KEMPER EQUITY FUNDS
STATEMENT OF ADDITIONAL INFORMATION
February 1, 1999, as revised May 14, 1999
Kemper Aggressive Growth Fund ("Aggressive Growth Fund")
Kemper Blue Chip Fund ("Blue Chip Fund")
Kemper Growth Fund ("Growth Fund")
Kemper Small Capitalization Equity Fund ("Small Cap Fund")
Kemper Technology Fund ("Technology Fund")
Kemper Total Return Fund ("Total Return Fund")
Kemper Value Plus Growth Fund ("Value+Growth Fund")
222 South Riverside Plaza, Chicago, Illinois 60606
1-800-621-1048
This Statement of Additional Information is not a prospectus. It is the
combined Statement of Additional Information for each of the funds (the "Funds")
listed above. It should be read in conjunction with the combined prospectus of
the Funds dated February 1, 1999. The prospectus may be obtained without charge
from the Funds and is also available along with other related materials on the
SEC's Internet web site (http://www.sec.gov).
TABLE OF CONTENTS
INVESTMENT RESTRICTIONS.......................................................2
INVESTMENT POLICIES AND TECHNIQUES............................................6
PORTFOLIO TRANSACTIONS.......................................................19
INVESTMENT MANAGER AND UNDERWRITER...........................................20
PURCHASE, REPURCHASE AND REDEMPTION OF SHARES................................29
DIVIDENDS AND TAXES..........................................................41
PERFORMANCE..................................................................47
OFFICERS AND BOARD MEMBERS...................................................52
SHAREHOLDER RIGHTS...........................................................57
APPENDIX--RATINGS OF FIXED INCOME INVESTMENTS................................59
The financial statements appearing in each Fund's 1998 Annual Report to
Shareholders are incorporated herein by reference. The Annual Reports for each
of the Funds accompanies this document.
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INVESTMENT RESTRICTIONS
Each Fund has adopted certain fundamental investment restrictions which cannot
be changed without approval of a majority of its outstanding voting shares. As
defined in the Investment Company Act of 1940, (the "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.
The Aggressive Growth Fund has elected to be classified as a non-diversified
open-end investment fund. The Blue Chip Fund, Growth Fund, Small Cap Fund,
Technology Fund, Total Return Fund and Value+Growth Fund have elected to be
classified as diversified open-end investment funds.
Each Fund may not, as a fundamental policy:
1. Make loans except as permitted under the 1940 Act, as amended, and as
interpreted or modified by regulatory authority having jurisdiction,
from time to time.
2. Borrow money, except as permitted under the 1940 Act, as amended, and
as interpreted or modified by regulatory authority having jurisdiction,
from time to time.
3. Concentrate its investments in a particular industry, as that term is
used in the 1940 Act, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time.
4. Purchase physical commodities or contracts relating to physical
commodities.
5. Engage in the business of underwriting securities issued by others,
except to the extent that a Fund may be deemed to be an underwriter in
connection with the disposition of portfolio securities.
6. Issue senior securities except as permitted under the 1940 Act, as
amended, and as interpreted or modified by regulatory authority having
jurisdiction, from time to time.
7. Purchase or sell real estate, which term does not include securities of
companies which deal in real estate or mortgages or investments secured
by real estate or interests therein, except that the Fund reserves
freedom of action to hold and to sell real estate acquired as a result
of the Fund's ownership of securities.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage beyond that specified limit resulting from a
change in values or net assets will not be considered a violation. None of the
Funds borrowed money as permitted by fundamental investment restriction number 2
in the latest fiscal year and none intend to borrow money during the current
year.
Each Fund has adopted the following non-fundamental restrictions, which may be
changed by the Board without shareholder approval.
The Aggressive Growth Fund may not, as a non-fundamental policy:
i. Invest for the purpose of exercising control or management of
another issuer.
ii. Purchase more than 3% of the stock of another investment
company or purchase stock of other investment companies equal
to more than 5% of the Fund's total assets (valued at time of
purchase) in the case of any one other investment company and
10% of such assets (valued at time of purchase) in the case of
all other investment companies in the aggregate. Any such
purchases are to be made in the open market where no profit to
a sponsor or dealer results from the purchase, other than the
customary broker's commission, except for securities acquired
as part of a merger, consolidation or acquisition of assets.
iii. Invest more than 15% of its net assets in illiquid securities.
iv. Write or sell put or call options, combinations thereof or
similar options on more than 25% of the 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.
v. With respect to 50% of its total assets, purchase securities
of any issuer (other than obligations of, or guaranteed by,
the U.S. Government, its agencies or instrumentalities) if, as
a result, more than 5% of the total value of the Fund's assets
would be invested in securities of that issuer, except that
all or substantially all of the assets of the
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Fund may be invested in another registered investment company
having the same investment objective and substantially similar
investment policies as the Fund.
vi. Invest more than 25% of its total assets in a single issuer
(other than obligations of, or guaranteed by, the U.S.
Government, its agencies or instrumentalities), except that
all or substantially all of the assets of the Fund may be
invested in another registered investment company having the
same investment objective and substantially similar investment
policies as the Fund.
vii. Make short sales of securities or maintain a short position
for the account of the Fund unless at all times when a short
position is open it owns an equal amount of such securities or
owns securities which, without payment of any further
consideration, are convertible into or exchangeable for
securities of the same issue as, and equal in amount to, the
securities sold short and unless not more than 10% of the
Fund's total assets is held as collateral for such sales at
any one time.
viii. Pledge, hypothecate, mortgage or otherwise encumber its assets
except to secure borrowings permitted by restriction number 2
above. (The collateral arrangements with respect to options,
financial futures, foreign currency transactions and delayed
delivery transactions and any margin payments in connection
therewith are not deemed to be pledges or other encumbrances.)
ix. Purchase more than 10% of any class of voting securities of
any issuer, except that all or substantially all of the assets
of the Fund may be invested in another registered investment
company having the same investment objective and substantially
similar investment policies as the Fund.
x. Purchase 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.
The Blue Chip Fund may not, as a non-fundamental policy:
i. Invest for the purpose of exercising control or management of
another issuer.
ii. Purchase securities of other open-end investment companies,
except in connection with a merger, consolidation,
reorganization or acquisition of assets.
iii. Invest more than 15% of its net assets in illiquid securities.
iv. Make short sales of securities or maintain a short position
for the account of the Fund unless at all times when a short
position is open it owns an equal amount of such securities or
owns securities which, without payment of any further
consideration, are convertible into or exchangeable for
securities of the same issue as, and equal in amount to, the
securities sold short and unless not more than 10% of the
Fund's total assets is held as collateral for such sales at
any one time.
v. Pledge, hypothecate, mortgage or otherwise encumber more than
15% of its total assets and then only to secure borrowings
permitted by restriction number (2) above. (The collateral
arrangements with respect to options, financial futures and
delayed delivery transactions and any margin payments in
connection therewith are not deemed to be pledges or other
encumbrances.)
vi. Purchase more than 10% of any class of voting securities of
any issuer, except that all or substantially all of the assets
of the Fund may be invested in another registered investment
company having the same investment objective and substantially
similar investment policies as the Fund.
vii. Write (sell) put or call options, combinations thereof or
similar options; 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.
viii. Purchase 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.
ix. Purchase securities of any issuer (other than obligations of,
or guaranteed by, the U.S. Government, its agencies or
instrumentalities) if, as a result, more than 5% of the total
value of the Fund's assets would be invested in securities of
that issuer, except that all or substantially all of the
assets of the Fund may be invested in another registered
investment company having the same investment objective and
substantially similar investment policies as the Fund.
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The Growth Fund and the Value+Growth Fund may not, as a non-fundamental policy:
i. Invest for the purpose of exercising control or management of
another issuer.
ii. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or
acquisition of assets.
iii. Invest more than 15% of its net assets in illiquid securities.
iv. 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 financial futures
and options transactions.
v. Purchase more than 10% of any class of securities of any
issuer, except that all or substantially all of the assets of
the Fund may be invested in another registered investment
company having the same investment objective and substantially
similar investment policies as the Fund. All debt securities
and all preferred stocks are each considered as one class.
vi. Write (sell) put or call options, combinations thereof or
similar options; 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.
vii. Purchase securities of any issuer (other than obligations of,
or guaranteed by, the United States Government, 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, except that all or substantially all of the assets of
the Fund may be invested in another registered investment
company having the same investment objective and substantially
similar investment policies as the Fund.
The Small Cap Fund may not, as a non-fundamental policy:
i. Invest for the purpose of exercising control or management of
another issuer.
ii. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or
acquisition of assets.
iii. Invest more than 15% of its net assets in illiquid securities.
iv. 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 financial futures
and options transactions.
v. Purchase more than 10% of any class of securities of any
issuer, except that all or substantially all of the assets of
the Fund may be invested in another registered investment
company having the same investment objective and substantially
similar investment policies as the Fund. All debt securities
and all preferred stocks are each considered as one class.
vi. Write (sell) put or call options, combinations thereof or
similar options; 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.
vii. Purchase securities of any issuer (other than obligations of,
or guaranteed by, the United States Government, 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, except that all or substantially all of the assets of
the Fund may be invested in another registered investment
company having the same investment objective and substantially
similar investment policies as the Fund.
The Technology Fund may not, as a non-fundamental policy:
i. Invest for the purpose of exercising control or management of
another issuer.
ii. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or
reorganization, or by purchase in the open market of
securities of closed-end investment companies where no
underwriter or dealer's commission or profit, other than
customary broker's commission, is involved and only if
immediately thereafter not more than (i) 3% of the total
outstanding voting stock of such company is owned by it, (ii)
5% of its total assets would be invested in any one such
company, and (iii) 10% of total assets would be invested in
such securities.
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iii. Invest more than 15% of its net assets in illiquid securities.
iv. 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 financial futures
and options transactions.
v. Purchase more than 10% of any class of securities of any
issuer, except that all or substantially all of the assets of
the Fund may be invested in another registered investment
company having the same investment objective and substantially
similar investment policies as the Fund. All debt securities
and all preferred stocks are each considered as one class.
vi. 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.
vii. Purchase securities of any issuer (other than obligations of,
or guaranteed by, the United States Government, 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, except that all or substantially all of the assets of
the Fund may be invested in another registered investment
company having the same investment objective and substantially
similar investment policies as the Fund.
The Total Return Fund may not, as a non-fundamental policy:
i. Invest for the purpose of exercising control or management of
another issuer.
ii. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or
acquisition of assets.
iii. Invest more than 15% of its net assets in illiquid securities.
iv. 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 financial futures
and options transactions.
v. Pledge, hypothecate, mortgage or otherwise encumber more than
15% of its total assets and then only to secure borrowings
permitted by restriction number (2) above. (The collateral
arrangements with respect to options, financial futures and
delayed delivery transactions and any margin payments in
connection therewith are not deemed to be pledges or other
encumbrances.)
vi. Purchase more than 10% of any class of securities of any
issuer, except that all or substantially all of the assets of
the Fund may be invested in another registered investment
company having the same investment objective and substantially
similar investment policies as the Fund. All debt securities
and all preferred stocks are each considered as one class.
vii. Write (sell) put or call options, combinations thereof or
similar options; 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.
viii. Purchase securities of any issuer (other than obligations of,
or guaranteed by, the United States Government, 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, except that all or substantially all of the assets of
the Fund may be invested in another registered investment
company having the same investment objective and substantially
similar investment policies as the Fund.
Master/feeder fund structure. The Board of Trustees of each Fund has the
discretion to retain the current distribution arrangement for a Fund while
investing in a master fund in a master/feeder fund structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder fund"), instead
of investing directly in a portfolio of securities, invests most or all of its
investment assets in a separate registered investment company (the "master
fund") with substantially the same investment objective and policies as the
feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to
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convert to a feeder fund by selling all of its investments, which involves
brokerage and other transaction costs and realization of a taxable gain or loss,
or by contributing its assets to the master fund and avoiding transaction costs
and, if proper procedures are followed, the realization of taxable gain or loss.
INVESTMENT POLICIES AND TECHNIQUES
GENERAL. Descriptions in this Statement of Additional Information of a
particular investment practice or technique in which the Fund may engage (such
as hedging, etc.) or a financial instrument which the Fund may purchase (such as
options, forward foreign currency contracts, etc.) are meant to describe the
spectrum of investments that Scudder Kemper Investment, Inc. (the "Adviser"), in
its discretion, might, but is not required to, use in managing the Fund's
portfolio assets. The Adviser may, in its discretion, at any time employ such
practice, technique, or instrument for one or more funds but not for all funds
advised by it. Furthermore, it is possible that certain types of financial
instruments or investment techniques described herein may not be available,
permissible, economically feasible or effective for their intended purposes in
all markets. Certain practices, techniques, or instruments may not be principal
activities of the Fund, but to the extent employed, could from time to time have
a material impact on the Fund's performance.
Each Fund may engage in options transactions and may engage in financial futures
transactions in accordance with its respective investment objectives and
policies. The Blue Chip, Growth, Small Cap, Total Return and Value+Growth Funds
each may invest in put and call options but may not write (sell) options. The
Aggressive Growth and Technology Funds may write (sell) covered call options and
secured put options and may purchase put and call options. Each such 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 and also to hedge against the effects of market risks but not for
speculative purposes. The use of futures and options, and possible benefits and
attendant risks, are discussed below along with information concerning other
investment policies and techniques.
When a defensive position is deemed advisable, all or a significant portion of
each Fund's assets may be held temporarily in cash or defensive type securities,
such as high-grade debt securities, securities of the U.S. Government or its
agencies and high quality money market instruments, including repurchase
agreements. It is impossible to predict for how long such alternative strategies
may be utilized.
AGGRESSIVE GROWTH FUND. The Aggressive Growth Fund is a non-diversified
investment company that seeks capital appreciation through the use of aggressive
investment techniques. In seeking to achieve its objective, the Fund invests
primarily in equity securities of U.S. companies that the investment manager
believes offer the best opportunities for capital appreciation at any given
time. The investment manager pursues a flexible investment strategy in the
selection of securities, not limited to any particular investment sector,
industry or company size; and it may, depending upon market circumstances,
emphasize the securities of small, medium or large-sized companies from time to
time. The Fund may invest a significant portion of its assets in initial public
offerings ("IPOs"), which are typically securities of small, unseasoned issuers.
In addition, since the Fund is a non-diversified investment company, when
attractive investments are identified, the investment manager may establish
relatively large individual positions, sometimes representing more than 5% of
total assets. Therefore, the Fund has broader latitude in its selection of
securities than a typical equity mutual fund. There is no assurance that the
management strategy for the Fund will be successful or that the Fund will
achieve its objective.
The investment manager uses a disciplined approach to stock selection and
fundamental research to help it identify quality "growth" companies whose stocks
are selling at reasonable prices. Growth stocks are stocks of companies whose
earnings per share are expected by the investment manager to grow faster than
the market average. Growth stocks tend to trade at higher price to earnings
(P/E) ratios than the general market, but the investment manager believes that
the potential of such stocks for above average earnings more than justifies
their price. The investment manager relies heavily upon the fundamental analysis
and research of its large research staff, and will generally seek to invest in
growth companies whose value may not be fully recognized by the market at large.
Such companies may be:
o Expected to achieve accelerating earnings growth, perhaps due to strong
demand for their products or services;
o Undervalued, based upon price/earnings ratios, price/book value ratios
and other measures;
o Undergoing financial restructuring;
o Involved in takeover or arbitrage situations;
o Expected to benefit from evolving market cycles or changing economic
conditions; or
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o Representing special situations, such as changes in management or
favorable regulatory developments.
Because of the flexible nature of the Fund's investment policies, the Fund may
have a higher portfolio turnover than a typical equity mutual fund. To some
extent, the Fund may trade in securities for the short term. In addition, the
investment manager may use market volatility in an attempt to capitalize on
apparently unwarranted price fluctuations, both to purchase or increase
undervalued positions and to sell or reduce overvalued holdings. For example,
during market declines, the Fund may add to positions in favored securities,
while becoming more aggressive as it gradually reduces the number of companies
represented in its portfolio. Conversely, in rising markets, the Fund may reduce
or eliminate fully valued positions, while becoming more conservative as it
gradually increases the number of companies in its portfolio.
Although the Fund will not invest 25% or more of its total assets in any one
industry, it may, from time to time, invest 25% or more of its total assets in
one or more market sectors, such as the technology sector. If the Fund
concentrates its investments in a market sector, financial, economic, business
and other developments affecting issuers in that sector may have a greater
effect on the Fund than if it had not concentrated its assets in that sector.
Under normal conditions, the Fund will invest at least 65%, and may invest up to
100%, of its total assets in equity securities. 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 and rights exercisable for
equity securities.
The Fund may also purchase and write options, engage in financial futures
transactions, purchase foreign securities and engage in related foreign currency
transactions and lend its portfolio securities. The Fund may engage in short
sales against-the-box, although it is the Fund's current intention that no more
than 5% of its net assets will be at risk. When a defensive position is deemed
advisable, all or a significant portion of the Fund's assets may be held
temporarily in cash or defensive type securities, such as high-grade debt
securities, securities of the U.S. Government or its agencies and high quality
money market instruments, including repurchase agreements.
BLUE CHIP FUND. The Blue Chip Fund seeks growth of capital and of income. In
seeking to achieve its objective, the Fund will invest primarily in common
stocks of well capitalized, established companies that the Fund's investment
manager believes to have the potential for growth of capital, earnings and
dividends. Under normal market conditions, the Fund will invest at least 65%,
and may invest up to 100%, of its total assets in the common stocks of companies
with a market capitalization of at least $1 billion at the time of investment.
In pursuing its objective, the Fund will emphasize investments in common stocks
of large, well known, high quality companies. Companies of this general type are
often referred to as "Blue Chip" companies. Blue Chip companies are generally
identified by their substantial capitalization, established history of earnings
and dividends, easy access to credit, good industry position and superior
management structure. Blue Chip companies are believed to generally exhibit less
investment risk and less price volatility than companies lacking these high
quality characteristics, such as smaller, less seasoned companies. In addition,
the large market of publicly held shares for such companies and the generally
high trading volume in those shares results in a relatively high degree of
liquidity for such investments. The characteristics of high quality and high
liquidity of Blue Chip investments should make the market for such stocks
attractive to investors both within and outside the United States. The Fund will
generally attempt to avoid speculative securities or those with significant
speculative characteristics.
In general, the Fund will seek to invest in those established, high quality
companies whose industries are experiencing favorable secular or cyclical
change. Thus, the Fund in seeking its objective will endeavor to select its
investments from among high quality companies operating in the more attractive
industries.
As indicated above, the Fund's investment portfolio will normally consist
primarily of common stocks. The Fund may invest to a more limited extent in
preferred stocks, debt securities and securities convertible into or
exchangeable for common stocks, including warrants and rights, when they are
believed to offer opportunities for growth of capital and of income. The Fund
may also purchase options, engage in financial futures transactions, purchase
foreign securities, engage in related foreign currency transactions and lend its
portfolio securities. The Fund may engage in short sales against-the-box,
although it is the Fund's current intention that no more than 5% of its net
assets will be at risk. When, as a result of market conditions affecting Blue
Chip companies, a defensive position is deemed advisable to help preserve
capital, the Fund may temporarily invest without limit in high-grade debt
securities, securities of the U.S. Government and its agencies, and high quality
money market instruments, including repurchase agreements, or retain cash.
The Fund does not generally make investments for short-term profits, but it is
not restricted in policy with regard to portfolio turnover and will make changes
in its investment portfolio from time to time as business and economic
conditions and market prices may dictate and as its investment policy may
require.
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There are risks inherent in the investment in any security, including shares of
the Fund. The investment manager attempts to reduce risk through diversification
of the Fund's portfolio and fundamental research; however, there is no guarantee
that such efforts will be successful. The investment manager believes that there
are opportunities for growth of capital and growth of dividends from investments
in Blue Chip companies over time. The Fund's shares are intended for long-term
investment.
GROWTH FUND. The Growth Fund seeks growth of capital through professional
management and diversification of investments in securities it believes to have
potential for capital appreciation. In seeking to obtain capital appreciation,
the Fund may trade in securities for the short-term. To this extent, the Fund
will be engaged in trading operations based on short-term market considerations
as distinct from long-term investment based upon fundamental valuation of
securities. However, the Fund will emphasize fundamental research in attempting
to identify under-valued situations that it hopes will appreciate over the
longer term. The Fund's investment policy may involve a somewhat greater risk
than is inherent in the ordinary investment security. Since any income received
from such securities will be entirely incidental, an investor should not
consider a purchase of Fund shares as equivalent to a complete investment
program.
In seeking to achieve its objective, it will be the Fund's policy to invest
primarily in securities that it believes offer the potential for increasing the
Fund's total asset value. While it is anticipated that most investments will be
in common stocks of companies with above-average growth prospects, investments
may also be made to a limited degree in other common stocks and in convertible
securities (including warrants), such as bonds and preferred stocks. The Fund
may also purchase options, engage in financial futures transactions, purchase
foreign securities, engage in related foreign currency transactions and lend its
portfolio securities. There may also be times when a significant portion of the
Fund's assets may be held temporarily in cash or defensive type securities, such
as high-grade debt securities, securities of the U.S. Government or its agencies
and high quality money market instruments, including repurchase agreements,
depending upon the investment manager's analysis of business and economic
conditions and the outlook for security prices.
Some of the factors the Fund's management will consider in making its
investments are patterns of increasing growth in sales and earnings, the
development of new or improved products or services, favorable outlooks for
growth in the industry, the probability of increased operating efficiencies,
emphasis on research and development, cyclical conditions, or other signs that a
company is expected to show greater than average capital appreciation and
earnings growth.
SMALL CAP FUND. The Small Cap Fund seeks maximum appreciation of investors'
capital. Current income will not be a significant factor.
The Fund seeks attractive areas for investment opportunity arising from such
factors as technological advances, new marketing methods, and changes in the
economy and population. Currently, the investment manager believes that such
investment opportunities may be found among the following: (a) companies engaged
in high technology fields such as electronics, medical technology, computer
software and specialty retailing; (b) companies having a significantly improved
earnings outlook as the result of a changed economic environment, acquisitions,
mergers, new management, changed corporate strategy or product innovation; (c)
companies supplying new or rapidly growing services to consumers and businesses
in such fields as automation, data processing, communications, marketing and
finance; and (d) companies having innovative concepts or ideas.
