Filed electronically with the Securities and Exchange Commission on
January 7, 1998
File No. _________
File No. 811-08599
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.____
Post-Effective Amendment No.____
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No.____
Kemper Equity Trust
-------------------
(Exact name of Registrant as Specified in Charter)
222 South Riverside Plaza, Chicago, IL 60603
-------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (312) 781-1121
--------------
Kathryn L. Quirk
Scudder Kemper Investments, Inc.
345 Park Avenue, New York, NY 10154
-----------------------------------
(Name and Address of Agent for Service)
Approximate date of proposed public offering: As soon as practicable after the
effective date of the registration statement.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, as amended, the
Registrant hereby elects to register an indefinite number of shares of
beneficial interest, $.01 par value.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
KEMPER EQUITY TRUST
KEMPER-DREMAN FINANCIAL SERVICES FUND
CROSS-REFERENCE SHEET
Items Required by Form N-1A
PART A
Item No. Item Caption Prospectus Caption
-------- ------------ ------------------
1. Cover Page COVER PAGE
2. Synopsis SUMMARY
SUMMARY OF EXPENSES
3. Condensed Financial NOT APPLICABLE
Information
4. General Description INVESTMENT OBJECTIVES, POLICIES AND RISK
of Registrant FACTORS
SUMMARY
CAPITAL STRUCTURE
5. Management of the SUMMARY
Fund INVESTMENT MANAGER AND UNDERWRITER
5A. Management's NOT APPLICABLE
Discussion of Fund
Performance
6. Capital Stock and SUMMARY
Other Securities INVESTMENT OBJECTIVES, POLICIES AND RISK
FACTORS
DIVIDENDS, DISTRIBUTIONS AND TAXES
PURCHASE OF SHARES
7. Purchase of PURCHASE OF SHARES
Securities Being SUMMARY
Offered INVESTMENT MANAGER AND UNDERWRITER
8. Redemption or SUMMARY
Repurchase REDEMPTION OR REPURCHASE OF SHARES
9. Pending Legal NOT APPLICABLE
Proceedings
1
<PAGE>
KEMPER-DREMAN FINANCIAL SERVICES FUND
(continued)
PART B
Caption in Statement of
Item No. Item Caption Additional Information
-------- ------------ ----------------------
10. Cover Page COVER PAGE
11. Table of Contents TABLE OF CONTENTS
12. General Information NOT APPLICABLE
and History
13. Investment Objectives INVESTMENT RESTRICTIONS
and Policies INVESTMENT POLICIES AND TECHNIQUES
14. Management of the Fund OFFICERS AND TRUSTEES
REMUNERATION
15. Control Persons and OFFICERS AND TRUSTEES
Principal Holders of
Securities
16. Investment Advisory INVESTMENT MANAGER AND UNDERWRITER
and Other Services
17. Brokerage Allocation PORTFOLIO TRANSACTIONS
18. Capital Stock and INVESTMENT MANAGER AND UNDERWRITER
Other Securities
19. Purchase, Redemption PURCHASE AND REDEMPTION OF SHARES
and Pricing of
Securities Being
Offered
20. Tax Status DIVIDENDS AND TAXES
21. Underwriters INVESTMENT MANAGER AND UNDERWRITER
22. Calculation of PERFORMANCE
Performance Data
23. Financial Statements NOT APPLICABLE
2
<PAGE>
Table of Contents
-----------------------------------------
Summary
-----------------------------------------
Summary of Expenses
-----------------------------------------
Investment Objective, Policies and Risk
Factors
-----------------------------------------
Investment Manager and Underwriter
-----------------------------------------
Dividends, Distributions and Taxes
-----------------------------------------
Net Asset Value
-----------------------------------------
Purchase of Shares
-----------------------------------------
Redemption or Repurchase of Shares
-----------------------------------------
Special Features
-----------------------------------------
Performance
-----------------------------------------
Fund Organization and Capital Structure
-----------------------------------------
This prospectus contains concisely the information about Kemper-Dreman Financial
Services Fund (the "Fund"), a diversified series of Kemper Equity Trust ("KET"),
an open-end management investment company, that a prospective investor should
know before investing and should be retained for future reference. A Statement
of Additional Information, which contains additional information about the Fund
and KET, dated March 1, 1998, has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated herein by reference. It is available
upon request without charge from the Fund at the address or telephone number on
this cover or the firm from which this prospectus was received. It is also
available along with other related materials on the SEC's Internet Web Site
(http://www.sec.gov).
The Fund's shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, nor are they federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other agency. Investment in the
Fund's shares involves risk, including the possible loss of
principal.
[KEMPER FUND LOGO]
Kemper-Dreman
Financial Services Fund
PROSPECTUS DATED March 1, 1998
KEMPER EQUITY TRUST
222 South Riverside Plaza, Chicago, Illinois 60606
1-800-621-1048
The investment objective of Kemper-Dreman Financial Services Fund is to provide
long-term capital appreciation.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
SUMMARY
INVESTMENT OBJECTIVE. The Kemper-Dreman Financial Services Fund (the "Fund"), a
diversified series of Kemper Equity Trust ("KET"), seeks long-term capital
appreciation by investing primarily in common stocks and other equity securities
of companies in the financial services industry believed by the Fund's
investment manager to be undervalued.
RISK FACTORS. The Fund's risks are determined by the nature of the securities
held and the portfolio management strategies used by the investment manager. The
following are descriptions of certain risks related to the investments and
techniques that the Fund may use from time to time. For a more complete
discussion of risks involved in an investment in the Fund, see "Special Risk
Factors."
There is no assurance that the investment objective of the Fund will be
achieved. The return and net asset value of the Fund will fluctuate.
Concentration by the Fund of investments in the financial services industry
creates greater risk than investment across various industries since the
financial, economic, business and developments affecting issuers in such
industry may have a greater effect on the Fund than if it had not concentrated
its assets in the financial services industry. Foreign investments by the Fund
involve risk and opportunity considerations not typically associated with
investing in U.S. companies. The U.S. Dollar value of a foreign security tends
to decrease when the value of the U.S. Dollar rises against the foreign currency
in which the security is denominated and tends to increase when the value of the
U.S. Dollar falls against such currency. Thus, the U.S. Dollar value of foreign
securities in the Fund's portfolio, and the Fund's net asset value, may change
in response to changes in currency exchange rates even though the value of the
foreign securities in local currency terms may not have changed. While the
Fund's investments in foreign securities will principally be in developed
countries, the Fund may invest a small portion of its assets in developing or
"emerging" markets, which involve exposure to economic structures that are
generally less diverse and mature than in the United States, and to political
systems that may be less stable. A small portion of the assets of the Fund may
be invested in lower rated or unrated high yield bonds, which entail greater
risk of loss of principal and interest than higher rated fixed-income
securities. There are special risks associated with options, financial futures
and foreign currency transactions and other derivatives and there is no
assurance that use of those investment techniques will be successful. See
"Investment Objective, Policies and Risk Factors."
PURCHASES AND REDEMPTIONS. The Fund provides investors with the option of
purchasing shares in the following ways:
Class A Shares Offered at net asset value plus a maximum sales charge of
5.75% of the offering price. Reduced sales charges apply to
purchases of $50,000 or more. Class A shares purchased at net
asset value under the "Large Order NAV Purchase Privilege" may
be subject to a 1% contingent deferred sales charge if
redeemed within one year of purchase and a 0.50% contingent
deferred sales charge if redeemed within the second year of
purchase.
Class B Shares Offered at net asset value, subject to a Rule 12b-1
distribution fee and a contingent deferred sales charge that
declines from 4% to zero on certain redemptions made within
six years of purchase. Class B shares automatically convert
into Class A shares (which have lower ongoing expenses) six
years after purchase.
Class C Shares Offered at net asset value without an initial sales
charge, but subject to a Rule 12b-1 distribution fee and a 1%
contingent deferred sales charge on redemptions made within
one year of purchase. Class C shares do not convert into any
other class.
Each class of shares represents interests in the same portfolio of investments
of the Fund. The minimum initial investment for each class is $1,000 and
investments thereafter must be for at least $100. Shares are redeemable at net
asset value, which may be more or less than original cost, subject to any
applicable contingent deferred sales charge. See "Purchase of Shares" and
"Redemption or Repurchase of Shares."
INVESTMENT MANAGER AND UNDERWRITER. Scudder Kemper Investments, Inc. (the
"Adviser") serves as investment manager for the Fund. The Adviser is paid an
investment management fee by the Fund based upon average daily net assets of the
Fund at an annual rate of ___%. Dreman Value Management, L.L.C. (the
2
<PAGE>
"Sub-Adviser") serves as sub-adviser for the Fund. The Sub-Adviser is paid by
the Adviser an investment management fee based upon the average daily net assets
of the Fund at an annual rate of %___. Kemper Distributors, Inc. ("KDI") is
principal underwriter and administrator for the Fund. For Class B shares and
Class C shares of the Fund, KDI receives a Rule 12b-1 distribution fee of 0.75%
of average daily net assets of each such class. KDI also receives the amount of
any contingent deferred sales charges paid on the redemption of shares. The
expenses of the Fund and of other investment companies investing in foreign
securities can be expected to be higher than for investment companies investing
primarily in domestic securities since the costs of operation are higher,
including custody and transaction costs for foreign securities and investment
management fees, but not necessarily higher than the fees charged to funds with
investment objectives similar to those of the Fund. Administrative services are
provided to shareholders under an administrative services agreement with KDI.
The Fund pays an administrative services fee at an annual rate of up to 0.25% of
average daily net assets of each of Class A, B and C shares of the Fund, which
KDI pays to financial services firms. See "Investment Manager and Underwriter."
DIVIDENDS. The Fund normally distributes semi-annually dividends of net
investment income. Any net realized short-term and long-term capital gains for
the Fund are distributed at least annually. Income and capital gain dividends of
the Fund are automatically reinvested in additional shares of the Fund, without
a sales charge, unless the investor makes an election otherwise. See "Dividends,
Distributions and Taxes."
3
<PAGE>
SUMMARY OF EXPENSES
Shareholder Transaction Expenses (1) Class A Class B Class C
------- ------- -------
Maximum Sales Charge on Purchases (as a
percentage of offering price)............... 5.75%(2) None None
Maximum Sales Charge on Reinvested Dividends.. None None None
Redemption Fees............................... None None None
Exchange Fee.................................. None None None
Maximum Contingent Deferred Sales Charge
(as a percentage of redemption proceeds)..... None(3) 4%(4) 1%(5)
- ----------
(1) Investment dealers and other firms may independently charge additional
fees for shareholder transactions or for advisory services; please see
their materials for details.
(2) Reduced sales charges apply to purchases of $50,000 or more. See "Purchase
of Shares -- Initial Sales Charge Alternative -- Class A Shares."
(3) The redemption of Class A shares purchased at net asset value under the
"Large Order NAV Purchase Privilege" may be subject to a contingent
deferred sales charge of 1% during the first year and 0.50% during the
second year. See "Purchase of Shares -- Initial Sales Charge Alternative
Class A Shares."
(4) The maximum Contingent Deferred Sales Charge on Class B Shares applies to
redemptions during the first year. The charge is 4% during the first year,
3% during the second and third years, 2% during the fourth and fifth years
and 1% in the sixth year.
(5) The Contingent Deferred Sales Charge on Class C Shares applies to
redemptions during the first year after purchase.
Annual Fund Operating Expenses
(estimated as a percentage of average net assets)
Class A Class B Class C
Shares Shares Shares
Management Fees* _____% _____% _____%
12b-1 Fees (6) (7) none _____% _____%
Other Expenses _____% _____% _____%
Total Fund Operating Expenses* _____% _____% _____%
- ----------
* After waiver
(6) Long-term Class B shareholders of the Fund may, as a result of the Fund's
Rule 12b-1 fees, pay more than the economic equivalent of the maximum
initial sales charges permitted by the National Association of Securities
Dealers, Inc., although KDI believes that this is unlikely because of the
automatic conversion feature described under "Purchase of Shares --
Deferred Sales Charge Alternative -- Class B Shares."
(7) As a result of the accrual of Rule 12b-1 fees, long-term Class C
shareholders of the Fund may pay more than the economic equivalent of the
maximum initial sales charges permitted by the National Association of
Securities Dealers, Inc.
4
<PAGE>
Example**
The following example assumes reinvestment of all dividends and distributions
and that the percentage amounts under "Total Fund Operating Expenses" remain the
same each year.
1 year 3 years
------ -------
Class A Shares (8)
Based on the estimated level of $__ $___
total operating expenses listed
above, you would pay the following
expenses on a $1,000 investment,
assuming a 5% annual return and
redemption at the end of each time
period:
Class B Shares (9)
Based on the estimated level of $ __ $ __
total operating expenses listed
above, you would pay the following
expenses on a $1,000 investment,
assuming a 5% annual return and
redemption at the end of each time
period:
You would pay the following
expenses on the same investment,
assuming no redemption: $ __ $ __
Class C Shares (10)
Based on the estimated level of $ __ $ __
total operating expenses listed
above, you would pay the following
expenses on a $1,000 investment,
assuming a 5% annual return and
redemption at the end of each time
period:
You would pay the following
expenses on the same investment,
assuming no redemption: $ __ $ __
- ----------
[**] Based on Total Fund Operating Expenses net of fee waiver (see "Annual Fund
Operating Expenses" table above).
(8) Assumes deduction of the maximum 5.75% initial sales charge at the time of
purchase and no deduction of a Contingent Deferred Sales Charge at the
time of redemption.
(9) Assumes that the shareholder was the owner on the first day of the first
year and the contingent deferred sales charge was applied as follows: 1
year (4%) and 3 years (3%).
(10) Assumes that the shareholder was the owner on the first day of the first
year and the contingent deferred sales charge of 1.00 % was applied.
The purpose of the preceding table is to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. See "Investment Manager and Underwriter" for more information. The
Fund commenced operations on March 1, 1998, thus "Management Fees" and "Other
Expenses" are estimates for the fiscal year ending __________, 1998, and
expenses are shown for only the one and three year periods.
5
<PAGE>
Each Example assumes a 5% annual rate of return pursuant to requirements of the
SEC and assumes reinvestment of all dividends and distributions. This
hypothetical rate of return is not intended to be representative of past or
future performance of the Fund. The Examples should not be considered to be a
representation of past or future expenses. Actual expenses may be greater or
less than those shown.
6
<PAGE>
INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
The following information sets forth the Fund's investment objective and
policies. The Fund's returns and net asset value will fluctuate, and there is no
assurance that the Fund will meet its objective. Except as otherwise indicated,
the Fund's investment objective and policies are not fundamental and may be
changed without a vote of shareholders. If there is a change in the Fund's
investment objective, shareholders should consider whether the Fund remains an
appropriate investment in light of their then current financial position and
needs.
Kemper-Dreman Financial Services Fund (the "Fund"), a diversified series of
Kemper Equity Trust ("KET"), seeks long-term capital appreciation. The Fund
pursues its investment objective by investing primarily in common stocks and
other equity securities of companies in the financial services industry believed
by the investment manager to be undervalued. Securities of a company may be
undervalued as a result of overreaction by investors to unfavorable news about a
company, industry or the stock markets in general or as a result of a market
decline, poor economic conditions, tax-loss selling or actual or anticipated
unfavorable developments affecting a company.
The Fund invests in securities of financial services companies, including
commercial banks, insurance companies, thrifts, consumer finance, commercial
finance, leasing, securities brokerage firms, asset management firms, and
government-sponsored financial enterprises. The Fund will invest primarily in
common stocks of larger, listed companies with a record of earnings and
dividends, low price-earnings ratios, reasonable returns on equity and sound
finances which, in the opinion of the investment manager, have intrinsic value.
The Fund may, however, from time to time, invest in stocks that pay no
dividends. It is anticipated that most stocks purchased will be listed on the
New York Stock Exchange, but the Fund may also purchase securities listed on
other securities exchanges and in the over-the-counter market.
In the opinion of the Fund's investment manager, the Fund offers investors the
opportunity to participate in the substantial long-term appreciation potential
of companies in the financial services sector. An investment in the Fund may
involve significantly greater risks and greater volatility than a diversified
equity mutual fund that is invested in issuers in various industries. The Fund
is subject to the risk that a particular group of related stocks will decline in
price due to industry-specific developments, As a result, the Fund should only
be considered a long-term investment and part of a well-diversified portfolio.
INVESTMENTS. Under normal circumstances, the Fund will invest at least 65% of
its assets in equity securities of companies in the financial services industry.
The Fund will invest primarily in equity securities of U.S. companies, but may
invest up to 30% of its assets in foreign companies and in U.S. Dollar
denominated American Depository Receipts ("ADRs"), which are bought and sold in
the United States. For purposes of the foregoing, a company will be considered
within the financial services industry if at least 50% of its assets, revenues
or net income are related to or derived from the financial services industry.
