premium received. In writing puts, there is a risk that
the Fund may be required to take delivery of the underlying security or other
asset at a disadvantageous price.
Over-the-counter traded options ("OTC options") differ from exchange traded
options in several respects. They are transacted directly with dealers and not
with a clearing corporation, and there is a risk of non-performance by the
dealer as a result of the insolvency of such dealer or otherwise, in which event
the Fund may experience material losses. However, in writing options the premium
is paid in advance by the dealer. OTC options are available for a greater
variety of securities and other assets, and a wider range of expiration dates
and exercise prices, than are exchange traded options.
The Fund may engage in financial futures transactions. Financial futures
contracts are commodity contracts that obligate the long or short holder to take
or make delivery of a specified quantity of a financial instrument, such as a
security, or an amount of a foreign currency, or the cash value of a securities
index during a specified future period at a specified price. The Fund will
"cover" futures contracts sold by the Fund and maintain in a segregated account
certain liquid assets in connection with futures contracts purchased by the Fund
as described under "Investment Policies and Techniques" in the Statement of
Additional Information. In connection with its foreign securities investments,
the Fund may also engage in foreign currency financial futures transactions. The
Fund will not enter into any futures contracts or options on futures contracts
if the aggregate of the market value of the outstanding futures contracts of the
Fund and futures contracts subject to outstanding options written by the Fund
would exceed 50% of the total assets of the Fund.
The Fund may engage in financial futures transactions and may use index options
in an attempt to hedge against market risks. For example, when the near-term
market view is bearish but the portfolio composition is judged satisfactory for
the longer term, exposure to temporary declines in the market may be reduced by
entering into futures contracts to sell securities or the cash value of a
securities index. Conversely, where the near-term view is bullish, but the Fund
is believed to be well positioned for the longer term with a high cash position,
the Fund can hedge against market increases by entering into futures contracts
to buy securities or the cash value of a securities index. In either case, the
use of futures contracts would tend to reduce portfolio turnover and facilitate
the Fund's pursuit of its investment objective.
Futures contracts entail risks. If the investment manager's judgment about the
general direction of interest rates, markets or exchange rates is wrong, the
overall performance may be poorer than if no such contracts had been entered
into. There may be an imperfect correlation between movements in prices of
futures contracts and portfolio assets being hedged. In addition, the market
prices of futures contracts may be affected by certain factors. For example, if
participants in the futures market elect to close out their contracts rather
than meet margin requirements, distortions in the normal relationship between
the underlying assets and futures market could result. Price distortions also
could result if investors in futures contracts decide to make or take delivery
of underlying securities or other assets rather than engage in closing
transactions because of the resultant reduction in the liquidity of the futures
market. In addition, because, from the point of view of speculators, margin
requirements in the futures market are less onerous than margin requirements in
the cash market, increased participation by speculators in the futures market
could cause temporary price distortions. Due to the possibility of price
distortions in the futures market and because of the imperfect correlation
between movements in the prices of securities or other assets and movements in
the prices of futures contracts, a correct forecast of market trends by the
investment manager still may not result in a successful hedging transaction. If
any of these events should occur, the Fund could lose money on the financial
futures contracts and also on the value of its portfolio assets. The costs
incurred in connection with futures transactions could reduce the Fund's return.
Index options involve risks similar to those risks relating to transactions in
financial futures contracts described above. Also, an option purchased by the
Fund may expire worthless, in which case the Fund would lose the premium paid
therefor.
The Fund may engage in futures transactions only on commodities exchanges or
boards of trade. The Fund will not engage in transactions in index options,
financial futures contracts or related options for speculation, but only
10
<PAGE> 14
as an attempt to hedge against changes in interest rates or market conditions
affecting the values of securities or other assets that the Fund owns or intends
to purchase.
FOREIGN CURRENCY TRANSACTIONS. The Fund may invest all or a portion of its
assets in securities denominated in foreign currencies. The Fund may engage in
foreign currency transactions in connection with its investments in foreign
securities but will not speculate in foreign currency exchange. The value of the
foreign securities investments of the Fund measured in U.S. Dollars (including
ADRs) may be affected favorably or unfavorably by changes in foreign currency
exchange rates and exchange control regulations, and the Fund may incur costs in
connection with conversions between various currencies. The Fund will conduct
its foreign currency exchange transactions either on a spot (i.e., cash) basis
at the spot rate prevailing in the foreign currency exchange market, or through
forward contracts to purchase or sell foreign currencies. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded directly between currency traders (usually
large commercial banks) and their customers.
When the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may want to establish the U.S. Dollar cost
or proceeds, as the case may be. By entering into a forward contract in U.S.
Dollars for the purchase or sale of the amount of foreign currency involved in
an underlying security transaction, the Fund is able to protect itself against a
possible loss between trade and settlement dates resulting from an adverse
change in the relationship between the U.S. Dollar and such foreign currency.
However, this tends to limit potential gains which might result from a positive
change in such currency relationships. The Fund may also hedge its foreign
currency exchange rate risk by engaging in currency financial futures and
options transactions.
When the Fund's investment manager believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. Dollar, it may
enter into a forward contract to sell an amount of foreign currency
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency. The forecasting of short-term currency
market movement is extremely difficult and whether such a short-term hedging
strategy will be successful is highly uncertain.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of a contract. Accordingly, it may be
necessary for the Fund to purchase additional currency on the spot market (and
bear the expense of such purchase) if the market value of the security is less
than the amount of foreign currency the Fund is obligated to deliver when a
decision is made to sell the security and make delivery of the foreign currency
in settlement of a forward contract. Conversely, it may be necessary to sell on
the spot market some of the foreign currency received upon the sale of the
portfolio security if its market value exceeds the amount of foreign currency
the Fund is obligated to deliver.
The Fund will not enter into forward contracts or maintain a net exposure in
such contracts where the Fund would be obligated to deliver an amount of foreign
currency in excess of the value of the Fund's securities or other assets
denominated in that currency. The Fund does not intend to enter into such
forward contracts if it would have more than 15% of the value of its total
assets committed to such contracts. The Fund segregates cash or liquid
securities to the extent required by applicable regulation in connection with
forward foreign currency exchange contracts entered into for the purchase of a
foreign currency. The Fund generally does not enter into a forward contract with
a term longer than one year.
DERIVATIVES. In addition to options, financial futures and foreign currency
transactions, consistent with its objective, the Fund may invest in a broad
array of financial instruments and securities in which the value of the
instrument or security is "derived" from the performance of an underlying asset
or a "benchmark" such as a security index, an interest rate or a currency
("derivatives"). Derivatives are most often used in an effort to manage
investment risk, to increase or decrease exposure to an asset class or benchmark
(as a hedge or to enhance return), or to create an investment position
indirectly (often because it is more efficient or less costly than direct
investment). There is no guarantee that these results can be achieved through
the use of derivatives.
11
<PAGE> 15
The types of derivatives used by the Fund and the techniques employed by the
investment manager may change over time as new derivatives and strategies are
developed or regulatory changes occur.
SPECIAL RISK FACTORS--OPTIONS, FUTURES, FOREIGN CURRENCIES AND OTHER
DERIVATIVES. The Statement of Additional Information contains further
information about the characteristics, risks and possible benefits of options,
futures, foreign currency and other derivative transactions. See "Investment
Policies and Techniques" in the Statement of Additional Information. The
principal risks are: (a) possible imperfect correlation between movements in the
prices of options, currencies, futures or other derivatives contracts and
movements in the prices of the securities or currencies hedged, used for cover
or that the derivatives intended to replicate; (b) lack of assurance that a
liquid secondary market will exist for any particular option, futures, foreign
currency or other derivatives contract at any particular time; (c) the need for
additional skills and techniques beyond those required for normal portfolio
management; (d) losses on futures contracts resulting from market movements not
anticipated by the investment manager; (e) the possible need to defer closing
out certain options, futures or other derivative contracts in order to continue
to qualify for beneficial tax treatment afforded "regulated investment
companies" under the Internal Revenue Code; and (f) the possible non-performance
of the counter-party to the derivative contract.
LENDING OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, the Fund may lend its portfolio securities (principally to
broker-dealers) without limit where such loans are callable at any time and are
continuously secured by segregated collateral (cash or other liquid securities)
equal to no less than the market value, determined daily, of the securities
loaned. The Fund will receive amounts equal to dividends or interest on the
securities loaned. It also will earn income for having made the loan. Any cash
collateral pursuant to these loans will be invested in short-term money market
instruments. As with other extensions of credit, there are risks of delay in
recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. However, the loans would be made only to firms
deemed by the Fund's investment manager to be of good standing, and when the
Fund's investment manager believes the potential earnings to justify the
attendant risk. Management will limit such lending to not more than one-third of
the value of the Fund's total assets.
INVESTMENT MANAGER AND UNDERWRITER
INVESTMENT MANAGER. Zurich Kemper Investments, Inc. ("ZKI"), 222 South Riverside
Plaza, Chicago, Illinois 60606, is the investment manager of the Fund and
provides the Fund with continuous professional investment supervision. ZKI is
one of the largest investment managers in the country and has been engaged in
the management of investment funds for more than forty-eight years. ZKI and its
affiliates provide investment advice and manage investment portfolios for the
Kemper Funds, affiliated insurance companies and other corporate, pension,
profit-sharing and individual accounts representing approximately $80 billion
under management. ZKI acts as investment manager for 31 open-end and seven
closed-end investment companies, with 78 separate investment portfolios,
representing more than 2.5 million shareholder accounts. ZKI is an indirect
subsidiary of Zurich Insurance Company, an internationally recognized provider
of financial services in property/casualty and life insurance, reinsurance and
asset management.
Responsibility for overall management of the Fund rests with its Board of
Trustees and officers. Professional investment supervision is provided by ZKI.
The investment management agreement provides that ZKI shall act as the Fund's
investment adviser, manage its investments and provide it with various services
and facilities. Zurich Investment Management Limited ("ZIML"), 1 Fleet Place,
London EC4M 7RQ, an affiliate of ZKI, is a sub-adviser for the Fund. ZIML is an
indirect subsidiary of Zurich Insurance Company and has served as sub-adviser
for mutual funds since December, 1996 and investment adviser for certain
institutional accounts since August, 1988. Under the terms of the sub-advisory
agreement between ZIML and ZKI, ZIML renders investment advisory and management
services with regard to such portion of the Fund's portfolio as may be allocated
to ZIML by ZKI from time to time for management of foreign securities, including
foreign currency transactions and related investments. ZKI pays ZIML for its
services a sub-advisory fee, payable monthly at the annual rate of .35% for the
portion of the average daily net assets of the Fund allocated by ZKI to ZIML for
management.
12
<PAGE> 16
Edith A. Thouin has been the portfolio manager of the Fund since its inception
in 1996. Ms. Thouin joined ZKI and ZIML in 1992, and is Director--European
Equities for ZIML. Ms. Thouin received an L.L.M. in law from the University of
Leiden (The Netherlands) in 1983 and is a member of the Swiss Society of
Security Analysts. As reflected above, ZIML is an affiliate of ZKI that provides
services to ZKI with respect to the Fund's foreign investments.
The Fund pays ZKI an investment management fee, payable monthly, at the annual
rates shown below.
<TABLE>
<CAPTION>
ANNUAL MANAGEMENT
AVERAGE DAILY NET ASSETS OF THE FUND FEE RATES
------------------------------------ -----------------
<S> <C>
$0 - $250 million........................................... .75%
$250 million - $1 billion................................... .72
$1 billion - $2.5 billion................................... .70
$2.5 billion - $5 billion................................... .68
$5 billion - $7.5 billion................................... .65
$7.5 billion - $10 billion.................................. .64
$10 billion - $12.5 billion................................. .63
Over $12.5 billion.......................................... .62
</TABLE>
ZKI has agreed to a reduction of its investment management fee by .25% until the
earlier of May 1, 1997 or the date when the Fund's net assets reach $100
million. The expenses of the Fund, and of other investment companies investing
in foreign securities, can be expected to be higher than for investment
companies investing primarily in domestic securities since the costs of
operation are higher, including custody and transaction costs for foreign
securities and investment management fees.
PRINCIPAL UNDERWRITER. Pursuant to an underwriting and distribution services
agreement ("distribution agreement") with the Fund, Kemper Distributors, Inc.
("KDI"), 222 South Riverside Plaza, Chicago, Illinois 60606, a wholly owned
subsidiary of ZKI, is the principal underwriter and distributor of the Fund's
shares and acts as agent of the Fund in the sale of its shares. KDI bears all
its expenses of providing services pursuant to the distribution agreement,
including the payment of any commissions. KDI provides for the preparation of
advertising or sales literature and bears the cost of printing and mailing
prospectuses to persons other than shareholders. KDI bears the cost of
qualifying and maintaining the qualification of Fund shares for sale under the
securities laws of the various states and the Fund bears the expense of
registering its shares with the Securities and Exchange Commission. KDI may
enter into related selling group agreements with various broker-dealers,
including affiliates of KDI, that provide distribution services.
CLASS A SHARES. KDI receives no compensation from the Fund as principal
underwriter for Class A shares and pays all expenses of distribution of the
Fund's Class A shares under the distribution agreement not otherwise paid by
dealers or other financial services firms. As indicated under "Purchase of
Shares," KDI retains the sales charge upon the purchase of shares and pays or
allows concessions or discounts to firms for the sale of Fund shares.
CLASS B SHARES. For its services under the distribution agreement, KDI receives
a fee from the Fund, payable monthly, at an annual rate of .75% of average daily
net assets of the Fund attributable to Class B shares. This fee is accrued daily
as an expense of Class B shares. KDI also receives any contingent deferred sales
charges. See "Redemption or Repurchase of Shares--Contingent Deferred Sales
Charge--Class B Shares." KDI currently compensates firms for sales of Class B
shares at a commission rate of 3.75%.
CLASS C SHARES. For its services under the distribution agreement, KDI receives
a fee from the Fund, payable monthly, at an annual rate of .75% of average daily
net assets of the Fund attributable to Class C shares. This fee is accrued daily
as an expense of Class C shares. KDI currently advances to firms the first year
distribution fee at a rate of .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 .75%
of net assets attributable to Class C shares maintained and serviced by the firm
and the fee continues until terminated by KDI
13
<PAGE> 17
or the Fund. KDI also receives any contingent deferred sales charges. See
"Redemption or Repurchase of Shares--Contingent Deferred Sales Charge--Class C
Shares."
RULE 12B-1 PLAN. Since each distribution agreement provides for fees payable as
an expense of the Class B shares and the Class C shares that are used by KDI to
pay for distribution services for those classes, that agreement is approved and
reviewed separately for the Class B shares and the Class C shares in accordance
with Rule 12b-1 under the 1940 Act, which regulates the manner in which an
investment company may, directly or indirectly, bear the expenses of
distributing its shares. The table below shows amounts paid in connection with
the Fund's Rule 12b-1 Plan during its 1996 period (May 1, 1996 to November 30,
1996).
<TABLE>
<CAPTION>
DISTRIBUTION EXPENSES DISTRIBUTION FEES PAID
INCURRED BY FUND TO
BY UNDERWRITER UNDERWRITER
- --------------------- -----------------------
CLASS B CLASS C CLASS B CLASS C
------- ------- ------- -------
<S> <C> <C> <C>
$49,000 7,000 3,000 1,000
</TABLE>
If the Rule 12b-1 Plan (the "Plan") is terminated in accordance with its terms,
the obligation of the 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 the Plan, if for any reason
the Plan is terminated in accordance with its terms. Future fees under the Plan
may or may not be sufficient to reimburse KDI for its expenses incurred.
ADMINISTRATIVE SERVICES. KDI also provides information and administrative
services for Fund shareholders pursuant to an administrative services agreement
("administrative agreement"). KDI may enter 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 in the Fund. Such administrative 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 and its special features and such other administrative
services as may be agreed upon from time to time and permitted by applicable
statute, rule or regulation. KDI bears all its expenses of providing services
pursuant to the administrative agreement, including the payment of any service
fees. For services under the administrative agreement, the Fund pays KDI a fee,
payable monthly, at an annual rate of up to .25% of average daily net assets of
Class A, B and C shares of the Fund. KDI then pays each firm a service fee at an
annual rate of up to .25% of net assets attributable to Class A, B and C shares
maintained and serviced by the firm. Firms to which service fees may be paid
include affiliates of KDI.