At least 65% of the Fund's total assets normally will be invested in small
capitalization stocks similar in size to those comprising the Russell 2000
Index. The investment manager currently believes that investment in such
companies may offer greater opportunities for growth of capital than larger,
more established companies, but also involves certain special risks. Smaller
companies often have limited product lines, markets, or financial resources, and
they may be dependent upon one or a few key people for management. The
securities of such companies generally are subject to more abrupt or erratic
market movements and may be less liquid than securities of larger, more
established companies or the market averages in general.
The Fund's investment portfolio will normally consist primarily of common stocks
and securities convertible into or exchangeable for common stocks, including
warrants and rights. The Fund may also invest to a limited degree in preferred
stocks and debt securities when they are believed by the investment manager to
offer opportunities for capital growth. The Fund may also purchase options,
engage in financial futures transactions, purchase foreign securities, engage in
related foreign currency transactions and lend its portfolio securities. When a
defensive position is deemed advisable, it may, without limit, invest in
high-grade senior securities and securities of the U.S. Government and its
instrumentalities or retain cash or cash equivalents, including repurchase
agreements.
In the selection of investments, long-term capital appreciation will take
precedence over short range market fluctuations. The Fund does not intend to
engage actively in trading for short-term profits, although it may occasionally
make investments for short-term capital appreciation when such action is
believed to be desirable and consistent with sound investment procedure.
Generally, the Fund will make long-term rather than short-term investments.
Nevertheless, it may dispose of such
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investments at any time it may be deemed advisable because of a subsequent
change in the circumstances of a particular company or industry or in general
market or economic conditions. For example, a security initially purchased for
long-term growth potential may be sold at any time when it is determined that
future growth may not be at an acceptable rate or that there is a risk of
substantial decline in market price. The rate of portfolio turnover is not a
limiting factor when changes in investments are deemed appropriate. In addition,
market conditions, cash requirements for redemption and repurchase of Fund
shares or other factors could affect the portfolio turnover rate.
Since many of the securities in the Fund's portfolio may be considered
speculative in nature by traditional investment standards, substantially greater
than average market volatility and investment risk may be involved. There can be
no assurance that the Fund's shareholders will be protected from the risk of
loss inherent in security ownership.
TECHNOLOGY FUND. The Technology Fund seeks growth of capital. In seeking to
achieve its objective, the Fund will invest primarily in securities of companies
which the investment manager expects to benefit from technological advances and
improvements ("technology companies") with an emphasis on the securities of
companies that the investment manager believes have potential for long-term
capital growth. Receipt of income from such securities will be entirely
incidental. Technology companies include those whose processes, products or
services, in the judgment of the investment manager, are or may be expected to
be significantly benefited by scientific developments and the application of
technical advances in industry, manufacturing and commerce resulting from
improving technology in such fields as, for example, aerospace, chemistry,
electronics, genetic engineering, geology, information sciences (including
computers and computer software), metallurgy, medicine (including pharmacology,
biotechnology and biophysics) and oceanography. This investment policy permits
the investment manager to seek stocks having superior growth potential in
virtually any industry in which they may be found.
The investment manager currently believes that investments in smaller emerging
growth technology companies may offer greater opportunities for growth of
capital than investments in larger, more established technology companies.
However, such investments also involve certain special risks. Smaller companies
often have limited product lines, markets, or financial resources; and they may
be dependent upon one or a few persons for management. The securities of such
companies generally are subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general. Thus, investment by the Fund in smaller emerging growth technology
companies may expose investors to greater than average financial and market
risk. There is no assurance that the Fund's objective will be achieved.
The Fund's investment portfolio will normally consist primarily of common stocks
and securities convertible into or exchangeable for common stocks, including
warrants and rights. The Fund may also invest to a limited degree in preferred
stocks and debt securities when they are believed to offer opportunities for
capital growth. The Fund may also purchase and write options, engage in
financial futures transactions, purchase foreign securities, engage in related
foreign currency transactions and lend its portfolio securities. When a
defensive position is deemed advisable, the Fund may, without limit, invest in
high-grade senior securities and securities of the U.S. Government and its
instrumentalities or retain cash or cash equivalents, such as high quality money
market instruments, including repurchase agreements. The Fund's shares are
intended for long-term investment.
The Fund may invest up to 10% of its total assets in entities, such as limited
partnerships or trusts, that invest primarily in the securities of technology
companies. The investment manager believes that the flexibility to make limited
indirect investment in technology companies through entities such as limited
partnerships and trusts will provide the Fund with increased opportunities for
growth of capital. However, there is no assurance that such investments will be
profitable. Entities that invest in the securities of technology companies
normally have management fees and other costs that are in addition to those of
the Fund. Such fees and costs will reduce any returns directly attributable to
the underlying technology companies. The effect of these fees will be considered
by the investment manager in connection with any decision to invest in such
entities. Securities issued by these entities are normally privately placed,
restricted and illiquid.
The Fund purchases securities for long-term investment, but it is the investment
manager's belief that a sound investment program must be flexible in order to
meet changing conditions, and changes in holdings will be made whenever deemed
advisable.
TOTAL RETURN FUND. The Total Return Fund seeks the highest total return, a
combination of income and capital appreciation, consistent with reasonable risk.
The Fund will emphasize liberal current income in seeking its objective. The
Fund's investments will normally consist of domestic and foreign fixed income
and equity securities. Fixed income securities will include bonds and other debt
securities (such as U.S. and foreign Government securities and investment grade
and high yield corporate obligations) and preferred stocks, some of which may
have a call on common stocks through attached warrants or a conversion
privilege. The percentage of assets invested in specific categories of fixed
income and equity securities will vary from time to time depending upon the
judgment of management as to general market and economic
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conditions, trends in yields and interest rates and changes in fiscal or
monetary policies. The Fund may also purchase options, engage in financial
futures transactions, engage in foreign currency transactions and lend its
portfolio securities.
As noted above, the Fund may invest in high yield fixed income securities which
are in the lower rating categories and those which are unrated. Thus, the Fund
could invest in some instruments considered by the rating services to have
predominantly speculative characteristics. Investments in lower rated or
non-rated securities, while generally providing greater income and opportunity
for gain than investments in higher rated securities, entail greater risk of
loss of income and principal. Currently, it is anticipated that the Fund would
invest less than 35% of its total assets in high yield bonds.
The Fund does not make investments for short-term profits, but it is not
restricted in policy with regard to portfolio turnover and will make changes in
its investment portfolio from time to time as business and economic conditions
and market prices may dictate and as its investment policy may require.
VALUE+GROWTH FUND. The Value+Growth Fund seeks growth of capital through
professional management of a portfolio of growth and value stocks. These stocks
include stocks of large established companies, as well as stocks of small
companies. A secondary objective is the reduction of risk over a full market
cycle compared to a portfolio of only growth stocks or only value stocks.
Growth stocks are stocks of companies whose earnings per share are expected by
the investment manager to grow faster than the market average. Growth stocks
tend to trade at higher price to earnings (P/E) ratios than the general market,
but the investment manager believes that the potential of such stocks for above
average earnings more than justifies their price. Value stocks are considered
"bargain stocks" because they are perceived as undervalued, i.e., attractively
priced in relation to their earnings potential (low P/E ratios). Value stocks
typically have dividend yields higher than the average of the companies
represented in the Standard & Poor's 500 Stock Index.
The allocation between growth and value stocks in the Fund's portfolio will be
made by the investment manager's Quantitative Research Department with the help
of a proprietary model that evaluates macro-economic factors such as the
strength of the economy, interest rates and special factors concerning growth
and value stocks. Historically, the performance of growth and value stocks has
tended to be counter-cyclical, i.e., when one was in favor, the other was out of
favor relative to the equity market in general. Through the allocation process,
the investment manager will seek to weight the portfolio more heavily in the
type of stocks that are believed to present greater return opportunities at the
time. The neutral allocation between growth and value stocks would be 50%/50%.
The allocation to growth or value may be up to 75% at any time. Allocation
decisions are normally based upon long-term considerations and changes would
normally be expected to be gradual. There is no assurance that the allocation
process will improve investment results.
In managing the growth portion of the portfolio, the investment manager
emphasizes stock selection and fundamental research in seeking to enhance
long-term performance potential. The investment manager considers a number of
quantitative factors in considering whether to invest in a stock including
historical earnings growth, projected earnings growth, return on equity, debt to
capital and other balance sheet data. In managing the value portion of the
portfolio, the investment manager seeks stocks it believes to be undervalued.
The factors considered include price-to-earnings ratios, price-to-book ratios,
price-to-cash-flow, dividend growth rates, earnings estimates and growth rates,
return on equity and other balance sheet data.
Although it is anticipated that the Fund will invest primarily in common stocks
of domestic companies, the Fund may also purchase convertible securities, such
as bonds and preferred stocks (including warrants and rights). The Fund may also
purchase options, engage in financial futures transactions, purchase foreign
securities, engage in related foreign currency transactions and lend its
portfolio securities. When a defensive position is deemed advisable, all or a
significant portion of the Fund's assets may be held temporarily in cash or
defensive type securities, such as high-grade debt securities, securities of the
U.S. Government or its agencies and high quality money market instruments,
including repurchase agreements.
The Fund does not generally make investments for short-term profits, but it is
not restricted in policy with regard to portfolio turnover and will make changes
in its investment portfolio from time to time as business and economic
conditions and market prices may dictate and as its investment policy may
require.
COMMON STOCKS. Under normal circumstances, the Funds invest primarily in common
stocks. Common stock is issued by companies to raise cash for business purposes
and represents a proportionate interest in the issuing companies. Therefore, the
Funds participate in the success or failure of any company in which it holds
stock. The market values of common stock can fluctuate significantly, reflecting
the business performance of the issuing company, investor perception and general
economic or financial market movements. Smaller companies are especially
sensitive to these factors and may even become valueless. Despite the risk of
price volatility, however, common stocks also offer the greatest potential for
gain on investment, compared to other classes of financial assets such as bonds
or cash equivalents.
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NON-DIVERSIFIED. The 1940 Act classifies investment companies as either
"diversified" or "non-diversified." All of the Funds, except the Aggressive
Growth Fund, are diversified funds under the 1940 Act. As a non-diversified
fund, the Aggressive Growth Fund may invest a greater proportion of its assets
in the obligations of a small number of issuers, and may be subject to greater
risk and substantial losses as a result of changes in the financial condition or
the market's assessment of the issuers. While not limited by the 1940 Act as to
the proportion of its assets that it may invest in obligations of a single
issuer, the Aggressive Growth Fund will comply with the diversification
requirements imposed by the Internal Revenue Code for qualification as a
regulated investment company. Accordingly, the Aggressive Growth Fund will not:
(i) purchase more than 10% of any class of voting securities of any issuer; (ii)
with respect to 50% of its total assets, purchase securities of any issuer
(other than U.S. Government Securities) if, as a result, more than 5% of the
total value of the Fund's assets would be invested in securities of that issuer;
and (iii) invest more than 25% of its total assets in a single issuer (other
than U.S. Government Securities). The Aggressive Growth Fund does not currently
expect that it would invest more than 10% of its total assets in a single issuer
(other than U.S. Government Securities).
FOREIGN SECURITIES. The Funds invest primarily in securities that are publicly
traded in the United States; but, they have discretion to invest a portion of
their assets in foreign securities that are traded principally in securities
markets outside the United States. The Funds may also invest without limit in
U.S. Dollar denominated American Depository Receipts ("ADRs"), which are bought
and sold in the United States. In connection with their foreign securities
investments, the Funds may, to a limited extent, engage in foreign currency
exchange, options and futures transactions as a hedge and not for speculation.
Additional information concerning foreign securities and related techniques is
contained under "Additional Investment Information."
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.
Foreign securities may be subject to foreign government taxes that reduce their
attractiveness. Other risks of investing in such securities include political or
economic instability in the country involved, the difficulty of predicting
international trade patterns and the possible imposition of exchange controls.
The prices of such securities may be more volatile than those of domestic
securities and the markets for such securities may be less liquid. In addition,
there may be less publicly available information about foreign issuers than
about domestic issuers. Many foreign issuers are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic issuers. There is generally less regulation of stock
exchanges, brokers, banks and listed companies abroad than in the United States.
With respect to certain foreign countries, there is a possibility of
expropriation or diplomatic developments that could affect investment in these
countries.
EMERGING MARKETS. While each Fund's investments in foreign securities will be
principally in developed countries, a Fund may make investments in developing or
"emerging" countries, which involve exposure to economic structures that are
generally less diverse and mature than in the United States, and to political
systems that may be less stable. A developing or emerging market country can be
considered to be a country that is in the initial stages of its
industrialization cycle. Currently, emerging markets generally include every
country in the world other than the United States, Canada, Japan, Australia, New
Zealand, Hong Kong, Singapore and most Western European countries. Currently,
investing in many emerging markets may not be desirable or feasible because of
the lack of adequate custody arrangements for a 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, a Fund may
expand and further broaden the group of emerging markets in which it invests. In
the past, markets of developing or emerging market countries have been more
volatile than the markets of developed countries; however, such markets often
have provided higher rates of return to investors. The investment manager
believes that these characteristics can be expected to continue in the future.
Many of the risks described above relating to foreign securities generally will
be greater for emerging markets than for developed countries. For instance,
economies in individual developing markets may differ favorably or unfavorably
from the U.S. economy in such respects as growth of domestic product, rates of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency and balance of payments positions. Many emerging markets have
experienced substantial rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on the economies and securities markets of certain developing markets.
Economies in emerging markets generally are dependent heavily upon international
trade and, accordingly, have been and may continue to be affected adversely by
trade barriers, exchange controls, managed adjustments in relative currency
values and other protectionist measures imposed or negotiated by the countries
with which they trade. These economies also have been and may continue to be
affected adversely
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by economic conditions in the countries with which they trade. Also, the
securities markets of developing countries are substantially smaller, less
developed, less liquid and more volatile than the securities markets of the
United States and other more developed countries. Disclosure, regulatory and
accounting standards in many respects are less stringent than in the United
States and other developed markets. There also may be a lower level of
monitoring and regulation of developing markets and the activities of investors
in such markets, and enforcement of existing regulations has been extremely
limited.
In addition, brokerage commissions, custodial services and other costs relating
to investment in foreign markets generally are more expensive than in the United
States; this is particularly true with respect to emerging markets. Such markets
have different settlement and clearance procedures. In certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Such settlement problems may cause emerging market securities to be illiquid.
The inability of a 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 a Fund due to subsequent declines in value of the
portfolio security or, if a 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 a 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 a Fund's portfolio securities in such
markets may not be readily available. At such times a 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 a 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 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. A Fund's investments in the
securities of privatized enterprises may include privately negotiated
investments in a government- or state-owned or controlled company or enterprise
that has not yet conducted an initial equity offering, investments in the
initial offering of equity securities of a state enterprise or former state
enterprise and investments in the securities of a state enterprise following its
initial equity offering.
In certain jurisdictions, the ability of foreign entities, such as a 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 privatization will be successful or that
governments will not re-nationalize enterprises that have been privatized.
In the case of the enterprises in which a 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 of management. Such
reorganizations are made in an attempt to better enable these enterprises to
compete in the private sector. However, certain reorganizations could result in
a management team that does not function as well as the enterprise's prior
management and may have a negative effect on such enterprise. In addition, the
privatization of an enterprise by its government may occur over a number of
years, with the government continuing to hold a controlling position in the
enterprise even after the initial equity offering for the enterprise.
Prior to privatization, most of the state enterprises in which a 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. 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
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deposited in the domestic bank or a correspondent bank. ADRs do not eliminate
all the risk inherent in investing in the securities of foreign issuers, such as
changes in foreign currency exchange rates. However, by investing in ADRs rather
than directly in foreign issuers' stock, the Fund avoids currency risks during
the settlement period. In general, there is a large, liquid market in the United
States for most ADRs. The Funds may also invest in European Depository Receipts
("EDRs"), which are receipts evidencing an arrangement with a European bank
similar to that for ADRs and are designed for use in the European securities
markets. EDRs are not necessarily denominated in the currency of the underlying
security.
FIXED INCOME. Since most foreign fixed income securities are not rated, a Fund
(principally the Total Return Fund) will invest in foreign fixed income
securities based on the investment manager's analysis without relying on
published ratings. Since such investments will be based upon the investment
manager's analysis rather than upon published ratings, achievement of a Fund's
goals may depend more upon the abilities of the investment manager than would
otherwise be the case.
The value of the foreign fixed income securities held by a Fund, and thus the
net asset value of the Fund's shares, generally will fluctuate with (a) changes
in the perceived creditworthiness of the issuers of those securities, (b)
movements in interest rates, and (c) changes in the relative values of the
currencies in which a Fund's investments in fixed income securities are
denominated with respect to the U.S. Dollar. The extent of the fluctuation will
depend on various factors, such as the average maturity of a Fund's investments
in foreign fixed income securities, and the extent to which a Fund hedges its
interest rate, credit and currency exchange rate risks. Many of the foreign
fixed income obligations in which a Fund will invest will have long maturities.
A longer average maturity generally is associated with a higher level of
volatility in the market value of such securities in response to changes in
market conditions.
Investments in sovereign debt, including Brady Bonds, involve special risks.
Brady Bonds are debt securities issued under a plan implemented to other debtor
nations to restructure their outstanding commercial bank indebtedness. Foreign
governmental issuers of debt or the governmental authorities that control the
repayment of the debt may be unable or unwilling to repay principal or pay
interest when due. In the event of default, there may be limited or no legal
recourse in that, generally, remedies for defaults must be pursued in the courts
of the defaulting party. Political conditions, especially a sovereign entity's
willingness to meet the terms of its fixed income securities, are of
considerable significance. Also, there can be no assurance that the holders of
commercial bank loans to the same sovereign entity may not contest payments to
the holders of sovereign debt in the event of default under commercial bank loan
agreements. In addition, there is no bankruptcy proceeding with respect to
sovereign debt on which a sovereign has defaulted, and a Fund may be unable to
collect all or any part of its investment in a particular issue.
Foreign investment in certain sovereign debt is restricted or controlled to
varying degrees, including requiring governmental approval for the repatriation
of income, capital or proceed of sales by foreign investors. These restrictions
or controls may at times limit or preclude foreign investment in certain
sovereign debt or increase the costs and expenses of a Fund. A significant
portion of the sovereign debt in which a Fund may invest is issued as part of
debt restructuring and such debt is to be considered speculative. There is a
history of defaults with respect to commercial bank loans by public and private
entities issuing Brady Bonds. All or a portion of the interest payments and/or
principal repayment with respect to Brady Bonds may be uncollateralized.
HIGH YIELD (HIGH RISK) BONDS. The Total Return Fund may invest a portion of its
assets in fixed income securities that are in the lower rating categories of
recognized rating agencies or are non-rated. These lower rated or non-rated
fixed income securities are considered, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation and generally will involve more credit risk than
securities in the higher rating categories.
The market values of such securities tend to reflect individual corporate
developments to a greater extent than do those of higher rated securities, which
react primarily to fluctuations in the general level of interest rates. Such
lower rated securities also tend to be more sensitive to economic conditions
than are higher rated securities. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, regarding lower rated bonds may
depress the prices for such securities. These and other factors adversely
affecting the market value of high yield securities will adversely affect the
Fund's net asset value. Although some risk is inherent in all securities
ownership, holders of fixed income securities have a claim on the assets of the
issuer prior to the holders of common stock. Therefore, an investment in fixed
income securities generally entails less risk than an investment in common stock
of the same issuer.
High yield securities frequently are issued by corporations in the growth stage
of their development. They may also be issued in connection with a corporate
reorganization or a corporate takeover. Companies that issue such high yielding
securities often are highly leveraged and may not have available to them more
traditional methods of financing. Therefore, the risk associated with acquiring
the securities of such issuers generally is greater than is the case with higher
rated securities. For example, during an economic downturn or recession, highly
leveraged issuers of high yield securities may experience financial stress.
During such periods, such issuers may not have sufficient revenues to meet their
interest payment
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obligations. The issuer's ability to service its debt obligations may also be
adversely affected by specific corporate developments, or the issuer's inability
to meet specific projected business forecasts, or the unavailability of
additional financing. The risk of loss from default by the issuer is
significantly greater for the holders of high yielding securities because such
securities are generally unsecured and are often subordinated to other creditors
of the issuer.
The Fund may have difficulty disposing of certain high yield securities because
they may have a thin trading market. The lack of a liquid secondary market may
have an adverse effect on market price and the Fund's ability to dispose of
particular issues and may also make it more difficult for the Fund to obtain
accurate market quotations for purposes of valuing these assets.
Zero coupon securities and pay-in-kind bonds involve additional special
considerations. Zero coupon securities are debt obligations that do not entitle
the holder to any periodic payments of interest prior to maturity or a specified
cash payment date when the securities begin paying current interest (the "cash
payment date") and therefore are issued and traded at a discount from their face
amount or par value. The market prices of zero coupon securities are generally
more volatile than the market prices of securities that pay interest
periodically and are likely to respond to changes in interest rates to a greater
degree than do securities paying interest currently with similar maturities and
credit quality. Zero coupon, pay-in-kind or deferred interest bonds carry
additional risk in that unlike bonds that pay interest throughout the period to
maturity, the Fund will realize no cash until the cash payment date unless a
portion of such securities is sold and, if the issuer defaults, the Fund may
obtain no return at all on its investment.
Additional information concerning high yield securities appears under
"Appendix--Ratings of Fixed Income Investments."