While the Fund invests predominantly in common stocks, the Fund may purchase
other types of equity securities, including preferred stock, convertible or
non-convertible securities, equity investments in partnerships, joint ventures
and other forms of non-corporate investment and rights and warrants. Securities
may be listed on national exchanges or traded over-the-counter. The Fund may
invest up to 35% of its assets in corporate debt securities, including up to 5%
of its assets in securities rated below investment-grade, i.e. rated below BBB
by Standard & Poor's Corporation and below Baa by Moody's Investor Services,
Inc., or if unrated determined to be of equivalent quality by the Fund's
investment manager, or in U.S. Treasury securities, agency and instrumentality
obligations and zero coupon securities. In addition, the Fund may enter into
repurchase agreements, purchase securities on a when-issued basis and, further,
may engage in strategic transactions to attempt to increase stock market
participation or for hedging purposes, to enhance liquidity and manage
transaction costs.
SELECTION OF INVESTMENTS. In order to determine whether a security is
"undervalued," the principal factor considered by the investment manager is the
price-earnings, or P/E, ratio of the security. The investment manager believes
that the risk in owning stocks can be reduced by investing in companies with
sound finances whose current market prices are low in relation to earnings. In
determining whether a company's finances are sound, the investment manager
considers among other things, its cash position and current ratio (current
assets compared to current liabilities).
7
<PAGE>
The investment manager applies quantitative analysis to its research process,
and begins by screening a large number of stocks. Typically, most companies
selected for inclusion in the Fund will have market capitalizations well in
excess of $1 billion. In selecting among stocks with low P/E ratios, the
investment manager also considers factors such as the following about the
issuer:
o Financial strength,
o Book-to-market value,
o Five and ten-year earnings growth rates,
o Five and ten-year dividend growth rates,
o Five and ten-year return on equity,
o Size of institutional ownership, and
o Earnings estimates for the next 12 months.
Fundamental analysis is used on companies that initially look promising.
Earnings and cash flow analysis as well as a company's conventional dividend
payout ratio are important to this process. Typically, the Fund will consist of
approximately 25 to 50 stocks. While it is anticipated that under normal
circumstances the Fund will be fully invested, in order to conserve assets
during temporary defensive periods when the investment manager deems it
appropriate, the Fund may invest up to 100% of its assets in cash or
defensive-type securities, such as high-grade debt securities (those rated BBB
or above by S&P, or Baa or above by Moody's), securities of the U.S. Government
or its agencies and high quality money market instruments, including repurchase
agreements. Investments in such interest bearing securities will be for
temporary defensive purposes only.
The Fund's policy of investing in securities that may be out of favor differs
from the investment approach followed by many other mutual funds. Companies
reporting poor earnings, whose businesses are cyclically down, whose prices have
declined sharply or that are not widely followed are not typically held by most
investment companies. It is the investment manager's belief, however, that the
securities of sound, well-managed companies that may be temporarily out of favor
due to earnings declines or other adverse developments are likely to provide a
greater total investment return than securities whose prices appear to reflect
anticipated favorable developments.
ADDITIONAL INVESTMENT INFORMATION. The Fund may periodically experience a high
portfolio turnover rate (over 100%). The Fund will usually hold stocks acquired
for the long-term and will sell stocks when the investment manager believes that
anticipated price appreciation is no longer probable, alternative investments
offer superior appreciation prospects, or the risk of decline in market prices
is greater than the potential for gain. Portfolio turnover will tend to rise
during periods of economic turbulence and decline during periods of stable
growth. The use of options and futures contracts will tend to increase the
portfolio turnover rate of the Fund. To the extent the investment policies of
the Fund result in a relatively high portfolio turnover rate, it will incur
greater expenses and brokerage fees.
SPECIAL RISK FACTORS. The Fund's risks are determined by the nature of the
securities held and the portfolio management strategies used by the investment
manager. The following are descriptions of certain risks related to the
investments and techniques that the Fund may use from time to time.
Repurchase Agreements. The Fund may invest in repurchase agreements, under which
it acquires ownership of a security and the broker-dealer or bank agrees to
repurchase the security at a mutually agreed upon time and 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 have 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. In addition, the Fund must take physical possession of
the security or receive written confirmation of the purchase and a custodial or
safekeeping receipt from a third party or be recorded as the owner of the
security through the Federal Reserve Book-Entry System. Repurchase agreements
will be limited to transactions with financial institutions believed by the
investment manager to present minimal credit risk. The investment manager will
monitor on an on-going basis the creditworthiness of the broker-dealers and
banks with which the Fund may engage in repurchase agreements. Repurchase
agreements maturing in more than seven days will be considered as illiquid for
purposes of the Fund's
8
<PAGE>
limitations on illiquid securities. The Fund will not invest more than 15% of
the value of its net assets in illiquid securities.
High Yield/High Risk Securities. The Fund may invest in debt securities with
varying degrees of credit quality. High quality bonds (rated AAA or AA by S&P or
Aaa or Aa by Moody's) characteristically have a strong capacity to pay interest
and repay principal. Medium investment-grade bonds (rated A or BBB by S&P or A
or Baa by Moody's) are defined as having adequate capacity to pay interest and
repay principal. In addition, certain medium investment-grade bonds are
considered to have speculative characteristics. The Fund may invest up to 5% of
its assets in debt securities which are rated below investment-grade
(hereinafter referred to as "lower rated securities") or which are unrated, but
deemed equivalent to those rated below investment-grade by the investment
manager. These are commonly referred to as "junk bonds." The lower the ratings
of such debt securities, the greater their risks render them like equity
securities. For a more complete description of the risks of high yield/high risk
securities, please refer to the Fund's Statement of Additional Information.
Illiquid Securities. The Fund may invest a portion of its assets in securities
for which there is not an active trading market, or which have resale
restrictions. Such securities may have been acquired through private placements
(transactions in which the securities acquired have not been registered with the
SEC). These illiquid securities generally offer a higher return than more
readily marketable securities, but carry the risk that the Fund may not be able
to dispose of them at an advantageous time or price. Some restricted securities
purchased by the Fund, however, may be considered liquid despite resale
restrictions since they can be sold to other qualified institutional buyers
under a rule of the SEC (Rule 144A). The absence of a trading market can make it
difficult to ascertain a market value for illiquid securities. Disposing of
illiquid securities may involve time-consuming negotiation and legal expenses,
and it may be difficult or impossible for the Fund to sell them promptly at an
acceptable price. Upon approval from the Fund's Board of Trustees, the Adviser
may determine which Rule 144A securities will be considered liquid.
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 Fund participates in the success or failure of any company in
which it holds stock. The market values of common stock can fluctuate
significantly, reflecting the business performance of the issuing company,
investor perception and general economic 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 stock also
offers the greatest potential for long-term gain on investment, compared to
other classes of financial assets such as bonds or cash equivalents.
Convertible Securities. The Fund may invest in convertible securities which may
offer higher income than the common stocks into which they are convertible. The
convertible securities in which the Fund may invest include fixed-income or zero
coupon debt securities, which may be converted or exchanged at a stated or
determinable exchange ratio into underlying shares of common stock. The Fund may
invest in bonds, notes, debentures and preferred stocks which may be converted
or exchanged at a stated or determinable exchange ratio into underlying shares
of common stock. Prior to their conversion, convertible securities may have
characteristics similar to both nonconvertible debt securities and equity
securities. While convertible securities generally offer lower yields than
nonconvertible debt securities of similar quality, their prices may reflect
changes in the value of the underlying common stock. Convertible securities
generally entail less credit risk than the issuer's common stock. The Fund may
be required to permit the issuer of a convertible security to redeem the
security, convert it into the underlying common stock or sell it to a third
party. Thus, the Fund may not be able to control whether the issuer of a
convertible security chooses to convert that security. If the issuer chooses to
do so, this action could have an adverse effect on this Fund's ability to
achieve its investment objectives.
Depository Receipts. For many foreign securities, there are U.S. Dollar
denominated ADRs, which are bought and sold in the United States and are issued
by domestic banks. ADRs represent the right to receive securities of foreign
issuers deposited in the domestic bank or a correspondent bank. ADRs do not
eliminate all the risk inherent in investing in the securities of foreign
issuers, such as changes in foreign currency exchange rates. However, by
investing in ADRs rather than directly in foreign issuers' stock, the Fund
avoids currency risks during the settlement period. In general, there is a
large, liquid market in the United States for most ADRs.
9
<PAGE>
Foreign Securities. Investments in foreign securities involve special
considerations, due to more limited information, higher brokerage costs,
different accounting standards, thinner trading markets and the likely impact of
foreign taxes on the yield from debt securities. They may also entail certain
other risks, such as the possibility of one or more of the following: imposition
of dividend or interest withholding or confiscatory taxes; currency blockages or
transfer restrictions; expropriation, nationalization, military coups or other
adverse political or economic developments; less government supervision and
regulation of securities exchanges, brokers and listed companies; and the
difficulty of enforcing obligations in other countries. Further, it may be more
difficult for the Fund's agents to keep currently informed about corporate
actions which may affect the prices of portfolio securities. Communications
between the U.S. and foreign countries may be less reliable than within the
U.S., increasing the risk of delayed settlements of portfolio transactions or
loss of certificates for portfolio securities. Certain markets may require
payment for securities before delivery. The Fund's ability and decisions to
purchase and sell portfolio securities may be affected by laws or regulations
relating to the convertibility of currencies and repatriation of assets. Some
countries restrict the extent to which foreigners may invest in their securities
markets. These risks may be more of a concern in developing or emerging markets.
Changes in the value of these currencies against the U.S. dollar will result in
corresponding changes in the U.S. dollar value of the Fund's assets denominated
in those currencies.
Some foreign countries also may have managed currencies, which are not free
floating against the U.S. dollar. In addition, there is risk that certain
foreign countries may restrict the free conversion of their currencies into
other currencies. Further, it generally will not be possible to eliminate the
Fund's foreign currency risk through hedging. Any devaluations in the currencies
in which the Fund's portfolio securities are denominated may have a detrimental
impact on the Fund's net asset value.
Securities Loans. The Fund is authorized to lend its portfolio securities to
qualified brokers, dealers, banks and other financial institutions for the
purpose of realizing additional investment income. The Fund does not intend to
loan securities if as a result more than 5% of its respective net assets would
be on loan.
Strategic Transactions And Derivatives. The Fund may, but is not required to,
utilize various other investment strategies as described below to hedge various
market risks (such as interest rates, currency exchange rates, and broad or
specific equity or fixed-income market movements), to manage the effective
maturity or duration of fixed-income securities in the Fund's portfolio or to
enhance potential gain. These strategies may be executed through the use of
derivative contracts. Such strategies are generally accepted as a part of modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may purchase and
sell exchange-listed and over-the-counter put and call options on securities,
equity and fixed-income indices and other financial instruments, purchase and
sell financial futures contracts and options thereon, enter into various
interest rate transactions such as swaps, caps, floors or collars, and enter
into various currency transactions such as currency forward contracts, currency
futures contracts, currency swaps or options on currencies or currency futures
(collectively, all of the above are called "Strategic Transactions").
Strategic Transactions may be used without limit to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Fund's portfolio resulting from securities markets or currency exchange
rate fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of fixed-income
securities in the Fund's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities.
Some Strategic Transactions may also be used to enhance potential gain although
no more than 5% of the Fund's assets will be committed to Strategic Transactions
entered into for non-hedging purposes. Any or all of these investment techniques
may be used at any time and in any combination, and there is no particular
strategy that dictates the use of one technique rather than another, as use of
any Strategic Transaction is a function of numerous variables including market
conditions. The ability of the Fund to utilize these Strategic Transactions
successfully will depend on the investment manager's ability to predict
pertinent market movements, which cannot be assured.
10
<PAGE>
The Fund will comply with applicable regulatory requirements when implementing
these strategies, techniques and instruments.
Strategic Transactions involving financial futures and options thereon will be
purchased, sold or entered into only for bona fide hedging, risk management or
portfolio management purposes and not for leveraging purposes. Strategic
Transactions, including derivative contracts, have risks associated with them
including possible default by the other party to the transaction, illiquidity
and, to the extent the investment manager's view as to certain market movements
is incorrect, the risk that the use of such Strategic Transactions could result
in losses greater than if they had not been used. Use of put and call options
may result in losses to the Fund, force the sale or purchase of portfolio
securities at inopportune times or for prices higher than (in the case of put
options) or lower than (in the case of call options) current market values,
limit the amount of appreciation the Fund can realize on its investments or
cause the Fund to hold a security it might otherwise sell. The use of currency
transactions can result in the Fund's incurring losses as a result of a number
of factors including the imposition of exchange controls, suspension of
settlements or the inability to deliver or receive a specified currency. The use
of options and futures transactions entails certain other risks. In particular,
the variable degree of correlation between price movements of futures contracts
and price movements in the related portfolio position of the Fund creates the
possibility that losses on the hedging instrument may be greater than gains in
the value of the Fund's position. In addition, futures and options markets may
not be liquid in all circumstances and certain over-the-counter options may have
no markets. As a result, in certain markets, the Fund might not be able to close
out a transaction without incurring substantial losses, if at all. Although the
use of futures contracts and options transactions for hedging should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized. The
Strategic Transactions that the Fund may use and some of their risks are
described more fully in the Fund's Statement of Additional Information.
INVESTMENT POLICIES. The Fund has adopted certain fundamental policies, which
are described in the Statement of Additional Information and cannot be changed
without a vote of shareholders and which are designed to reduce the Fund's
investment risk. The investment objective and policies of the Fund that are not
incorporated into any of the fundamental investment restrictions referred to
above may be changed by the Board of Trustees of the Fund without shareholder
approval.
As a matter of fundamental policy, the Fund may not borrow money except as
permitted under Federal law. In addition, as a matter of fundamental policy, the
Fund may not make loans except through the lending of portfolio securities, the
purchase of debt securities or through repurchase agreements.
A complete description of these and other policies and restrictions is contained
under "Investment Restrictions" in the Fund' Statement of Additional
Information.
11
<PAGE>
INVESTMENT MANAGER AND UNDERWRITER
INVESTMENT MANAGER. Scudder Kemper Investments, Inc. (the "Adviser"), 345 Park
Avenue, New York, New York, is the investment manager of the Fund and provides
the Fund with continuous professional investment supervision. Dreman Value
Management, L.L.C. (the "Sub-Adviser"), Three Harding Road, Red Bank, New Jersey
07701, is the sub-adviser for the Fund.
The Trustees have overall responsibility for the management of the Fund under
Maryland law. Professional investment supervision is provided by the Adviser.
Under the Investment Management Agreement with the Adviser, dated
_______________, the Fund is responsible for all of its expenses, including fees
and expenses incurred in connection with membership in investment company
organizations; fees and expenses of the Fund's accounting agent; brokers'
commissions; legal, auditing and accounting expenses; taxes and governmental
fees; the fees and expenses of the transfer agent; the expenses of and the fees
for registering or qualifying securities for sale; the fees and expenses of
Trustees, officers and employees of KET who are not affiliated with the Adviser;
the cost of printing and distributing reports and notices to shareholders; and
the fees and disbursements of custodians.
The Fund pays the Adviser an investment management fee, payable monthly, at the
annual rate of .__% of the first $___ million of its average daily net assets,
.__% of average daily net assets between $___ million and $___ billion, .___% of
average daily net assets between $___ billion and $___ billion, .___% of average
daily net assets between $___ billion and $___ billion, .___% of average daily
net assets between $___ billion and $___ billion, .___% of average daily net
assets between $___ billion and $___ billion, .___% of average daily net assets
between $___ billion and $___ billion and .___% of its average daily net assets
over $___ billion. The fee is payable monthly, provided that the Fund will make
such interim payments as may be requested by the Adviser not to exceed 75% of
the amount of the fee then accrued on the books of the Fund and unpaid. All of
the Fund's expenses are paid out of gross investment income. To the extent that
the management fee paid to the Adviser is at least .75%, it is higher than that
paid by most other mutual funds. The expenses of the Fund, and of other
investment companies investing in foreign securities can be expected to be
higher than for investment companies investing primarily in domestic securities
since the costs of operation are higher, including custody and transaction costs
for foreign securities and investment management fees.
Scudder Kemper Investments, Inc., an investment counsel firm, acts as investment
adviser to the Fund. This organization, the predecessor of which is Scudder,
Stevens & Clark, Inc. ("Scudder"), is one of the most experienced investment
counsel firms in the U.S. It was established as a partnership in 1919 and
pioneered the practice of providing investment counsel to individual clients on
a fee basis. In 1928 it introduced the first no-load mutual fund to the public.
The predecessor firm reorganized from a partnership to a corporation on June 28,
1985. On June 26, 1997, Adviser's predecessor entered into an agreement with
Zurich Insurance Company ("Zurich") pursuant to which the predecessor and Zurich
agreed to form an alliance. On December 31, 1997, Zurich acquired a majority
interest in Scudder, and Zurich made its subsidiary Zurich Kemper Investments,
Inc., a part of the predecessor organization. The predecessor's name has been
changed to Scudder Kemper Investments, Inc.
Under the terms of the sub-advisory agreement between the Adviser and the
Sub-Adviser, the Sub-Adviser manages the investment and reinvestment of the
Fund's assets in accordance with the investment objective, policies and
limitations and subject to the supervision of the Adviser and the Board of
Trustees. The Sub-Adviser was formed in April 1997 and is controlled by David N.