CLASS A SHARES. For Class A shares, a firm becomes eligible for the service fee
based upon assets in the accounts in the month following the month of purchase
and the fee continues until terminated by KDI or the Fund. The fees are
calculated monthly and paid quarterly.
CLASS B AND CLASS C SHARES. KDI currently advances to firms the first-year
service fee at a rate of up to .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 .25% (calculated monthly and paid quarterly) of the net
assets attributable to Class B and Class C shares maintained and serviced by the
firm and the fee continues until terminated by KDI or the Fund.
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreement not paid to firms to compensate
itself for administrative functions performed for the Fund. Currently, the
administrative services fee payable to KDI is based only upon Fund assets in
accounts for which a firm provides administrative services and it is intended
that KDI will pay all the administrative services fee that it receives from the
Fund to firms in the form of service fees. The effective administrative services
fee rate to be charged against all assets of the Fund while this procedure is in
effect will depend upon the proportion of Fund
14
<PAGE> 18
assets that is in accounts for which a firm provides administrative services. In
addition, KDI may, from time to time, from its own resources pay certain firms
additional amounts for ongoing administrative services and assistance provided
to their customers and clients who are shareholders of the Fund.
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT. The Chase Manhattan
Bank, Chase MetroTech Center, Brooklyn, New York 11245, as custodian, has
custody of all securities and cash of the Fund held outside the United States.
Investors Fiduciary Trust Company ("IFTC"), 127 West 10th Street, Kansas City,
Missouri 64105, as custodian, and State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110, as sub-custodian, have custody of
all securities and cash of the Fund maintained in the United States. IFTC also
is the Fund's transfer agent and dividend-paying agent. Pursuant to a services
agreement with IFTC, Kemper Service Company, an affiliate of ZKI, serves as
"Shareholder Service Agent" of the Fund and as such, performs all of IFTC's
duties as transfer agent and dividend-paying agent. For a description of
transfer agent and shareholder service agent fees payable to IFTC and the
Shareholder Service Agent, see "Investment Manager and Underwriter" in the
Statement of Additional Information.
PORTFOLIO TRANSACTIONS. ZKI and ZIML place all orders for purchases and sales of
the Fund's securities. Subject to seeking best execution of orders, they may
consider sales of shares of the Fund and other funds managed by ZKI or its
affiliates as a factor in selecting broker-dealers. See "Portfolio Transactions"
in the Statement of Additional Information.
DIVIDENDS AND TAXES
DIVIDENDS. The Fund normally distributes annual dividends of net investment
income and any net realized short-term and long-term capital gains.
Dividends paid by the Fund as to each class of its shares will be calculated in
the same manner, at the same time and on the same day. The level of income
dividends per share (as a percentage of net asset value) will be lower for Class
B and Class C shares than for Class A shares primarily as a result of the
distribution services fee applicable to Class B and Class C shares.
Distributions of capital gains, if any, will be paid in the same amount for each
class.
Income dividends and capital gain dividends, if any, of the Fund will be
credited to shareholder accounts in full and fractional Fund shares of the same
class at net asset value except that, upon written request to the Shareholder
Service Agent, a shareholder may select one of the following options:
(1) To receive income and short-term capital gain dividends in cash and
long-term capital gain dividends in shares of the same class at net asset
value; or
(2) To receive income and capital gain dividends in cash.
Any dividends of the Fund that are reinvested normally will be reinvested in
Fund shares of the same class. However, upon written request to the Shareholder
Service Agent, a shareholder may elect to have dividends of the Fund invested
without sales charge in shares of the same class of another Kemper Fund at the
net asset value of such class of such other fund. See "Special Features--Class A
Shares--Combined Purchases" for a list of such other Kemper Funds. To use this
privilege of investing dividends of the Fund in shares of another Kemper Fund,
shareholders must maintain a minimum account value of $1,000 in the Fund
distributing the dividends. The Fund reinvests dividend checks (and future
dividends) in shares of that same class of the Fund if checks are returned as
undeliverable. Dividends and other distributions in the aggregate amount of $10
or less are automatically reinvested in shares of the same Fund unless the
shareholder requests that such policy not be applied to the shareholder's
account.
TAXES. The Fund intends to continue to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code ("Code") and, if so qualified,
will not be liable for federal income taxes to the extent its earnings are
distributed. Dividends derived from net investment income and net short-term
capital gains are
15
<PAGE> 19
taxable to shareholders as ordinary income and long-term capital gain dividends
are taxable to shareholders as long-term capital gain regardless of how long the
shares have been held and whether received in cash or shares. Long-term capital
gain dividends received by individual shareholders are taxed at a maximum rate
of 28%. Dividends declared in October, November or December to shareholders of
record as of a date in one of those months and paid during the following January
are treated as paid on December 31 of the calendar year declared. It is
anticipated that only a small portion, if any, of the ordinary income dividends
paid by the Fund will qualify for the dividends received deduction available to
corporate shareholders.
A dividend received shortly after the purchase of shares reduces the net asset
value of the shares by the amount of the dividend and, although in effect a
return of capital, will be taxable to the shareholder. If the net asset value of
shares were reduced below the shareholder's cost by dividends representing gains
realized on sales of securities, such dividends would be a return of investment
though taxable as stated above.
If more than 50% of the value of the Fund's total assets at the close of a
fiscal year consists of foreign securities, the Fund may make the election
permitted under Section 853 of the Code. If this election is made, shareholders
will be able to claim a credit or deduction on their income tax returns for, and
will be required to treat as part of the amounts distributed to them, their pro
rata portion of the income taxes paid by the Fund to foreign countries (which
taxes relate primarily to investment income). The shareholders of the Fund may
claim a credit by reason of the Fund's election, subject to certain limitations
imposed by Section 904 of the Code. Also, under the Code, no deduction for
foreign taxes may be claimed by individual shareholders who do not elect to
itemize deductions on their federal income tax returns; although such a
shareholder may claim a credit for foreign taxes and in any event will be
treated as having taxable income in the amount of the shareholder's pro rata
share of foreign taxes paid by the Fund.
The Fund is required by law to withhold 31% of taxable dividends and redemption
proceeds paid to certain shareholders who do not furnish a correct taxpayer
identification number (in the case of individuals, a social security number) and
in certain other circumstances. Trustees of qualified retirement plans and
403(b)(7) accounts are required by law to withhold 20% of the taxable portion of
any distribution that is eligible to be "rolled over." The 20% withholding
requirement does not apply to distributions from Individual Retirement Accounts
("IRAs") or any part of a distribution that is transferred directly to another
qualified retirement plan, 403(b)(7) account, or IRA. Shareholders should
consult with their tax advisers regarding the 20% withholding requirement.
After each transaction, shareholders will receive a confirmation statement
giving complete details of the transaction except that statements will be sent
quarterly for transactions involving dividend reinvestment and periodic
investment and redemption programs. Information for income tax purposes,
including information regarding any foreign taxes and credits, will be provided
after the end of the calendar year. Shareholders are encouraged to retain copies
of their account confirmation statements or year-end statements for tax
reporting purposes. However, those who have incomplete records may obtain
historical account transaction information at a reasonable fee.
When more than one shareholder resides at the same address, certain reports and
communications to be delivered to such shareholders may be combined in the same
mailing package, and certain duplicate reports and communications may be
eliminated. Similarly, account statements to be sent to such shareholders may be
combined in the same mailing package or consolidated into a single statement.
However, a shareholder may request that the foregoing policies not be applied to
the shareholder's account.
NET ASSET VALUE
The net asset value per share of the Fund is determined separately for each
class by dividing the value of the Fund's net assets attributable to that class
by the number of shares of that class outstanding. The per share net asset value
of the Class B and Class C shares of the Fund will generally be lower than that
of the Class A shares of
16
<PAGE> 20
the Fund because of the higher expenses borne by the Class B and Class C shares.
Securities that are primarily traded on a domestic securities exchange or
securities listed on the NASDAQ National Market are valued at the last sale
price on the exchange or market where primarily traded or listed, or, if there
is no recent sale price available, at the last current bid quotation. Securities
that are primarily traded on foreign securities exchanges are generally valued
at the preceding closing values of such securities on their respective exchanges
where primarily traded. A security that is listed or traded on more than one
exchange is valued at the quotation on the exchange determined to be the primary
market for such security by the Board of Trustees or its delegates. Securities
not so traded or listed are valued at the last current bid quotation if market
quotations are available. Equity options are valued at the last sale price
unless the bid price is higher or the asked price is lower, in which event such
bid or asked price is used. Exchange traded fixed income options, financial
futures and options thereon are valued at the settlement price established each
day by the board of trade or exchange on which they are traded. Over-the-counter
traded options are valued based upon current prices provided by market makers.
Other securities and assets are valued at fair value as determined in good faith
by the Board of Trustees. Because of the need to obtain prices as of the close
of trading on various exchanges throughout the world, the calculation of net
asset value of the Fund does not necessarily take place contemporaneously with
the determination of the prices of the Fund's foreign securities, which may be
made prior to the determination of net asset value. For purposes of determining
the Fund's net asset value, all assets and liabilities initially expressed in
foreign currency values will be converted into U.S. Dollar values at the mean
between the bid and offered quotations of such currencies against U.S. Dollars
as last quoted by a recognized dealer. If an event were to occur after the value
of a security was so established but before the net asset value per share was
determined, which was likely to materially change the net asset value, then that
security would be valued using fair value determinations by the Board of
Trustees or its delegates. On each day the New York Stock Exchange (the
"Exchange") is open for trading, the net asset value is determined as of the
earlier of 3:00 p.m. Chicago time or the close of the Exchange.
PURCHASE OF SHARES
ALTERNATIVE PURCHASE ARRANGEMENTS. Class A shares of the Fund are sold to
investors subject to an initial sales charge. Class B shares are sold without an
initial sales charge but are subject to higher ongoing expenses than Class A
shares and a contingent deferred sales charge payable upon certain redemptions.
Class B shares automatically convert to Class A shares six years after issuance.
Class C shares are sold without an initial 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 the Fund'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
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<PAGE> 21
class has distinct advantages and disadvantages for different investors, and
investors may choose the class that best suits their circumstances and
objectives.
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------ ------------------------ -----------------
<S> <C> <C> <C>
Class A Maximum initial sales charge of None Initial sales charge waived or
5.75% of the public offering reduced for certain purchases
price
Class B Maximum contingent deferred sales 0.75% Shares convert to Class A shares
charge of 4% of redemption six years after issuance
proceeds; declines to zero after
six years
Class C Contingent deferred sales charge 0.75% No conversion feature
of 1% of redemption proceeds for
redemptions made during first
year after purchase
</TABLE>
The minimum initial investment for the Fund 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.
<TABLE>
<CAPTION>
SALES CHARGE
----------------------------------------------------------------------
ALLOWED TO
DEALERS AS A
AS A PERCENTAGE AS A PERCENTAGE PERCENTAGE OF
OF OFFERING PRICE OF NET ASSET VALUE* OFFERING PRICE
AMOUNT OF PURCHASE ----------------- ------------------- --------------
<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** ***
- ---------------
* 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.
</TABLE>
The Fund receives the entire net asset value of all Class A shares sold. KDI,
the Fund's principal underwriter, retains the sales charge on sales of Class A
shares from which it allows discounts from the applicable public offering price
to investment dealers, which discounts are uniform for all dealers in the United
States and its territories. The normal discount allowed to dealers is set forth
in the above table. Upon notice to all dealers with
18
<PAGE> 22
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 the Fund may be purchased at net asset value to the extent
that the amount invested represents the net proceeds from a redemption of shares
of a mutual fund for which ZKI or an affiliate does not serve as investment
manager ("non-Kemper Fund") provided that: (a) the investor has previously paid
either an initial sales charge in connection with the purchase of the non-Kemper
Fund shares redeemed or a contingent deferred sales charge in connection with
the redemption of the non-Kemper Fund shares, and (b) the purchase of Fund
shares is made within 90 days after the date of such redemption. To make such a
purchase at net asset value, the investor or the investor's dealer must, at the
time of purchase, submit a request that the purchase be processed at net asset
value pursuant to this privilege. The redemption of the shares of the non-Kemper
Fund is, for federal income tax purposes, a sale upon which a gain or loss may
be realized. KDI may in its discretion compensate firms for sales of Class A
shares under this privilege at a commission rate of .50% of the amount of Class
A shares purchased.
Class A shares of the Fund may be purchased at net asset value by: (a) any
purchaser provided that the amount invested in the Fund or other Kemper Mutual
Funds listed under "Special Features--Class A Shares--Combined Purchases" totals
at least $1,000,000 including purchases of Class A shares pursuant to the
"Combined Purchases," "Letter of Intent" and "Cumulative Discount" features
described under "Special Features"; or (b) a participant-directed qualified
retirement plan described in Code Section 401(a) or a participant-directed non-
qualified deferred compensation plan described in Code Section 457 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 the Fund 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, .50% on the next $45 million and .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. For purposes of
determining the appropriate commission percentage to be applied to a particular
sale under the foregoing schedules, KDI will consider the cumulative amount
invested by the purchaser in the Fund and other Kemper Mutual Funds listed under
"Special Features--Class A Shares--Combined Purchases," including purchases
pursuant to the "Combined Purchases," "Letter of Intent" and "Cumulative
Discount" features referred to above. The privilege of purchasing Class A shares
of the Fund at net asset value under the Large Order NAV Purchase Privilege is
not available if another net asset value purchase privilege is also applicable.
Effective on February 1, 1996, Class A shares of the Fund or any other Kemper
Mutual Fund listed under "Special Features--Class A Shares--Combined Purchases"
may be purchased at net asset value in any amount by members of the plaintiff
class in the proceeding known as HOWARD AND AUDREY TABANKIN, ET AL. V. KEMPER
SHORT-TERM GLOBAL INCOME FUND, ET AL., Case No. 93 C 5231 (N.D. IL). This
privilege is generally non-transferrable and continues for the lifetime of
individual class members and for a ten year period for non-individual class
members. To make a purchase at net asset value under this privilege, the
investor must, at the time of purchase, submit a written request that the
purchase be processed at net asset value pursuant to this privilege specifically
identifying the purchaser as a member of the "Tabankin Class." Shares purchased
under this privilege will be maintained in a separate account that includes only
shares purchased under this privilege. For more details concerning this
privilege, class members should refer to the Notice of (1) Proposed Settlement
with Defendants; and (2) Hearing to Determine Fairness of Proposed Settlement,
dated August 31, 1995, issued in connection with the
19
<PAGE> 23
aforementioned court proceeding. For sales of Fund shares at net asset value
pursuant to this privilege, KDI may at its discretion pay investment dealers and
other financial services firms a concession, payable quarterly, at an annual
rate of up to .25% of net assets attributable to such shares maintained and
serviced by the firm. A firm becomes eligible for the concession based upon
assets in accounts attributable to shares purchased under this privilege in the
month after the month of purchase and the concession continues until terminated
by KDI. The privilege of purchasing Class A shares of the Fund at net asset
value under this privilege is not available if another net asset value purchase
privilege also applies.
Class A shares may be sold at net asset value in any amount to: (a) officers,
trustees, directors, employees (including retirees) and sales representatives of
the Fund, its investment manager, its principal underwriter or certain
affiliated companies, for themselves or members of their families: (b)
registered representatives and employees of broker-dealers having selling group
agreements with KDI and officers, directors and employees of service agents of
the Fund, for themselves or their spouses or dependent children; (c)
shareholders who owned shares of Kemper-Dreman Fund, Inc. ("KDF") on September
8, 1995, and have continuously owned shares of KDF (or a Kemper Fund acquired by
exchange of KDF shares) since that date, for themselves or members of their
families, and (d) any trust or pension, profit-sharing or other benefit plan for
only such persons. Class A shares may be sold at net asset value in any amount
to selected employees (including their spouses and dependent children) of banks
and other financial services firms that provide administrative services related
to order placement and payment to facilitate transactions in shares of the Fund
for their clients pursuant to an agreement with KDI or one of its affiliates.