OPTIONS ON SECURITIES. The Aggressive Growth and Technology Funds may write
(sell) "covered" call options on securities as long as the Fund 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 Aggressive Growth and
Technology Funds 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 Funds may write (for the Technology Funds) or purchase
spread options, which are options for which the exercise price may be a fixed
dollar spread or yield spread between the security underlying the option and
another security that is used as a bench mark. The exercise price of an option
may be below, equal to or above the current market value of the underlying
security at the time the option is written. The buyer of a put who also owns the
related security is protected by ownership of a put option against any decline
in that security's price below the exercise price less the amount paid for the
option. The ability to purchase put options allows a Fund to protect capital
gains in an appreciated security it owns, without being required to actually
sell that security. At times a Fund would like to establish a position in a
security upon which call options are available. By purchasing a call option, a
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 a 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 security
rise in value, and the secured put writer retains the risk of loss should the
underlying security decline in value. For the covered call writer, substantial
appreciation in the value of the underlying security would result in the
security being "called away." For the secured put writer, substantial
depreciation in the value of the underlying security would result in the
security being "put to" the writer. If a covered call option expires
unexercised, the writer realizes a gain in the amount of the premium received.
If the covered call option writer has to sell the underlying security because of
the exercise of a call option, it realizes a gain or loss from the sale of the
underlying security, with the proceeds being increased by the amount of the
premium.
If a secured put option expires unexercised, the writer realizes a gain from the
amount of the premium, plus the interest income on the eligible securities that
have been segregated. If the secured put writer has to buy the underlying
security because of the exercise of the put option, the secured put writer
incurs an unrealized loss to the extent that the current market
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value of the underlying security is less than the exercise price of the put
option. However, this would be offset in whole or in part by gain from the
premium received and any interest income earned on the eligible securities that
have been segregated.
EXCHANGE-LISTED OPTIONS. The Funds may deal in exchange-listed options. Exchange
listed options are issued by a regulated intermediary such as the Options
Clearing Corporation ("OCC"), which guarantees the performance of the
obligations of the parties to such options. The discussion below uses the OCC as
an example, but is also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally settle
by physical delivery of the underlying security or currency, although in the
future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
A Fund's ability to close out its position as a purchaser or seller of an OCC or
exchange listed put or call option is dependent, in part, upon the liquidity of
the option market. Among the possible reasons for the absence of a liquid option
market on an exchange are: (i) insufficient trading interest in certain options;
(ii) restrictions on transactions imposed by an exchange; (iii) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities including reaching daily price
limits; (iv) interruption of the normal operations of the OCC or an exchange;
(v) inadequacy of the facilities of an exchange or OCC to handle current trading
volume; or (vi) a decision by one or more exchanges to discontinue the trading
of options (or a particular class or series of options), in which event the
relevant market for that option on that exchange would cease to exist, although
outstanding options on that exchange would generally continue to be exercisable
in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OVER THE COUNTER OPTIONS. The Funds may also deal in over-the-counter traded
options ("OTC options"). OTC options differ from exchange traded options in
several respects. They are transacted directly with dealers and not with a
clearing corporation, and there is a risk of nonperformance by the dealer as a
result of the insolvency of such dealer or otherwise, in which event a 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, a 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 a 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 Funds understand the position of the staff of the Securities and Exchange
Commission ("SEC") to be that purchased OTC options and the assets used as
"cover" for written OTC options are illiquid securities. The investment manager
disagrees with this position and has found the dealers with which it engages in
OTC options transactions generally agreeable to and capable of entering into
closing transactions. The Funds have adopted procedures for engaging in OTC
options for the purpose of reducing any potential adverse effect of such
transactions upon the liquidity of the Funds' portfolios. A brief description of
such procedures is set forth below.
A Fund will only engage in OTC options transactions with dealers that have been
specifically approved by the investment manager pursuant to procedures adopted
by the Fund's Board of Trustees. The investment manager believes that the
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<PAGE>
approved dealers should be able to enter into closing transactions if necessary
and, therefore, present minimal credit risks to a Fund. The investment manager
will monitor the credit-worthiness of the approved dealers on an ongoing basis.
A Fund currently will not engage in OTC options transactions if the amount
invested by the Fund in OTC options, plus (for the Aggressive Growth and
Technology Funds) 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 Aggressive Growth and Technology Funds anticipate entering into agreements
with dealers to which the Fund sells OTC options. Under these agreements either
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 either Fund to repurchase a specific OTC
option written by the Fund, the "liquidity charge" will be the current market
value of the assets serving as "cover" for such OTC option.
OPTIONS ON SECURITIES INDICES. The Blue Chip, Growth, Small Cap, Total Return
and Value+Growth Funds may purchase, and the Aggressive Growth and Technology
Funds 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, a 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 such difference between the closing price of the index and the exercise
price of the option. The writer of the option is obligated, in return for the
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 Aggressive Growth or Technology Fund writes an option on a securities
index, it will segregate, and mark-to-market, eligible securities to the extent
required by applicable regulations. In addition, where a 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.
A Fund may also purchase and sell options on other appropriate indices, as
available, such as foreign currency indices. Options on futures contracts and
index options involve risks similar to those risks relating to transactions in
financial futures contracts described below. Also, an option purchased by a Fund
may expire worthless, in which case the Fund would lose the premium paid
therefor.
FINANCIAL FUTURES CONTRACTS. The Funds 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 futures contracts by their terms call for the actual delivery or
acquisition of securities or other assets, in most cases a party will close out
the contractual commitment before delivery without having to make or take
delivery of the underlying assets by purchasing (or selling, as the case may be)
on a commodities exchange an identical futures contract calling for delivery in
the same month. Such a transaction, if effected through a member of an exchange,
cancels the
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<PAGE>
obligation to make or take delivery of the underlying securities or other
assets. All transactions in the futures market are made, offset or fulfilled
through a clearing house associated with the exchange on which the contracts are
traded. A Fund will incur brokerage fees when it purchases or sells contracts,
and will be required to maintain margin deposits. At the time a 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 a 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, because, from the point of view of speculators, the
margin requirements in the futures markets are less onerous than margin
requirements in the cash market, increased participation by speculators in the
futures market could cause temporary price distortions. Due to the possibility
of price distortions in the futures market and because of the imperfect
correlation between movements in the prices of securities or other assets and
movements in the prices of futures contracts, a correct forecast of market
trends by the investment manager may still not result in a successful hedging
transaction. If any of these events should occur, the Fund could lose money on
the financial futures contracts and also on the value of its portfolio assets.
OPTIONS ON FINANCIAL FUTURES CONTRACTS. A 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. A 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. A 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 a Fund may expire worthless, in
which case the Fund would lose the premium paid therefor.
FOREIGN CURRENCY OPTIONS. The Funds 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 a 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 had
entered into a contract to purchase a security denominated in a foreign currency
and had purchased a foreign currency call to hedge against a rise in value of
the currency but instead the currency had depreciated in value between the date
of purchase and the settlement date, the 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 their financial futures
transactions (see "Financial Futures Contracts" and "Options on Financial
Futures Contracts" above), the Funds may use foreign currency futures contracts
and options on such futures contracts. Through the purchase or sale of such
contracts, a 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
17
<PAGE>
exchanges. It is anticipated that such contracts may provide greater liquidity
and lower cost than forward foreign currency exchange contracts.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days ("term") from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
These contracts are traded directly between currency traders (usually large
commercial banks) and their customers. The investment manager believes that it
is important to have the flexibility to enter into such forward contracts when
it determines that to do so is in the best interests of a Fund. A Fund will not
speculate in foreign currency exchange.
If a 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 a 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 that might result should the value of such currency increase. A
Fund may 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.
A 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. A 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.
A 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, each 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.
The types of derivatives used by each Fund and the techniques employed by the
investment manager may change over time as new derivatives and strategies are
developed or regulatory changes occur.
REGULATORY RESTRICTIONS. To the extent required to comply with applicable
regulation, when purchasing a futures contract, writing a put option or entering
into a forward currency exchange purchase, a Fund will maintain eligible
securities in a segregated account. A Fund will use cover in connection with
selling a futures contract. A 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 that the Fund holds or intends to purchase.
SHORT SALES AGAINST-THE-BOX. The Aggressive Growth, and Blue Chip Funds may make
short sales against-the-box for the purpose of, but not limited to, deferring
realization of loss when deemed advantageous for federal income tax purposes. A
short sale "against-the-box" is a short sale in which a 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. A
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. Each Fund does not currently intend, however, to
engage in such short sales to the extent that more than 5% of its net assets
will be held as collateral therefor during the current year.
REPURCHASE AGREEMENTS. A 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
18
<PAGE>
expenses in enforcing its rights, and could experience losses, including a
decline in the value of the underlying securities and loss of income. The
securities underlying a repurchase agreement will be marked-to-market every
business day so that the value of such securities is at least equal to the
investment value of the repurchase agreement, including any accrued interest
thereon. No Fund currently intends to invest more than 5% of its net assets in
repurchase agreements during the current year.
BORROWING. The Aggressive Growth and Blue Chip Funds each may not borrow money
except as a temporary measure for extraordinary or emergency purposes and not
for leverage purposes, and then only in an amount up to one-third of the value
of its total assets in order to meet redemption requests without immediately
selling any portfolio securities or other assets. (If, for any reason, the
current value of a Fund's total assets fall 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 Blue Chip Fund and Total Return Funds may pledge up to 15% of
its total assets to secure any such borrowings. The Growth, Quantitative, Small
Cap, Technology, Total Return and Value+Growth Funds each may not borrow money
except from temporary or emergency purposes (but not for the purchase of
investments) and then only in an amount not to exceed 5% of its net assets, and
may not pledge their assets in an amount exceeding the amount of the borrowings
secured by such pledge. The Aggressive Growth Fund may not pledge its assets
except to secure permitted borrowings.
ILLIQUID SECURITIES. A 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 a 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. Each 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 Funds. 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.
LENDING OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, the Funds may lend securities (principally to broker-dealers)
without limit where such loans are callable at any time and are continuously
secured by segregated collateral (cash or U.S. Government securities) equal to
no less than the market value, determined daily, of the securities loaned. The
Funds will receive amounts equal to dividends or interest on the securities
loaned. The Funds will also earn income for having made the loan. Any cash
collateral pursuant to these loans will be invested in short-term money market
instruments. As with other extensions of credit, there are risks of delay in
recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. However, the loans would be made only to firms
deemed by the investment manager to be of good standing, and when the investment
manager believes the potential earnings justify the attendant risk. Management
will limit such lending to not more than one-third of the value of a Fund's
total assets.
PORTFOLIO TRANSACTIONS
Brokerage
Allocation of brokerage is supervised by the Adviser.
The primary objective of the Adviser in placing orders for the purchase and sale
of securities for a Fund is to obtain the most favorable net results, taking
into account such factors as price, commission where applicable, size of order,
difficulty of execution and skill required of the executing broker/dealer. The
Adviser seeks to evaluate the overall reasonableness of brokerage commissions
paid (to the extent applicable) through the familiarity of the Distributor with
commissions charged on comparable transactions, as well as by comparing
commissions paid by a Fund to reported commissions paid by others. The Adviser
routinely reviews commission rates, execution and settlement services performed
and makes internal and external comparisons.
The Funds' purchases and sales of fixed-income securities are generally placed
by the Adviser with primary market makers for these securities on a net basis,
without any brokerage commission being paid by a Fund. Trading does, however,
involve transaction costs. Transactions with dealers serving as primary market
makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most favorable
net results, it is the Adviser's practice to place such orders with
broker/dealers who supply brokerage and research services to the
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<PAGE>
Adviser or a Fund. The term "research services" includes advice as to the value
of securities; the advisability of investing in, purchasing or selling
securities; the availability of securities or purchasers or sellers of
securities; and analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts.
The Adviser is authorized when placing portfolio transactions, if applicable,
for a Fund to pay a brokerage commission in excess of that which another broker
might charge for executing the same transaction on account of execution of
services and the receipt of research services. services. The Adviser has
negotiated arrangements, which are not applicable to most fixed-income
transactions, with certain broker/dealers pursuant to which a broker/dealer will
provide research services, to the Adviser or the Fund in exchange for the
direction by the Adviser of brokerage transactions to the broker/dealer. These
arrangements regarding receipt of research services generally apply to equity
security transactions. The Adviser may place orders with broker/dealers on the
basis that the broker/dealer has or has not sold shares of a Fund. In effecting
transactions in over-the-counter securities, orders are placed with the
principal market makers for the security being traded unless, after exercising
care, it appears that more favorable results are available elsewhere.
To the maximum extent feasible, it is expected that the Adviser will place
orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker-dealer and a subsidiary of the Adviser; the
Distributor will place orders on behalf of the Funds with issuers, underwriters
or other brokers and dealers. The Distributor will not receive any commission,
fee or other remuneration from the Funds for this service.
Although certain research services from broker/dealers may be useful to a Fund
and to the Adviser, it is the opinion of the Adviser that such information only
supplements the Adviser's own research effort since the information must still
be analyzed, weighed and reviewed by the Adviser's staff. Such information may
be useful to the Adviser in providing services to clients other than a Fund, and
not all such information is used by the Adviser in connection with a Fund.
Conversely, such information provided to the Adviser by broker/dealers through
whom other clients of the Adviser effect securities transactions may be useful
to the Adviser in providing services to a Fund.
Each Fund's Board members review from time to time whether the recapture for the
benefit of a Fund of some portion of the brokerage commissions or similar fees
paid by a Fund on portfolio transactions is legally permissible and advisable.
Each Fund's average portfolio turnover rate is the ratio of the lesser of sales
or purchases to the monthly average value of the portfolio securities owned
during the year, excluding all securities with maturities or expiration dates at
the time of acquisition of one year or less. A higher rate involves greater
brokerage transaction expenses to a Fund and may result in the realization of
net capital gains, which would be taxable to shareholders when distributed.
Purchases and sales are made for a Fund's portfolio whenever necessary, in
management's opinion, to meet a Fund's objective.
Brokerage Commissions
The table below shows total brokerage commissions paid by each Fund for the last
three fiscal years and, for the most recent fiscal year, the percentage thereof
that was allocated to firms based upon research information provided.
<TABLE>
<CAPTION>
Allocated to Firms Based on
Fund Fiscal 1998 Research in Fiscal 1998 Fiscal 1997 Fiscal 1996
- ---- ----------- ----------------------- ----------- -----------
<S> <C> <C> <C>
Aggressive $338,000 77% $ 27,000* N.A.
Blue Chip $2,371,000 90%** $ 2,664,000 $ 1,661,000
Growth $7,022,000 93% $ 11,676,000 $ 9,535,000
Small Cap $4,592,000 96% $ 6,618,000 $ 6,362,000
Technology $2,613,000 96% $ 3,329,000 $ 4,438,000
Total Return $5,321,000 87% $ 7,170,000 $ 6,335,000
Value+Growth $282,000 84% $ 142,000 $ 66,000
</TABLE>
* For the period December 31, 1996 to September 30, 1997.
** Estimated.
INVESTMENT MANAGER AND UNDERWRITER
INVESTMENT MANAGER. Scudder Kemper Investments, Inc. ("Scudder Kemper" or "the
Adviser"), 345 Park Avenue, New York, New York, is each Fund's investment
manager. Scudder Kemper is approximately 70% owned by Zurich Financial Services,
a newly formed global insurance and financial services company. The balance of
the Adviser is owned by its officers and employees. Pursuant to investment
management agreements, Scudder Kemper acts as each Fund's investment Adviser,
manages its investments, administers its business affairs, furnishes office
facilities and equipment,
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<PAGE>
provides clerical and administrative services, and permits any of its officers
or employees to serve without compensation as trustees or officers of a Fund if
elected to such positions. Each investment management agreement provides that
each Fund pays the charges and expenses of its operations, including the fees
and expenses of the trustees (except those who are affiliated with officers or
employees of Scudder Kemper), independent auditors, counsel, custodian and
transfer agent and the cost of share certificates, reports and notices to
shareholders, brokerage commissions or transaction costs, costs of calculating
net asset value and maintaining all accounting records related thereto, taxes
and membership dues. Each Fund bears the expenses of registration of its shares
with the SEC, while Kemper Distributors, Inc. ("KDI"), as principal underwriter,
pays the cost of qualifying and maintaining the qualification of each Fund's
shares for sale under the securities laws of the various states.
The investment management agreements provide that Scudder Kemper shall not be
liable for any error of judgment or of law, or for any loss suffered by a Fund
in connection with the matters to which the agreements relate, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
Scudder Kemper in the performance of its obligations and duties, or by reason of
its reckless disregard of its obligations and duties under each agreement.
Each Fund's investment management agreement continues in effect from year to
year so long as its continuation is approved at least annually by a majority of
the trustees who are not parties to such agreement or interested persons of any
such party except in their capacity as trustees of the Fund and by the
shareholders of the Fund subject thereto or the Board of Trustees. Each 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 subject thereto, and will terminate automatically upon assignment. If
additional Funds become subject to an investment management agreement, the
provisions concerning continuation, amendment and termination shall be on a Fund
by Fund basis. Additional Funds may be subject to a different agreement.
Responsibility for overall management of each Fund rests with its Board of
Trustees and officers. Professional investment supervision is provided by
Scudder Kemper. The investment management agreements provide that Scudder Kemper
shall act as each Fund's investment Adviser, manage its investments and provide
it with various services and facilities.
On December 31, 1997, pursuant to the terms of an agreement, Scudder, Stevens &
Clark, Inc. ("Scudder") and Zurich Insurance Company ("Zurich") formed a new
global organization by combining Scudder with Zurich Kemper Investments, Inc., a
former subsidiary of Zurich and the former investment manager to each Fund, and
Scudder changed its name to Scudder Kemper Investments, Inc. As a result of the
transaction, Zurich owned approximately 70% of the Adviser, with the balance
owned by the Adviser's officers and employees.
On September 7, 1998, the businesses of Zurich (including Zurich's 70% interest
in Scudder Kemper) and the financial services businesses of B.A.T Industries
p.l.c. ("B.A.T") were combined to form a new global insurance and financial
services company known as Zurich Financial Services, Inc. By way of a dual
holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services, Inc., with the balance initially
owned by former B.A.T shareholders.
Upon consummation of this transaction, each Fund's existing investment
management agreement with Scudder Kemper was deemed to have been assigned and,
therefore, terminated. The Board has approved a new investment management
agreement with Scudder Kemper, which is substantially identical to the current
investment management agreement, except for the date of execution and
termination. This agreement became effective upon the termination of the then
current investment management agreement and was approved by shareholders at a
special meeting .
The Funds (other than the Aggressive Growth Fund and the Small Cap Fund) pay
Scudder Kemper investment management fees, payable monthly, at 1/12 of the
annual rates shown below. The Aggressive Growth Fund and the Small Cap Fund each
pay a base annual management fee, payable monthly, at the annual rate of 0.65%
of the average daily net assets of the Fund. This base fee is subject to upward
or downward adjustment on the basis of the investment performance of the Class A
shares of the Fund compared with the performance of the Standard & Poor's 500
Stock Index as described herein. After the effect of the adjustment, the
management fee rate for the Aggressive Growth Fund may range between 0.45% and
0.85% and the management fee rate for the Small Cap Fund may range between 0.35%
and 0.95%.
21
<PAGE>
<TABLE>
<CAPTION>
Blue Chip,
Growth,
Technology
and Total Value+
Return Growth
Average Daily Net Assets Funds Fund
- ------------------------ ----- ----
<S> <C> <C>
$0 - $250 million 0.58% 0.72%
$250 million - $1 billion 0.55 0.69
$1 billion - $2.5 billion 0.53 0.66
$2.5 billion - $5 billion 0.51 0.64
$5 billion - $7.5 billion 0.48 0.60
$7.5 billion - $10 billion 0.46 0.58
$10 billion - $12.5 billion 0.44 0.56
Over $12.5 billion 0.42 0.54
</TABLE>
The Small Cap Fund pays a base annual investment management fee, payable
monthly, at the rate of 0.65% of the average daily net assets of the Fund. This
base fee is subject to upward or downward adjustment on the basis of the
investment performance of the Class A shares of the Fund as compared with the
performance of the Standard & Poor's 500 Stock Index (the "Index"). The Small
Cap Fund will pay an additional monthly fee at an annual rate of 0.05% of such
average daily net assets for each percentage point (fractions to be prorated) by
which the performance of the Class A shares of the Fund exceeds that of the
Index for the immediately preceding twelve months; provided that such additional
monthly fee shall not exceed 1/12 of 0.30% of the average daily net assets.
Conversely, the compensation payable by the Small Cap Fund will be reduced by an
annual rate of 0.05% of such average daily net assets for each percentage point
(fractions to be prorated) by which the performance of the Class A shares of the
Fund falls below that of the Index, provided that such reduction in the monthly
fee shall not exceed 1/12 of 0.30% of the average net assets. The total fee on
an annual basis can range from 0.35% to 0.95% of average daily net assets. The
Small Cap Fund's investment performance during any twelve month period is
measured by the percentage difference between (a) the opening net asset value of
one Class A share of the Fund and (b) the sum of the closing net asset value of
one Class A share of the Fund plus the value of any income and capital gain
dividends on such share during the period treated as if reinvested in Class A
shares of the Fund at the time of distribution. The performance of the Index is
measured by the percentage change in the Index between the beginning and the end
of the twelve month period with cash distributions on the securities which
comprise the Index being treated as reinvested in the Index at the end of each
month following the payment of the dividend. Each monthly calculation of the
incentive portion of the fee may be illustrated as follows: if over the
preceding twelve month period the Small Cap Fund's adjusted net asset value
applicable to one Class A share went from $10.00 to $11.00 (10% appreciation),
and the Index, after adjustment, went from 100 to 104 (or only 4%), the entire
incentive compensation would have been earned by Scudder Kemper. On the other
hand, if the Index rose from 100 to 110 (10%), no incentive fee would have been
payable. A rise in the Index from 100 to 116 (16%) would have resulted in the
minimum monthly fee of 1/12 of 0.35%. Since the computation is not cumulative
from year to year, an additional management fee may be payable with respect to a
particular year, although the Small Cap Fund's performance over some longer
period of time may be less favorable than that of the Index. Conversely, a lower
management fee may be payable in a year in which the performance of the Fund's
Class A shares' is less favorable than that of the Index, although the
performance of the Fund's Class A shares over a longer period of time might be
better than that of the Index.
The Aggressive Growth Fund pays a base annual investment management fee, payable
monthly, at the rate of 0.65 of 1% of the average daily net assets of the Fund.