Dreman. The Adviser pays the Sub-Adviser for its services a sub-advisory fee,
payable monthly, at the annual rate of .__% of the first $___ million of the
Fund's average daily net assets, .___% of the average daily net assets between
$___ million and $___ billion, .___% of average daily net assets between $___
billion and $___ billion, .___% of average daily net assets between $___ billion
and $___ billion, .___% of average daily net assets between $___ billion and
$___ billion, .___% of average daily net assets between $___ billion and $___
billion, .___% of average daily net assets between $___ billion and $___ billion
and .___% of the Fund's average daily net assets over $___ billion. In addition,
the Adviser has guaranteed the following minimum payments to the Sub-Adviser
during the calendar years that the Sub-Adviser serves as sub-adviser: $___
million for 1998, and $___ million in each of 2000, 2001 and 2002.
12
<PAGE>
David N. Dreman is the Fund's portfolio manager. He is the Chairman of the
Sub-Adviser, and was associated with KET's former investment adviser. Mr. Dreman
is a pioneer of the philosophy of contrarian investing (buying what is out of
favor) and a leading proponent of the low P/E investment style. He is a
columnist for Forbes and the author of several books on the value style of
investing. He received a Bachelor of Commerce from the University of Manitoba,
Winnipeg, Manitoba, Canada.
PRINCIPAL UNDERWRITER. Pursuant to an underwriting and distribution services
agreement ("distribution agreement") with the Fund, Kemper Distributors, Inc.
("KDI"), 222 South Riverside Plaza, Chicago, Illinois, 60606 is the principal
underwriter and distributor of the Fund's shares and acts as agent of the Fund
in the sale of its shares. KDI bears all of its expenses of providing services
pursuant to the distribution agreement, including the payment of any
commissions. KDI provides for the preparation of advertising or sales literature
and bears the cost of printing and mailing prospectuses to persons other than
shareholders. KDI bears the cost of qualifying and maintaining the qualification
of Fund shares for sale under the securities laws of the various states and the
Fund bears the expense of registering its shares with the SEC. KDI may enter
into related selling group agreements with various broker-dealers, including
affiliates of KDI, that provide distribution services to investors. KDI also may
provide some of the distribution services.
CLASS A SHARES. KDI receives no compensation from the Fund as principal
underwriter for Class A shares and pays all expenses of distribution of the
Fund's Class A shares under the distribution agreements not otherwise paid by
dealers or other financial services firms. As indicated under "Purchase of
Shares," KDI retains the sales charge upon the purchase of shares and pays out a
portion of this sales charge or allows concessions or discounts to firms for the
sale of the Fund's Class A shares.
CLASS B SHARES. For its services under the Class B distribution plan, KDI
receives a fee from the Fund, payable monthly, at the annual rate of 0.75% of
average daily net assets of the Fund attributable to its Class B shares. This
fee is accrued daily as an expense of Class B shares. KDI also receives any
contingent deferred sales charges. See "Redemption or Repurchase of
Shares--Contingent Deferred Sales Charge--Class B Shares." KDI currently
compensates firms for sales of Class B shares at a commission rate of 3.75%.
CLASS C SHARES. For its services under the Class C distribution plan, KDI
receives a fee from the Fund, payable monthly, at the annual rate of 0.75% of
average daily net assets of the Fund attributable to its Class C shares. This
fee is accrued daily as an expense of Class C shares. KDI currently advances to
firms the first year distribution fee at a rate of 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 the Fund.
KDI also receives any contingent deferred sales charges. See "Redemption or
Repurchase of Shares--Contingent Deferred Sales Charges--Class C Shares".
RULE 12B-1 PLANS. Since each distribution plan provides for fees payable as an
expense of each of the Class B shares and the Class C shares that are used by
KDI to pay for distribution services for those classes, each agreement is
approved and reviewed separately for the Class B shares and the Class C shares
in accordance with Rule 12b-1 under the 1940 Act, which regulates the manner in
which an investment company may, directly or indirectly, bear the expenses of
distributing its shares.
If a Rule 12b-1 Plan (the "Plan") for a class is terminated in accordance with
its terms, the obligation of the Fund to make payments to KDI pursuant to such
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.
ADMINISTRATIVE SERVICES. KDI also provides information and administrative
services for shareholders of the Fund pursuant to an administrative services
agreement ("administrative agreement"). KDI may enter into related arrangements
with various financial services firms, such as broker-dealer firms or banks
("firms"), that provide services and facilities for their customers or clients
who are shareholders of the Fund. Such administrative
13
<PAGE>
services and assistance may include, but are not limited to, establishing and
maintaining shareholder accounts and records, processing purchase and redemption
transactions, answering routine inquiries regarding the Fund and its special
features, and such other services as may be agreed upon from time to time and
permitted by applicable statute, rule or regulation. KDI bears all of its
expenses of providing services pursuant to the administrative agreement,
including the payment of any service fees. For services under the administrative
agreement, the Fund pays KDI a fee, payable monthly, at the annual rate of up to
0.25% of average daily net assets of each of Class A, B and C shares of such
Fund. KDI then pays each firm a service fee at an annual rate of up to 0.25% of
net assets of each of Class A, B and C shares maintained and serviced by the
firm. Firms to which service fees may be paid include affiliates of KDI.
CLASS A SHARES. For Class A shares, a firm becomes eligible for the service fee
based upon assets in the Fund accounts maintained and serviced by the firm
commencing in the month following the month of purchase and the fee continues
until terminated by KDI or the Fund. The fees are calculated monthly and paid
quarterly.
CLASS B AND CLASS C SHARES. KDI currently advances to firms the first-year
service fee at a rate of up to 0.25% of the purchase price of Class B and Class
C shares of the Fund. For periods after the first year, KDI currently intends to
pay firms a service fee at a rate of up to 0.25% (calculated monthly and
normally paid quarterly) of the net assets attributable to each of Class B and
Class C shares maintained and serviced by the firm during such period. After the
first year, a firm becomes eligible for the quarterly service fee and the fee
continues until terminated by KDI or the Fund.
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreements not paid to firms to compensate
itself for administrative functions performed for the Fund. Currently, the
administrative services fee payable to KDI is based only upon 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 of the administrative services fee that it
receives from the Fund to firms in the form of service fees. The effective
administrative services fee rate to be charged against all assets of the Fund
while this procedure is in effect will depend upon the proportion of Fund assets
that is in accounts for which there is a firm of record. In addition, KDI may,
from time to time, from its own resources pay certain firms additional amounts
for ongoing administrative services and assistance provided to their customers
and clients who are shareholders of the Fund.
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT._________________, as
custodian has custody of all securities and cash of the Fund. Pursuant to a
services agreement with Kemper Service Company, an affiliate of the Adviser,
_________________ serves as "Shareholder Service Agent" of the Fund and, as
such, performs all of the duties as transfer agent and dividend-paying agent.
For a description of transfer agent and shareholder service agent fees payable
to Kemper Service Company and the Shareholder Service Agent, see "Investment
Manager and Underwriter" in the Statement of Additional Information.
FUND ACCOUNTING AGENT. Scudder Fund Accounting Corporation, Two International
Place, Boston, Massachusetts, 02110-4103, a subsidiary of the Adviser, computes
net asset value for the Fund. The Fund pays Scudder Fund Accounting Corporation
an annual fee.
PORTFOLIO TRANSACTIONS. The Sub-Adviser places all orders for purchases and
sales of the Fund's securities. Subject to seeking best execution of orders, it
may consider sales of shares of the Fund and other Funds managed by the Adviser
or its affiliates as a factor in selecting broker-dealers. See "Portfolio
Transactions" in the Statement of Additional Information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND OTHER DISTRIBUTIONS. The Fund normally distributes semi-annually
dividends of net investment income, and any net realized short-term and
long-term capital gains at least annually. The Fund intends to distribute any
dividends from net investment income and any net realized capital gains after
utilization of capital loss carryforwards, if any, in December to prevent
application of federal excise tax. Additional distributions may be made at a
later date, if necessary.
14
<PAGE>
Dividends paid by the Fund with respect to each class of its shares will be
calculated in the same manner, at the same time and on the same day. The level
of income dividends per share (as a percentage of net asset value) will be lower
for Class B and Class C shares than for Class A shares primarily as a result of
the distribution services fee applicable to Class B and Class C shares.
Distributions of capital gains, if any, will be paid in the same amount for each
class.
Income and capital gain dividends, if any, of the Fund will be credited to
shareholder accounts in full and fractional shares of the same class of the 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 the 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 the 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 Fund. To use this
privilege of investing dividends of the Fund in shares of another Kemper Fund,
shareholders must maintain a minimum account value of $1,000 in the Fund
distributing the dividends. The Fund 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 the 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.
TAXES. The Fund intends to qualify as a regulated investment company under
Subchapter M of the Code and, if so qualified, generally will not be liable for
federal income taxes to the extent its earnings are distributed. To so qualify,
the Fund must satisfy certain income, asset diversification and distribution
requirements annually. Dividends derived from net investment income and net
short-term capital gains are taxable to shareholders as ordinary income and
properly designated net 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. Dividends declared in October,
November or December to shareholders of record as of a date in one of those
months and paid during the following January are treated as paid on December 31
of the calendar year declared. A portion of the dividends paid by the Fund may
qualify for the dividends received deduction available to corporate
shareholders.
A dividend received shortly after the purchase of shares reduces the net asset
value of the shares by the amount of the dividend and, although in effect a
return of capital, will be taxable to the shareholder. Thus, investors should
consider the tax implications of buying shares just prior to a dividend. The
price of shares purchased at that time includes the amount of the forthcoming
dividend, which nevertheless will be taxable to them.
A sale or exchange of shares is a taxable event that may result in gain or loss
that will be a capital gain or loss if held by the shareholder as a capital
asset, and may qualify for reduced tax rates applicable to certain capital
gains, depending upon the shareholder's holding period for the shares. Further
information relating to tax consequences is contained in the Statement of
Additional Information. Shareholders of the Fund may be subject to state, local
and foreign taxes on Fund distributions and dispositions of Fund shares.
Shareholders should consult their own tax advisors regarding the particular tax
consequences of an investment in the Fund. The Fund is required by law to
withhold 31% of taxable dividends and redemption proceeds paid to certain
shareholders who do not furnish a correct taxpayer identification number (in the
case of individuals, a social security number) and in certain other
circumstances. Any amounts so withheld are not an additional tax, and may be
applied against the affected shareholder's U.S.
federal income tax liability.
The Fund's investment income derived from foreign securities may be subject to
foreign income taxes withheld at the source. Because the amount of the Fund's
investments in various countries will change from time to time, it is not
possible to determine the effective rate of such taxes in advance.
15
<PAGE>
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.
NET ASSET VALUE
The net asset value per share of the Fund is the value of one share and is
determined separately for each class by dividing the value of the Fund's net
assets attributable to that class by the number of shares of that class
outstanding. The per share net asset value of the Class B and Class C shares of
the Fund will generally be lower than that of the Class A shares of the Fund
because of the higher expenses borne by the Class B and Class C shares. The net
asset value of shares of the Fund is computed as of the close of regular trading
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, Martin Luther King Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving and Christmas.
PURCHASE OF SHARES
ALTERNATIVE PURCHASE ARRANGEMENTS. Class A shares of the Fund are sold to
investors subject to an initial sales charge. Class B shares are sold without an
initial sales charge but are subject to higher ongoing expenses than Class A
shares and a contingent deferred sales charge payable upon certain redemptions.
Class B shares automatically convert to Class A shares six years after issuance.
Class C shares are sold without an initial sales charge but are subject to
higher ongoing expenses than Class A shares, are subject to a contingent
deferred sales charge payable upon certain redemptions within the first year
following purchase, and do not convert into another class. When placing purchase
orders, investors must specify whether the order is for Class A, Class B or
Class C shares.
The primary distinctions among the classes of the Fund's shares lie in their
initial and contingent deferred sales charge structures and in their ongoing
expenses, including asset-based sales charges in the form of Rule 12b-1
distribution fees. These differences are summarized in the table below. See,
also, "Summary of Expenses." Each class has distinct advantages and
disadvantages for different investors, and investors may choose the class that
best suits their circumstances and objectives.
<TABLE>
<CAPTION>
Annual 12b-1 Fees
(as a % of average daily
Sales Charge net assets) Other Information
------------ ----------- -----------------
<S> <C> <C> <C>
Class A Maximum initial sales charge of None Initial sales charge waived or
5.75% of the public offering reduced for certain purchases
price
Class B Maximum contingent deferred sales 0.__% Shares convert to Class A shares
charge of 4% of redemption six years after issuance
proceeds; declines to zero after
six years
Class C Contingent deferred sales charge 0.__% No conversion feature
of 1% of redemption proceeds for
redemptions made during first
year after purchase
</TABLE>
16
<PAGE>
The minimum initial investment for each class of the Fund is $1,000 and the
minimum subsequent investment is $100. The minimum initial investment for an
Individual Retirement Account is $250 and the minimum subsequent investment is
$50. Under an automatic investment plan, such as Bank Direct Deposit, Payroll
Direct Deposit or Government Direct Deposit, the minimum initial and subsequent
investment is $50. These minimum amounts may be changed at any time in
management's discretion.
Share certificates will not be issued unless requested in writing and may not be
available for certain types of account registrations. It is recommended that
investors not request share certificates unless needed for a specific purpose.
You cannot redeem shares by telephone or wire transfer or use the telephone
exchange privilege if share certificates have been issued. A lost or destroyed
certificate is difficult to replace and can be expensive to the shareholder (a
bond worth 2% or more of the certificate value is normally required).
INITIAL SALES CHARGE ALTERNATIVE--Class A Shares. The public offering price of
Class A shares for purchasers choosing the initial sales charge alternative is
the net asset value plus a sales charge, as set forth below.
<TABLE>
<CAPTION>
Sales Charge
------------
Allowed to
As a Percentage Dealers as a
As a Percentage of Net Asset Percentage of
of Offering Price Value* Offering Price
----------------- ------ --------------
Amount of Purchase
<S> <C> <C> <C>
Less than $50,000..................... 5.75% 6.10% 5.20%
$50,000 but less than $100,000........ 4.50 4.71 4.00
$100,000 but less than $250,000....... 3.50 3.63 3.00
$250,000 but less than $500,000....... 2.60 2.67 2.25
$500,000 but less than $1 million..... 2.00 2.04 1.75
$1 million and over................... .00** .00** ***
</TABLE>
- ----------
* Rounded to the nearest one-hundredth percent.
** Redemption of shares may be subject to a contingent deferred sales charge
as discussed below.
*** Commission is payable by KDI as discussed below.
The Fund receives the entire net asset value of all its shares sold. KDI, the
Fund' 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 re-allow up to the full applicable sales charge, as shown in
the above table, during periods and for transactions specified in such notice
and such reallowances may be based upon attainment of minimum sales levels.
During periods when 90% or more of the sales charge is reallowed, such dealers
may be deemed to be underwriters as that term is defined in the Securities Act
of 1933.
Class A shares of the Fund may be purchased at net asset value to the extent
that the amount invested represents the net proceeds from a redemption of shares
of a mutual fund for which the investment manager does not serve as investment
manager and KDI does not serve as Distributor ("non-Kemper Fund") provided that:
(a) the investor has previously paid either an initial sales charge in
connection with the purchase of the non-Kemper Fund shares redeemed or a
contingent deferred sales charge in connection with the redemption of the
non-Kemper Fund shares, and (b) the purchase of Fund shares is made within 90
days after the date of such redemption. To make such a purchase at net asset
value, the investor or the investor's dealer must, at the time of purchase,
submit a request that the purchase be processed at net asset value pursuant to
this privilege. KDI may in its discretion compensate 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. The redemption of the shares of the non-Kemper Fund is, for
Federal income tax purposes, a sale upon which a gain or loss may be realized.
Class A shares of the Fund may be purchased at net asset value by: (a) any
purchaser provided that the amount invested in such Fund or other Kemper Mutual
Fund 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-
17
<PAGE>
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 at its discretion compensate investment dealers or other financial
services firms in connection with the sale of Class A shares of the Fund at net
asset value in accordance with the Large Order NAV Purchase Privilege up to the
following amounts: 1.00% of the net asset value of shares sold on amounts up to
$5 million, 0.50% on the next $45 million and 0.25% on amounts over $50 million.
The commission schedule will be reset on a calendar year basis for sales of
shares pursuant to the Large Order NAV Purchase Privilege to employer sponsored
employee benefit plans using the subaccount recordkeeping system made available
through Kemper Service Company. 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 the Fund and other Kemper Mutual
Fund listed under "Special Features--Class A Shares--Combined Purchases,"
including purchases pursuant to the "Combined Purchases," "Letter of Intent" and
"Cumulative Discount" features referred to above. The privilege of purchasing
Class A shares of the Fund at net asset value under the Large Order NAV Purchase
Privilege is not available if another net asset value purchase privilege is also
applicable.
Class A shares of the Fund or any other Kemper Mutual Fund listed under "Special
Features--Class A Shares--Combined Purchases" may be purchased at net asset
value in any amount by members of the plaintiff class in the proceeding known as
Howard and Audrey Tabankin, et al. v. Kemper Short-Term Global Income Fund, et
al., Case No. 93 C 5231 (N.D. IL). This privilege is generally non-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 the Fund
at net asset value under this privilege is not available if another net asset
value purchase privilege also applies.
Class A shares of the Fund may be purchased at net asset value in any amount by
certain professionals who assist in the promotion of Kemper Funds pursuant to
personal services contracts with KDI, for themselves or members of their
families. KDI in its discretion may compensate financial services firms for
sales of Class A shares under this privilege at a commission rate of 0.50% of
the amount of Class A shares purchased.