Only those employees of such banks and other firms who as part of their usual
duties provide services related to transactions in Fund Class A shares may
purchase Fund 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 the
Fund's Class A shares at net asset value through reinvestment programs described
in the prospectuses of such trusts that have such programs. The Fund's Class A
shares may be sold at net asset value through certain investment advisers
registered under the Investment Advisers Act of 1940 and other financial
services firms that adhere to certain standards established by KDI, including a
requirement that such shares be sold for the benefit of their clients
participating in an investment advisory program under which such clients pay a
fee to the investment adviser or other firm for portfolio management and other
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 Fund. The
Fund may also issue Class A shares at net asset value in connection with the
acquisition of the assets of or merger or consolidation with another investment
company, or to shareholders in connection with the investment or reinvestment of
income and capital gain dividends.
Class A shares of the Fund 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 .50% of the
amount of Class A shares purchased.
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
20
<PAGE> 24
purchase payment will be invested in Class B shares for his or her account. A
contingent deferred sales charge may be imposed upon redemption of Class B
shares. See "Redemption or Repurchase of Shares--Contingent Deferred Sales
Charge--Class B Shares."
KDI compensates firms for sales of Class B shares at the time of sale at a
commission rate of up to 3.75% of the amount of Class B shares purchased. KDI is
compensated by the Fund for services as distributor and principal underwriter
for Class B shares. See "Investment Manager and Underwriter."
Class B shares of the Fund will automatically convert to Class A shares of the
Fund six years after issuance on the basis of the relative net asset value per
share. Class B shareholders of the Fund who originally acquired their shares as
Initial Shares of Kemper Portfolios, formerly known as Kemper Investment
Portfolios ("KIP"), hold them subject to the same conversion period schedule as
that of their KIP Portfolio. Class B shares originally representing Initial
Shares of a KIP Portfolio will automatically convert to Class A shares of the
Fund six years after issuance of the Initial Shares for shares issued on or
after February 1, 1991 and seven years after issuance of the Initial Shares for
shares issued before February 1, 1991. The purpose of the conversion feature is
to relieve holders of Class B shares from the distribution services fee when
they have been outstanding long enough for KDI to have been compensated for
distribution related expenses. For purposes of conversion to Class A shares,
shares purchased through the reinvestment of dividends and other distributions
paid with respect to Class B shares in a shareholder's Fund 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
the Fund 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 .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 .75% of net assets
attributable to Class C shares maintained and serviced by the firm. KDI is
compensated by the Fund for services as distributor and principal underwriter
for Class C shares. See "Investment Manager and Underwriter."
WHICH ARRANGEMENT IS BETTER FOR YOU? The decision as to which class of shares
provides a more suitable investment for an investor depends on a number of
factors, including the amount and intended length of the investment. Investors
making investments that qualify for reduced sales charges might consider Class A
shares. Investors who prefer not to pay an initial sales charge and who plan to
hold their investment for more than six years might consider Class B shares.
Investors who prefer not to pay an initial sales charge but who plan to redeem
their shares within six years might consider Class C shares. Orders for Class B
shares or Class C shares for $500,000 or more will be declined. Orders for Class
B shares or Class C shares by employer sponsored employee benefit plans using
the subaccount record keeping system made available through the Shareholder
Service Agent will be invested instead in Class A shares at net asset value
where the combined subaccount value in the Fund or other Kemper Mutual Funds
listed under "Special Features--Class A Shares--Combined Purchases" is in excess
of $5 million including purchases pursuant to the "Combined Purchases," "Letter
of Intent" and "Cumulative Discount" features described under "Special
Features." For more information about the three sales arrangements, consult your
financial representative or the Shareholder Service Agent. Financial services
firms may receive different compensation depending upon which class of shares
they sell.
GENERAL. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of the Fund 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 currently are prohibited under the Glass-Steagall Act
from providing certain underwriting or distribution services. Banks or other
financial services firms may be subject to various state laws regarding the
services described above and may be required to register as dealers pursuant to
state law. If banking firms were prohibited
21
<PAGE> 25
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 the Fund.
KDI may, from time to time, pay or allow to firms a 1% commission on the amount
of shares of the Fund sold by the firm 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
Kemper Service Company, (iii) the registered representative placing the trade is
a member of ProStar, a group of persons designated by KDI in acknowledgement 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 or other compensation, to firms that sell shares
of the Fund. Non-cash compensation includes luxury merchandise and trips to
luxury resorts. In some instances, such discounts, commissions or other
incentives will be offered only to certain firms that sell or are expected to
sell during specified time periods certain minimum amounts of shares of the Fund
or other funds underwritten by KDI.
Orders for the purchase of shares of the Fund will be confirmed at a price based
on the net asset value of the Fund next determined after receipt by KDI of the
order accompanied by payment. However, orders 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 its business day will be confirmed at a
price based on the net asset value effective on that day ("trade date"). The
Fund reserves the right to determine the net asset value more frequently than
once a day if deemed desirable. Dealers and other financial services firms are
obligated to transmit orders promptly. Collection may take significantly longer
for a check drawn on a foreign bank than for a check drawn on a domestic bank.
Therefore, if an order is accompanied by a check drawn on a foreign bank, funds
must normally be collected before shares will be purchased. See "Purchase and
Redemption of Shares" in the Statement of Additional Information.
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem Fund 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
Fund shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Fund's transfer agent will have no information
with respect to or control over accounts of specific shareholders. Such
shareholders may obtain access to their accounts and information about their
accounts only from their firm. Certain of these firms may receive compensation
from the Fund through the Shareholder Service Agent for recordkeeping and other
expenses relating to these nominee accounts. In addition, certain privileges
with respect to the purchase and redemption of shares or the reinvestment of
dividends may not be available through such firms. Some firms may participate in
a program allowing them access to their clients' accounts for servicing
including, without limitation, transfers of registration and dividend payee
changes; and may perform functions such as generation of confirmation statements
and disbursement of cash dividends. Such firms, including affiliates of KDI, may
receive compensation from the Fund through the Shareholder Service Agent for
these services. This prospectus should be read in connection with such firms'
material regarding their fees and services.
The Fund reserves the right to withdraw all or any part of the offering made by
this prospectus and to reject purchase orders. Also, from time to time, the Fund
may temporarily suspend the offering of any class of its shares to new
investors. During the period of such suspension, persons who are already
shareholders of such class of the Fund normally are permitted to continue to
purchase additional shares of such class and to have dividends reinvested.
Shareholders should direct their inquiries to Kemper Service Company, 811 Main
Street, Kansas City, Missouri 64105-2005 or to the firm from which they received
this prospectus.
22
<PAGE> 26
REDEMPTION OR REPURCHASE OF SHARES
GENERAL. Any shareholder may require the Fund to redeem his or her shares. When
shares are held for the account of a shareholder by the Fund's transfer agent,
the shareholder may redeem them by sending a written request with signatures
guaranteed to Kemper Mutual Funds, Attention: Redemption Department, P.O. Box
419557, Kansas City, Missouri 64141-6557. When certificates for shares have been
issued, they must be mailed to or deposited with the Shareholder Service Agent,
along with a duly endorsed stock power and accompanied by a written request for
redemption. Redemption requests and a stock power must be endorsed by the
account holder with signatures guaranteed by a commercial bank, trust company,
savings and loan association, federal savings bank, member firm of a national
securities exchange or other eligible financial institution. The redemption
request and stock power must be signed exactly as the account is registered
including any special capacity of the registered owner. Additional documentation
may be requested, and a signature guarantee is normally required, from
institutional and fiduciary account holders, such as corporations, custodians
(e.g., under the Uniform Transfers to Minors Act), executors, administrators,
trustees or guardians.
The redemption price for shares of the Fund will be the net asset value per
share of the Fund next determined following receipt by the Shareholder Service
Agent of a properly executed request with any required documents as described
above. Payment for shares redeemed will be made in cash as promptly as
practicable but in no event later than seven days after receipt of a properly
executed request accompanied by any outstanding share certificates in proper
form for transfer. When the Fund is asked to redeem shares for which it may not
have yet received good payment (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 the Fund 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") and 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 Fund reserve the
right to redeem an account (and, in the case of Class B shares and Class C
shares, impose any applicable contingent deferred sales charge) that falls below
the minimum investment level, currently $1,000, as a result of redemptions.
Currently, Individual Retirement Accounts (IRAs) and employee benefit plan
accounts are not subject to this procedure. A shareholder will be notified in
writing and will be allowed 60 days to make additional purchases to bring the
account value up to the minimum investment level before the Fund redeems the
shareholder's account. The investment required to reach that level may be made
at net asset value (without any initial sales charge in the case of Class A
shares).
Shareholders can request the following telephone privileges: expedited wire
transfer redemptions and EXPRESS-Transfer transactions (see "Special Features")
and exchange transactions for individual and institutional accounts and
pre-authorized telephone redemption transactions for certain institutional
accounts. Shareholders may choose these privileges on the account application or
by contacting the Shareholder Service Agent for appropriate instructions. Please
note that the telephone exchange privilege is automatic unless the shareholder
refuses it on the account application. The Fund or its agents may be liable for
any losses, expenses or costs arising out of any fraudulent or unauthorized
telephone requests pursuant to these privileges unless the Fund or its agents
reasonably believe, based upon reasonable verification procedures, that the
telephonic instructions are genuine. The SHAREHOLDER WILL BEAR THE RISK OF LOSS,
including loss resulting from fraudulent or unauthorized transactions, so long
as reasonable verification procedures are followed. Verification procedures
include recording instructions, requiring certain identifying information before
acting upon instructions and sending written confirmations.
TELEPHONE REDEMPTIONS. If the proceeds of the redemption (prior to the
imposition of any contingent deferred sales charge) are $50,000 or less and the
proceeds are payable to the shareholder of record at the address
23
<PAGE> 27
of record, normally a telephone request or a written request by any one account
holder without a signature guarantee is sufficient for redemptions by individual
or joint account holders, and trust, executor and guardian account holders
(excluding custodial accounts for gifts and transfers to minors), provided the
trustee, executor or guardian is named in the account registration. Other
institutional account holders and guardian account holders of custodial accounts
for gifts and transfers to minors may exercise this special privilege of
redeeming shares by telephone request or written request without a signature
guarantee subject to the same conditions as individual account holders and
subject to the limitations on liability described under "General" above,
provided that this privilege has been pre-authorized by the institutional
account holder or guardian account holder by written instruction to the
Shareholder Service Agent with signatures guaranteed. Telephone requests may be
made by calling 1-800-621-1048. Shares purchased by check or through
EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this privilege
of redeeming shares by telephone request until such shares have been owned for
at least 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 Fund reserves the right to terminate or modify
this privilege at any time.
REPURCHASES (CONFIRMED REDEMPTIONS). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to KDI, which the Fund has authorized to act as its agent. There
is no charge by KDI with respect to repurchases; however, dealers or other firms
may charge customary commissions for their services. Dealers and other financial
services firms are obligated to transmit orders promptly. The repurchase price
will be the net asset value next determined after receipt of a request by KDI.
However, requests for repurchases received by dealers or other firms prior to
the determination of net asset value (see "Net Asset Value") and received by KDI
prior to the close of KDI's business day will be confirmed at the net asset
value effective on that day. The offer to repurchase may be suspended at any
time. Requirements as to stock powers, certificates, payments and delay of
payments are the same as for redemptions.
EXPEDITED WIRE TRANSFER REDEMPTIONS. If the account holder has given
authorization for expedited wire redemption to the account holder's brokerage or
bank account, shares of the Fund can be redeemed and proceeds 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 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 request of
$250,000 or more may be delayed by the Fund for up to seven days if ZKI deems it
appropriate under then current market conditions. Once authorization is on file,
the Shareholder Service Agent will honor requests by telephone at 1-800-621-1048
or in writing, subject to the limitations on liability described under "General"
above. The Fund is not responsible for the efficiency of the federal wire system
or the account holder's financial services firm or bank. The Fund currently does
not charge the account holder for wire transfers. The account holder is
responsible for any charges imposed by the account holder's firm or bank. There
is a $1,000 wire redemption minimum (including any contingent deferred sales
charge). To change the designated account to receive wire redemption proceeds,
send a written request to the Shareholder Service Agent with signatures
guaranteed as described above or contact the firm through which shares of the
Fund were purchased. Shares purchased by check or through EXPRESS-Transfer or
Bank Direct Deposit may not be redeemed by wire transfer until such shares have
been owned for at least 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 Fund reserves the right to
terminate or modify this privilege at any time.
CONTINGENT DEFERRED SALES CHARGE--LARGE ORDER NAV PURCHASE PRIVILEGE. A
contingent deferred sales charge 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 .50% if they
24
<PAGE> 28
are redeemed during the second year following purchase. The charge will not be
imposed upon redemption of reinvested dividends or share appreciation. The
charge is applied to the value of the shares redeemed excluding amounts not
subject to the charge. The contingent deferred sales charge will be waived in
the event of: (a) redemptions by a participant-directed qualified retirement
plan described in Code Section 401(a) or a participant-directed non-qualified
deferred compensation plan described in Code Section 457 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 the Fund'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 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.
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED
SALES
YEAR OF REDEMPTION AFTER PURCHASE CHARGE
--------------------------------- ----------
<S> <C>
First....................................................... 4%
Second...................................................... 3%
Third....................................................... 3%
Fourth...................................................... 2%
Fifth....................................................... 2%
Sixth....................................................... 1%
</TABLE>
Class B shareholders who originally acquired their shares as Initial Shares of
Kemper Portfolios, formerly known as Kemper Investment Portfolios, hold them
subject to the same CDSC schedule that applied when those shares were purchased,
as follows:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
---------------------------------------------------------------------------------------
SHARES PURCHASED ON OR AFTER
FEBRUARY 1, 1991 AND
YEAR OF REDEMPTION SHARES PURCHASED ON OR AFTER BEFORE SHARES PURCHASED BEFORE
AFTER PURCHASE MARCH 1, 1993 MARCH 1, 1993 FEBRUARY 1, 1991
------------------ ---------------------------- ---------------------------- -----------------------
<S> <C> <C> <C>
First.................... 4% 3% 5%
Second................... 3% 3% 4%
Third.................... 3% 2% 3%
Fourth................... 2% 2% 2%
Fifth.................... 2% 1% 2%
Sixth.................... 1% 1% 1%
</TABLE>
The 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
25
<PAGE> 29
equal periodic payments described in 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 the Fund), (c) redemptions in
connection with distributions qualifying under the hardship provisions of the
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) and (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.
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 the Fund'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 in appreciation to a total of $12,000. If
the investor were then to redeem the entire $12,000 in share value, the
contingent deferred sales charge would be payable only with respect to $10,000
because neither the $1,000 of reinvested dividends nor the $1,000 of share
appreciation is subject to the charge. The charge would be at the rate of 3%
($300) because it was in the second year after the purchase was made.
The rate of the contingent deferred sales charge 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, 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 the
Fund or any other Kemper Mutual Fund listed under "Special Features--Class A
Shares--Combined Purchases" (other than shares of Kemper Cash Reserves Fund
purchased directly at net asset value) may reinvest up to the full amount
redeemed at net asset value at the time of the reinvestment in Class A shares of
the Fund or of the other listed Kemper Mutual Funds. A shareholder of the Fund
or any 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"), 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 or Class C shares, as the case may be, of the Fund or of other Kemper
Mutual Funds. The amount of any
26
<PAGE> 30
contingent deferred sales charge also will be reinvested. These reinvested
shares will retain their original cost and purchase date for purposes of the
contingent deferred sales charge. Also, a holder of Class B shares who has
redeemed shares may reinvest up to the full amount redeemed, less any applicable
contingent deferred sales charge that may have been imposed upon the redemption
of such shares, at net asset value in Class A shares of the Fund or of the other
Kemper Mutual Funds listed under "Special Features--Class A Shares--Combined
Purchases." Purchases through the reinvestment privilege are subject to the
minimum investment requirements applicable to the shares being purchased and may
only be made for Kemper 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 Fund shares, the reinvestment in shares of the
Fund 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. The Fund'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: Kemper Technology Fund, Kemper Total Return Fund, Kemper Growth
Fund, Kemper Small Capitalization Equity Fund, Kemper Income and Capital
Preservation Fund, Kemper Municipal Bond Fund, Kemper Diversified Income Fund,
Kemper High Yield Fund, Kemper U.S. Government Securities Fund, Kemper
International Fund, Kemper State Tax-Free Income Series, Kemper Adjustable Rate
U.S. Government Fund, Kemper Blue Chip Fund, Kemper Global Income Fund, Kemper
Target Equity Fund (series are subject to a limited offering period), Kemper
Intermediate Municipal Bond Fund, Kemper Cash Reserves Fund, Kemper U.S.