This base fee is subject to upward or downward adjustment on the basis of the
investment performance of the Class A shares of the Fund as compared with the
performance of the Standard & Poor's 500 Stock Index (the "Index"). The
Aggressive Growth Fund will pay an additional monthly fee at an annual rate of
0.02% of such average daily net assets for each percentage point (fractions to
be prorated) by which the performance of the Class A shares of the Fund exceeds
that of the Index for the immediately preceding twelve months; provided that
such additional monthly fee shall not exceed 1/12 of 0.20% of the average daily
net assets. Conversely, the compensation payable by the Aggressive Growth Fund
will be reduced by an annual rate of 0.02% of such average daily net assets for
each percentage point (fractions to be prorated) by which the performance of the
Class A shares of the Fund falls below that of the Index, provided that such
reduction in the monthly fee shall not exceed 1/12 of 0.20% of the average net
assets. The total fee on an annual basis can range from 0.45% to 0.85% of
average daily net assets. The Aggressive Growth Fund's investment performance
during any twelve month period is measured by the percentage difference between
(a) the opening net asset value of one Class A share of the Fund and (b) the sum
of the closing net asset value of one Class A share of the Fund plus the value
of any income and capital gain dividends on such share during the period treated
as if reinvested in Class A shares of the Fund at the time of distribution. The
performance of the Index is measured by the percentage change in the Index
between the beginning and the end of the twelve month period with cash
distributions on the securities which comprise the
22
<PAGE>
Index being treated as reinvested in the Index at the end of each month
following the payment of the dividend. Each monthly calculation of the incentive
portion of the fee may be illustrated as follows: if over the preceding twelve
month period the Aggressive Growth Fund's adjusted net asset value applicable to
one Class A share went from $10.00 to $11.50 (15% appreciation), and the Index,
after adjustment, went from 100 to 104 (or only 4%), the entire incentive
compensation would have been earned by Scudder Kemper. On the other hand, if the
Index rose from 100 to 115 (15%), no incentive fee would have been payable. A
rise in the Index from 100 to 125 (25%) would have resulted in the minimum
monthly fee of 1/12 of 0.45%. Since the computation is not cumulative from year
to year, an additional management fee may be payable with respect to a
particular year, although the Aggressive Growth Fund's performance over some
longer period of time may be less favorable than that of the Index. Conversely,
a lower management fee may be payable in a year in which the performance of the
Fund's Class A shares is less favorable than that of the Index, although the
performance of the Fund's Class A shares over a longer period of time might be
better than that of the Index.
The investment management fees paid by each Fund for its last three fiscal years
are shown in the table below.
<TABLE>
<CAPTION>
Fund Fiscal 1998 Fiscal 1997 Fiscal 1996
- ---- ----------- ----------- -----------
<S> <C> <C> <C>
Aggressive+ 98,000^(4) $37,000^(1) --
Blue Chip 3,104,000 $2,018,000 $1,198,000
Growth 14,891,000 $14,576,000 $13,994,000
Small Cap 3,519,000^(5) $3,193,000^(2) $4,418,000^(3)
Technology 6,842,000 $6,532,000 $5,582,000
Total Return 18,088,000 $17,084,000 $15,825,000
Value+Growth 906,000 $474,000 $131,000*
+ For the period December 31, 1996 (commencement of operations) to
September 30, 1997.
* Amounts shown are after expense waiver.
(1) Fee was increased $1,000 from $36,000 base fee.
(2) Fee was decreased $2,617,000 from $5,810,000 base fee.
(3) Fee was decreased $670,000 from $5,088,000 base fee.
(4) Fee was decreased $9,000 from $107,000 base fee.
(5) Fee was decreased $2,791,000 from $6,310,000 base fee.
</TABLE>
FUND ACCOUNTING AGENT. Scudder Fund Accounting Corporation ("SFAC"), Two
International Place, Boston, Massachusetts 02110, a subsidiary of Scudder
Kemper, is responsible for determining the daily net asset value per share of
the Funds and maintaining all accounting records related thereto. Currently,
SFAC receives no fee for its services to the Funds; however, subject to Board
approval, some time in the future, SFAC may seek payment for its services under
this agreement.
PRINCIPAL UNDERWRITER. Pursuant to separate underwriting and distribution
services agreements ("distribution agreements"), Kemper Distributors, Inc.
("KDI"), 222 South Riverside Plaza, Chicago, Illinois, 60606, an affiliate of
Scudder Kemper, is the principal underwriter and distributor for the shares of
each Fund and acts as agent of each Fund in the continuous offering of its
shares. KDI bears all its expenses of providing services pursuant to the
distribution agreements, including the payment of any commissions. Each Fund
pays the cost for the prospectus and shareholder reports to be set in type and
printed for existing shareholders, and KDI, as principal underwriter, pays for
the printing and distribution of copies thereof used in connection with the
offering of shares to prospective investors. KDI also pays for supplementary
sales literature and advertising costs.
Class A Shares. KDI receives no compensation from the Funds as principal
underwriter for Class A shares and pays all expenses of distribution of each
Fund's Class A shares under the distribution agreements not otherwise paid by
dealers or other financial services firms. As indicated under "Purchase of
Shares," KDI retains the sales charge upon the purchase of shares and pays or
allows concessions or discounts to firms for the sale of each Fund's shares. The
following information concerns the underwriting commissions paid in connection
with the distribution of each Fund's Class A shares for the fiscal years noted.
<TABLE>
<CAPTION>
Commissions Retained by Commissions Underwriter Commissions Paid to Kemper
Fund Fiscal Year Underwriter Paid to All Firms Affiliated Firms
- ---- ----------- ----------- ----------------- ----------------
<S> <C> <C> <C> <C>
Aggressive 1998 $32,000 $323,000 $5,000
1997+ $7,000 $111,000 $5,000
1996 N.A. N.A. N.A.
23
<PAGE>
Blue Chip 1998 $183,000 $1,286,000 $6,000
1997 $124,000 $1,101,000 $7,000
1996 $72,000 $424,000 $11,000
Growth 1998 $326,000 $1,998,000 $5,000
1997 $296,000 $1,523,000 $9,000
1996 $327,000 $2,075,000 $57,000
Small Cap 1998 $154,000 $875,000 $0
1997 $104,000 $705,000 $0
1996 $130,000 $849,000 $16,000
Technology 1998 $163,000 $824,000 $7,000
1997 $181,000 $853,000 $7,000
1996 $198,000 $869,000 $37,000
Total Return 1998 $233,000 $2,219,000 $6,000
1997 $191,000 $1,591,000 $0
1996 $225,000 $1,697,000 $79,000
Value+Growth 1998 $61,000 $462,000 $0
1997 $40,000 $538,000 $0
1996 $33,000 $238,000 $15,000
+ For the period December 31, 1996 (commencement of operations) to September 30, 1997.
* For the period February 15, 1996 to November 30, 1996.
</TABLE>
Class B Shares and Class C Shares. Each Fund has adopted a plan under Rule 12b-1
(the "Rule 12b-1 Plan") that provides for fees payable as an expense of the
Class B shares and Class C shares that are used by KDI to pay for distribution
and services for those classes. Because 12b-1 fees are paid out of fund assets
on an ongoing basis, they will, over time, increase the cost of an investment
and cost more than other types of sales charges.
For its services under the distribution agreement, KDI receives a fee from each
Fund under a Rule 12b-1 Plan, payable monthly, at the annual rate of 0.75% of
average daily net assets of each Fund attributable to Class B shares. This fee,
pursuant to the 12b-1 Plan, 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%.
For its services under the distribution agreement, KDI receives a fee from each
Fund under a Rule 12b-1 Plan, payable monthly, at the annual rate of 0.75% of
average daily net assets of each Fund attributable to Class C shares. This fee,
pursuant to the Rule 12b-1 Plan, is accrued daily as an expense of Class C
shares. KDI currently advances to firms the first year distribution fee at a
rate of 0.75% of the purchase price of Class C shares. For periods after the
first year, KDI currently pays firms for sales of Class C shares a distribution
fee, payable quarterly, at an annual rate of 0.75% of net assets attributable to
Class C shares maintained and serviced by the firm and the fee continues until
terminated by KDI or a Fund. KDI also receives any contingent deferred sales
charges. See "Redemption or Repurchase of Shares--Contingent Deferred Sales
Charges--Class C Shares".
Expenses of the Funds 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.
24
<PAGE>
<TABLE>
<CAPTION>
Total Commissions
Distribution Contingent Commissions Paid by
Fees Paid by Deferred Sales Paid by Underwriter to
Fund Class Fiscal Fund to Charges to Underwriter Affiliated
B Shares Year Underwriter Underwriter to Firms Firms
- -------- ---- ----------- ----------- -------- -----
<S> <C> <C> <C> <C> <C>
Aggressive 1998 $28,000 $28,000 $337,000 $0
1997+ $13,000 $11,000 $122,000 $0
1996 N.A. N.A. N.A. N.A.
Blue Chip 1998 $1,198,000 $293,000 $2,266,000 $0
1997 $659,000 $128,000 $1,885,000 $0
1996 $233,000 $41,000 $521,000 $3,000
Growth 1998 $5,791,000 $1,180,000 $2,647,000 $0
1997 $6,426,000 $1,183,000 $3,193,000 $0
1996 $6,149,000 $1,494,000 $3,522,000 $53,000
Small Cap 1998 $1,938,000 $438,000 $1,229,000 $0
1997 $1,930,000 $417,000 $1,308,000 $0
1996 $1,743,000 $389,000 $1,370,000 $18,000
Technology 1998 $884,000 $273,000 $1,248,000 $0
1997 $698,000 $179,000 $1,272,000 $0
1996 $413,000 $102,000 $974,000 $28,000
Total Return 1998 $7,774,000 $1,259,000 $3,718,000 $0
1997 $8,705,000 $1,382,000 $3,769,000 $0
1996 $8,464,000 $2,089,000 $3,572,000 $64,000
Value+Growth 1998 $345,000 $86,000 $697,000 $0
1997 $195,000(a) $28,000 $656,000 $0
1996 $65,000 $4,000 $320,000 $15,000
<CAPTION>
Other Distribution Expenses Paid by Underwriter
-----------------------------------------------
Advertising Marketing Misc.
Fund Class Fiscal and Prospectus and Sales Operating Interest
B Shares Year Literature Printing Expenses Expenses Expenses
- -------- ---- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Aggressive 1998 $31,000 $3,000 $65,000 $29,000 $31,000
1997+ $12,000 $1,000 $3,000 $1,000 $4,000
1996
Blue Chip 1998 $289,000 $34,000 $598,000 $113,000 $482,000
1997 $189,000 $13,000 $530,000 $97,000 $238,000
1996 $117,000 $10,000 $232,000 $76,000 $85,000
Growth 1998 $355,000 $31,000 $731,000 $124,000 ($318,000)
1997 $563,000 $39,000 $1,424,000 $199,000 $48,000
1996 $1,020,000 $88,000 $2,049,000 $284,000 $188,000
Small Cap 1998 $165,000 $14,000 $334,000 $66,000 $397,000
1997 $222,000 $15,000 $564,000 $97,000 $426,000
1996 $384,000 $34,000 $781,000 $125,000 $380,000
Technology 1998 $167,000 $19,000 $340,000 $68,000 $404,000
1997 $162,000 $11,000 $442,000 $77,000 $295,000
1996 $309,000 $28,000 $572,000 $121,000 $191,000
Total Return 1998 $484,000 $57,000 $1,008,000 $171,000 ($373,000)
1997 $517,000 $36,000 $1,391,000 $193,000 $44,000
1996 $1,100,000 $100,000 $2,139,000 $344,000 $438,000
Value+Growth 1998 $96,000 $10,000 $183,000 $40,000 $1,213,000
1997 $65,000 $5,000 $184,000 $30,000 $104,000
1996 $88,000 $7,000 $160,000 $41,000 $40,000
</TABLE>
+ For the period December 31, 1996 (commencement of operations) to September
30, 1997.
* For the period February 15, 1996 to November 30, 1996.
(a) Amounts shown after expense waiver.
25
<PAGE>
<TABLE>
<CAPTION>
Total Distribution Fees
Distribution Contingent Distribution Fees Paid by
Fees Paid by Deferred Sales Paid by Underwriter to
Fund Class Fiscal Fund to Charges to Underwriter Affiliated
C Shares Year Underwriter Underwriter to Firms Firms
- -------- ---- ----------- ----------- -------- -----
<S> <C> <C> <C> <C> <C>
Aggressive 1998 $6,000 $1,000 $21,000 $0
1997+ $6,000 $5,000 $16,000 $0
1996 N.A. N.A. N.A. N.A.
Blue Chip 1998 $134,000 $6,000 $140,000 $0
1997 $49,000 $3,000 $72,000 $0
1996 $12,000 $0 $18,000 $0
Growth 1998 $148,000 $3,000 $148,000 $0
1997 $110,000 $1,000 $123,000 $0
1996 $57,000 $0 $73,000 $0
Small Cap 1998 $106,000 $4,000 $97,000 $0
1997 $62,000 $2,000 $63,000 $0
1996 $35,000 $0 $42,000 $0
Technology 1998 $108,000 $2,000 $104,000 $0
1997 $51,000 $3,000 $66,000 $0
1996 $21,000 $1,000 $32,000 $0
Total Return 1998 $167,000 $5,000 $173,000 $0
1997 $109,000 $2,000 $123,000 $0
1996 $60,000 $0 $69,000 $0
Value+Growth 1998 $9,000 $3,000 $31,000 $0
1997 $8,000(a) $1,000 $20,000 $0
1996 $2,000 $0 $7,000 $0
<CAPTION>
Other Distribution Expenses Paid by Underwriter
-----------------------------------------------
Advertising Marketing Misc.
Fund Class Fiscal and Prospectus and Sales Operating Interest
C Shares Year Literature Printing Expenses Expenses Expenses
- -------- ---- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Aggressive 1998 $6,000 $1,000 $12,000 $3,000 $4,000
1997+ $7,000 $1,000 $20,000 $0 $1,000
1996 N.A. N.A. N.A. N.A. N.A.
Blue Chip 1998 $56,000 $7,000 $111,000 $30,000 $27,000
1997 $26,000 $2,000 $52,000 $18,000 $12,000
1996 $14,000 $1,000 $28,000 $1,000 $5,000
Growth 1998 $29,000 $3,000 $59,000 $19,000 $51,000
1997 $44,000 $3,000 $110,000 $8,000 $36,000
1996 $48,000 $4,000 $89,000 $8,000 $18,000
Small Cap 1998 $24,000 $2,000 $48,000 $19,000 $29,000
1997 $21,000 $1,000 $53,000 $9,000 $21,000
1996 $30,000 $3,000 $60,000 $3,000 $11,000
Technology 1998 $33,000 $4,000 $67,000 $22,000 $31,000
1997 $24,000 $2,000 $66,000 $2,000 $19,000
1996 $34,000 $3,000 $67,000 $2,000 $8,000
Total Return 1998 $42,000 $5,000 $90,000 $24,000 $53,000
1997 $35,000 $2,000 $94,000 $2,000 $36,000
1996 $49,000 $4,000 $97,000 $5,000 $20,000
Value+Growth 1998 $12,000 $1,000 $24,000 $9,000 $11,000
1997 $7,000 $1,000 $20,000 $2,000 $7,000
1996 $13,000 $1,000 $23,000 $8,000 $3,000
</TABLE>
+ For the period December 31, 1996 (commencement of operations) to September
30, 1997.
* For the period February 15, 1996 to November 30, 1996.
(a) Amount shown after expense waiver.
26
<PAGE>
Rule 12b-1 Plan. If a Rule 12b-1 Plan (the "Plan") is terminated in accordance
with its terms, the obligation of a Fund to make payments to KDI pursuant to the
Plan will cease and the Fund will not be required to make any payments past the
termination date. Thus, there is no legal obligation for the Fund to pay any
expenses incurred by KDI in excess of its fees under a Plan, if for any reason
the Plan is terminated in accordance with its terms. Future fees under a Plan
may or may not be sufficient to reimburse KDI for its expenses incurred.
Each distribution agreement and Rule 12b-1 Plan continues in effect from year to
year so long as such continuance is approved for each class at least annually by
a vote of the Board of Trustees of the Fund, including the Trustees who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the agreement. Each agreement automatically terminates in the event
of its assignment and may be terminated for a class at any time without penalty
by a Fund or by KDI upon 60 days' notice. Termination by a Fund with respect to
a class may be by vote of a majority of the Board of Trustees, or a majority of
the Trustees who are not interested persons of the Fund and who have no direct
or indirect financial interest in the agreement, or a "majority of the
outstanding voting securities" of the class of the Fund, as defined under the
1940 Act. The agreement may not be amended for a class to increase the fee to be
paid by a Fund with respect to such class without approval by a majority of the
outstanding voting securities of such class of the Fund and all material
amendments must in any event be approved by the Board of Trustees in the manner
described above with respect to the continuation of the agreement. The
provisions concerning the continuation, amendment and termination of the
distribution agreement are on a Fund by Fund basis and for each Fund on a class
by class basis.
ADMINISTRATIVE SERVICES. Administrative services are provided to each 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 each Fund, including the payment of service fees. Each
Fund pays KDI an administrative services fee, payable monthly, at an annual rate
of up to 0.25% of average daily net assets of Class A, B and C shares of each
Fund.
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 shareholders of a 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 services as may be agreed upon from time to time and
permitted by applicable statute, rule or regulation. For Class A shares, KDI
pays each firm a service fee, normally payable quarterly, at an annual rate of
up to 0.25% of the net assets in 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 0.25% of the purchase price of such
shares. For periods after the first year, KDI currently intends to pay firms a
service fee at an annual rate of up to 0.25% (calculated monthly and normally
paid quarterly) of the net assets attributable to Class B and Class C shares
maintained and serviced by the firm and the fee continues until terminated by
KDI or the Fund. Firms to which service fees may be paid include broker-dealers
affiliated with KDI.
The following information concerns the administrative services fee paid by each
Fund for the last three fiscal years.
<TABLE>
<CAPTION>
Administrative Service Fees Paid by Fund
----------------------------------------
Service Fees Paid Service Fees Paid
by Administrator by Administrator
Fund Fiscal Year Class A Class B Class C to Firms to Affiliated firms
- ---- ----------- ------- ------- ------- -------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Aggressive 1998* $2,000 $1,000 $0 $80,000 $0
1997+ $7,000 $4,000 $2,000 $24,000 $0
1996 N.A. N.A. N.A. N.A. N.A.
Blue Chip 1998 $879,000 $394,000 $44,000 $1,311,000 $5,000
1997 $598,000 $220,000 $16,000 $886,000 $0
1996 $415,000 $78,000 $4,000 $512,000 $15,000
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Administrative Service Fees Paid by Fund
----------------------------------------
Service Fees Paid Service Fees Paid
by Administrator by Administrator
Fund Fiscal Year Class A Class B Class C to Firms to Affiliated firms
- ---- ----------- ------- ------- ------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Growth 1998 $4,274,000 $1,829,000 $47,000 $6,179,000 $37,000
1997 $4,000,000 $2,093,000 $36,000 $6,149,000 $41,000
1996 $3,929,000 $2,016,000 $19,000 $5,983,000 $138,000
Small Cap 1998 $1,407,000 $614,000 $33,000 $2,071,000 $5,000
1997 $1,376,000 $632,000 $21,000 $2,027,000 $7,000
1996 $1,315,000 $580,000 $12,000 $1,918,000 $34,000
Technology 1998 $1,763,000 $284,000 $32,000 $2,114,000 $5,000
1997 $1,682,000 $228,000 $17,000 $1,955,000 $0
1996 $1,460,000 $138,000 $7,000 $1,607,000 $15,000
Total Return 1998 $5,353,000 $2,504,000 $56,000 $7,976,000 $17,000
1997 $4,683,000 $2,813,000 $36,000 $7,603,000 $22,000
1996 $4,252,000 $2,772,000 $20,000 $7,049,000 $194,000
Value+Growth 1998 $152,000 $130,000 $10,000 $299,000 $0
1997* $71,000 $73,000 $4,000 $169,000 $0
1996 $22,000 $25,000 $2,000 $57,000 $2,000
+ For the period December 31, 1996 (commencement of operations) to September 30, 1997.
* Amounts shown after expense waiver.
** For the period February 15, 1996 to November 30, 1996.
</TABLE>
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreement not paid to firms to compensate
itself for administrative functions performed for a Fund. Currently, the
administrative services fee payable to KDI is based only upon Fund assets in
accounts for which there is a firm listed on the Fund's records and it is
intended that KDI will pay all the administrative services fee that it receives
from a Fund to firms in the form of service fees. The effective administrative
services fee rate to be charged against all assets of a 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 a Fund,
in its discretion, may approve basing the fee to KDI on all Fund assets in the
future.
Certain trustees or officers of a Fund are also directors or officers of Scudder
Kemper or KDI as indicated under "Officers and Trustees."
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT. State Street Bank and
Trust Company, 225 Franklin Street, Boston, Massachusetts 02110, as custodian,
has custody of all securities and cash of each Fund. It attends to the
collection of principal and income, and payment for and collection of proceeds
of securities bought and sold by each Fund. Investors Fiduciary Trust Company,
801 Pennsylvania Avenue, Kansas City, Missouri, 64105 ("IFTC") is each Fund's
transfer agent and dividend-paying agent. Pursuant to a services agreement with
IFTC, Kemper Service Company ("KSvC"), an affiliate of Scudder Kemper, serves as
"Shareholder Service Agent" of each 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 as follows: prior to January 1, 1999, annual account
fees at a maximum rate of $6 per account plus account set up, transaction and
maintenance charges, annual fees associated with the contingent deferred sales
charge (Class B only) and out-of-pocket expense reimbursement and effective
January 1, 1999, annual account fees of $10.00 ($18.00 for retirement accounts)
plus set up charges, annual fees associated with the contingent deferred sales
charges (Class B only), an asset-based fee of 0.08% and out-of-pocket
reimbursement. The following shows for each Fund's 1998 fiscal year the
shareholder service fees IFTC remitted to KSvC.