Class A shares may be sold at net asset value in any amount to: (a) officers,
trustees, employees (including retirees) and sales representatives of the Fund,
its investment manager, its principal underwriter or certain affiliated
companies, for themselves or members of their families; (b) registered
representatives and employees of broker-dealers having selling group agreements
with KDI and officers, directors and employees of service agents of the Fund,
for themselves or their spouses or dependent children; (c) shareholders who
owned shares of KET on September 8, 1995, and have continuously owned shares of
KET (or a Kemper Fund acquired by exchange of KET shares) since that date, for
themselves or members of their families; (d) any trust, pension, profit-sharing
or other benefit plan for only such persons; (e) 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; and (f) 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
18
<PAGE>
employer groups. Class A shares may be sold at net asset value in any amount to
selected employees (including their spouses and dependent children) of banks and
other financial services firms that provide administrative services related to
order placement and payment to facilitate transactions in shares of the Fund for
their clients pursuant to an agreement with KDI or one of its affiliates. Only
those employees of such banks and other firms who as part of their usual duties
provide services related to transactions in Fund shares may purchase Fund Class
A shares at net asset value hereunder. Class A shares may be sold at net asset
value in any amount to unit investment trusts sponsored by Ranson & Associates,
Inc. In addition, unitholders of unit investment trusts sponsored by Ranson &
Associates, Inc. or its predecessors may purchase the Fund's Class A shares at
net asset value through reinvestment programs described in the prospectuses of
such trusts that have such programs. Class A shares of the Fund may be sold at
net asset value through certain investment advisers registered under the 1940
Act and other financial services firms that adhere to certain standards
established by KDI, including a requirement that such shares be sold for the
benefit of their clients participating in an investment advisory program under
which such clients pay a fee to the investment adviser or other firm for
portfolio management and other services. Such shares are sold for investment
purposes and on the condition that they will not be resold except through
redemption or repurchase by the Fund. The Fund may also issue Class A shares at
net asset value in connection with the acquisition of the assets of or merger or
consolidation with another investment company, or to shareholders in connection
with the investment or reinvestment of income and capital gain dividends.
The sales charge scale is applicable to purchases made at one time by any
"purchaser" which includes: an individual; or an individual, his or her spouse
and children under the age of 21; or a trustee or other fiduciary of a single
trust estate or single fiduciary account; or an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Code; or a pension,
profit-sharing or other employee benefit plan whether or not qualified under
Section 401 of the Code; or other organized group of persons whether
incorporated or not, provided the organization has been in existence for at
least six months and has some purpose other than the purchase of redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales charge, all orders from an organized group will have to be
placed through a single investment dealer or other firm and identified as
originating from a qualifying purchaser.
DEFERRED SALES CHARGE ALTERNATIVE--Class B Shares. Investors choosing the
deferred sales charge alternative may purchase Class B shares at net asset value
per share without any sales charge at the time of purchase. Since Class B shares
are being sold without an initial sales charge, the full amount of the
investor's purchase payment will be invested in Class B shares for his or her
account. A contingent deferred sales charge may be imposed upon redemption of
Class B shares. See "Redemption or Repurchase of Shares--Contingent Deferred
Sales Charge--Class B Shares."
KDI compensates firms for sales of Class B shares at the time of sale at a
commission rate of up to 3.75% of the amount of Class B shares purchased. KDI is
compensated by the Fund for services as distributor and principal underwriter
for Class B shares. See "Investment Manager and Underwriter."
Class B shares of the 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 of the Class B shares. The purpose of the conversion feature is to
relieve holders of Class B shares from the distribution services fee when they
have been outstanding long enough for KDI to have been compensated for
distribution related expenses. For purposes of conversion to Class A shares,
shares purchased through the reinvestment of dividends and other distributions
paid with respect to Class B shares in a shareholder's Fund account will be
converted to Class A shares on a pro rata basis.
PURCHASE OF CLASS C SHARES. The public offering price of the Class C shares of
the Fund is the next determined net asset value. No initial sales charge is
imposed. Since Class C shares are sold without an initial sales charge, the full
amount of the investor's purchase payment will be invested in Class C shares for
his or her account. A contingent deferred sales charge may be imposed upon the
redemption of Class C shares if they are redeemed within one year of purchase.
See "Redemption or Repurchase of Shares--Contingent Deferred Sales Charge--Class
C Shares." KDI currently advances to firms the first year distribution fee at a
rate of 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 the Fund for services as distributor and principal underwriter
for Class C shares. See "Investment Manager and Underwriter."
19
<PAGE>
WHICH ARRANGEMENT IS BETTER FOR YOU? The decision as to which class of shares
provides a more suitable investment for an investor depends on a number of
factors, including the amount and intended length of the investment. Investors
making investments that qualify for reduced sales charges might consider Class A
shares. Investors who prefer not to pay an initial sales charge and who plan to
hold their investment for more than six years might consider Class B shares.
Investors who prefer not to pay an initial sales charge but who plan to redeem
their shares within six years might consider Class C shares. Orders for Class B
shares or Class C shares for $500,000 or more will be declined. Orders for Class
B shares or Class C shares by employer sponsored employee benefit plans using
the subaccount record keeping system made available through the Shareholder
Service Agent will be invested instead in Class A shares at net asset value
where the combined subaccount value in the Fund or other Kemper Mutual Fund
listed under "Special Features--Class A Shares--Combined Purchases" is in excess
of $5 million including purchases pursuant to the "Combined Purchases," "Letter
of Intent" and "Cumulative Discount" features described under "Special
Features." For more information about the three sales arrangements, consult your
financial representative or the Shareholder Service Agent. Financial services
firms may receive different compensation depending upon which class of shares
they sell.
GENERAL. Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of the Fund for their clients, and KDI may pay them a transaction fee up
to the level of the discount or commission allowable or payable to dealers, as
described above. Banks are currently prohibited under the Glass-Steagall Act
from providing certain underwriting or distribution services. Banks or other
financial services firms may be subject to various state laws regarding the
services described above and may be required to register as dealers pursuant to
state law. If banking firms were prohibited from acting in any capacity or
providing any of the described services, management would consider what action,
if any, would be appropriate. KDI does not believe that termination of a
relationship with a bank would result in any material adverse consequences to
the Fund.
KDI may, from time to time, pay or allow to firms a 1% commission on the amount
of shares of the Fund sold under the following conditions: (i) the purchased
shares are held in a Kemper IRA account, (ii) the shares are purchased as a
direct "roll over" of a distribution from a qualified retirement plan account
maintained on a participant subaccount record keeping system provided by Kemper
Service Company, (iii) the registered representative placing the trade is a
member of ProStar, a group of persons designated by KDI in 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 or other compensation, to firms that sell shares
of the Fund. Non cash compensation includes luxury merchandise and trips to
luxury resorts. In some instances, such discounts, commissions or other
incentives will be offered only to certain firms that sell or are expected to
sell during specified time periods certain minimum amounts of shares of the
Fund, or other Fund underwritten by KDI.
Orders for the purchase of shares of the Fund will be confirmed at a price based
on the net asset value of the Fund next determined after receipt in good order
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 in good order by KDI prior to the close of
its business day will be confirmed at a price based on the net asset value
effective on that day ("trade date"). The Fund reserves the right to determine
the net asset value more frequently than once a day if deemed desirable. Dealers
and other financial services firms are obligated to transmit orders promptly.
Collection may take significantly longer for a check drawn on a foreign bank
than for a check drawn on a domestic bank. Therefore, if an order is accompanied
by a check drawn on a foreign bank, Fund must normally be collected before
shares will be purchased. See "Purchase and Redemption of Shares" in the
Statement of Additional Information.
Investment dealers and other firms provide varying arrangements for their
clients to purchase and redeem the Fund's shares. Some may establish higher
minimum investment requirements than set forth above. Firms may 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.
20
<PAGE>
Firms also may hold the Fund's shares in nominee or street name as agent for and
on behalf of their customers. In such instances, the Fund's transfer agent will
have no information with respect to or control over the accounts of specific
shareholders. Such shareholders may obtain access to their accounts and
information about their accounts only from their firm. Certain of these firms
may receive compensation from the Fund through the Shareholder Service Agent for
recordkeeping and other expenses relating to these nominee accounts. In
addition, certain privileges with respect to the purchase and redemption of
shares or the reinvestment of dividends may not be available through such firms.
Some firms may participate in a program allowing them access to their clients'
accounts for servicing. including, without limitation, transfers of registration
and dividend payee changes; and may perform functions such as generation of
confirmation statements and disbursement of cash dividends. Such firms,
including affiliates of KDI, may receive compensation from the Fund through the
Shareholder Service Agent for these services. This prospectus should be read in
connection with such firms' material regarding their fees and services.
The Fund reserves the right to withdraw all or any part of the offering made by
this prospectus and to reject purchase orders for any reason. Also, from time to
time, the Fund may temporarily suspend the offering of any class of its shares
to new investors. During the period of such suspension, persons who are already
shareholders of such class of such Fund normally are permitted to continue to
purchase additional shares of such class and to have dividends reinvested.
TAX IDENTIFICATION NUMBER. Be sure to complete the Tax Identification Number
section of the Fund's application when you open an account. Federal tax law
requires the Fund to withhold 31% of taxable dividends, capital gains
distributions and redemption and exchange proceeds from accounts (other than
those of certain exempt payees) without a correct certified Social Security or
tax identification number and certain other certified information or upon
notification from the IRS or a broker that withholding is required. The Fund
reserves the right to reject new account applications without a correct
certified Social Security or tax identification number. The Fund also reserves
the right, following 30 days' notice, to redeem all shares in accounts without a
correct certified Social Security or tax identification number. A shareholder
may avoid involuntary redemption by providing the applicable Fund with a tax
identification number during the 30-day notice period.
Shareholders should direct their inquiries to Kemper Service Company, 811 Main
Street, Kansas City, Missouri 64105-2005 or to the firm from which they received
this prospectus.
REDEMPTION OR REPURCHASE OF SHARES
GENERAL. Any shareholder may require the Fund to redeem his or her shares. When
shares are held for the account of a shareholder by the Fund's transfer agent,
the shareholder may redeem such shares 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 class of the Fund will be the net asset
value per share of that class of the Fund next determined following receipt by
the Shareholder Service Agent of a properly executed request with any required
documents as described above. Payment for shares redeemed will be made in cash
as promptly as practicable but in no event later than seven days after receipt
of a properly executed request accompanied by any outstanding share certificates
in proper form for transfer. When the Fund is asked to redeem shares for which
it may not have yet received good payment (i.e., purchases by check,
Express-Transfer or Bank Direct Deposit), it may delay transmittal of redemption
proceeds until it has determined that collected Fund have been received for the
purchase of such shares, which will be up to 10 days from receipt by the Fund of
the purchase amount. The redemption within two years of Class A shares purchased
at net asset value under the Large Order NAV Purchase
21
<PAGE>
Privilege may be subject to a contingent deferred sales charge (see "Purchase of
Shares--Initial Sales Charge Alternative--Class A Shares"), the redemption of
Class B shares within six years may be subject to a contingent deferred sales
charge (see "Contingent Deferred Sales Charge--Class B Shares" below), and the
redemption of Class C shares within the first year following purchase may be
subject to a contingent deferred sales charge (see "Contingent Deferred Sales
Charge--Class C Shares" below).
Because of the high cost of maintaining small accounts, the Fund may assess a
quarterly fee of $9 on any 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 and guardian account holders
(excluding custodial accounts for gifts and transfers to minors), provided the
trustee, executor or guardian is named in the account registration. Other
institutional account holders and guardian account holders of custodial accounts
for gifts and transfers to minors may exercise this special privilege of
redeeming shares by telephone request or written request without signature
guarantee subject to the same conditions as individual account holders and
subject to the limitations on liability described under "General" above,
provided that this privilege has been pre-authorized by the institutional
account holder or guardian account holder by written instruction to the
Shareholder Service Agent with signatures guaranteed. Telephone requests may be
made by calling 1-800-621-1048. Shares purchased by check or through
EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this privilege
of redeeming shares by telephone request until such shares have been owned for
at least 10 days. This privilege of redeeming shares by telephone request or by
written request without a signature guarantee may not be used to redeem shares
held in certificated form and may not be used if the shareholder's account has
had an address change within 30 days of the redemption request. During periods
when it is difficult to contact the Shareholder Service Agent by telephone, it
may be difficult to use the telephone redemption privilege, although investors
can still redeem by mail. The Fund reserves the right to terminate or modify
this privilege at any time.
REPURCHASES (CONFIRMED REDEMPTIONS). A request for repurchase may be
communicated by a shareholder through a securities dealer or other financial
services firm to KDI, which the Fund has authorized to act as its agent. There
is no charge by KDI with respect to repurchases; however, dealers or other firms
may charge customary commissions for their services. Dealers and other financial
services firms are obligated to transmit orders promptly. The repurchase price
will be the net asset value 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 the Fund can be redeemed and proceeds sent by federal
wire transfer to a single previously designated account. Requests received by
the
22
<PAGE>
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 the Fund or the Shareholder Servicing Agent deems it appropriate under
then-current market conditions. Once authorization is on file, the Shareholder
Service Agent will honor requests by telephone at 1-800-621-1048 or in writing,
subject to the limitations on liability described under "General" above. The
Fund is not responsible for the efficiency of the federal wire system or the
account holder's financial services firm or bank. The Fund currently does not
charge the account holder for wire transfers. The account holder is responsible
for any charges imposed by the account holder's firm or bank. There is a $1,000
wire redemption minimum (including any contingent deferred sales charge). To
change the designated account to receive wire redemption proceeds, send a
written request to the Shareholder Service Agent with signatures guaranteed as
described above or contact the firm through which shares of the Fund were
purchased. Shares purchased by check or through EXPRESS-Transfer or Bank Direct
Deposit may not be redeemed by wire transfer until such shares have been owned
for at least 10 days. Account holders may not use this privilege to redeem
shares held in certificated form. During periods when it is difficult to contact
the Shareholder Service Agent by telephone, it may be difficult to use the
expedited wire transfer redemption privilege. The Fund reserves the right to
terminate or modify this privilege at any time.
CONTINGENT DEFERRED SALES CHARGE--LARGE ORDER NAV PURCHASE PRIVILEGE. A
contingent deferred sales charge may be imposed upon redemption of Class A
shares that are purchased under the Large Order NAV Purchase Privilege as
follows: 1% if they are redeemed within one year of purchase and 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 the Fund's Systematic Withdrawal Plan at a maximum of 10% per
year of the net asset value of the account; and (f) redemptions of shares whose
dealer of record at the time of the investment notifies KDI that the dealer
waives the 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
Sales
Year of Redemption After Purchase Charge
--------------------------------- ------
First................................... 4%
Second.................................. 3%
Third................................... 3%
Fourth.................................. 2%
Fifth................................... 2%
Sixth................................... 1%
The contingent deferred sales charge will be waived: (a) in the event of the
total disability (as evidenced by a determination by the federal Social Security
Administration) of the shareholder (including a registered joint owner)
occurring after the purchase of the shares being redeemed, (b) in the event of
the death of the shareholder (including a registered joint owner), (c) for
redemptions made pursuant to a systematic withdrawal plan (see "Special
Features--Systematic Withdrawal Plan" below), (d) for redemptions made pursuant
to any IRA systematic
23
<PAGE>
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 the 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) for redemption of shares by an employer sponsored employee
benefit plan that (i) offers Fund in addition to Kemper Funds (i.e.,
"multi-manager"), and (ii) 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 the Fund's Class B shares and that 16
months later the value of the shares has grown by $1,000 through reinvested
dividends and by an additional $1,000 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 the
Fund or any other Kemper Mutual Fund listed under "Special Features--Class A
Shares--Combined Purchases" (other than shares of the Kemper Cash Reserves Fund
purchased directly at net asset value) may reinvest up to the full amount
redeemed at net asset value at the time of the reinvestment in Class A shares of
the Fund or of the other listed Kemper Mutual Fund. A shareholder of the Fund or
other Kemper Mutual Fund who redeems Class A shares purchased under the Large
Order NAV Purchase Privilege (see "Purchase of Shares--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 the same class of shares as
the case
24
<PAGE>
may be, of the Fund or of other Kemper Mutual Fund. The amount of any contingent
deferred sales charge also will be reinvested. These reinvested shares will
retain their original cost and purchase date for purposes of the contingent
deferred sales charge schedule. Also, a holder of Class B shares who has
redeemed shares may reinvest up to the full amount redeemed, less any applicable
contingent deferred sales charge that may have been imposed upon the redemption
of such shares, at net asset value in Class A shares of the Fund or of the other
Kemper Mutual Fund 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 Fund 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 the Fund, the reinvestment in shares of
the Fund may be subject to the "wash sale" rules if made within 30 days of the
redemption, resulting in a postponement of the recognition of such loss for
federal income tax purposes. The reinvestment privilege may be terminated or
modified at any time.