Mortgage Fund, Kemper Short-Intermediate Government Fund, Kemper-Dreman Fund,
Inc., Kemper Value+Growth Fund, Kemper Quantitative Equity Fund, Kemper Horizon
Fund, Kemper Europe Fund, Kemper Asian Growth Fund and Kemper Aggressive Growth
Fund ("Kemper Mutual Funds"). Except as noted below, there is no combined
purchase credit for direct purchases of shares of Kemper Money Funds, Cash
Equivalent Fund, Tax-Exempt California Money Market Fund, Cash Account Trust,
Tax-Exempt New York Money Market Fund or Investors Cash Trust ("Money Market
Funds"), which are not considered "Kemper Mutual Funds" for purposes hereof. For
purposes of the Combined Purchases feature described above as well as for the
Letter of Intent and Cumulative Discount features described below, employer
sponsored employee benefit plans using the subaccount record keeping system made
available through the Shareholder Service Agent may include: (a) Money Market
Funds as "Kemper Mutual Funds," (b) all classes of shares of any Kemper Mutual
Fund and (c) the value of any other plan investments, such as guaranteed
investment contracts and employer stock, maintained on such subaccount record
keeping system.
CLASS A SHARES--LETTER OF INTENT. The same reduced sales charges for Class A
shares, as shown in the applicable prospectus, also apply to the aggregate
amount of purchases of such Kemper Mutual Funds listed above made by any
purchaser within a 24-month period under a written Letter of Intent ("Letter")
provided by KDI. The Letter, which imposes no obligation to purchase or sell
additional Class A shares, provides for a price adjustment depending upon the
actual amount purchased within such period. The Letter provides that the first
purchase following execution of the Letter must be at least 5% of the amount of
the intended purchase, and that 5% of the amount of the intended purchase
normally will be held in escrow in the form of shares pending completion of the
intended purchase. If the total investments under the Letter are less than the
intended amount and thereby qualify only for a higher sales charge than actually
paid, the appropriate number of escrowed shares are redeemed and the proceeds
used toward satisfaction of the obligation to pay the increased sales charge.
The Letter for an employer sponsored employee benefit plan maintained on the
subaccount record keeping system available through the Shareholder Service Agent
may have special provisions regarding payment of any increased sales charge
resulting from a failure to complete the intended purchase under the Letter. A
shareholder may
27
<PAGE> 31
include the value (at the maximum offering price) of all shares of such Kemper
Mutual Funds held of record as of the initial purchase date under the Letter as
an "accumulation credit" toward the completion of the Letter, but no price
adjustment will be made on such shares. Only investments in Class A shares of
the Fund are included for this privilege.
CLASS A SHARES--CUMULATIVE DISCOUNT. The Fund's Class A shares also may be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of Fund shares being purchased the value of all Class A shares of the
above mentioned Kemper Mutual Funds (computed at the maximum offering price at
the time of the purchase for which the discount is applicable) already owned by
the investor.
CLASS A SHARES--AVAILABILITY OF QUANTITY DISCOUNTS. An investor or the
investor's dealer or other financial services firm must notify the Shareholder
Service Agent or KDI whenever a quantity discount or reduced sales charge is
applicable to a purchase. Upon such notification, the investor will receive the
lowest applicable sales charge. Quantity discounts described above may be
modified or terminated at any time.
EXCHANGE PRIVILEGE. Shareholders of Class A, Class B and Class C shares may
exchange their shares for shares of the corresponding class of other Kemper
Mutual Funds in accordance with the provisions below.
CLASS A SHARES. Class A shares of the Kemper Mutual Funds and shares of the
Money Market Funds listed under "Special Features--Class A Shares--Combined
Purchases" above may be exchanged for each other at their relative net asset
values. Shares of Money Market Funds and Kemper Cash Reserves Fund that were
acquired by purchase (not including shares acquired by dividend reinvestment)
are subject to the applicable sales charge on exchange. Series of Kemper Target
Equity Fund are available on exchange only during the offering period for such
series as described in the applicable prospectus. Cash Equivalent Fund,
Tax-Exempt California Money Market Fund, Cash Account Trust, Tax-Exempt New York
Money Market Fund and Investors Cash Trust are available on exchange but only
through a financial services firm having a services agreement with KDI.
Class A shares of the Fund purchased under the Large Order NAV Purchase
Privilege may be exchanged for Class A shares of another Kemper Mutual Fund or a
Money Market Fund under the exchange privilege described above without paying
any contingent deferred sales charge at the time of exchange. If the Class A
shares received on exchange are redeemed thereafter, a contingent deferred sales
charge may be imposed in accordance with the foregoing requirements provided
that the shares redeemed will retain their original cost and purchase date for
purposes of the contingent deferred sales charge.
CLASS B SHARES. Class B shares of the Fund and Class B shares of any other
Kemper Mutual Fund listed under "Special Features--Class A Shares--Combined
Purchases" may be exchanged for each other at their relative net asset values.
Class B shares may be exchanged without any 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 the Fund and Class C shares of any other
Kemper Mutual Fund listed under "Special Features--Class A Shares--Combined
Purchases" may be exchanged for each other at their relative net asset values.
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, 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"). 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, direction 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
28
<PAGE> 32
are made based on relative dollar values of the shares involved in the exchange.
There is no service fee for an exchange; however, dealers or other firms may
charge for their services in effecting exchange transactions. Exchanges will be
effected by redemption of shares of the fund held and purchase of shares of the
other fund. For federal income tax purposes, any such exchange constitutes a
sale upon which a gain or loss may be realized, depending upon whether the value
of the shares being exchanged is more or less than the shareholder's adjusted
cost basis of such shares. Shareholders interested in exercising the exchange
privilege may obtain prospectuses of the other funds from dealers, other firms
or KDI. Exchanges may be accomplished by a written request to Kemper Service
Company, 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 implement 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 Kemper Funds that are eligible for sale in the
shareholder's state of residence. Currently, Tax-Exempt California Money Market
Fund is available for sale only in California and Tax-Exempt New York Money
Market Fund is available for sale only in New York, Connecticut, New Jersey and
Pennsylvania. Except as otherwise permitted by applicable regulations, 60 days'
prior written notice of any termination or material change will be provided.
SYSTEMATIC EXCHANGE PRIVILEGE. The owner of $1,000 or more of any class of the
shares of a Kemper Mutual Fund or Money Market Fund may authorize the automatic
exchange of a specified amount ($100 minimum) of such shares for shares of the
same class of another such Kemper Fund. If selected, exchanges will be made
automatically until the privilege is terminated by the shareholder or the other
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 the Fund. Shareholders can also redeem shares (minimum $100 and maximum
$50,000) from their Fund 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 Fund account and the predesignated bank,
savings and loan or credit union account, subject to the limitations on
liability under "Redemption or Repurchase of Shares--General." Once enrolled in
EXPRESS-Transfer, a shareholder can initiate a transaction by calling Kemper
Shareholder Services toll free at 1-800-621-1048 Monday through Friday, 8:00
a.m. to 3:00 p.m. Chicago time. Shareholders may terminate this privilege by
sending written notice to Kemper Service Company, P.O. Box 419415, Kansas City,
Missouri 64141-6415. Termination will become effective as soon as the
Shareholder Service Agent has had a reasonable time to act upon the request.
EXPRESS-Transfer cannot be used with passbook savings accounts or for
tax-deferred plans such as Individual Retirement Accounts ("IRAs").
BANK DIRECT DEPOSIT. A shareholder may purchase additional Fund shares through
an automatic investment program. With the Bank Direct Deposit Purchase Plan,
investments are made automatically (minimum $50, maximum $50,000) from the
shareholder's account at a bank, savings and loan or credit union into the
shareholder's Fund account. By enrolling in Bank Direct Deposit, the shareholder
authorizes the Fund and its agents to either draw checks or initiate Automated
Clearing House debits against the designated account at a bank or other
financial institution. This privilege may be selected by completing the
appropriate section on the Account Application or by contacting the Shareholder
Service Agent for appropriate forms. A shareholder may terminate his or her Plan
by sending written notice to Kemper Service Company, P.O. Box 419415, Kansas
City, Missouri
29
<PAGE> 33
64141-6415. Termination by a shareholder will become effective within thirty
days after the Shareholder Service Agent has received the request. The Fund may
immediately terminate a shareholder's Plan in the event that any item is unpaid
by the shareholder's financial institution. The Fund may terminate or modify
this privilege at any time.
PAYROLL DIRECT DEPOSIT AND GOVERNMENT DIRECT DEPOSIT. A shareholder may invest
in the Fund through Payroll Direct Deposit or Government Direct Deposit. Under
these programs, all or a portion of a shareholder's net pay or government check
is automatically invested in their Fund 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.) The Fund 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 the Fund'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 up to $50,000 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 (and Class A shares purchased under the Large Order NAV Purchase
Privilege and Class C shares in the first year following the purchase) may be
redeemed under a systematic withdrawal plan is 10% of the net asset value of the
account. 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 ordinarily will 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 already have been
paid. Therefore, the Fund will not knowingly permit additional investments of
less than $2,000 if the investor is at the same time making systematic
withdrawals. KDI will waive the contingent deferred sales charge on redemption
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 Fund.
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:
- - Individual Retirement Accounts ("IRAs") with IFTC 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.
- - 403(b)(7) Custodial Accounts with IFTC as custodian. This type of plan is
available to employees of most non-profit organizations.
- - Prototype money purchase pension and profit-sharing plans may be adopted by
employers. The maximum annual contribution per participant is the lesser of
25% of compensation or $30,000.
Brochures describing the above plans as well as model defined benefit plans,
target benefit plans, 457 plans, 401(k) plans, SIMPLE 401(k) plans and materials
for establishing them are available from the Shareholder Service Agent upon
request. The brochures for plans with IFTC as custodian describe the current
fees payable to IFTC for its services as custodian. Investors should consult
with their own tax advisers before establishing a retirement plan.
30
<PAGE> 34
PERFORMANCE
The Fund may advertise several types of performance information for a class of
shares, including "average annual total return" and "total return." Performance
information will be computed separately for Class A, Class B and Class C shares.
Each of these figures is based upon historical results and is not representative
of the future performance of any class of the Fund. ZKI has agreed to a
temporary reduction of its investment management fee payable by the Fund to the
extent specified under "Investment Manager and Underwriter." This fee reduction
will improve the performance results of the Fund.
Average annual total return and total return figures measure both the net
investment income generated by, and the effect of any realized and unrealized
appreciation or depreciation of, the underlying investments in the Fund's
portfolio for the period in question, assuming the reinvestment of all
dividends. Thus, these figures reflect the change in the value of an investment
in the Fund during a specified period. Average annual total return will be
quoted for at least the one, five and ten year periods ending on a recent
calendar quarter (or if such periods have not yet elapsed, at the end of a
shorter period corresponding to the life of the Fund for performance purposes).
Average annual total return figures represent the average annual percentage
change over the period in question. Total return figures represent the aggregate
percentage or dollar value change over the period in question.
The Fund's performance may be compared to that of the Consumer Price Index or
various unmanaged equity indexes, including, but not limited to, the Dow Jones
Industrial Average, Value Line, the Standard & Poor's 500 Stock Index, the
Europe Australasia Far East ("EAFE") Index, The Europe 14 Index, The Europe 18
Index, the European Community (EC) Index and any of the country indices or
regional indices prepared by Morgan Stanley Capital International (MSCI), and
may also be compared to the performance of other mutual funds or mutual fund
indexes as reported by independent mutual fund reporting services such as Lipper
Analytical Services, Inc. ("Lipper"). Lipper performance calculations are based
upon changes in net asset value with all dividends reinvested and do not include
the effect of any sales charges. Also, investors may want to compare the
historical returns of various European securities markets. Such returns would
not necessarily be representative of the future performance of such markets or
of the performance of the Fund.
Information may be quoted from publications such as MORNINGSTAR, INC., THE WALL
STREET JOURNAL, MONEY MAGAZINE, FORBES, BARRON'S, FORTUNE, THE CHICAGO TRIBUNE,
USA TODAY, INSTITUTIONAL INVESTOR and REGISTERED REPRESENTATIVE. Also, investors
may want to compare the historical returns of various investments, performance
indexes of those investments or economic indicators, including, but not limited
to, stocks, bonds, certificates of deposit, money market funds and U.S. Treasury
obligations. Bank product performance may be based upon, among other things, the
BANK RATE MONITOR National IndexTM or various certificate of deposit indexes.
Money market fund performance may be based upon, among other things, the
IBC/Donoghue's Money Fund Report(R) or Money Market Insight(R), reporting
services on money market funds. Performance of U.S. Treasury obligations may be
based upon, among other things, various U.S. Treasury bill indexes. Certain of
these alternative investments may offer fixed rates of return and guaranteed
principal and may be insured.
The Fund may depict the historical performance of the securities in which the
Fund may invest over periods reflecting a variety of market or economic
conditions either alone or in comparison with alternative investments,
performance indexes of those investments or economic indicators. The Fund may
also describe its portfolio holdings and depict its size or relative size
compared to other mutual funds, the number and make-up of its shareholder base
and other descriptive factors concerning the Fund. The Fund may also describe
economic, political, demographic, and regulatory trends and conditions relative
to the European region and specific countries within that region and may compare
such conditions to other regions throughout the world.
The Fund's Class A shares are sold at net asset value plus a maximum sales
charge of 5.75% of the offering price. While the maximum sales charge is
normally reflected in a Fund's Class A performance figures, certain total return
calculations may not include such charge and those results would be reduced if
it were included. Class B shares and Class C shares are sold at net asset value.
Redemptions of Class B shares within the first six years after
31
<PAGE> 35
purchase may be subject to a contingent deferred sales charge that ranges from
4% during the first year to 0% after six years. Redemption of Class C shares
within the first year after purchase may be subject to a 1% contingent deferred
sales charge. Average annual total return figures do, and total return figures
may, include the effect of the contingent deferred sales charge for the Class B
and Class C shares that may be imposed at the end of the period in question.
Performance figures for the Class B shares and Class C shares not including the
effect of the applicable contingent deferred sales charge would be reduced if it
were included.
The Fund's returns and net asset value will fluctuate and shares of the Fund are
redeemable by an investor at the then current net asset value, which may be more
or less than original cost. Redemption of Class B shares and Class C shares may
be subject to a contingent deferred sales charge as described above. Additional
information concerning the Fund's performance, and the performance of various
global stock markets, appears in the Statement of Additional Information.
Additional information about the Fund's performance will also appear in its
Annual Report to Shareholders, which will be available without charge from the
Fund.
CAPITAL STRUCTURE
The Fund is an open-end management investment company, organized as a business
trust under the laws of Massachusetts. The Fund was organized as a business
trust under the laws of Massachusetts on June 12, 1995.
The Fund may issue an unlimited number of shares of beneficial interest in one
or more series or "Portfolios," all having no par value, which may be divided by
the Board of Trustees into classes of shares. While only shares of a single
Portfolio are presently being offered by the Fund, the Board of Trustees of the
Fund may authorize the issuance of additional classes and additional Portfolios
if deemed desirable, each with its own investment objective, policies and
restrictions. Since the Fund may offer multiple Portfolios, it is known as a
"series company." Shares of a Portfolio have equal noncumulative voting rights
and equal rights with respect to dividends, assets and liquidation of such
Portfolio and are subject to any preferences, rights or privileges of any
classes of shares of the Portfolio. Currently, the Fund offers four classes of
shares of a single Portfolio. These are Class A, Class B and Class C shares, as
well as Class I shares. Class I shares have different expenses, which will
affect performance; and they are available for purchase exclusively by the
following investors: (a) tax-exempt retirement plans of ZKI and its affiliates;
and (b) the following investment advisory clients of ZKI and its investment
advisory affiliates that invest at least $1 million in the Fund: (1)
unaffiliated benefit plans (other than individual retirement accounts and
self-directed retirement plans); (2) unaffiliated banks and insurance companies
purchasing for their own accounts; and (3) endowment funds of unaffiliated
non-profit organizations. Shares of the Fund have equal noncumulative voting
rights except that Class B and Class C shares have separate and exclusive voting
rights with respect to the Fund's Rule 12b-1 Plan. Shares of each class also
have equal rights with respect to dividends, assets and liquidation of the Fund
subject to any preferences (such as resulting from different Rule 12b-1
distribution fees), rights or privileges of any classes of shares of the Fund.