Fund Fees IFTC Paid to KSvC
- ---- ----------------------
Aggressive $209,000
28
<PAGE>
Blue Chip $1,790,000
Growth $7,105,000
Small Cap $3,107,000
Technology $1,454,000
Total Return $7,277,000
Value+Growth $501,000
INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS. The Funds' independent
auditors, Ernst & Young LLP, 233 South Wacker Drive, Chicago, Illinois 60606,
audit and report on the Funds' annual financial statements, review certain
regulatory reports and the Funds' federal income tax returns, and perform other
professional accounting, auditing, tax and advisory services when engaged to do
so by the Funds. Shareholders will receive annual audited financial statements
and semi-annual unaudited financial statements.
LEGAL COUNSEL. Vedder, Price, Kaufman & Kammholz, 222 North LaSalle Street,
Chicago, Illinois 60601, serves as legal counsel to the Funds .
PURCHASE, REPURCHASE AND REDEMPTION OF SHARES
PURCHASE OF SHARES
Alternative Purchase Arrangements. Class A shares of each 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 each 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 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 5.75% None Initial sales charge waived
of the public offering price or reduced for certain purchases
Class B Maximum contingent deferred sales 0.75% Shares convert to Class A
charge of 4% of redemption proceeds; shares six years after issuance
declines to zero after six years
Class C Contingent deferred sales charge of 1% 0.75% No conversion feature
of redemption proceeds for
redemptions made during first year
after purchase
</TABLE>
The minimum initial investment for each 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
29
<PAGE>
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 as a
Percentage Percentage Percentage of
of of Net Offering
Amount of Purchase Offering Price Asset Value* Price
------------------ -------------- ------------ -----
<S> <C> <C> <C>
Less than $50,000 5.75% 6.10% 5.20%
$50,000 but less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 3.50 3.63 3.00
$250,000 but less than $500,000 2.60 2.67 2.25
$500,000 but less than $1 million 2.00 2.04 1.75
$1 million and over 0.00** 0.00** ***
* 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>
Each Fund receives the entire net asset value of all its Class A shares sold.
KDI, the Funds' principal underwriter, retains the sales charge on sales of
Class A shares from which it allows discounts from the applicable public
offering price to investment dealers, which discounts are uniform for all
dealers in the United States and its territories. The normal discount allowed to
dealers is set forth in the above table. Upon notice to all dealers with whom it
has sales agreements, KDI may reallow up to the full applicable sales charge, as
shown in the above table, during periods and for transactions specified in such
notice and such reallowances may be based upon attainment of minimum sales
levels. During periods when 90% or more of the sales charge is reallowed, such
dealers may be deemed to be underwriters as that term is defined in the
Securities Act of 1933.
Class A shares of a Fund may be purchased at net asset value by: (a) any
purchaser provided that the amount invested in such 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), a participant-directed
non-qualified deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district, provided in each
case that such plan has not less than 200 eligible employees (the "Large Order
NAV Purchase Privilege"). Redemption within two years of shares purchased under
the Large Order NAV Purchase Privilege may be subject to a contingent deferred
sales charge. See "Redemption or Repurchase of Shares--Contingent Deferred Sales
Charge--Large Order NAV Purchase Privilege."
KDI may in its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of a 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, 0.50% on the next $45 million and 0.25% on amounts over $50 million.
The commission schedule will be reset on a calendar year basis for sales of
shares pursuant to the Large Order NAV Purchase Privilege to employer sponsored
employee benefit plans using the subaccount
30
<PAGE>
recordkeeping system made available through KSvC. For purposes of determining
the appropriate commission percentage to be applied to a particular sale, KDI
will consider the cumulative amount invested by the purchaser in a 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 a Fund at net asset value
under the Large Order NAV Purchase Privilege is not available if another net
asset value purchase privilege also applies.
Effective on February 1, 1996, Class A shares of a 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-transferable and continues for the lifetime of
individual class members and for a ten year period for non-individual class
members. To make a purchase at net asset value under this privilege, the
investor must, at the time of purchase, submit a written request that the
purchase be processed at net asset value pursuant to this privilege specifically
identifying the purchaser as a member of the "Tabankin Class." Shares purchased
under this privilege will be maintained in a separate account that includes only
shares purchased under this privilege. For more details concerning this
privilege, class members should refer to the Notice of (1) Proposed Settlement
with Defendants; and (2) Hearing to Determine Fairness of Proposed Settlement,
dated August 31, 1995, issued in connection with the aforementioned court
proceeding. For sales of Fund shares at net asset value pursuant to this
privilege, KDI may in its discretion pay investment dealers and other financial
services firms a concession, payable quarterly, at an annual rate of up to 0.25%
of net assets attributable to such shares maintained and serviced by the firm. A
firm becomes eligible for the concession based upon assets in accounts
attributable to shares purchased under this privilege in the month after the
month of purchase and the concession continues until terminated by KDI. The
privilege of purchasing Class A shares of a Fund at net asset value under this
privilege is not available if another net asset value purchase privilege also
applies.
Class A shares of a Fund may be purchased at net asset value by persons who
purchase such shares through bank trust departments that process such trades
through an automated, integrated mutual fund clearing program provided by a
third party clearing firm.
Class A shares of a 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 0.50% of
the amount of Class A shares purchased.
Class A shares of a Fund may be purchased at net asset value by persons who
purchase shares of the Fund through KDI as part of an automated billing and wage
deduction program administered by RewardsPlus of America for the benefit of
employees of participating employer groups.
Class A shares may be sold at net asset value in any amount to: (a) officers,
trustees, directors, employees (including retirees) and sales representatives of
a 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 Funds,
for themselves or their spouses or dependent children; (c) shareholders who
owned shares of Kemper Value Series, Inc. ("KVS") on September 8, 1995, and have
continuously owned shares of KVS (or a Kemper Fund acquired by exchange of KVS
shares) since that date, for themselves or members of their families; and (d)
any trust, pension, profit-sharing or other benefit plan for only such persons.
Class A shares may be sold at net asset value in any amount to selected
employees (including their spouses and dependent children) of banks and other
financial services firms that provide administrative services related to order
placement and payment to facilitate transactions in shares of the Funds for
their clients pursuant to an agreement with KDI or one of its affiliates. Only
those employees of such banks and other firms who as part of their usual duties
provide services related to transactions in Fund shares may purchase 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 a Fund's Class A shares at net
asset value through reinvestment programs described in the prospectuses of such
trusts that have such programs. Class A shares of a Fund may be sold at net
asset value through certain investment advisors registered under the Investment
Advisors Act of 1940 and other financial services firms acting solely as agent
for their clients that adhere to certain standards established by KDI, including
a requirement that such shares be sold for the benefit of their clients
participating in an investment advisory program or agency commissions program
under which such clients pay a fee to the Adviser or other firm for portfolio
management and brokerage services. Such shares are sold for investment purposes
and on the condition that they will not be resold except through redemption or
repurchase by the Funds. The Funds may also issue Class A shares
31
<PAGE>
at net asset value in connection with the acquisition of the assets of or merger
or consolidation with another investment company, or to shareholders in
connection with the investment or reinvestment of income and capital gain
dividends.
The sales charge scale is applicable to purchases made at one time by any
"purchaser" which includes: an individual; or an individual, his or her spouse
and children under the age of 21; or a trustee or other fiduciary of a single
trust estate or single fiduciary account; or an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Code; or a pension,
profit-sharing or other employee benefit plan whether or not qualified under
Section 401 of the Code; or other organized group of persons whether
incorporated or not, provided the organization has been in existence for at
least six months and has some purpose other than the purchase of redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales charge, all orders from an organized group will have to be
placed through a single investment dealer or other firm and identified as
originating from a qualifying purchaser.
Deferred Sales Charge Alternative--Class B Shares. Investors choosing the
deferred sales charge alternative may purchase Class B shares at net asset value
per share without any sales charge at the time of purchase. Since Class B shares
are being sold without an initial sales charge, the full amount of the
investor's purchase payment will be invested in Class B shares for his or her
account. A contingent deferred sales charge may be imposed upon redemption of
Class B shares. See "Redemption or Repurchase of Shares--Contingent Deferred
Sales Charge--Class B Shares."
KDI compensates firms for sales of Class B shares at the time of sale at a
commission rate of up to 3.75% of the amount of Class B shares purchased. KDI is
compensated by each Fund for services as distributor and principal underwriter
for Class B shares. See "Investment Manager and Underwriter."
Class B shares of a Fund will automatically convert to Class A shares of the
same Fund six years after issuance on the basis of the relative net asset value
per share. Class B shareholders of the Funds who originally acquired their
shares as Initial Shares of Kemper Portfolios, formerly known as Kemper
Investment Portfolios ("KIP"), hold them subject to the same conversion period
schedule as that of their KIP Portfolio. Class B shares representing Initial
Shares of a former KIP Portfolio will automatically convert to Class A shares of
the applicable 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 a
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 0.75% of the purchase price of such shares. For periods after the first
year, KDI currently intends to pay firms for sales of Class C shares a
distribution fee, payable quarterly, at an annual rate of 0.75% of net assets
attributable to Class C shares maintained and serviced by the firm. KDI is
compensated by each Fund for services as distributor and principal underwriter
for Class C shares. See "Investment Manager and Underwriter."
Which Arrangement is Better for You? The decision as to which class of shares
provides a more suitable investment for an investor depends on a number of
factors, including the amount and intended length of the investment. Investors
making investments that qualify for reduced sales charges might consider Class A
shares. Investors who prefer not to pay an initial sales charge and who plan to
hold their investment for more than six years might consider Class B shares.
Investors who prefer not to pay an initial sales charge but who plan to redeem
their shares within six years might consider Class C shares. Orders for Class B
shares or Class C shares for $500,000 or more will be declined. Orders for Class
B shares or Class C shares by employer sponsored employee benefit plans using
the subaccount record keeping system made available through the Shareholder
Service Agent will be invested instead in Class A shares at net asset value
where the combined subaccount value in a 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 a 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 are currently prohibited under the
32
<PAGE>
Glass-Steagall Act from providing certain underwriting or distribution services.
Banks or other financial services firms may be subject to various state laws
regarding the services described above and may be required to register as
dealers pursuant to state law. If banking firms were prohibited from acting in
any capacity or providing any of the described services, management would
consider what action, if any, would be appropriate. KDI does not believe that
termination of a relationship with a bank would result in any material adverse
consequences to a Fund.
KDI may, from time to time, pay or allow to firms a 1% commission on the amount
of shares of the Fund sold under the following conditions: (i) the purchased
shares are held in a Kemper IRA account, (ii) the shares are purchased as a
direct "roll over" of a distribution from a qualified retirement plan account
maintained on a participant subaccount record keeping system provided by KSvC,
(iii) the registered representative placing the trade is a member of ProStar, a
group of persons designated by KDI in acknowledgment of their dedication to the
employee benefit plan area; and (iv) the purchase is not otherwise subject to a
commission.
In addition to the discounts or commissions described above, KDI will, from time
to time, pay or allow additional discounts, commissions or promotional
incentives, in the form of cash to firms that sell shares of the Funds. 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 Funds, or other funds underwritten by
KDI.
Orders for the purchase of shares of a Fund will be confirmed at a price based
on the net asset value of that Fund next determined after receipt by KDI of the
order accompanied by payment. However, orders received by dealers or other
financial services firms prior to the determination of net asset value (see "Net
Asset Value") and received by KDI prior to the close of its business day will be
confirmed at a price based on the net asset value effective on that day ("trade
date"). The Funds reserve the right to determine the net asset value more
frequently than once a day if deemed desirable. Dealers and other financial
services firms are obligated to transmit orders promptly. Collection may take
significantly longer for a check drawn on a foreign bank than for a check drawn
on a domestic bank. Therefore, if an order is accompanied by a check drawn on a
foreign bank, funds must normally be collected before shares will be purchased.
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem the Funds' shares. Some may establish higher
minimum investment requirements than set forth above. Firms may arrange with
their clients for other investment or administrative services. Such firms may
independently establish and charge additional amounts to their clients for such
services, which charges would reduce the clients' return. Firms also may hold
the Funds' shares in nominee or street name as agent for and on behalf of their
customers. In such instances, the Funds' transfer agent will have no information
with respect to or control over the accounts of specific shareholders. Such
shareholders may obtain access to their accounts and information about their
accounts only from their firm. Certain of these firms may receive compensation
from the Funds 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 Funds through the Shareholder Service Agent for
these services. This statement of additional information should be read in
connection with such firms' material regarding their fees and services.
The Funds reserve the right to withdraw all or any part of the offering made by
this statement of additional information and to reject purchase orders. Also,
from time to time, each 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 such Fund normally are permitted
to continue to purchase additional shares of such class and to have dividends
reinvested.
Shareholders should direct their inquiries to KSvC, 811 Main Street, Kansas
City, Missouri 64105-2005 or to the firm from which they received this statement
of additional information.
As described herein, shares of a Fund are sold at their public offering price,
which is the net asset value per share of the Fund next determined after an
order is received in proper form plus, with respect to Class A shares, an
initial sales charge. The minimum initial investment is $1,000 and the minimum
subsequent investment is $100 but such minimum amounts may be changed at any
time. An order for the purchase of shares that is accompanied by a check drawn
on a foreign bank (other than a check drawn on a Canadian bank in U.S. Dollars)
will not be considered in proper form and will not be processed unless and until
the 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. The amount received by a shareholder upon redemption or repurchase may
be more or less than the amount paid for such shares depending on the market
value of the Fund's portfolio securities at the time.
33
<PAGE>
Upon receipt by the Shareholder Service Agent of a request for redemption,
shares of a Fund will be redeemed by the Fund at the applicable net asset value
per share of such Fund as described herein.
Scheduled variations in or the elimination of the initial sales charge for
purchases of Class A shares or the contingent deferred sales charge for
redemptions of Class B or Class C shares, by certain classes of persons or
through certain types of transactions, are provided because of anticipated
economies in sales and sales related efforts.
A Fund may suspend the right of redemption or delay payment more than seven days
(a) during any period when the New York Stock Exchange (the "Exchange") is
closed other than customary weekend and holiday closings or during any period in
which trading on the Exchange is restricted, (b) during any period when an
emergency exists as a result of which (i) disposal of a 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 SEC may by order permit for the protection of a Fund's shareholders.
The conversion of Class B shares to Class A shares may be subject to the
continuing availability of an opinion of counsel, ruling by the Internal Revenue
Service or other assurance acceptable to each 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 herein.
The Funds have authorized certain members of the National Association of
Securities Dealers, Inc. ("NASD"), other than Kemper Distributors, Inc. ("KDI")
to accept purchase and redemption orders for the Fund's shares. Those brokers
may also designate other parties to accept purchase and redemption orders on the
Fund's behalf. Orders for purchase or redemption will be deemed to have been
received by the Fund when such brokers or their authorized designees accept the
orders. Subject to the terms of the contract between the Fund and the broker,
ordinarily orders will be priced as the Fund's net asset value next computed
after acceptance by such brokers or their authorized designees. Further, if
purchases or redemptions of the Fund's shares are arranged and settlement is
made at an investor's election through any other authorized NASD member, that
member may, at its discretion, charge a fee for that service. The Board of
Trustees or Directors as the case may be ("Board") of the Fund and KDI each has
the right to limit the amount of purchases by, and to refuse to sell to, any
person. The Board and KDI may suspend or terminate the offering of shares of the
Fund at any time for any reason.
REDEMPTION OR REPURCHASE OF SHARES
General. Any shareholder may require a Fund to redeem his or her shares. When
shares are held for the account of a shareholder by the Funds' transfer agent,
the shareholder may redeem them by sending a written request with signatures
guaranteed to Kemper Mutual Funds, Attention: Redemption Department, P.O. Box
419557, Kansas City, Missouri 64141-6557. When certificates for shares have been
issued, they must be mailed to or deposited with the Shareholder Service Agent,
along with a duly endorsed stock power and accompanied by a written request for
redemption. Redemption requests and a stock power must be endorsed by the
account holder with signatures guaranteed by a commercial bank, trust company,
savings and loan association, federal savings bank, member firm of a national
securities exchange or other eligible financial institution. The redemption
request and stock power must be signed exactly as the account is registered
including any special capacity of the registered owner. Additional documentation
may be requested, and a signature guarantee is normally required, from
institutional and fiduciary account holders, such as corporations, custodians
(e.g., under the Uniform Transfers to Minors Act), executors, administrators,
trustees or guardians.
The redemption price for shares of a Fund will be the net asset value per share
of that 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 a 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 a 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"), 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
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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 Funds may assess a
quarterly fee of $9 on an account with a balance below $1,000 for the quarter.
The fee will not apply to accounts enrolled in an automatic investment program,
Individual Retirement Accounts or employer sponsored employee benefit plans
using the subaccount record keeping system made available through the
Shareholder Service Agent.
Shareholders can request the following telephone privileges: expedited wire
transfer redemptions and EXPRESS-Transfer transactions (see "Special Features")
and exchange transactions for individual and institutional accounts and
pre-authorized telephone redemption transactions for certain institutional
accounts. Shareholders may choose these privileges on the account application or
by contacting the Shareholder Service Agent for appropriate instructions. Please
note that the telephone exchange privilege is automatic unless the shareholder
refuses it on the account application. A Fund or its agents may be liable for
any losses, expenses or costs arising out of fraudulent or unauthorized
telephone requests pursuant to these privileges unless the Fund or its agents
reasonably believe, based upon reasonable verification procedures, that the
telephonic instructions are genuine. The shareholder will bear the risk of loss,
including loss resulting from fraudulent or unauthorized transactions, so long
as reasonable verification procedures are followed. Verification procedures
include recording instructions, requiring certain identifying information before
acting upon instructions and sending written confirmations.
Telephone Redemptions. If the proceeds of the redemption (prior to the
imposition of any contingent deferred sales charge) are $50,000 or less and the
proceeds are payable to the shareholder of record at the address of record,
normally a telephone request or a written request by any one account holder
without a signature guarantee is sufficient for redemptions by individual or
joint account holders, and trust, executor, guardian or custodian account
holders provided the trustee, executor, guardian or custodian is named in the
account registration. Other institutional account holders and guardian account
holders of custodial accounts for gifts and transfers to minors may exercise
this special privilege of redeeming shares by telephone request or written
request without signature guarantee subject to the same conditions as individual
account holders and subject to the limitations on liability described under
"General" above, provided that this privilege has been pre-authorized by the
institutional account holder or guardian account holder by written instruction
to the Shareholder Service Agent with signatures guaranteed. Telephone requests
may be made by calling 1-800-621-1048. Shares purchased by check or through
EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this privilege
of redeeming shares by telephone request until such shares have been owned for
at least 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 Funds reserve the right to terminate or modify
this privilege at any time.
Repurchases (Confirmed Redemptions). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to KDI, which each 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 of the Fund next determined after receipt of a
request by KDI. However, requests for repurchases received by dealers or other
firms prior to the determination of net asset value (see "Net Asset Value") and
received by KDI prior to the close of KDI's business day will be confirmed at
the net asset value effective on that day. The offer to repurchase may be
suspended at any time. Requirements as to stock powers, certificates, payments
and delay of payments are the same as for redemptions.
Expedited Wire Transfer Redemptions. If the account holder has given
authorization for expedited wire redemption to the account holder's brokerage or
bank account, shares of a 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 of the Fund
effective on that day and normally the proceeds will be sent to the designated
account the following business day. Delivery of the proceeds of a wire
redemption of $250,000 or more may be delayed by the Fund for up to seven days
if Scudder Kemper deems it appropriate under then current market conditions.
Once authorization is on file, the Shareholder Service Agent will honor requests
by telephone at 1-800-621-1048 or in writing, subject to the limitations on
liability described under "General" above. The Funds are not responsible for the
efficiency of the federal wire system or the account holder's financial services
firm or bank. The Funds currently do not charge the account holder for wire
transfers. The account holder is responsible for any charges imposed by the
account holder's firm or bank. There is a $1,000 wire redemption minimum
(including any contingent deferred sales charge). To change the designated
account to receive wire redemption proceeds, send a written request to the
Shareholder
35
<PAGE>
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 Funds reserve the right to terminate or modify this privilege at
any time.
Contingent Deferred Sales Charge--Large Order NAV Purchase Privilege. A
contingent deferred sales charge may be imposed upon redemption of Class A
shares that are purchased under the Large Order NAV Purchase Privilege as
follows: 1% if they are redeemed within one year of purchase and 0.50% if they
are redeemed during the second year after purchase. The charge will not be
imposed upon redemption of reinvested dividends or share appreciation. The
charge is applied to the value of the shares redeemed excluding amounts not
subject to the charge. The contingent deferred sales charge will be waived in
the event of: (a) redemptions by a participant-directed qualified retirement
plan described in Code Section 401(a), a participant-directed non-qualified
deferred compensation plan described in Code Section 457 or a
participant-directed qualified retirement plan described in Code Section
403(b)(7) which is not sponsored by a K-12 school district; (b) redemptions by
employer sponsored employee benefit plans using the subaccount record keeping
system made available through the Shareholder Service Agent; (c) redemption of
shares of a shareholder (including a registered joint owner) who has died; (d)
redemption of shares of a shareholder (including a registered joint owner) who
after purchase of the shares being redeemed becomes totally disabled (as
evidenced by a determination by the federal Social Security Administration); (e)
redemptions under a 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 discretionary commission applicable to such Large Order NAV Purchase.
Contingent Deferred Sales Charge--Class B Shares. A contingent deferred sales
charge may be imposed upon redemption of Class B shares. There is no such charge
upon redemption of any share appreciation or reinvested dividends on Class B
shares. The charge is computed at the following rates applied to the value of
the shares redeemed excluding amounts not subject to the charge.