REDEMPTION IN KIND. Although it is the Fund's present policy to redeem in cash,
if the Board of Trustees determines that a material adverse effect would be
experienced by the remaining shareholders if payment were made wholly in cash,
the Fund will satisfy the redemption request in whole or in part by a
distribution of portfolio securities in lieu of cash, in conformity with the
applicable rules of the Securities and Exchange Commission, taking such
securities at the same value used to determine net asset value, and selecting
the securities in such manner as the Board of Trustees may deem fair and
equitable. If such a distribution occurred, shareholders receiving securities
and selling them could receive less than the redemption value of such securities
and in addition would incur certain transaction costs. Such a redemption would
not be as liquid as a redemption entirely in cash.
SPECIAL FEATURES
CLASS A SHARES--COMBINED PURCHASES. The Fund's Class A shares (or the
equivalent) may be purchased at the rate applicable to the discount bracket
attained by combining concurrent investments in Class A shares of any of the
following Funds: Kemper U.S. Growth and Income Fund, Kemper Global Blue Chip
Fund, Kemper Latin America Fund, Kemper International Growth and Income Fund,
Kemper Emerging Markets Income Fund, Kemper Emerging Markets Growth Fund, Kemper
Technology Fund, Kemper Total Return Fund, Kemper Growth Fund, Kemper Small
Capitalization Equity Fund, Kemper Income and Capital Preservation Fund, Kemper
Municipal Bond Fund, Kemper Diversified Income Fund, Kemper High Yield Series,
Kemper U.S. Government Securities Fund, Kemper International Fund, Kemper State
Tax-Free Income Series, Kemper Adjustable Rate U.S. Government Fund, Kemper Blue
Chip Fund, Kemper Global Income Fund, Kemper Target Equity Fund (series are
subject to a limited offering period), Kemper Intermediate Municipal Bond Fund,
Kemper Cash Reserves Fund, Kemper U.S. Mortgage Fund, Kemper Short-Intermediate
Government Fund, Kemper Value+ Growth Fund, Kemper Equity Trust, Kemper
Quantitative Equity Fund, Kemper Horizon Fund, Kemper Europe Fund, Kemper Asian
Growth Fund and Kemper Aggressive Growth Fund ("Kemper Mutual Fund"). Except as
noted below, there is no combined purchase credit for direct purchases of shares
of Kemper Money Fund, Cash Equivalent Fund, Tax-Exempt California Money Market
Fund, Cash Account Trust, Investor's Municipal Cash Fund or Investors Cash Trust
("Money Market Fund"), which are not considered "Kemper Mutual Fund" 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 Fund as "Kemper Mutual Fund", (b) all classes of shares of any
Kemper Mutual Fund and (c) the value of any other plan investment, such as
guaranteed investment contracts and employer stock, maintained on such
subaccount record keeping system.
CLASS A SHARES--LETTER OF INTENT. The same reduced sales charges for Class A
shares, as shown in the applicable prospectus, also apply to the aggregate
amount of purchases of such Kemper Mutual Fund 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
25
<PAGE>
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 Fund 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 the Fund may also be
purchased at the rate applicable to the discount bracket attained by adding to
the cost of shares of the Fund being purchased, the value of all Class A shares
of the above mentioned Kemper Mutual Fund (computed at the maximum offering
price at the time of the purchase for which the discount is applicable) already
owned by the investor.
CLASS A SHARES--AVAILABILITY OF QUANTITY DISCOUNTS. An investor or the
investor's dealer or other financial services firm must notify the Shareholder
Service Agent or KDI whenever a quantity discount or reduced sales charge is
applicable to a purchase. Upon such notification, the investor will receive the
lowest applicable sales charge. Quantity discounts described above may be
modified or terminated at any time.
EXCHANGE PRIVILEGE. Shareholders of Class A, Class B and Class C shares may
exchange their shares for shares of the corresponding class of other Kemper
Mutual Fund 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 Funds that
were acquired by purchase (not including shares acquired by dividend
reinvestment) are subject to the applicable sales charge on exchange. Series of
Kemper Target Equity Fund are available on exchange only during the Offering
Period for such series as described in the applicable prospectus. Cash
Equivalent Fund, Tax-Exempt California Money Market Fund, Cash Account Trust,
Investor's 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 the Fund purchased under the Large Order NAV Purchase
Privilege may be exchanged for Class A shares of another Kemper Mutual Fund or a
Money Market Fund under the exchange privilege described above without paying
any contingent deferred sales charge at the time of exchange. If the Class A
shares received on exchange are redeemed thereafter, a contingent deferred sales
charge may be imposed in accordance with the foregoing requirements provided
that the shares redeemed will retain their original cost and purchase date for
purposes of calculating the contingent deferred sales charge.
CLASS B SHARES. Class B shares of the Fund and Class B shares of any other
Kemper Mutual Fund listed under "Special Features--Class A Shares--Combined
Purchases" may be exchanged for each other at their relative net asset values.
Class B shares may be exchanged without a contingent deferred sales charge being
imposed at the time of exchange. For purposes of calculating the contingent
deferred sales charge that may be imposed upon the redemption of the Class B
shares received on exchange, amounts exchanged retain their original cost and
purchase date.
CLASS C SHARES. Class C shares of the Fund and Class C shares of any other
Kemper Mutual Fund listed under "Special Features--Class A Shares--Combined
Purchases" may be exchanged for each other at their relative net asset values.
Class C shares may be exchanged without a contingent deferred sales charge being
imposed at the time of exchange. For determining whether there is a contingent
deferred sales charge that may be imposed upon the redemption of the Class C
shares received by exchange, 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 through 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
26
<PAGE>
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 Fund from dealers, other firms or
KDI. Exchanges may be accomplished by a written request to Kemper Service
Company, Attention: Exchange Department, P.O. Box 419557, Kansas City, Missouri
64141-6557, or by telephone if the shareholder has given authorization. Once the
authorization is on file, the Shareholder Service Agent will honor requests by
telephone at 1-800-621-1048, subject to the limitations on liability under
"Redemption or Repurchase of Shares--General." Any share certificates must be
deposited prior to any exchange of such shares. During periods when it is
difficult to contact the Shareholder Service Agent by telephone, it may be
difficult to 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 Fund 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 Investor's Municipal Cash Fund is available for sale
only in New York, Connecticut, New Jersey and Pennsylvania. Except as otherwise
permitted by applicable regulations, 60 days' prior written notice of any
termination or material change will be provided.
SYSTEMATIC EXCHANGE PRIVILEGE. The owner of $1,000 or more of any class of the
shares of a Kemper Mutual Fund or Money Market Fund may authorize the automatic
exchange of a specified amount ($100 minimum) of such shares for shares of the
same class of another such Kemper Fund. If selected, exchanges will be made
automatically until the privilege is terminated by the shareholder or the Kemper
Fund. Exchanges are subject to the terms and conditions described above under
"Exchange Privilege," except that the $1,000 minimum investment requirement for
the Kemper Fund acquired on exchange is not applicable. This privilege may not
be used for the exchange of shares held in certificated form.
EXPRESS-Transfer. EXPRESS-Transfer permits the transfer of money via the
Automated Clearing House System (minimum $100 and maximum $50,000) from a
shareholder's bank, savings and loan, or credit union account to purchase shares
in the Fund. Shareholders can also redeem shares (minimum $100 and maximum
$50,000) from their Fund account and transfer the proceeds to their bank,
savings and loan, or credit union checking account. Shares purchased by check or
through EXPRESS-Transfer or Bank Direct Deposit may not be redeemed under this
privilege until such shares have been owned for at least 10 days. By enrolling
in EXPRESS-Transfer, the shareholder authorizes the Shareholder Service Agent to
rely upon telephone instructions from any person to transfer the specified
amounts between the shareholder's Fund account and the predesignated bank,
savings and loan or credit union account, subject to the limitations on
liability under "Redemption or Repurchase of Shares--General." Once enrolled in
EXPRESS-Transfer, a shareholder can initiate a transaction by calling Kemper
Shareholder Services toll free at 1-800-621-1048, Monday through Friday, 8:00
a.m. to 3:00 p.m. Chicago time. Shareholders may terminate this privilege by
sending written notice to Kemper Service Company, P.O. Box 419415, Kansas City,
Missouri 64141-6415. Termination will become effective as soon as the
Shareholder Service Agent has had a reasonable amount of time to act upon the
request. EXPRESS-Transfer cannot be used with passbook savings accounts or for
tax-deferred plans such as Individual Retirement Accounts ("IRAs").
BANK DIRECT DEPOSIT. A shareholder may purchase additional shares of the Fund
through an automatic investment program. With the Bank Direct Deposit Purchase
Plan, 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
27
<PAGE>
sending written notice to Kemper Service Company, P.O. Box 419415, Kansas City,
Missouri 64141-6415. Termination by a shareholder will become effective within
thirty days after the Shareholder Service Agent has received the request. A Fund
may immediately terminate a shareholder's Plan in the event that any item is
unpaid by the shareholder's financial institution. The Fund may terminate or
modify this privilege at any time.
PAYROLL DIRECT DEPOSIT AND GOVERNMENT DIRECT DEPOSIT. A shareholder may invest
in the Fund through Payroll Direct Deposit or Government Direct Deposit. Under
these programs, all or a portion of a shareholder's net pay or government check
is automatically invested in the Fund account each payment period. A shareholder
may terminate participation in these programs by giving written notice to the
shareholder's employer or government agency, as appropriate. (A reasonable time
to act is required.) The Fund is not responsible for the efficiency of the
employer or government agency making the payment or any financial institutions
transmitting payments.
SYSTEMATIC WITHDRAWAL PLAN. The owner of $5,000 or more of a class of the Fund's
shares at the offering price (net asset value plus, in the case of Class A
shares, the initial sales charge) may provide for the payment from the owner's
account of any requested dollar amount 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, the Fund will not knowingly permit additional investments of
less than $2,000 if the investor is at the same time making systematic
withdrawals. KDI will waive the contingent deferred sales charge on redemptions
of Class A shares purchased under the Large Order NAV Purchase Privilege, Class
B shares and Class C shares made pursuant to a systematic withdrawal plan. The
right is reserved to amend the systematic withdrawal plan on 30 days' notice.
The plan may be terminated at any time by the investor or the Fund.
TAX-SHELTERED RETIREMENT PLANS. The Shareholder Service Agent provides
retirement plan services and documents and KDI can establish investor accounts
in any of the following types of retirement plans:
o Individual Retirement Accounts ("IRAs"). This includes Simplified Employee
Pension Plan ("SEP") IRA accounts and prototype documents.
o 403(b)(7) Custodial Accounts. 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 and materials for establishing
them are available from the Shareholder Service Agent upon request. Investors
should consult with their own tax advisers before establishing a retirement
plan.
PERFORMANCE
The Fund may advertise several types of performance information for a class of
shares, including "average annual total return" and "total return." Performance
information will be computed separately for Class A, Class B and
28
<PAGE>
Class C shares. Each of these figures is based upon historical results and is
not representative of the future performance of any class of the Fund.
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 particular
class of the 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 the Fund during a specified period. Average annual
total return will be quoted for at least the one, five and ten year periods
ending on a recent calendar quarter (or if any such period has not yet elapsed,
at the end of a shorter period corresponding to the life of the Fund for
performance purposes). Average annual total return figures represent the average
annual percentage change over the period in question. Total return figures
represent the aggregate percentage or dollar value change over the period in
question.
The Fund's performance may be compared to that of the Consumer Price Index or
various unmanaged indices including, but not limited to, the Dow Jones
Industrial Average, the Standard & Poor's Financial Services Index, the Standard
& Poor's Composite Stock Price 500 Index, the Russell 1000(R) Index, the Russell
1000(R) Growth Index, the Wilshire Large Company Growth Index, the Wilshire 750
Mid Cap Company Growth Index, the Standard & Poor's/Barra Value Index, Standard
& Poor's/Barra Growth Index, the Russell 1000(R) Value Index, the
Europe/Australia/Far East Index, International Finance Corporation's Latin
America Investable Return Index, the Morgan Stanley Capital International World
Index, the J.P. Morgan Global Traded Bond Index, and the Salomon Brothers World
Government Bond Index. The performance of the Fund may also be compared to the
performance of other mutual Fund or mutual fund indices with similar objectives
and policies as reported by independent mutual fund reporting services such as
Lipper Analytical Services, Inc. ("Lipper"). Lipper performance calculations are
based upon changes in net asset value with all dividends reinvested and do not
include the effect of any sales charges.
Information may be quoted from publications such as Morningstar, Inc., The Wall
Street Journal, Money Magazine, Forbes, Barron's, Fortune, The Chicago Tribune,
USA Today, Institutional Investor and Registered Representative. Also, investors
may want to compare the historical returns of various investments, performance
indexes of those investments or economic indicators, including but not limited
to stocks, bonds, certificates of deposit, money market Fund 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 Fund. Performance of U.S. Treasury obligations may be
based upon, among other things, various U.S. Treasury bill indexes. Certain of
these alternative investments may offer fixed rates of return and guaranteed
principal and may be insured.
The Fund may depict the historical performance of the securities in which the
Fund may invest over periods reflecting a variety of market or economic
conditions either alone or in comparison with alternative investments,
performance indexes of those investments or economic indicators. The Fund may
also describe its portfolio holdings and depict its size or relative size
compared to other mutual fund, the number and make-up of its shareholder base
and other descriptive factors concerning the Fund. The relative performance of
growth stocks versus value stocks may also be discussed.
Because some of the Fund's investments are denominated in foreign currencies,
the strength or weakness of the U.S. dollar as against these currencies may
account for part the Fund's investment performance. Historical information on
the value of the dollar versus foreign currencies may be used from time to time
in advertisements concerning the Fund. Such historical information is not
indicative of future fluctuations in the value of the U.S. dollar against these
currencies. In addition, marketing materials may cite country and economic
statistics and historical stock market performance for any of the countries in
which any of the Fund invest, including, but not limited to, the following:
population growth, gross domestic product, inflation rate, average stock market
price-earnings ratios and the total value of stock markets. Sources for such
statistics may include official publications of various foreign governments and
exchanges.
The Fund's Class A shares are sold at net asset value plus a maximum sales
charge of 5.75% of the offering price. While the maximum sales charge is
normally reflected in the Fund's Class A performance figures, certain total
29
<PAGE>
return calculations may not include such charge and those results would be
reduced if it were included. Class B shares and Class C shares are sold at net
asset value. Redemptions of Class B shares within the first six years after
purchase may be subject to a contingent deferred sales charge that ranges from
4% during the first year to 0% after six years. Redemption of Class C shares
within the first year after purchase may be subject to a 1% contingent deferred
sales charge. Average annual total return figures do, and total return figures
may, include the effect of the contingent deferred sales charge for the Class B
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.
The Fund's returns and net asset value will fluctuate. Shares of a class of the
Fund are redeemable by an investor at the class' then current net asset value,
which may be more or less than original cost. Redemption of Class B shares and
Class C shares may be subject to a contingent deferred sales charge as described
above. Additional information concerning the Fund's performance appears in the
Statement of Additional Information. Additional information about the Fund's
performance also appears in its Annual Report to Shareholders, which is
available without charge from the Fund.
FUND ORGANIZATION AND CAPITAL STRUCTURE
The Fund is a series of KET, an open-end management investment company
registered under the 1940 Act. KET was organized as a Massachusetts business
trust on ___________.
KET may issue an indefinite amount of shares of beneficial interest, all having
$____ par value, which may be divided by the Board of Trustees into classes of
shares. An indefinite number of shares of beneficial interest have been duly
authorized by the Board of Trustees of KET. Currently, the Fund offers three
classes of shares. These are Class A, Class B and Class C shares. The Board of
Trustees may authorize the issuance of additional classes and additional series
or Portfolios if deemed desirable, each with its own investment objectives,
policies and restrictions. Since KET may offer multiple Portfolios, each is
known as a "series company." Shares of a Portfolio have equal noncumulative
voting rights except that Class B and Class C shares have separate and exclusive
voting rights with respect to each such class' 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 the Fund are fully paid and nonassessable when issued, are
transferable without restriction and have no preemptive or conversion rights. If
shares of more than one Portfolio are outstanding, shareholders will vote by
Portfolio and not in the aggregate or by class except when voting in the
aggregate is required, under the 1940 Act, such as for the election of trustees
or when voting by class is appropriate.
The Fund's activities are supervised by the KET's Board of Trustees. KET is not
required to hold and has no current intention of holding annual shareholder
meetings, although special meetings may be called for purposes such as electing
or removing Trustees, changing fundamental investment policies or approving an
investment management contract. Subject to the Declaration of Trust,
shareholders may remove Trustees. Shareholders will be assisted in communicating
with other shareholders in connection with removing a Trustee as if Section
16(c) of the 1940 Act were applicable.
30
<PAGE>
KEMPER EQUITY TRUST
STATEMENT OF ADDITIONAL INFORMATION
March 1, 1998
KEMPER-DREMAN FINANCIAL SERVICES FUND
222 South Riverside Plaza, Chicago, Illinois 60606
1-800-621-1048
This Statement of Additional Information is not a prospectus. It is the
Statement of Additional Information for Kemper-Dreman Financial Services Fund
(the "Fund"), a diversified series of Kemper Equity Trust ("KET"). It should be
read in conjunction with the Fund's prospectus dated March 1, 1998. The
prospectus may be obtained without charge from KET.