Shares are fully paid and nonassessable when issued, are transferable without
restriction and have no preemptive or conversion rights. The Fund is not
required to hold annual shareholder meetings and does not intend to do so.
However, it will hold special meetings as required or deemed desirable for such
purposes as electing trustees, changing fundamental policies or approving an
investment management agreement. Subject to the Agreement and Declaration of
Trust of the Fund, shareholders may remove trustees. If shares of more than one
Portfolio are outstanding, shareholders will vote by Portfolio and not in the
aggregate or by class except when voting in the aggregate is required under the
1940 Act, such as for the election of trustees, or when voting by class is
appropriate.
32
<PAGE> 36
PROSPECTUS
Kemper
Europe
Fund
APRIL 1, 1997
[GRAPHICS]
[KEMPER FUNDS LOGO]
Kemper Distributors, Inc.
222 South Riverside Plaza
Chicago, IL 60606-5808
[RECYCLE LOGO] printed on recycled paper
KEUF-1 (4/97)
KDI 703097
<PAGE> 37
STATEMENT OF ADDITIONAL INFORMATION
APRIL 1, 1997
KEMPER EUROPE FUND
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 Kemper Europe Fund (the "Fund"). It
should be read in conjunction with the prospectus of the Fund dated April 1,
1997. The prospectus may be obtained without charge from the Fund.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Restrictions..................................... B-1
Investment Policies and Techniques.......................... B-3
Dividends and Taxes......................................... B-8
Performance................................................. B-9
Investment Manager and Underwriter.......................... B-12
Portfolio Transactions...................................... B-16
Purchase and Redemption of Shares........................... B-17
Officers and Trustees....................................... B-18
Shareholder Rights.......................................... B-21
</TABLE>
The financial statements appearing in the Fund's Annual Report to Shareholders
are incorporated herein by reference.
KEUF-13 4/97 (LOGO)printed on recycled paper
<PAGE> 38
INVESTMENT RESTRICTIONS
The Fund has adopted certain fundamental investment restrictions which, together
with the investment objective of the Fund, cannot be changed without approval of
a "majority" of its outstanding voting shares. As defined in the Investment
Company Act of 1940, this means the lesser of (1) 67% of the Fund's shares
present at a meeting where more than 50% of the outstanding shares are present
in person or by proxy; or (2) more than 50% of the Fund's outstanding shares.
THE FUND MAY NOT, AS A FUNDAMENTAL POLICY:
(1) With respect to 75% of the Fund's total assets, purchase securities of any
issuer (other than securities issued or guaranteed by the U.S. Government or any
of its agencies or instrumentalities) if, as a result, more than 5% of the
Fund's total assets would be invested in securities of that issuer.
(2) Purchase more than 10% of any class of voting securities of any issuer.
(3) Lend money or securities, provided that the making of time or demand
deposits with banks and the purchase of debt securities such as bonds,
debentures, commercial paper, repurchase agreements and short-term obligations
in accordance with its objective and policies are not prohibited.
(4) Borrow money except as a temporary measure for extraordinary or emergency
purposes, and then only in an amount up to one-third of the value of its total
assets, in order to meet redemption requests without immediately selling any
portfolio securities. If, for any reason, the current value of the Fund's total
assets falls below an amount equal to three times the amount of its indebtedness
from money borrowed, the Fund will, within three days (not including Sundays and
holidays), reduce its indebtedness to the extent necessary. The Fund will not
borrow for leverage purposes and will not purchase securities or make
investments while borrowings are outstanding.
(5) Pledge, hypothecate, mortgage or otherwise encumber more than 15% of its
total assets and then only to secure borrowings permitted by restriction 4
above. (The collateral arrangements with respect to options and financial
futures transactions and any margin payments in connection therewith are not
deemed to be pledges or other encumbrances.)
(6) Make short sales of securities, or purchase any securities on margin except
to obtain such short-term credits as may be necessary for the clearance of
transactions; however, the Fund may make margin deposits in connection with
options and financial futures transactions.
(7) Write or sell put or call options, combinations thereof or similar options
on more than 25% of the Fund's net assets; nor may it purchase put or call
options if more than 5% of the Fund's net assets would be invested in premiums
on put and call options, combinations thereof or similar options; however, the
Fund may buy or sell options on financial futures contracts.
(8) Concentrate 25% or more of the Fund's total assets in any one industry.
Water, communications, electric and gas utilities shall each be considered a
separate industry. This limitation shall not apply to obligations issued by the
U.S. Government or its agencies or instrumentalities.
(9) Invest in commodities or commodity futures contracts, although it may buy or
sell financial futures contracts and options on such contracts and may enter
into foreign currency transactions; or in real estate, although it may invest in
securities which are secured by real estate and securities of issuers which
invest or deal in real estate including real estate investment trusts.
(10) Underwrite securities issued by others except to the extent the Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities. The Fund may buy and sell
securities outside the United States which are not registered with the
Securities and Exchange Commission or marketable in the United States.
B-1
<PAGE> 39
(11) Issue senior securities except as permitted under the Investment Company
Act of 1940.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond the specified limit resulting from a
change in values or net assets will not be considered a violation. The Fund has
adopted the following non-fundamental restrictions, which may be changed by the
Board of Trustees without shareholder approval. The Fund may not:
(i) Invest more than 5% of the Fund's total assets in securities of issuers
(other than obligations of, or guaranteed by, the U.S. Government, its agencies
or instrumentalities) which with their predecessors have a record of less than
three years continuous operation, and equity securities of issuers which are not
readily marketable.
(ii) Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of the Fund or its investment adviser owns beneficially
more than 1/2 of 1% of the securities of such issuer and together own more than
5% of the securities of such issuer.
(iii) Invest for the purpose of exercising control or management of another
issuer.
(iv) Invest in interests in oil, gas or other mineral exploration or development
programs, although it may invest in the securities of issuers which invest in or
sponsor such programs.
(v) Purchase securities of other investment companies, except in connection with
a merger, consolidation, acquisition or reorganization, or by purchase in the
open market of securities of closed-end investment companies where no
underwriter or dealer's commission or profit, other than customary broker's
commission, is involved and only if immediately thereafter not more than (i) 3%
of the total outstanding voting stock of such company is owned by the Fund, (ii)
5% of the Fund's total assets would be invested in any one such company, and
(iii) 10% of the Fund's total assets would be invested in such securities.
(vi) Invest more than 15% of its net assets in illiquid securities.
(vii) Invest in warrants if more than 5% of the Fund's net assets would be
invested in warrants. Included within that amount, but not to exceed 2% of the
Fund's net assets, may be warrants not listed on the New York or American Stock
Exchanges. Warrants acquired in units or attached to securities may be deemed to
be without value for such purposes.
(viii) Invest in oil, gas, and other mineral leases.
(ix) Purchase or sell real property (including limited partnership interests but
excluding readily marketable interests in real estate investment trusts and
readily marketable securities of companies which invest in real estate).
(x) Invest more than 5% of its total assets in restricted securities, excluding
restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 that have been determined to be liquid pursuant to
procedures adopted by the Board of Trustees, provided that the total amount of
Fund assets invested in restricted securities and securities of issuers which
with their predecessors have a record of less than 3 years continuous operation
will not exceed 15% of total assets.
(xi) Invest more than 10% of its total assets in securities of real estate
investment trusts.
B-2
<PAGE> 40
INVESTMENT POLICIES AND TECHNIQUES
GENERAL. The Fund may engage in futures, options and other derivative
transactions in accordance with its investment objective and policies. The Fund
intends to engage in such transactions if it appears to the investment manager
to be advantageous for the Fund to do so, in order to pursue its investment
objective, to hedge against the effects of fluctuating interest rates and to
stabilize the value of its assets and not for speculation. The use of futures
and options, and possible benefits and attendant risks, are discussed below,
along with information concerning certain other investment policies and
techniques.
FINANCIAL FUTURES CONTRACTS. The Fund may enter into financial futures contracts
for the future delivery of a financial instrument, such as a security, or an
amount of foreign currency, or the cash value of a securities index. This
investment technique is designed primarily to hedge (i.e., protect) against
anticipated future changes in market conditions or foreign exchange rates which
otherwise might affect adversely the value of securities or other assets which
the Fund holds or intends to purchase. A "sale" of a futures contract means the
undertaking of a contractual obligation to deliver the securities or the cash
value of an index or foreign currency called for by the contract at a specified
price during a specified delivery period. A "purchase" of a futures contract
means the undertaking of a contractual obligation to acquire the securities or
cash value of an index or foreign currency at a specified price during a
specified delivery period. At the time of delivery, in the case of fixed income
securities pursuant to the contract, adjustments are made to recognize
differences in value arising from the delivery of securities with a different
interest rate than that specified in the contract. In some cases, securities
called for by a futures contract may not have been issued at the time the
contract was written.
Although some financial futures contracts by their terms call for the actual
delivery or acquisition of securities or other assets, in most cases a party
will close out the contractual commitment before delivery of the underlying
assets by purchasing (or selling, as the case may be) on a commodities exchange
an identical futures contract calling for delivery in the same month. Such a
transaction, if effected through a member of an exchange, cancels the obligation
to make or take delivery of the underlying securities or other assets. All
transactions in the futures market are made, offset or fulfilled through a
clearing house associated with the exchange on which the contracts are traded.
The Fund will incur brokerage fees when it purchases or sells contracts, and
will be required to maintain margin deposits. At the time the Fund enters into a
futures contract, it is required to deposit with its custodian, on behalf of the
broker, a specified amount of cash or eligible securities, called "initial
margin." The initial margin required for a futures contract is set by the
exchange on which the contract is traded. Subsequent payments, called "variation
margin," to and from the broker are made on a daily basis as the market price of
the futures contract fluctuates. The costs incurred in connection with futures
transactions could reduce the Fund's return. Futures contracts entail risks. If
the investment manager's judgment about the general direction of markets or
exchange rates is wrong, the overall performance may be poorer than if no such
contracts had been entered into.
There may be an imperfect correlation between movements in prices of futures
contracts and portfolio assets being hedged. In addition, the market prices of
futures contracts may be affected by certain factors. If participants in the
futures market elect to close out their contracts through offsetting
transactions rather than meet margin requirements, distortions in the normal
relationship between the assets and futures markets could result. Price
distortions could also result if investors in futures contracts decide to make
or take delivery of underlying securities or other assets rather than engage in
closing transactions because of the resultant reduction in the liquidity of the
futures market. In addition, from the point of view of speculators, the margin
requirements in the futures market are less onerous than margin requirements in
the cash market, increased participation by speculators in the futures market
could cause temporary price distortions. Due to the possibility of price
distortions in the futures market and because of the imperfect correlation
between movements in the prices of securities or other assets and movements in
the prices of futures contracts, a correct forecast of market trends by the
investment manager may still not result in a successful hedging transaction. If
any of these events should occur, the Fund could lose money on the financial
futures contracts and also on the value of its portfolio assets.
B-3
<PAGE> 41
OPTIONS ON FINANCIAL FUTURES CONTRACTS. The Fund may purchase and write call and
put options on financial futures contracts. An option on a futures contract
gives the purchaser the right, in return for the premium paid, to assume a
position in a futures contract at a specified exercise price at any time during
the period of the option. Upon exercise, the writer of the option delivers the
futures contract to the holder at the exercise price. The Fund would be required
to deposit with its custodian initial margin and maintenance margin with respect
to put and call options on futures contracts written by it. The Fund will
establish segregated accounts or will provide cover with respect to written
options on financial futures contracts in a manner similar to that described
under "Options on Securities." Options on futures contracts involve risks
similar to those risks relating to transactions in financial futures contracts
described above. Also, an option purchased by the Fund may expire worthless, in
which case the Fund would lose the premium paid therefor.
OPTIONS ON SECURITIES. The Fund may write (sell) "covered" call options on
securities as long as it owns the underlying securities subject to the option or
an option to purchase the same underlying securities, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain for the term of the option a segregated account
consisting of cash or other liquid securities ("eligible securities") to the
extent required by applicable regulation in connection with the optioned
securities. The Fund may write "covered" put options provided that, as long as
the Fund is obligated as a writer of a put option, the Fund will own an option
to sell the underlying securities subject to the option, having an exercise
price equal to or greater than the exercise price of the "covered" option, or it
will deposit and maintain in a segregated account eligible securities having a
value equal to or greater than the exercise price of the option. A call option
gives the purchaser the right to buy, and the writer the obligation to sell, the
underlying security at the exercise price during or at the end of the option
period. A put option gives the purchaser the right to sell, and the writer the
obligation to buy, the underlying security at the exercise price during or at
the end of the option period. The premium received for writing an option will
reflect, among other things, the current market price of the underlying
security, the relationship of the exercise price to such market price, the price
volatility of the underlying security, the option period, supply and demand and
interest rates. The Fund may write or purchase spread options, which are options
for which the exercise price may be a fixed dollar spread or yield spread
between the security underlying the option and another security that is used as
a bench mark. The exercise price of an option may be below, equal to or above
the current market value of the underlying security at the time the option is
written. The buyer of a put who also owns the related security is protected by
ownership of a put option against any decline in that security's price below the
exercise price less the amount paid for the option. The ability to purchase put
options allows the Fund to protect capital gains in an appreciated security it
owns, without being required to actually sell that security. At times the Fund
would like to establish a position in a security upon which call options are
available. By purchasing a call option, the Fund is able to fix the cost of
acquiring the security, this being the cost of the call plus the exercise price
of the option. This procedure also provides some protection from an unexpected
downturn in the market because the Fund is only at risk for the amount of the
premium paid for the call option which it can, if it chooses, permit to expire.
During the option period the covered call writer gives up the potential for
capital appreciation above the exercise price should the underlying asset rise
in value, and the secured put writer retains the risk of loss should the
underlying security decline in value. For the covered call writer, substantial
appreciation in the value of the underlying asset would result in the security
being "called away." For the secured put writer, substantial depreciation in the
value of the underlying security would result in the security being "put to" the
writer. If a covered call option expires unexercised, the writer realizes a gain
in the amount of the premium received. If the covered call option writer has to
sell the underlying security because of the exercise of a call option, it
realizes a gain or loss from the sale of the underlying security, with the
proceeds being increased by the amount of the premium.
If a secured put option expires unexercised, the writer realizes a gain from the
amount of the premium. If the secured put writer has to buy the underlying
security because of the exercise of the put option, the secured put writer
incurs an unrealized loss to the extent that the current market value of the
underlying security is less than
B-4
<PAGE> 42
the exercise price of the put option. However, this would be offset in whole or
in part by gain from the premium received.
OVER-THE-COUNTER OPTIONS. As indicated in the prospectus (see "Investment
Objective, Policies and Risk Factors"), the Fund may deal in over-the-counter
traded options ("OTC options"). OTC options differ from exchange traded options
in several respects. They are transacted directly with dealers and not with a
clearing corporation, and there is a risk of nonperformance by the dealer as a
result of the insolvency of such dealer or otherwise, in which event the Fund
may experience material losses. However, in writing options the premium is paid
in advance by the dealer. OTC options are available for a greater variety of
securities, and a wider range of expiration dates and exercise prices, than are
exchange traded options. Since there is no exchange, pricing is normally done by
reference to information from market makers, which information is carefully
monitored by the investment manager and verified in appropriate cases.
A writer or purchaser of a put or call option can terminate it voluntarily only
by entering into a closing transaction. In the case of OTC options, there can be
no assurance that a continuous liquid secondary market will exist for any
particular option at any specific time. Consequently, the Fund may be able to
realize the value of an OTC option it has purchased only by exercising it or
entering into a closing sale transaction with the dealer that issued it.
Similarly, when the Fund writes an OTC option, it generally can close out that
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote it. If a covered
call option writer cannot effect a closing transaction, it cannot sell the
underlying security until the option expires or the option is exercised.
Therefore, a covered call option writer of an OTC option may not be able to sell
an underlying security even though it might otherwise be advantageous to do so.