Contingent
Deferred
Year of Redemption Sales
After Purchase Charge
- -------------- ------
First 4%
Second 3%
Third 3%
Fourth 2%
Fifth 2%
Sixth 1%
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<PAGE>
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special
Features--Systematic Withdrawal Plan" below), (d) for redemptions made pursuant
to any IRA systematic withdrawal based on the shareholder's life expectancy
including, but not limited to, substantially equal periodic payments described
in Internal Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2 and (e) for
redemptions to satisfy required minimum distributions after age 70 1/2 from an
IRA account (with the maximum amount subject to this waiver being based only
upon the shareholder's Kemper IRA accounts). The contingent deferred sales
charge will also be waived in connection with the following redemptions of
shares held by employer sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service
Agent: (a) redemptions to satisfy participant loan advances (note that loan
repayments constitute new purchases for purposes of the contingent deferred
sales charge and the conversion privilege), (b) redemptions in connection with
retirement distributions (limited at any one time to 10% of the total value of
plan assets invested in a Fund), (c) redemptions in connection with
distributions qualifying under the hardship provisions of the Internal Revenue
Code and (d) redemptions representing returns of excess contributions to such
plans.
Contingent Deferred Sales Charge--Class C Shares. A contingent deferred sales
charge of 1% may be imposed upon redemption of Class C shares if they are
redeemed within one year of purchase. The charge will not be imposed upon
redemption of reinvested dividends or share appreciation. The charge is applied
to the value of the shares redeemed excluding amounts not subject to the charge.
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (limited to 10% of the
net asset value of the account during the first year, see "Special
Features--Systematic Withdrawal Plan"), (d) for redemptions made pursuant to any
IRA systematic withdrawal based on the shareholder's life expectancy including,
but not limited to, substantially equal periodic payments described in Internal
Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2, (e) for redemptions to
satisfy required minimum distributions after age 70 1/2 from an IRA account
(with the maximum amount subject to this waiver being based only upon the
shareholder's Kemper IRA accounts), (f) for any participant-directed redemption
of shares held by employer sponsored employee benefit plans maintained on the
subaccount record keeping system made available by the Shareholder Service Agent
and (g) redemption of shares by an employer sponsored employee benefit plan that
offers funds in addition to Kemper Funds and whose dealer of record has waived
the advance of the first year administrative service and distribution fees
applicable to such shares and agrees to receive such fees quarterly.
Contingent Deferred Sales Charge--General. The following example will illustrate
the operation of the contingent deferred sales charge. Assume that an investor
makes a single purchase of $10,000 of a 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 of share appreciation to a total of $12,000. If the
investor were then to redeem the entire $12,000 in share value, the contingent
deferred sales charge would be payable only with respect to $10,000 because
neither the $1,000 of reinvested dividends nor the $1,000 of share appreciation
is subject to the charge. The charge would be at the rate of 3% ($300) because
it was in the second year after the purchase was made.
The rate of the contingent deferred sales charge is determined by the length of
the period of ownership. Investments are tracked on a monthly basis. The period
of ownership for this purpose begins the first day of the month in which the
order for the investment is received. For example, an investment made in
December, 1996 will be eligible for the second year's charge if redeemed on or
after December 1, 1997. In the event no specific order is requested when
redeeming shares subject to a contingent deferred sales charge, the redemption
will be made first from shares representing reinvested dividends and then from
the earliest purchase of shares. KDI receives any contingent deferred sales
charge directly.
Reinvestment Privilege. A shareholder who has redeemed Class A shares of a Fund
or any other Kemper Mutual Fund listed under "Special Features--Class A
Shares--Combined Purchases" (other than shares of the Kemper Cash Reserves Fund
purchased directly at net asset value) may reinvest up to the full amount
redeemed at net asset value at the time of the reinvestment in Class A shares of
a Fund or of the other listed Kemper Mutual Funds. A shareholder of a Fund or
other Kemper Mutual Fund who redeems Class A shares purchased under the Large
Order NAV Purchase Privilege (see "Purchase of Shares--Initial Sales Charge
Alternative--Class A Shares") or Class B shares or Class C shares and incurs a
contingent deferred sales charge may reinvest up to the full amount redeemed at
net asset value at the time of the reinvestment, in Class A shares, Class B
shares or Class C shares, as the case may be, of a Fund or of other Kemper
Mutual Funds. The amount of any contingent deferred sales charge also will be
reinvested. These reinvested shares will retain their original cost
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<PAGE>
and purchase date for purposes of the contingent deferred sales charge. Also, a
holder of Class B shares who has redeemed shares may reinvest up to the full
amount redeemed, less any applicable contingent deferred sales charge that may
have been imposed upon the redemption of such shares, at net asset value in
Class A shares of a 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 shares of a
Fund, the reinvestment in shares of a 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. Each 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 Classic Growth Fund, Kemper U.S. Growth and Income Fund,
Kemper Technology Fund, Kemper Total Return Fund, Kemper Growth Fund, Kemper
Small Capitalization Equity Fund, Kemper Income and Capital Preservation Fund,
Kemper Municipal Bond Fund, Kemper Diversified Income Fund, Kemper High Yield
Series, Kemper U.S. Government Securities Fund, Kemper International Fund,
Kemper State Tax-Free Income Series, Kemper Blue Chip Fund, Kemper Global Income
Fund, Kemper Target Equity Fund (series are subject to a limited offering
period), Kemper Intermediate Municipal Bond Fund, Kemper Cash Reserves Fund,
Kemper U.S. Mortgage Fund, Kemper Short-Intermediate Government Fund, Kemper
Value+Growth Fund, Kemper Value Series, Inc., Kemper Horizon Fund, Kemper Europe
Fund, Kemper Asian Growth Fund, Kemper Funds Trust (available only to employees
of Scudder Kemper and its affiliates and only in certain states), Kemper Income
Trust, Kemper Small Cap Relative Value Fund, Kemper-Dreman Financial Services
Fund, Kemper Aggressive Growth Fund and Kemper Global/International Series, Inc.
("Kemper Mutual Funds"). Except as noted below, there is no combined purchase
credit for direct purchases of shares of Zurich Money Funds, Cash Equivalent
Fund, Tax-Exempt California Money Market Fund, Cash Account Trust, Investors
Municipal Cash Fund or Investors Cash Trust ("Money Market Funds"), which are
not considered "Kemper Mutual Funds" for purposes hereof. For purposes of the
Combined Purchases feature described above as well as for the Letter of Intent
and Cumulative Discount features described below, employer sponsored employee
benefit plans using the subaccount record keeping system made available through
the Shareholder Service Agent may include: (a) Money Market Funds as "Kemper
Mutual Funds", (b) all classes of shares of any Kemper Mutual Fund and (c) the
value of any other plan investment, such as guaranteed investment contracts and
employer stock, maintained on such subaccount record keeping system.
Class A Shares--Letter of Intent. The same reduced sales charges for Class A
shares, as shown in the applicable prospectus or statement of additional
information, also apply to the aggregate amount of purchases of such Kemper
Mutual Funds listed above made by any purchaser within a 24-month period under a
written Letter of Intent ("Letter") provided by KDI. The Letter, which imposes
no obligation to purchase or sell additional Class A shares, provides for a
price adjustment depending upon the actual amount purchased within such period.
The Letter provides that the first purchase following execution of the Letter
must be at least 5% of the amount of the intended purchase, and that 5% of the
amount of the intended purchase normally will be held in escrow in the form of
shares pending completion of the intended purchase. If the total investments
under the Letter are less than the intended amount and thereby qualify only for
a higher sales charge than actually paid, the appropriate number of escrowed
shares are redeemed and the proceeds used toward satisfaction of the obligation
to pay the increased sales charge. The Letter for an employer sponsored employee
benefit plan maintained on the subaccount record keeping system available
through the Shareholder Service Agent may have special provisions regarding
payment of any increased sales charge resulting from a failure to complete the
intended purchase under the Letter. A shareholder may include the value (at the
maximum offering price) of all shares of such Kemper Mutual Funds held of record
as of the initial purchase date under the Letter as an "accumulation credit"
toward the completion of the Letter, but no price adjustment will be made on
such shares. Only investments in Class A shares are included in this privilege.
Class A Shares--Cumulative Discount. Class A shares of a Fund may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of a Fund 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
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<PAGE>
purchase. Upon such notification, the investor will receive the lowest
applicable sales charge. Quantity discounts described above may be modified or
terminated at any time.
Exchange Privilege. Shareholders of Class A, Class B and Class C shares may
exchange their shares for shares of the corresponding class of other Kemper
Mutual Funds in accordance with the provisions below.
Class A Shares. Class A shares of the Kemper Mutual Funds and shares of the
Money Market Funds listed under "Special Features--Class A Shares--Combined
Purchases" above may be exchanged for each other at their relative net asset
values. Shares of Money Market Funds and the Kemper Cash Reserves Fund that were
acquired by purchase (not including shares acquired by dividend reinvestment)
are subject to the applicable sales charge on exchange. Series of Kemper Target
Equity Fund are available on exchange only during the Offering Period for such
series as described in the applicable prospectus or statement of additional
information. Cash Equivalent Fund, Tax-Exempt California Money Market Fund, Cash
Account Trust, Investors Municipal Cash Fund and Investors Cash Trust are
available on exchange but only through a financial services firm having a
services agreement with KDI.
Class A shares of a 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 a Fund and Class B shares of any other Kemper
Mutual Fund listed under "Special Features--Class A Shares--Combined Purchases"
may be exchanged for each other at their relative net asset values. Class B
shares may be exchanged without a contingent deferred sales charge being imposed
at the time of exchange. For purposes of the contingent deferred sales charge
that may be imposed upon the redemption of the Class B shares received on
exchange, amounts exchanged retain their original cost and purchase date.
Class C Shares. Class C shares of a 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, they retain the cost and purchase date of the shares that
were originally purchased and exchanged.
General. Shares of a Kemper Mutual Fund with a value in excess of $1,000,000
(except Kemper Cash Reserves Fund) acquired by exchange from another Kemper
Mutual Fund, or from a Money Market Fund, may not be exchanged thereafter until
they have been owned for 15 days (the "15-Day Hold Policy"). For purposes of
determining whether the 15-Day Hold Policy applies to a particular exchange, the
value of the shares to be exchanged shall be computed by aggregating the value
of shares being exchanged for all accounts under common control, discretion or
advice, including without limitation accounts administered by a financial
services firm offering market timing, asset allocation or similar services. The
total value of shares being exchanged must at least equal the minimum investment
requirement of the Kemper Fund into which they are being exchanged. Exchanges
are made based on relative dollar values of the shares involved in the exchange.
There is no service fee for an exchange; however, dealers or other firms may
charge for their services in effecting exchange transactions. Exchanges will be
effected by redemption of shares of the 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 KSvC, Attention:
Exchange Department, P.O. Box 419557, Kansas City, Missouri 64141-6557, or by
telephone if the shareholder has given authorization. Once the authorization is
on file, the Shareholder Service Agent will honor requests by telephone at
1-800-621-1048, subject to the limitations on liability under "Redemption or
Repurchase of Shares--General." Any share certificates must be deposited prior
to any exchange of such shares. During periods when it is difficult to contact
the Shareholder Service Agent by telephone, it may be difficult to use the
telephone exchange privilege. The exchange privilege is not a right and may be
suspended, terminated or modified at any time. Exchanges may only be made for
funds that are available for sale in the shareholder's state of residence.
Currently, Tax-Exempt California Money Market Fund is available for sale only in
California and the portfolios of Investors Municipal Cash Fund are available for
sale only in certain states.
Effective June 1, 1999, in addition to the current limits on exchanges of shares
with a value over $1,000,000, shares of a Kemper Fund with a value of $1,000,000
or less (except Kemper Cash Reserves Fund) acquired by exchange from another
Kemper Fund, or from a Money Market Fund, may not be exchanged thereafter until
they have been owned for 15 days if, in the investment manager's judgement, the
exchange activity may have an adverse effect on the fund. In, particular, a
pattern of
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<PAGE>
exchanges that coincides a "market timing" strategy may be disruptive to the
Fund and therefore may be subject to the 15-Day Hold Policy.
Systematic Exchange Privilege. The owner of $1,000 or more of any class of the
shares of a Kemper Mutual Fund or Money Market Fund may authorize the automatic
exchange of a specified amount ($100 minimum) of such shares for shares of the
same class of another such Kemper Fund. If selected, exchanges will be made
automatically until the privilege is terminated by the shareholder or the Kemper
Fund. Exchanges are subject to the terms and conditions described above under
"Exchange Privilege," except that the $1,000 minimum investment requirement for
the Kemper Fund acquired on exchange is not applicable. This privilege may not
be used for the exchange of shares held in certificated form.
EXPRESS-Transfer. EXPRESS-Transfer permits the transfer of money via the
Automated Clearing House System (minimum $100 and maximum $50,000) from a
shareholder's bank, savings and loan, or credit union account to purchase shares
in a Fund. Shareholders can also redeem shares (minimum $100 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 KSvC, P.O. Box 419415, Kansas City, Missouri
64141-6415. Termination will become effective as soon as the Shareholder Service
Agent has had a reasonable time to act upon the request. EXPRESS-Transfer cannot
be used with passbook savings accounts or for tax-deferred plans such as
Individual Retirement Accounts ("IRAs").
Bank Direct Deposit. A shareholder may purchase additional shares of a Fund
through an automatic investment program. With the Bank Direct Deposit Purchase
Plan, investments are made automatically (maximum $50,000) from the
shareholder's account at a bank, savings and loan or credit union into the
shareholder's 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 KSvC, P.O. Box 419415, Kansas City, Missouri
64141-6415. Termination by a shareholder will become effective within thirty
days after the Shareholder Service Agent has received the request. A Fund may
immediately terminate a shareholder's Plan in the event that any item is unpaid
by the shareholder's financial institution. The Funds may terminate or modify
this privilege at any time.
Payroll Direct Deposit and Government Direct Deposit. A shareholder may invest
in a Fund through Payroll Direct Deposit or Government Direct Deposit. Under
these programs, all or a portion of a shareholder's net pay or government check
is automatically invested in a 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.) A 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 a 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 to be paid to the owner or a designated
payee monthly, quarterly, semiannually or annually. The $5,000 minimum account
size is not applicable to Individual Retirement Accounts. The minimum periodic
payment is $100. The maximum annual rate at which Class B shares may be redeemed
(and Class A shares purchased under the Large Order NAV Purchase Privilege and
Class C shares in their first year following the purchase) under a systematic
withdrawal plan is 10% of the net asset value of the account. Shares are
redeemed so that the payee will receive payment approximately the first of the
month. Any income and capital gain dividends will be automatically reinvested at
net asset value. A sufficient number of full and fractional shares will be
redeemed to make the designated payment. Depending upon the size of the payments
requested and fluctuations in the net asset value of the shares redeemed,
redemptions for the purpose of making such payments may reduce or even exhaust
the account.
The purchase of Class A shares while participating in a systematic withdrawal
plan will ordinarily be disadvantageous to the investor because the investor
will be paying a sales charge on the purchase of shares at the same time that
the investor is redeeming shares upon which a sales charge may have already been
paid. Therefore, a 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
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the contingent deferred sales charge on redemptions of Class A shares purchased
under the Large Order NAV Purchase Privilege, Class B shares and Class C shares
made pursuant to a systematic withdrawal plan. The right is reserved to amend
the systematic withdrawal plan on 30 days' notice. The plan may be terminated at
any time by the investor or the Funds.
Tax-Sheltered Retirement Plans. The Shareholder Service Agent provides
retirement plan services and documents and KDI can establish investor accounts
in any of the following types of retirement plans:
o Individual Retirement Accounts ("IRAs") with 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.
o 403(b)(7) Custodial Accounts also with IFTC as custodian. This type
of plan is available to employees of most non-profit organizations.
o Prototype money purchase pension and profit-sharing plans may be
adopted by employers. The maximum annual contribution per participant is the
lesser of 25% of compensation or $30,000.
Brochures describing the above plans as well as model defined benefit plans,
target benefit plans, 457 plans, 401(k) plans, SIMPLE 401(k) plans and materials
for establishing them are available from the Shareholder Service Agent upon
request. The brochures for plans with IFTC as custodian describe the current
fees payable to IFTC for its services as custodian. Investors should consult
with their own tax Advisors before establishing a retirement plan.
DIVIDENDS AND TAXES
Dividends. Each Fund normally distributes dividends of net investment income as
follows: annually for the Aggressive Growth, Small Cap, Technology and
Value+Growth Funds; semi-annually for the Blue Chip Fund; and quarterly for the
Total Return Fund. Each Fund distributes any net realized short-term and
long-term capital gains at least annually. The quarterly distribution to
shareholders of the Total Return Fund may include short-term capital gains.
Dividends paid by a 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.
A Fund may at any time vary its foregoing dividend practices and, therefore,
reserves the right from time to time to either distribute or retain for
reinvestment such of its net investment income and its net short-term and
long-term capital gains as the Board of Trustees of the Fund determines
appropriate under the then current circumstances. In particular, and without
limiting the foregoing, a 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 paying such dividends unless
shareholders indicate in writing that they wish to receive them in cash or in
shares of other Kemper Funds as described herein.
The level of income dividends per share (as a percentage of net asset value)
will be lower for Class B and Class C shares than for Class A shares primarily
as a result of the distribution services fee applicable to Class B and Class C
shares. Distributions of capital gains, if any, will be paid in the same amount
for each class.
Income and capital gain dividends, if any, of a Fund will be credited to
shareholder accounts in full and fractional shares of the same class of that
Fund at net asset value on the reinvestment date, except that, upon written
request to the Shareholder Service Agent, a shareholder may select one of the
following options:
(1) To receive income and short-term capital gain dividends in cash and
long-term capital gain dividends in shares of the same class at net asset value;
or
(2) To receive income and capital gain dividends in cash.
Any dividends of a Fund that are reinvested normally will be reinvested in
shares of the same class of that same Fund. However, upon written request to the
Shareholder Service Agent, a shareholder may elect to have dividends of a Fund
invested in shares of the same class of another Kemper Fund at the net asset
value of such class of such other fund. See "Special Features--Class A
Shares--Combined Purchases" for a list of such other Kemper Funds. To use this
privilege of investing dividends of a Fund in shares of another Kemper Fund,
shareholders must maintain a minimum account value of $1,000 in the Fund
distributing the dividends. The Funds will reinvest dividend checks (and future
dividends) in shares of that same Fund and class if checks are returned as
undeliverable. Dividends and other distributions of a Fund in the aggregate
amount of $10 or less are automatically reinvested in shares of the Fund unless
the shareholder requests that such policy not be applied to the shareholder's
account.
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Taxes. Each 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. Such
qualification does not involve governmental supervision or management of
investment practices or policy.
A regulated investment company qualifying under Subchapter M of the Code is
required to distribute to its shareholders at least 90% of its investment
company taxable income (including net short-term capital gain) and generally is
not subject to federal income tax to the extent that it distributes annually its
investment company taxable income and net realized capital gains in the manner
required under the Code. Dividends derived from net investment income and net
short-term capital gains are taxable to shareholders as ordinary income and
long-term capital gain dividends are taxable to shareholders as long-term
capital gain regardless of how long the shares have been held and whether
received in cash or shares. Long-term capital gain dividends received by
individual shareholders are taxed at a maximum rate of 20% on gains realized by
a Fund from securities held more than 18 months and at a maximum rate of 28% on
gains realized by a Fund from securities held more than 12 months but not more
than 18 months. Dividends declared in October, November or December to
shareholders of record as of a date in one of those months and paid during the
following January are treated as paid on December 31 of the calendar year
declared. A portion of the dividends paid by the Funds may qualify for the
dividends received deduction available to corporate shareholders.
A dividend received shortly after the purchase of shares reduces the net asset
value of the shares by the amount of the dividend and, although in effect a
return of capital, will be taxable to the shareholder. If the net asset value of
shares were reduced below the shareholder's cost by dividends representing gains
realized on sales of securities, such dividends would be a return of investment
though taxable as stated above.
A 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 net income or
loss recognized will generally be treated as long-term and 40% as short-term.
However, although certain forward 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.
Gains and losses attributable to fluctuations in the value of foreign currencies
will be characterized generally as ordinary gain or loss under Section 988 of
the Code. For example, if a Fund sold a foreign bond and part of the gain or
loss on the sale was attributable to an increase or decrease in the value of a
foreign currency, then the currency gain or loss may be treated as ordinary
income or loss. If such transactions result in greater net ordinary income, the
dividends paid by the Fund will be increased; if the result of such transactions
is lower net ordinary income, a portion of dividends paid could be classified as
a return of capital.
A 4% excise tax is imposed on the excess of the required distribution for a
calendar year over the distributed amount for such calendar year. The required
distribution is the sum of 98% of a 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 of the prior calendar year, minus any overdistribution
in the prior calendar year. For purposes of calculating the required
distribution, foreign currency gains or losses occurring after October 31 are
taken into account in the following calendar year. Each Fund intends to declare
or distribute dividends during the appropriate periods of an amount sufficient
to prevent imposition of the 4% excise tax. If any net realized long-term
capital gains in excess of net realized short-term capital losses are retained
by a Fund for reinvestment, requiring federal income taxes to be paid thereon by
a Fund, the Fund intends to elect to treat such capital gains as having been
distributed to shareholders. As a result, each shareholder will report such
capital gains as long-term capital gains, will be able to claim a relative share
of federal income taxes paid by the Fund on such gains as a credit against
personal federal income tax liability, and will be entitled to increase the
adjusted tax basis on Fund shares by the difference between a pro rata share of
such gains owned and the individual tax credit.
A shareholder who redeems shares of a 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 a Fund or other Kemper Mutual Fund listed above 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
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redeemed at net asset value at the time of the reinvestment in shares of any
Fund or in shares of a Kemper Mutual Fund within six months of the redemption as
described above under "Redemption or Repurchase of Shares--Reinvestment
Privilege." If redeemed shares were purchased after October 3, 1989 and 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 realized a loss on the redemption or
exchange of a Fund's shares and reinvests in shares of the same Fund 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.
A Fund's investment income derived from foreign securities may be subject to
foreign income taxes withheld at the source. Because the amount of a 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. A Fund may
invest in shares of certain foreign corporations which may be classified under
the Code as passive foreign investment companies ("PFICs"). If a Fund receives a
so-called "excess distribution" with respect to PFIC stock, the Fund itself may
be subject to a tax on a portion of the excess distribution. Certain
distributions from a PFIC as well as gains from the sale of the PFIC shares are
treated as "excess distributions." In general, under the PFIC rules, an excess
distribution is treated as having been realized ratably over the period during
which the Fund held the PFIC shares. The Fund will be subject to tax on the
portion, if any, of an excess distribution that is allocated to prior Fund
taxable years and an interest factor will be added to the tax, as if the tax had
been payable in such prior taxable years. Excess distributions allocated to the
current taxable year are characterized as ordinary income even though, absent
application of the PFIC rules, certain excess distributions might have been
classified as capital gain.