---------------
TABLE OF CONTENTS
Page
Investment Restrictions............................................ B-
Investment Policies and Techniques................................. B-
Portfolio Transactions............................................. B-
Investment Manager and Underwriter................................. B-
Purchase and Redemption of Shares.................................. B-
Dividends and Taxes................................................ B-
Performance........................................................ B-
Officers and Trustees.............................................. B-
Report of Independent Auditors ( , 1998)..................... B-
Statement of Net Assets ( , 1998)............................ B-
Appendix--Ratings of Fixed Income Investments...................... B-
The financial statements for the Fund accompany this document.
DRE-13 (11/97)
(LOGO) printed on recycled paper
<PAGE>
INVESTMENT RESTRICTIONS
The 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, as amended (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 Fund may not, as a fundamental policy:
(a) borrow money, except as permitted under the 1940 Act and as
interpreted or modified by regulatory authority having jurisdiction
from time to time;
(b) issue senior securities, except as permitted under the 1940 Act and
as interpreted or modified by regulatory authority having
jurisdiction, from time to time;
(c) purchase physical commodities or contracts relating to physical
commodities;
(d) 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;
(e) 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 a Fund
reserves freedom of action to hold and to sell real estate acquired
as a result of the Fund's ownership of securities;
(f) make loans to other persons except (i) loans of portfolio
securities, and (ii) to the extent that entry into repurchase
agreements and the purchase of debt instruments or interests in
indebtedness in accordance with a Fund's investment objective and
policies may be deemed to be loans; or;
(g) concentrate its investments in a particular industry, as that term
is used in the 1940 Act, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time, except
that the Fund may concentrate iits investments in the financial
services industry.
The Fund may not, as a non-fundamental policy:
(1) Invest for the purpose of exercising control over management of any
company.
(2) Invest its assets in securities of any investment company, except by
open market purchases, including an ordinary broker's commission, or in
connection with a merger, acquisition of assets, consolidation or
reorganization, and any investments in the securities of other investment
companies will be in compliance with the Investment Company Act of 1940.
(3) Invest more than 15% of the value of its net assets in illiquid
securities.
INVESTMENT POLICIES AND TECHNIQUES
General. The Fund may engage in options and financial futures and other
derivatives transactions in accordance with its respective investment objectives
and policies. The Fund intends to engage in such transactions if it appears to
the investment manager to be advantageous to do so in order to pursue its
investment objective and also to hedge against the effects of market risks but
not to create leveraged exposure in the Fund. The use of futures and options,
and possible benefits and attendant risks, are discussed below along with
information concerning other investment policies and techniques.
2
<PAGE>
Strategic Transactions And Derivatives. The Fund may, but is not required to,
utilize various other investment strategies as described below to hedge various
market risks (such as interest rates, currency exchange rates, and broad or
specific equity or fixed-income market movements), to manage the effective
maturity or duration of the fixed-income securities in the Fund's portfolio, or
to enhance potential gain. These strategies may be executed through the use of
derivative contracts. Such strategies are generally accepted as a part of modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may purchase and
sell exchange-listed and over-the-counter put and call options on securities,
equity and fixed-income indices and other financial instruments, purchase and
sell financial futures contracts and options thereon, enter into various
interest rate transactions such as swaps, caps, floors or collars, and enter
into various currency transactions such as currency forward contracts, currency
futures contracts, currency swaps or options on currencies or currency futures
(collectively, all the above are called "Strategic Transactions"). Strategic
Transactions may be used without limit to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the fixed-income
securities in the Fund's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. Some Strategic Transactions may also be used to enhance
potential gain although no more than 5% of the Fund's assets will be committed
to Strategic Transactions entered into for non-hedging purposes. Any or all of
these investment techniques may be used at any time and in any combination and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Fund to utilize these
Strategic Transactions successfully will depend on the investment manager's
ability to predict pertinent market movements, which cannot be assured. The Fund
will comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions involving
financial futures and options thereon will be purchased, sold or entered into
only for bona fide hedging, risk management or portfolio management purposes and
not for leveraging purposes.
Strategic Transactions, including derivative contracts have risks associated
with them including possible default by the other party to the transaction,
illiquidity and, to the extent the investment manager's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation the Fund can realize on its
investments or cause the Fund to hold a security it might otherwise sell. The
use of currency transactions can result in the Fund incurring losses as a result
of a number of factors including the imposition of exchange controls, suspension
of settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.
General Characteristics Of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. For
instance, the Fund's purchase of a put
3
<PAGE>
option on a security might be designed to protect its holdings in the underlying
instrument (or, in some cases, a similar instrument) against a substantial
decline in the market value by giving the Fund the right to sell such instrument
at the option exercise price. A call option, upon payment of a premium, gives
the purchaser of the option the right to buy, and the seller the obligation to
sell, the underlying instrument at the exercise price. The Fund's purchase of a
call option on a security, financial future, index, currency or other instrument
might be intended to protect the Fund against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase such instrument. An American style put or call
option may be exercised at any time during the option period while a European
style put or call option may be exercised only upon expiration or during a fixed
period prior thereto. The Fund is authorized to purchase and sell exchange
listed options and over-the-counter options ("OTC options"). Exchange listed
options are issued by a regulated intermediary such as the Options Clearing
Corporation ("OCC"), which guarantees the performance of the obligations of the
parties to such options. The discussion below uses the OCC as an example, but is
also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally settle
by physical delivery of the underlying security or currency, although in the
future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The 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.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. The
Fund expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the investment manager must assess the
creditworthiness of each such Counterparty or any guarantor or credit
enhancement of the Counterparty's credit to determine the likelihood that the
terms of the OTC option will be satisfied. The Fund will engage in OTC option
transactions only with U.S. government securities dealers recognized by the
Federal Reserve Bank of New York as "primary dealers" or broker/dealers,
domestic or foreign banks or other financial institutions which have received
(or the guarantors of the obligation of which have received) a short-term credit
rating of A-1 from S&P or P-1 from Moody's or an equivalent rating from any
nationally recognized statistical rating organization ("NRSRO") or, in the case
of OTC currency transactions, are determined to be of equivalent credit quality
by the investment manager. The staff of the SEC currently takes the position
that OTC options purchased by the Fund, and portfolio securities "covering" the
amount of the Fund's obligation pursuant to an OTC option sold by it (the cost
of the sell-back plus the in-the-money amount, if any) are illiquid, and are
subject to the Fund's limitation on investing in illiquid securities.
4
<PAGE>
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets, and on securities indices, currencies and futures
contracts. All calls sold by the Fund must be "covered" (i.e., the Fund must own
the securities or futures contract subject to the call) or must meet the asset
segregation requirements described below as long as the call is outstanding.
Even though the Fund will receive the option premium to help protect it against
loss, a call sold by the Fund exposes the Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Fund to hold a security or
instrument which it might otherwise have sold.
The Fund may purchase and sell put options on securities including U.S. Treasury
and agency securities, mortgage-backed securities, foreign sovereign debt,
corporate debt securities, equity securities (including convertible securities)
and Eurodollar instruments (whether or not it holds the above securities in its
portfolio), and on securities indices, currencies and futures contracts other
than futures on individual corporate debt and individual equity securities. None
of the Funds will sell put options if, as a result, more than 50% of the Fund's
assets would be required to be segregated to cover its potential obligations
under such put options other than those with respect to futures and options
thereon. In selling put options, there is a risk that the Fund may be required
to buy the underlying security at a disadvantageous price above the market
price.
General Characteristics Of Futures. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate, currency or equity market changes, for
duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below. The sale of a futures
contract creates a firm obligation by the Fund, as seller, to deliver to the
buyer the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.
The Fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into only for bona fide hedging, risk management (including duration management)
or other portfolio management purposes. Typically, maintaining a futures
contract or selling an option thereon requires the Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price, nor that delivery will occur.
None of the Funds will enter into a futures contract or related option (except
for closing transactions) if, immediately thereafter, the sum of the amount of
its initial margin and premiums on open futures contracts and options thereon
would exceed 5% of the Fund's total assets (taken at current value); however, in
the case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
Options On Securities Indices And Other Financial Indices. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying
5
<PAGE>
instrument, they settle by cash settlement, i.e., an option on an index gives
the holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of the index upon which the option is based exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option (except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the excess of the closing price of
the index over the exercise price of the option, which also may be multiplied by
a formula value. The seller of the option is obligated, in return for the
premium received, to make delivery of this amount. The gain or loss on an option
on an index depends on price movements in the instruments making up the market,
market segment, industry or other composite on which the underlying index is
based, rather than price movements in individual securities, as is the case with
respect to options on securities.
Currency Transactions. The Fund may engage in currency transactions with
Counterparties in order to hedge the value of portfolio holdings denominated in
particular currencies against fluctuations in relative value. Currency
transactions include forward currency contracts, exchange listed currency
futures, exchange listed and OTC options on currencies, and currency swaps. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. A currency swap is
an agreement to exchange cash flows based on the notional difference among two
or more currencies and operates similarly to an interest rate swap, which is
described below. The Fund may enter into currency transactions with
Counterparties which have received (or the guarantors of the obligations which
have received) a credit rating of A-1 or P-1 by S&P or Moody's, respectively, or
that have an equivalent rating from a NRSRO or are determined to be of
equivalent credit quality by the investment manager.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Fund, which will generally
arise in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
None of the Funds will enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended wholly or partially to
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to proxy hedging or cross hedging as described below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of the Fund's securities
denominated in correlated currencies. For example, if the investment manager
considers that the Austrian schilling is correlated to the German deutschemark
(the "D-mark"),the Fund holds securities denominated in schillings and the
investment manager believes that the value of schillings will decline against
the U.S. dollar, the investment manager may enter into a commitment or option to
sell D-marks and buy dollars. Currency hedging involves some of the same risks
and considerations as other transactions with similar instruments. Currency
transactions can result in losses to the Fund if the currency being hedged
fluctuates in value to a degree or in a direction that is not anticipated.
Further, there is the risk that the perceived correlation between various
currencies may not be present or may not be present during the particular time
that the Fund is engaging in proxy hedging. If the Fund enters into a currency
hedging transaction, the Fund will comply with the asset segregation
requirements described below.
Risks Of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Fund if it is unable to deliver or
6
<PAGE>
receive currency or funds in settlement of obligations and could also cause
hedges it has entered into to be rendered useless, resulting in full currency
exposure as well as incurring transaction costs. Buyers and sellers of currency
futures are subject to the same risks that apply to the use of futures
generally. Further, settlement of a currency futures contract for the purchase
of most currencies must occur at a bank based in the issuing nation. Trading
options on currency futures is relatively new, and the ability to establish and
close out positions on such options is subject to the maintenance of a liquid
market which may not always be available. Currency exchange rates may fluctuate
based on factors extrinsic to that country's economy.
Combined Transactions. The Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the investment manager, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the investment manager's judgment that the combined
strategies will reduce risk or otherwise more effectively achieve the desired
portfolio management goal, it is possible that the combination will instead
increase such risks or hinder achievement of the portfolio management objective.
Swaps, Caps, Floors And Collars. Among the Strategic Transactions into which the
Fund may enter are interest rate, currency and index swaps and the purchase or
sale of related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, to protect against currency fluctuations, as a
duration management technique or to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date. The Fund intends to
use these transactions as hedges and not as speculative investments and will not
sell interest rate caps or floors where it does not own securities or other
instruments providing the income stream the Fund may be obligated to pay.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal. A currency swap is an agreement to exchange cash flows on a notional
amount of two or more currencies based on the relative value differential among
them and an index swap is an agreement to swap cash flows on a notional amount
based on changes in the values of the reference indices. The purchase of a cap
entitles the purchaser to receive payments on a notional principal amount from
the party selling such cap to the extent that a specified index exceeds a
predetermined interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the
investment manager and the Funds believe such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. None of the Funds will enter into
any swap, cap, floor or collar transaction unless, at the time of entering into
such transaction, the unsecured long-term debt of the Counterparty, combined
with any credit enhancements, is rated at least A by S&P or Moody's or has an
equivalent rating from a NRSRO or is determined to be of equivalent credit
quality by the investment manager. If there is a default by the Counterparty,
the Fund may have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.
7
<PAGE>
Risks Of Strategic Transactions Outside The U.S. When conducted outside the
U.S., Strategic Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
Use Of Segregated And Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash or liquid
assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid assets at least equal to
the current amount of the obligation must be segregated with the custodian. The
segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by the Fund will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate cash or liquid
assets sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Fund on an index will require the Fund to
own portfolio securities which correlate with the index or to segregate cash or
liquid assets equal to the excess of the index value over the exercise price on
a current basis. A put option written by the Fund requires the Fund to segregate
cash or liquid assets equal to the exercise price.
Except when the Fund enters into a forward contract for the purchase or sale of
a security denominated in a particular currency, which requires no segregation,
a currency contract which obligates the Fund to buy or sell currency will
generally require the Fund to hold an amount of that currency or liquid
securities denominated in that currency equal to the Fund's obligations or to
segregate cash or liquid assets equal to the amount of the Fund's obligation.
OTC options entered into by the Fund, including those on securities, currency,
financial instruments or indices and OCC issued and exchange listed index
options, will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of assets equal to its
accrued net obligations, as there is no requirement for payment or delivery of
amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by the Fund other than those
above generally settle with physical delivery, or with an election of either
physical delivery or cash settlement and the Fund will segregate an amount of
assets equal to the full value of the option. OTC options settling with physical
delivery, or with an election of either physical delivery or cash settlement
will be treated the same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
assets sufficient to meet its obligation to purchase or provide securities or
currencies, or to pay the amount owed at the expiration of an index-based
futures contract. Such assets may consist of cash, cash equivalents, liquid debt
or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid assets having a value
equal to the accrued excess. Caps, floors and collars require segregation of
assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting
8
<PAGE>
transaction terminates at the time of or after the primary transaction no
segregation is required, but if it terminates prior to such time, assets equal
to any remaining obligation would need to be segregated.
Other Considerations--High Yield (High Risk) Bonds. As reflected in the
prospectus, the 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 obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific corporate developments,
or the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss from default by the
issuer is significantly greater for the holders of high yielding securities
because such securities are generally unsecured and are often subordinated to
other creditors of the issuer.
Zero coupon securities and pay-in-kind bonds involve additional special
considerations. Zero coupon securities are debt obligations that do not entitle
the holder to any periodic payments of interest prior to maturity or a specified
cash payment date when the securities begin paying current interest (the "cash
payment date") and therefore are issued and traded at a discount from their face
amount or par value. The market prices of zero coupon securities are generally
more volatile than the market prices of securities that pay interest
periodically and are likely to respond to 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."
PORTFOLIO TRANSACTIONS
Under the sub-advisory agreement between Scudder Kemper Investments, Inc. (the
"Adviser") and Dreman Value Management, L.L.C. (the "Sub-Adviser"), the
Sub-Adviser places all orders for purchases and sales of the Fund's securities.
At times investment decisions may be made to purchase or sell the same
investment securities of the Fund and for one or more of the other clients
managed by the Sub-Adviser. When two or more of such clients are simultaneously
engaged in the purchase or sale of the same security through the same trading
facility, the transactions are allocated as to amount and price in a manner
considered equitable to each. As mentioned above, position limits imposed by
national securities exchanges may restrict the number of options the Fund will
be able to write on a particular security.
The above mentioned factors may have a detrimental effect on the quantities or
prices of securities, options or future contracts available to the Fund. On the
other hand, the ability of the Fund to participate in volume transactions may
produce better executions
9
<PAGE>
for the Fund in some cases. The Board of Trustees believes that the benefits of
the Sub-Adviser's organization outweigh any limitations that may arise from
simultaneous transactions or position limitations.
The Sub-Adviser, in effecting purchases and sale of portfolio securities for the
account of the Fund, will implement the Fund's policy of seeking best execution
of orders. The Sub-Adviser may be permitted to pay higher brokerage commissions
for research services as described below. Consistent with this policy, orders
for portfolio transactions are placed with broker-dealer firms giving
consideration to the quality, quantity and nature of each firm's professional
services, which include execution, financial responsibility, responsiveness,
clearance procedures, wire service quotations and statistical and other research
information provided to the Fund and the Sub-Adviser. Subject to seeking best
execution of an order, brokerage is allocated on the basis of all services
provided. Any research benefits derived are available for all clients of the
Sub-Adviser. In selecting among firms believed to meet the criteria for handling
a particular transaction, the Sub-Adviser may give consideration to those firms
that have sold or are selling shares of the Fund and of other funds managed by
the Adviser and its affiliates, as well as to those firms that provide market,
statistical and other research information to the Fund and the Sub-Adviser,
although the Sub-Adviser is not authorized to pay higher commissions to firms
that provide such services, except as described below.
The Sub-Adviser may in certain instances be permitted to pay higher brokerage
commissions solely for receipt of market, statistical and other research
services as defined in Section 28(e) of the Securities Exchange Act of 1934 and
interpretations thereunder. Such services may include among other things:
economic, industry or company research reports or investment recommendations;
computerized databases; quotation and execution equipment and software; and
research or analytical computer software and services. Where products or
services have a "mixed use," a good faith effort is made to make a reasonable
allocation of the cost of products or services in accordance with the
anticipated research and non-research uses and the cost attributable to
non-research use is paid by the Sub-Adviser in cash. Subject to Section 28(e)
and procedures adopted by the Board of Trustees of KET, the Fund could pay a
firm that provides research services commissions for effecting a securities
transaction for the Fund in excess of the amount other firms would have charged
for the transaction if the Sub-Adviser determines in good faith that the greater
commission is reasonable in relation to the value of the brokerage and research
services provided by the executing firm viewed in terms either of a particular
transaction or the Sub-Adviser's overall responsibilities to the Fund and other
clients. Not all of such research services may be useful or of value in advising
the Fund. Research benefits will be available for all clients of the
Sub-Adviser. The sub-advisory fee paid by the Adviser to the Sub-Adviser is not
reduced because these research services are received.