Likewise, a secured put writer of an OTC option may be unable to sell the
securities pledged to secure the put for other investment purposes while it is
obligated as a put writer. Similarly, a purchaser of such put or call option
might also find it difficult to terminate its position on a timely basis in the
absence of a secondary market.
The Fund understands the position of the staff of the Securities and Exchange
Commission ("SEC") to be that purchased OTC options and the securities used as
"cover" for written OTC options are illiquid securities. The investment manager
disagrees with this position and has found the dealers with which it engages in
OTC options transactions generally agreeable to and capable of entering into
closing transactions. The Fund has adopted procedures for engaging in OTC
options for the purpose of reducing any potential adverse effect of such
transactions upon the liquidity of the Fund's portfolio. A brief description of
such procedures is set forth below.
The Fund will only engage in OTC options transactions with dealers approved by
the investment manager pursuant to procedures adopted by the Fund's Board of
Trustees. The investment manager believes that the approved dealers should be
able to enter into closing transactions if necessary and, therefore, present
minimal credit risks to the Fund. The investment manager will monitor the
creditworthiness of the approved dealers on an ongoing basis. The Fund currently
will not engage in OTC options transactions if the amount invested by the Fund
in OTC options, plus a "liquidity charge" related to OTC options written by the
Fund, plus the amount invested by the Fund in illiquid securities, would exceed
15% of the Fund's net assets. The "liquidity charge" referred to above is
computed as described below.
The Fund anticipates entering into agreements with dealers to which the Fund
sells OTC options. Under these agreements the Fund would have the absolute right
to repurchase the OTC options from the dealer at any time at a price no greater
than a price established under the agreements (the "Repurchase Price"). The
"liquidity charge" referred to above for a specific OTC option transaction will
be the Repurchase Price related to the OTC option less the intrinsic value of
the OTC option. The intrinsic value of an OTC call option for such purposes will
be the amount by which the current market value of the underlying security
exceeds the exercise price. In the case of an OTC put option, intrinsic value
will be the amount by which the exercise price exceeds the current market value
of the underlying security. If there is no such agreement requiring a dealer to
allow the Fund to repurchase a specific OTC option written by the Fund, the
"liquidity charge" will be the current market value of the securities serving as
"cover" for such OTC option.
B-5
<PAGE> 43
OPTIONS ON SECURITIES INDICES. The Fund also may purchase and write call and put
options on securities indices in an attempt to hedge against market conditions
affecting the value of securities that the Fund owns or intends to purchase, and
not for speculation. Through the writing or purchase of index options, the Fund
can achieve many of the same objectives as through the use of options on
individual securities. Options on securities indices are similar to options on a
security except that, rather than the right to take or make delivery of a
security at a specified price, an option on a securities index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the securities index upon which the option is based is greater
than, in the case of a call, or less than, in the case of a put, the exercise
price of the option. This amount of cash is equal to the difference between the
closing price of the index and the exercise price of the option. The writer of
the option is obligated, in return for the premium received, to make delivery of
this amount. Unlike security options, all settlements are in cash and gain or
loss depends upon price movements in the market generally (or in a particular
industry or segment of the market), rather than upon price movements in
individual securities. Price movements in securities that the Fund owns or
intends to purchase will probably not correlate perfectly with movements in the
level of an index since the prices of such securities may be affected by
somewhat different factors and, therefore, the Fund bears the risk that a loss
on an index option would not be completely offset by movements in the price of
such securities.
When the Fund writes an option on a securities index, it will segregate and
mark-to-market eligible securities to the extent required by applicable
regulation. In addition, where the Fund writes a call option on a securities
index at a time when the contract value exceeds the exercise price, the Fund
will segregate and mark-to-market, until the option expires or is closed out,
cash or cash equivalents equal in value to such excess.
The Fund may also purchase and sell options on other appropriate indices, as
available, such as foreign currency indices. Options on a securities index
involve risks similar to those risks relating to transactions in financial
futures contracts described above. Also, an option purchased by the Fund may
expire worthless, in which case the Fund would lose the premium paid therefor.
REGULATORY RESTRICTIONS. To the extent required by applicable regulation, when
purchasing a futures contract, writing a put option or entering into a forward
foreign currency exchange purchase, the Fund will maintain eligible securities
in a segregated account. The Fund will use cover in connection with selling a
futures contract.
The Fund will not engage in transactions in financial futures contracts or
options thereon for speculation, but only in an attempt to hedge against changes
in interest rates or market conditions affecting the value of securities which
the Fund holds or intends to purchase.
FOREIGN CURRENCY OPTIONS. The Fund may engage in foreign currency options
transactions. A foreign currency option provides the option buyer with the right
to buy or sell a stated amount of foreign currency at the exercise price at a
specified date or during the option period. A call option gives its owner the
right, but not the obligation, to buy the currency, while a put option gives its
owner the right, but not the obligation, to sell the currency. The option seller
(writer) is obligated to fulfill the terms of the option sold if it is
exercised. However, either seller or buyer may close its position during the
option period in the secondary market for such options any time prior to
expiration.
A call rises in value if the underlying currency appreciates. Conversely, a put
rises in value if the underlying currency depreciates. While purchasing a
foreign currency option can protect the Fund against an adverse movement in the
value of a foreign currency, it does not limit the gain which might result from
a favorable movement in the value of such currency. For example, if the Fund
were holding securities denominated in an appreciating foreign currency and had
purchased a foreign currency put to hedge against a decline in the value of the
currency, it would not have to exercise its put. Similarly, if the Fund has
entered into a contract to purchase a security denominated in a foreign currency
and had purchased a foreign currency call to hedge against a rise in value of
the currency but instead the currency had depreciated in value between the date
of purchase and the
B-6
<PAGE> 44
settlement date, the Fund would not have to exercise its call but could acquire
in the spot market the amount of foreign currency needed for settlement.
FOREIGN CURRENCY FUTURES TRANSACTIONS. As part of its financial futures
transactions (see "Financial Futures Contracts" and "Options on Financial
Futures Contracts" above), the Fund may use foreign currency futures contracts
and options on such futures contracts. Through the purchase or sale of such
contracts, the Fund may be able to achieve many of the same objectives as
through forward foreign currency exchange contracts more effectively and
possibly at a lower cost.
Unlike forward foreign currency exchange contracts, foreign currency futures
contracts and options on foreign currency futures contracts are standardized as
to amount and delivery period and are traded on boards of trade and commodities
exchanges. It is anticipated that such contracts may provide greater liquidity
and lower cost than forward foreign currency exchange contracts.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Fund may engage in forward
foreign currency transactions. A forward foreign currency exchange contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days ("term") from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. These
contracts are traded directly between currency traders (usually large commercial
banks) and their customers. The investment manager believes that it is important
to have the flexibility to enter into such forward contracts when it determines
that to do so is in the best interests of the Fund. The Fund will not speculate
in foreign currency exchange.
If the Fund retains the portfolio security and engages in an offsetting
transaction with respect to a forward contract, the Fund will incur a gain or a
loss (as described below) to the extent that there has been movement in forward
contract prices. If the Fund engages in an offsetting transaction, it may
subsequently enter into a new forward contract to sell the foreign currency.
Should forward prices decline during the period between the Fund's entering into
a forward contract for the sale of foreign currency and the date it enters into
an offsetting contract for the purchase of the foreign currency, the Fund would
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Fund would suffer a loss to the extent the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. Although such contracts tend to minimize the risk of loss due to
a decline in the value of the hedged currency, they also tend to limit any
potential gain which might result should the value of such currency increase.
The Fund will have to convert its holdings of foreign currencies into U.S.
Dollars from time to time in order to meet such needs as Fund expenses and
redemption requests. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various currencies.
The Fund will not enter into forward contracts or maintain a net exposure in
such contracts when the Fund would be obligated to deliver an amount of foreign
currency in excess of the value of the Fund's securities or other assets
denominated in that currency. See "Foreign Currency Transactions" under
"Investment Objective, Policies and Risk Factors--Additional Investment
Information" in the prospectus. The Fund does not intend to enter into such
forward contracts if it would have more than 15% of the value of its total
assets committed to such contracts. The Fund segregates eligible securities to
the extent required by applicable regulation in connection with forward foreign
currency exchange contracts entered into for the purchase of a foreign currency.
The Fund generally does not enter into a forward contract with a term longer
than one year.
REPURCHASE AGREEMENTS. The Fund may invest in repurchase agreements, which are
instruments under which the Fund 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 Fund's holding period. In the event of
a bankruptcy or other default of a seller of a repurchase agreement, the Fund
might incur expenses in enforcing its rights, and could experience losses,
B-7
<PAGE> 45
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. The Fund currently does not intend to invest more than
5% of its net assets in repurchase agreements during the coming year.
SHORT SALES AGAINST-THE-BOX. The Fund may make short sales against-the-box for
the purpose of deferring realization of gain or loss for federal income tax
purposes. A short sale "against-the-box" is a short sale in which the Fund 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. The Fund may engage in such short sales only to the extent that not
more than 10% of the Fund's total assets (determined at the time of the short
sale) is held as collateral for such sales. The Fund currently does not intend,
however, to engage in such short sales to the extent that more than 5% of its
net assets will be held as collateral therefor during the coming year.
DIVIDENDS AND TAXES
DIVIDENDS. The Fund normally distributes annual dividends of net investment
income and any net realized short-term and long-term capital gains.
The level of income dividends per share (as a percentage of net asset value)
will be lower for Class B and Class C shares than for Class A shares primarily
as a result of the distribution services fee applicable to Class B and Class C
shares. Distributions of capital gains, if any, will be paid in the same amount
for each class.
The Fund may at any time vary the foregoing dividend practice and, therefore,
reserves the right from time to time to either distribute or retain for
reinvestment such of its net investment income and its net short-term and long-
term capital gains as the Board of Trustees of the Fund determines appropriate
under then current circumstances. In particular, and without limiting the
foregoing, the Fund may make additional distributions of 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 Fund unless shareholders indicate in writing that
they wish to receive them in cash or in shares of other Kemper Funds as provided
in the prospectus.
TAXES. The Fund intends to continue to qualify as a regulated investment company
under Subchapter M of the Code and, if so qualified, will not be liable for
federal income taxes to the extent its earnings are distributed. One of the
Subchapter M requirements to be satisfied is that less than 30% of the Fund's
gross income during the fiscal year must be derived from gains (not reduced by
losses) from the sale or other disposition of securities and certain other
investments held for less than three months. The Fund may be limited in its
options, futures and foreign currency transactions in order to prevent
recognition of such gains.
The Fund's options, futures and foreign currency transactions are subject to
special tax provisions that may accelerate or defer recognition of certain gains
or losses, change the character of certain gains or losses, or alter the holding
periods of certain of the Fund's securities.
The mark-to-market rules of the Code may require a Fund to recognize unrealized
gains and losses on certain options and futures held by the Fund at the end of
the fiscal year. Under these provisions, 60% of any capital gain or loss
recognized will generally be treated as long-term and 40% as short-term.
However, although certain forward contracts and futures contracts on foreign
currency are marked-to-market, the gain or loss is generally ordinary under
Section 988 of the Code. In addition, the straddle rules of the Code would
require deferral of certain losses realized on positions of a straddle to the
extent that the Fund had unrealized gains in offsetting positions at year end.
B-8
<PAGE> 46
A 4% excise tax is imposed on the excess of the required distribution for a
calendar year over the distributed amount for such calendar year. The required
distribution is the sum of 98% of the Fund's net investment income for the
calendar year plus 98% of its capital gain net income for the one-year period
ending October 31, plus any undistributed net investment income from the prior
calendar year, plus any undistributed capital gain net income from the one year
period ended October 31 in the prior calendar year, minus any overdistribution
in the prior calendar year. For purposes of calculating the required
distribution, foreign currency gains or losses occurring after October 31 are
taken into account in the following calendar year. The Fund intends to declare
or distribute dividends during the appropriate periods of an amount sufficient
to prevent imposition of the 4% excise tax.
It is anticipated that only a small portion, if any, of the ordinary income
dividends from the Fund will be eligible for the dividends received deduction
available to corporate shareholders. The aggregate amount eligible for the
dividends received deduction may not exceed the aggregate qualifying dividends
received by the Fund for the fiscal year.
A shareholder who redeems shares of the Fund will recognize capital gain or loss
for federal income tax purposes measured by the difference between the value of
the shares redeemed and the adjusted cost basis of the shares. Any loss
recognized on the redemption of Fund 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 the Fund or any other Kemper Mutual Fund listed in the
prospectus under "Special Features--Class A Shares--Combined Purchases" (other
than shares of Kemper Cash Reserves Fund not acquired by exchange from another
Kemper Mutual Fund) may reinvest the amount redeemed at net asset value at the
time of the reinvestment in shares of the Fund or in shares of the other Kemper
Mutual Funds within six months of the redemption as described in the prospectus
under "Redemption or Repurchase of Shares--Reinvestment Privilege." If redeemed
shares were held less than 91 days, then the lesser of (a) the sales charge
waived on the reinvested shares, or (b) the sales charge incurred on the
redeemed shares, is included in the basis of the reinvested shares and is not
included in the basis of the redeemed shares. If a shareholder realizes a loss
on the redemption or exchange of a Fund's shares and reinvests in shares of the
same Fund 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 Fund'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.
The Fund's investment income derived from foreign securities may be subject to
foreign income taxes withheld at the source. Because the amount of the Fund's
investments in various countries will change from time to time, it is not
possible to determine the effective rate of such taxes in advance.
Shareholders who are non-resident aliens are subject to U.S. withholding tax on
ordinary income dividends (whether received in cash or shares) at a rate of 30%
or such lower rate as prescribed by any applicable tax treaty.
PERFORMANCE
As described in the Prospectus, the Fund'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 measures of performance are described below.
Performance information will be computed separately for each class. Zurich
Kemper Investments, Inc. (formerly named Kemper Financial Services, Inc.), the
Fund's investment manager, has agreed to a reduction of its management fee for
the Fund to the extent specified in the prospectus. See "Investment Manager and
Underwriter." This fee reduction will improve the performance results of the
Fund.
Average annual total return and total return measure both the net investment
income generated by, and the effect of any realized or unrealized appreciation
or depreciation of, the underlying investments in the Fund's portfolio. The
Fund'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 the Fund for
B-9
<PAGE> 47
a specific period is found by first taking a hypothetical $1,000 investment
("initial investment") in the Fund'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 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 redeemable value is then
divided by the initial investment, and this quotient is taken to the Nth root (N
representing the number of years in the period) and 1 is subtracted from the
result, which is then expressed as a percentage. The calculation assumes that
all income and capital gains dividends paid by the Fund have been reinvested at
net asset value on the reinvestment dates during the period. Average annual
total return may also be calculated without deducting the maximum sales charge.
Calculation of the Fund's total return is not subject to a standardized formula,
except when calculated for the Fund's "Financial Highlights" table in the Fund's
financial statements and prospectus. Total return performance for a specific
period is calculated by first taking a hypothetical investment ("initial
investment") in the Fund'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 or 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 Fund 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 and Class C shares
would be reduced if such charges were included.
The Fund's performance figures are based upon historical results and are not
necessarily representative of future performance. The Fund's Class A shares are
sold at net asset value plus a maximum sales charge of 5.75% of the offering
price. Class B and Class C shares are sold at net asset value. Redemption 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
each year 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 the purchase. Returns and net asset value will fluctuate. Factors
affecting the Fund'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 returns described in this section.
Shares of the Fund are redeemable at the then current net asset value, which may
be more or less than original cost.
The figures below show performance information for various periods. Comparative
information with respect to certain indices is also included. There are
differences and similarities between the investments which a Fund may purchase
and the investments measured by the indices which are described herein. The
Consumer Price Index is generally considered to be a measure of inflation. The
Dow Jones Industrial Average and the Standard & Poor's 500 Stock Index are
indices of common stocks which are considered to be generally representative of
the U.S. stock market. The Financial Times/Standard & Poor's Actuaries World
Index--Europe(TM) is a managed index that is generally representative of the
equity securities of European markets. The foregoing indices are unmanaged. The
net asset value and returns of the Funds will fluctuate. No adjustment has been
made for taxes payable on dividends. The periods indicated were ones of
fluctuating securities prices and interest rates.