A Fund may make an election to mark to market its shares of these foreign
investment companies in lieu of being subject to U.S. federal income taxation.
At the end of each taxable year to which the election applies, the Fund would
report as ordinary income the amount by which the fair market value of the
foreign company's stock exceeds the Fund's adjusted basis in these shares; any
mark to market losses and any loss from an actual disposition of shares would be
deductible as ordinary loss to the extent of any net mark to market gains
included in income in prior years. The effect of the election would be to treat
excess distributions and gain on dispositions as ordinary income which is not
subject to a fund level tax when distributed to shareholders as a dividend.
Alternatively, a Fund may elect to include as income and gain its share of the
ordinary earnings and net capital gain of certain foreign investment companies
in lieu of being taxed in the manner described above.
Equity options (including covered call options on portfolio stock) and
over-the-counter options on debt securities written or purchased by a Fund will
be subject to tax under Section 1234 of the Code. In general, no loss is
recognized by a Fund upon payment of a premium in connection with the purchase
of a put or call option. The character of any gain or loss recognized (i.e.,
long-term or short-term) will generally depend, in the case of a lapse or sale
of the option, on the Fund's holding period for the option, and in the case of
an exercise of a put option, on the Fund's holding period for the underlying
stock. The purchase of a put option may constitute a short sale for federal
income tax purposes, causing an adjustment in the holding period of the
underlying stock or substantially identical stock in the Fund's portfolio. If a
Fund writes a put or call option, no gain is recognized upon its receipt of a
premium. If the option lapses or is closed out, any gain or loss is treated as a
short-term capital gain or loss. If a call option is exercised, any resulting
gain or loss is a short-term or long-term capital gain or loss depending on the
holding period of the underlying stock. The exercise of a put option written by
a Fund is not a taxable transaction for the Fund.
Many futures contracts and certain foreign currency forward contracts entered
into by a Fund and all listed non-equity options written or purchased by a Fund
(including options on futures contracts and options on broad-based stock
indices) will be governed by Section 1256 of the Code. Absent a tax election to
the contrary, gain or loss attributable to the lapse, exercise or closing out of
any such position generally will be treated as 60% long-term and 40% short-term
capital gain or loss, and on the last trading day of the Fund's fiscal year, all
outstanding Section 1256 positions will be marked to market (i.e. treated as if
such positions were closed out at their closing price on such day), with any
resulting gain or loss recognized as 60% long-term and 40% short-term. Under
Section 988 of the Code, discussed below, foreign currency gain or loss from
foreign currency-related forward contracts and similar financial instruments
entered into or acquired by a Fund will be treated as ordinary income. Under
certain circumstances, entry into a futures contract to sell a security may
constitute a short sale for federal income tax purposes, causing an adjustment
in the holding period of the underlying security or a substantially identical
security in the Fund's portfolio.
Positions of a Fund which consist of at least one stock and at least one other
position with respect to a related security which substantially diminishes a
Fund's risk of loss with respect to such stock could be treated as a "straddle"
which is governed by Section 1092 of the Code, the operation of which may cause
deferral of losses, adjustments in the holding periods of stock
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or securities and conversion of short-term capital losses into long-term capital
losses. An exception to these straddle rules exists for certain "qualified
covered call options" on stock written by the Fund.
Positions of a Fund which consist of at least one position not governed by
Section 1256 and at least one futures or forward contract or non-equity option
governed by Section 1256 which substantially diminishes a Fund's risk of loss
with respect to such other position will be treated as a "mixed straddle."
Although mixed straddles are subject to the straddle rules of Section 1092 of
the Code, certain tax elections exist for them which reduce or eliminate the
operation of these rules. The Fund intends to monitor its transactions in
options and futures and may make certain tax elections in connection with these
investments.
Notwithstanding any of the foregoing, recent tax law changes may require a Fund
to recognize gain (but not loss) from a constructive sale of certain
"appreciated financial positions" if a Fund enters into a short sale, offsetting
notional principal contract, futures or forward contract transaction with
respect to the appreciated position or substantially identical property.
Appreciated financial positions subject to this constructive sale treatment are
interests (including options, futures and forward contracts and short sales) in
stock, partnership interests, certain actively traded trust instruments and
certain debt instruments. Constructive sale treatment of appreciated financial
positions does not apply to certain transactions closed in the 90-day period
ending with the 30th day after the close of the Fund's taxable year, if certain
conditions are met.
Similarly, if a Fund enters into a short sale of property that becomes
substantially worthless, the Fund will be required to recognize gain at that
time as though it had closed the short sale. Future regulations may apply
similar treatment to other strategic transactions with respect to property that
becomes substantially worthless.
Under the Code, gains or losses attributable to fluctuations in exchange rates
which occur between the time a Fund accrues receivables or liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables, or pays such liabilities, generally are treated as ordinary income
or ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency, and on disposition of certain options, futures contracts and
forward contracts, gains or losses attributable to fluctuations in the value of
foreign currency between the date of acquisition of the security or contract and
the date of disposition are also treated as ordinary gain or loss. These gains
or losses, referred to under the Code as "Section 988" gains or losses, may
increase or decrease the amount of a Fund's investment company taxable income to
be distributed to its shareholders as ordinary income
Dividends from domestic corporations are expected to comprise a substantial part
of each Fund's gross income. To the extent that such dividends constitute a
portion of a Fund's gross income, a portion of the income distributions of the
Fund may be eligible for the deduction for dividends received by corporations.
Shareholders will be informed of the portion of dividends which so qualify. The
dividends-received deduction is reduced to the extent the shares of a Fund with
respect to which the dividends are received are treated as debt-financed under
federal income tax law, and is eliminated if either those shares or the shares
of the Fund are deemed to have been held by a Fund or the shareholder, as the
case may be, for less than 46 days during the 90-day period beginning 45 days
before the shares become ex-dividend.
Properly designated distributions of the excess of net long-term capital gain
over net short-term capital loss are taxable to shareholders as long-term
capital gain, regardless of the length of time the shares of the Fund have been
held by such shareholders. Such distributions are not eligible for the
dividends-received deduction. Any loss realized upon the redemption of shares
held at the time of redemption for six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain during such six-month period.
Distributions of investment company taxable income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date.
All distributions of investment company taxable income and net realized capital
gain, whether received in shares or in cash, must be reported by each
shareholder on his or her federal income tax return. Dividends and capital gains
distributions declared in October, November or December and payable to
shareholders of record in such a month will be deemed to have been received by
shareholders on December 31 if paid during January of the following year.
Redemptions of shares, including exchanges for shares of another Scudder fund,
may result in tax consequences (gain or loss) to the shareholder and are also
subject to these reporting requirements.
The Funds will be required to report to the Internal Revenue Service all
distributions of taxable income and capital gains as well as gross proceeds from
the redemption or exchange of Fund shares, except in the case of certain exempt
shareholders. Under the backup withholding provisions of Section 3406 of the
Code, distributions of taxable income and capital gains and proceeds from the
redemption or exchange of the shares of a regulated investment company may be
subject to withholding of
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federal income tax at the rate of 31% in the case of non-exempt shareholders who
fail to furnish the investment company with their taxpayer identification
numbers and with required certifications regarding their status under the
federal income tax law. Withholding may also be required if the Fund is notified
by the IRS or a broker that the taxpayer identification number furnished by the
shareholder is incorrect or that the shareholder has previously failed to report
interest or dividend income. If the withholding provisions are applicable, any
such distributions and proceeds, whether taken in cash or reinvested in
additional shares, will be reduced by the amounts required to be withheld.
Shareholders of a Fund may be subject to state and local taxes on distributions
received from a Fund and on redemptions of the Fund's shares. Each distribution
is accompanied by a brief explanation of the form and character of the
distribution. In January of each year the Fund issues to each shareholder a
statement of the federal income tax status of all distributions.
Each Fund is organized as a Massachusetts business trust and is not liable for
any income or franchise tax in the Commonwealth of Massachusetts, provided that
it qualifies as a regulated investment company for federal income tax purposes.
An individual may make a deductible IRA contribution for any taxable year only
if (i) the individual is not an active participant in an employer's retirement
plan, or (ii) the individual has an adjusted gross income below a certain level
($50,000 for married individuals filing a joint return, with a phase-out of the
deduction for adjusted gross income between $50,000 and $60,000; $30,000 for a
single individual, with a phase-out for adjusted gross income between $30,000
and $40,000). An individual is not considered an active participant in an
employer's retirement plan if the individual's spouse is an active participant
in such a plan. However, in the case of a joint return, the amount of the
deductible contribution by the individual who is not an active participant (but
whose spouse is) is phased out for adjusted gross income between $150,000 and
$160,000. However, an individual not permitted to make a deductible contribution
to an IRA for any such taxable year may nonetheless make nondeductible
contributions up to $2,000 to an IRA (up to $2,000 per individual for married
couples if only one spouse has earned income) for that year. There are special
rules for determining how withdrawals are to be taxed if an IRA contains both
deductible and nondeductible amounts. In general, a proportionate amount of each
withdrawal will be deemed to be made from nondeductible contributions; amounts
treated as a return of nondeductible contributions will not be taxable. Also,
annual contributions may be made to a spousal IRA even if the spouse has
earnings in a given year if the spouse elects to be treated as having no
earnings (for IRA contribution purposes) for the year.
Distributions by a Fund result in a reduction in the net asset value of the
Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution would nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which will nevertheless be taxable to them.
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. Each 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 Advisors regarding the 20% withholding requirement.
After each transaction, shareholders will receive a confirmation statement
giving complete details of the transaction except that statements will be sent
quarterly for transactions involving reinvestment of dividends and periodic
investment and redemption programs. Information for income tax purposes,
including, when appropriate, information regarding any foreign taxes and
credits, will be provided after the end of the calendar year. Shareholders are
encouraged to retain copies of their account confirmation statements or year-end
statements for tax reporting purposes. However, those who have incomplete
records may obtain historical account transaction information at a reasonable
fee.
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.
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The foregoing discussion of U.S. federal income tax law relates solely to the
application of that law to U.S. persons, i.e., U.S. citizens and residents and
U.S. corporations, partnerships, trusts and estates. Each shareholder who is not
a U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the Fund, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30% (or at a lower rate under an
applicable income tax treaty) on amounts constituting ordinary income received
by him or her, where such amounts are treated as income from U.S. sources under
the Code.
Dividend and interest income received by a Fund from sources outside the U.S.
may be subject to withholding and other taxes imposed by such foreign
jurisdictions. Tax conventions between certain countries and the U.S. may reduce
or eliminate these foreign taxes, however, and foreign countries generally do
not impose taxes on capital gains respecting investments by foreign investors.
Shareholders should consult their tax advisors about the application of the
provisions of tax law described in this Statement of Additional Information in
light of their particular tax situations.
NET ASSET VALUE
The net asset value per share of a Fund is the value of one share and is
determined separately for each class by dividing the value of a Fund's net
assets attributable to the class by the number of shares of that class
outstanding. The per share net asset value of each of Class B and Class C shares
of the Fund will generally be lower than that of the Class A shares of a Fund
because of the higher expenses borne by the Class B and Class C shares. The net
asset value of shares of a Fund is computed as of the close of regular trading
(the "value time") on the New York Stock Exchange (the "Exchange") on each day
the Exchange is open for trading. The Exchange is scheduled to be closed on the
following holidays: New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas.
Portfolio securities for which market quotations are readily available are
generally valued at market value as of the value time in the manner described
below. All other securities may be valued at fair value as determined in good
faith by or under the direction of the Board.
With respect to the Funds with securities listed primarily on foreign exchanges,
such securities may trade on days when the Fund's net asset value is not
computed; and therefore, the net asset value of a Fund may be significantly
affected on days when the investor has no access to the Fund.
An exchange-traded equity security is valued at its most recent sale price.
Lacking any sales, the security is valued at the calculated mean between the
most recent bid quotation and the most recent asked quotation (the "Calculated
Mean"). Lacking a Calculated Mean, the security is valued at the most recent bid
quotation. An equity security which is traded on The Nasdaq Stock Market Inc.
("Nasdaq") is valued at its most recent sale price. Lacking any sales, the
security is valued at the most recent bid quotation. The value of an equity
security not quoted on Nasdaq, but traded in another over-the-counter market, is
its most recent sale price. Lacking any sales, the security is valued at the
Calculated Mean. Lacking a Calculated Mean, the security is valued at the most
recent bid quotation.
Debt securities are valued at prices supplied by a pricing agent(s) which
reflect broker/dealer supplied valuations and electronic data processing
techniques. Money market instruments purchased with an original maturity of
sixty days or less, maturing at par, shall be valued at amortized cost, which
the Board believes approximates market value. If it is not possible to value a
particular debt security pursuant to these valuation methods, the value of such
security is the most recent bid quotation supplied by a bona fide marketmaker.
If it is not possible to value a particular debt security pursuant to the above
methods, the investment manager of the particular fund may calculate the price
of that debt security, subject to limitations established by the Board.
An exchange-traded options contract on securities, currencies, futures and other
financial instruments is valued at its most recent sale price on such exchange.
Lacking any sales, the options contract is valued at the Calculated Mean.
Lacking any Calculated Mean, the options contract is valued at the most recent
bid quotation in the case of a purchased options contract, or the most recent
asked quotation in the case of a written options contract. An options contract
on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate on the
valuation date.
If a security is traded on more than one exchange, or upon one or more exchanges
and in the over-the-counter market, quotations are taken from the market in
which the security is traded most extensively.
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If, in the opinion of the Valuation Committee of the Board of Trustees, the
value of a portfolio asset as determined in accordance with these procedures
does not represent the fair market value of the portfolio asset, the value of
the portfolio asset is taken to be an amount which, in the opinion of the
Valuation Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by a Fund is determined
in a manner which, in the discretion of the Valuation Committee, most fairly
reflects market value of the property on the valuation date.
Following the valuations of securities or other portfolios assets in terms of
the currency in which the market quotation used is expressed ("Local Currency"),
the value of these portfolio assets in terms of U.S. dollars is calculated by
converting the Local Currency into U.S. dollars at the prevailing currency
exchange rate on the valuation date.
PERFORMANCE
A Fund may advertise several types of performance information for a class of
shares, including "yield" and "average annual total return" and "total return."
Performance information will be computed separately for each class. Each of
these figures is based upon historical results and is not representative of the
future performance of any class of a Fund. A Fund with fees or expenses being
waived or absorbed by Scudder Kemper may also advertise performance information
before and after the effect of the fee waiver or expense absorption.
A 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
various measures of performance are described below. Performance information
will be computed separately for each class.
Each Fund's average annual total return quotation is computed in accordance with
a standardized method prescribed by rules of the SEC. The average annual total
return for a Fund for 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 or Class C shares
includes the effect of the applicable contingent deferred sales charge that may
be imposed at the end of the period. The redeemable value is then divided by the
initial investment, and this quotient is taken to the Nth root (N representing
the number of years in the period) and 1 is subtracted from the result, which is
then expressed as a percentage. The calculation assumes that all income and
capital gains dividends paid by the 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 a Fund's total return is not subject to a standardized formula,
except when calculated for purposes of 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 an investment (assumed below to
be $10,000) ("initial investment") in a 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 and Class C shares may or may not
include the effect of the applicable contingent deferred sales charge that may
be imposed at the end of the period. The calculation assumes that all income and
capital gains dividends paid by the 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 charge were included. Total return figures for Class A
shares for various periods are set forth in the tables below.
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 a Fund's
portfolio for the period referenced, assuming the reinvestment of all dividends.
Thus, these figures reflect the change in the value of an investment in a 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.
A Fund's performance figures are based upon historical results and are not
representative of future performance. Each 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
shares and Class C shares are sold at net asset value. Redemptions of Class B
shares may be subject to a contingent deferred sales
47
<PAGE>
charge that is 4% in the first year following the purchase, declines by a
specified percentage thereafter and becomes zero after six years. Redemption of
Class C shares may be subject to a 1% contingent deferred sales charge in the
first year following purchase. Average annual total return figures do, and total
return figures may, include the effect of the contingent deferred sales charge
for the Class B shares 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. Returns and net asset value will
fluctuate. Factors affecting each 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 the returns
described in this section. Shares of each Fund are redeemable at the then
current net asset value, which may be more or less than original cost.
A Fund's performance may be compared to that of the Consumer Price Index or
various unmanaged bond indexes including, but not limited to, the Salomon
Brothers High Grade Corporate Bond Index, the Lehman Brothers Adjustable Rate
Index, the Lehman Brothers Aggregate Bond Index, the Lehman Brothers Government/
Corporate Bond Index, the Salomon Brothers Long-Term High Yield Index, the
Salomon Brothers 30 Year GNMA Index and the Merrill Lynch Market Weighted Index
and may also be compared to the performance of other mutual funds or mutual fund
indexes with similar objectives and policies as reported by independent mutual
fund reporting services such as Lipper Analytical Services, Inc. (""Lipper").
Lipper performance calculations are based upon changes in net asset value with
all dividends reinvested and do not include the effect of any sales charges.
Information may be quoted from publications such as Morningstar, Inc., The Wall
Street Journal, Money Magazine, Forbes, Barron's, Fortune, The Chicago Tribune,
USA Today, Institutional Investor and Registered Representative. Also, investors
may want to compare the historical returns of various investments, performance
indexes of those investments or economic indicators, including but not limited
to stocks, bonds, certificates of deposit and other bank products, money market
funds and U.S. Treasury obligations. Bank product performance may be based upon,
among other things, the BANK RATE MONITOR National Index(TM) or various
certificate of deposit indexes. Money market fund performance may be based upon,
among other things, the IBC/Donoghue's Money Fund Report(R) or Money Market
Insight(R), reporting services on money market funds. Performance of U.S.
Treasury obligations may be based upon, among other things, various U.S.
Treasury bill indexes. Certain of these alternative investments may offer fixed
rates of return and guaranteed principal and may be insured. Economic indicators
may include, without limitation, indicators of market rate trends and cost of
funds, such as Federal Home Loan Bank Board 11th District Cost of Funds Index
("COFI").
A 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. A 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.
Each Fund's returns and net asset value will fluctuate and shares of a 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 about each Fund's performance also appears in its Annual Report to
Shareholders, which is available without charge from the applicable Fund.
The figures below show performance information for various periods. The net
asset values and returns of each class of shares 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.
AGGRESSIVE GROWTH FUND -- SEPTEMBER 30, 1998
AVERAGE ANNUAL TOTAL Fund Class Fund Class Fund Class
RETURN TABLE A Shares B Shares C Shares
- ------------ -------- -------- --------
Life of Class(+) 7.87% 9.14% 10.79%
One Year -13.93% -11.90% -9.29%
(+) Since December 31, 1996 for Class A, B and C shares.
48
<PAGE>
BLUE CHIP FUND -- OCTOBER 31, 1998
AVERAGE ANNUAL TOTAL Fund Class Fund Class Fund Class
RETURN TABLE A Shares B Shares C Shares
- ------------ -------- -------- --------
Life of Class(+) 12.24% 17.59% 18.01%
Ten Years 14.05% N/A N/A
Five Years 14.01% N/A N/A
One Year 1.59% 4.14% 7.08%
(+) Since November 23, 1987 for Class A shares. Since May 31, 1994 for
Class B and Class C shares.
GROWTH FUND -- SEPTEMBER 30, 1998
AVERAGE ANNUAL TOTAL Fund Class Fund Class Fund Class
RETURN TABLE A Shares B Shares C Shares
- ------------ -------- -------- --------
Life of Class(+) 12.04% 9.62% 10.10%
Ten Years 12.47% N/A N/A
Five Years 6.38% N/A N/A
One Year -16.84% -14.97% -12.50%
(+) Since April 4, 1966 for Class A shares. Since May 31, 1994 for Class B
and Class C shares.
SMALL CAP FUND -- SEPTEMBER 30, 1998
AVERAGE ANNUAL TOTAL Fund Class Fund Class Fund Class
RETURN TABLE A Shares B Shares C Shares
- ------------ -------- -------- --------
Life of Class(+) 11.52% 7.50% 7.94%
Ten Years 11.86% N/A N/A
Five Years 5.04% N/A N/A
One Year -29.46% -28.02% -25.65%
(+) Since February 20, 1969 for Class A shares. Since May 31, 1994 for
Class B and Class C shares.
NA -- Not Available.
TECHNOLOGY FUND -- OCTOBER 31, 1998
AVERAGE ANNUAL TOTAL Fund Class Fund Class Fund Class
RETURN TABLE A Shares B Shares C Shares
- ------------ -------- -------- --------
Life of Class(+) 13.06% 19.46% 19.95%
Ten Years 15.88% N/A N/A
Five Years 16.88% N/A N/A
One Year 2.00% 4.61% 7.57%
(+) Since September 7, 1948 for Class A shares. Since May 31, 1994 for
Class B and Class C shares.
NA--Not Available.
TOTAL RETURN FUND -- OCTOBER 31, 1998
AVERAGE ANNUAL TOTAL Fund Class A Fund Class Fund Class
RETURN TABLE Shares B Shares C Shares
- ------------ ------ -------- --------
Life of Class(+) 11.78% 12.82% 13.62%
Ten Years 12.31% N/A N/A
Five Years 9.45% N/A N/A
One Year 4.14% 6.52% 9.50%
(+) Since March 2, 1964 for Class A shares. Since May 31, 1994 for Class B
and Class C shares.
49
<PAGE>
VALUE+GROWTH FUND -- NOVEMBER 30, 1998
AVERAGE ANNUAL TOTAL Fund Class Fund Class Fund Class
RETURN TABLE A Shares B Shares C Shares
- ------------ -------- -------- --------
Life of Class(+) 19.37% 20.23% 20.66%
Three Years 20.23% 19.01% 19.52%
One Year 20.66% 8.06% 5.63%
(+) Since October 16, 1995 for Class A, B and C shares.