INVESTMENT MANAGER AND UNDERWRITER
INVESTMENT MANAGER. Scudder Kemper Investments, Inc. (the "Adviser"), an
investment counsel firm, 345 Park Avenue, New York, New York, is the Fund's
investment manager. This organization is one of the most experienced investment
management firms in the United States. It was established as a partnership in
1919 and pioneered the practice of providing investment counsel to individual
clients on a fee basis. The predecessor firm reorganized from a partnership to a
corporation on June 28, 1985. On June 26, 1997, Adviser's predecessor, Scudder
Stevens & Clark, Inc. ("Scudder") entered into an agreement with Zurich
Insurance Company ("Zurich") pursuant to which the predecessor and Zurich agreed
to form an alliance.
On December 31, 1997, Zurich acquired a majority interest in Scudder, and Zurich
made the business of its subsidiary Zurich Kemper Investments, Inc., a part of
the predecessor organization. The predecessor's name has been changed to Scudder
Kemper Investments, Inc. Founded in 1872, Zurich is a multinational, public
corporation organized under the laws of Switzerland. Its home office is located
at Mythenquai 2, 8002 Zurich, Switzerland. Historically, Zurich's earnings have
resulted from its operations as an insurer as well as from its ownership of its
subsidiaries and affiliated companies (the Zurich Insurance Group"). Zurich and
the Zurich Insurance Group provide an extensive range of insurance products and
services and have branch offices and subsidiaries in more than 40 countries
throughout the world.
Pursuant to an investment management agreement, the Adviser acts as the
investment adviser of the Fund, manages its investments, administers its
business affairs, furnishes office facilities and equipment, provides clerical,
bookkeeping and administrative services, and permits any of its officers or
employees to serve without compensation as trustees or officers of KET if
elected to such positions. The investment management agreement provides that the
Fund pays the charges and expenses of its operations, including the fees and
expenses of the trustees (except those who are affiliates of the Adviser or its
affiliates), independent auditors, counsel, custodian and transfer agent and the
cost of share certificates, reports and notices to shareholders, brokerage
commissions or transaction costs,
10
<PAGE>
costs of calculating net asset value, taxes and membership dues. KET bears the
expenses of registration of its shares with the Securities and Exchange
Commission, while Kemper Distributors, Inc., as principal underwriter, pays the
cost of qualifying and maintaining the qualification of the Fund's shares for
sale under the securities laws of the various states.
The investment management agreement provides that the Adviser shall not be
liable for any error of judgment or of law, or for any loss suffered by the Fund
in connection with the matters to which the agreements relate, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
the Adviser in the performance of its obligations and duties, or by reason of
its reckless disregard of its obligations and duties under the agreement.
The Fund's investment management agreement continues in effect from year to year
so long as its continuation is approved at least annually by (a) 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 KET, and (b) by the
shareholders or the Board of Trustees of KET. The investment management
agreement may be terminated at any time upon 60 days notice by either party, or
by a majority vote of the outstanding shares of the Fund, and will terminate
automatically upon assignment.
The current investment management fee rate paid by the Fund is in the prospectus
under "Investment Manager and Underwriter."
SUB-ADVISER. Dreman Value Management, L.L.C. (the "Sub-Adviser"), Three Harding
Road, Red Bank, New Jersey 07701, is the sub-adviser for the Fund. The
Sub-Adviser is controlled by David N. Dreman. the Sub-Adviser serves as
sub-adviser pursuant to the terms of a Sub-Advisory Agreement between it and the
Adviser.
Under the terms of the Sub-Advisory Agreement, the Sub-Adviser manages the
investment and reinvestment of the Fund's portfolio and will provide such
investment advice, research and assistance as the Adviser may, from time to
time, reasonably request. The current sub-advisory fee rates paid by the Adviser
to the Sub-Adviser are in the prospectus under "Investment Manager and
Underwriter."
The Sub-Advisory Agreement provides that the Sub-Adviser will not be liable for
any error of judgment or mistake of law or for any loss suffered by the Fund in
connection with matters to which the Sub-Advisory Agreement relates, except a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of the Sub-Adviser in the performance of its duties or from reckless
disregard by the Sub-Adviser of its obligations and duties under the
Sub-Advisory Agreement.
The Sub-Advisory Agreement remains in effect until ____________, 20__ unless
sooner terminated or not annually approved as described below. Notwithstanding
the foregoing, the Sub-Advisory Agreement shall continue in effect through
____________, 20__ and year to year thereafter, but only as long as such
continuance is specifically approved at least annually (a) by a majority of the
trustees who are not parties to such agreement or interested persons of any such
party except in their capacity as trustees of the Fund, and (b) by the
shareholders or the Board of Trustees of the Fund. The Sub-Advisory Agreement
may be terminated at any time upon 60 days' notice by the Adviser or by the
Board of Trustees of the Fund or by majority vote of the outstanding shares of
the Fund, and will terminate automatically upon assignment or upon termination
of the Fund's investment management agreement. the Sub-Adviser may not terminate
the Sub-Advisory Agreement prior to __________ , 20__. Thereafter, the
Sub-Adviser may terminate the Sub-Advisory Agreement upon 90 days' notice to the
Adviser.
PRINCIPAL UNDERWRITER. Pursuant to an underwriting and distribution services
agreement ("distribution agreement"), Kemper Distributors, Inc. ("KDI"), an
affiliate of the Adviser, is the principal underwriter and distributor for the
shares of KET and acts as agent of KET in the continuous offering of its shares.
KDI bears all its expenses of providing services pursuant to the distribution
agreement, including the payment of any commissions. KET pays the cost for the
prospectus and shareholder reports to be set in type and printed for existing
shareholders, and KDI, as principal underwriter, pays for the printing and
distribution of copies thereof used in connection with the offering of shares to
prospective investors. KDI also pays for supplementary sales literature and
advertising costs.
The distribution agreement continues in effect from year to year so long as such
continuance is approved for each class at least annually by a vote of the Board
of Trustees of KET, including the Trustees who are not interested persons of KET
and who have no direct or indirect financial interest in the agreement. The
agreement automatically terminates in the event of its assignment and may be
terminated for a class at any time without penalty by the Fund for that Fund or
by KDI upon 60 days' notice. Termination by the
11
<PAGE>
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 KET
and who have no direct or indirect financial interest in the agreement, or a
"majority of the outstanding voting securities" of the class of KET, as defined
under the 1940 Act. The agreement may not be amended for a class to increase the
fee to be paid by the Fund with respect to such class without approval by a
majority of the outstanding voting securities of such class of the Fund and all
material amendments must in any event be approved by the Board of Trustees in
the manner described above with respect to the continuation of the agreement.
ADMINISTRATIVE SERVICES. Administrative services are provided to KET under an
administrative services agreement ("administrative agreement") with KDI, which
became effective__________, 19__. KDI bears all its expenses of providing
services pursuant to the administrative agreement between KDI and KET, including
the payment of service fees. KET pays KDI an administrative services fee,
payable monthly, at an annual rate of up to .25% of average daily net assets of
the Class A, B and C shares of the Fund.
KDI has entered into related arrangements with various broker-dealer firms and
other service or administrative firms ("firms"), that provide services and
facilities for their customers or clients who are investors in KET. The firms
provide such office space and equipment, telephone facilities and personnel as
is necessary or beneficial for providing information and services to their
clients. Such services and assistance may include, but are not limited to,
establishing and maintaining accounts and records, processing purchase and
redemption transactions, answering routine inquiries regarding the Fund,
assistance to clients in changing dividend and investment options, account
designations and addresses and such other administrative services as may be
agreed upon from time to time and permitted by applicable statute, rule or
regulation. With respect to Class A shares, KDI pays each firm a service fee,
payable quarterly, at an annual rate of up to .25% of the net assets in the
Fund's accounts that it maintains and services attributable to Class A shares,
commencing with the month after investment. With respect to Class B and Class C
shares, KDI currently advances to firms the first-year service fee at a rate of
up to .25% of the purchase price of such shares. For periods after the first
year, KDI currently intends to pay firms a service fee at a rate of up to .25%
(calculated monthly and normally paid quarterly) of the net assets attributable
to Class B and C shares maintained and serviced by the firm. After the first
year, a firm becomes eligible for the quarterly service fee and the fee
continues until terminated by KDI or KET. Firms to which service fees may be
paid may include affiliates of KDI.
KDI also may provide some of the above services and may retain any portion of
the fee under the administrative agreement not paid to firms to compensate
itself for administrative functions performed for the Fund. Currently, the
administrative services fee payable to KDI is based only upon KET assets in
accounts for which a firm provides administrative services and it is intended
that KDI will pay all the administrative services fee that it receives from KET
to firms in the form of service fees. The effective administrative services fee
rate to be charged against all assets of KET while this procedure is in effect
will depend upon the proportion of KET assets that is in accounts for which a
firm of record provides administrative services.
Certain trustees or officers of KET are also directors or officers of the
Adviser or KDI as indicated under "Officers and Trustees."
CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICE AGENT.________________, as
custodian, and ________________________as sub-custodian, have custody of all
securities and cash of KET maintained in the United States.
__________________________, as custodian, has custody of all securities and cash
of the Fund held outside of the United States. They attend to the collection of
principal and income, and payment for and collection of proceeds of securities
bought and sold by KET. _________ is also the KET transfer agent and
dividend-paying agent. Pursuant to a services agreement with ________, Kemper
Service Company ("KSVC"), an affiliate of the Adviser, serves as "Shareholder
Service Agent" of the Funds, and as such, performs all of ____________'s duties
as transfer agent and dividend paying agent. ________ receives as transfer
agent, and pays to KSVC, annual account fees of $___ per account plus account
set up, transaction and maintenance charges, annual fees associated with the
contingent deferred sales charge (Class B shares only) and out-of-pocket expense
reimbursement. ______'s fee is reduced by certain earnings credits in favor of
KET.
INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS. KET's independent auditors,
________________, audit and report on KET annual financial statements, review
certain regulatory reports and KET's federal income tax returns, and perform
other professional accounting, auditing, tax and advisory services when engaged
to do so by KET. Shareholders will receive annual audited financial statements
and semi-annual unaudited financial statements.
12
<PAGE>
PURCHASE AND REDEMPTION OF SHARES
As described in the Fund's prospectus, shares of the 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. See the prospectus for certain exceptions to these
minimums. An order for the purchase of shares that is accompanied by a check
drawn on a foreign bank (other than a check drawn on a Canadian bank in U.S.
Dollars) will not be considered in proper form and will not be processed unless
and until KET determines that it has received payment of the proceeds of the
check. The time required for such a determination will vary and cannot be
determined in advance.
Upon receipt by the Shareholder Service Agent of a request for redemption,
shares of the Fund will be redeemed by KET at the applicable net asset value per
share of such Fund as described in KET's prospectus.
Scheduled variations in or the elimination of the initial sales charge for
purchases of Class A shares or the contingent deferred sales charge for
redemptions of Class B shares or Class C shares by certain classes of persons or
through certain types of transactions as described in the prospectus are
provided because of anticipated economies in sales and sales related efforts.
KET 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 the Fund's investments is
not reasonably practicable, or (ii) it is not reasonably practicable for KET to
determine the value of the Fund's net assets, or (c) for such other periods as
the Securities and Exchange Commission may by order permit for the protection of
KET's shareholders.
The conversion of Class B shares to Class A shares may be subject to the
continuing availability of an opinion of counsel or ruling by the Internal
Revenue Service or other assurance acceptable to KET to the effect that (a) the
assessment of the distribution services fee with respect to Class B shares and
not Class A shares and the assessment of the administrative services fee with
respect to each Class does not result in KET's dividends constituting
"preferential dividends" under the Internal Revenue Code, and (b) that the
conversion of Class B shares to Class A shares does not constitute a taxable
event under the Internal Revenue Code. The conversion of Class B shares to Class
A shares may be suspended if such assurance is not available. In that event, no
further conversions of Class B shares would occur, and shares might continue to
be subject to the distribution services fee for an indefinite period that may
extend beyond the proposed conversion date as described in the prospectus.
NET ASSET VALUE
The net asset value per share of the Fund is the value of one share and is
determined separately for each class by dividing the value of the Fund's net
assets attributable to that class by the number of shares of that class
outstanding. The per share net asset value of the Class B and Class C shares of
the Fund will generally be lower than that of the Class A shares of the Fund
because of the higher expenses borne by the Class B and Class C shares. The net
asset value of shares of the Fund is computed as of the close of regular trading
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, Martin Luther King Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving and Christmas.
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
("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, other than money market instruments, are valued at prices
supplied by the Fund's 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
13
<PAGE>
value. Short-term securities with remaining maturities of sixty days or less are
also valued at amortized cost. 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 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.
If a security is traded on more than one exchange, or upon one or more exchanges
and in the over-the-counter market, quotations are taken from the market in
which the security is traded most extensively.
If, in the opinion of the Valuation Committee of the Board of Trustees, the
value of a portfolio asset as determined in accordance with these procedures
does not represent the fair market value of the portfolio asset, the value of
the portfolio asset is taken to be an amount which, in the opinion of the
Valuation Committee, represents fair market value on the basis of all available
information. The value of other portfolio holdings owned by the Fund is
determined in a manner which, in the discretion of the Valuation Committee most
fairly reflects fair market value of the property on the valuation date.
Following the valuations of securities or other portfolio 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.
DIVIDENDS AND TAXES
DIVIDENDS. The Fund normally distributes semi-annually dividends of net
investment income. The Fund distributes any net realized short-term and
long-term capital gains at least annually.
The Fund may at any time vary the 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 KET determines appropriate
under the then current circumstances. In particular, and without limiting the
foregoing, the Fund may make additional distributions of net investment income
or capital gain net income in order to satisfy the minimum distribution
requirements contained in the Internal Revenue Code (the "Code"). Dividends will
be reinvested in shares of the Fund unless shareholders indicate in writing that
they wish to receive them in cash or in shares of Kemper Funds as described in
the prospectus.
The level of income dividends per share (as a percentage of net asset value)
will be lower for Class B and Class C shares than for Class A shares primarily
as a result of the distribution services fee applicable to Class B and Class C
shares. Distributions of capital gains, if any, will be paid in the same amount
for each class.
TAXES. The Fund intends 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.
The Fund's options and futures 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 the Fund to recognize
unrealized gains and losses on certain options, futures and forward contracts
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
14
<PAGE>
of the Code would require deferral of certain losses realized on positions of a
straddle to the extent that such Fund had unrealized gains in offsetting
positions at year end.
A 4% excise tax is imposed on the excess of the required distribution for a
calendar year over the distributed amount for such calendar year. The required
distribution is the sum of 98% of the Fund's net investment income for the
calendar year plus 98% of its capital gain net income for the one-year period
ending October 31, plus any undistributed net investment income from the prior
calendar year, plus any undistributed capital gain net income from the one year
period ended October 31 of the prior calendar year, minus any overdistribution
in the prior calendar year. For purposes of calculating the required
distribution, foreign currency gains or losses occurring after October 31 are
taken into account in the following calendar year. The Fund intends to declare
or distribute dividends during the appropriate periods of an amount sufficient
to prevent imposition of the 4% excise tax.
A shareholder who redeems shares of the Fund will recognize capital gain or loss
for federal income tax purposes measured by the difference between the value of
the shares redeemed and the adjusted cost basis of the shares. Any loss
recognized on the redemption of 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. An exchange of the 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
shareholder who has redeemed shares of the Fund or other Kemper Mutual Fund
listed in the prospectus under "Special Features--Class A Shares--Combined
Purchases" (other than shares of Kemper Cash Reserves Fund not acquired by
exchange from another Kemper Mutual Fund) may reinvest the amount redeemed at
net asset value at the time of the reinvestment in shares of the Fund or in
shares of a Kemper Mutual Fund within six months of the redemption as described
in the prospectus under "Redemption or Repurchase of Shares--Reinvestment
Privilege." If redeemed shares were held less than 91 days, then the lesser of
(a) the sales charge waived on the reinvested shares, or (b) the sales charge
incurred on the redeemed shares, is included in the basis of the reinvested
shares and is not included in the basis of the redeemed shares. If a shareholder
realized a loss on the redemption or exchange of the 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. If
a shareholder of Class A shares redeems or otherwise disposes of such Class A
shares less than ninety-one days after they are acquired and subsequently
acquires shares of the Fund or of a Kemper Mutual Fund without payment of any
sales charge (or for a reduced sales charge) pursuant to a reinvestment
privilege acquired in connection with the Class A shares disposed of, then the
sales charge on the Class A shares disposed of (to the extent of the reduction
in the sales charge on the shares subsequently acquired) shall not be taken into
account in determining gain or loss on the Class A shares disposed of, but shall
be treated as incurred on the acquisition of the shares subsequently acquired.