B-10
<PAGE> 48
NOVEMBER 30, 1996
<TABLE>
<CAPTION>
COMPARED T
----------
INITIAL INCOME ENDING PERCENTAGE ENDING PERCENTAGE
TOTAL $10,000 CAPITAL GAIN DIVIDENDS VALUE INCREASE VALUE INCREASE DOW JONES
RETURN INVESTMENT DIVIDENDS REINVESTED (ADJUSTED) (ADJUSTED) (UNADJUSTED) (UNADJUSTED) INDUSTRIAL
TABLE (1) REINVESTED (2) (1) (1) (1) (1) AVERAGE(4)
- ------------ ---------- ------------ ---------- ---------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
Life of
Fund(+) $10,933 $0 $0 $10,933 9.3% $11,600 16.0% 18.4%
CLASS B SHARES
Life of
Fund(+) $11,547 $0 $0 $11,147 11.5% $11,547 15.5% 18.4%
CLASS C SHARES
Life of
Fund(+) $11,547 $0 $0 $11,447 14.5% $11,547 15.5% 18.4%
<CAPTION>
COMPARED TO
---------------------------------
STANDARD
TOTAL & CONSUMER FIN. TIMES/
RETURN POOR'S PRICE S&P
TABLE 500(5) INDEX(3) INDEX(6)
- ------------ -------- -------- -----------
<S> <C> <C> <C>
CLASS A SHAR
Life of
Fund(+) 17.0% 1.5% 14.6%
CLASS B SHAR
Life of
Fund(+) 17.0% 1.5% 14.6%
CLASS C SHAR
Life of
Fund(+) 17.0% 1.5% 14.6%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE STANDARD
ANNUAL FUND FUND FUND DOW JONES & CONSUMER FIN. TIMES/
TOTAL RETURN CLASS A CLASS B CLASS C INDUSTRIAL POOR'S PRICE S&P
TABLE SHARES SHARES SHARES AVERAGE(4) 500(5) INDEX(3) INDEX(6)
- ------------ ------- ------- ------- ---------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Life of
Fund(+) *% *% *% *% *% *% *%
</TABLE>
- ---------------
Footnotes
* Not applicable or not available.
(+) Since May 1, 1996.
(1) The Initial Investment and adjusted amounts for Class A shares were adjusted
for the maximum initial sales charge at the beginning of the period, which
is 5.75%. The Initial Investment for Class B and Class C shares was not
adjusted. Amounts were adjusted for Class B shares for the contingent
deferred sales charge that may be imposed at the end of the period based
upon the schedule for shares sold currently, see "Redemption or Repurchase
of Shares" in the prospectus. No adjustments were made to Class C shares.
(2) Includes short-term capital gain dividends, if any.
(3) The Consumer Price Index is a statistical measure of change, over time, in
the prices of goods and services in major expenditure groups for all urban
consumers. Source is Towers Data Systems.
(4) The Dow Jones Industrial Average is an unmanaged weighted average of thirty
blue chip industrial corporations listed on the New York Stock Exchange.
Assumes reinvestment of dividends. Source is Towers Data Systems.
(5) The Standard & Poor's 500 Stock Index is an unmanaged unweighted average of
500 stocks, over 95% of which are listed on the New York Stock Exchange.
Assumes reinvestment of dividends. Source is Towers Data Systems.
(6) The Financial Times/Standard & Poor's Actuaries World Index--Europe(TM) is a
managed index that is generally representative of the equity securities of
European Markets. Assumes reinvestment of dividends. Source is Datastream.
The following table illustrates an assumed $10,000 investment in Class A shares
of the Fund, which includes the maximum sales charge of 5.75%, with income and
capital gain dividends reinvested in additional shares. The table for the Fund
covers the period from its commencement of operations through December 31, 1996.
(5/1/96)
<TABLE>
<CAPTION>
DIVIDENDS CUMULATIVE VALUE OF SHARES ACQUIRED
-------------------------- -------------------------------------------
ANNUAL ANNUAL REINVESTED
YEAR INCOME CAPITAL GAIN INITIAL REINVESTED CAPITAL
ENDED DIVIDENDS DIVIDENDS INVEST- INCOME GAIN TOTAL
12/31 REINVESTED* REINVESTED MENT DIVIDENDS* DIVIDENDS VALUE
- ----- ----------- ------------ ------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
1996 $129 $0 $10,903 $134 $0 $11,037
</TABLE>
- ---------------
* Includes short-term capital gain dividends.
Investors may want to compare the performance of the Fund 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
B-11
<PAGE> 49
and may be insured. Withdrawal of deposits prior to maturity will normally be
subject to a penalty. Rates offered by banks and other depository institutions
are subject to change at any time specified by the issuing institution.
Information regarding bank products may be based upon, among other things, the
BANK RATE MONITOR National Index(TM) for certificates of deposit, which is an
unmanaged index and is based on stated rates and the annual effective yields of
certificates of deposit in the ten largest banking markets in the United States,
or the CDA Investment Technologies, Inc. Certificate of Deposit Index, which is
an unmanaged index based on the average monthly yields of certificates of
deposit.
Investors also may want to compare the performance of the Fund 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 the Fund 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.
INVESTMENT MANAGER AND UNDERWRITER
INVESTMENT MANAGER. Zurich Kemper Investments, Inc. ("ZKI"), 222 South Riverside
Plaza, Chicago, Illinois 60606, is the Fund's investment manager. ZKI is wholly
owned by ZKI Holding Corp. ZKI Holding Corp. is a more than 90% owned subsidiary
of Zurich Holding Company of America, Inc., which is a wholly owned subsidiary
of Zurich Insurance Company, an internationally recognized provider of financial
services in property/ casualty and life insurance, reinsurance and asset
management. Pursuant to the investment management agreement, ZKI acts as the
Fund's investment adviser, manages its investments, administers its business
affairs, furnishes office facilities and equipment, provides clerical,
bookkeeping and administrative services and permits any of its officers or
employees to serve without compensation as trustees or officers of the Fund if
elected to such positions. The investment management agreement provides that the
Fund shall pay the charges and expenses of its operations, including the fees
and expenses of the trustees (except those who are affiliates of ZKI),
independent auditors, counsel, custodian and transfer agent and the cost of
share certificates, reports and notices to shareholders, brokerage commissions
or transaction costs, costs of calculating net asset value, taxes and membership
dues. The Fund bears the expenses of registration of its shares with the
Securities and Exchange Commission, while Kemper Distributors, Inc. ("KDI"), as
principal underwriter, pays the cost of qualifying and maintaining the
qualification of the Fund's shares for sale under the securities laws of the
various states. ZKI has agreed to reimburse the Fund to the extent required by
applicable state expense limitations should all operating expenses of the Fund,
including the investment management fees of ZKI but excluding taxes, interest,
distribution fees, extraordinary expenses, brokerage commissions or transaction
costs and any other properly excludable expenses, exceed the applicable state
expense limitations. Currently, there are no state expense limitations in
effect.
The investment management agreement provides that ZKI 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 agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
ZKI in the performance of its obligations and duties, or by reason of its
reckless disregard of its obligations and duties under the agreement.
B-12
<PAGE> 50
The Fund's investment management agreement continues in effect from year to year
so long as its continuation is approved at least annually (a) by a majority of
the trustees who are not parties to such agreement or interested persons of any
such party except in their capacity as trustees of the Fund and (b) by the
shareholders or the Board of Trustees of the Fund. The Fund's investment
management agreement may be terminated at any time upon 60 days' notice by
either party, or by a majority vote of the outstanding shares of the Fund, and
will terminate automatically upon assignment. If additional series become
subject to an investment management agreement, the provisions concerning
continuation, amendment and termination shall be on a series by series basis.
Additional series may be subject to a different agreement.
The investment management fee rates paid to ZKI by the Fund are set forth in the
prospectus, under "Investment Manager and Underwriter." The investment
management fee paid by the Fund for the period May 1, 1996 (commencement of
operations) to November 30, 1996 was $5,000 (which reflects the effect of the
fee reduction described in the prospectus.)
FUND SUB-ADVISER. Zurich Investment Management Limited ("ZIML"), 1 Fleet Place,
London, U.K. EC4M 7RQ, an affiliate of ZKI, is the sub-adviser for the Fund.
ZIML acts as sub-adviser pursuant to the terms of the sub-advisory agreement
between it and ZKI for the Fund. ZIML is subject to regulation by the Investment
Management Regulatory Organization (IMRO) in England as well as the U.S.
Securities and Exchange Commission.
Under the terms of the sub-advisory agreement for the Fund, ZIML renders
investment advisory and management services with regard to that portion of the
Fund's portfolio as may be allocated to ZIML by ZKI from time to time for
management, including services related to foreign securities, foreign currency
transactions and related investments. ZIML may, under the terms of each
sub-advisory agreement, render similar services to others including other
investment companies. For its services, ZIML will receive from ZKI a monthly fee
at the annual rate of .35% of the portion of the average daily net assets of the
Fund allocated by ZKI to ZIML for management. ZIML permits any of its officers
or employees to serve without compensation as trustees or officers of the Fund
if elected to such positions.
The sub-advisory agreement provides that ZIML will not be liable for any error
of judgment or mistake of law or for any loss suffered by the Fund in connection
with matters to which the sub-advisory agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
ZIML in the performance of its duties or from reckless disregard by ZIML of its
obligations and duties under the sub-advisory agreement.
The sub-advisory agreement continues in effect from year to year so long as its
continuation is approved at least annually (a) by a majority of the trustees who
are not parties to such agreement or interested persons of any such party except
in their capacity as trustees of the Fund and (b) by the shareholders or the
Board of Trustees. The sub-advisory agreement may be terminated at any time for
the Fund upon 60 days notice by ZKI, ZIML or the Board of Trustees, or by a
majority vote of the outstanding shares of the Fund, and will terminate
automatically upon assignment or upon the termination of the Fund's investment
management agreement. If additional series become subject to a sub-advisory
agreement, the provisions concerning continuation, amendment and termination
shall be on a series-by-series basis. Additional series may be subject to a
different agreement. No sub-advisory fees were paid by ZKI to ZIML for the
Fund's 1996 period, although in such fiscal year ZKI paid ZIML for its services
to ZKI with respect to foreign securities investments of the Fund.
PRINCIPAL UNDERWRITER. Pursuant to an underwriting and distribution services
agreement ("distribution agreement"), Kemper Distributors, Inc. ("KDI"), a
wholly owned subsidiary of ZKI, is the principal underwriter and distributor for
the shares of the Fund and acts as agent of the Fund in the continuous offering
its shares. KDI bears all its expenses of providing services pursuant to the
distribution agreement, 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 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.
B-13
<PAGE> 51
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 distribution agreement automatically terminates in the event of
its assignment and may be terminated for a class at any time without penalty by
the Fund or by KDI upon 60 days' notice. Termination by the 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 distribution agreement, or a "majority of
the outstanding voting securities" of the class of the Fund, as defined under
the Investment Company Act of 1940. The distribution agreement may not be
amended for a class to increase the fee to be paid by the 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 distribution agreement. The provisions concerning the
continuation, amendment and termination of the distribution agreement are on a
class by class basis.
CLASS A SHARES. The following information concerns the underwriting commissions
paid in connection with the distribution of the Fund's Class A shares.
<TABLE>
<CAPTION>
COMMISSIONS COMMISSIONS
COMMISSIONS RETAINED UNDERWRITER PAID TO KEMPER
FISCAL YEAR BY UNDERWRITER PAID TO ALL FIRMS AFFILIATED FIRMS
----------- -------------------- ----------------- ----------------
<S> <C> <C> <C>
1996(+)............................. $5,000 24,000 1,000
</TABLE>
- ---------------
(+) For the period May 1, 1996 (commencement of operations) to November 30,
1996.
CLASS B SHARES AND CLASS C SHARES. Since the distribution agreement provides for
fees charged to Class B and Class C shares that are used by KDI to pay for
distribution services (see the prospectus under "Investment Manager and
Underwriter"), the agreement (the "Plan") is approved and renewed separately for
the Class B and Class C shares in accordance with Rule 12b-1 under the
Investment Company Act of 1940, which regulates the manner in which an
investment company may, directly or indirectly, bear expenses of distributing
its shares. Expenses of the Fund and of KDI, in connection with the Rule 12b-1
Plans for the Class B and Class C shares, are set forth below. A portion of the
marketing, sales and operating expenses shown below could be considered overhead
expense.
<TABLE>
<CAPTION>
TOTAL COMMISSIONS
DISTRIBUTION CONTINGENT COMMISSIONS PAID BY
FEES PAID DEFERRED PAID BY UNDERWRITER
FISCAL BY FUND TO SALES CHARGES UNDERWRITER TO AFFILIATED
CLASS B SHARES YEAR UNDERWRITER TO UNDERWRITER TO FIRMS FIRMS
-------------- ------ ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
1996(+) $3,000 -- 29,000 --
<CAPTION>
OTHER DISTRIBUTION EXPENSES PAID BY UNDERWRITER
-----------------------------------------------------------
ADVERTISING MARKETING MISC.
AND PROSPECTUS AND SALES OPERATING INTEREST
CLASS B SHARES LITERATURE PRINTING EXPENSES EXPENSES EXPENSES
-------------- ----------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
3,000 -- 7,000 9,000 1,000
</TABLE>
<TABLE>
<CAPTION>
TOTAL DISTRIBUTION
DISTRIBUTION CONTINGENT DISTRIBUTION FEES PAID BY
FEES PAID DEFERRED FEES PAID BY UNDERWRITER
FISCAL BY FUND TO SALES CHARGE UNDERWRITER TO AFFILIATED
CLASS C SHARES YEAR UNDERWRITER TO UNDERWRITER TO FIRMS FIRMS
-------------- ------ ------------ -------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
1996(+) $1,000 -- 1,000 --
<CAPTION>
OTHER DISTRIBUTION EXPENSES PAID BY UNDERWRITER
-----------------------------------------------------------
ADVERTISING MARKETING MISC.
AND PROSPECTUS AND SALES OPERATING INTEREST
CLASS C SHARES LITERATURE PRINTING EXPENSES EXPENSES EXPENSES
-------------- ----------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
1,000 -- 3,000 2,000 --
</TABLE>
- ---------------
(+) For the period May 1, 1996 (commencement of operations) to November 30,
1996.
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. For
the services under the administrative agreement, the Fund pays KDI an
administrative services fee, payable monthly, at an annual rate of up to .25% of
average daily net assets of Class A, B and C shares of the Fund.
B-14
<PAGE> 52
KDI enters 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 in 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. With respect to
Class A shares, KDI pays each firm a service fee, payable quarterly, at an
annual rate of up to .25% of the net assets in Fund accounts that it maintains
and services attributable to Class A shares, commencing with the month after
investment. With respect to Class B and Class C shares, KDI currently advances
to firms the first-year service fee at a rate of up to .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 .25% (calculated monthly and 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 may include affiliates
of KDI.
The following information concerns the administrative services fee paid by the
Fund.
<TABLE>
<CAPTION>
ADMINISTRATIVE SERVICE FEES PAID SERVICE FEES
--------------------------------- PAID BY ADMINISTRATOR
FISCAL PERIOD CLASS A CLASS B CLASS C TO FIRMS
------------- ------- ------- ------- ---------------------
<S> <C> <C> <C> <C>
1996(+)............................. $1,000 1,000 -- 4,000
</TABLE>
- ---------------
(+) For the period May 1, 1996 (commencement of operations) to November 30,
1996.
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreement not paid to firms to compensate
itself for administrative functions performed for the Fund. Currently, the
administrative services fee payable to KDI is based only upon Fund assets in
accounts for which a firm provides administrative services listed on the Fund's
records and it is intended that KDI will pay all the administrative services fee
that it receives from the Fund to firms in the form of service fees. The
effective administrative services fee rate to be charged against all assets of
the Fund while this procedure is in effect will depend upon the proportion of
Fund assets that is in accounts for which there is a firm of record. The Board
of Trustees of the Fund, in its discretion, may approve basing the fee to KDI on
all Fund assets in the future.
Certain trustees or officers of the Fund are also directors or officers of ZKI,
ZIML or KDI, as indicated under "Officers and Trustees."
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT. The Chase Manhattan
Bank, Chase MetroTech Center, Brooklyn, New York 11245, as custodian, has
custody of all securities and cash of the Fund held outside the United States.