FOOTNOTES FOR ALL FUNDS
(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. Amounts were adjusted for Class C shares for the contingent
deferred sales charge that may be imposed for periods less than one year.
(2) Includes short-term capital gain dividends, if any.
Investors may want to compare the performance of a 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
and may be insured. Withdrawal of deposits prior to maturity will normally be
subject to a penalty. Rates offered by banks and other depository institutions
are subject to change at any time specified by the issuing institution.
Information regarding bank products may be based upon, among other things, the
BANK RATE MONITOR National Index(TM) for certificates of deposit, which is an
unmanaged index and is based on stated rates and the annual effective yields of
certificates of deposit in the ten largest banking markets in the United States,
or the CDA Investment Technologies, Inc. Certificate of Deposit Index, which is
an unmanaged index based on the average monthly yields of certificates of
deposit.
Investors also may want to compare the performance of a 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 a Fund, such as the Total
Return Fund, to the performance of a hypothetical portfolio weighted 60% in the
Standard & Poor's 500 Stock Index (an unmanaged index generally representative
of the U.S. stock market) and 40% in the Lehman Brothers Government/Corporate
Bond Index (an unmanaged index generally representative of intermediate and
long-term government and investment grade corporate debt securities). See the
footnotes above for a more complete description of these indexes. The Total
Return Fund may invest in both equity and fixed income securities. The
percentage of assets invested in each type of security will vary from time to
time in the discretion of the Fund's investment manager and will not necessarily
approximate the 60%/40% weighting of this hypothetical index.
Investors may want to compare the performance of a 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 (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.
The following tables compare the performance of the Class A shares of the Funds
over various periods with that of other mutual funds within the categories
described below according to data reported by Lipper Analytical Services, Inc.
("Lipper"), New York, New York, which is a mutual fund reporting service. Lipper
performance figures are based on changes in net asset value, with all income and
capital gain dividends reinvested. Such calculations do not include the effect
of any sales charges. Future performance cannot be guaranteed. Lipper publishes
performance analyses on a regular basis. Each category includes funds with a
variety of objectives, policies and market and credit risks that should be
considered in reviewing these rankings.
50
<PAGE>
<TABLE>
<CAPTION>
AGGRESSIVE GROWTH FUND
Lipper Mutual Fund
Performance Analysis
--------------------
Capital Appreciation Funds
--------------------------
<S> <C>
One Year (Period ended 9/30/98) #117 of 238 funds
The Lipper Capital Appreciation Fund category includes funds which aim to
maximize capital appreciation.
BLUE CHIP FUND
Lipper Mutual Fund
Performance Analysis
--------------------
Growth & Income Funds
---------------------
Ten Year (Period ended 10/31/98) #80 of 146 funds
Five Year (Period ended 10/31/98) #213 of 296 funds
One Year (Period ended 10/31/98) #476 of 726 funds
The Lipper Growth & Income Funds category includes funds which combine a growth
of earnings orientation and an income requirement for level and/or rising
dividends.
GROWTH FUND
Lipper Mutual Fund
Performance Analysis
--------------------
Growth Funds
------------
Twenty Years (Period ended 9/30/98) #57 of 98 funds
Fifteen Years (Period ended 9/30/98) #88 of 113 funds
Ten Years (Period ended 9/30/98) #130 of 187 funds
Five Years (Period ended 9/30/98) #332 of 359 funds
One Year (Period ended 9/30/98) #757 of 954 funds
The Lipper Growth Funds category includes funds which normally invest in
companies whose long-term earnings are expected to grow significantly faster
than the earnings of the stocks represented in the major unmanaged stock
indices.
SMALL CAP FUND
Lipper Mutual Fund
Performance Analysis
Small Cap Company
Growth Funds
------------
Twenty Years (Period ended 9/30/98) #4 of 14 funds
Fifteen Years (Period ended 9/30/98) #10 of 22 funds
Ten Years (Period ended 9/30/98) #36 of 62 funds
Five Years (Period ended 9/30/98) #146 of 180 funds
One Year (Period ended 9/30/98) #426 of 576 funds
The Lipper Small Company Growth Fund category includes funds which by prospectus
or portfolio practice limit their investments to companies on the basis of the
size of the company.
51
<PAGE>
TECHNOLOGY FUND
Lipper Mutual Fund
Performance Analysis
--------------------
Science &
---------
Technology Funds
----------------
Twenty Years (Period ended 10/31/98) #2 of 3 funds
Fifteen Years (Period ended 10/31/98) #4 of 7 funds
Ten Years (Period ended 10/31/98) #11 of 12 funds
Five Years (Period ended 10/31/98) #11 of 19 funds
One Year (Period ended 10/31/98) #38 of 69 funds
The Lipper Science & Technology Funds category includes funds which invest 65%
of their equity portfolio in science and technology stocks.
TOTAL RETURN FUND
Lipper Mutual Fund
Performance Analysis
--------------------
Balanced Funds
--------------
Twenty Years (Period ended 10/31/98) #6 of 28 funds
Fifteen Years (Period ended 10/31/98) #20 of 29 funds
Ten Years (Period ended 10/31/98) #16 of 56 funds
Five Years (Period ended 10/31/98) #121 of 151 funds
One Year (Period ended 10/31/98) #151 of 395 funds
The Lipper Balanced Fund category includes funds whose primary objectives are to
conserve principal by maintaining at all times a balanced portfolio of both
stock and bonds. Typically, the stock/bond ratio ranges around 60% to 40%.
VALUE + GROWTH FUND
Lipper Mutual Fund
Performance Analysis
--------------------
Growth & Income
---------------
Three Year (Period ended 11/30/98) #218 of 459 funds
One Year (Period ended 11/30/98) #402 of 744 funds
The Lipper Growth & Income Fund category includes funds which combine a growth
of earnings orientation and an income requirement for level and/or rising
dividends.
</TABLE>
OFFICERS AND BOARD MEMBERS
The officers and trustees of the Funds, their birth dates, their principal
occupations and their affiliations, if any, with the Advisor and KDI are listed
below. All persons named as trustees also serve in similar capacities for other
funds advised by the Adviser.
All Funds:
The officers and trustees of the Fund, their birthdates, their principal
occupations and their affiliations, if any, with Scudder Kemper and KDI, are
listed below. All persons named as officers and trustees also serve in similar
capacities for other funds advised by the Adviser. :
LEWIS A. BURNHAM (1/8/33), Trustee, 16410 Avila Boulevard, Tampa, Florida;
Retired; formerly, Partner, Business Resources Group; formerly, Executive Vice
President, Anchor Glass Container Corporation.
52
<PAGE>
DONALD L. DUNAWAY (3/8/37), Trustee, 7515 Pelican Bay Boulevard, Naples,
Florida; Retired; formerly, Executive Vice President, A.O. Smith Corporation
(diversified manufacturer).
ROBERT B. HOFFMAN (12/11/36), Trustee, 800 North Lindbergh Boulevard, St. Louis,
Missouri; Vice Chairman and Chief Financial Officer, Monsanto Company
(agricultural, pharmaceutical and nutritional/food products); formerly, Vice
President, Head of International Operations, FMC Corporation (manufacturer of
machinery and chemicals).
DONALD R. JONES (1/17/30), Trustee, 182 Old Wick Lane, Inverness, Illinois;
Retired; Director, Motorola, Inc. (manufacturer of electronic equipment and
components); formerly, Executive Vice President and Chief Financial Officer,
Motorola, Inc.
THOMAS W. LITTAUER (4/26/55), Trustee*, Two International Place, Boston,
Massachusetts; Managing Director, Scudder Kemper; formerly, Head of Broker
Dealer Division of an unaffiliated investment management firm during 1997; prior
thereto, President of Client Management Services of an unaffiliated investment
management firm from 1991 to 1996.
SHIRLEY D. PETERSON (9/3/41), Trustee, 401 Rosemont Avenue, Frederick, Maryland;
President, Hood College; formerly, Partner, Steptoe & Johnson (attorneys); prior
thereto, Commissioner, Internal Revenue Service; prior thereto, Assistant
Attorney General, U.S. Department of Justice; Director, Bethlehem Steel Corp.
DANIEL PIERCE (3/18/34), Trustee*, Two International Place, Boston,
Massachusetts; Managing Director, Scudder Kemper.
WILLIAM P. SOMMERS (7/22/33), Trustee, 24717 Harbour View Drive, Ponte Vedra
Beach, Florida; Consultant and Director, SRI International (research and
development); prior thereto, President and Chief Executive Officer, SRI
International; prior thereto, Executive Vice President, Iameter (medical
information and educational service provider); prior thereto, Senior Vice
President and Director, Booz, Allen & Hamilton Inc. (management consulting
firm); Director, PSI Inc., Evergreen Solar, Inc. and Litton Industries.
MARK S. CASADY (9/21/60), President*, 345 Park Avenue, New York, New York;
Managing Director, Scudder Kemper; formerly, Institutional Sales Manager of an
unaffiliated mutual fund distributor.
PHILIP J. COLLORA (11/15/45), Vice President and Secretary*, 222 South Riverside
Plaza, Chicago, Illinois; Senior Vice President and Assistant Secretary, Scudder
Kemper.
ANN M. McCREARY (11/6/56), Vice President*, 345 Park Avenue, New York, New York;
Managing Director, Scudder Kemper.
KATHRYN L. QUIRK (12/3/52), Vice President*, 345 Park Avenue, New York, New
York; Managing Director, Scudder Kemper.
LINDA J. WONDRACK (9/12/64), Vice President*, Two International Place, Boston,
Massachusetts; Senior Vice President, Scudder Kemper.
JOHN R. HEBBLE (6/27/58), Treasurer*, Two International Place, Boston,
Massachusetts; Senior Vice President, Scudder Kemper.
BRENDA LYONS, (2/21/63) Assistant Treasurer*, Two International Place, Boston,
Massachusetts; Senior Vice President, Scudder Kemper.
CAROLINE PEARSON (4/1/62), Assistant Secretary*, Two International Place,
Boston, Massachusetts; Senior Vice President, Scudder Kemper; formerly,
Associate, Dechert Price & Rhoads (law firm) 1989 to 1997.
MAUREEN E. KANE (2/14/62), Assistant Secretary*, Two International Place,
Boston, Massachusetts; Vice President, Scudder Kemper; formerly, Assistant Vice
President of an unaffiliated investment management firm; prior thereto,
Associate Staff Attorney of an unaffiliated investment management firm;
Associate, Peabody & Arnold (law firm).
ELIZABETH C. WERTH (10/1/47), Assistant Secretary*, 222 South Riverside Plaza,
Chicago, Illinois; Vice President, Scudder Kemper and KDI.
Aggressive Growth Fund and Small Cap Fund:
KURT R. STALZER (5/1/58), Vice President*, 222 South Riverside Plaza, Chicago,
Illinois; Managing Director, Scudder Kemper.
53
<PAGE>
Blue Chip Fund and Technology Fund:
TRACY CHESTER (9/27/54), Vice President*, 222 South Riverside Plaza, Chicago,
Illinois; Managing Director, Scudder Kemper; formerly, Portfolio Manager for
Fiduciary Management; prior thereto, independent consultant managing private
accounts.
Value+Growth Fund:
PHILIP S. FORTUNA (11/30/57), Vice President*, 101 California Street, Suite
4100, San Francisco, California; Managing Director, Scudder Kemper.
Total Return Fund:
GARY A. LANGBAUM (12/16/48), Vice President*, 222 South Riverside Plaza,
Chicago, Illinois; Managing Director, Scudder Kemper.
*Interested persons of the Fund as defined in the 1940 Act.
The trustees and officers who are "interested persons" as designated above
receive no compensation from the Funds. The table below shows amounts paid or
accrued to those trustees who are not designated "interested persons" during
each Fund's 1998 fiscal year except that the information in the last column is
for calendar year 1998.
<TABLE>
<CAPTION>
Aggregate Compensation From Fund
Total
Compensation
From Fund
and
Kemper Fund
Complex
Value+ Paid
Name of Trustee Aggressive Blue Chip Growth Small Cap Tech Total Return Growth Trustees**
- --------------- ---------- --------- ------ --------- ---- ------------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Lewis A. Burnham $400 $3,000 $5,900 $4,200 $4,400 $6,200 $1,600 $126,100
Donald L. Dunaway* $400 $3,100 $6,400 $4,500 $4,700 $6,700 $1,800 $135,000
Robert B. Hoffman $400 $2,700 $5,600 $4,000 $4,200 $5,900 $1,500 $116,100
Donald R. Jones $400 $3,000 $6,100 $4,300 $4,500 $6,400 $1,600 $129,600
Shirley D. Peterson $300 $2,500 $5,200 $5,700 $3,900 $5,500 $1,400 $108,800
William P. Sommers $300 $2,500 $5,200 $5,700 $3,900 $5,500 $1,400 $108,800
</TABLE>
* Includes deferred fees. Pursuant to deferred compensation agreements with
Kemper funds deferred amounts accrue interest monthly at a rate equal to
the yield of Zurich Money Funds -- Zurich Money Market Fund. Total deferred
amounts (including interest thereon) payable from the Funds through each
Fund's fiscal year are $0, $12,600, $36,400, $22,400, $26,700, $39,400 and
$1,800 for Mr. Dunaway for the Aggressive, Blue Chip, Growth, Small Cap,
Technology, Total Return and Value+Growth Funds, respectively.
** Includes compensation for service on the boards of 26 Kemper funds with 48
fund portfolios. Each trustee currently serves as a trustee of 26 Kemper
funds with 45 fund portfolios.
As of December 31, 1998, the officers and trustees of the Funds, as a group,
owned less than 1% of the then outstanding shares of each Fund and no person
owned of record 5% or more of the outstanding shares of any class of any Fund,
except the persons indicated in the charts below.
<TABLE>
<CAPTION>
Kemper Aggressive Growth Fund
- -----------------------------
Name and Address Class Percentage
- ---------------- ----- ----------
<S> <C> <C>
National Financial Svcs Corp., A 7.37
200 Liberty Street
New York, NY 10281
54
<PAGE>
Donaldson Lufkin Jenrette A 5.26
Securities Corp. Inc.
PO Box 2052
Jersey City, NJ 07303
National Financial Svcs Corp., B 9.65
200 Liberty Street
New York, NY 10281
Donaldson Lufkin Jenrette B 8.33
Securities Corp. Inc.
PO Box 2052
Jersey City, NJ 07303
National Financial Svcs Corp., C 10.38
200 Liberty Street
New York, NY 10281
Kemper Blue Chip Fund
- ---------------------
Name and Address Class Percentage
- ---------------- ----- ----------
National Financial Svcs Corp., B 5.01
200 Liberty Street
New York, NY 10281
Donaldson Lufkin Jenrette B 6.60
Securities Corp. Inc.
PO Box 2052
Jersey City, NJ 07303
Prudential Securities, Inc. C 5.67
One New York Plaza
New York, NY 10004-1901
55
<PAGE>
Kemper Small Capitalization Equity
- ----------------------------------
Name and Address Class Percentage
- ---------------- ----- ----------
Everen Securities, Inc. B 5.24
111 E Kilbourn Ave
Milwaukee, WI 53202
J.C. Bradford & Co. C 9.61
330 Commerce St.,
Nashville, TN 37201
Kemper Technology Fund
- ----------------------
Name and Address Class Percentage
- ---------------- ----- ----------
Everen Securities, Inc. B 5.40
111 E Kilbourn Ave
Milwaukee, WI 53202
J.C. Bradford & Co. C 8.15
330 Commerce St.,
Nashville, TN 37201
Kemper Value Plus Growth Fund
Name and Address Class Percentage
- ---------------- ----- ----------
National Financial Svcs Corp., B 5.45
200 Liberty Street
New York, NY 10281
Everen Securities, Inc. B 5.63
111 E Kilbourn Ave
Milwaukee, WI 53202
National Financial Svcs Corp., C 10.01
200 Liberty Street
New York, NY 10281
* Record and beneficial owner.
** Record owner only.
</TABLE>
56
<PAGE>
SHAREHOLDER RIGHTS
The Funds are open-end management investment companies, organized as separate
business trusts under the laws of Massachusetts. The Aggressive Growth Fund was
organized as a business trust under the laws of Massachusetts on October 3,
1996. The Blue Chip Fund was organized as a business trust under the laws of
Massachusetts on May 28, 1987. The Growth Fund was organized as a business trust
under the laws of Massachusetts on October 24, 1985 and, effective January 31,
1986, that Fund pursuant to a reorganization succeeded to the assets and
liabilities of Kemper Growth Fund, Inc., a Maryland corporation organized in
1965. The Small Cap Fund was organized as a business trust under the laws of
Massachusetts on October 24, 1985 and, effective January 31, 1986, that Fund
pursuant to a reorganization succeeded to the assets and liabilities of Kemper
Summit Fund, Inc., a Maryland corporation organized in 1968. Prior to February
1, 1992, the Small Cap Fund was known as "Kemper Summit Fund." The Technology
Fund was organized as a business trust under the laws of Massachusetts on
October 24, 1985 as Technology Fund and changed its name to Kemper Technology
Fund effective February 1, 1988. Effective January 31, 1986, Technology Fund
pursuant to a reorganization succeeded to the assets and liabilities of
Technology Fund, Inc., a Maryland corporation originally organized as a Delaware
corporation in 1948. Technology Fund was known as Television Fund, Inc. until
1950 and as Television-Electronics Fund, Inc. until 1968. The Total Return Fund
was organized as a business trust under the laws of Massachusetts on October 24,
1985 and, effective January 31, 1986, that Fund pursuant to a reorganization
succeeded to the assets and liabilities of Kemper Total Return Fund, Inc., a
Maryland corporation organized in 1963. The Total Return Fund was known as
Balanced Income Fund, Inc. until 1972 and as Supervised Investors Income Fund,
Inc. until 1977. The Value+Growth Fund was organized as a business trust under
the laws of Massachusetts on June 14, 1995 under the name Kemper Value Plus
Growth Fund and does business as Kemper Value+Growth Fund.
The Technology Fund may in the future seek to achieve its investment objective
by pooling its assets with assets of other mutual funds for investment in
another investment company having the same investment objective and
substantially the same investment policies and restrictions as such Fund. The
purpose of such an arrangement is to achieve greater operational efficiencies
and to reduce costs. It is expected that any such investment company will be
managed by Scudder Kemper in substantially the same manner as the corresponding
Fund. Shareholders of a Fund will be given at least 30 days' prior notice of any
such investment, although they will not be entitled to vote on the action. Such
investment would be made only if the Trustees determine it to be in the best
interests of the respective Fund and its shareholders.
Currently, each Fund offers four classes of shares. These are Class A, Class B
and Class C shares, as well as Class I shares, which have different expenses,
which may affect performance. Class I shares are available for purchase
exclusively by the following categories of institutional investors: (1)
tax-exempt retirement plans (Profit Sharing, 401(k), Money Purchase Pension and
Defined Benefit Plans) of Scudder Kemper Investments, Inc. ("Scudder Kemper")
and its affiliates and rollover accounts from those plans; (2) the following
investment advisory clients of Scudder Kemper and its investment advisory
affiliates that invest at least $1 million in a Fund: unaffiliated benefit
plans, such as qualified retirement plans (other than individual retirement
accounts and self-directed retirement plans); unaffiliated banks and insurance
companies purchasing for their own accounts; and endowment funds of unaffiliated
non-profit organizations; (3) investment-only accounts for large qualified
plans, with at least $50 million in total plan assets or at least 1000
participants; (4) trust and fiduciary accounts of trust companies and bank trust
departments providing fee based advisory services that invest at least $1
million in a Fund on behalf of each trust; (5) policy holders under
Zurich-American Insurance Group's collateral investment program investing at
least $200,000 in a Fund and (6) investment companies managed by Scudder Kemper
that invest primarily in other investment companies. The Board of Trustees of a
Fund may authorize the issuance of additional classes and additional Portfolios
if deemed desirable, each with its own investment objectives, policies and
restrictions. Since the Funds may offer multiple Portfolios, each is known as a
"series company." Shares of a Fund have equal noncumulative voting rights except
that Class B and Class C shares have separate and exclusive voting rights with
respect to each Fund's Rule 12b-1 Plan. Shares of each class also have equal
rights with respect to dividends, assets and liquidation of such 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 of each Fund
are fully paid and nonassessable when issued, are transferable without
restriction and have no preemptive or conversion rights. The Funds are not
required to hold annual shareholder meetings and do not intend to do so.
However, they 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 each Fund, shareholders may remove trustees. If shares of more than one
Portfolio for any Fund 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.
The Funds generally are not required to hold meetings of their shareholders.
Under the Agreement and Declaration of Trust of each Fund ("Declaration of
Trust"), however, shareholder meetings will be held in connection with the
following matters:
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(a) the election or removal of trustees if a meeting is called for such purpose;
(b) the adoption of any contract for which shareholder approval is required by
the 1940 Act); (c) any termination of the Fund 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 SEC or any state, or as the trustees may
consider necessary or desirable. The shareholders also would vote upon changes
in fundamental investment objectives, policies or restrictions.
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) each 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 a 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, each
Fund has undertaken to disseminate appropriate materials at the expense of the
requesting shareholders.
Each 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 a 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
auditors. Some matters requiring a larger vote under the Declaration of Trust,
such as termination or reorganization of a 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.
Each 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 a
Fund. The Declaration of Trust, however, disclaims shareholder liability for
acts or obligations of each Fund and requires that notice of such disclaimer be
given in each agreement, obligation, or instrument entered into or executed by a
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 a Fund and each Fund
will be covered by insurance which the trustees consider adequate to cover
foreseeable tort claims. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is considered by Scudder Kemper remote
and not material, since it is limited to circumstances in which a disclaimer is
inoperative and such Fund itself is unable to meet its obligations.
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APPENDIX--RATINGS OF FIXED INCOME INVESTMENTS
Standard & Poor's Corporation Bond Ratings
AAA. Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C. Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI. The rating CI is reserved for income bonds on which no interest is being
paid.
D. Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
Moody's Investors Service, Inc. Bond Ratings
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa. Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca. Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
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