Investment income derived from foreign securities and certain American
Depository Receipts may be subject to foreign income taxes withheld at the
source. Because the amount of the Fund's investments in various countries will
change from time to time, it is not possible to determine the effective rate of
such taxes in advance.
Shareholders who are non-resident aliens are subject to U.S. withholding tax on
ordinary income dividends (whether received in cash or shares) at a rate of 30%
or such lower rate as prescribed by any applicable tax treaty.
PERFORMANCE
As described in the prospectus, the Fund's historical performance or return for
a class of shares may be shown in the form of "average annual total return" and
"total return" figures. These various measures of performance are described
below. Performance information will be computed separately for each class.
The Fund's average annual total return quotation is computed in accordance with
a standardized method prescribed by rules of the Securities and Exchange
Commission. The average annual total return for the Fund for 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 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 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
15
<PAGE>
Fund have been reinvested at net asset value on the reinvestment dates during
the period. Average annual total return may also be calculated without adjusting
to deduct the maximum sales charge.
Calculation of the Fund's total return is not subject to a standardized formula,
except when calculated for purposes of the "Financial Highlights" table in KET's
financial statements and prospectus. Total return performance for a specific
period is calculated by first taking a hypothetical investment ("initial
investment") in the Fund's shares on the first day of the period, either
adjusting or not adjusting to deduct the maximum sales charge (in the case of
Class A shares), and computing the "ending value" of that investment at the end
of the period. The total return percentage is then determined by subtracting the
initial investment from the ending value and dividing the remainder by the
initial investment and expressing the result as a percentage. The ending value
in the case of Class B shares 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 shares and Class C
shares would be reduced if such charge were included.
The Fund's performance figures are based upon historical results and are not
representative of future performance. The Fund's Class A shares are sold at net
asset value plus a maximum sales charge of 5.75% of the offering price. Class B
shares and Class C shares are sold at net asset value. Redemptions of Class B
shares may be subject to a contingent deferred sales charge that is 4% in the
first year following the purchase, declines by a specified percentage each year
thereafter and becomes zero after six years. Redemption of Class C shares may be
subject to a 1% contingent deferred sales charge in the first year following the
purchase. Returns and net asset value will fluctuate. Factors affecting the
Fund's performance include general market conditions, operating expenses and
investment management. Any additional fees charged by a dealer or other
financial services firm would reduce the returns described in this section.
Shares of the Fund are redeemable at the then current net asset value, which may
be more or less than original cost.
Investors may want to compare the performance of the Fund to certificates of
deposit issued by banks and other depository institutions. Certificates of
deposit may offer fixed or variable interest rates and principal is guaranteed
and may be insured. Withdrawal of deposits prior to maturity will normally be
subject to a penalty. Rates offered by banks and other depository institutions
are subject to change at any time specified by the issuing institution.
Information regarding bank products may be based upon, among other things, the
BANK RATE MONITOR National Index(TM) for certificates of deposit, which is an
unmanaged index and is based on stated rates and the annual effective yields of
certificates of deposit in the ten largest banking markets in the United States,
or the CDA Investment Technologies, Inc. Certificate of Deposit Index, which is
an unmanaged index based on the average monthly yields of certificates of
deposit.
Investors also may want to compare the performance of the Fund to that of U.S.
Treasury bills, notes or bonds. Treasury obligations are issued in selected
denominations. Rates of Treasury obligations are fixed at the time of issuance
and payment of principal and interest is backed by the full faith and credit of
the U.S. Treasury. The market value of such instruments will generally fluctuate
inversely with interest rates prior to maturity and will equal par value at
maturity. Information regarding the performance of Treasury obligations may be
based upon, among other things, the Towers Data Systems U.S. Treasury Bill
index, which is an unmanaged index based on the average monthly yield of
treasury bills maturing in six months. Due to their short maturities, Treasury
bills generally experience very low market value volatility.
Investors may want to compare the performance of the Fund to that of money
market funds. Money market funds seek to maintain a stable net asset value and
yield fluctuates. Information regarding the performance of money market funds
may be based upon, among other things, IBC Financial Data Inc.'s Money Fund
Report (All Taxable). As reported by IBC, all investment results represent total
return (annualized results for the period net of management fees and expenses)
and one year investment results are effective annual yields assuming
reinvestment of dividends.
OFFICERS AND TRUSTEES
The officers and trustees of KET, their birthdates, their principal occupations
and their affiliations, if any, the Adviser and KDI, or their affiliates are as
follows (The number following each person's title is the number of investment
companies managed by the Adviser for which he or she holds similar positions):
16
<PAGE>
*Mark S. Casady, Trustee (__). Vice President and Treasurer, Kemper Equity
Trust. Managing Director, Scudder Kemper Investments, Inc.
*Daniel Pierce, Trustee (__). President, Kemper Equity Trust. Managing Director,
Scudder Kemper Investments, Inc.
*Kathryn L. Quirk, Trustee (__). Vice President and Secretary, Kemper Equity
Trust. Managing Director, Scudder Kemper Investments, Inc.
*Trustee who is considered to be an "interested person" under the Investment
Company Act of 1940.
The trustees and officers who are "interested persons" as designated above
receive no compensation from KET. The table below shows amounts paid or accrued
to those trustees of KET who are not designated "interested persons" during the
1997 calendar year.
Total
Compensation
Aggregate from Kemper Fund
Compensation Complex Paid to
Name of Board Members From KET Board Members(2)
_______________....................... $ 0 $
_______________(1).................... $ 0 $
_______________(1).................... $ 0 $
_______________....................... $ 0 $
_______________....... $ 0 $
_______________ $ 0 $
(1) Includes deferred fees and interest thereon pursuant to deferred
compensation agreements with certain Kemper funds. Deferred amounts accrue
interest monthly at a rate equal to the yield of Zurich Money Funds -
Zurich Money Market Fund. The total deferred amount and interest accrued
for the fiscal year ended December 31, 1997 for KET is $_____
for____________.
(2) Includes compensation for service on the boards of __ Kemper funds with __
fund portfolios. Each board member currently serves as a board member of _
Kemper Funds with __ fund portfolios.
As of March 1, the officers and trustees of KET as a group owned less than 1% of
the Fund and the Adviser owned of record all of the outstanding shares of the
Fund.
17
<PAGE>
APPENDIX--RATINGS OF FIXED INCOME INVESTMENTS
Standard & Poor's Corporation Bond Ratings
AAA. Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C. Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI. The rating CI is reserved for income bonds on which no interest is being
paid.
D. Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
Moody's Investors Service, Inc. Bond Ratings
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
18
<PAGE>
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.
19
<PAGE>
KEMPER-DREMAN FINANCIAL SERVICES FUND
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
a. Financial Statements
Included in Part A of this Registration Statement:
Financial Highlights to be filed by amendment.
Included in Part B of this Registration Statement:
Statements, schedules and historical information other than
those listed above have been omitted since they are either
not applicable or are not required. Financial Statements
to be filed by amendment.
b. Exhibits:
1. Declaration of Trust dated January 6, 1998, to
be filed by Amendment.
2. By-Laws to be filed by Amendment.
3. Inapplicable.
4. Specimen Share Certificate to be filed by
Amendment.
5(a). Investment Management Agreement to be filed by
Amendment.
5(b). Investment Sub-Advisory Agreement to be filed
by Amendment.
6. Underwriting Agreement to be filed by
Amendment.
7. Inapplicable.
8. (a) Custodian Agreement to be filed by Amendment.
(b) Fee schedule for Exhibit 8(a) to be filed by
Amendment.
9. (a)(1) Transfer Agency and Service Agreement to be
filed by Amendment.
(a)(2) Fee schedule for Exhibit 9(a)(1) to be filed
by Amendment.
(b) Shareholder Services Agreement to be filed by
Amendment.
(c) Fund Accounting Services Agreement to be filed
by Amendment.
(d) Administrative Services Agreement to be filed
by Amendment.
10. Opinion of Counsel to be filed by Amendment.
11. Inapplicable.
12. Inapplicable.
Part C - Page 1
<PAGE>
13. Inapplicable.
14. Inapplicable.
15. Inapplicable.
16. Inapplicable.
17. Inapplicable.
18. Inapplicable.
Item 25. Persons Controlled by or under Common Control with Registrant
None
Item 26. Number of Holders of Securities (as of January 1, 1998).
(1) (2)
Title of Class Number of Shareholders
-------------- ----------------------
Shares of beneficial interest
($.01 par value)
Kemper-Dreman Financial
Services Fund 0
Item 27. Indemnification.
Article IV, Sections 4.1 - 4.3 of Registrant's Declaration of Trust
provide as follows:
Section 4.1 No Personal Liability of Shareholders, Trustees, Etc. No
Shareholder shall be subject to any personal liability whatsoever to any
Person in connection with Trust Property or the acts, obligations or
affairs of the Trust. No Trustee, officer, employee or agent of the Trust
shall be subject to any personal liability whatsoever to any Person, other
than to the Trust or its Shareholders, in connection with Trust Property
or the affairs of the Trust, save only that arising from bad faith,
willful misfeasance, gross negligence or reckless disregard of his duties
with respect to such Person; and all such Persons shall look solely to the
Trust Property for satisfaction of claims of any nature arising in
connection with the affairs of the Trust. If any Shareholder, Trustee,
officer, employee, or agent, as such, of the Trust, is made a party to any
suit or proceeding to enforce any such liability of the Trust, he shall
not, on account thereof, be held to any personal liability. The Trust
shall indemnify and hold each Shareholder harmless from and against all
claims and liabilities, to which such Shareholder may become subject by
reason of his being or having been a Shareholder, and shall reimburse such
Shareholder for all legal and other expenses reasonably incurred by him in
connection with any such claim or liability, provided that any such
expenses shall be paid solely out of the funds and property of the series
of the Trust with respect to which such Shareholders Shares are issued.
The rights accruing to a Shareholder under this Section 4.1 shall not
exclude any other right to which such Shareholder may be lawfully
entitled, nor shall anything herein contained restrict the right of the
Trust to indemnify or reimburse a Shareholder in any appropriate situation
even though not specifically provided herein.
Section 4.2 Non-Liability of Trustees, Etc. No Trustee, officer, employee
or agent of the Trust shall be liable to the Trust, its Shareholders, or
to any Shareholder, Trustee, officer, employee, agent or service provider
thereof for any action or failure to act by him (or her) or any other such
Trustee, officer, employee, agent or service provider (including without
limitation the failure to compel in any way any former or acting Trustee
to redress any breach of trust) except for his own bad faith, willful
misfeasance, gross negligence or reckless disregard of the duties involved
in the conduct of his office. The term
Part C - Page 2
<PAGE>
"service provider" as used in this Section 4.2, shall include any
investment adviser, principal underwriter or other person with whom the
Trust has an agreement for provision of services.
Section 4.3 Mandatory Indemnification.
(a) Subject to the exceptions and limitations contained in
paragraph (b) below:
(i) every person who is, or has been, a Trustee or officer of
the Trust shall be indemnified by the Trust to the fullest extent
permitted by law against all liability and against all expenses reasonably
incurred or paid by him in connection with any claim, action, suit or
proceeding in which he becomes involved as a party or otherwise by virtue
of his being or having been a Trustee or officer and against amounts paid
or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding"
shall apply to all claims, actions, suits or proceedings (civil, criminal,
or other, including appeals), actual or threatened; and the words
"liability" and "expenses" shall include, without limitation, attorneys'
fees, costs, judgments, amounts paid in settlement, fines, penalties and
other liabilities.
(b) No indemnification shall be provided hereunder to a Trustee
or officer:
(i) against any liability to the Trust or the Shareholders by
reason of a final adjudication by the court or other body before which the
proceeding was brought that he engaged in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the
conduct of his office;
(ii) with respect to any matter as to which he shall have been
finally adjudicated not to have acted in good faith in the reasonable
belief that his action was in the best interest of the Trust;
(iii) in the event of a settlement or other disposition not
involving a final adjudication as provided in paragraph (b)(i) resulting
in a payment by a Trustee or officer, unless there has been a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office;
(A) by the court or other body approving the settlement or
other disposition; or
(B) based upon a review of readily available facts (as opposed
to a full trial-type inquiry) by (x) vote of a majority of the
Disinterested Trustees acting on the matter (provided that a majority of
the Disinterested Trustees then in office act on the matter) or (y)
written opinion of independent legal counsel.
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall not
affect any other rights to which any Trustee or officer may now or
hereafter be entitled, shall continue as to a person who has ceased to be
such Trustee or officer and shall inure to the benefit of the heirs,
executors, administrators and assigns of such a person. Nothing contained
herein shall affect any rights to indemnification to which personnel of
the Trust other than Trustees and officers may be entitled by contract or
otherwise under law.
(d) Expenses of preparation and presentation of a defense to any
claim, action, suit or proceeding of the character described in paragraph
(a) of this Section 4.3 shall be advanced by the Trust prior to final
disposition thereof upon receipt of an undertaking by or on behalf of the
recipient to repay such amount if it is ultimately determined that he is
not entitled to indemnification under this Section 4.3 provided that
either:
(i) such undertaking is secured by a surety bond or some
appropriate security provided by the recipient, or the Trust shall be
insured against losses arising out of any such advances: or
Part C - Page 3
<PAGE>
(ii) a majority of the Disinterested Trustees acting on the
matter (provided that a majority of the Disinterested Trustees act on the
matter) or an independent legal counsel in a written opinion shall
determine, based upon a review of readily available facts (as opposed to a
full trial-type inquiry), that there is reason to believe that the
recipient ultimately will be found entitled to indemnification.
As used in this Section 4.3, a "Disinterested Trustee" is one who is
not (i) an "Interested Person" of the Trust (including anyone who has been
exempted from being an "Interested Person" by any rule, regulation or
order of the Commission), or (ii) involved in the claim, action, suit or
proceeding.
Item 28. Business or Other Connections of Investment Adviser
Business and Other Connections of Board
Name of Trustees of Registrant's Adviser
---- ---------------------------------------
To be filed by Amendment.
Item 29. Principal Underwriters.
(a) Kemper Distributors, Inc. acts as principal underwriter and
distributor of the Registrant's shares.
(b)
(1) (2) (3)
Positions and
Name and Principal Position and Offices with Offices with
Business Address Underwriter Registrant
---------------- ----------- ----------
Mark S. Casady None Treasurer,
Two International Place Trustee and Vice
Boston, MA 02110 President
Daniel Pierce None President and
Two International Place Trustee
Boston, MA 02110
Kathryn L. Quirk None Trustee,
345 Park Avenue Secretary and
New York, NY 10154 Vice President
(c)
(1) (2) (3) (4) (5)
Net Compensation
Underwriting on Redemptions
Name of Principal Discounts and and Brokerage Other
Underwriter Commissions Repurchases Commissions Compensation
----------- ----------- ----------- ----------- ------------
Kemper None None None None
Distributors, Inc.
Part C - Page 4
<PAGE>
Item 30. Location of Accounts and Records.
Certain accounts, books and other documents required to be
maintained by Section 31(a) of the 1940 Act and the Rules
promulgated thereunder will be maintained by Scudder Kemper
Investments, Inc., 345 Park Avenue, New York, NY 10154. Records
relating to the duties of the Registrant's custodian are maintained
by _____________________________ .
Item 31. Management Services.
Inapplicable.
Item 32. Undertakings.
The Registrant hereby undertakes to file post-effective amendments,
using reasonably current financial statements of Kemper-Dreman
Financial Services Fund, within four to six months from the
effectiveness date of the Registrant's Registration Statement under
the 1933 Act.
The Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of a Fund's latest annual report
to shareholders upon request and without change.
The Registrant hereby undertakes to call a meeting of shareholders
for the purpose of voting on the question of removal of a Trustee or
Trustees when requested to do so by the holders of at least 10% of
the Registrant's outstanding shares and in connection with such
meeting to comply with the provisions of Section 16(c) of the
Investment Company Act of 1940 relating to shareholder
communications.
The Registrant hereby undertakes, insofar as indemnification for
liability arising under the Securities Act of 1933 may be permitted
to trustees, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a
trustee, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by
such trustee, officer or controlling person in connection with the
securities being registered, the registrant will submit unless in
the opinion of its counsel the matter has been settled by
controlling precedent, to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the financial
adjudication of such issue.
Part C - Page 5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this amendment to
its Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Boston and the Commonwealth of
Massachusetts on the 6th day of January, 1998.
KEMPER EQUITY TRUST
By
/s/Kathryn L. Quirk,
Kathryn L. Quirk,
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
/s/Kathryn L. Quirk
- ---------------------------------------
Kathryn L. Quirk Trustee, Vice President and Secretary January 6, 1998
/s/Mark S. Casady
- ---------------------------------------
Mark S. Casady Trustee, Vice President and Treasurer January 6, 1998
(Principal Financial and Accounting
Officer)
/s/Daniel Pierce
- ---------------------------------------
Daniel Pierce Trustee and President January 6, 1998
</TABLE>
<PAGE>
File No. _________
File No. 811-08599
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
FORM N-1A
INITIAL REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
INITIAL REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
KEMPER-DREMAN FINANCIAL SERVICES FUND
<PAGE>
KEMPER-DREMAN FINANCIAL SERVICES FUND
Exhibit Index