Investors Fiduciary Trust Company ("IFTC"), 127 West 10th Street, Kansas City,
Missouri 64105, as custodian, and State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110, as sub-custodian, have custody of
all securities and cash of the Fund maintained in the United States. They attend
to the collection of principal and income, and payment for and collection of
proceeds of securities bought and sold by the Fund. IFTC is also the Fund's
transfer agent and dividend-paying agent. Pursuant to a services agreement with
IFTC, Kemper Service Company ("KSvC"), an affiliate of ZKI, serves as
"Shareholder Service Agent" of the Fund, and as such, performs all of IFTC's
duties as transfer agent and dividend-paying agent. IFTC receives as transfer
agent, and pays to KSvC, annual account fees of $6 per account plus account set
up, transaction and maintenance charges, annual fees associated with the
contingent deferred sales charge (Class B shares only) and out-of-pocket expense
reimbursement. IFTC's fee is reduced by certain earnings credits in favor of the
Fund. For the period May 1, 1996 (commencement of operations) to
B-15
<PAGE> 53
November 30, 1996, IFTC remitted shareholder service fees in the amount of
$2,000 to KSvC as Shareholder Service Agent for the Fund.
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 return, 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.
PORTFOLIO TRANSACTIONS
ZKI and its affiliates furnish investment management services to the Kemper
Funds and other clients including affiliated insurance companies. ZIML is the
sub-adviser for the Fund. ZKI and its affiliates share some common research and
trading facilities. At times investment decisions may be made to purchase or
sell the same investment securities for the Fund and for one or more of the
other clients managed by ZKI or its affiliates. When two or more of such clients
are simultaneously engaged in the purchase or sale of the same security through
the same trading facility, the transactions are allocated as to amount and price
in a manner considered equitable to each.
National securities exchanges have established limitations governing the maximum
number of options in each class which may be written by a single investor or
group of investors acting in concert. An exchange may order the liquidation of
positions found to be in violation of these limits, and it may impose certain
other sanctions. These position limits may restrict the number of options the
Fund will be able to write on a particular security.
The above mentioned factors may have a detrimental effect on the quantities or
prices of securities and options and futures contracts available to the Fund. On
the other hand, the ability of the Fund to participate in volume transactions
may produce better executions for the Fund in some cases. The Board of Trustees
of the Fund believes that the benefits of ZKI's organization outweigh any
limitations that may arise from simultaneous transactions or position
limitations.
ZKI and ZIML, in effecting purchases and sales of portfolio securities for the
account of the Fund, will implement the Fund's policy of seeking best execution
of orders. ZKI and ZIML may be permitted to pay higher brokerage commissions for
research services as described below. Consistent with this policy, orders for
portfolio transactions are placed with broker-dealer firms giving consideration
to the quality, quantity and nature of each firm's professional services, which
include execution, financial responsibility, responsiveness, clearance
procedures, wire service quotations and statistical and other research
information provided to the Fund and ZKI and its affiliates. Subject to seeking
best execution of an order, brokerage is allocated on the basis of all services
provided. Any research benefits derived are available for all clients of ZKI and
its affiliates. In selecting among firms believed to meet the criteria for
handling a particular transaction, ZKI and ZIML may give consideration to those
firms that have sold or are selling shares of the Fund and of other funds
managed by ZKI or its affiliates, as well as to those firms that provide market,
statistical and other research information to the Fund and ZKI and its
affiliates, although ZKI and ZIML are not authorized to pay higher commissions
to firms that provide such services, except as provided below.
ZKI and ZIML may in certain instances be permitted to pay higher brokerage
commissions solely for receipt of market, statistical and other research
services as defined in Section 28(e) of the Securities Exchange Act of 1934 and
interpretations thereunder. Such services may include among other things:
economic, industry or company research reports or investment recommendations;
computerized databases; quotation and execution equipment and software; and
research or analytical computer software and services. Where products or
services have a "mixed use," a good faith effort is made to make a reasonable
allocation of the cost of products or services in accordance with the
anticipated research and non-research uses and the cost attributable to
non-research use is paid by ZKI or one of its affiliates in cash. Subject to
Section 28(e) and procedures adopted by the Board of Trustees of the Fund, the
Fund could pay a firm that provides research services commissions for effecting
a
B-16
<PAGE> 54
securities transaction for the Fund in excess of the amount other firms would
have charged for the transaction if ZKI or ZIML determines in good faith that
the greater commission is reasonable in relation to the value of the brokerage
and research services provided by the executing firm viewed in terms either of a
particular transaction or ZKI's or ZIML's overall responsibilities to the Fund
and other clients. Not all of such research services may be useful or of value
in advising the Fund. Research benefits will be available for all clients of ZKI
and its affiliates. The investment management fee paid by the Fund to ZKI is not
reduced because these research services are received.
The table below shows total brokerage commissions paid by the Fund for the
period May 1, 1996 (commencement of operations) to November 30, 1996, and the
percentage thereof that was allocated to firms based upon research information
provided:
<TABLE>
<CAPTION>
BROKERAGE ALLOCATED TO FIRMS
COMMISSIONS BASED ON RESEARCH
- ----------- ------------------
<C> <C>
$9,000 90%
</TABLE>
PURCHASE AND REDEMPTION OF SHARES
As described in the prospectus, Fund shares are sold at their public offering
price, which is the net asset value 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. The Fund may waive the minimum for
purchases by trustees, directors, officers or employees of the Fund or ZKI and
its affiliates. 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 the Fund will be redeemed by the Fund at the applicable net asset
value per share of the Fund 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 or Class C shares by certain classes of persons or
through certain types of transactions as described in the prospectus are
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 ("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 the Fund's investments is
not reasonably practicable, or (ii) it is not reasonably practicable for the
Fund to determine the value of its net assets, or (c) for such other periods as
the Securities and Exchange Commission may by order permit for the protection of
the Fund's shareholders.
Although it is the Fund's present policy to redeem in cash, if the Board of
Trustees determines that a material adverse effect would be experienced by the
remaining shareholders if payment were made wholly in cash, the Fund will
satisfy the redemption request in whole or in part by a distribution of
portfolio securities in lieu of cash, in conformity with the applicable rules of
the Securities and Exchange Commission, taking such securities at the same value
used to determine net asset value, and selecting the securities in such manner
as the Board of Trustees may deem fair and equitable. If such a distribution
occurred, shareholders receiving securities and selling them could receive less
than the redemption value of such securities and in addition would incur certain
transaction costs. Such a redemption would not be so liquid as a redemption
entirely in cash. The Fund has elected to be governed by Rule 18f-1 under the
Investment Company Act of 1940 pursuant to which the Fund is obligated to
B-17
<PAGE> 55
redeem shares solely in cash up to the lesser of $250,000 or 1% of the net
assets of the Fund during any 90-day period for any one shareholder of record.
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 the Fund'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.
OFFICERS AND TRUSTEES
The officers and trustees of the Fund, their birthdates, their principal
occupations and their affiliations, if any, with ZKI, the Fund's investment
manager, ZIML, the sub-adviser of the Fund and KDI, the principal underwriter,
are as follows (the number following each person's title is the number of
investment companies managed by ZKI and its affiliates for which he or she holds
similar positions):
JAMES E. AKINS (10/15/26), Trustee (13), 2904 Garfield Terrace, N.W.,
Washington, D.C.; Consultant on International, Political and Economic Affairs;
formerly a career United States Foreign Service Officer, Energy Adviser for the
White House and United States Ambassador to Saudi Arabia, 1973-76.
ARTHUR R. GOTTSCHALK (2/13/25), Trustee (13), 10642 Brookridge Drive, Frankfort,
Illinois, Retired; formerly, President, Illinois Manufacturers Association;
Trustee, Illinois Masonic Medical Center; Member, Board of Governors, Heartland
Institute/Illinois; formerly, Illinois State Senator.
FREDERICK T. KELSEY (4/25/27), Trustee (13), 738 York Court, Northbrook,
Illinois; Retired; formerly, consultant to Goldman, Sachs & Co.; formerly,
President, Treasurer and Trustee of Institutional Liquid Assets and its
affiliated mutual funds; Trustee of the Benchmark Fund and the Pilot Fund.
*DOMINIQUE P. MORAX (10/02/48), Trustee (38), 222 South Riverside Plaza,
Chicago, Illinois; Member, Extended Corporate Executive Board, Zurich Insurance
Company; Director, ZKI.
FRED B. RENWICK (2/1/30), Trustee (13), 3 Hanover Square, New York, New York;
Professor of Finance, New York University, Stern School of Business; Director,
TIFF Industrial Program, Inc., Director, the Wartburg Home Foundation; Chairman
Investment Committee of Morehouse College Board of Trustees; Chairman, American
Bible Society Investment Committee; formerly member of the Investment Committee
of Atlanta University Board of Trustees; formerly Director of Board of Pensions,
Evangelical Lutheran Church of America.
*STEPHEN B. TIMBERS (8/8/44), President and Trustee (38), 222 South Riverside
Plaza, Chicago, Illinois; President, Chief Executive Officer, Chief Investment
Officer and Director, ZKI; Director, KDI, Dreman Value Advisors, Inc. and LTV
Corporation.
JOHN B. TINGLEFF (5/4/35), Trustee (13), 2015 South Lake Shore Drive, Harbor
Springs, Michigan; Retired; formerly, President, Tingleff & Associates
(management consulting firm); formerly, Senior Vice President, Continental
Illinois National Bank & Trust Company.
JOHN G. WEITHERS (8/8/33), Trustee (13), 311 Spring Lake, Hinsdale, Illinois;
Retired; formerly, Chairman of the Board and Chief Executive Officer, Chicago
Stock Exchange; Director, Federal Life Insurance Company, President of the
Members of the Corporation and Trustee, DePaul University; Director, Systems
Imagineering and Records Management Services, Inc.
B-18
<PAGE> 56
*STEVEN H. REYNOLDS (9/11/43), Vice President (15), 222 South Riverside Plaza,
Chicago, Illinois; Executive Vice President and Chief Investment
Officer--Equities, ZKI.
*CHARLES R. MANZONI, JR. (1/23/47), Vice President* (38), 222 South Riverside
Plaza, Chicago, Illinois; Executive Vice President, Secretary and General
Counsel of ZKI; Secretary, ZKI Holding Corp.; Secretary, ZKI Agency, Inc.;
formerly, Partner, Gardner, Carton & Douglas (attorneys).
*JOHN E. NEAL (3/9/50), Vice President (38), 222 South Riverside Plaza, Chicago,
Illinois; President, Kemper Funds Group, a unit of ZKI; Director, ZKI, Dreman
Value Advisors, Inc. and KDI.
*JEROME L. DUFFY (6/29/36), Treasurer (38), 222 South Riverside Plaza, Chicago,
Illinois, Senior Vice President, ZKI.
*PHILIP J. COLLORA (11/15/45), Vice President and Secretary (38), 222 South
Riverside Plaza, Chicago, Illinois; Attorney, Senior Vice President and
Assistant Secretary, ZKI.
*ELIZABETH C. WERTH (10/1/47), Assistant Secretary (31), 222 South Riverside
Plaza, Chicago, Illinois; Vice President, ZKI; and Vice President and Director
of State Registrations, KDI.
* Interested persons of the Fund as defined in the Investment Company Act of
1940.
The trustees and officers who are "interested persons" as designated above
receive no compensation from the Fund. The table below shows amounts estimated
to be paid or accrued to those trustees who are not designated "interested
persons" during the Fund's first full fiscal year and the total compensation
that the Kemper Funds paid or accrued to such trustees during calendar year
1996.
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION FROM
COMPENSATION KEMPER FUND COMPLEX PAID
NAME OF BOARD MEMBER FROM FUND TO BOARD MEMBERS(2)
-------------------- ------------ ------------------------
<S> <C> <C>
James E. Akins.............................................. $1,500 $ 94,300
Arthur R. Gottschalk(1)..................................... $1,400 $102,700
Frederick T. Kelsey(1)...................................... $1,200 $106,800
Fred B. Renwick............................................. $1,500 $ 94,300
John B. Tingleff............................................ $1,500 $ 94,300
John G. Weithers............................................ $1,500 $ 94,300
</TABLE>
- ---------------
(1) Includes deferred fees and interest thereon pursuant to deferred
compensation agreements with certain Kemper funds. Deferred amounts accrue
interest monthly at a rate equal to the yield of Kemper Money Funds--Kemper
Money Market Fund. Total deferred amounts and interest accrued for the
fiscal period ended November 30, 1996 are $900 for Mr. Gottschalk and $700
for Mr. Kelsey.
(2) Includes compensation for service on the Boards of 13 Kemper Funds with 36
fund portfolios during calendar year 1996. Each trustee currently serves as
a board member of 13 Kemper funds with 36 fund portfolios.
As of March 10, 1997, with the exception of Stephen B. Timbers who beneficially
owned 1.18% of the Class A shares of the Fund, the trustees and officers as a
group owned less than 1% of the then outstanding shares of the Fund and no
person owned of record more than 5% of the outstanding shares of any class of
the Fund, except as shown below:
<TABLE>
<CAPTION>
NAME AND ADDRESS CLASS PERCENTAGE
---------------- ----- ----------
<S> <C> <C>
**Donaldson Lufkin Jenrette................................. A 5.43
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303
</TABLE>
B-19
<PAGE> 57
<TABLE>
<CAPTION>
NAME AND ADDRESS CLASS PERCENTAGE
---------------- ----- ----------
<S> <C> <C>
**Everen Clearing Corp Cust................................. B 5.17
FBO Randal M Zickuhr IRA
A/C 8580-7583
2547 Saxon Place
Rockford, IL 61114
*Zurich Kemper Investments.................................. C 10.25
Attn Accounting Control
222 S Riverside Plaza 31st Fl
Chicago, IL 60606
**NFSC/FMTC IRA Rollover.................................... C 15.35
FBO Carole Sue Crenshaw
1604 Cherokee Place
Bartlesville, OK 74003
*John E Susong.............................................. C 8.77
c/o Pension Consulting Svcs
7181 Chagrin Rd
Chagrin Falls, OH 44023
*E Jean Keown............................................... C 6.96
7 Brooking G #201
Timonium, MD 21093
**Roger Rutz Trustee........................................ C 7.21
Sales Inc Employee Ret Tr
U/A 01/01/1988
29600 Northwestern Hwy Ste 101
Southfield, MI 48034
**Investors Fiduciary Tr Co Cust............................ C 6.01
IRA R/O Albert J. Comfort
2550 40th St
Port Huron MI 48060
**Dain Bosworth Inc FBO..................................... C 13.03
Lancaster Ventures LLC
Attn Joseph J Kerrigan
PO Box 6365
Lincoln, NE 68506
**Alex Brown & Sons Incorporated............................ C 7.25
PO Box 1346
Baltimore, MD 21203
**William H Hines Trustee................................... C 8.06
William H Hines M/P Pen Plan
5720 Chandler Dr
Baton Rouge, LA 70808
</TABLE>
- ---------------
* Record and beneficial owner.
** Record owner only.
B-20
<PAGE> 58
SHAREHOLDER RIGHTS
The Fund generally is not required to hold meetings of its shareholders. Under
the Agreement and Declaration of Trust of the Fund ("Declaration of Trust"),
however, shareholder meetings will be held in connection with the following
matters: (a) the election or removal of trustees if a meeting is called for such
purpose; (b) the adoption of any contract for which approval by shareholders is
required by the Investment Company Act of 1940 ("1940 Act"); (c) any termination
of the Fund 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 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 were
represented on its scheduled date. Shareholders would in such a case be
permitted to take action which does not require a larger vote than a majority of
a quorum, such as the election of trustees and ratification of the selection of
independent 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 which under the 1940 Act require the vote of a "majority of
the outstanding voting securities" as defined in the 1940 Act.
The Fund's Declaration of Trust specifically authorizes the Board of Trustees to
terminate the Fund or any Portfolio or class by notice to the shareholders
without shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for obligations of the
Fund. The Declaration of Trust, however, disclaims shareholder liability for
acts or obligations of the Fund and requires that notice of such disclaimer be
given in each agreement, obligation, or instrument entered into or executed by
the Fund or the Fund's trustees. Moreover, the Declaration of Trust provides for
indemnification out of Fund property for all losses and expenses of any
shareholder held personally liable for the obligations of the Fund and the Fund
will be covered by insurance which the trustees consider adequate to cover
foreseeable tort claims. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is considered by ZKI 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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